See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Effective as of December 31, 2019, pursuant to that certain Merger and Reorganization Agreement (as amended, the “Merger Agreement”) by and among StoneMor GP LLC (“StoneMor GP”), a Delaware limited liability company and the general partner of StoneMor Partners L.P. (the “Partnership”), the Partnership, StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole member of GP (“GP Holdings”) and Hans Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of GP (“Merger Sub”), GP converted from a Delaware limited liability company into a Delaware corporation named StoneMor Inc. (the “Company”) and Merger Sub was merged with and into the Partnership (the “Merger”). The Company is the successor registrant to the Partnership pursuant to Rule 405 under the Securities Act of 1933, as amended (the “Securities Act”) and Rule 12g-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As used in this Quarterly Report on Form 10-Q (the “Quarterly Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,” “we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries for all periods from and after the Merger and to StoneMor Partners L.P. and its consolidated subsidiaries for all periods prior to the Merger.
Nature of Operations
The Company is a provider of funeral and cemetery products and services in the death care industry in the United States. As of March 31, 2020, the Company operated 319 cemeteries in 27 states and Puerto Rico, of which 289 were owned and 30 were operated under lease, management or operating agreements. The Company also owned and operated 88 funeral homes, including 41 located on the grounds of cemetery properties that the Company owned, in 17 states and Puerto Rico.
The Company’s cemeteries provide cemetery property interment rights, such as burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery merchandise is comprised of burial vaults, caskets, grave markers and memorials. Cemetery services include the installation of this merchandise and other service items. The Company sells these products and services both at the time of death, which is referred to as at-need, and prior to the time of death, which is referred to as pre-need.
The Company’s funeral home services include family consultation, the removal and preparation of remains, insurance products and the use of funeral home facilities for visitation and memorial services.
C-Corporation Conversion
On December 31, 2019, pursuant to the terms of the Merger Agreement, the Company completed the following series of reorganization transactions (which the Company sometimes refer to collectively as the “C-Corporation Conversion”):
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GP Holdings contributed its entire equity interest in the Partnership to StoneMor GP and, in exchange, ultimately received an aggregate of 5,099,969 shares of the Company’s common stock;
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StoneMor GP contributed the common units in the Partnership it received from GP Holdings to StoneMor LP Holdings, LLC (“LP Sub”), a Delaware limited liability company and wholly-owned subsidiary of StoneMor GP;
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Merger Sub merged with and into the Partnership, with the Partnership surviving as a Delaware limited partnership, and pursuant to which each outstanding Series A Convertible Preferred Unit (defined within) and Common Unit (defined within) (other than the common units held by LP Sub) was converted into the right to receive one share of the Company’s common stock; and
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StoneMor GP converted from a Delaware limited liability company to a Delaware corporation called StoneMor Inc.
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As a result of the C-Corporation Conversion, the Company remains the general partner of the Partnership and LP Sub is the sole limited partner of the Partnership such that, directly or indirectly, the Company owns 100% of the interests in the Partnership.
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The C-Corporation Conversion represented a transaction between entities under common control and was accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to the holders of the common units and preferred units of the Partnership and to GP Holdings for its general partner interest in the Partnership was recognized by the Company at the carrying value of the equity interests in the Partnership. In addition, the Company became the successor and the Partnership the predecessor for the purposes of financial reporting.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements, which are unaudited, have been prepared in accordance with the requirements of the Quarterly Report on Form 10-Q and Generally Accepted Accounting Principles (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Annual Reports on Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods disclosed have been made. The balance sheet at December 31, 2019 has been derived from the audited consolidated financial statement as of December 31, 2019, as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with Securities and Exchange Commission ("SEC") on April 7, 2020 (the “Annual Report”). The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto presented in the Annual Report. The results of operations for the three months ended March 31, 2020 may not necessarily be indicative of the results of operations for the full year ending December 31, 2020.
The unaudited condensed consolidated financial statements include the accounts of each of the Company’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 30 cemeteries under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated.
The Company operates 14 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities, since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services and interment rights and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these agreements, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Company has also recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.
COVID-19 and Business Interruption
The outbreak of COVID-19, which has reached pandemic proportions (“COVID-19 Pandemic”), poses a significant threat to the health and economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations have been deemed essential by the state and local governments in which it operates, with the exception of Puerto Rico, and the Company is actively working with federal, state and local government officials to ensure that it continues to satisfy their requirements for offering the Company’s essential services. The operation of all of the Company’s facilities is critically dependent on the Company’s employees who staff these locations. To ensure the wellbeing of the Company’s employees and their families, the Company has provided every employee of the Company with detailed health and safety literature on COVID-19, such as the Centers for Disease Control and Prevention (the “CDC”)’s industry-specific guidelines for working with the deceased who were and may have been infected with COVID-19. In addition, the Company’s procurement and safety teams have updated and developed new safety-oriented guidelines to support daily field operations and continue to provide personal protection equipment to those employees whose positions necessitate them, and the Company has implemented work from home policies at the Company’s corporate office consistent with the CDC’s guidance to reduce the risks of exposure to COVID-19 while still supporting the families that we serve. The Company has not experienced any significant disruptions to its business as a result of the work from home policies in its corporate office.
The Company’s marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that the Company’s sales personnel can continue to connect with and meet the needs of the Company’s customers in a safe, effective and productive manner. Some of the Company’s locations are providing live video streaming of their funeral and burial services to customers or providing other alternatives that respect social distancing, so that family and friends can connect during their time of grief.
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Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. Over the last two weeks of the quarter, the Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. In addition, the Company’s pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. While the Company expects its pre-need sales to be challenged during the COVID-19 Pandemic, the Company believes the implementation of its virtual meeting tools is one of several key steps to mitigate this disruption. In addition, the Company expects that throughout this disruption its cemeteries and funeral homes will remain open and available to serve its families in all the locations in which it operates to the extent permitted by local authorities, with the exception of Puerto Rico.
The Company expects the COVID-19 Pandemic to continue to have an adverse effect on its results of operations and cash flows, however the Company cannot presently predict, with certainty, the scope and severity of that impact. The Company may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of the Company’s facilities, the Company may incur costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. As a result of the implications of COVID-19, the Company assessed long-lived assets for impairment and concluded no assets were impaired as of March 31, 2020.
Sources and Uses of Liquidity
The Company’s primary sources of liquidity are cash generated from operations and proceeds from asset sales. The Company’s primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service. In general, as part of its operating strategy, the Company expects to fund:
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working capital deficits through available cash, cash generated from operations, proceeds from asset sales and proceeds from equity offerings;
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expansion capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service obligations through available cash, cash generated from operations or proceeds from asset sales. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold to which the contribution related (see "Summary of Significant Accounting Policies" section below regarding revenue recognition), which will reduce the amount of additional borrowings or asset sales needed; and
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any maintenance capital expenditures through available cash and cash flows from operating activities.
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While the Company relies heavily on its available cash and cash flows from operating activities to execute its operational strategy and meet its financial commitments and other short-term financial needs, the Company cannot be certain that sufficient capital will be generated through operations or be available to the Company to the extent required and on acceptable terms. The Company has experienced negative financial trends, including use of cash in operating activities, which, when considered in the aggregate, could raise substantial doubt about the Company’s ability to continue as a going concern. These negative financial trends include:
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the Company has continued to generate negative cash flow from operating activities through March 31, 2020, due to an increased competitive environment and increases in professional fees and compliance costs; and
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a decline in billings coupled with the increase in professional, compliance and consulting expenses that tightened the Company's liquidity position and increased reliance on long-term financial obligations.
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During 2019 and 2020, the Company implemented (and will continue to implement) various actions to improve profitability and cash flows to fund operations. A summary of these actions is as follows:
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sold an aggregate of 52,083,333 Preferred Units for an aggregate purchase price of $57.5 million and completed a private placement of $385.0 million of the Senior Secured Notes in June 2019. The net proceeds of both transactions were used to fully repay the then-outstanding senior notes due in June 2021 and retire the Company’s revolving credit facility that was due in May 2020;
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manage recurring operating expenses, seek to limit non-recurring operating expenses and implement cost reduction initiatives to minimize the impact of the COVID-19 Pandemic on the Company; and
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identify and complete sales of select assets to provide supplemental liquidity.
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See Note 18 Subsequent Events for a discussion of additional actions taken by the Company subsequent to March 31, 2020.
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In addition, there is no certainty that the Company's actual operating performance and cash flows will not be substantially different from forecasted results and no certainty the Company will not need amendments to the Indenture in the future or that any such amendments will be available on terms acceptable to the Company or at all. Factors that could impact the significant assumptions used by the Company in assessing its ability to satisfy its financial covenants include the following:
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operating performance not meeting reasonably expected forecasts, including the effects of the COVID-19 Pandemic on the Company’s operations;
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failing to generate profitable sales;
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investments in the Company's trust funds experiencing significant declines due to factors outside its control;
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being unable to compete successfully with other cemeteries and funeral homes in the Company's markets;
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the number of deaths in the Company's markets declining; and
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an adverse change in the mix of funeral and cemetery revenues between burials and cremations.
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If the Company's planned, implemented and not yet implemented actions are not successful in generating sustainable cash savings for the Company, or the Company fails to improve its operating performance and cash flows or the Company is not able to comply with the covenants under the Indenture, the Company may be forced to limit its business activities, limit its ability to implement further modifications to its operations or limit the effectiveness of some actions that are included in its forecasts, amend its Indenture and/or seek other sources of capital, and the Company may be unable to continue as a going concern. Additionally, a failure to generate additional liquidity could negatively impact the Company's access to inventory or services that are important to the operation of the Company's business. Any of these events may have a material adverse effect on the Company's results of operations and financial condition, and limit the Company’s ability to continue as a going concern.
Based on the Company's forecasted operating performance, planned actions to improve the Company’s profitability and cash flows, the execution of the Supplemental Indenture and the Axar Commitment (see Note 18 Subsequent Events for explanation of defined terms and additional information) and the consummation of the transactions contemplated thereby, including receipt of not less than $17.0 million in proceeds from the contemplated rights offering, together with plans to file its financial statements on a timely basis consistent with the debt covenants and commitment to filing its periodic reports on a timely basis consistent with the debt covenants, the Company does not believe it is probable that it will breach the covenants under the Indenture or be unable to continue as a going concern for the next twelve-month period. As such, the unaudited condensed consolidated financial statements for the three months ended March 31, 2020 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments, if any, that would be necessary should the Company be required to liquidate its assets.
Summary of Significant Accounting Policies
Refer to Note 1 General to the Company’s audited consolidated financial statements included in Item 8 of its Annual Report for the complete summary of significant accounting policies.
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as described in its Annual Report. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash and Cash Equivalents was $27.1 million and $34.9 million as of March 31, 2020 and December 31, 2019, respectively.
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Restricted Cash
Cash that is restricted from withdrawal or use under the terms of certain contractual agreements is recorded as restricted cash. Restricted cash was $20.4 million and $21.9 million as of March 31, 2020 and December 31, 2019, respectively, which primarily related to cash collateralization of the Company’s letters of credit and surety bonds, and at December 31, 2019 also included a $5.0 million refundable deposit received in connection with the sale of one of the Company’s properties.
Revenue
The Company's revenues are derived from contracts with customers through sale and delivery of death care products and services. Primary sources of revenue are derived from (1) cemetery and funeral home operations generated both at-need and pre-need, which are classified on the unaudited condensed consolidated statements of operations as Interments, Merchandise and Services, (2) investment income, which includes income earned on assets maintained in perpetual care and merchandise trusts related to pre-need sales of cemetery and funeral home merchandise and services that are required to be maintained in the trust by state law and (3) interest earned on pre-need installment contracts. Investment income is presented within Investment and other for Cemetery revenue and Services for Funeral home revenue. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts collected on behalf of third parties. Pre-need contracts are price guaranteed, providing for future merchandise and services at prices prevailing when the agreements are signed.
Investment income is earned on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the merchandise and service trusts. Amounts are withdrawn from the merchandise trusts when the Company fulfills the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in total transaction price. Pre-need contracts are generally subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate at the time of origination plus 375 basis points in order to segregate the principal and interest component of the total contract value. The Company has elected to not adjust the transaction price for the effects of a significant financing component for contracts that have payment terms under one year.
At the time of a non-cancellable pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid. The revenue from both the sales and interest income from trusted funds are deferred until the merchandise is delivered or the services are performed. For a sale in a cancellable state, an account receivable is only recorded to the extent control has transferred to the customer for interment rights, merchandise or services for which the Company has not collected cash. The amounts collected from customers in states in which pre-need contracts are cancellable may be subject to refund provisions. The Company estimates the fair value of its refund obligation under such contracts on a quarterly basis and records such obligations within other long-term liabilities line item on its consolidated balance sheets.
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue in the amount to which the Company expect to be entitled to when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company only recognizes amounts due from a customer for unfulfilled performance obligations on a cancellable pre-need contract to the extent that control has transferred to the customer for interments, merchandise or services for which the Company has not collected cash. The Company defers the recognition of any nonrefundable up-front fees and incremental direct selling costs associated with its sales contracts with a customer (i.e., commissions and bonuses) until the underlying goods or services have been delivered to the customer if the amortization period associated with the deferred nonrefundable up-front fees and incremental direct selling is greater than a year; otherwise, these nonrefundable up-front fees and incremental direct selling costs are expensed immediately. Incremental direct selling costs are recognized by specific identification. The Company calculates the deferred selling costs asset by dividing total deferred selling and obtaining expenses by total deferrable revenues and multiplying such percentage by the periodic change in gross deferred revenues. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in deferred revenues. All other selling costs are expensed as incurred.
In addition, the Company maintains a reserve representing the fair value of the refund obligation that may arise due to state law provisions that include a guarantee of customer funds collected on unfulfilled performance obligations and maintained in trust to the extent that the funds are refundable upon a customer’s exercise of any cancellation rights.
Sales taxes assessed by governmental authorities are excluded from revenue. Any shipping and handling costs that are incurred after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
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Nature of Goods and Services
The following is a description of the principal activities within the Company’s two reportable segments from which the Company generates its revenue.
Cemetery Operations
The Company generates revenues in its Cemetery Operations segment principally from (1) providing rights to inter remains in a specific cemetery property inventory space such as burial lots and constructed mausoleum crypts (“Interments”), (2) sales of cemetery merchandise which includes markers (i.e., method of identifying a deceased person in a burial space, crypt or niche), base (i.e., the substrate upon which a marker is placed), vault (i.e., a container installed in the burial lot in which the casket is placed), caskets, cremation niches and other cemetery related items and (3) service revenues, including opening and closing, a service of digging and refilling burial spaces to install the burial vault and place the casket into the vault, cremation services and fees for installation of cemetery merchandise. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services in a package based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and reasonable ranges for both merchandise and services which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second interment rights), the Company estimates stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price broken down by each geographic location. Additionally, the Company considers typical sales promotions that could have impacted the stand-alone selling price estimates.
Interments revenue is recognized when control transfers, which is when the property is available for use by the customer. For pre-construction mausoleum contracts, the Company only recognizes revenue once the property is constructed and the customer has obtained substantially all of the remaining benefits of the property.
Merchandise revenue and deferred investment earnings on merchandise trusts are recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to the Company). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligation. The estimate of the refund obligation is reevaluated on a quarterly basis. In addition, the Company is entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a pre-need contract; these amounts are also recognized in revenue at the time the contract is cancelled.
Service revenue is recognized when the services are performed, and the performance obligation is thereby satisfied.
The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services and the value of cemetery property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific identification method under which the total value of the underlying cemetery property and the lots available to be sold at the location are used to determine the cost per lot.
Funeral Home Operations
The Company generates revenues in its Funeral Home Operations segment principally from (1) sales of funeral home merchandise which includes caskets and other funeral related items and (2) service revenues, which includes services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and services of remembrance. The Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which the Company earns a commission from the sales of these policies. Insurance commission revenue is reported within service revenues. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services based on their relative stand-alone selling prices. The relative stand-alone selling price is determined by management's best estimate of the stand-alone price based upon the list price at each location. The revenue generated by the Company through its Funeral Home Operations segment is principally derived from at-need sales.
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Merchandise revenue is recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligations. The estimate of the refund obligation is reevaluated on a quarterly basis.
Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.
Costs related to the delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed.
Deferred Revenues
Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services are performed or the merchandise is delivered. In addition, for amounts deferred on new contracts and investment income and unrealized gains on our merchandise trusts, deferred revenues include deferred revenues from pre-need sales that were entered into by entities prior to the Company’s acquisition of those entities or the assets of those entities. The Company provides for a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. These revenues and their associated costs are recognized when the related merchandise is delivered or services are performed and are presented on a gross basis on the unaudited condensed consolidated statements of operations.
Accounts Receivable, Net of Allowance
The Company sells pre-need cemetery contracts whereby the customer enters into arrangements for future pre-need merchandise and services. These sales are usually made using interest-bearing installment contracts not to exceed 60 months. The interest income is recorded as revenue when the interest amount is considered realizable and collectible, which typically coincides with cash payment. Interest income is not recognized until payments are collected in accordance with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income, unfulfilled performance obligations on cancellable contracts and any cash deposit paid. The Company recognizes an allowance for doubtful accounts by applying a cancellation rate to amounts included in accounts receivable, which is recorded as a reduction in accounts receivable and a corresponding offset to deferred revenues. The cancellation rate is based on a five year average rate by each specific location. Management evaluates customer receivables for impairment based upon historical experience, including the age of the receivables and customers’ payment histories.
Leases
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. The Company has both operating and finance leases. The Company’s operating leases primarily include office space, funeral homes and equipment. The Company’s finance leases primarily consist of vehicles and certain IT equipment. The Company determines whether an arrangement is or contains a lease at the inception of the arrangement based on the facts and circumstances in each contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term in excess of 12 months, the Company records the lease liability and Right of Use (“ROU”) asset at commencement date based upon the present value of the sum of the remaining minimum rental payments, which exclude executory costs. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. Where leases contain escalation clauses, rent abatements and/or concessions, the Company applies them in the determination of lease expense. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that the Company will exercise the additional options.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company evaluates the term of the lease, type of asset and its weighted average cost of capital to determine its incremental borrowing rate used to measure the ROU asset and lease liability.
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The Company calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. The Company considers reasonably assured renewal options, fixed escalation provisions and residual value guarantees in its calculation. Leasehold improvements are amortized over the shorter of the lease term or asset life, which may include renewal periods where the renewal is reasonably assured, and are included in the determination of straight-line rent expense. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
The Company’s leases also typically have lease and non-lease components, which are generally accounted for separately and not included in the measurement of the ROU asset and lease liability.
Stock-Based Compensation
The Company has a long-term incentive plan under which it is authorized to grant stock-based compensation awards, such as restricted stock or restricted units to be settled in common stock and non-qualified stock options (“stock options”). The Company recognizes compensation expense in an amount equal to the fair value of the stock-based awards on the date of grant over the requisite service period. The fair value of restricted stock awards and restricted stock unit awards is determined based on the number of restricted stock or restricted stock units granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common stock of the Company. The Company has elected to recognize forfeiture credits for these stock-based compensation awards as they are incurred, as this method best reflects actual stock-based compensation expense.
Tax deductions on the stock-based compensation awards are not realized until the stock-based compensation awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based compensation award is greater than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for a stock-based compensation award is less than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the Company’s consolidated statements of cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted stock-based compensation awards by the Company withholding stock equal to such income tax obligations. Stock acquired from employees in connection with the settlement of the employees’ income tax obligations on these stock-based compensation awards are accounted for as treasury shares that are subsequently retired. Restricted stock awards, restricted stock units and stock options are not considered issued and outstanding for purposes of earnings per share calculations until vested.
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Net Income (Loss) per Common Share (Basic and Diluted)
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shares by the sum of the weighted-average number of outstanding common shares and the dilutive effect of share-based awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common shares that are contingently issuable upon the satisfaction of certain vesting conditions for stock awards granted under the Company’s long-term incentive plan.
The following table sets forth the reconciliation from the Company’s weighted-average number of outstanding common shares as of March 31, 2020 and common limited partner units as of March 31, 2019 used to compute basic net income (loss) attributable to common shares and common limited partners per unit, respectively, to those used to compute diluted net loss per common share and per common limited partners unit, respectively, (in thousands):
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Three Months Ended March 31,
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2020
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2019
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Weighted average number of outstanding common shares—basic(1)
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94,472
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38,031
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Plus effect of dilutive incentive awards(2):
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Restricted shares
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—
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of outstanding common shares—diluted(1)
|
|
|
94,472
|
|
|
|
38,031
|
|
|
(1)
|
For the three months ended March 31, 2020, represents common shares (basic and diluted), and for the three months ended March 31, 2019, represents limited partner units (basic and diluted).
|
|
(2)
|
For the three months ended March 31, 2020, the diluted weighted-average number of outstanding common shares does not include 1,656,496 common stock options and 468,750 restricted common shares, as their effects would have been anti-dilutive. For the three months ended March 31, 2019, the diluted weighted-average number of outstanding common limited partner units does not include 977,166 units, as their effects would have been anti-dilutive. In addition, for the three months ended March 31, 2019, anti-dilutive units excludes 46,734 units that were contingently issuable for which the contingency had not been met.
|
Recently Adopted Accounting Standards
Variable Interest Entities
In October 2018, FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). The core principle of ASU 2018-17 is that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. ASU 2018-17 is effective for fiscal years beginning after December 15, 2019. The Company adopted the requirements of this amendment upon its effective date of January 1, 2020 retrospectively. The adoption of this standard did not impact the Company’s consolidated financial statements or related disclosures upon adoption, because the Company did not, and currently does not, have any indirect interests through related parties under common control for which it receives decision-making fees.
Fair Value Measurement
In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This standard removed, modified and added disclosure requirements from ASC 820, Fair Value Measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2020, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. Currently, the Company does not have any fair value instruments that would be classified as Level 3 on the fair value hierarchy.
15
Table of Contents
Internal-Use Software
In August 2018, FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU No. 2018-15 is effective for annual periods beginning after December 15, 2019. The Company adopted the requirements of this amendment on a prospective basis upon its effective date of January 1, 2020. The Company is applying the requirements of this amendment to the implementation costs incurred in connection with its new procurement software.
Recently Issued Accounting Standard Updates - Not Yet Effective
Credit Losses
In June 2016, FASB issued ASU No. 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. In November 2018, FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-09”), which clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842, Leases. In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which includes clarifications to the amendments issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326), which provides entities that have certain instruments within the scope of ASC 326-20 with an option to irrevocably elect the fair value option in ASC 825, Financial Instruments, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which modifies the effective dates for ASU 2016-13, ASU 2017-12 and ASU 2016-02 to reflect the FASB’s new policy of staggering effective dates between larger public companies and all other companies. With the issuance of ASU 2019-10, the Company’s effective date for adopting all amendments related to the new credit loss standard has been extended to January 1, 2023. In November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”), which includes clarifications to and addresses specific stakeholders’ issues concerning the amendments issued in ASU 2016-13. In February 2020, FASB issued ASU No, 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) and in March 2020 issued ASU No. 2020-03, Codification Improvements to Financial Instruments, both of which also provide updates and clarification. The Company plans to adopt the requirements of these amendments upon their effective date of January 1, 2023, using the modified-retrospective method and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
Taxes
In December 2019, FASB issued ASU No. 2019-12, Income Taxes (Topic 340) (“ASU 2019-12”), with the intent to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. ASU 2019-12 also adds guidance to reduce complexity in certain tax accounting areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual periods beginning after December 15, 2021. The Company plans to adopt the requirements of this amendment upon its effective date of January 1, 2022 retrospectively, except where required to be adopted prospectively, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
16
Table of Contents
Reference Rate Reform
In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendment is effective immediately and may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact of reference rate reform and the optional expedients provided by this amendment on its contracts.
On January 3, 2020, the Company sold substantially all of the assets of Oakmont Memorial Park, Oakmont Funeral Home, Redwood Chapel, Inspiration Chapel and Oakmont Crematory located in California pursuant to the terms of an asset sale agreement (the “Oakmont Agreement”) with Carriage Funeral Holdings, Inc. for an aggregate cash purchase price of $33.0 million (the “Oakmont Sale”). The divested assets consisted of one cemetery, one funeral home and certain related assets. The Oakmont Sale resulted in a gain of $24.4 million for the Company, which is included in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2020. Net proceeds from the sale were used to redeem an aggregate $30.3 million principal amount of the Senior Secured Notes.
In March 2020, the Company entered into an asset sale agreement for the sale of substantially all of the assets of the cemetery, funeral establishment and crematory commonly known as Olivet Memorial Park, Olivet Funeral and Cremation Services and Olivet Memorial Park & Crematory (the “Olivet Agreement”) with Cypress Lawn Cemetery Association for a net cash purchase price of $24.3 million, subject to certain adjustments (the “Olivet Sale”). Refer to Note 18 Subsequent Events for details on the closing of this sale in April 2020 and the related redemption of additional principal portions of the Senior Secured Notes. In addition, in March 2020, the Company entered into an asset sale agreement (the “California Agreement”) with certain entities owned by John Yeatman and Guy Saxton to sell substantially all of the Company’s remaining California properties, consisting of five cemeteries, six funeral establishments and four crematories (the “Remaining California Assets”) for a cash purchase price of $7.1 million, subject to certain closing adjustments (the “Remaining California Sale” and together with the Olivet Sale, the “Total California Sale”). The Company anticipates using the first $3.2 million of net proceeds and the remaining 80% of the net proceeds from the Remaining California Sale to redeem additional principal portions of the outstanding Senior Secured Notes.
17
Table of Contents
The following table summarizes the assets and liabilities that have been classified as Assets held for sale on the Company’s unaudited condensed consolidated balance sheets:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Total California
|
|
|
Other
|
|
|
Total
|
|
|
Oakmont
|
|
|
Other
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
|
$
|
1,576
|
|
|
$
|
—
|
|
|
$
|
1,576
|
|
|
$
|
580
|
|
|
$
|
—
|
|
|
$
|
580
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
|
|
34
|
|
Other current assets
|
|
|
163
|
|
|
|
—
|
|
|
|
163
|
|
|
|
35
|
|
|
|
—
|
|
|
|
35
|
|
Total current assets held for sale
|
|
|
1,739
|
|
|
|
—
|
|
|
|
1,739
|
|
|
|
649
|
|
|
|
—
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term accounts receivable, net of allowance
|
|
|
5,102
|
|
|
|
—
|
|
|
|
5,102
|
|
|
|
3,194
|
|
|
|
—
|
|
|
|
3,194
|
|
Cemetery property
|
|
|
15,439
|
|
|
|
350
|
|
|
|
15,789
|
|
|
|
5,811
|
|
|
|
350
|
|
|
|
6,161
|
|
Property and equipment, net of accumulated depreciation
|
|
|
8,888
|
|
|
|
—
|
|
|
|
8,888
|
|
|
|
2,762
|
|
|
|
150
|
|
|
|
2,912
|
|
Merchandise trusts, restricted, at fair value
|
|
|
20,127
|
|
|
|
—
|
|
|
|
20,127
|
|
|
|
6,673
|
|
|
|
—
|
|
|
|
6,673
|
|
Perpetual care trusts, restricted, at fair value
|
|
|
21,917
|
|
|
|
—
|
|
|
|
21,917
|
|
|
|
2,470
|
|
|
|
—
|
|
|
|
2,470
|
|
Deferred selling and obtaining costs
|
|
|
2,361
|
|
|
|
—
|
|
|
|
2,361
|
|
|
|
1,388
|
|
|
|
—
|
|
|
|
1,388
|
|
Other assets
|
|
|
1,927
|
|
|
|
—
|
|
|
|
1,927
|
|
|
|
411
|
|
|
|
—
|
|
|
|
411
|
|
Total assets held for sale
|
|
$
|
77,500
|
|
|
$
|
350
|
|
|
$
|
77,850
|
|
|
$
|
23,358
|
|
|
$
|
500
|
|
|
$
|
23,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
234
|
|
|
$
|
—
|
|
|
$
|
234
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
102
|
|
Current portion, long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
|
—
|
|
|
|
36
|
|
Other current liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
5,000
|
|
Total current liabilities held for sale
|
|
|
234
|
|
|
|
—
|
|
|
|
234
|
|
|
|
5,138
|
|
|
|
—
|
|
|
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
28,841
|
|
|
|
—
|
|
|
|
28,841
|
|
|
|
12,856
|
|
|
|
—
|
|
|
|
12,856
|
|
Perpetual care trust corpus
|
|
|
21,917
|
|
|
|
—
|
|
|
|
21,917
|
|
|
|
2,470
|
|
|
|
—
|
|
|
|
2,470
|
|
Other long-term liabilities
|
|
|
1,445
|
|
|
|
—
|
|
|
|
1,445
|
|
|
|
204
|
|
|
|
—
|
|
|
|
204
|
|
Total liabilities held for sale
|
|
|
52,437
|
|
|
|
—
|
|
|
|
52,437
|
|
|
|
20,668
|
|
|
|
—
|
|
|
|
20,668
|
|
Net assets held for sale
|
|
$
|
25,063
|
|
|
$
|
350
|
|
|
$
|
25,413
|
|
|
$
|
2,690
|
|
|
$
|
500
|
|
|
$
|
3,190
|
|
3.EXIT AND DISPOSAL ACTIVITIES
In January 2019, the Company announced a profit improvement initiative as part of its ongoing organizational review. This profit improvement initiative was intended to further integrate, streamline and optimize the Company’s operations. As part of this profit improvement initiative, during 2019 the Company undertook certain cost reduction initiatives, which included a reduction of approximately 200 positions of its workforce within its field operations and corporate functions in its headquarters located in Trevose, Pennsylvania. The following table summarizes the activity in the severance liability recognized for this reduction in workforce in the accompanying consolidated balance sheets as of March 31, 2020, by reportable segment (in thousands):
|
|
Cemetery Operations
|
|
|
Funeral Home Operations
|
|
|
Corporate
|
|
|
Consolidated
|
|
Balance at December 31, 2019
|
|
$
|
86
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
150
|
|
Accruals
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cash payments
|
|
|
(86
|
)
|
|
|
—
|
|
|
|
(64
|
)
|
|
|
(150
|
)
|
Balance at March 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company does not expect to incur any additional charges related to this reduction in workforce. Refer to Note 18 Subsequent Events for details on a cost reduction initiative implemented in April 2020.
18
Table of Contents
4.
|
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
|
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Customer receivables
|
|
$
|
147,673
|
|
|
$
|
153,530
|
|
Unearned finance income
|
|
|
(15,345
|
)
|
|
|
(16,303
|
)
|
Allowance for doubtful accounts
|
|
|
(5,338
|
)
|
|
|
(5,884
|
)
|
Accounts receivable, net of allowance
|
|
|
126,990
|
|
|
|
131,343
|
|
Less: Current portion, net of allowance
|
|
|
55,516
|
|
|
|
55,794
|
|
Long-term portion, net of allowance
|
|
$
|
71,474
|
|
|
$
|
75,549
|
|
Activity in the allowance for doubtful accounts was as follows (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Balance, beginning of period
|
|
$
|
5,884
|
|
|
$
|
4,941
|
|
Provision for doubtful accounts
|
|
|
1,144
|
|
|
|
7,559
|
|
Charge-offs, net
|
|
|
(1,690
|
)
|
|
|
(6,616
|
)
|
Balance, end of period
|
|
$
|
5,338
|
|
|
$
|
5,884
|
|
Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the customers’ payment histories.
Cemetery property consisted of the following at the dates indicated (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Cemetery land
|
|
$
|
235,568
|
|
|
$
|
249,260
|
|
Mausoleum crypts and lawn crypts
|
|
|
68,060
|
|
|
|
71,345
|
|
Cemetery property
|
|
$
|
303,628
|
|
|
$
|
320,605
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following at the dates indicated (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Buildings and improvements
|
|
$
|
118,796
|
|
|
$
|
125,382
|
|
Furniture and equipment
|
|
|
55,965
|
|
|
|
57,674
|
|
Funeral home land
|
|
|
11,285
|
|
|
|
14,185
|
|
Property and equipment, gross
|
|
|
186,046
|
|
|
|
197,241
|
|
Less: Accumulated depreciation
|
|
|
(92,574
|
)
|
|
|
(93,841
|
)
|
Property and equipment, net of accumulated depreciation
|
|
$
|
93,472
|
|
|
$
|
103,400
|
|
19
Table of Contents
Depreciation expense was $2.2 million and $2.4 million for the three months ended March 31, 2020 and 2019, respectively.
At March 31, 2020 and December 31, 2019, the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value hierarchy and considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 14 Fair Value of Financial Instruments. There were no Level 3 assets. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which pre-need customers may cancel contracts with the Company comprises 52.6% of the total merchandise trust as of March 31, 2020. The merchandise trusts are variable interest entities (“VIE”) of which the Company is deemed the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Company may be required to fund this shortfall.
The Company included $8.6 million and $9.7 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at March 31, 2020 and December 31, 2019, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.
A reconciliation of the Company’s merchandise trust activities for the three months ended March 31, 2020 and 2019 is presented below (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance—beginning of period
|
|
$
|
517,192
|
|
|
$
|
488,248
|
|
Contributions
|
|
|
10,697
|
|
|
|
13,883
|
|
Distributions
|
|
|
(14,029
|
)
|
|
|
(13,639
|
)
|
Interest and dividends
|
|
|
5,704
|
|
|
|
7,325
|
|
Capital gain distributions
|
|
|
68
|
|
|
|
99
|
|
Realized gains and losses, net
|
|
|
218
|
|
|
|
(281
|
)
|
Other than temporary impairment
|
|
|
—
|
|
|
|
(2,314
|
)
|
Taxes
|
|
|
118
|
|
|
|
4
|
|
Fees
|
|
|
(3,022
|
)
|
|
|
(873
|
)
|
Unrealized change in fair value
|
|
|
(59,181
|
)
|
|
|
22,613
|
|
Total
|
|
|
457,765
|
|
|
|
515,065
|
|
Less: Assets held for sale
|
|
|
(20,127
|
)
|
|
|
—
|
|
Balance—end of period
|
|
$
|
437,638
|
|
|
$
|
515,065
|
|
During the three months ended March 31, 2020 and 2019, purchases of available for sale securities were approximately $13.2 million and $21.3 million, respectively. During the three months ended March 31, 2020 and 2019, sales, maturities and paydowns of available for sale securities were approximately $11.1 million and $9.1 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s unaudited condensed consolidated statements of cash flows.
20
Table of Contents
The cost and market value associated with the assets held in the merchandise trusts as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
March 31, 2020
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
120,171
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
120,171
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
474
|
|
|
|
23
|
|
|
|
(82
|
)
|
|
|
415
|
|
Corporate debt securities
|
|
2
|
|
|
6,293
|
|
|
|
4
|
|
|
|
(234
|
)
|
|
|
6,063
|
|
Total fixed maturities
|
|
|
|
|
6,767
|
|
|
|
27
|
|
|
|
(316
|
)
|
|
|
6,478
|
|
Mutual funds—debt securities
|
|
1
|
|
|
30,138
|
|
|
|
160
|
|
|
|
(2,464
|
)
|
|
|
27,834
|
|
Mutual funds—equity securities
|
|
1
|
|
|
46,279
|
|
|
|
1,577
|
|
|
|
(25,236
|
)
|
|
|
22,620
|
|
Other investment funds(1)
|
|
|
|
|
235,150
|
|
|
|
10,916
|
|
|
|
(15,626
|
)
|
|
|
230,440
|
|
Equity securities
|
|
1
|
|
|
56,668
|
|
|
|
1,001
|
|
|
|
(20,331
|
)
|
|
|
37,338
|
|
Other invested assets
|
|
2
|
|
|
4,387
|
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
4,293
|
|
Total investments
|
|
|
|
|
499,560
|
|
|
|
13,681
|
|
|
|
(64,067
|
)
|
|
|
449,174
|
|
West Virginia Trust Receivable
|
|
|
|
|
9,506
|
|
|
|
—
|
|
|
|
(915
|
)
|
|
|
8,591
|
|
Total
|
|
|
|
$
|
509,066
|
|
|
$
|
13,681
|
|
|
$
|
(64,982
|
)
|
|
$
|
457,765
|
|
Less: Assets held for sale
|
|
|
|
|
(21,778
|
)
|
|
|
(425
|
)
|
|
|
2,076
|
|
|
|
(20,127
|
)
|
Total
|
|
|
|
$
|
487,288
|
|
|
$
|
13,256
|
|
|
$
|
(62,906
|
)
|
|
$
|
437,638
|
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of one to six years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2020, there were $49.3 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
December 31, 2019
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
144,610
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144,610
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
456
|
|
|
|
6
|
|
|
|
(65
|
)
|
|
|
397
|
|
Corporate debt securities
|
|
2
|
|
|
783
|
|
|
|
14
|
|
|
|
(133
|
)
|
|
|
664
|
|
Total fixed maturities
|
|
|
|
|
1,239
|
|
|
|
20
|
|
|
|
(198
|
)
|
|
|
1,061
|
|
Mutual funds—debt securities
|
|
1
|
|
|
67,801
|
|
|
|
1,857
|
|
|
|
(6
|
)
|
|
|
69,652
|
|
Mutual funds—equity securities
|
|
1
|
|
|
46,609
|
|
|
|
1,744
|
|
|
|
—
|
|
|
|
48,353
|
|
Other investment funds(1)
|
|
|
|
|
213,024
|
|
|
|
6,366
|
|
|
|
(2,953
|
)
|
|
|
216,437
|
|
Equity securities
|
|
1
|
|
|
24,386
|
|
|
|
1,327
|
|
|
|
(4
|
)
|
|
|
25,709
|
|
Other invested assets
|
|
2
|
|
|
8,360
|
|
|
|
32
|
|
|
|
—
|
|
|
|
8,392
|
|
Total investments
|
|
|
|
|
506,029
|
|
|
|
11,346
|
|
|
|
(3,161
|
)
|
|
|
514,214
|
|
West Virginia Trust Receivable
|
|
|
|
|
9,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,651
|
|
Total
|
|
|
|
$
|
515,680
|
|
|
$
|
11,346
|
|
|
$
|
(3,161
|
)
|
|
$
|
523,865
|
|
Less: Assets held for sale
|
|
|
|
|
(6,369
|
)
|
|
|
(304
|
)
|
|
|
—
|
|
|
|
(6,673
|
)
|
Total
|
|
|
|
$
|
509,311
|
|
|
$
|
11,042
|
|
|
$
|
(3,161
|
)
|
|
$
|
517,192
|
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of one to six years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2019, there were $57.3 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
21
Table of Contents
The contractual maturities of debt securities as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
March 31, 2020
|
|
Less than
1 year
|
|
|
1 year
through
5 years
|
|
|
6 years
through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
112
|
|
|
$
|
81
|
|
|
$
|
208
|
|
|
$
|
13
|
|
Corporate debt securities
|
|
|
87
|
|
|
|
3,970
|
|
|
|
2,007
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
199
|
|
|
$
|
4,051
|
|
|
$
|
2,215
|
|
|
$
|
13
|
|
December 31, 2019
|
|
Less than
1 year
|
|
|
1 year
through
5 years
|
|
|
6 years
through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
112
|
|
|
$
|
78
|
|
|
$
|
193
|
|
|
$
|
13
|
|
Corporate debt securities
|
|
|
101
|
|
|
|
546
|
|
|
|
16
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
213
|
|
|
$
|
624
|
|
|
$
|
209
|
|
|
$
|
13
|
|
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of March 31, 2020 and December 31, 2019 is presented below (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
March 31, 2020
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
302
|
|
|
$
|
82
|
|
|
$
|
302
|
|
|
$
|
82
|
|
Corporate debt securities
|
|
|
5,847
|
|
|
|
110
|
|
|
|
457
|
|
|
|
124
|
|
|
|
6,304
|
|
|
|
234
|
|
Total fixed maturities
|
|
|
5,847
|
|
|
|
110
|
|
|
|
759
|
|
|
|
206
|
|
|
|
6,606
|
|
|
|
316
|
|
Mutual funds—debt securities
|
|
|
19,756
|
|
|
|
2,064
|
|
|
|
—
|
|
|
|
400
|
|
|
|
19,756
|
|
|
|
2,464
|
|
Mutual funds—equity securities
|
|
|
18,857
|
|
|
|
23,880
|
|
|
|
—
|
|
|
|
1,356
|
|
|
|
18,857
|
|
|
|
25,236
|
|
Other investment funds
|
|
|
59,261
|
|
|
|
15,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,261
|
|
|
|
15,626
|
|
Equity securities
|
|
|
24,853
|
|
|
|
20,331
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,853
|
|
|
|
20,331
|
|
Other invested assets
|
|
|
—
|
|
|
|
—
|
|
|
|
905
|
|
|
|
94
|
|
|
|
905
|
|
|
|
94
|
|
Total
|
|
$
|
128,574
|
|
|
$
|
62,011
|
|
|
$
|
1,664
|
|
|
$
|
2,056
|
|
|
$
|
130,238
|
|
|
$
|
64,067
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2019
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
90
|
|
|
$
|
1
|
|
|
$
|
397
|
|
|
$
|
64
|
|
|
$
|
487
|
|
|
$
|
65
|
|
Corporate debt securities
|
|
|
198
|
|
|
|
29
|
|
|
|
424
|
|
|
|
104
|
|
|
|
622
|
|
|
|
133
|
|
Total fixed maturities
|
|
|
288
|
|
|
|
30
|
|
|
|
821
|
|
|
|
168
|
|
|
|
1,109
|
|
|
|
198
|
|
Mutual funds—debt securities
|
|
|
241
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
241
|
|
|
|
6
|
|
Mutual funds—equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other investment funds
|
|
|
54,782
|
|
|
|
2,953
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,782
|
|
|
|
2,953
|
|
Equity securities
|
|
|
3
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
4
|
|
Other invested assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
55,314
|
|
|
$
|
2,993
|
|
|
$
|
821
|
|
|
$
|
168
|
|
|
$
|
56,135
|
|
|
$
|
3,161
|
|
For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
22
Table of Contents
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2020, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. It is reasonably possible that continued declines could change the Company’s conclusion regarding whether or not merchandise trust assets are other-than-temporary impaired. During the three months ended March 31, 2019, the Company determined, based on its review, that there were 89 securities with an aggregate cost basis of approximately $91.9 million and an aggregate fair value of approximately $89.6 million, resulting in an impairment of $2.3 million, with such impairment considered to be other-than-temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset these changes against deferred merchandise trust revenue. These adjustments to deferred revenue will be reflected within the Company’s unaudited condensed consolidated statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.
At March 31, 2020 and December 31, 2019, the Company’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.
All of these investments are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 14 Fair Value of Financial Instruments. There were no Level 3 assets. The perpetual care trusts are VIEs for which the Company is the primary beneficiary.
A reconciliation of the Company’s perpetual care trust activities for the three months ended March 31, 2020 and 2019 is presented below (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance—beginning of period
|
|
$
|
343,619
|
|
|
$
|
330,562
|
|
Contributions
|
|
|
1,952
|
|
|
|
1,983
|
|
Distributions
|
|
|
(6,294
|
)
|
|
|
(4,403
|
)
|
Interest and dividends
|
|
|
6,624
|
|
|
|
5,148
|
|
Capital gain distributions
|
|
|
99
|
|
|
|
114
|
|
Realized gains and losses, net
|
|
|
163
|
|
|
|
977
|
|
Other than temporary impairment
|
|
|
—
|
|
|
|
(713
|
)
|
Taxes
|
|
|
(37
|
)
|
|
|
4
|
|
Fees
|
|
|
(913
|
)
|
|
|
(704
|
)
|
Unrealized change in fair value
|
|
|
(38,464
|
)
|
|
|
11,857
|
|
Total
|
|
|
306,749
|
|
|
|
344,825
|
|
Less: Assets held for sale
|
|
|
(21,917
|
)
|
|
|
—
|
|
Balance—end of period
|
|
$
|
284,832
|
|
|
$
|
344,825
|
|
During the three months ended March 31, 2020 and 2019, purchases of available for sale securities were approximately $5.4 million and $35.3 million, respectively. During the three months ended March 31, 2020 and 2019, sales, maturities and paydowns of available for sale securities were approximately $4.4 million and $31.9 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in Company’s unaudited condensed consolidated statements of cash flows.
23
Table of Contents
The cost and market value associated with the assets held in the perpetual care trusts as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
March 31, 2020
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
32,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,403
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
1,072
|
|
|
|
90
|
|
|
|
(58
|
)
|
|
|
1,104
|
|
Corporate debt securities
|
|
2
|
|
|
2,751
|
|
|
|
19
|
|
|
|
(177
|
)
|
|
|
2,593
|
|
Total fixed maturities
|
|
|
|
|
3,823
|
|
|
|
109
|
|
|
|
(235
|
)
|
|
|
3,697
|
|
Mutual funds—debt securities
|
|
1
|
|
|
17,631
|
|
|
|
58
|
|
|
|
(1,178
|
)
|
|
|
16,511
|
|
Mutual funds—equity securities
|
|
1
|
|
|
16,964
|
|
|
|
605
|
|
|
|
(6,724
|
)
|
|
|
10,845
|
|
Other investment funds(1)
|
|
|
|
|
230,401
|
|
|
|
12,474
|
|
|
|
(16,219
|
)
|
|
|
226,656
|
|
Equity securities
|
|
1
|
|
|
35,467
|
|
|
|
51
|
|
|
|
(18,272
|
)
|
|
|
17,246
|
|
Other invested assets
|
|
2
|
|
|
(609
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(609
|
)
|
Total investments
|
|
|
|
$
|
336,080
|
|
|
$
|
13,297
|
|
|
$
|
(42,628
|
)
|
|
$
|
306,749
|
|
Less: Assets held for sale
|
|
|
|
|
(24,002
|
)
|
|
|
(101
|
)
|
|
|
2,186
|
|
|
|
(21,917
|
)
|
Total
|
|
|
|
$
|
312,078
|
|
|
$
|
13,196
|
|
|
$
|
(40,442
|
)
|
|
$
|
284,832
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from one to seven years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2020 there were $56.4 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
December 31, 2019
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
50,358
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,358
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
1,069
|
|
|
|
32
|
|
|
|
(52
|
)
|
|
|
1,049
|
|
Corporate debt securities
|
|
2
|
|
|
2,020
|
|
|
|
22
|
|
|
|
(142
|
)
|
|
|
1,900
|
|
Total fixed maturities
|
|
|
|
|
3,089
|
|
|
|
54
|
|
|
|
(194
|
)
|
|
|
2,949
|
|
Mutual funds—debt securities
|
|
1
|
|
|
49,963
|
|
|
|
1,439
|
|
|
|
(38
|
)
|
|
|
51,364
|
|
Mutual funds—equity securities
|
|
1
|
|
|
16,698
|
|
|
|
1,617
|
|
|
|
(66
|
)
|
|
|
18,249
|
|
Other investment funds(1)
|
|
|
|
|
186,355
|
|
|
|
10,526
|
|
|
|
(5,472
|
)
|
|
|
191,409
|
|
Equity securities
|
|
1
|
|
|
30,423
|
|
|
|
1,333
|
|
|
|
(12
|
)
|
|
|
31,744
|
|
Other invested assets
|
|
2
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
Total investments
|
|
|
|
$
|
336,902
|
|
|
$
|
14,969
|
|
|
$
|
(5,782
|
)
|
|
$
|
346,089
|
|
Less: Assets held for sale
|
|
|
|
|
(2,416
|
)
|
|
|
(54
|
)
|
|
|
—
|
|
|
|
(2,470
|
)
|
Total
|
|
|
|
$
|
334,486
|
|
|
$
|
14,915
|
|
|
$
|
(5,782
|
)
|
|
$
|
343,619
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from one to seven years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2019 there were $62.4 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
24
Table of Contents
The contractual maturities of debt securities as of March 31, 2020 and December 31, 2019, were as follows (in thousands):
March 31, 2020
|
|
Less than
1 year
|
|
|
1 year through
5 years
|
|
|
6 years through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
85
|
|
|
$
|
168
|
|
|
$
|
780
|
|
|
$
|
70
|
|
Corporate debt securities
|
|
|
214
|
|
|
|
2,018
|
|
|
|
362
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
299
|
|
|
$
|
2,186
|
|
|
$
|
1,142
|
|
|
$
|
70
|
|
December 31, 2019
|
|
Less than
1 year
|
|
|
1 year through
5 years
|
|
|
6 years through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
60
|
|
|
$
|
192
|
|
|
$
|
684
|
|
|
$
|
114
|
|
Corporate debt securities
|
|
|
294
|
|
|
|
1,522
|
|
|
|
84
|
|
|
|
-
|
|
Total fixed maturities
|
|
$
|
354
|
|
|
$
|
1,714
|
|
|
$
|
768
|
|
|
$
|
114
|
|
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.
An aging of unrealized losses on the Company’s investments in debt and equity securities within the perpetual care trusts as of March 31, 2020 and December 31, 2019 is presented below (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
March 31, 2020
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,002
|
|
|
$
|
58
|
|
|
$
|
1,002
|
|
|
$
|
58
|
|
Corporate debt securities
|
|
|
1,759
|
|
|
|
70
|
|
|
|
1,829
|
|
|
|
107
|
|
|
|
3,588
|
|
|
|
177
|
|
Total fixed maturities
|
|
|
1,759
|
|
|
|
70
|
|
|
|
2,831
|
|
|
|
165
|
|
|
|
4,590
|
|
|
|
235
|
|
Mutual funds—debt securities
|
|
|
12,800
|
|
|
|
1,016
|
|
|
|
19
|
|
|
|
162
|
|
|
|
12,819
|
|
|
|
1,178
|
|
Mutual funds—equity securities
|
|
|
7,476
|
|
|
|
6,517
|
|
|
|
7
|
|
|
|
207
|
|
|
|
7,483
|
|
|
|
6,724
|
|
Other investment funds
|
|
|
58,418
|
|
|
|
16,219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,418
|
|
|
|
16,219
|
|
Equity securities
|
|
|
17,006
|
|
|
|
18,259
|
|
|
|
5
|
|
|
|
13
|
|
|
|
17,011
|
|
|
|
18,272
|
|
Other invested assets
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
Total
|
|
$
|
97,459
|
|
|
$
|
42,081
|
|
|
$
|
2,871
|
|
|
$
|
547
|
|
|
$
|
100,330
|
|
|
$
|
42,628
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2019
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
291
|
|
|
$
|
4
|
|
|
$
|
942
|
|
|
$
|
48
|
|
|
$
|
1,233
|
|
|
$
|
52
|
|
Corporate debt securities
|
|
|
463
|
|
|
|
46
|
|
|
|
1,887
|
|
|
|
96
|
|
|
|
2,350
|
|
|
|
142
|
|
Total fixed maturities
|
|
|
754
|
|
|
|
50
|
|
|
|
2,829
|
|
|
|
144
|
|
|
|
3,583
|
|
|
|
194
|
|
Mutual funds—debt securities
|
|
|
2,856
|
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,856
|
|
|
|
38
|
|
Mutual funds—equity securities
|
|
|
566
|
|
|
|
66
|
|
|
|
—
|
|
|
|
—
|
|
|
|
566
|
|
|
|
66
|
|
Other investment funds
|
|
|
53,426
|
|
|
|
5,472
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,426
|
|
|
|
5,472
|
|
Equity securities
|
|
|
121
|
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121
|
|
|
|
12
|
|
Total
|
|
$
|
57,723
|
|
|
$
|
5,638
|
|
|
$
|
2,829
|
|
|
$
|
144
|
|
|
$
|
60,552
|
|
|
$
|
5,782
|
|
For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
25
Table of Contents
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2020, the Company determined, based on its review, that there were no other-than-temporary impairments to the investment portfolio in the perpetual care trusts. It is reasonably possible that continued declines could change the Company’s conclusion regarding whether or not perpetual care trust assets are other-than-temporary impaired. During the three months ended March 31, 2019, the Company determined that there were 66 securities with an aggregate cost basis of approximately $29.2 million and an aggregate fair value of approximately $28.5 million, resulting in an impairment of $0.7 million, with such impairment considered to be other-than-temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value with the offset going against the liability for perpetual care trust corpus.
Total debt consisted of the following at the dates indicated (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
9.875%/11.500% Senior Secured PIK Toggle Notes, due June 2024
|
|
$
|
353,648
|
|
|
$
|
380,619
|
|
Insurance and vehicle financing
|
|
|
2,282
|
|
|
|
574
|
|
Less deferred financing costs, net of accumulated amortization
|
|
|
(12,348
|
)
|
|
|
(12,856
|
)
|
Total debt
|
|
|
343,582
|
|
|
|
368,337
|
|
Less current maturities
|
|
|
(2,139
|
)
|
|
|
(374
|
)
|
Total long-term debt
|
|
$
|
341,443
|
|
|
$
|
367,963
|
|
Senior Secured Notes
On June 27, 2019, StoneMor Partners L.P. (the “Partnership”), Cornerstone Family Services of West Virginia Subsidiary, Inc. (“CFS West Virginia”) and, collectively with the Partnership, the “Issuers”), certain direct and indirect subsidiaries of the Partnership (the “Guarantors”), the initial purchasers party thereto (the “Initial Purchasers”) and Wilmington Trust, National Association, as trustee (in such capacity, the “Trustee”) and as collateral agent (in such capacity, the “Collateral Agent”) entered into an indenture (the “Original Indenture”) with respect to the 9.875%/11.500% Senior Secured PIK Toggle Notes due 2024.
On December 31, 2019, the Company, the subsidiary guarantors party thereto, the Issuers and the Trustee entered into the First Supplemental Indenture (the “First Supplemental Indenture”) and on January 30, 2020, the Company, LP Sub, the Issuers and the Trustee entered into the Second Supplemental Indenture (the “Second Supplemental Indenture” and, collectively with the Original Indenture and the First Supplemental Indenture, the “Indenture”).
Pursuant to the terms of the Indenture, the Initial Purchasers purchased Senior Secured Notes in the aggregate principal amount of $385.0 million in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) thereof. The gross proceeds from the sale of the Senior Secured Notes was $371.5 million, less advisor fees (including a placement agent fee of approximately $7.0 million), legal fees, mortgage costs and other closing expenses, as well as cash funds for collateralization of existing letters of credit and credit card needs under the former credit facility.
The Issuers can elect to pay interest at either a fixed rate of 9.875% per annum in cash or, at their option through January 30, 2022, a fixed rate of 7.50% per annum in cash plus a fixed rate of 4.00% per annum payable in kind by increasing the principal amount of the Senior Secured Notes or by issuing additional Senior Secured Notes. The Senior Secured Notes will require cash interest payments at 9.875% for all interest periods after January 30, 2022. The Company has the right and expects to pay quarterly interest at a fixed rate of 7.50% per annum in cash plus a fixed rate of 4.00% per annum payable in kind through January 30, 2022. Interest is payable quarterly in arrears on the 30th day of each March, June, September and December, commencing September 30, 2019. The Senior Secured Notes mature on June 30, 2024.
The Senior Secured Notes are senior secured obligations of the Issuers. The Issuers’ joint and several obligations under the Senior Secured Notes and the Indenture are jointly and severally guaranteed (the “Note Guarantees”) by the Company and each subsidiary of the Company (other than the Issuers except at to each other’s obligations under the Senior Secured Notes) that the Company has caused or will cause to become a Guarantor pursuant to the terms of the Indenture. In addition, the Issuers, the Guarantors and the Collateral Agent entered into a Collateral Agreement (the “Collateral Agreement”). Pursuant to the Indenture and the Collateral Agreement, the Issuers’ obligations under the Indenture and the Senior Secured Notes and the
26
Table of Contents
Guarantors’ Note Guarantees are secured by a first priority lien and security interest (subject to permitted liens and security interests) in substantially all of the assets of the Issuers and the Guarantors (other than the Company), whether now owned or hereafter acquired, excluding certain assets which include, among others: (a) trust and other fiduciary accounts and amounts required to be deposited or held therein and (b) unless encumbered by a mortgage existing on the date of the Indenture, owned and leased real property that (i) may not be pledged as a matter of law or without governmental approvals, (ii) is not operated or intended to be operated as a cemetery, crematory or funeral home or (iii) is the subject of specified immaterial leases.
The Issuers may redeem the Senior Secured Notes at their option, in whole or in part, at any time for a redemption price equal to the principal balance thereof, accrued and unpaid interest thereon and, if applicable, a premium (the “Applicable Premium”) calculated as follows:
|
•
|
If redeemed before June 27, 2021, the sum of 4% of the principal amount so redeemed plus the excess of (i) the interest that would have accrued on the principal amount of the redeemed Senior Secured Notes from the redemption date through June 27, 2021 assuming an interest rate of 11.500% per annum over (ii) the interest that would have accrued on the principal amount of the redeemed Senior Secured Notes from the redemption date through June 27, 2021 at an interest rate equal to the then-applicable rate on United States Treasury securities for the period most nearly equaling that time period plus 0.50%;
|
|
•
|
If redeemed on or after June 27, 2021 and before June 27, 2022, 4% of the principal amount so redeemed;
|
|
•
|
If redeemed on or after June 27, 2022 and before June 27, 2023, 2% of the principal amount so redeemed; and
|
|
•
|
If redeemed on or after June 27, 2023, no premium will be payable.
|
The Issuers are obligated to redeem the Senior Secured Notes with the net cash proceeds of certain dispositions described in the Indenture, tax refunds, insurance or condemnation proceeds and certain other extraordinary receipts. The redemption price for such redemptions is the principal balance of the Senior Secured Notes being redeemed, all accrued and unpaid interest thereon plus, with respect to redemptions from asset dispositions with net proceeds in excess of $55.0 million, an Applicable Premium of 2% of the principal amount so redeemed. As of March 31, 2020, the Issuers redeemed approximately $32.2 million of the Senior Secured Notes with the net cash proceeds from dispositions.
The Issuers are also obligated to use 75% of any Excess Cash Flow, less any amount paid in any voluntary redemption of the Senior Secured Notes during the applicable period or subsequent thereto and prior to the applicable redemption date, to redeem the Senior Secured Notes at a redemption price equal to the principal balance thereof and all accrued and unpaid interest thereon.
All interest payable in connection with the redemption of any the Senior Secured Notes is payable in cash.
The Indenture requires the Issuers and the Guarantors, as applicable, to comply with various affirmative covenants regarding, among other matters, delivery to the Trustee of financial statements and certain other information or reports filed with the SEC and the maintenance and investment of trust funds and trust accounts into which certain sales proceeds are required by law to be deposited.
The Indenture includes financial covenants pursuant to which the Issuers will not permit:
|
•
|
the ratio of the sum of the Operating Cash Flow Amount plus Cash Interest Expense to Cash Interest Expense, or the Consolidated Interest Coverage Ratio, for the nine months ended March 31, 2020 and the twelve months ending as of each date from June 30, 2020 onwards, as set forth below, to be less than:
|
March 31, 2020
|
|
0.40x
|
June 30, 2020
|
|
0.75x
|
September 30, 2020
|
|
1.00x
|
December 31, 2020
|
|
1.15x
|
March 31, 2021
|
|
1.25x
|
June 30, 2021
|
|
1.30x
|
September 30, 2021
|
|
1.35x
|
December 31, 2021
|
|
1.45x
|
March 31, 2022 and each quarter end thereafter
|
|
1.50x
|
27
Table of Contents
|
•
|
the aggregate amount of Capital Expenditures for the prior four fiscal quarters as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2019 to be more than $20.0 million;
|
|
•
|
the average daily balance of Unrestricted Cash and unrestricted Permitted Investments of the Company and its subsidiaries as of the end of any day for any 10-business day period to be less than $12.5 million during the quarter ended March 31, 2020 and any subsequent quarter through maturity; or
|
|
•
|
the ratio of the (a) the sum of Unrestricted Cash, accounts receivable and merchandise trust account balances to (b) the aggregate principal or face amount of Consolidated Funded Indebtedness, or Asset Coverage Test, for the applicable measurement period as of the last day of any fiscal quarter to be less than 1.60:1.00.
|
The Indenture requires the Issuers and the Guarantors, as applicable, to comply with certain other covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Issuers’ and the Guarantors’ ability to: (i) incur additional indebtedness; (ii) grant liens; (iii) engage in certain sale/leaseback, merger, consolidation or asset sale transactions; (iv) make certain investments; (v) pay dividends or make distributions; (vi) engage in affiliate transactions and (vii) amend its organizational documents.
The Indenture provides for certain events of default, the occurrence and continuation of which could, subject to certain conditions, cause all amounts owing under the Senior Secured Notes to become due and payable, including but not limited to the following:
|
•
|
failure by the Issuers to pay any interest on any Senior Secured Note when it becomes due and payable that remains uncured for five business days;
|
|
•
|
failure by the Issuers to pay the principal on any of the Senior Secured Notes when it becomes due and payable, whether at the due date thereof, at a date fixed for redemption, by acceleration or otherwise;
|
|
•
|
failure by the Issuers to comply with the agreement and covenants relating to maintenance of its legal existence, providing notice of any default or event of default or use of proceeds from the sale of the Senior Secured Notes or any of the negative covenants in the Indenture;
|
|
•
|
failure by the Issuers to comply with any other agreement or covenant contained in the Indenture, the Collateral Agreement or any other Note Document that remains uncured for a period of 15 days after the earlier of written notice and request for cure from the Trustee or holders of at least 25% of the aggregate principal amount of the Senior Secured Notes;
|
|
•
|
the acceleration of or the failure to pay at final maturity indebtedness (other than the Senior Secured Notes) in a principal amount exceeding $5.0 million;
|
|
•
|
the occurrence of a Change in Control;
|
|
•
|
certain bankruptcy or insolvency proceedings involving an Issuer or any subsidiary; and
|
|
•
|
failure by the Company or any subsidiary to maintain one or more licenses, permits or similar approvals for the conduct of its business where the sum of the revenue associated therewith represents the lesser of (i) 15% of the Company and its subsidiaries’ consolidated revenue and (ii) $30.0 million, and such breach is not cured within 30 days.
|
At the option of holders holding a majority of the outstanding principal amount of the Senior Secured Notes (and automatically upon any default for failure to pay principal of the Senior Secured Notes when due and payable or certain bankruptcy or insolvency proceedings involving an Issuer), the interest rate on the Senior Secured Notes will increase to 13.50% per annum, payable in cash.
As of March 31, 2020, the Company was in compliance with the covenants of the Indenture.
28
Table of Contents
On April 1, 2020, the Issuers and the Trustee entered into the Third Supplemental Indenture to the Indenture (the “Supplemental Indenture”), pursuant to which certain financial covenants and the premium payable upon voluntary redemption of the Senior Secured Notes in the Indenture were amended. For further details, see Note 18 Subsequent Events.
Deferred Financing Costs
For the three months ended March 31, 2020 and 2019, the Company recognized $0.7 million and $1.5 million, respectively, of amortization of deferred financing fees on its various debt facilities.
Capital Stock
Effective as of the C-Corporation Conversion, the Company was authorized to issue two classes of capital stock: common stock, $0.01 par value per share (“Common Stock”) and preferred stock, $0.01 par value per share (“Preferred Stock”).
At March 31, 2020, 94,477,102 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued or outstanding. At March 31, 2020, there were 105,522,898 shares of Common Stock available for issuance, including 1,133,542 shares available for issuance as stock-based incentive compensation under the Company’s long-term incentive plan (the “Plan”), and 10,000,000 shares of Preferred Stock available for issuance.
For further details on events affecting the Company’s capital stock subsequent to March 31, 2020, see Note 18 Subsequent Events.
Stock-based Compensation
The Plan permits the granting of awards covering a total of 8,500,000 common units of the Company. A “unit” under the Plan is defined as a common unit of the Company and such other securities as may be substituted or resubstituted for common units of the Company, including but not limited to shares of the Company’s common stock. The Plan is intended to promote the interests of the Company by providing to employees, consultants and directors of the Company incentive compensation awards to encourage superior performance and enhance the Company’s ability to attract and retain the services of individuals who are essential for its growth and profitability and to encourage them to devote their best efforts to advancing the Company’s business.
For further details on changes to the Plan subsequent to March 31, 2020, see Note 18 Subsequent Events.
Non-qualified Stock Options
On December 18, 2019, the Compensation Committee approved the granting of options to employees of the Company, including certain members of senior management to purchase an aggregate of 5.5 million common shares at an exercise price of $1.20 per share. The option awards vest in three equal annual installments on each December 18 (or first business day thereafter) commencing on December 18, 2020, provided that the recipient remains employed by the Company. The Company measured the option awards at their grant-date fair value utilizing the Black-Scholes model and will recognize stock compensation expense on a straight-line basis over the weighted-average service period, which is expected to be three years. The option awards expire no later than 10 years from the date of grant.
A rollforward of stock options as of March 31, 2020 is as follows:
|
|
Number of Stock Options
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Weighted Average Exercise Price
|
|
Total outstanding at December 31, 2019
|
|
|
5,500,000
|
|
|
$
|
0.34
|
|
|
$
|
1.20
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options exercisable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options forfeited
|
|
|
(225,000
|
)
|
|
|
0.34
|
|
|
|
1.20
|
|
Options expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total outstanding at March 31, 2020
|
|
|
5,275,000
|
|
|
$
|
0.34
|
|
|
$
|
1.20
|
|
29
Table of Contents
For the three months ended March 31, 2020, non-cash stock compensation expense related to stock options was $0.2 million. As of March 31, 2020, total unrecognized compensation cost related to unvested stock options was $1.6 million, which the Company expects to recognize over the remaining weighted-average period of 2.7 years.
Assumptions used in calculating the fair value of the stock options granted are summarized below:
|
|
2019 Options Granted
|
|
Valuation assumptions:
|
|
|
|
|
Expected dividend yield
|
|
None
|
|
Expected volatility
|
|
|
23.41
|
%
|
Expected term (years)
|
|
|
6.0
|
|
Risk-free interest rate
|
|
|
1.78
|
%
|
Weighted average:
|
|
|
|
|
Exercise price per stock option
|
|
$
|
1.20
|
|
Market price per share
|
|
$
|
1.23
|
|
Weighted average fair value per stock option
|
|
$
|
0.34
|
|
Phantom Unit and Restricted Unit Awards
A rollforward of phantom unit and restricted unit awards as of March 31, 2020 is as follows:
|
|
Number of Phantom Unit and Restricted Unit Awards
|
|
|
Weighted Average Grant Date Fair Value
|
|
Total non-vested at December 31, 2019
|
|
|
559,218
|
|
|
$
|
3.67
|
|
Units issued
|
|
|
18,518
|
|
|
|
1.08
|
|
Units vested
|
|
|
(46,875
|
)
|
|
|
3.88
|
|
Units forfeited
|
|
|
—
|
|
|
|
—
|
|
Total non-vested at March 31, 2020
|
|
|
530,861
|
|
|
$
|
3.56
|
|
For the three months ended March 31, 2020 and 2019, the Company recognized $0.2 million and $0.3 million, respectively, of non-cash stock compensation expense related to phantom unit and restricted unit awards into earnings. As of March 31, 2020, total unamortized compensation cost related to unvested restricted stock awards was $1.6 million, which the Company expects to recognize over the remaining weighted-average period of 2.25 years.
11.
|
DEFERRED REVENUES AND COSTS
|
The Company defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Company recognizes deferred merchandise and service revenues as customer contract liabilities within long-term liabilities on its consolidated balance sheets. The Company recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its consolidated balance sheets. The Company also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in the customer contract liabilities. All other selling costs are expensed as incurred. Additionally, the Company has elected the practical expedient of not recognizing incremental costs to obtain a contract as incurred, as the associated amortization period is typically one year or less.
Deferred revenues and related costs consisted of the following (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Deferred contract revenues
|
|
$
|
819,147
|
|
|
$
|
837,190
|
|
Deferred merchandise trust revenue
|
|
|
97,910
|
|
|
|
104,304
|
|
Deferred merchandise trust unrealized gains (losses)
|
|
|
(49,650
|
)
|
|
|
7,881
|
|
Deferred revenues
|
|
$
|
867,407
|
|
|
$
|
949,375
|
|
Deferred selling and obtaining costs
|
|
$
|
113,611
|
|
|
$
|
114,944
|
|
For the three months ended March 31, 2020 and March 31, 2019, the Company recognized $19.9 million and $22.6 million of the customer contract liabilities balance that existed at December 31, 2019 and 2018 as revenue.
30
Table of Contents
The components of the customer contract liabilities, net in the Company’s consolidated balance sheets at March 31, 2020 and December 31, 2019 were as follows (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Customer contract liabilities, gross
|
|
$
|
889,868
|
|
|
$
|
974,927
|
|
Amounts due from customers for unfulfilled performance obligations on cancellable pre-need contracts
|
|
|
(22,461
|
)
|
|
|
(25,552
|
)
|
Customer contract liabilities, net
|
|
$
|
867,407
|
|
|
$
|
949,375
|
|
The Company expects to service approximately 55% of its deferred revenue in the first 4-5 years and approximately 80% of its deferred revenue within 18 years. The Company cannot estimate the period when it expects its remaining performance obligations will be recognized, because certain performance obligations will only be satisfied at the time of death.
12.COMMITMENTS AND CONTINGENCIES
Legal
The Partnership remains subject to state law derivative claims that certain of the Partnership’s officers and directors breached their fiduciary duty to the Partnership and its unitholders. The Company could also become subject to additional claims and legal proceedings relating to the factual allegations made in these actions. While management cannot reasonably estimate the potential exposure in these matters at this time, if we do not prevail in any such proceedings, we could be required to pay substantial damages or settlement costs, subject to certain insurance coverages. Management has determined that, based on the status of the claims and legal proceedings against the Company, the amount of the potential losses cannot be reasonably estimated at this time. These actions are summarized below.
|
•
|
Bunim v. Miller, et al., No. 2:17-cv-519-ER, pending in the United States District Court for the Eastern District of Pennsylvania, and filed on February 6, 2017. The plaintiff in this case brought, derivatively on behalf of the Partnership, claims that the officers and directors of StoneMor GP aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in the Partnership’s public filings, by allegedly failing to clearly disclose the use of proceeds from debt and equity offerings, and by allegedly approving unsustainable distributions. The plaintiff also claims that these actions and misrepresentations give rise to causes of action for gross mismanagement, unjust enrichment, and (in connection with a purportedly misleading proxy statement filed in 2014) violations of Section 14(a) of the Securities Exchange Act of 1934. The derivative plaintiff seeks an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as general compliance and governance changes. This case has been stayed, by the agreement of the parties, provided that either party may terminate the stay on 30 days’ notice.
|
|
•
|
Muth v. StoneMor G.P. LLC, et al., December Term, 2016, No. 1196 and Binder v. StoneMor G.P. LLC, et al., January Term, 2017, No. 4872, both pending in the Court of Common Pleas for Philadelphia County, Pennsylvania, and filed on December 20, 2016 and February 3, 2017, respectively. In these cases, the plaintiffs brought, derivatively on behalf of the Partnership, claims that the officers and directors of StoneMor GP aided and abetted in breaches of the StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in the Partnership’s public filings and by failing to clearly disclose the use of proceeds from debt and equity offerings, as well as approving unsustainable distributions. The plaintiffs also claim that these actions and misrepresentations give rise to a cause of action for unjust enrichment. The derivative plaintiffs seek an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as alterations to the procedures for electing members to the board of the Partnership’s general partner, and other compliance and governance changes. These cases have been consolidated and stayed, by the agreement of the parties, pending final resolution of the motion to dismiss filed in a separate case, which has now been dismissed. In February 2020, the court dismissed these cases for failure to prosecute. The plaintiffs have until the termination of the judicial emergency orders entered by the Pennsylvania Supreme Court and Philadelphia Court of Common Pleas, suspending certain court deadlines, to petition the court to restore the cases.
|
31
Table of Contents
The Company is party to other legal proceedings in the ordinary course of its business, but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows. The Company carries insurance with coverage and coverage limits that it believes to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect the Company against all contingencies, Management believes that the insurance protection is reasonable in view of the nature and scope of the Company’s operations.
Other
In connection with the Company’s 2014 lease and management agreements with the Archdiocese of Philadelphia, it has committed to pay aggregate fixed rent of $36.0 million in the following amounts:
Lease Years 1-5 (May 28, 2014-May 31, 2019)
|
|
None
|
Lease Years 6-20 (June 1, 2019-May 31, 2034)
|
|
$1,000,000 per Lease Year
|
Lease Years 21-25 (June 1, 2034-May 31, 2039)
|
|
$1,200,000 per Lease Year
|
Lease Years 26-35 (June 1, 2039-May 31, 2049)
|
|
$1,500,000 per Lease Year
|
Lease Years 36-60 (June 1, 2049-May 31, 2074)
|
|
None
|
The fixed rent for lease years six through 11, an aggregate of $6.0 million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements in accordance with their terms during lease year 11 or the Company terminates the agreements as a result of a default by the Archdiocese, the Company is entitled to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2025.
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. In addition the Company has a sale-leaseback related to one of its warehouses. Leases with an initial term of 12 months or less are not recorded on the Company’s consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term of more than 12 months, the Company measures the lease liability at the present value of the sum of the remaining minimum rental payments, which exclude executory costs.
Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that it will exercise the renewal options. The Company does have residual value guarantees on the finance leases for its vehicles, but no residual guarantees on any of its operating leases.
Certain of the Company’s leases have variable payments with annual escalations based on the proportion by which the consumer price index (“CPI”) for all urban consumers increased over the CPI index for the prior comparative year.
The Company has the following balances recorded on its consolidated balance sheets related to leases:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
8,793
|
|
|
$
|
10,570
|
|
Finance
|
|
|
5,095
|
|
|
|
5,685
|
|
Total ROU assets(1)
|
|
$
|
13,888
|
|
|
$
|
16,255
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
1,825
|
|
|
$
|
2,022
|
|
Finance
|
|
|
1,200
|
|
|
|
1,200
|
|
Long-term
|
|
|
|
|
|
|
|
|
Operating
|
|
|
9,833
|
|
|
|
11,495
|
|
Finance
|
|
|
3,927
|
|
|
|
4,302
|
|
Total lease liabilities(2)
|
|
$
|
16,785
|
|
|
$
|
19,019
|
|
(1)
|
The Company’s ROU operating assets and finance assets are presented within Other assets and Property and equipment, net of accumulated depreciation, respectively, in its consolidated balance sheets.
|
(2)
|
The Company’s current lease liabilities and long-term are presented within Accounts payable and accrued liabilities and Other long-term liabilities, respectively, in its consolidated balance sheets.
|
32
Table of Contents
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. The weighted average borrowing rates for operating and finance leases were 9.9% and 8.5%, respectively, as of March 31, 2020.
The components of lease expense were as follows:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Lease cost
|
Classification
|
|
|
|
|
|
|
|
Operating lease costs(1)
|
General and administrative expense
|
$
|
801
|
|
|
$
|
920
|
|
Finance lease costs
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
Depreciation and Amortization
|
|
329
|
|
|
|
320
|
|
Interest on lease liabilities
|
Interest expense
|
|
116
|
|
|
|
116
|
|
Variable lease costs
|
General and administrative expense
|
|
—
|
|
|
|
—
|
|
Short-term lease costs(2)
|
General and administrative expense
|
|
—
|
|
|
|
—
|
|
Net lease costs
|
|
$
|
1,246
|
|
|
$
|
1,356
|
|
(1)
|
The Company includes its variable lease costs under operating lease costs as these variable lease costs are immaterial.
|
(2)
|
The Company does not have any short-term leases with lease terms greater than one month.
|
Maturities of the Company’s lease labilities as of March 31, 2020 were as follows:
Year ending December 31,
|
|
Operating
|
|
|
Finance
|
|
2020
|
|
$
|
2,207
|
|
|
$
|
1,267
|
|
2021
|
|
|
2,512
|
|
|
|
1,838
|
|
2022
|
|
|
2,178
|
|
|
|
2,027
|
|
2023
|
|
|
1,900
|
|
|
|
708
|
|
2024
|
|
|
1,768
|
|
|
|
105
|
|
Thereafter
|
|
|
5,854
|
|
|
|
—
|
|
Total
|
|
$
|
16,419
|
|
|
$
|
5,945
|
|
Less: Interest
|
|
|
(4,762
|
)
|
|
|
(817
|
)
|
Present value of lease liabilities
|
|
$
|
11,657
|
|
|
$
|
5,128
|
|
Maturities of the Company’s lease labilities as of December 31, 2019 were as follows:
Year ending December 31,
|
|
Operating
|
|
|
Finance
|
|
2019
|
|
$
|
3,283
|
|
|
$
|
1,759
|
|
2020
|
|
|
2,783
|
|
|
|
1,838
|
|
2021
|
|
|
2,455
|
|
|
|
2,026
|
|
2022
|
|
|
2,190
|
|
|
|
708
|
|
2023
|
|
|
2,046
|
|
|
|
106
|
|
Thereafter
|
|
|
6,348
|
|
|
|
—
|
|
Total
|
|
$
|
19,105
|
|
|
$
|
6,437
|
|
Less: Interest
|
|
|
(5,588
|
)
|
|
|
(935
|
)
|
Present value of lease liabilities
|
|
$
|
13,517
|
|
|
$
|
5,502
|
|
Operating and finance lease payments include $2.5 million related to options to extend lease terms that are reasonably certain of being exercised and $2.0 million related to residual value guarantees. The weighted average remaining lease term for operating and finance leases was 7.0 years and 2.6 years, respectively, as of March 31, 2020.
As of March 31, 2020, the Company had one additional operating lease that had not yet commenced, which was valued at $0.1 million, but did not have any lease transactions with its related parties. In addition, as of March 31, 2020, the Company has not entered into any new sale-leaseback arrangements.
33
Table of Contents
14.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Management has established a hierarchy to classify the inputs used to measure the Company’s financial instruments at fair value, pursuant to which the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
|
•
|
Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
•
|
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same contractual term of the asset or liability.
|
|
•
|
Level 3 – Unobservable inputs based on the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.
|
The carrying value of the Company’s current assets and current liabilities on its consolidated balance sheets approximated or equaled their estimated fair values due to their short-term nature or imputed interest rates.
Recurring Fair Value Measurement
At March 31, 2020 and December 31, 2019, the two financial instruments measured by the Company at fair value on a recurring basis were its merchandise and perpetual care trusts, which consist of investments in debt and equity marketable securities and cash equivalents that are carried at fair value and are classified as either Level 1 or Level 2 (see Note 7 Merchandise Trusts and Note 8 Perpetual Care Trusts).
Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurement hierarchy. Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy. Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP. These funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy.
Non-Recurring Fair Value Measurement
The Company may be required to measure certain assets and liabilities at fair value, such as its indefinite-lived assets and long-lived assets, on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from impairment charges.
Other Financial Instruments
The Company’s other financial instruments at March 31, 2020 and December 31, 2019 consisted of its Senior Secured Notes (see Note 9 Long-Term Debt). At March 31, 2020 and December 31, 2019, the estimated fair value of the Company’s Senior Secured Notes was $353.3 million and $383.2 million, respectively, based on trades made on that date, compared with the carrying amount of $365.1 million and $392.8 million, respectively.
15.
|
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
|
The Company’s Senior Secured Notes are guaranteed by the Company’s 100% owned subsidiaries, other than the co-issuers (except as to each other’s obligations thereunder), as described in Note 9 Long-Term Debt. The guarantees are full, unconditional, joint and several. The Partnership and CFS West Virginia are the co-issuers of the Senior Secured Notes.
In accordance with the disclosures made in Note 1 General, StoneMor Inc. is the “Parent” for the audited consolidated balance sheet presented as of December 31, 2019 and the unaudited condensed consolidated financial statements presented as of and for
34
Table of Contents
the three months ended March 31, 2020, while the Partnership is the “Parent” for the unaudited condensed consolidated financial statements presented for the three months ended March 31, 2019. The Company’s audited consolidated balance sheet as of December 31, 2019 and its unaudited condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 include the accounts of cemeteries operated under long-term leases, operating agreements and management agreements. For the purposes of this note, these entities are deemed non-guarantor subsidiaries, as they are not 100% owned by the Company. The Company’s consolidated financial statements also contain merchandise and perpetual care trusts that are also non-guarantor subsidiaries for the purposes of this note.
The financial information presented below reflects the Company’s standalone accounts, the standalone accounts of the co-issuers, the combined accounts of the guarantor subsidiaries, the combined accounts of the non-guarantor subsidiaries, the consolidating adjustments and eliminations and the Company’s consolidated accounts as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019. For the purpose of the following financial information, the Company’s investments in its subsidiaries and the guarantor subsidiaries’ investments in their respective subsidiaries are presented in accordance with the equity method of accounting (in thousands):
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 2020
|
|
Parent
|
|
|
Partnership
|
|
|
CFS West Virginia
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding restricted cash
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,621
|
|
|
$
|
1,445
|
|
|
$
|
—
|
|
|
$
|
27,066
|
|
Restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,400
|
|
Assets held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77,850
|
|
Other current assets
|
|
|
—
|
|
|
|
—
|
|
|
|
3,565
|
|
|
|
60,619
|
|
|
|
11,574
|
|
|
|
—
|
|
|
|
75,758
|
|
Total current assets
|
|
|
—
|
|
|
|
—
|
|
|
|
3,565
|
|
|
|
184,490
|
|
|
|
13,019
|
|
|
|
—
|
|
|
|
201,074
|
|
Long-term accounts receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
2,345
|
|
|
|
59,074
|
|
|
|
10,055
|
|
|
|
—
|
|
|
|
71,474
|
|
Cemetery and funeral home property and
equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
531
|
|
|
|
364,534
|
|
|
|
32,035
|
|
|
|
—
|
|
|
|
397,100
|
|
Merchandise trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
437,638
|
|
|
|
—
|
|
|
|
437,638
|
|
Perpetual care trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
284,832
|
|
|
|
—
|
|
|
|
284,832
|
|
Deferred selling and obtaining costs
|
|
|
—
|
|
|
|
—
|
|
|
|
5,704
|
|
|
|
89,682
|
|
|
|
18,225
|
|
|
|
—
|
|
|
|
113,611
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98
|
|
|
|
55,844
|
|
|
|
—
|
|
|
|
55,942
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,141
|
|
|
|
2,607
|
|
|
|
—
|
|
|
|
26,748
|
|
Investments in and amounts due from
affiliates eliminated upon consolidation
|
|
|
—
|
|
|
|
279,834
|
|
|
|
—
|
|
|
|
576,588
|
|
|
|
—
|
|
|
|
(856,422
|
)
|
|
|
—
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
279,834
|
|
|
$
|
12,145
|
|
|
$
|
1,298,607
|
|
|
$
|
854,255
|
|
|
$
|
(856,422
|
)
|
|
$
|
1,588,419
|
|
Liabilities and Owners' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
180
|
|
|
|
102,968
|
|
|
|
1,486
|
|
|
|
—
|
|
|
|
104,634
|
|
Long-term debt, net of deferred financing costs
|
|
|
—
|
|
|
|
279,834
|
|
|
|
61,470
|
|
|
|
139
|
|
|
|
—
|
|
|
|
—
|
|
|
|
341,443
|
|
Deferred revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
31,431
|
|
|
|
727,227
|
|
|
|
108,749
|
|
|
|
—
|
|
|
|
867,407
|
|
Perpetual care trust corpus
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
284,832
|
|
|
|
—
|
|
|
|
284,832
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,670
|
|
|
|
16,545
|
|
|
|
—
|
|
|
|
83,215
|
|
Investments in and amounts due to
affiliates eliminated upon consolidation
|
|
|
93,112
|
|
|
|
93,112
|
|
|
|
177,069
|
|
|
|
341,304
|
|
|
|
494,246
|
|
|
|
(1,198,843
|
)
|
|
|
—
|
|
Total liabilities
|
|
|
93,112
|
|
|
|
372,946
|
|
|
|
270,150
|
|
|
|
1,238,308
|
|
|
|
905,858
|
|
|
|
(1,198,843
|
)
|
|
|
1,681,531
|
|
Owners' equity
|
|
|
(93,112
|
)
|
|
|
(93,112
|
)
|
|
|
(258,005
|
)
|
|
|
60,299
|
|
|
|
(51,603
|
)
|
|
|
342,421
|
|
|
|
(93,112
|
)
|
Total liabilities and owners' equity
|
|
$
|
—
|
|
|
$
|
279,834
|
|
|
$
|
12,145
|
|
|
$
|
1,298,607
|
|
|
$
|
854,255
|
|
|
$
|
(856,422
|
)
|
|
$
|
1,588,419
|
|
35
Table of Contents
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS (Continued)
December 31, 2019
|
|
Parent
|
|
|
Partnership
|
|
|
CFS West Virginia
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding restricted cash
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,553
|
|
|
$
|
1,314
|
|
|
$
|
—
|
|
|
$
|
34,867
|
|
Restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,900
|
|
Assets held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,858
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,858
|
|
Other current assets
|
|
|
—
|
|
|
|
—
|
|
|
|
3,497
|
|
|
|
62,686
|
|
|
|
11,531
|
|
|
|
—
|
|
|
|
77,714
|
|
Total current assets
|
|
|
—
|
|
|
|
—
|
|
|
|
3,497
|
|
|
|
141,997
|
|
|
|
12,845
|
|
|
|
—
|
|
|
|
158,339
|
|
Long-term accounts receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
2,557
|
|
|
|
63,124
|
|
|
|
9,868
|
|
|
|
—
|
|
|
|
75,549
|
|
Cemetery and funeral home property and
equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
609
|
|
|
|
391,626
|
|
|
|
31,770
|
|
|
|
—
|
|
|
|
424,005
|
|
Merchandise trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
517,192
|
|
|
|
—
|
|
|
|
517,192
|
|
Perpetual care trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
343,619
|
|
|
|
—
|
|
|
|
343,619
|
|
Deferred selling and obtaining costs
|
|
|
—
|
|
|
|
—
|
|
|
|
5,654
|
|
|
|
91,243
|
|
|
|
18,047
|
|
|
|
—
|
|
|
|
114,944
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136
|
|
|
|
56,110
|
|
|
|
—
|
|
|
|
56,246
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,907
|
|
|
|
2,567
|
|
|
|
—
|
|
|
|
29,474
|
|
Investments in and amounts due from
affiliates eliminated upon consolidation
|
|
|
—
|
|
|
|
301,531
|
|
|
|
—
|
|
|
|
648,359
|
|
|
|
—
|
|
|
|
(949,890
|
)
|
|
|
—
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
301,531
|
|
|
$
|
12,317
|
|
|
$
|
1,363,392
|
|
|
$
|
992,018
|
|
|
$
|
(949,890
|
)
|
|
$
|
1,719,368
|
|
Liabilities and Owners' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
161
|
|
|
$
|
74,674
|
|
|
$
|
1,466
|
|
|
$
|
—
|
|
|
$
|
76,301
|
|
Long-term debt, net of deferred financing costs
|
|
|
—
|
|
|
|
301,531
|
|
|
|
66,239
|
|
|
|
193
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367,963
|
|
Deferred revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
33,349
|
|
|
|
802,528
|
|
|
|
113,498
|
|
|
|
—
|
|
|
|
949,375
|
|
Perpetual care trust corpus
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
343,619
|
|
|
|
—
|
|
|
|
343,619
|
|
Liabilities held for sale, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,227
|
|
|
|
16,373
|
|
|
|
—
|
|
|
|
84,600
|
|
Investments in and amounts due to
affiliates eliminated upon consolidation
|
|
|
102,490
|
|
|
|
102,490
|
|
|
|
183,611
|
|
|
|
367,770
|
|
|
|
567,666
|
|
|
|
(1,324,027
|
)
|
|
|
—
|
|
Total liabilities
|
|
|
102,490
|
|
|
|
404,021
|
|
|
|
283,360
|
|
|
|
1,313,392
|
|
|
|
1,042,622
|
|
|
|
(1,324,027
|
)
|
|
|
1,821,858
|
|
Owners' equity
|
|
|
(102,490
|
)
|
|
|
(102,490
|
)
|
|
|
(271,043
|
)
|
|
|
50,000
|
|
|
|
(50,604
|
)
|
|
|
374,137
|
|
|
|
(102,490
|
)
|
Total liabilities and owners' equity
|
|
$
|
—
|
|
|
$
|
301,531
|
|
|
$
|
12,317
|
|
|
$
|
1,363,392
|
|
|
$
|
992,018
|
|
|
$
|
(949,890
|
)
|
|
$
|
1,719,368
|
|
36
Table of Contents
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2020
|
|
Parent
|
|
|
Partnership
|
|
|
CFS West Virginia
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,194
|
|
|
$
|
59,698
|
|
|
$
|
13,069
|
|
|
$
|
(2,716
|
)
|
|
$
|
71,245
|
|
Total costs and expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,169
|
)
|
|
|
(58,984
|
)
|
|
|
(13,319
|
)
|
|
|
2,716
|
|
|
|
(72,756
|
)
|
Gain on sale of businesses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,086
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,086
|
|
Net income from equity investment
in subsidiaries
|
|
|
9,003
|
|
|
|
17,701
|
|
|
|
12,585
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(39,289
|
)
|
|
|
—
|
|
Interest expense
|
|
|
—
|
|
|
|
(8,698
|
)
|
|
|
(1,911
|
)
|
|
|
(1,382
|
)
|
|
|
(293
|
)
|
|
|
—
|
|
|
|
(12,284
|
)
|
Income (loss) from operations
before income taxes
|
|
|
9,003
|
|
|
|
9,003
|
|
|
|
8,699
|
|
|
|
23,418
|
|
|
|
(543
|
)
|
|
|
(39,289
|
)
|
|
|
10,291
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,288
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,288
|
)
|
Net income (loss)
|
|
$
|
9,003
|
|
|
$
|
9,003
|
|
|
$
|
8,699
|
|
|
$
|
22,130
|
|
|
$
|
(543
|
)
|
|
$
|
(39,289
|
)
|
|
$
|
9,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Total revenues
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,564
|
|
|
$
|
59,752
|
|
|
$
|
11,132
|
|
|
$
|
(979
|
)
|
|
$
|
71,469
|
|
Total costs and expenses
|
|
|
|
|
|
|
—
|
|
|
|
(4,520
|
)
|
|
|
(65,935
|
)
|
|
|
(11,356
|
)
|
|
|
979
|
|
|
|
(80,832
|
)
|
Net loss from equity investment in
subsidiaries
|
|
|
|
|
|
|
(21,176
|
)
|
|
|
(18,925
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
40,101
|
|
|
|
—
|
|
Interest expense
|
|
|
|
|
|
|
(1,358
|
)
|
|
|
(2,087
|
)
|
|
|
(9,456
|
)
|
|
|
(270
|
)
|
|
|
—
|
|
|
|
(13,171
|
)
|
Income (loss) from operations
before income taxes
|
|
|
|
|
|
|
(22,534
|
)
|
|
|
(23,968
|
)
|
|
|
(15,639
|
)
|
|
|
(494
|
)
|
|
|
40,101
|
|
|
|
(22,534
|
)
|
Income tax expense
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
|
|
|
|
$
|
(22,534
|
)
|
|
$
|
(23,968
|
)
|
|
$
|
(15,639
|
)
|
|
$
|
(494
|
)
|
|
$
|
40,101
|
|
|
$
|
(22,534
|
)
|
37
Table of Contents
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2020
|
|
Parent
|
|
|
Partnership
|
|
|
CFS West Virginia
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash used in (provided by) operating activities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
4,465
|
|
|
$
|
893
|
|
|
$
|
(10,608
|
)
|
|
$
|
(5,238
|
)
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions and capital
expenditures, net of proceeds from
divestitures and asset sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,796
|
|
|
|
(679
|
)
|
|
|
—
|
|
|
|
26,117
|
|
Payments to affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,796
|
|
|
|
(679
|
)
|
|
|
—
|
|
|
|
26,117
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,608
|
)
|
|
|
—
|
|
|
|
10,608
|
|
|
|
—
|
|
Net borrowings and repayments of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
(29,872
|
)
|
|
|
(83
|
)
|
|
|
—
|
|
|
|
(29,967
|
)
|
Other financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(213
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(213
|
)
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
(40,693
|
)
|
|
|
(83
|
)
|
|
|
10,608
|
|
|
|
(30,180
|
)
|
Net (decrease) increase in cash and cash equivalents and restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,432
|
)
|
|
|
131
|
|
|
|
—
|
|
|
|
(9,301
|
)
|
Cash and cash equivalents and restricted
cash—Beginning of period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,453
|
|
|
|
1,314
|
|
|
|
—
|
|
|
|
56,767
|
|
Cash and cash equivalents and restricted
cash—End of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,021
|
|
|
$
|
1,445
|
|
|
$
|
—
|
|
|
$
|
47,466
|
|
Three Months Ended March 31, 2019
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash used in (provided by) operating activities
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
(9,509
|
)
|
|
$
|
(268
|
)
|
|
$
|
(3,445
|
)
|
|
$
|
(13,103
|
)
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions and capital
expenditures, net of proceeds from
divestitures and asset sales
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
(1,717
|
)
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
(1,903
|
)
|
Net cash used investing activities
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
(1,717
|
)
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
(1,903
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments to affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,445
|
)
|
|
|
—
|
|
|
|
3,445
|
|
|
|
—
|
|
Net borrowings and repayments of debt
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
24,030
|
|
|
|
(74
|
)
|
|
|
—
|
|
|
|
23,943
|
|
Other financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,636
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,636
|
)
|
Net cash (used in) provided by financing activities
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
17,949
|
|
|
|
(74
|
)
|
|
|
3,445
|
|
|
|
21,307
|
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
6,723
|
|
|
|
(422
|
)
|
|
|
—
|
|
|
|
6,301
|
|
Cash and cash equivalents and restricted cash
—Beginning of period
|
|
|
—
|
|
|
|
—
|
|
|
|
16,298
|
|
|
|
1,849
|
|
|
|
—
|
|
|
|
18,147
|
|
Cash and cash equivalents and restricted cash
—End of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,021
|
|
|
$
|
1,427
|
|
|
$
|
—
|
|
|
$
|
24,448
|
|
38
Table of Contents
Management operates the Company in two reportable operating segments: Cemetery Operations and Funeral Home Operations. These operating segments reflect the way the Company manages its operations and makes business decisions. Management evaluates the performance of these operating segments based on interments performed, interment rights sold, pre-need cemetery and at-need cemetery contracts written, revenue and segment profit (loss). As a percentage of revenue and assets, the Company’s major operations consist of its cemetery operations.
The following tables present financial information with respect to the Company’s segments (in thousands). Corporate costs represent those not directly associated with an operating segment, such as corporate overhead, interest expense and income taxes. Corporate assets primarily consist of cash and cash equivalents and restricted cash.
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
Cemetery Operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
58,066
|
|
|
$
|
57,910
|
|
Operating costs and expenses
|
|
|
(51,138
|
)
|
|
|
(53,162
|
)
|
Depreciation and amortization
|
|
|
(1,704
|
)
|
|
|
(1,962
|
)
|
Segment operating profit
|
|
$
|
5,224
|
|
|
$
|
2,786
|
|
Funeral Home Operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,179
|
|
|
$
|
13,559
|
|
Operating costs and expenses
|
|
|
(10,658
|
)
|
|
|
(11,500
|
)
|
Depreciation and amortization
|
|
|
(539
|
)
|
|
|
(588
|
)
|
Segment operating profit
|
|
$
|
1,982
|
|
|
$
|
1,471
|
|
Reconciliation of segment operating profit to net income (loss):
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
5,224
|
|
|
$
|
2,786
|
|
Funeral Home Operations
|
|
|
1,982
|
|
|
|
1,471
|
|
Total segment profit
|
|
|
7,206
|
|
|
|
4,257
|
|
Corporate overhead
|
|
|
(8,501
|
)
|
|
|
(13,413
|
)
|
Corporate depreciation and amortization
|
|
|
(216
|
)
|
|
|
(207
|
)
|
Gain on sale of businesses
|
|
|
24,086
|
|
|
|
—
|
|
Interest expense
|
|
|
(12,284
|
)
|
|
|
(13,171
|
)
|
Income tax expense
|
|
|
(1,288
|
)
|
|
|
—
|
|
Net income (loss)
|
|
$
|
9,003
|
|
|
$
|
(22,534
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
1,188
|
|
|
$
|
890
|
|
Funeral Home Operations
|
|
|
10
|
|
|
|
976
|
|
Corporate
|
|
|
875
|
|
|
|
37
|
|
Total capital expenditures
|
|
$
|
2,073
|
|
|
$
|
1,903
|
|
39
Table of Contents
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
1,394,901
|
|
|
$
|
1,504,463
|
|
Funeral Home Operations
|
|
|
136,726
|
|
|
|
148,310
|
|
Corporate
|
|
|
56,792
|
|
|
|
66,595
|
|
Total assets
|
|
$
|
1,588,419
|
|
|
$
|
1,719,368
|
|
Assets held for sale:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
65,360
|
|
|
$
|
20,819
|
|
Funeral Home Operations
|
|
|
12,490
|
|
|
|
3,039
|
|
Total assets held for sale
|
|
$
|
77,850
|
|
|
$
|
23,858
|
|
Disposed assets:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
20,445
|
|
|
$
|
—
|
|
Funeral Home Operations
|
|
|
3,032
|
|
|
|
110
|
|
Total disposed assets
|
|
$
|
23,477
|
|
|
$
|
110
|
|
17.SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
The tables presented below provide supplemental information to the unaudited condensed consolidated statements of cash flows regarding contract origination and maturity activity included in the pertinent captions on the Company’s unaudited condensed consolidated statements of cash flows (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
Pre-need/at-need contract originations (sales on credit)
|
|
$
|
(25,457
|
)
|
|
$
|
(27,587
|
)
|
Cash receipts from sales on credit (post-origination)
|
|
|
23,862
|
|
|
|
25,622
|
|
Changes in accounts receivable, net of allowance
|
|
$
|
(1,595
|
)
|
|
$
|
(1,965
|
)
|
Customer Contract Liabilities
|
|
|
|
|
|
|
|
|
Deferrals:
|
|
|
|
|
|
|
|
|
Cash receipts from customer deposits at origination, net of refunds
|
|
$
|
35,586
|
|
|
$
|
34,205
|
|
Withdrawals of realized income from merchandise trusts during the period
|
|
|
2,684
|
|
|
|
2,124
|
|
Pre-need/at-need contract originations (sales on credit)
|
|
|
25,457
|
|
|
|
27,587
|
|
Undistributed merchandise trust investment earnings, net
|
|
|
(1,595
|
)
|
|
|
3,610
|
|
Recognition:
|
|
|
|
|
|
|
|
|
Merchandise trust investment income, net withdrawn as of end of period
|
|
|
(2,107
|
)
|
|
|
(2,255
|
)
|
Recognized maturities of customer contracts collected as of end of period
|
|
|
(45,989
|
)
|
|
|
(46,131
|
)
|
Recognized maturities of customer contracts uncollected as of end of period
|
|
|
(7,602
|
)
|
|
|
(10,556
|
)
|
Changes in customer contract liabilities
|
|
$
|
6,434
|
|
|
$
|
8,584
|
|
18.SUBSEQUENT EVENTS
Amendments to Indenture and Capital Raise
On April 1, 2020, the Partnership and CFS West Virginia (collectively, the “Issuers”) and Wilmington Trust, National Association, as trustee, entered into the Third Supplemental Indenture (the “Supplemental Indenture”) to the Indenture. Pursuant to the terms of the Supplemental Indenture, the following financial covenants were amended:
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The Interest Coverage Ratio measurements at March 31, June 30 and September 30, 2020 were eliminated and replaced with a Minimum Operating Cash Flow covenant of $(25.0 million), $(35.0 million) and $(35.0 million), respectively;
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The required Interest Coverage Ratios at December 31, 2020, March 31, 2021 and June 30, 2021 were reduced to 0.00x, 0.75x and 1.10x, respectively, from 1.15x, 1.25x and 1.30x; and
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The Asset Coverage tests at March 31, June 30, September 30 and December 31, 2020 were reduced to 1.40x from 1.60x.
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In addition, the premium payable upon voluntary redemption of the Senior Secured Notes on or after June 27, 2021 and before June 27, 2022 was increased from 4.0% to 5.0% and the premium payable upon any such voluntary redemption on or after June 27, 2022 and before June 27, 2023 was increased from 2.0% to 3.0%.
The Issuers also agreed in the Supplemental Indenture to use their best efforts to cause the Company to effectuate a rights offering on the terms described below as promptly as practicable with an expiration date no later than July 24, 2020 and to receive proceeds of not less than $8.2 million therefrom (in addition to the $8.8 million capital raise described below).
Concurrently with the execution of the Supplemental Indenture, the Company entered into a letter agreement (the “Axar Commitment”) with Axar pursuant to which Axar committed to (a) purchase shares of our Series A Preferred Stock with an aggregate purchase price of $8.8 million on April 3, 2020, (b) exercise its basic rights in the rights offering by tendering the shares of Series A Preferred Stock so purchased for shares of Common Stock and (c) purchasing any shares offered in the rights offering for which other stockholders do not exercise their rights, up to a maximum of an additional $8.2 million of such shares. The Company did not pay Axar any commitment, backstop or other fees in connection with the Axar Commitment.
On April 3, 2020, as contemplated by the Axar Commitment, the Company and Axar CL SPV LLC, Star V Partners LLC and Blackwell Partners LLC –Series E. (the “2020 Purchasers”) entered into a Series A Preferred Stock Purchase Agreement (the “2020 Preferred Purchase Agreement”) pursuant to which the Company sold 176 shares of its Series A Preferred Stock, par value $0.01 per share (the “Preferred Shares”), for a cash price of $50,000 per share, an aggregate of $8.8 million. The Company offered and sold the Preferred Shares in reliance upon the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. The Company relied on this exemption from registration based in part on representations made by the 2020 Purchasers in the 2020 Preferred Purchase Agreement.
Under the terms of the Supplemental Indenture and the Axar Commitment, the Company agreed to undertake an offering to holders of its Common Stock of transferable rights to purchase their pro rata share of shares of Common Stock with an aggregate exercise price of at least $17.0 million at a price of $0.73 per share. The rights offering period, during which the rights will be transferable, will be no less than 20 calendar days and no more than 45 calendar days. The Company agreed to use its best efforts to complete the rights offering with an expiration date no later than July 24, 2020.
Strategic Partnership Agreement
On April 2, 2020, the Company entered into two multi-year Master Services Agreements (the “MSAs”) with Moon Landscaping, Inc. and its affiliate, Rickert Landscaping, Inc. (collectively “Moon”). Under the terms of the MSAs, Moon will provide all grounds and maintenance services at most of the funeral homes, cemeteries and other properties the Company owns or manages including, but not limited to, landscaping, openings and closings, burials, installations, routine maintenance and janitorial services. Moon will hire all of the Company’s grounds and maintenance employees at the serviced locations and will perform all functions currently handled by those employees. The Company expects the implementation of the MSAs to take place on a clustered basis over the next three to four months, with full implementation expected no later than July 31, 2020.
The Company agreed to pay a total of approximately $241.0 million over the term of the contract, which runs through December 31, 2024, based upon an initial annual cost of $49.0 million and annual increases of 2%. The first year cost will be prorated based upon exact implementation and roll-out schedule for each location. As part of the MSAs, the Company agreed to lease its landscaping and maintenance equipment to Moon for the duration of the agreements and to transfer title to any such equipment we own at the end of the term to Moon, in each case without any additional payment by Moon. As of December 31, 2019, the net book value of the equipment the Company will be leasing to Moon was approximately $7.4 million.
Each party has the right to terminate the MSAs at any time on six months’ prior written notice, provided that if the Company terminate the MSAs without cause, it will be obligated to pay Moon an equipment credit fee in the amount of $1.0 million for each year remaining in the term, prorated for the portion of the year in which any such termination occurs. The MSAs also contain representations, covenants and indemnity provisions that are customary for agreements of this nature.
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Divestitures
On April 7, 2020, the Company completed the Olivet Sale for a net cash purchase price of $24.3 million, subject to certain adjustments, and the assumption of certain liabilities, including $17.1 million in land purchase obligations. The Company used net proceeds of $20.5 million to redeem additional Senior Secured Notes as required by the Indenture.
Cost Reduction Initiatives Related to COVID-19
In an effort to minimize the impact of the COVID-19 Pandemic on the Company’s results of operations, the Company implemented certain cost reduction initiatives in April 2020, which included a reduction of 21 positions within its corporate functions at its headquarters located in Trevose, Pennsylvania.
Amendment of Plan
On May 5, 2020, the Company’s Board approved the second amendment (the “Amendment”) to the Plan, which increased the number of shares of the Company’s common stock reserved for delivery under the Plan by 1,375,000 shares, provided that such additional shares may not be delivered pursuant to awards under the Plan unless and until the increase is approved by the stockholders of the Company, and any awards under the Plan with respect to such additional shares will be expressly conditioned upon receipt of such approval. The Company plans to submit the Plan, as so amended, to its stockholders for their approval at the 2020 annual meeting of stockholders.
NYSE Delisting Notification
On April 14, 2020, the Company received notice from the New York Stock Exchange (the “NYSE”) stating that upon its review of the Company’s financial condition, the NYSE has concluded that the Company is not in compliance with the NYSE’s continued listing requirements (the “NYSE Notification”), since as of April 13, 2020, the 30-trading day average closing price of the Company’s Common Stock had fallen below $1.00 per share over a consecutive 30 trading-day period, which is the minimum average share price for continued listing on the NYSE under Rule 802.01C of the NYSE Listed Company Manual (the “NYSE Listed Manual”). As of April 13, 2020, the Company’s 30 trading-day average closing share price of its security was $0.97.
The Company has a period of six months following the receipt of the NYSE Notification to regain compliance with the minimum share price requirement, which period has been tolled from April 21, 2020 through June 30, 2020. In order to regain compliance, on the last trading day of any calendar month during the cure period, the Common Stock must have (i) a closing price of at least $1.00 per share and (ii) an average closing price of at least $1.00 per share over the 30-trading day period ending on the last trading day of such month. In addition, the Company must notify the NYSE, within 10 business days of receipt of the NYSE Notification, of its intent to cure this deficiency or be subject to suspension and delisting procedures. In the event that at the expiration of the six–month cure period, both a $1.00 share price and a $1.00 average share price over the preceding 30 trading days are not attained, the NYSE will commence suspension and delisting procedures. Alternatively, however, the Company can also demonstrate an accelerated cure based on a $1.00 share price on both the last trading day of any calendar month within the six-month cure period and the average share price over the 30 trading days preceding the end of that month. In response, the Company’s Board of Directors is reviewing all available alternatives to return to compliance with the NYSE continued listing standards.
19.RELATED PARTIES
In December 2019, the Company purchased a $30 million participation in a $70 million new debt facility issued by Payless Holdings LLC (“Payless”). Funds and accounts affiliated with Axar also invested $20 million in this facility. The investment was initially proposed by the Company’s Chairman of the Board, Mr. Axelrod, and subsequently approved by the Board. The Axar funds controlled by Mr. Axelrod own approximately 30% of the equity of Payless, and Mr. Axelrod serves on Payless’ board of directors. The Company’s investment in Payless represented approximately 4% of the total fair market value of all of the Company’s trusts as of March 31, 2020 and December, 31, 2019.
As of March 31, 2020, Axar beneficially owned 52.4% of the Company’s outstanding common stock, which constituted a majority of the Company’s outstanding common stock. As a result, the Company is a “controlled company” within the meaning of NYSE corporate governance standards. For discussion of certain risks and uncertainties attributable to the Company being a controlled company, see Part I, Item 1A. Risk Factors of the Company’s Annual Report, and for discussion on the security
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ownership of certain beneficial owners, directors and executives of the Company, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of the Annual Report.
On April 1, 2020 and April 3, 2020, the Company entered into the Axar Commitment and the 2020 Preferred Purchase Agreement, respectively, with Axar and funds or accounts under its management, respectively. For further details, see Note 18 Subsequent Events of this Report.
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