Attached files
file | filename |
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8-K/A - FORM 8-K/A - Ascent Capital Group, Inc. | v58206e8vkza.htm |
EX-99.3 - EX-99.3 - Ascent Capital Group, Inc. | v58206exv99w3.htm |
EX-23.1 - EX-23.1 - Ascent Capital Group, Inc. | v58206exv23w1.htm |
EX-99.2 - EX-99.2 - Ascent Capital Group, Inc. | v58206exv99w2.htm |
Table of Contents
Exhibit 99.1
Consolidated Financial Statements
Monitronics International, Inc. and Subsidiaries
Years Ended June 30, 2010, 2009 and 2008
With Report of Independent Auditors
Years Ended June 30, 2010, 2009 and 2008
With Report of Independent Auditors
1
Monitronics International, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended June 30, 2010, 2009 and 2008
Contents
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Consolidated Financial Statements |
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Report of Independent Auditors
The Board of Directors
Monitronics International, Inc.
Monitronics International, Inc.
We have audited the accompanying consolidated balance sheets of Monitronics International, Inc. and
its subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of
operations, shareholders net capital (deficiency), and cash flows for each of the three years in
the period ended June 30, 2010. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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. We were not engaged to
perform an audit of the Companys internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Monitronics International, Inc. and its
subsidiaries at June 30, 2010 and 2009, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended June 30, 2010, in conformity with
accounting principles generally accepted in the United States.
/s/
Ernst & Young LLP
October 13,
2010,
except for Note 13, as to which the date is
December 17, 2010
except for Note 13, as to which the date is
December 17, 2010
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Monitronics International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(In Thousands, Except Share Data)
June 30 | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 40,838 | $ | 33,268 | ||||
Restricted cash |
51,776 | 79,452 | ||||||
Accounts receivable, less allowance for doubtful accounts
of $1,794 in 2010 and $1,917 in 2009 |
10,748 | 11,016 | ||||||
Prepaid expenses and other current assets |
1,453 | 2,011 | ||||||
Total current assets |
104,815 | 125,747 | ||||||
Property and equipment, net |
15,718 | 17,633 | ||||||
Subscriber accounts, net of accumulated amortization
of $652,562 in 2010 and $615,635 in 2009 |
638,255 | 577,785 | ||||||
Deferred financing costs, net |
27,991 | 29,451 | ||||||
Fair value of derivative financial instruments |
433 | 2,402 | ||||||
Other assets |
1,557 | 71 | ||||||
Long-term deferred tax asset |
1,198 | 1,198 | ||||||
Goodwill |
14,795 | 14,795 | ||||||
Total assets |
$ | 804,762 | $ | 769,082 | ||||
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June 30 | ||||||||
2010 | 2009 | |||||||
Liabilities and shareholders net capital (deficiency) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,409 | $ | 1,842 | ||||
Accrued expenses |
5,434 | 5,095 | ||||||
Purchase holdbacks |
15,604 | 13,309 | ||||||
Deferred revenue |
5,604 | 5,074 | ||||||
Interest payable |
2,283 | 2,196 | ||||||
Taxes payable |
1,984 | 1,729 | ||||||
Current portion of long-term debt |
12 | | ||||||
Total current liabilities |
33,330 | 29,245 | ||||||
Noncurrent liabilities: |
||||||||
Long-term debt |
844,188 | 813,384 | ||||||
Fair value of derivative financial instruments |
77,011 | 76,778 | ||||||
Total noncurrent liabilities |
921,199 | 890,162 | ||||||
Commitments and contingencies |
||||||||
Shareholders net capital (deficiency): |
||||||||
Preferred stock, Series A: |
||||||||
Authorized shares 8,247,075 |
| | ||||||
Issued shares 0 |
| | ||||||
Class A common stock, $0.01 par value: |
||||||||
Authorized shares 80,000,000 |
||||||||
Issued shares 31,102,347 as of June 30, 2010 and 2009 |
311 | 311 | ||||||
Class B common stock, $0.01 par value: |
||||||||
Authorized shares 700,000; issued shares none |
| | ||||||
Additional paid-in capital |
125,939 | 125,633 | ||||||
Treasury stock, at cost, 1,322,135 shares as of
June 30, 2010 and 2009 |
(12,037 | ) | (12,037 | ) | ||||
Accumulated deficit |
(263,980 | ) | (264,232 | ) | ||||
Total shareholders net capital (deficiency) |
(149,767 | ) | (150,325 | ) | ||||
Total liabilities and shareholders net capital (deficiency) |
$ | 804,762 | $ | 769,082 | ||||
See accompanying notes.
6
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Monitronics International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended June 30 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In Thousands) | ||||||||||||
Revenue |
$ | 271,951 | $ | 234,432 | $ | 207,716 | ||||||
Cost of services |
32,966 | 28,997 | 29,108 | |||||||||
Gross profit |
238,985 | 205,435 | 178,608 | |||||||||
Operating expenses: |
||||||||||||
Sales, general, and administrative |
52,385 | 52,475 | 47,724 | |||||||||
Depreciation |
5,937 | 5,172 | 4,608 | |||||||||
Amortization |
118,834 | 110,623 | 100,606 | |||||||||
177,156 | 168,270 | 152,938 | ||||||||||
Operating income |
61,829 | 37,165 | 25,670 | |||||||||
Other expenses: |
||||||||||||
Unrealized loss on derivative instruments |
2,202 | 37,510 | 39,843 | |||||||||
Write-off of deferred financing costs |
| | 6,952 | |||||||||
Interest |
57,561 | 54,107 | 62,397 | |||||||||
59,763 | 91,617 | 109,192 | ||||||||||
Income (loss) before income taxes |
2,066 | (54,452 | ) | (83,522 | ) | |||||||
Provision for income taxes |
1,814 | 315 | 1,431 | |||||||||
Net income (loss) |
$ | 252 | $ | (54,767 | ) | $ | (84,953 | ) | ||||
See accompanying notes.
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Monitronics International, Inc. and Subsidiaries
Consolidated Statement of Shareholders Net Capital (Deficiency)
(In Thousands, Except Share Data)
(In Thousands, Except Share Data)
Total | ||||||||||||||||||||||||||||||||||||
Class A | Class B | Additional | Treasury Stock, | Shareholders | ||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | at Cost | Accumulated | Net Capital | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | (Deficiency) | ||||||||||||||||||||||||||||
Balances at July 1, 2007 |
31,102,317 | $ | 311 | | $ | | $ | 124,819 | 968,722 | $ | (9,673 | ) | $ | (124,512 | ) | $ | (9,055 | ) | ||||||||||||||||||
Options exercised |
30 | | | | | | | | | |||||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | 353,413 | (2,364 | ) | | (2,364 | ) | |||||||||||||||||||||||||
Stock-based compensation |
| | | | 514 | | | | 514 | |||||||||||||||||||||||||||
Net loss |
| | | | | | | (84,953 | ) | (84,953 | ) | |||||||||||||||||||||||||
Balances at June 30, 2008 |
31,102,347 | 311 | | | 125,333 | 1,322,135 | (12,037 | ) | (209,465 | ) | (95,858 | ) | ||||||||||||||||||||||||
Stock-based compensation |
| | | | 300 | | | | 300 | |||||||||||||||||||||||||||
Net loss |
| | | | | | | (54,767 | ) | (54,767 | ) | |||||||||||||||||||||||||
Balances at June 30, 2009 |
31,102,347 | 311 | | | 125,633 | 1,322,135 | (12,037 | ) | (264,232 | ) | (150,325 | ) | ||||||||||||||||||||||||
Stock-based compensation |
| | | | 306 | | | | 306 | |||||||||||||||||||||||||||
Net income |
| | | | | | | 252 | 252 | |||||||||||||||||||||||||||
Balances at June 30, 2010 |
31,102,347 | $ | 311 | | $ | | $ | 125,939 | 1,322,135 | $ | (12,037 | ) | $ | (263,980 | ) | $ | (149,767 | ) | ||||||||||||||||||
See accompanying notes.
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Monitronics International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In Thousands) | ||||||||||||
Operating activities |
||||||||||||
Net income (loss) |
$ | 252 | $ | (54,767 | ) | $ | (84,953 | ) | ||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
124,771 | 115,795 | 105,214 | |||||||||
Amortization of deferred financing costs |
1,460 | 1,464 | 8,209 | |||||||||
Provision for uncollectible accounts |
5,725 | 5,260 | 4,003 | |||||||||
Noncash interest expense for preferred stock redeemable |
| | 411 | |||||||||
Noncash interest accretion |
| | 521 | |||||||||
Change in value of put option |
| | (324 | ) | ||||||||
Change in deferred tax asset |
| (1,198 | ) | | ||||||||
Noncash stock-based compensation |
306 | 300 | 514 | |||||||||
Unrealized gain on derivative instruments |
2,202 | 37,510 | 39,843 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable (excluding provision for bad debt) |
(5,457 | ) | (7,456 | ) | (3,885 | ) | ||||||
Prepaid expenses and other assets |
(928 | ) | (477 | ) | 375 | |||||||
Accounts payable |
567 | (543 | ) | 420 | ||||||||
Accrued expenses |
339 | 294 | (1,031 | ) | ||||||||
Interest payable |
87 | 62 | (12,480 | ) | ||||||||
Deferred revenue |
530 | (124 | ) | (455 | ) | |||||||
Taxes payable |
255 | (943 | ) | 1,316 | ||||||||
Net cash provided by operating activities |
130,109 | 95,177 | 57,698 | |||||||||
Investing activities |
||||||||||||
Decrease (increase) in restricted cash |
27,676 | (65,591 | ) | (13,861 | ) | |||||||
Purchases of property and equipment |
(4,022 | ) | (6,832 | ) | (7,449 | ) | ||||||
Purchases of subscriber accounts (net of holdbacks) |
(177,009 | ) | (181,609 | ) | (131,460 | ) | ||||||
Net cash used in investing activities |
(153,355 | ) | (254,032 | ) | (152,770 | ) | ||||||
Financing activities |
||||||||||||
Proceeds from credit facility |
44,392 | 253,449 | 712,796 | |||||||||
Payments on credit facility |
(13,576 | ) | (79,066 | ) | (520,813 | ) | ||||||
Payment of deferred financing costs |
| (14 | ) | (31,937 | ) | |||||||
Redemption of preferred stock, less accrued interest |
| | (45,212 | ) | ||||||||
Purchase of treasury stock |
| | (2,364 | ) | ||||||||
Net cash provided by financing activities |
30,816 | 174,369 | 112,470 | |||||||||
Net increase in cash and cash equivalents |
7,570 | 15,514 | 17,398 | |||||||||
Cash and cash equivalents at beginning of fiscal year |
33,268 | 17,754 | 356 | |||||||||
Cash and cash equivalents at end of fiscal year |
$ | 40,838 | $ | 33,268 | $ | 17,754 | ||||||
Supplemental cash flow information |
||||||||||||
State taxes paid |
$ | 1,699 | $ | 2,574 | $ | 33 | ||||||
Interest paid |
$ | 41,921 | $ | 35,776 | $ | 40,703 | ||||||
See accompanying notes.
9
Table of Contents
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2010
1. Description of Business and Summary of Significant Accounting Policies
Monitronics International, Inc. and Subsidiaries (the Company) provide security alarm monitoring
and related services to residential and business subscribers throughout the United States and parts
of Canada. The Company monitors signals arising from burglaries, fires and other events through
security systems installed by independent dealers at subscribers premises.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash on hand, cash in banks and cash equivalents. The Company
classifies all highly liquid investments with original maturities when purchased of three months or
less as cash equivalents. At June 30, 2010 and 2009, there is $51.8 million and $79.5 million,
respectively, that is restricted and can be drawn per the terms of the debt issued through the
securitization. This amount is excluded from cash and cash equivalents.
Consolidation Policy
The Company consolidates companies in which it owns or controls, directly or indirectly, more than
50% of the voting shares. Monitronics consists of the following five entities: Monitronics
International, Inc. (Parent), Monitronics Funding LP (Funding), Monitronics Security LP (Security),
MIBU, Inc., and Monitronics Canada (Subsidiaries). The Company eliminates all material intercompany
balances and transactions.
Funding and Security are controlled by general partners that are majority-owned by the Company. The
general partners include independent directors who must concur with the Company in the event that
either Security or Funding files for bankruptcy or liquidation.
Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers for recurring monthly
monitoring services over a wide geographical base. The Company performs extensive credit
evaluations on the portfolios of subscriber accounts prior to purchase and requires no collateral
on the accounts that are acquired. The Company has established an allowance for doubtful accounts
for estimated losses resulting from the inability of subscribers to make required payments. Factors
such as historical-loss experience, recoveries and economic conditions are considered in
determining the sufficiency of the allowance to cover potential losses. The actual collection of
receivables could be different from recorded amounts.
The Companys allowance for doubtful accounts as of June 30, 2010 and 2009, was $1.8 million and
$1.9 million, respectively. During the fiscal years ended June 30, 2010, 2009, and 2008, the
Company recorded a provision for uncollectible accounts of $5.7 million, $5.2 million, and $4.0
million, respectively, and wrote off (net of recoveries) accounts receivable of $5.7 million, $4.9
million, and $4.0 million, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over
the estimated useful life of the assets. Major replacements and betterments are capitalized at
cost. Maintenance and repair costs are charged to expense when incurred. When assets are replaced
or disposed of, the cost and accumulated depreciation are removed from the accounts and the gains
or losses, if any, are reflected in the consolidated statements of operations.
Subscriber Accounts and Other Intangible Assets
Subscriber accounts relate to the cost of acquiring portfolios of monitoring service contracts from
independent dealers. The subscriber accounts are initially recorded at cost. All direct external
costs associated with the creation of subscriber accounts are initially capitalized. Internal
costs, including all personnel and related support costs, incurred solely in connection with
subscriber account acquisitions and transitions are expensed as incurred.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
The costs of subscriber accounts are amortized using the 10-year 135% declining balance method. The
amortization method was selected to provide a matching of amortization expense to individual
subscriber revenues. Amortization of subscriber accounts was $118.8 million, $110.6 million, and
$100.6 million for the fiscal years ended June 30, 2010, 2009, and 2008, respectively.
Based on subscriber accounts held at June 30, 2010, estimated amortization of subscriber accounts
in the succeeding five fiscal years ending June 30 is as follows (in thousands):
2011 |
$ | 113,192 | ||
2012 |
99,801 | |||
2013 |
88,637 | |||
2014 |
77,332 | |||
2015 |
68,351 | |||
Total |
$ | 447,313 | ||
Management reviews the subscriber accounts for impairment or a change in amortization period at
least annually or 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, the Company views subscriber accounts as a single pool because of the assets
homogeneous characteristics, which is the lowest level for which identifiable cash flows are
largely independent of the cash flows of the other assets and liabilities. Based on managements
analysis, no impairment was indicated during the years ended June 30, 2010, 2009, or 2008.
Deferred financing costs are capitalized when the related debt is issued or when amendments to
revolving credit lines increase the borrowing capacity. Deferred financing costs are amortized over
the term of the related debt on a straight-line basis.
Goodwill (carrying value of $14.8 million, including accumulated amortization of $1.2 million, at
June 30, 2010 and 2009) consists of the excess of the cost over the fair value of the net assets
acquired in a business combination. Goodwill is tested for impairment annually using a fair
value-based approach. The Companys goodwill of $14.8 million relates to two acquisitions of
businesses from competitors occurring in the fiscal years ended June 30, 1999, and June 30, 1995.
During the fiscal years ended June 30, 2010, 2009, and 2008, the Company performed its annual tests
of goodwill impairment using a fair value-based approach and no impairment was indicated.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of temporary
differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements. These temporary differences will result in taxable or deductible amounts in
future years when reported amounts of the assets or liabilities are recovered or settled. The
deferred tax assets are reviewed for recoverability at least annually, and a valuation allowance is
provided if it is more likely than not that some portion or all of the deferred tax assets will not
be realized.
Purchase Holdbacks
The Company typically withholds payment of a designated percentage of the purchase price when it
purchases subscriber accounts from dealers. The withheld funds are recorded as a liability until
the guarantee period provided by the dealer has expired. The holdback is used as a reserve to cover
any terminated subscriber accounts that are not replaced by the dealer during the guarantee period
as well as lost revenue during such period. At the end of the guarantee period, which is typically
one year from the date of purchase, the dealer is responsible for any deficit or is paid the
balance of the holdback.
Stock Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity
instruments, such as stock options and restricted stock, based on the fair value of those awards at
the date of grant over the requisite service period. The Company uses the Black-Scholes option
pricing model to determine the fair value of stock-option awards. Stock-based compensation plans,
related expenses and assumptions used in the Black-Scholes option-pricing model are more fully
described in Note 6.
Revenue Recognition
Revenues are recognized as the related monitoring services are provided. Deferred revenue primarily
includes payments for monitoring services to be provided in the future.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
Risk Concentration
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of trade accounts receivable. The Company performs extensive credit
evaluations on the portfolios of subscriber accounts prior to purchase and requires no collateral
on the subscriber accounts that are acquired. Concentrations of credit risk with respect to trade
accounts receivable are generally limited due to the large number of subscribers comprising the
Companys customer base.
Fair Value of Financial Instruments
The carrying amount of our financial instruments, consisting of cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, and certain other liabilities, approximates
their fair value due to their relatively short maturities. Borrowings under the Companys revolving
credit and term loan agreement approximate fair value due to the borrowings being based on variable
market interest rates. Derivative financial instruments are carried at fair value.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to movement in interest rates.
The use of these financial instruments modifies the exposure of these risks with the intention of
reducing the risk or cost. The Company does not use derivatives for speculative or trading
purposes. The Company recognizes the fair value of all derivative instruments as either assets or
liabilities at fair value on the consolidated balance sheets. Fair value is based on market quotes
for similar instruments with the same duration. Changes in the fair value of derivatives are
reported in the consolidated statements of operations.
On the date the derivative instrument is entered into, the Company may designate the derivative as
either a hedge of a forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability (cash flow hedge) or a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value hedge). For
effective hedges, the Company records in accumulated other comprehensive income or loss the
effective portion of changes in the fair value of derivatives that are designated as and meet all
the
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
required criteria for a cash flow hedge. The Company reclassifies these amounts into earnings as
the underlying hedged item affects earnings. The Company immediately records into earnings any
changes in the fair value of derivatives that are not designated as hedges.
Recent Accounting Pronouncements
During 2010, the Company adopted changes issued by the Financial Accounting Standards Board (FASB)
relating to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting
Standards Codification (ASC) as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission
(SEC) under the authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants. The FASB will no longer issue new standards in the form of Statements of Financial
Accounting Standards, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, the
FASB will issue Accounting Standards Updates (ASUs). ASUs will not be authoritative in their own
right, as they will only serve to update the ASC. These changes and the ASC itself do not change
GAAP. Other than the manner in which the new accounting guidance is referenced, the adoption of
these changes had no impact on our financial statements.
During 2010, the Company adopted changes issued by the FASB relating to disclosures about hedging
activities. The changes require qualitative disclosures about the objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about credit risk-related contingent features in derivative
agreements. The adoption of these changes required us to expand our disclosures regarding
derivative instruments, but did not have a material impact on our financial position, results of
operations or cash flows. See Note 10.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consists of the following at June 30 (in thousands):
Estimated | ||||||||||||
Useful Lives | 2010 | 2009 | ||||||||||
Central monitoring station and computer
systems |
35 years | $ | 34,902 | $ | 31,048 | |||||||
Furniture and office equipment |
35 years | 2,294 | 2,146 | |||||||||
Automobiles |
5 years | 20 | 20 | |||||||||
Leasehold improvements |
Lease term | 4,408 | 4,387 | |||||||||
41,624 | 37,601 | |||||||||||
Less accumulated depreciation |
25,906 | 19,968 | ||||||||||
$ | 15,718 | $ | 17,633 | |||||||||
3. Noncurrent Liabilities
Noncurrent liabilities consist of the following at June 30 (in thousands):
2010 | 2009 | |||||||
Revolving credit line and term notes payable |
$ | | $ | | ||||
Parent term loans payable |
5,000 | 5,000 | ||||||
Funding VFNs and term notes payable |
839,200 | 808,384 | ||||||
$ | 844,200 | $ | 813,384 | |||||
16
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Noncurrent Liabilities (continued)
On August 8, 2007, the Company completed a financing transaction of the type commonly referred to
as a whole business securitization. Under the securitization, Funding, a newly formed, wholly owned
subsidiary of the Company, issued $350.0 million Class A-1a Term Notes, $100.0 million Class A-1b
Term Notes, $100.0 million Class A-2 Term Notes, a $260.0 million Class A-3 Variable Funding Note,
and a $28.0 million Class A-4 Variable Funding Note, all of which mature in July 2037, except for
the A-1a and the A-1b Term Notes, which mature in July 2027. Principal payments under the Term
Notes and Variable Funding Notes (VFNs) are payable monthly beginning July 2012 in accordance with
the priority of payments established in the securitization. Available cash remaining after paying
higher-priority items is allocated ratably between the Class A Term Notes and the VFNs. Amounts
allocated to the Class A Term Notes are paid first to the Class A-1 Term Notes until their
outstanding amount has been paid in full, and second to the Class A-2 Term Notes. Amounts
allocated to the VFNs are paid ratably between the Class A-3 VFN and the Class A-4 VFN. The Class
A-1a Term Notes bear interest at a rate of LIBOR plus 1.8% (including certain other fees). The
Class A-1a Term Notes were converted from floating to fixed with a derivative instrument at a rate
of 7.5% (including certain other fees). The Class A-1b Term Notes bear interest at a rate of LIBOR
plus 1.7% (including certain other fees). The Class A-1b Term Notes were converted from floating to
fixed with a derivative financial instrument at a rate of 7.0% (including certain fees). The Class
A-2 Term Notes bear interest at a rate of LIBOR plus 2.2% (including certain other fees). The Class
A-2 Term Notes were converted from floating to fixed with a derivative instrument at a rate of 7.6%
(including certain other fees).
As part of the transaction, the Company transferred substantially all of its subscriber assets,
dealer alarm monitoring purchase agreements, and property and equipment related to its backup
monitoring center, to Funding. The Company also transferred substantially all of its other property
and equipment, dealer service agreements, contract monitoring agreements, and employees to
Security, which also was a newly formed, wholly owned subsidiary of the Company. Following such
transfers, Security assumed responsibility for the monitoring, customer service, billing, and
collection functions of Funding and the Company.
Funding and Security are distinct legal entities, and their assets are available only for payment
of the debt and satisfaction of the other obligations arising under the securitization transactions
and are not available to pay the Companys other obligations or the claims of the Companys other
creditors.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Noncurrent Liabilities (continued)
On the closing date of the securitization, Funding also entered into interest rate swaps in an
aggregate notional amount of $550.0 million that have similar terms in order to reduce the
financial risk related to changes in interest rates associated with the floating rate term notes.
The Company also entered into interest rate caps in an aggregate notional amount of $600.0 million
and an interest rate floor with a notional amount of $260.0 million to reduce the financial risk
related to changes in interest rates associated with the floating rate variable funding notes.
On August 5, 2009, after receiving a nonrenewal notice from a holder of 34% of the liquidity
facility for the VFNs, Funding drew down the banks unfunded commitment of $23.5 million, of which
$14.0 million and $9.5 million were drawn from the Class A-3 VFN and Class A-4 VFN, respectively,
which was deposited with the Trustee. On August 6, 2008, after receiving a nonrenewal notice from a
holder of 66% of the liquidity facility for the VFNs, Funding drew down the banks unfunded
commitment and deposited with the Trustee a total of $121.4 million, comprised of $102.9 million
and $18.5 million drawn from the Class A-3 VFN and Class A-4 VFN, respectively. As of June 30,
2010, a total of $260.0 million and $28.0 million was outstanding under the Class A-3 VFN and Class
A-4 VFN, respectively. As of June 30, 2010, no amounts are available to be drawn from the VFNs.
The Company has $2.0 million of the Class A-3 VFN and $28.0 million of the Class A-4 VFN in
restricted cash, which continues to be available to the Company.
The Company is charged a commitment fee of 0.15% on the unused portion. The VFNs bear interest at
the conduit cost of funds as established at the time of borrowing plus certain other fees if funded
from the commercial paper market or LIBOR plus 0.75% plus certain other fees if funded by liquidity
banks. Interest incurred on borrowings is payable monthly. The securitization debt and interest
rate swaps have an expected repayment date of July 2012. If the securitization debt is not redeemed
at that time, contingent additional interest payments at a rate of 5.0% will apply.
On August 8, 2007, the Company entered into a $5.0 million term loan and $15.0 million revolving
credit line, of which both mature in August 2011, with payment in full due at that time. The
Company is charged a commitment fee of 0.375% on the average daily unused portion. The facility
bears interest at a rate of either prime or LIBOR plus 1.75%. Interest incurred on borrowings is
payable monthly in arrears.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Noncurrent Liabilities (continued)
The credit facility and securitization debt have certain financial tests, which must be met on a
monthly or quarterly basis. Credit facility tests include maximum total senior debt, maximum total
leverage, and a minimum fixed charge coverage ratio. Securitization debt tests include maximum
attrition rates, interest coverage, and minimum average recurring monthly revenue. Indebtedness
under the securitization is secured by all of the assets of Funding. As of June 30, 2010, the
Company was in compliance with all required financial tests.
Scheduled maturities (as defined) of long-term debt at June 30, 2010, utilizing the required
payment schedule of the securitization debt and credit facility, are as follows for the fiscal
years below (in thousands):
2011 |
$ | 12 | ||
2012 |
5,013 | |||
2013 |
14 | |||
2014 |
16 | |||
2015 |
17 | |||
Thereafter |
839,128 | |||
$ | 844,200 | |||
4. Related-Party Transactions
On November 7, 2003, the Hull Family Limited Partnership (the Partnership) and Mr. Hull entered
into a written investor put option to sell up to a combined total of $500,000 in value of Class A
common stock to the Company in each of the five fiscal years ending June 30, 2009, at purchase
prices per share that were based on a multiple of the Companys consolidated cash flow. Based on
the fair value of the Companys stock at the time of the agreement, the Company recorded no
liability in connection with this agreement. As of June 30, 2007, the Partnership had sold the
Company 182,805 shares of Class A common stock for $1,500,000. As of June 30, 2007, the outstanding
liability for the put option was $300,000. On September 15, 2007, the Company entered into a stock
redemption agreement with Mr. Hull, whereby the Company redeemed the remaining 353,413 shares of
Class A common stock and outstanding options for a price of $9.32 per share. Also on this date, the
Company entered into an option surrender agreement whereby Mr. Hull surrendered options entitling
him to 135,000 shares of Class A common stock in exchange for $448,200, representing the difference
between the price of $9.32 per share less the exercise price of $6.00 per share. In connection with
this redemption, the Company recorded $1.0 million in sales, general, and administrative expense,
and $2.4 million to treasury stock, based on the fair value of the repurchased stock.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Shareholders Net Capital
Preferred Stock
The Series A preferred stock votes together with Class A common stock as a single class on an
as-converted basis on all matters to come before the Companys shareholders. The Series A preferred
stock was redeemed on August 8, 2007, from the proceeds of the securitization transaction described
in Note 3. As a result, the former holders of Series A preferred stock have no ongoing contractual
rights.
Common Stock
The Class A common stock and the Class B common stock are identical except for voting and
conversion rights and entitle the holders thereof to the same rights and privileges. Class B common
stock is nonvoting, and Class A common stock has full voting rights. Each holder of shares of Class
A common stock is entitled to one vote per share in the election of directors and on each other
matter submitted to a vote of the Companys shareholders. Class A common stock is not entitled to
vote separately as a class on any matter, unless expressly mandated by law. Class B common stock is
convertible on a share-for-share basis into Class A common stock, provided the conversion does not
result in the holder of Class B common stock acquiring voting securities in excess of the amounts
allowed for the holder under applicable laws or regulations.
The Company has reserved 3,855,023 shares of Class A common stock for future issuance upon the
possible exercise of outstanding stock options and warrants.
Stock Warrants
During January 2002, the Company issued warrants to purchase 1,133,328 shares of Class A common
stock at an exercise price of $0.01 per share in connection with a subordinated note agreement.
These warrants will expire on January 17, 2012. These warrants remain outstanding and are currently
exercisable.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Restricted Stock and Stock Option Plans
The Company maintains a 1999 Stock Option Plan (the 1999 Plan), which was adopted November
3, 1999, and provides for the grant of options to purchase up to 150,000 shares of Class A
common stock to its officers and employees; a 2001 Stock Option Plan (the 2001 Plan),
which was adopted on April 27, 2001, and provides for the grant of options to purchase up
to 250,000 shares of Class A common stock to its officers and employees; and a 2005 Stock
Option Plan (the 2005 Plan), which was adopted on March 28, 2005, and provides for the
grant of options to purchase up to 1,350,000 shares of Class A common stock to its
officers and employees. As of June 30, 2010, there were 39,000, 115,212, and 1,167,483
options outstanding under the 1999, 2001, and 2005 Plans, respectively. In addition, there
are options outstanding to purchase up to 1,400,000 shares of Class A common stock that
were not issued under a plan. Options granted to date vest ratably over periods not
exceeding five years, as specified by the option agreements. The Company recognizes
compensation expense on a straight-line basis for options that vest ratably.
Stock option transactions for the years ended June 30 are summarized as follows:
2010 | 2009 | 2008 | ||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Number of | Exercise | Number of | Exercise | Number of | Exercise | |||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||||||
Outstanding at
beginning of
year |
2,658,695 | $ | 7.16 | 2,555,195 | $ | 7.07 | 1,363,896 | $ | 6.58 | |||||||||||||||
Granted |
84,000 | 7.50 | 315,000 | 7.50 | 1,504,000 | 7.50 | ||||||||||||||||||
Forfeited |
(5,000 | ) | 6.75 | (211,500 | ) | 6.51 | (177,671 | ) | 7.80 | |||||||||||||||
Canceled |
(16,000 | ) | 20.00 | | | (135,000 | ) | 6.00 | ||||||||||||||||
Exercised |
| | | | (30 | ) | 6.00 | |||||||||||||||||
Outstanding at
end of year |
2,721,695 | $ | 7.10 | 2,658,695 | $ | 7.16 | 2,555,195 | $ | 7.07 | |||||||||||||||
Exercisable at
end of year |
1,762,695 | $ | 6.90 | 1,315,235 | $ | 6.96 | 975,992 | $ | 6.90 | |||||||||||||||
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Restricted Stock and Stock Option Plans (continued)
The following table summarizes information about stock options outstanding at June 30, 2010:
Stock Options | Stock Options | Contractual | ||||||||||||
Exercise Prices | Outstanding | Exercisable | Life (in years) | |||||||||||
$ | 6.00 | 739,195 | 732,595 | 4.80 | ||||||||||
6.25 | 100,000 | 80,000 | 6.00 | |||||||||||
7.50 | 1,871,000 | 938,600 | 7.33 | |||||||||||
20.00 | 11,500 | 11,500 | 0.33 |
The weighted-average remaining contractual life for outstanding and exercisable stock options is
6.6 and 4.7 years, respectively.
During 2010, 2009, and 2008, the Company recognized $306,513, $299,613, and $513,952, respectively,
of stock compensation expense. At June 30, 2010, the balance of unearned stock-based compensation
to be expensed in future periods related to unvested share-based awards, as adjusted for estimated
forfeitures, is approximately $0.39 million. The Company anticipates that it will grant additional
stock-based awards to employees in the future, which will increase the stock-based compensation by
additional unearned compensation resulting from these grants. If the Company uses different
assumptions in measuring or accounting for future awards, the stock-based compensation expense that
is recorded relating to those awards may differ significantly from what has been recorded in the
current period.
The Company estimates the fair value of each option using the Black-Scholes option pricing model.
The following weighted-average assumptions were used in computing the fair value of stock options
for the purpose of expense recognition for the following periods:
Year Ended June 30 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected volatility |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Risk-free interest rate |
1.7 | % | 2.6 | % | 4.6 | % | ||||||
Expected dividends |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected term (years) |
3.0 | 3.0 | 5.5 | |||||||||
Weighted-average stock option fair value
per option granted |
$ | 0.19 | $ | 0.21 | $ | 0.98 |
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Restricted Stock and Stock Option Plans (continued)
The expected volatility was based on the historical volatility of similar industry sector
companies, taking into consideration their size and nature of operations.
The risk-free interest rate assumption was based upon the yield curve of U.S. Treasury notes with a
remaining term equal to the expected term of the options.
The expected term of employee stock options represents the period of time the stock options are
expected to remain outstanding and is based upon historical employee exercise behavior and the lack
of marketability for employee stock options and the underlying securities created primarily by
certain restrictions stated in the employee stock option agreements.
7. Income Taxes
The provision for income taxes consists of the following (in thousands):
2010 | 2009 | 2008 | ||||||||||
Current state income taxes |
$ | 1,814 | $ | 1,513 | $ | 1,431 | ||||||
Deferred state income taxes |
| (1,198 | ) | | ||||||||
Total provision for income taxes |
$ | 1,814 | $ | 315 | $ | 1,431 | ||||||
The differences between the actual income tax benefit and the amount computed by applying the
statutory federal tax rate to the loss before income taxes result in the following (in thousands).
The amounts have been restated to record the change in fair value of the swaps within the statement
of operations instead of within other comprehensive income, as follows :
2010 | 2009 | 2008 | ||||||||||
(Benefit) computed at federal statutory rate |
$ | 724 | $ | (19,058 | ) | $ | (29,233 | ) | ||||
Nondeductible expenses |
67 | 79 | | |||||||||
State tax (net of federal benefit) |
1,179 | 984 | 1,431 | |||||||||
Other |
177 | (337 | ) | (114 | ) | |||||||
(Decrease) increase in valuation allowance |
(333 | ) | 18,647 | 29,347 | ||||||||
Total provision for income taxes |
$ | 1,814 | $ | 315 | $ | 1,431 | ||||||
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Deferred income taxes are provided for the tax effects of differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
The components of net deferred income tax assets as of June 30 are as follows (in thousands):
2010 | 2009 | |||||||
Deferred income tax assets: |
||||||||
Book over tax depreciation and amortization |
$ | 15,526 | $ | 15,465 | ||||
Charitable contributions |
42 | 41 | ||||||
Allowance for doubtful accounts |
629 | 606 | ||||||
Deferred revenue |
485 | 503 | ||||||
Texas credit carryforwards |
1,198 | 1,198 | ||||||
Alternative minimum tax carryforward |
426 | 426 | ||||||
Texas deferred assets |
22 | 22 | ||||||
Accrued expenses |
650 | 912 | ||||||
Mark-to-market valuation on derivative financial instruments |
26,800 | 26,032 | ||||||
Net operating loss carryforwards |
25,627 | 26,478 | ||||||
Total deferred tax assets |
71,405 | 71,683 | ||||||
Valuation allowance |
(69,564 | ) | (69,897 | ) | ||||
Net deferred tax assets |
1,841 | 1,786 | ||||||
Deferred income tax liabilities: |
||||||||
Other, net |
(643 | ) | (588 | ) | ||||
Total deferred tax liabilities |
(643 | ) | (588 | ) | ||||
Net deferred tax assets (liabilities) |
$ | 1,198 | $ | 1,198 | ||||
At June 30, 2010, the Company had available for federal income tax purposes an alternative minimum
tax credit carryforward of $426,000, which is available for an indefinite period. The Company had
$76.3 million of federal net operating loss carryforwards, which begin to expire, if unused, in
2024. The Company had available for state income tax purposes net operating loss carryforwards of
$716,000 as of June 30, 2010.
24
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The Company provides a valuation allowance for deferred tax assets when it is more likely than not
that some portion or all of its deferred tax assets will not be realized. In assessing the
realizability of the deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The Company had deferred tax
assets totaling $71.4 million and $71.7 million at June 30, 2010 and 2009, respectively. The
Company maintains a valuation allowance primarily based on experiencing a cumulative loss before
income taxes for the three-year period ended June 30, 2010. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income (including reversals of
deferred tax liabilities) during the periods in which those temporary differences will become
deductible. The $1.2 million net deferred tax asset relates to Texas margin tax and does not depend
on net income. The asset will more likely than not be realized based on future gross margin.
The Company accounts for uncertain tax positions using a two-step approach. The first step is to
evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the
tax benefit as the largest amount that is more than 50% likely of being recognized upon settlement.
The Company has evaluated matters such as derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition, and has determined that there is no
impact on the Companys financial statements for fiscal 2010. The only periods still subject to
audit for the Companys federal tax return are the 2007 through 2010 tax years. The Company will
classify interest and penalties in the provision for income taxes. The Company has determined that
no additional accrual for interest is required in the provision for income taxes during the year
ended June 30, 2010.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Employee Benefit Plan
The Company maintains a tax-qualified, defined contribution plan that meets the requirements of
Section 401(k) of the Internal Revenue Code (the Monitronics 401(k) Plan) . For the fiscal year
ended June 30, 2010, the Company, at its election, made contributions to the Monitronics 401(k)
Plan. These contributions were allocated among participants based upon the respective contributions
made by the participants through salary reductions during the applicable plan year. The Company
also makes matching cash contributions under the Monitronics 401(k) Plan. For the fiscal years
ended June 30, 2010, 2009, and 2008, the Company made matching cash contributions to the
Monitronics 401(k) Plan of approximately $76,723, $106,000, and $109,000, respectively. The funds
of the Monitronics 401(k) Plan are deposited with a trustee and invested at each participants
option in one or more investment funds.
9. Commitments and Contingencies
The Company leases certain office space and equipment under various noncancelable operating leases.
The Company leases 132,880 square feet of total office space, of which 10,000, 13,050, 11,830, and
98,000 square feet are currently under separate leases expiring on February 28, 2011, May 31, 2014,
January 31, 2015, and May 31, 2015, respectively. The Company has the option to renew the lease
expiring on February 28, 2011, for an additional term of 60 months following the expiration of the
original lease agreement. The lease expiring May 31, 2014, has rent escalation clauses associated
with it, and the Company has the option to renew the lease for three additional terms of 60 months
each following the expiration of the original lease agreement. The lease expiring January 31, 2015,
has rent escalation clauses associated with it, and the Company has the option to renew the lease
for an additional term of 36 months following the expiration of the original lease agreement. The
lease expiring May 31, 2015, has rent escalation clauses associated with it, and the Company has
the option to renew the lease for two additional terms of 60 months each following the expiration
of the original lease agreement. All equipment leases are renewable at the option of the Company
upon expiration.
At June 30, 2010, future minimum payments under such leases are as follows (in thousands):
2011 |
$ | 1,854 | ||
2012 |
1,799 | |||
2013 |
1,818 | |||
2014 |
1,810 | |||
2015 |
1,503 | |||
Thereafter |
| |||
Total minimum lease payments |
$ | 8,784 | ||
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
Rental expense for all operating leases was approximately $1,746,000, $1,739,000, and $1,745,000
for the fiscal years ended June 30, 2010, 2009, and 2008, respectively.
On March 22, 2006, a lawsuit was filed by State Farm Fire & Casualty Co., as Subrogee of Edward
Streit vs. Monitronics International, Inc., Q.I.S. Incorporated, Protection Associates, Inc., and
C&H Electric & Communications, Ltd. in the Circuit Court of the Twenty-First Judicial District for
Kankakee County, Illinois. The complaint alleges that the Company and the various other defendants
negligently serviced, maintained, installed, tested, repaired, and inspected the central fire alarm
system located at a multiunit apartment building in Kankakee, Illinois. The complaint alleges that
as a result of these actions by the various defendants, the central fire alarm system did not
immediately detect and notify the authorities of a fire, resulting in damage to the building
premises in excess of what normally would have been caused. The plaintiff seeks compensatory
damages from the various defendants. The Company believes that it acted properly and lawfully in
its dealings with the customer. As a result, the Company intends to vigorously defend and contest
any and all issues or threatened claims in this matter. Management is currently unable to determine
the outcome of the claims or to estimate the amount of potential loss. The Company has not
established a loss accrual associated with this claim.
On March 13, 2008, a lawsuit was filed by Paradox Security Systems, Ltd., Shmuel Hershkovitz, and
Pinhas Shpater vs. ADT Security Services, Inc., Digital Security Controls, Ltd., Monitronics
International, Inc., and Protection One, Inc. in the United States District Court for the Eastern
District of Texas. Judgment was entered as a matter of law in the Companys favor with no finding
of liability. On August 27, 2009, a final judgment was entered and the Company was dismissed from
the lawsuit.
On August 18, 2009, a lawsuit was filed by Velma Veasley vs. Monitronics International, Inc. and
Tel-Star Alarms, Inc. in the state court of Dekalb County, Georgia. The complaint alleges that the
Company and Tel-Star Alarms, Inc. negligently installed and monitored the alarm system located at
Plaintiffs residence, that defendants breached the terms of the alarm monitoring contract with
Plaintiff, and that defendants fraudulently misrepresented to Plaintiff the capabilities of the
alarm monitoring system. The complaint alleges that as a result of these actions, Plaintiff was
assaulted in her home. The plaintiff seeks compensatory and punitive
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
damages from the various defendants. The Company believes that it acted properly and lawfully in
its dealings with the customer. As a result, the Company intends to vigorously defend and contest
any and all issues or threatened claims in this matter. Management is currently unable to determine
the outcome of the claims or to estimate the amount of potential loss; therefore, the Company has
not established a loss accrual associated with this claim.
The Company is party to various other legal proceedings and claims that have arisen in the ordinary
course of its business. In the opinion of management, the amount of ultimate liability with respect
to these actions will not have a material impact on the Companys financial position or results of
operations.
10. Derivatives
The Company uses interest rate derivatives to manage its interest rate risk. The valuation of these
instruments is determined using widely accepted valuation techniques, including discounted cash
flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual
terms of the derivatives, including the period to maturity, and uses observable market-based
inputs, including interest rate curves and implied volatilities. The fair values of interest rate
caps are determined using the market standard methodology of discounting the future expected cash
receipts that would occur if variable interest rates rise above the strike rate of the caps. The
variable interest rates used in the calculation of projected receipts on the cap are based on an
expectation of future interest rates derived from observable market interest rate curves and
volatilities. The Company incorporates credit valuation adjustments to appropriately reflect the
respective counterpartys nonperformance risk in the fair value measurements.
At June 30, 2010, derivative financial instruments include two interest rate caps with an aggregate
fair value of $0.4 million, an interest rate floor with a fair value of $(23.5) million, and three
interest rate swaps (Swaps) with an aggregate fair value of $(53.5) million. The interest rate caps
represent financial assets of the Company, while the interest rate floor and Swaps represent
financial liabilities of the Company. The interest rate caps floor and Swaps have not been
designated as hedges. The net change in fair value of these derivatives for the years ended June
30, 2010, 2009, and 2008, is a loss of $2.2 million, $37.5 million, and $30.8 million,
respectively, included in unrealized loss on derivative instruments in the consolidated statements
of operations.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Derivatives (continued)
For purposes of valuation of the Swaps, the Company has considered that certain provisions of the
Term Notes and VFNs provide for significant adverse changes to interest rates and uses of cash
flows if this debt is not repaid by July 2012. In addition, the Swaps can be terminated at this
time with no additional costs to the Company. Currently, a make whole payment would be due to the
counterparty to the Swaps were the swaps terminated before April 2012. Were the Term Notes and the
VFNs not repaid in full by July 2012, the Company would incur additional interest and other costs
and be restricted in subscriber account purchases at Funding, until the Term Notes and VFNs were
repaid in full. Management believes it is highly likely the Company will be able to refinance
and/or repay the Term Notes and VFNs in full by July 2012, and the valuation considers adjustments
for termination dates before and after July 2012 on a probability weighted basis. The valuation of
the Swaps is based principally on a July 2012 maturity of the Term Notes less a credit valuation
adjustment.
Borrowings under the debt bear interest at variable rates. Our objective in entering into the Swaps
was to reduce the risk associated with these variable rates. The Swaps, in effect, convert variable
rates of interest into fixed rates of interest on $550 million of borrowings. It is our policy to
offset fair value amounts recognized for derivative instruments executed with the same counterparty
under a master netting agreement. As of June 30, 2010, 2009, and 2008, no such amounts were offset.
The Companys Swaps are as follows (dollars in thousands):
Notional | Rate Paid | Rate Received | ||
$350,000 | 6.56% | 1 mo. USD-LIBOR-BBA | ||
100,000 | 6.06% | 1 mo. USD-LIBOR-BBA | ||
100,000 | 6.64% | 1 mo. USD-LIBOR-BBA |
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Derivatives (continued)
The fair value of derivative instruments as of June 30, 2010, is as follows (in thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
Purchased interest rate swaps |
Other assets | $ | | Other liabilities | $ | 53,486 | ||||||||||
Purchased interest rate caps |
Other assets | 433 | Other liabilities | | ||||||||||||
Sold interest rate floor |
Other assets | | Other liabilities | 23,525 | ||||||||||||
Total interest rate products |
433 | 77,011 | ||||||||||||||
Total derivatives |
$ | 433 | $ | 77,011 | ||||||||||||
Gains and losses recognized during the year ended June 30, 2010, relating to derivatives not
designated as hedging instruments are as follows:
Location of | Amount of Gain | |||||||
Gain (Loss) | (Loss) | |||||||
Recognized in | Recognized in | |||||||
Income on | Income on | |||||||
Derivatives | Derivatives | |||||||
Interest rate products |
Unrealized loss on derivative instruments | $ | 2,202 | |||||
Total |
$ | 2,202 | ||||||
The Company has a single counterparty that it faces for its derivative contracts. The Companys
contractual agreement with its counterparty contains a provision where if the Company defaults on
its master debt agreement and liquidates the assets that are encumbered by the debt agreement, then
the Company could also be declared in default on its derivative obligations.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Derivatives (continued)
As of June 30, 2010, the fair value of derivatives in a net liability position, which includes
accrued interest but excludes any adjustment for nonperformance risk, related to these agreements
was $77.0 million. As of June 30, 2010, the Company has not posted any collateral related to these
agreements. If the Company had breached the provision above, it could have been required to settle
its obligations under the agreements at the termination value of $77.0 million.
11. Fair Value Accounting
On July 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defined fair value, established a framework for measuring
fair value, and expanded disclosures about fair value measurements. SFAS 157 was replaced by ASC
820, Fair Value Measurements and Disclosures.
ASC 820, defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure
fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize
the use of unobservable inputs. The three levels of inputs used to measure fair value are, as
follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar
assets and liabilities in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This includes certain pricing
models, discounted cash flow methodologies, and similar techniques that use significant
unobservable inputs.
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Fair Value Accounting (continued)
We have aggregated our financial assets and liabilities that are measured at fair value on a
recurring basis (at least annually) into the most appropriate level within the fair value hierarchy
based on the inputs used to determine the fair value at the measurement dates.
The tables below presents the Companys assets and liabilities measured at fair value on a
recurring basis as of June 30, 2010 and 2009, aggregated by the level in the fair value hierarchy
within which those measurements fall. The tables do not include cash on hand or assets and
liabilities that are measured at historical cost or any basis other than fair value (in thousands):
Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2010
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | Balance at | |||||||||||||
Liabilities | Inputs | Inputs | June 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||
Assets |
||||||||||||||||
Cash equivalents |
$ | 88,035 | $ | | $ | | $ | 88,035 | ||||||||
Derivative financial
instruments |
| 433 | | 433 | ||||||||||||
Liabilities |
||||||||||||||||
Derivative financial
instruments |
$ | | $ | 23,524 | $ | 53,487 | $ | 77,011 |
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Fair Value Accounting (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2009
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | Balance at | |||||||||||||
Liabilities | Inputs | Inputs | June 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2009 | |||||||||||||
Assets |
||||||||||||||||
Cash equivalents |
$ | 108,606 | $ | | $ | | $ | 108,606 | ||||||||
Derivative financial
instruments |
| 2,402 | | 2,402 | ||||||||||||
Liabilities |
||||||||||||||||
Derivative financial
instruments |
$ | | $ | 19,237 | $ | 57,541 | $ | 76,778 |
The Companys fair value measurements of the Swaps rely on significant unobservable inputs (Level
3) as of June 30, 2010 and 2009.
The Company has determined that the majority of the inputs used to value its interest rate caps and
floor derivatives fall within Level 2 of the fair value hierarchy. The Company has determined that
the majority of the inputs used to value its Swaps fall within Level 3 of the fair value hierarchy,
as the valuation is based in part on managements estimates of the refinancing date of the Term
Notes, which affects the termination date of the Swaps as the notional amount of the Swaps is
directly linked to the outstanding principal balance of the Term Notes. However, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of
current credit spreads to evaluate the likelihood of default by its counterparties. For
counterparties with publicly available credit information, the credit spreads over LIBOR used in
the calculations represent implied credit default swap spreads obtained from a third-party credit
data provider. However, as of June 30, 2010, the Company has assessed the significance of the
impact of the credit valuation adjustments on the overall valuation of its derivative positions and
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Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Fair Value Accounting (continued)
has determined that the credit valuation adjustments are not significant to the overall valuation
of its interest rate caps and floor derivatives, but are significant for the Swaps. As a result,
the Company has determined that its derivative valuations on its interest rate caps and floor are
classified in Level 2 of the fair value hierarchy and its derivative valuation on its Swaps are
classified in Level 3 of the fair-value hierarchy.
The table below sets forth a summary of changes in the fair value of the Companys Level 3
liabilities for the year-ended June 30, 2010, 2009, and 2008:
Fair value at July 1, 2007 |
$ | | ||
Change in unrealized loss related to the Swaps |
30,846 | |||
Fair value at June 30, 2008 |
30,846 | |||
Change in unrealized loss related to the Swaps |
26,695 | |||
Fair value at June 30, 2009 |
57,541 | |||
Change in unrealized loss related to the Swaps |
4,054 | |||
Fair value at June 30, 2010 |
$ | 53,487 | ||
12. Subsequent Events
The Company has evaluated events and transactions subsequent to October 13, 2010, the date that the
financial statements were available to be issued. Based on requirements of the subsequent event
guidance, the Company has not identified any events that require disclosure.
13. Acquisition by Ascent Media Corporation
On December 17, 2010, Ascent Media Corporation (AMC) acquired 100% of the
outstanding capital stock of the Company through the merger of Mono Lake Merger Sub, Inc.
(Merger Sub), a direct wholly owned subsidiary of AMC established to consummate the merger,
with and into the Company, with the Company as the surviving corporation in the merger. The terms
of the merger are set forth in an agreement and plan of merger dated December 17, 2010, among AMC,
Merger Sub, the Company, and, for certain purposes only, ABRY Partners, LLC (the Shareholder Representative).
The closing of the merger occurred simultaneously with the execution of the merger agreement. The cash portion
of the aggregate merger consideration paid by AMC pursuant to the merger agreement, including unpaid
company transaction expenses, was approximately $413,141,000, subject to adjustment.
34