Quarterly report pursuant to Section 13 or 15(d)

Fresh Start Accounting (Tables)

v3.19.3
Fresh Start Accounting (Tables)
9 Months Ended
Sep. 30, 2019
Reorganizations [Abstract]  
Reconciliation of Reorganization Value
The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (dollars in thousands):

Enterprise value
$
1,373,400

Plus: Fair value of non-interest bearing current liabilities
61,188

Plus: Fair value of non-interest bearing long-term liabilities
26,060

Reorganization value
$
1,460,648

Schedule of Fresh-Start Adjustments
The adjustments set forth in the following unaudited condensed consolidated balance sheet as of August 31, 2019 reflect the consummation of the transactions contemplated by the Plan (reflected in the column "Reorganization Adjustments"), transactions recorded to complete the merger with Ascent Capital (reflected in the column "Ascent Capital Merger") as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions or inputs (dollars in thousands).


 
 
As of August 31, 2019
 
 
Predecessor
Company
 
Reorganization
Adjustments
 
Ascent Capital
Merger
 
Fresh Start
Adjustments
 
Successor
Company
Assets
 
 

 
 
 
 
 
 
 
 
Current assets:
 
 

 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
19,862

 
3,604

(1)
1,139

(9)

 
24,605

Restricted cash
 
35

 

 

 

 
35

Trade receivables, net
 
11,834

 

 

 

 
11,834

Prepaid and other current assets
 
23,825

 

 
27

(9)

 
23,852

Total current assets
 
55,556

 
3,604

 
1,166

 

 
60,326

Property and equipment, net
 
37,143

 

 

 
3,808

(10)
40,951

Subscriber accounts and deferred contract acquisition costs, net
 
1,151,322

 

 

 
(55,936
)
(11)
1,095,386

Dealer network and other intangible assets
 

 

 

 
144,700

(12)
144,700

Goodwill
 

 

 

 
81,943

(13)
81,943

Deferred income tax asset, net
 
783

 

 

 

 
783

Operating lease right-of-use asset
 
19,222

 

 
90

(9)

 
19,312

Other assets
 
17,932

 

 

 
(685
)
(14)
17,247

Total assets
 
$
1,281,958

 
3,604

 
1,256

 
173,830

 
1,460,648

Liabilities and Stockholder's Equity (Deficit)
 
 

 
 
 
 
 
 
 
 
Current liabilities:
 
 

 
 

 
 
 
 
 
 
Accounts payable
 
$
13,713

 

 

 

 
13,713

Other accrued liabilities
 
30,571

 
(1,070
)
(2)
241

(9)
4,427

(15)
34,169

Deferred revenue
 
12,646

 

 

 
(5,331
)
(16)
7,315

Holdback liability
 
12,516

 

 

 
(6,525
)
(17)
5,991

Current portion of long-term debt
 

 
8,225

(3)

 

 
8,225

Total current liabilities
 
69,446

 
7,155

 
241

 
(7,429
)
 
69,413

Non-current liabilities:
 
 

 
 
 
 
 
 
 
 
Long-term debt
 
199,000

 
786,775

(4)

 

 
985,775

Long-term holdback liability
 
1,817

 

 

 

 
1,817

Operating lease liabilities
 
16,055

 

 

 

 
16,055

Other liabilities
 
2,175

 

 

 
6,013

(15)
8,188

Total non-current liabilities
 
219,047

 
786,775

 

 
6,013

 
1,011,835

Liabilities subject to compromise
 
1,722,052

 
(1,722,052
)
(5)

 

 

Total liabilities
 
2,010,545

 
(928,122
)
 
241

 
(1,416
)
 
1,081,248

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
Stockholder's equity (deficit):
 
 
 
 
 
 
 
 
 
 
Predecessor additional paid-in capital
 
436,986

 
(436,986
)
(6)

 

 

Predecessor accumulated other comprehensive income, net
 
6,668

 

 

 
(6,668
)
(18)

Successor common stock
 

 
225

(7)

 

 
225

Successor additional paid-in capital
 

 
379,175

(7)

 

 
379,175

(Accumulated deficit) retained earnings
 
(1,172,241
)
 
989,312

(8)
1,015

(9)
181,914

(18)

Total stockholder's equity (deficit)
 
(728,587
)
 
931,726

 
1,015

 
175,246

 
379,400

Total liabilities and stockholder's equity (deficit)
 
$
1,281,958

 
3,604

 
1,256

 
173,830

 
1,460,648


Reorganization adjustments

1. Reflects cash contributions and debt principal and interest payments from the implementation to the Plan as follows (dollars in thousands):
Equity rights offering proceeds from Noteholders
$
177,000

Equity rights offering proceeds from Ascent Capital
23,000

Payment of Predecessor Credit Facility principal and interest
(165,619
)
Payment of Predecessor DIP Facility principal and interest
(28,570
)
Payment of Predecessor Senior Notes principal and interest
(2,207
)
Net cash contribution
$
3,604


2. Represents payment of Predecessor DIP Facility accrued interest.

3. Represents the Current portion of long-term debt based on the repayment terms of the Successor Takeback Loan Facility.

4. Represents the net increase in Long-term debt as follows (dollars in thousands):
Long-term portion of Successor Takeback Term Loan
$
814,275

Payment of Predecessor DIP Facility principal
(27,500
)
Net increase in Long-term Debt
$
786,775


5. Liabilities subject to compromise immediately prior to the Effective Date consisted of the following (dollars in thousands):
Predecessor Term Loan
$
1,072,500

Predecessor Senior Notes
585,000

Predecessor Term Loan accrued interest
15,619

Predecessor Senior Notes accrued interest
48,933

Total Liabilities subject to compromise
$
1,722,052


Liabilities subject to compromise have been settled as follows in accordance with the Plan (dollars in thousands):
Liabilities subject to compromise
$
1,722,052

Payment of Predecessor Term Loan principal and interest
(165,619
)
Payment of Predecessor Senior Notes principal and interest
(2,207
)
Issue Successor Takeback Term Loan
(822,500
)
Fair value of common stock issued to Predecessor Term Loan and Predecessor Senior Notes holders
(171,989
)
Gain on settlement of Liabilities subject to compromise
$
559,737


6. Pursuant to the Plan, all equity interests of the Predecessor that were issuable or issued and outstanding immediately prior to the Effective Date were cancelled. The elimination of the carrying value of the cancelled equity interests was recorded as an offset to retained earnings (accumulated deficit).

7. Pursuant to the Plan, the Company issued new common stock through an equity rights offering to the Noteholders, the exchange of Ascent Capital common shares for Monitronics common shares pursuant to the Merger, the partial equitization of the Predecessor Term Loan and the cancellation of the outstanding Predecessor Senior Notes, to the extent each Noteholder elected not to receive cash. See note 2, Emergence from Bankruptcy for further information regarding these transactions. As of the Effective Date, there were 22,500,000 common shares issued and outstanding that have a par value of $0.01 per share.

8. Adjustment made to Retained earnings (accumulated deficit) consisted of the following (dollars in thousands):
Cancellation of Predecessor additional paid-in capital
$
436,986

Loss on equity rights offering discount, net
(7,411
)
Gain on settlement of Liabilities subject to compromise
559,737

Total adjustment to Retained earnings (accumulated deficit)
$
989,312


Ascent Capital Merger

9. Represents the transfer of the Ascent Capital final balances to Monitronics to complete the merger.

Fresh Start Adjustments

10. Reflects the increase in net book value of property and equipment to the estimated fair value as of the Effective Date. The following table summarizes the components of Property and equipment, net as of August 31, 2019, and the fair value as of the Effective Date (dollars in thousands):
 
Estimated Useful Life
 
Successor Company
 
 
Predecessor Company
Leasehold improvements
9 years
 
$
353

 
 
$
771

Computer systems and software
2 to 4 years
 
39,320

 
 
83,238

Furniture and fixtures
5 years
 
1,278

 
 
2,009

 
 
 
40,951

 
 
86,018

Accumulated depreciation
 
 

 
 
(48,875
)
Property and equipment, net
 
 
$
40,951

 
 
$
37,143


To estimate the fair value of property and equipment, the Company utilized an cost approach by applying the reproduction cost method. The Successor property and equipment will be depreciated using the straight-line method over the estimated useful lives of the assets.

11. Represents the fair value adjustment of the subscriber accounts. The fair value of the subscriber accounts was determined based on the excess earnings method, a derivation of the income approach, that considers cash flows to the subscriber accounts after accounting for a fair return to the other supporting assets of the business. The valuation of the subscriber accounts is based on the projected cash flows to be generated by the existing subscribers as of the Effective Date. The Successor subscriber accounts will be amortized using the 14-year 235% double-declining balance method. The amortization methods were selected to provide an approximate matching of the amortization of the subscriber accounts intangible asset to estimated future subscriber revenues based on the projected lives of individual subscriber contracts.

12. The Company recorded an adjustment to dealer network and other intangible assets as follows (dollars in thousands):
Dealer network
$
140,000

Leasehold interest
4,700

Total Dealer network and other intangible assets
$
144,700


The fair values of dealer network and other intangible assets were determined as follows:
a. The fair value of the dealer network was determined based on the excess earnings method, a derivation of the income approach, that considers cash flows related to the dealer network after accounting for a fair return to the other supporting assets of the business. The valuation of the dealer network is based on the cash flow, net of purchase price, to be earned from subscribers purchased in the future from the current dealer network. The Successor dealer network will be amortized on a straight-line basis over the estimated useful life of six years.

b. The leasehold interest was valued using an income approach by applying the discount cash flow method based on the contractual lease rate and market lease rates. The Successor leasehold interest will be amortized on a straight-line basis over the remaining life of the lease.

13. The amount recognized for goodwill represents the amount of the reorganization value, after the fresh start accounting adjustments, left over after allocating to the fair value of acquired assets and liabilities.

14. Represents the elimination of the carrying value of dealer assets. The fair value adjustment of these assets is included in the valuation of the dealer network.

15. Represents the fair value adjustment of the bonus purchase price and revenue sharing liabilities based on estimated future cash payments.

16. Represents the fair value adjustment of deferred revenue to remove gross margin costs from the balance sheet.

17. Represents the fair value adjustment of the holdback liability based on estimated future cash payments.

18. Reflects the cumulative impact of the fresh start accounting adjustments discussed above on retained earnings (accumulated deficit) as follows (dollars in thousands):
Property and equipment fair value adjustment
$
3,808

Subscriber accounts fair value adjustment
(55,936
)
Dealer network and other intangible assets fair value adjustment
144,700

Goodwill
81,943

Other assets and liabilities fair value adjustments
731

Predecessor accumulated other comprehensive income, net
6,668

Net gain on fresh start adjustments
$
181,914


Gain on restructuring and reorganization, net

Gain on restructuring and reorganization recognized as a result of the Chapter 11 Cases is presented separately in the accompanying unaudited condensed consolidated statement of operations as follows (dollars in thousands):
 
Predecessor Company
 
Period from July 1, 2019 through
August 31, 2019
 
Period from January 1, 2019 through
August 31, 2019
Gain on settlement of Liabilities subject to compromise (a)
$
559,737

 
559,737

Gain on fresh start adjustments (b)
181,914

 
181,914

Loss on equity rights offering discount (c)
(8,325
)
 
(8,325
)
Restructuring and reorganization expense (d)
(30,502
)
 
(63,604
)
Gain on restructuring and reorganization, net
$
702,824

 
669,722

 
(a)        Gain recognized primarily on Predecessor Senior Notes converted from debt to equity and Predecessor Senior Notes settled at a discount in accordance with the Plan.
(b)        Revaluation of certain assets and liabilities upon the adoption of fresh start accounting.
(c)        In accordance with the Plan, Noteholders that participated in the equity rights offering purchased Monitronics common stock at a discount.
(d)        Legal, financial advisory and other professional costs directly associated with the restructuring and reorganization process.