Attached files
file | filename |
---|---|
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-99.1 - EX-99.1 - Ascent Capital Group, Inc. | v58206exv99w1.htm |
Exhibit 99.2
Consolidated Financial Statements
(Unaudited)
(Unaudited)
Monitronics International, Inc. and Subsidiaries
For the Three Months ended September 30, 2010 and
September 30, 2009
For the Three Months ended September 30, 2010 and
September 30, 2009
1
Monitronics International, Inc. and Subsidiaries
Consolidated Financial Statements
(Unaudited)
(Unaudited)
For the Three Months Ended September 30, 2010 and September 30, 2009
Contents
Consolidated Financial Statements (Unaudited) |
||||
Consolidated Balance Sheet (Unaudited)
|
3 | |||
Consolidated Statements of Operations (Unaudited)
|
5 | |||
Consolidated Statements of Shareholders Net Capital (Deficiency) (Unaudited)
|
6 | |||
Consolidated Statements of Cash Flows (Unaudited)
|
7 | |||
Notes to Consolidated Financial Statements (Unaudited)
|
8 |
2
Monitronics International, Inc. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
(In Thousands, Except Share Data)
(In Thousands, Except Share Data)
September 30, | ||||
2010 | ||||
Assets |
||||
Current assets: |
||||
Cash and cash equivalents |
$ | 36,101 | ||
Restricted cash |
53,544 | |||
Accounts receivable, less allowance for doubtful accounts
of $1,778 in 2010 |
10,624 | |||
Prepaid expenses and other current assets |
3,224 | |||
Total current assets |
103,493 | |||
Property and equipment, net |
14,987 | |||
Subscriber accounts, net of accumulated amortization
of $653,631 in 2010 |
639,490 | |||
Deferred financing costs, net |
27,626 | |||
Fair value of derivative financial instruments |
231 | |||
Other assets |
1,544 | |||
Long-term deferred tax asset |
1,198 | |||
Goodwill |
14,795 | |||
Total assets |
$ | 803,364 | ||
3
September 30, | ||||
2010 | ||||
Liabilities and shareholders net capital (deficiency) |
||||
Current liabilities: |
||||
Accounts payable |
$ | 1,788 | ||
Accrued expenses |
5,175 | |||
Purchase holdbacks |
12,437 | |||
Deferred revenue |
5,627 | |||
Interest payable |
2,299 | |||
Taxes payable |
2,414 | |||
Total current liabilities |
29,740 | |||
Noncurrent liabilities: |
||||
Long-term debt |
844,200 | |||
Fair value of derivative financial instruments |
77,978 | |||
Total noncurrent liabilities |
922,178 | |||
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 |
311 | |||
Class B common stock, $0.01 par value: |
||||
Authorized shares 700,000; issued shares none |
| |||
Additional paid-in capital |
126,016 | |||
Treasury stock, at cost, 1,322,135 shares |
(12,037 | ) | ||
Accumulated deficit |
(262,844 | ) | ||
Total shareholders net capital (deficiency) |
(148,554 | ) | ||
Total liabilities and shareholders net capital (deficiency) |
$ | 803,364 | ||
See accompanying notes.
4
Monitronics International, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | ||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In Thousands) | ||||||||
Revenue |
$ | 71,653 | $ | 65,175 | ||||
Cost of services |
9,213 | 8,235 | ||||||
Gross profit |
62,440 | 56,940 | ||||||
Operating expenses: |
||||||||
Sales, general, and administrative |
13,023 | 12,725 | ||||||
Depreciation |
1,499 | 1,411 | ||||||
Amortization |
30,660 | 28,837 | ||||||
45,182 | 42,973 | |||||||
Operating income |
17,258 | 13,967 | ||||||
Other expenses: |
||||||||
Unrealized loss on derivative instruments |
1,169 | 3,745 | ||||||
Interest |
14,471 | 14,362 | ||||||
15,640 | 18,107 | |||||||
Income (loss) before income taxes |
1,618 | (4,140 | ) | |||||
Provision for income taxes |
482 | 428 | ||||||
Net income (loss) |
$ | 1,136 | $ | (4,568 | ) | |||
See accompanying notes.
5
Monitronics International, Inc. and Subsidiaries
Consolidated Statement of Shareholders Net Capital (Deficiency)
(Unaudited)
(In Thousands)
(In Thousands)
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 June 30, 2009 |
31,102,347 | $ | 311 | | $ | | $ | 125,633 | 1,322,135 | $ | (12,037 | ) | $ | (264,232 | ) | $ | (150,325 | ) | ||||||||||||||||||
Stock-based compensation |
| | | | 77 | | | | 77 | |||||||||||||||||||||||||||
Net loss |
| | | | | | | (4,568 | ) | (4,568 | ) | |||||||||||||||||||||||||
Balances at September 30,
2009 |
31,102,347 | $ | 311 | | $ | | $ | 125,710 | 1,322,135 | $ | (12,037 | ) | $ | (268,800 | ) | $ | (154,816 | ) | ||||||||||||||||||
Balances at June 30, 2010 |
31,102,347 | $ | 311 | | $ | | $ | 125,939 | 1,322,135 | $ | (12,037 | ) | $ | (263,980 | ) | $ | (149,767 | ) | ||||||||||||||||||
Stock-based compensation |
| | | | 77 | | | | 77 | |||||||||||||||||||||||||||
Net income |
| | | | | | | 1,136 | 1,136 | |||||||||||||||||||||||||||
Balances at September 30,
2010 |
31,102,347 | $ | 311 | | $ | | $ | 126,016 | 1,322,135 | $ | (12,037 | ) | $ | (262,844 | ) | $ | (148,554 | ) | ||||||||||||||||||
See accompanying notes.
6
Monitronics International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | ||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In Thousands) | ||||||||
Operating activities |
||||||||
Net income (loss) |
$ | 1,136 | $ | (4,568 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
32,159 | 30,248 | ||||||
Amortization of deferred financing costs |
365 | 365 | ||||||
Provision for uncollectible accounts |
1,363 | 1,556 | ||||||
Noncash stock-based compensation |
77 | 77 | ||||||
Unrealized loss on derivative instruments |
1,169 | 3,745 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,341 | ) | (1,557 | ) | ||||
Prepaid expenses and other assets |
(1,655 | ) | (1,698 | ) | ||||
Accounts payable |
(620 | ) | 451 | |||||
Accrued expenses |
(259 | ) | 5 | |||||
Interest payable |
15 | 44 | ||||||
Deferred revenue |
23 | 66 | ||||||
Taxes payable |
430 | 360 | ||||||
Net cash provided by operating activities |
32,862 | 29,094 | ||||||
Investing activities |
||||||||
(Increase) decrease in restricted cash |
(1,769 | ) | 10,295 | |||||
Purchases of property and equipment |
(768 | ) | (871 | ) | ||||
Purchases of subscriber accounts (net of holdbacks) |
(35,062 | ) | (60,884 | ) | ||||
Net cash used in investing activities |
(37,599 | ) | (51,460 | ) | ||||
Financing activities |
||||||||
Proceeds from credit facility |
| 42,892 | ||||||
Payments on credit facility |
| (13,276 | ) | |||||
Payment of deferred financing costs |
| 2 | ||||||
Net cash provided by financing activities |
| 29,618 | ||||||
Net (decrease) increase in cash and cash equivalents |
(4,737 | ) | 7,252 | |||||
Cash and cash equivalents at beginning of period |
40,838 | 33,267 | ||||||
Cash and cash equivalents at end of period |
$ | 36,101 | $ | 40,519 | ||||
See accompanying notes.
7
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
1. Description of Business and Summary of Significant Accounting Policies
Monitronics International, Inc. (Monitronics) 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.
Basis of Presentation
The consolidated balance sheet and related consolidated statements of operations, stockholders
equity and comprehensive income, and cash flows contained in this report, which are unaudited,
include the accounts of Monitronics and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial information.
Accordingly, they do not include all of the information and notes required by GAAP for complete
financial statements. The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts in the
consolidated financial statements and accompanying notes. In the opinion of management, all
adjustments, consisting of normal recurring items, necessary for a fair presentation of
consolidated financial statements have been included. Operating results for the three months ended
September 30, 2010, are not necessarily indicative of the results to be expected for any other
interim period or for the fiscal year ending June 30, 2011.
These unaudited interim consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and related notes thereto for the year ended
June 30, 2010.
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.
8
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
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.
3. Income Taxes
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 Companys deferred tax asset is fully reserved primarily based on experiencing a
cumulative loss before income taxes for the three-year period ended September 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 tax expense of $482 thousand and $428 thousand at September 30, 2010 and 2009, respectively, is
for Texas margin tax. The Company has not reported any federal income tax expense due to its
ability to utilize net operating loss carry-forwards.
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 de-recognition, 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 quarter ending September 30, 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 quarter ended September 30, 2010.
9
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
4. Commitment and Contingencies
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 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.
10
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
4. Commitments and contingencies, continued
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.
5. 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.
For purposes of valuation of the interest rate swaps (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.
11
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
5. Derivatives, continued
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 and 2009, no such amounts were
offset.
At September 30, 2010, derivative financial instruments included a purchased interest rate cap, a
sold interest rate floor, and three Swaps as summarized in the tables below. The interest rate cap
represents a financial asset of the Company, while the interest rate floor and Swaps represent
financial liabilities of the Company. Although effective economic hedges of the Companys floating
rate debt, the interest rate cap, floor, and Swaps are not designated as hedges and as such, the
periodic changes in value are recorded in current period earnings. The following table summarizes
the key economic terms of the Companys active derivatives as of September 30, 2010 (dollars in
thousands):
The Companys derivative instruments are, as follows (dollars in thousands):
Notional | Rate Paid | Rate Received | ||||||||||
Swap |
$ | 350,000 | 6.56 | % | 1 mo. USD-LIBOR-BBA | |||||||
Swap |
100,000 | 6.06 | % | 1 mo. USD-LIBOR-BBA | ||||||||
Swap |
100,000 | 6.64 | % | 1 mo. USD-LIBOR-BBA | ||||||||
Cap |
240,000 | 6.30 | % | 1 mo. USD-LIBOR-BBA | ||||||||
Floor |
260,000 | 3.80 | % | 1 mo. USD-LIBOR-BBA |
12
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
5. Derivatives, continued
The fair value of derivative instruments as of September 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 | $ | 51,487 | ||||||||||
Purchased interest rate caps |
Other assets | 231 | Other liabilities | | ||||||||||||
Sold interest rate floor |
Other assets | | Other liabilities | 26,510 | ||||||||||||
Total interest rate products |
231 | 77,978 | ||||||||||||||
Total derivatives |
$ | 231 | $ | 77,978 | ||||||||||||
13
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
5. Derivatives, continued
Gains and losses recognized during the three months ended September 30, 2010 and 2009, relating to
derivatives are as follows:
Location of Loss | Amount of Loss | |||||||
Recognized in | Recognized in | |||||||
Loss on | Loss on | |||||||
Three months ended September 30, 2010 | Derivatives | Derivatives | ||||||
Unrealized loss on | ||||||||
derivative | ||||||||
Interest rate products |
instruments | $ | 1,169 | |||||
Total |
$ | 1,169 | ||||||
Location of Loss | Amount of Loss | |||||||
Recognized in | Recognized in | |||||||
Loss on | Loss on | |||||||
Three months ended September 30, 2009 | Derivatives | Derivatives | ||||||
Unrealized loss on | ||||||||
derivative | ||||||||
Interest rate products |
instruments | $ | 3,745 | |||||
Total |
$ | 3,745 | ||||||
14
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
5. Derivatives, continued
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.
As of September 30, 2010, the fair value of derivatives in a net liability position, which includes
accrued interest and any adjustment for nonperformance risk related to these agreements, was $77.7
million. As of September 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 $77.7 million.
6. Fair Value Accounting
ASC 820, Fair Value Measurement and Disclosures, 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.
15
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
6. 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 present the Companys assets and liabilities measured at fair value on a
recurring basis as of September 30, 2010, 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 September 30, 2010
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | Balance at | |||||||||||||
Liabilities | Inputs | Inputs | September 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||
Assets |
||||||||||||||||
Cash equivalents |
$ | 86,706 | $ | | $ | | $ | 86,706 | ||||||||
Derivative
financial
instruments |
| 231 | | 231 | ||||||||||||
Liabilities |
||||||||||||||||
Derivative
financial
instruments |
$ | | $ | 26,510 | $ | 51,469 | $ | 77,978 |
16
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
6. Fair Value Accounting, continued
The Company has determined that the majority of the inputs used to value its interest rate cap and
sold floor 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 September 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 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 as 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 three months ended September 30, 2010:
Fair value at June 30, 2010 |
$ | 53,487 | ||
Change in unrealized loss related to the Swaps |
(2,018 | ) | ||
Fair value at September 30, 2010 |
$ | 51,469 | ||
17
Monitronics International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
7. Subsequent Events
The Company has evaluated events and transactions subsequent to September 30, 2010 through December
28, 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, except for the event described below.
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.
18