Item 7.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial
statements and notes thereto included in Part II Item 8 of this Annual Report on Form 10-K. Those notes also give more detailed information regarding the basis of presentation for the following information.
Forward-Looking Statements
Certain
statements contained in this Annual Report on Form 10-K, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future
performance and plans, and any financial guidance provided, as well as certain information in our other filings with the SEC and elsewhere are forward-looking statements. The words believe, may, will,
estimate, continue, anticipate, intend, project, expect, predict and similar expressions identify these forward-looking statements. These forward-looking statements
are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated or implied, including, but not limited to, the following: uncertainties associated with future revenue and revenue growth; the
effect of economic downturns; the impact of our significant leverage on our operating plans; our ability to service our debt and pay distributions; the decline in the fair value of certain equity and debt securities held in our trusts; our ability
to attract, train and retain an adequate number of sales people; uncertainties associated with the volume and timing of pre-need sales of cemetery services and products; increased use of cremation; changes in the death rate; changes in the political
or regulatory environments, including potential changes in tax accounting and trusting policies; our ability to successfully implement a strategic plan relating to achieving operating improvements, strong cash flows and further deleveraging; our
ability to successfully compete in the cemetery and funeral home industry; uncertainties associated with the integration or anticipated benefits of our recent acquisitions or any future acquisitions; our ability to complete and fund additional
acquisitions; litigation or legal proceedings that could expose us to significant liabilities and damage our reputation; the effects of cyber security attacks due to our significant reliance on information technology; uncertainties relating to the
financial condition of third-party insurance companies that fund our pre-need funeral contracts; and various other uncertainties associated with the death care industry and our operations in particular.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth under Risk
Factors in Part I, Item 1A and our other reports filed with the SEC. Except as required under applicable law, we assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking
statements made by us, whether as a result of new information, future events or otherwise.
Organization
We were organized on April 2, 2004 to own and operate the cemetery and funeral home business conducted by Cornerstone and its
subsidiaries. On September 20, 2004, in connection with our initial public offering of common units representing limited partner interests, Cornerstone contributed to us substantially all of its assets, liabilities and businesses, and then
converted into CFSI LLC, a limited liability company. This transfer represented a reorganization of entities under common control and was recorded at historical cost.
Cornerstone had been founded in 1999 by members of our management team and a private equity investment firm in order to acquire a group of 123
cemetery properties and 4 funeral homes. Since that time, Cornerstone, succeeded by us, has acquired additional cemeteries and funeral homes, entered into long term cemetery operating agreements, built funeral homes, and sold cemeteries and funeral
homes, resulting in the operation of 277 cemeteries and 90 funeral homes as of December 31, 2013.
Capitalization
On September 20, 2004, we completed our initial public offering. Since that time, we have completed additional follow-on public offerings
in December 2007, November 2009, September 2010 and February 2011. On March 26, 2013, we completed a follow-on public offering of 1,610,000 common units at a price of $25.35 per unit. Net proceeds of the offering, after deducting
underwriting discounts and offering expenses, were approximately $38.4 million. The proceeds from the offering were used to pay down debt on our credit facility.
On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of
the offering, after deducting underwriting discounts and offering expenses, were approximately $53.1 million. The proceeds were used to pay down borrowings outstanding under our revolving credit facility.
Overview
Cemetery Operations
We are
currently the second largest owner and operator of cemeteries in the United States. As of December 31, 2013, we operated 277 cemeteries in 27 states and Puerto Rico. We own 259 of these cemeteries, and we operate the remaining 18 under
management or operating agreements with the nonprofit cemetery corporations that own the cemeteries. As a result of the agreements, other control arrangements and applicable accounting rules, we have treated 16 of these cemeteries as acquisitions
for accounting purposes.
32
We operate 2 cemeteries under long-term operating agreements that do not qualify as acquisitions
for accounting purposes. As a result, we did not consolidate all of the existing assets and liabilities related to these cemeteries. We have consolidated the existing assets and liabilities of each of these cemeteries merchandise and perpetual
care trusts as variable interest entities since we control and receive the benefits and absorb any losses from operating these trusts. Under these long-term operating agreements, which are subject to certain termination provisions, we are the
exclusive operator of these cemeteries. We earn revenues related to sales of merchandise, services, and interment rights and incur expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these
contracts, we will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. We have also recognized the existing merchandise liabilities assumed as part of these agreements.
We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer
to as pre-need. During the year ended December 31, 2013, we performed 45,470 burials and sold 30,543 interment rights (net of cancellations) compared to 45,128 and 29,829 in 2012 and 45,236 and 30,047 in 2011, respectively. Cemetery revenues
accounted for approximately 81.8%, 85.3% and 86.7% during the years ended December 31, 2013, 2012 and 2011, respectively.
Our
results of operations for our Cemetery Operations are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. We derive our cemetery revenues primarily from:
|
|
|
at-need sales of cemetery interment rights, merchandise and services, which we recognize as revenue when we have delivered the related merchandise or performed the service;
|
|
|
|
pre-need sales of cemetery interment rights, which we generally recognize as revenues when we have collected 10% of the sales price from the customer;
|
|
|
|
pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise to the customer;
|
|
|
|
pre-need sales of cemetery services which we recognize as revenues when we perform the services for the customer;
|
|
|
|
investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as
discussed above;
|
|
|
|
investment income from perpetual care trusts, excluding realized gains and losses on the sale of trust assets, which we recognize as revenues as the income is earned in the trust; and
|
|
|
|
other items, such as interest income on pre-need installment contracts and sales of land.
|
The
criteria for recognizing revenue related to the sale of cemetery merchandise is that such merchandise is delivered to our customer, which generally means that:
|
|
|
the merchandise is complete and ready for installation; or
|
|
|
|
the merchandise is either installed or stored at an off-site location, at no additional cost to us, and specifically identified with a particular customer; and
|
|
|
|
the risks and rewards of ownership have passed to the customer.
|
We generally satisfy these
delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the customers request, in third-party warehouses, at no additional cost to us, until the time of need. With respect to burial
vaults, we install the vaults rather than storing them to satisfy the delivery criteria. When merchandise is stored for a customer, we may issue a certificate of ownership to the customer to evidence the transfer to the customer of the risks and
rewards of ownership.
Pre-need Sales
As previously noted, we do not recognize revenue on pre-need sales of merchandise and services until we have delivered the merchandise or
performed the services. Accordingly, deferred revenues from pre-need sales and related merchandise trust earnings are reflected as a liability on our consolidated balance sheet in deferred cemetery revenues, net.
Total deferred cemetery revenues, net, also includes deferred revenues from pre-need sales that were entered into by entities we acquired
prior to the time we acquired them. This includes both those entities that we acquired at the time of the formation of Cornerstone and other subsequent acquisitions. Our profit margin on pre-need sales entered into by entities we subsequently
acquired is generally less than our profit margin on other pre-need sales because, in accordance with industry practice at the time these acquired
33
pre-need sales were made, none of the selling expenses were recognized at the time of sale. As a result, we are required to recognize all of the expenses (including deferred selling expenses)
associated with these acquired pre-need sales when we recognize the revenues from that sale.
Pre-need products and services are typically
sold on an installment basis. Subject to state law, these contracts are normally subject to cooling-off periods, generally between three and thirty days, during which the customer may elect to cancel the contract and receive a full
refund of amounts paid. Also, subject to applicable state law, we are generally permitted to retain the amounts already paid on contracts, including any amounts that were required to be deposited into trust, on contracts cancelled after the
cooling-off period. Historical post cooling-off period cancellations total approximately 10% of our pre-need sales (based on contract dollar amounts). If the products and services purchased under a pre-need contract are
needed for interment before payment has been made in full, generally the balance due must be immediately paid in full.
Contracts related
to pre-need installment sales are usually for a period not to exceed 60 months, with payments of principal and interest required. Pre-need sales contracts normally contain provisions for both principal and interest. For those contracts that do not
bear a market rate of interest, we impute such interest based upon the prime rate plus 150 basis points, which resulted in a rate of 4.75% during 2013, 2012 and 2011.
We normally offer prepayment incentives to customers whose pre-need contracts are longer than 36 months and bear interest. If those customers
pay their contracts in full in less than 12 months, we rebate the interest that we have collected from them. Even though this rebate policy reduces the amount of interest income we receive on our accounts receivable, the net effect is an
increase in our immediate cash flow.
In certain cases, pre-need contracts will be cancelled before they are fully paid. In these
circumstances, we are generally permitted to retain amounts already paid to us, including any amounts that were required to be deposited into trust. In certain other cases, the products and services purchased under a pre-need contract are needed for
interment before payment has been made in full. In these cases, we are generally entitled to be immediately paid in full for any amounts still outstanding.
At-need Sales
Revenue on
at-need merchandise sales is deferred until the time that such merchandise is delivered. The lag between the contract origination and delivery is normally minimal. At-need sales of products and services are generally required to be paid for in full
at the time of sale. At that time, we will deposit amounts, as legally required, into our perpetual care trusts. We are not required to deposit any amounts from our at-need sales into merchandise trusts.
Expenses
We analyze and
categorize our operating expenses as follows:
1.
|
Cost of goods sold and selling expenses
|
Cost of goods sold reflects the actual cost of
purchasing products and performing services. Sales of cemetery lots and interment rights, whether at-need or pre-need, typically have a lower cost of goods sold than other merchandise that we sell.
Selling expenses consist of salesperson and sales management payroll costs, including selling commissions, bonuses and employee benefits. We
self-insure medical expenses of our employees up to certain individual and aggregate limits over which we have stop-loss insurance coverage. Our self-insurance policy may result in variability in our future operating expenses. Selling expenses also
includes other costs of obtaining product and service sales, such as advertising, marketing, postage and telephone.
Direct costs
associated with pre-need sales of cemetery merchandise and services, such as sales commissions and cost of goods sold, are reflected in the consolidated balance sheet in deferred selling and obtaining costs and deferred cemetery revenues, net,
respectively, and are expensed as the merchandise is delivered or the services are performed. Indirect costs, such as marketing and advertising costs, are expensed in the period in which they are incurred.
Cemetery expenses represent the cost to maintain and repair our cemetery
properties and consist primarily of labor and equipment, utilities, real estate taxes and other maintenance items. Repairs necessary to maintain our cemeteries are expensed as they are incurred. Other maintenance costs required over the long term to
maintain the operating capacity of our cemeteries, such as to build roads and install sprinkler systems, are capitalized.
34
3.
|
General and administrative expenses
|
General and administrative expenses, which do not include
corporate overhead, primarily include personnel costs, insurance and other costs necessary to maintain our cemetery offices.
4.
|
Depreciation and amortization
|
We depreciate our property and equipment on a straight-line
basis over their estimated useful lives.
5.
|
Acquisition related costs
|
Acquisition related costs, which include legal fees and other third
party costs incurred in acquisition related activities, are expensed as incurred.
Funeral Home Operations
As of December 31, 2013, we owned and operated 90 funeral homes. These properties are located in eighteen states and Puerto Rico.
Forty-one of our funeral homes are located on the grounds of cemeteries that we own.
We derive revenues at our funeral homes from the
sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation
services. We sell these services and merchandise generally at the time of need utilizing salaried licensed funeral directors. Funeral home revenues accounted for approximately 18.2%, 14.7% and 13.3% during the years ended December 31, 2013,
2012 and 2011, respectively.
Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is put into
trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or the
services are performed. The balance of the amounts in these trusts is included within the merchandise trusts.
We generally include
revenues from pre-need casket sales in the results of our cemetery operations. However, some states require that caskets be sold by funeral homes, and revenues from casket sales in those states are included in our funeral home results.
Our funeral home operating expenses consist primarily of compensation to our funeral directors, day to day costs of managing the business and
the cost of caskets.
Corporate
We incur fixed costs for corporate overhead primarily for centralized functions, such as payroll, accounting, collections and professional
fees. We also incur expenses relating to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.
35
Revenues by State
The following table shows the percentage of revenues attributable to each of the states in which we operate for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Alabama
|
|
|
3.8
|
%
|
|
|
3.8
|
%
|
|
|
3.6
|
%
|
California
|
|
|
8.8
|
%
|
|
|
8.0
|
%
|
|
|
8.8
|
%
|
Florida
|
|
|
4.3
|
%
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
Georgia
|
|
|
1.6
|
%
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
Illinois
|
|
|
2.7
|
%
|
|
|
2.6
|
%
|
|
|
2.3
|
%
|
Indiana
|
|
|
6.7
|
%
|
|
|
6.9
|
%
|
|
|
8.0
|
%
|
Kansas
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
Maryland
|
|
|
5.7
|
%
|
|
|
5.8
|
%
|
|
|
6.0
|
%
|
Michigan
|
|
|
6.2
|
%
|
|
|
6.1
|
%
|
|
|
8.9
|
%
|
Missouri
|
|
|
1.6
|
%
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
New Jersey
|
|
|
6.3
|
%
|
|
|
7.1
|
%
|
|
|
6.8
|
%
|
North Carolina
|
|
|
4.8
|
%
|
|
|
5.8
|
%
|
|
|
5.8
|
%
|
Ohio
|
|
|
8.1
|
%
|
|
|
9.3
|
%
|
|
|
8.7
|
%
|
Oregon
|
|
|
2.9
|
%
|
|
|
2.7
|
%
|
|
|
2.9
|
%
|
Pennsylvania
|
|
|
12.7
|
%
|
|
|
13.2
|
%
|
|
|
14.7
|
%
|
Puerto Rico
|
|
|
3.1
|
%
|
|
|
3.3
|
%
|
|
|
0.9
|
%
|
South Carolina
|
|
|
1.8
|
%
|
|
|
1.9
|
%
|
|
|
2.1
|
%
|
Tennessee
|
|
|
3.6
|
%
|
|
|
3.7
|
%
|
|
|
2.4
|
%
|
Virginia
|
|
|
6.7
|
%
|
|
|
6.8
|
%
|
|
|
6.5
|
%
|
West Virginia
|
|
|
5.1
|
%
|
|
|
5.6
|
%
|
|
|
5.3
|
%
|
All others
|
|
|
2.2
|
%
|
|
|
2.3
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Principal Products and Services
The following table shows the percentage of revenues attributable to our principal products, services and other items during the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Pre-need sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Burial lots
|
|
|
8.8
|
%
|
|
|
9.9
|
%
|
|
|
8.9
|
%
|
Mausoleum crypts
|
|
|
4.7
|
%
|
|
|
5.1
|
%
|
|
|
4.7
|
%
|
Markers
|
|
|
4.6
|
%
|
|
|
4.8
|
%
|
|
|
4.2
|
%
|
Grave marker bases
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
Burial vaults
|
|
|
4.2
|
%
|
|
|
5.1
|
%
|
|
|
5.0
|
%
|
Lawn crypts
|
|
|
1.3
|
%
|
|
|
1.5
|
%
|
|
|
1.4
|
%
|
Caskets
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
|
|
2.9
|
%
|
Initial openings and closings (1)
|
|
|
5.5
|
%
|
|
|
6.2
|
%
|
|
|
6.5
|
%
|
Other (2)
|
|
|
5.7
|
%
|
|
|
5.5
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-need sales
|
|
|
37.0
|
%
|
|
|
40.0
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest from pre-need sales
|
|
|
2.8
|
%
|
|
|
2.8
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income from trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual care trusts
|
|
|
5.4
|
%
|
|
|
6.1
|
%
|
|
|
6.6
|
%
|
Merchandise trusts
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income from trusts
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At-need sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings and closings (3)
|
|
|
10.9
|
%
|
|
|
11.1
|
%
|
|
|
12.4
|
%
|
Markers
|
|
|
8.2
|
%
|
|
|
7.8
|
%
|
|
|
7.7
|
%
|
Burial lots
|
|
|
3.2
|
%
|
|
|
3.4
|
%
|
|
|
3.6
|
%
|
Mausoleum crypts
|
|
|
1.0
|
%
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
Grave marker bases
|
|
|
1.6
|
%
|
|
|
1.6
|
%
|
|
|
1.7
|
%
|
Foundations and inscriptions (4)
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
1.0
|
%
|
Burial vaults
|
|
|
1.6
|
%
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
Other (5)
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at-need sales
|
|
|
30.6
|
%
|
|
|
30.8
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral home revenues
|
|
|
18.2
|
%
|
|
|
14.7
|
%
|
|
|
13.3
|
%
|
Other revenues
(6)
|
|
|
1.5
|
%
|
|
|
1.8
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Installation of the burial vault into the ground.
|
(2)
|
Includes revenues from niches, mausoleum lights, cremations, pet cemeteries, installation of burial vaults and markers sold to our customers by third parties and pre-need sales made in connection with the relocation of
other cemetery interment rights. Also includes document processing fees on pre-need contracts and fees from sales of travel care protection, which covers shipping costs of a body if death occurs more than 100 miles from the place of residence.
|
(3)
|
Installation of the burial vault into the ground and the placement of the casket into the vault.
|
(4)
|
Installation of the marker on the ground and its inscription.
|
(5)
|
Includes revenues from lawn crypts, decorative lights installed on mausoleum crypts, installations of burial vaults, markers sold to our customers by third parties, cremation fees and document-processing fees on at-need
contracts.
|
(6)
|
Includes sales of manufactured burial vaults to third parties, sales of cemetery and undeveloped land, commissions from sales of pre-need funeral and death benefit insurance policies provided through a third-party
insurer and other miscellaneous revenues.
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37
Cash Flow
Pre-need sales often generate short-term cash flow deficits due to the timing of when we receive amounts from customers, pay related
commissions and deposit amounts into the perpetual care and merchandise trusts.
We generally require customers to make a down payment on
a pre-need contract of at least 5% of the total sales price. When we receive a payment from a customer on a pre-need contract, we first deposit the requisite portion into trust as required by state law. Then, we pay all or a portion of the
commission due to the salesperson responsible for the sale up to a maximum of total cash received. In many cases, the sum of the commission paid and amount deposited into the trust exceeds the total cash received, causing a short-term cash flow
deficit.
If the down payment received from the customer is not sufficient to cover the entire commission, the remaining commission is
paid from subsequent installments, but only to the extent of 80% of the cash received from the customer in each installment. Again, in the near-term there is a possibility that the sum of the commission paid and amount deposited into the trust
exceeds the total cash received, causing an additional short-term cash flow deficit. These short-term deficits are eventually recaptured as the total amount received exceeds the commissions paid and we meet the requirements for withdrawing amounts
deposited into the merchandise trust.
The following example assumes a pre-need contract with a total sales price of $1,000, a 10% down
payment, a 40% perpetual care and merchandise trusting requirement, a 15% sales commission and a one-year term without interest, our short-term cash flow would be as follows:
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When we receive the $100 down payment from the customer, we would deposit 40% of the payment, or $40 in trust and pay 100% of the commission due to the salesperson, or $150, but only to the extent that we received cash
from the customer, or $100. Our total cash obligations would be $140 even though we only received $100 from the customer. We would use $40 of our operating cash to pay the sales commission and, at this time, would be cash flow negative on the
contract.
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In month one, when we receive the first $75 installment from the customer, we would deposit 40%, or $30, into trust and pay 100% of the balance of the commission due to the sales person, or $50. Our total cash
obligations would be $80 even though we only received $75 from the customer. We would use $5 of our operating cash to pay sales commission and would still be cash flow negative on the contract.
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In month two, when we receive the next $75 installment from the customer, we would deposit 40%, or $30, into trust, but we would have no further commission due on the sale. The remaining $45 received from the customer
would go back into our operating cash, and we would break even on the contract on a cash-flow basis.
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In month three, when we receive the next $75 installment from the customer, we would deposit 40%, or $30, into trust and the remaining $45 would go back into our operating cash. In this month, we would become cash flow
positive on the contract.
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We can accelerate our operating cash flow by purchasing and delivering many of our products in
advance of the time of customer need, either by installing them in the customers burial space (in the case of burial vaults) or storing them for the customer, and by performing certain services prior to the time of need. For example, within
the allowances of state law, we purchase burial vaults, grave markers and caskets, and perform initial openings and closings to install the burial vault in the ground before the time of need. When we satisfy the criteria for delivery of pre-need
products or perform pre-need services, we are permitted to withdraw the related principal and any income and capital gains that we have not already withdrawn from the merchandise trust, and we recognize the amounts withdrawn, including amounts
previously withdrawn, as revenues. Advance purchasing helps us avoid the negative cash flow impact of depositing significant portions of our sales proceeds in trusts while earning rates on those trusts that are currently less than interest rates we
pay on our debt. To the extent that we can purchase and deliver products and perform services in advance of the time of need, we can accelerate, within the limitations of GAAP, the timing of our revenue recognition for these products and services.
As a result, decisions made by our management to purchase and deliver products or perform services in advance, for cash flow or other reasons, affect the timing of revenue recognition from the underlying sales.
We are somewhat limited, however, in our ability to purchase some products in advance of the time of need because of their availability. Given
our large volume of pre-need sales, it is unlikely that our suppliers could provide, or we could manufacture, all of the products included in our pre-need backlog at any given time. For example, we generally need more vaults per year to fulfill our
pre-need contract obligations, than we currently manufacture at our plants. We must purchase any excess from third party suppliers who must also meet the demands of other cemetery operators.
We currently purchase some of our burial vaults from third-party providers to assist us in meeting the demands of our accelerated purchase and
delivery program. We are also limited in our ability to perform certain services in advance of the time of need because of their nature or our resources. For example, we cannot perform the final opening and closing, which is the placing of the
casket into the ground, or inscribe the date of death on the monument or marker until the time of need. Even if we chose to perform all of the services in our pre-need backlog that could be performed in advance of need, such as installing all of the
burial vaults in our pre-need backlog, we would not currently have the labor, equipment or other resources to perform all of those services in a short period of time.
38
Trusting
We are required to deposit a portion of amounts received on sales of certain cemetery merchandise and services into a perpetual care and/or
merchandise trust. These amounts are invested by third-party investment managers who are selected by the Trust and Compliance Committee of the board of directors of our general partner. These investment managers are required to invest our trust
funds in accordance with applicable state law and internal investment guidelines adopted by the Trust and Compliance Committee. Our investment managers are monitored by third-party investment advisors selected by the Trust and Compliance Committee
who advise the committee on the determination of asset allocations, evaluate the investment managers and provide detailed monthly reports on the performance of each merchandise and perpetual care trust.
Perpetual Care Trust
Pursuant to
state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. While this amount varies, it is generally 10% to 20% of the sales price of the interment right. All principal must remain in
this trust into perpetuity while interest and dividends may be released to us and used to defray cemetery maintenance costs, which are expensed as incurred. Earnings from the perpetual care trusts are recognized in current cemetery revenues. To
maximize this income, we have established investment guidelines for the third-party investment managers that manage the trust so that substantially all of the funds are invested in intermediate-term investment-grade fixed-income securities,
high-yield fixed-income securities, master limited partnerships and real estate investment trusts.
We fund these amounts pro-rata on an
as received basis. As payments are received from the customer, we deposit a pro-rata amount of the payment into a perpetual care trust. For example, if we receive a payment of 20% of the sales price from the customer, we would deposit
into the perpetual care trust 20% of the total amount required to be placed into trust for that sale.
We consolidate the assets of the
trust in accordance with the provisions of ASC 810, as the trust is considered to be a variable interest entity for which we are the primary beneficiary. Assets are reflected at fair market value on the asset portion of our consolidated balance
sheet as an asset entitled perpetual care trusts, restricted, at fair value, and an equal amount is reflected as a liability as perpetual care trust corpus.
Merchandise Trust
We are
generally required by state law to deposit a portion of the sales price of pre-need cemetery merchandise and services, or the estimated current cost of providing that merchandise and those services, into a merchandise trust to ensure that we will
have sufficient funds in the future to purchase the merchandise or perform the services. The amount we are required to deposit into a merchandise trust varies from state to state but is generally 40% to 70% of the sales price of the merchandise or
services.
We fund these amounts pro-rata on an as received basis. As payments are received from the customer, we deposit a
pro-rata amount of the payment into a merchandise trust. For example, if we receive a payment of 20% of the sales price from the customer, we would deposit into the merchandise trust 20% of the total amount required to be placed into trust for the
merchandise and services sold.
We consolidate the assets of the trust in accordance with the provisions of ASC 810, as the trust is
considered to be a variable interest entity for which we are the primary beneficiary. Assets are reflected at fair market value on the asset portion of our consolidated balance sheet as an asset entitled merchandise trusts, restricted, at fair
value.
Unlike assets in the perpetual care trusts, assets in the merchandise trusts will be released to us at the time we meet the
requirements. These requirements vary from state to state depending upon applicable laws.
Earnings on funds held in merchandise trusts,
including investment income and capital gains, are deferred and included in our consolidated balance sheet in deferred cemetery revenues, net, until such time that we recognize the revenue from the related sale.
We are permitted to withdraw the investment income, such as interest and dividends, as well as capital gains,
from merchandise trusts at varying times depending on the applicable state law. In some states, we are permitted to make monthly withdrawals of investment income, but in other states we are permitted to withdraw income less frequently or only upon
death. In all states, however, we are permitted to withdraw trust principal and earnings to purchase the merchandise or perform the services or, generally, when the customer cancels the contract. Some states impose additional restrictions on our
ability to withdraw merchandise trust earnings if those trusts have realized losses. For example, if a Pennsylvania merchandise trust realizes a loss, the trust is required to recover the amount of the realized loss, either by earning income or
generating capital gains, before we are allowed to withdraw earnings, except to purchase the related products or perform the related services. Other states, such as Virginia, permit continued withdrawals of merchandise trust earnings following a
realized loss so long as the fair market value of the funds held in trust equals or exceeds the cost of the related products and services.
We invest the amounts deposited into merchandise trusts, within specified investment guidelines, primarily in intermediate-term,
investment-grade fixed-income securities, high-yield fixed-income securities, real estate investment trusts and, to a lesser extent, equity securities and cash.
39
The income earned on funds held in the perpetual care and merchandise trusts can be materially
affected by fluctuations in interest rates, dividend payments and, in the case of merchandise trusts, by the performance of the stock market. Investment income from the trusts accounted for 9.9%, 9.9% and 10.3% of our 2013, 2012 and 2011 total
revenues, respectively. During 2013, 2012 and 2011 our average annual rates of return (not including changes in unrealized gains and losses) on funds held in the merchandise trusts were 9.4%, 6.7% and 7.5%, respectively, while our average annual
rates of return on funds held in the perpetual care trusts were 4.8%, 5.9% and 6.2%, respectively. Past performance is not indicative of future performance.
Unrealized gains and losses in the merchandise trusts are deferred and accordingly have no immediate impact on our revenues, earnings or cash
flow unless the fair market value of the funds declines below the estimated costs to deliver the related products and services, in which case we would be required to record a current charge to earnings equal to the difference between the fair market
value of the funds and the estimated costs.
We determine whether or not assets in the merchandise and perpetual care trusts have an
other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to a
specific issuer and our ability and intent to hold securities until they recover their value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value.
For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an
equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts,
any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
The trust footnotes (Notes 5
and 6 of our consolidated financial statements included in Part II Item 8) disclose the adjusted cost basis of the assets in the trusts and contain a more detailed discussion of other-than- temporarily impaired assets.
Current Market Conditions and Economic Developments
We are subject to fluctuations in the fair value of equity and fixed-maturity debt securities in our trusts. These values can be negatively
impacted by contractions in the credit market and overall downturns in economic activity.
In general, the financial markets have trended
upward since 2009. As of December 31, 2013, the market value of the assets in our merchandise trusts exceeded their amortized cost by 2.6%, which is an improvement from December 31, 2012 when the market value of the assets exceeded their
amortized cost by 0.2%. As of December 31, 2013, the market value of the assets in our perpetual care trusts exceeded their amortized cost by 10.5% which is an improvement from December 31, 2012 when the market value of the assets exceeded
their amortized cost by 5.8%.
Further, we raised capital via a follow-on public offering of our common units in March of 2013. In
addition, in May of 2013, we completed an offering of $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021, the net proceeds of which were used to pay the tender offer consideration and redeem our then outstanding 10.25% Senior
Notes due 2017. As of December 31, 2013, the majority of our long-term debt consisted of $175.0 million in Senior Notes due 2021 and $114.0 million of borrowings under our credit facility which expires in 2017. As of December 31, 2013, we
had $26.0 million of availability under our revolving credit facility.
The average dollar value of contracts written has not deteriorated
and the values for the year ended December 31, 2013 exceed the values from 2012.
We will continue to monitor evolving economic
conditions, including changes in inflation rates and plan accordingly.
Recent Developments
On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of
the offering, after deducting underwriting discounts and offering expenses, were approximately $53.1 million. The proceeds were used to pay down borrowings outstanding under our revolving credit facility.
Change in Market Value of Trust Assets
We have a substantial portfolio of invested assets in both our merchandise and perpetual care trusts. Both trusts have a mix of cash and cash
equivalents, fixed maturity debt securities and equity securities. Declines in the fair value of equity securities, and to a lesser degree, fixed maturity debt securities held in our trusts, can be a critical issue for us. The financial markets have
generally trended upward since 2009 and reached a new record high at the end of December 2013. During 2013 and 2012, we determined that a few select assets in our merchandise trust had been impaired and we took an impairment charge of
approximately $1.0 million in both years. We also determined an impairment in our perpetual care trust assets in 2012, resulting in an impairment charge of
40
approximately $2.8 million. These impairment charges are deferred until such time that we deliver the merchandise or perform the services for which the trust assets are set aside. The impairment
charges reduced the cost basis of the assets to their fair value. As of December 31, 2013, the aggregate post write-down fair value of the assets in our merchandise trust exceeded its amortized cost by 2.6% and the aggregate post write-down
fair value of the assets in our perpetual care trust exceeded its amortized cost by 10.5%.
Funds in our trusts are managed by third-party
investment managers who are in turn monitored by a third-party investment advisor selected by our Trust and Compliance Committee. The third-party investment advisor provides the committee with frequent updates on the performance of our investments.
We will continue to monitor this performance closely. See Item 7A. Quantitative and Qualitative Disclosure About Market Risk for more information.
The perpetual care trust and merchandise trust serve vastly different purposes and the risks and implications of changes in trust asset values
are dissimilar.
Perpetual Care Trust
Pursuant to state law, a portion of the proceeds from the sale of cemetery property must be deposited into a perpetual care trust.
The perpetual care trust principal does not belong to us and must remain in the trust into perpetuity. We consolidate the trust into our
financial statements in accordance with ASC 810-10-15-(13 through 22) because the trust is considered a variable interest entity for which we are the primary beneficiary.
The fair value of trust assets is recorded as an asset on our consolidated balance sheet and is entirely offset by a liability. This liability
is recorded as Perpetual care trust corpus. Changes in fair value of trust assets are recognized by adjusting both the trust asset and the offsetting liability. Impairment of the value of trust assets, whether temporary or
other-than-temporary, will not impact periodic earnings nor will it impact our financial position or liquidity at any point in time.
Our
primary risks related to the assets in the perpetual care trust relate to the interest and dividends paid and released to us and used to defray cemetery maintenance costs. Any material reduction in this income stream could have a material effect on
our financial condition, results of operations and liquidity. Interest income earned on the perpetual care trust assets was approximately $15.7 million, $16.7 million and $15.8 million during the years ended December 31, 2013, 2012 and 2011,
respectively.
Merchandise Trust
Pursuant to state law, a portion of the proceeds from the sale of pre-need cemetery and funeral home merchandise and services must be deposited
into a merchandise trust.
Unlike the perpetual care trust, the principal in the merchandise trust will ultimately revert to us. This will
occur once we have met the various requirements for its release which is generally the delivery of merchandise or performance of underlying services. Accordingly, changes in the fair value of trust assets, both temporary and other-than-temporary,
may ultimately impact our periodic earnings and financial position or liquidity at any point in time.
Managing the cash flow associated
with the release of trust assets and investment income is a critical component of our overall corporate strategy. Our investment strategy reflects the fact that the release of trust assets and the resultant cash flow is critical to our ability to
meet our profitability goals and liquidity needs. Accordingly, we set such strategy to balance the potential for return with the need to maintain asset value.
A decline in the market value of the assets in the merchandise trust could ultimately impair our profitability and resulting financial
position and liquidity should we be forced to liquidate such assets at an amount significantly below our original expectation, which is ultimately asset cost.
We mitigate this risk by ensuring that a sufficient portion of trust assets is invested in cash and cash equivalents that do not have
significant risk to principal. We can then manage trust assets so that released amounts are liquidated from this pool as opposed to any pool of assets that are currently valued below cost.
At December 31, 2013, the merchandise trust had approximately
$46.5 million in cash and cash equivalents. This amount functions to mitigate the risk of liquidating impaired assets. In evaluating the sufficiency of this amount as to its effectiveness in mitigating the risk of liquidating impaired assets, we
have considered the net inflows and outflows of cash into the trust in recent prior periods. These net inflows and outflows are a function of both sales originations and the corresponding trust deposits and meeting the criteria for releasing funds.
Total net cash inflows into the merchandise trust for the year ended December 31, 2013 were approximately $12.4 million, which includes an inflow of $10.3 million related to acquisitions made in 2013. See Liquidity and Capital
Resources within this Item 7 for more information.
Absent a substantial downturn in pre-need sales, we believe that the
cash and cash equivalent allocation of the merchandise trust assets is sufficient to mitigate the risk of liquidating impaired assets in the near future.
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Impact of Current Market Conditions on Our Ability to Meet Our Debt Covenants
Current market conditions have not negatively impacted our ability to meet our significant debt covenants. These covenants specifically relate
to a certain measure of Consolidated EBITDA and certain coverage and leverage ratios as defined in the Credit Agreement described below.
Consolidated EBITDA is primarily related to the current period value of contracts written, investment income from the merchandise and
perpetual care trusts, and current expenses incurred. The revenue recognition rules we must follow in accordance with accounting principles generally accepted in the United States of America (GAAP) are not considered.
We have two primary debt covenants that are dependent upon our financial results, the Consolidated Leverage Ratio and the Consolidated Debt
Service Coverage Ratio. The Consolidated Leverage Ratio relates to the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA. Our Consolidated Leverage Ratio was 3.88 at December 31, 2013 compared to a maximum allowed ratio of 4.00.
The Consolidated Debt Service Coverage Ratio relates to the ratio of Consolidated EBITDA to Consolidated Debt Service. Our Consolidated Debt Service Coverage Ratio was 3.33 at December 31, 2013 compared to a minimum allowed ratio of 2.50.
Net Income (Loss), Operating Cash Flows and Partner Distributions
The table below details net income (loss), operating cash flows and partner distributions made in 2013, 2012 and 2011, respectively:
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Year ended December 31,
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2013
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2012
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2011
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(in thousands)
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Net income (loss)
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$
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(19,032
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$
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(3,013
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)
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$
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(9,715
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)
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Operating cash flows
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35,077
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31,896
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5,466
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Partner distributions
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52,053
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47,454
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44,605
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Cash flows from operations for the years ended December 31, 2013, 2012 and 2011 were $35.1 million, $31.9
million and $5.5 million, respectively, which exceeded our net loss of $19.0 million, $3.0 million and $9.7 million, respectively, during the same periods. The differences between our operating cash flows and net loss are in large part attributable
to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not and are not as of yet recognized as revenues as we had not and have not met the delivery criteria for revenue recognition. Although there is no
assurance, we expect that the trend of operating cash flows exceeding our net income or net loss will continue into the foreseeable future.
Consolidation
Our historical operations
are part of a consolidated group for financial reporting purposes that include the cemeteries we operate under long-term operating agreements. We currently operate 18 cemeteries, 16 of which have been fully consolidated, under these long-term
operating agreements. Intercompany balances and transactions have been eliminated in consolidation.
Income Taxes
Our historical financial statements include the effects of applicable U.S. federal and state income taxes in order to comply with GAAP. We are
a limited partnership that has elected to be treated as a partnership for U.S. federal income tax purposes and therefore not be subject to U.S. federal or applicable state income taxes. In order to be treated as a partnership for federal income tax
purposes, at least 90% of our gross income must be qualifying income, which includes income from the sale of real property, including burial lots (with and without installed vaults), lawn and mausoleum crypts and cremation niches. Most of our
activities that do not generate qualifying income, such as the sale of other cemetery products, the provision of perpetual care services, the operation of our managed cemeteries and all funeral home operations, will be owned by and conducted through
corporate subsidiaries, which will be subject to tax on their net taxable income. Dividends we receive from corporate subsidiaries will be qualifying income.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our historical consolidated financial
statements. We prepared these financial statements in conformity with GAAP. The preparation of these consolidated financial statements required us to make estimates and assumptions that affected the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of
42
revenues and expenses during the reporting periods. We based our estimates, judgments and assumptions on historical experience and known facts and other assumptions that we believed to be
reasonable under the circumstances. In future periods, we expect to make similar estimates, judgments and assumptions on the same basis as we have historically. Our actual results in future periods may differ from these estimates under different
assumptions and conditions. We believe that the following accounting policies or estimates had or will have the greatest potential impact on our consolidated financial statements for the periods discussed and for future periods.
Revenue Recognition
We sell our
merchandise and services on both a pre-need and at-need basis. All at-need sales are recognized as revenues and recorded in earnings at the time that merchandise is delivered and services are performed.
Revenues from pre-need sales of cemetery interment rights in constructed burial property are deferred until at least 10% of the sales price
has been collected, at which time they are fully earned.
Revenues from pre-need sales of cemetery interment rights in unconstructed
burial property, such as mausoleum crypts and lawn crypts, are recognized using the percentage-of-completion method of accounting, with no revenue being recognized until at least 10% of the sales price has been received. The percentage-of-completion
method of accounting requires us to make certain estimates as of our reporting dates. These estimates are made based upon information available at the reporting date and are updated on a specific identification method at the end of each reporting
period. Periodic earnings are calculated based upon the total sales price, estimated costs to complete and the percentage completed during a given reporting period.
Revenues from pre-need sales of cemetery merchandise and services are deferred until the merchandise is delivered or the services are
performed, at which time they are fully earned.
Investment earnings, including realized gains and losses, generated by assets in our
merchandise trusts are deferred until the associated merchandise is delivered or the services are performed.
In order to appropriately
match revenue and expenses, we defer certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to acquisitions of new pre-need cemetery and prearranged funeral business until such time that the
associated revenue is recognized.
Deferred Cemetery Revenues, Net
Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trust is deferred until such time
that the services are performed or the merchandise is delivered.
In addition to amounts deferred on new contracts, investment income and
unrealized gains on our merchandise trust, deferred cemetery revenues, net, includes deferred revenues from pre-need sales that were entered into by entities prior to the acquisition of those entities by us, including entities that were acquired by
Cornerstone Family Services, Inc. upon its formation in 1999. We provide for a reasonable profit margin for these deferred revenues (deferred margin) to account for the future costs of delivering products and providing services on pre-need contracts
that we acquired through acquisitions. Deferred margin amounts are deferred until the merchandise is delivered or the services are performed.
Accounts Receivable Allowance for Cancellations
At the time of a pre-need sale, we record an account receivable in an amount equal to the total contract value less any cash deposit paid net
of an estimated allowance for cancellations.
The allowance for cancellations is established based upon our estimate of expected
cancellations and historical experiences and is currently approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. We will continue to evaluate cancellation rates and will make changes to the
estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at December 31, 2013 or 2012.
Merchandise Trust Assets
Assets
held in our merchandise trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is recognized as deferred revenue. Any and all investment income streams, including interest,
dividends or gains and losses from the sale of trust assets are offset against deferred revenue until such time that we deliver the underlying merchandise. Investment income generated from our merchandise trust is included in Cemetery revenues
investment and other.
We evaluate whether or not the assets in our merchandise trusts have an other-than-temporary impairment on a
security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer and our ability and intent
to hold the security until it regains its value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market
43
value. Any reduction in the cost basis of the assets held in our merchandise trusts due to an other-than-temporary impairment is offset against deferred revenue. Refer to Note 5 of our
consolidated financial statements included in this Annual Report on Form 10-K for a more detailed discussion of other-than-temporarily impaired assets.
Perpetual Care Trust Assets
Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All
principal must remain in this trust into perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred.
Assets in our perpetual care trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of
the assets and is offset against perpetual care trust corpus.
We evaluate whether or not the assets in our perpetual care trusts have an
other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the
specific issuer and our ability and intent to hold the security until it recovers its value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value. Any reduction in the cost basis
of the assets held in our perpetual care trusts due to an other-than-temporary impairment is offset against perpetual care trust corpus. There is no impact on earnings. Refer to Notes 5 and 6 of our consolidated financial statements included in this
Annual Report on Form 10-K for a more detailed discussion of other-than-temporarily impaired assets.
Other-Than-Temporary Impairment of Trust
Assets
We determine whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of
the following:
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Whether it is our intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.
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If there is no intent to sell, we evaluate if it is not more likely than not that we will be required to sell the debt security before its anticipated recovery. If we determine that it is more likely than not that it
will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary.
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We further evaluate whether or not all assets in the merchandise trusts have other-than-temporary impairments based upon a number of criteria
including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.
If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.
For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an
equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts,
any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
The trusts footnotes (Notes 5
and 6) disclose the adjusted cost basis of the assets in both the merchandise and perpetual care trusts. This adjusted cost basis includes any adjustments to the original cost basis due to other-than-temporary impairments.
Goodwill
Goodwill represents the
excess of the purchase price over the fair value of identifiable net assets acquired. We test goodwill for impairment using a two-step test. In the first step of the test, we compare the fair value of the reporting unit to its carrying amount,
including goodwill. We determine the fair value of each reporting unit using the income approach. We do not record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying amount. If the aggregate fair
value of a reporting unit is less than the related carrying amount, we proceed to the second step of the test in which we would determine and record an impairment loss in an amount equal to the excess of the carrying amount of goodwill over the
implied fair value. The goodwill impairment test is performed annually or more frequently if events or circumstances indicate that impairment may exist.
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Income Taxes
Our corporate subsidiaries are subject to both federal and state income taxes. We record deferred tax assets and liabilities to recognize
temporary differences between the bases of assets and liabilities in our tax and GAAP balance sheets and for federal and state net operating loss carryforwards and alternative minimum tax credits.
We record a valuation allowance against our deferred tax assets if we deem that it is more likely than not that some portion or all of the
recorded deferred tax assets will not be realizable in future periods.
In evaluating our ability to recover deferred tax assets, we
consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable
income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we
use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax
expense in the period and could have a significant impact on our future earnings.
As of December 31, 2013, our taxable corporate
subsidiaries had federal net operating loss carryforwards of approximately $194.3 million, which will begin to expire in 2019 and $238.2 million in state net operating losses, a portion of which expires annually. Our ability to use such federal net
operating losses may be limited by changes in the ownership of our units deemed to result in an ownership change under the applicable provisions of the Internal Revenue Code of 1986, as amended.
Recent Accounting Pronouncements
In the third quarter of 2013, the Financial Accounting Standards Board issued Update No. 2013-11, Income Taxes (Topic 740) (ASU
2013-11). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This amendment requires an entity
to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except
as follows. To the extent that (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes
that would result from the disallowance of a tax position; or (ii) the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should
be presented in the financial statements as a liability and should not be combined with deferred tax assets. We applied the provisions of ASU 2013-11 to all unrecognized tax benefits that existed at the effective date of December 15, 2013. This
adoption did not have a significant impact on our financial position, results of operations, or cash flows.
Segment Reporting and Related Information
The Company is organized into five distinct reportable segments which are classified as Cemetery OperationsSoutheast, Cemetery
OperationsNortheast, Cemetery OperationsWest, Funeral Homes, and Corporate.
We chose this level of organization and
disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level
at which our chief decision makers and other senior management evaluate performance.
The Cemetery Operations segments sell interment
rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. Our cemetery operations are disaggregated into three different geographically based segments. The nature of our customers differs in each of our
regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers
who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in
customer attributes along with the previously mentioned management structure and senior management analysis methodologies.
Our Funeral
Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery
merchandise and services sold and provided by the Cemetery Operations segments.
Our Corporate segment includes various home office
expenses, miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments, certain depreciation and amortization expenses and acquisition related costs.
45
Results of Operations- Segments
We account for and analyze the results of operations for our segments on a basis of accounting that is different from GAAP. We reconcile these
non-GAAP accounting results of operations to GAAP based amounts at the consolidated level. This reconciliation is included in Note 14 to the consolidated financial statements included in this Annual Report on Form 10-K.
The method of accounting we utilize to analyze our overall results of operations, including segment results, provides for a production based
view of our business. Under the production based view, we recognize revenues at their contract value at the point in time in which the contract is written, less a historic cancellation reserve. All related costs are expensed in the period the
contract is recognized as revenue. In contrast, GAAP requires that we defer all revenues, and the direct costs associated with these revenues, until we meet certain delivery and performance requirements. The nature of our business is such that there
is no meaningful relationship between the time that elapses from the date a contract is executed and the date the underlying merchandise is delivered or the service, delivery and performance requirements are met. Further, certain factors affecting
this time period, such as weather and supplier issues, are out of our control. As a result, during a period of growth, operating profits as defined by GAAP will tend to lag behind operating profits on a production based view because of the required
deferral of revenues. Our performance based view ignores these delays and presents results based upon the underlying value of contracts written. We believe this is the most reliable indicator of our performance for a given period as the value of
contracts written less a historical cancellation reserve reflects the economic value added during a given period of time. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from generally accepted accounting
principles. See Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K for a more detailed discussion of our accounting policies under GAAP.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Cemetery Segments
Cemetery Operations
Southeast
In 2012 and 2013 we acquired five properties in our Cemetery Operations Southeast segment. Of these acquisitions,
four occurred during the third quarter of 2012 and one occurred during the third quarter of 2013. Therefore, the results of operations for these properties have either a lesser or no impact on the results for the year ended December 31, 2012,
but are included in the results for the year ended December 31, 2013. These additions are responsible for approximately two-thirds of the increase to revenues and approximately one half of the increase to costs and expenses for this segment.
The table below compares the results of operations for our Cemetery Operations Southeast for the year ended December 31, 2013
to the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
134,046
|
|
|
$
|
129,212
|
|
|
$
|
4,834
|
|
|
|
3.7
|
%
|
Total costs and expenses
|
|
|
95,726
|
|
|
|
91,239
|
|
|
|
4,487
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
38,320
|
|
|
$
|
37,973
|
|
|
$
|
347
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $1.6 million in the value of
at-need contracts and $0.2 million in the value of pre-need contracts. We also had increases of $3.4 million in income from our trusts, partially offset by a decrease of $0.4 million in interest on accounts receivable and other income. Our
investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The
increase in costs and expenses was primarily related to:
|
|
|
A $0.1 million increase in cost of goods sold primarily attributable to the increase in the value of contracts written and product mix.
|
|
|
|
A $1.0 million increase in cemetery expenses primarily due to increases of $0.6 million in labor costs and $0.4 million in repair and maintenance costs.
|
|
|
|
A $1.7 million increase in selling expenses primarily attributable to increases of $0.9 million in commissions and personnel expenses, $0.5 million in advertising and telemarketing costs, $0.2 million in travel costs,
and $0.1 million in supplies and printing expenses.
|
|
|
|
A $1.5 million increase in general and administrative expenses primarily due to increases of $0.3 million in personnel costs, $0.3 million in insurance costs, $0.2 million in professional fees, $0.1 million in travel
costs, $0.1 million in repair and maintenance expense, and $0.1 million in rent expense, with the remaining increase due to general office costs.
|
|
|
|
A $0.2 million increase in depreciation primarily due to the acquired properties.
|
Cemetery Operations
Northeast
The table below compares the results of operations for our Cemetery Operations Northeast for the year ended
December 31, 2013 to the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
63,110
|
|
|
$
|
60,357
|
|
|
$
|
2,753
|
|
|
|
4.6
|
%
|
Total costs and expenses
|
|
|
43,283
|
|
|
|
40,620
|
|
|
|
2,663
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
19,827
|
|
|
$
|
19,737
|
|
|
$
|
90
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $2.5 million in the value of
pre-need contracts, partially offset by a decrease of $0.6 million in the value of at-need contracts. In addition, we had an increase of $1.6 million in income from our trusts, partially offset by a decrease of $0.7 million in other income. Our
investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The
increase in costs and expenses was primarily related to:
|
|
|
A $0.5 million increase in cost of goods sold primarily attributable to the corresponding increase in the value of contracts written and product mix.
|
|
|
|
A $0.9 million increase in cemetery expenses primarily due to increases of $0.4 million in labor costs, $0.2 million in repair and maintenance expense, $0.2 million in utility costs and $0.1 million in automobile and
equipment expenses.
|
47
|
|
|
A $0.9 million increase in selling expenses primarily attributable to increases of $0.5 million in commissions and personnel expenses, $0.3 million in advertising and telemarketing costs and $0.1 million in travel
costs.
|
|
|
|
A $0.4 million increase in general and administrative expenses primarily due to increases of $0.2 million in personnel costs and $0.2 million in insurance costs.
|
Cemetery Operations West
Effective March 31, 2012, we terminated our operating agreement with the Archdiocese of Detroit. Therefore, the results of operations for
these properties are only included in the year ended December 31, 2012 up to that point, and have no impact on the results for the year ended December 31, 2013. The removal of these properties from our results of operations resulted in a
$1.8 million decrease in revenues and $1.6 million decrease in costs and expenses period over period. In the second quarter of 2012 we made one acquisition in our Cemetery Operations West segment. This acquisition did not have a significant
impact on the comparison of the segments results of operations below.
The table below compares the results of operations for our
Cemetery Operations West for the year ended December 31, 2013 to the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
78,636
|
|
|
$
|
68,766
|
|
|
$
|
9,870
|
|
|
|
14.4
|
%
|
Total costs and expenses
|
|
|
48,958
|
|
|
|
45,437
|
|
|
|
3,521
|
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
29,678
|
|
|
$
|
23,329
|
|
|
$
|
6,349
|
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $3.7 million in the value of
pre-need contracts, partially offset by a decrease of $0.4 million in the value of at-need contracts. In addition, we had an increase of $7.0 million in income from our trusts, partially offset by a decrease of $0.4 million in interest and other
income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The
increase in costs and expenses was primarily related to:
|
|
|
A $1.1 million increase in cost of goods sold primarily attributable to the corresponding increase in the value of contracts written and product mix.
|
|
|
|
A $0.2 million increase in cemetery expenses primarily due to increases of $0.3 million in repair and maintenance expense and $0.2 million in real estate taxes, partially offset by a decrease of $0.3 million in
personnel costs.
|
|
|
|
A $1.4 million increase in selling expenses primarily attributable to increases of $1.0 million in commissions and personnel expenses, $0.3 million in advertising and telemarketing costs and $0.2 million in travel
costs, partially offset by a net $0.1 million decrease in miscellaneous selling costs.
|
|
|
|
A $1.0 million increase in general and administrative expenses comprised of increases of $0.2 million in personnel costs, $0.2 million in legal costs, $0.1 million in insurance costs, $0.1 million in professional fees,
and $0.1 million in travel costs, with the remaining increase due to general office costs.
|
|
|
|
A $0.2 million decrease in depreciation.
|
Funeral Homes Segment
In 2012 and 2013 we acquired twenty three funeral homes. Of these acquisitions, two occurred during the second quarter of 2012, fourteen
occurred during the third quarter of 2012, one occurred during the fourth quarter of 2012 and six occurred during the first quarter of 2013. Therefore, the results of operations for these properties have either a lesser or no impact on the results
for the year ended December 31, 2012, but are included in the results for the year ended December 31, 2013. These additions are primarily responsible for the increases to revenues and costs and expenses for the Funeral Homes segment.
48
The table below compares the results of operations for our Funeral Homes segment for the year
ended December 31, 2013 to the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
50,808
|
|
|
$
|
37,988
|
|
|
$
|
12,820
|
|
|
|
33.7
|
%
|
Total costs and expenses
|
|
|
39,355
|
|
|
|
31,486
|
|
|
|
7,869
|
|
|
|
25.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
11,453
|
|
|
$
|
6,502
|
|
|
$
|
4,951
|
|
|
|
76.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The increase in revenues was primarily attributable to a $7.3 million increase in pre-need revenues, a $3.3 million increase in at-need
revenues and a $2.2 million increase in other revenues.
Total costs and expenses
The increase in costs and expenses was primarily attributable to increases of $4.3 million in personnel expenses, $0.6 million in merchandise
costs, $0.4 million in other service and supplies expenses, $0.7 million in advertising costs, $0.7 million in facility costs, and $0.5 million in depreciation and amortization expense, with the remainder attributable to increases in other general
expense categories.
Corporate Segment
The table below compares expenses incurred by the Corporate segment for the year ended December 31, 2013 to the year ended
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Selling, cemetery and general and administrative expenses
|
|
$
|
972
|
|
|
$
|
870
|
|
|
$
|
102
|
|
|
|
11.7
|
%
|
Depreciation and amortization
|
|
|
1,176
|
|
|
|
1,542
|
|
|
|
(366
|
)
|
|
|
-23.7
|
%
|
Acquisition related costs, net of recoveries
|
|
|
1,051
|
|
|
|
3,123
|
|
|
|
(2,072
|
)
|
|
|
-66.3
|
%
|
|
|
|
|
|
Corporate expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate personnel expenses
|
|
|
14,478
|
|
|
|
12,309
|
|
|
|
2,169
|
|
|
|
17.6
|
%
|
Other corporate expenses
|
|
|
14,397
|
|
|
|
15,860
|
|
|
|
(1,463
|
)
|
|
|
-9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate overhead
|
|
|
28,875
|
|
|
|
28,169
|
|
|
|
706
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate expenses
|
|
$
|
32,074
|
|
|
$
|
33,704
|
|
|
$
|
(1,630
|
)
|
|
|
-4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, cemetery and general and administrative expenses allocated to the Corporate segment remained
relatively consistent period over period.
The decrease in depreciation and amortization was due to a decrease in the amortization of
deferred financing fees.
49
Acquisition related costs include legal fees and other third party costs incurred in acquisition
related activities. These costs will vary from period to period depending on the amount of acquisition activity that takes place. There was a decrease in the expense related to a recovery of legal fees in the first and second quarters of 2013
resulting from a legal settlement.
The increase in total corporate overhead was attributable to increases of $2.2 million in personnel
expenses and $0.4 million in unit-based compensation expense. These increases were partially offset by a $1.0 million decrease in professional fees, primarily related to a recovery of legal fees from a legal settlement during the second quarter of
2013, and a $0.9 million decrease in advertising and public relations costs.
Reconciliation of Segment Results of Operations to Consolidated
Results of Operations
As discussed in the segment sections of this Managements Discussion and Analysis of Financial
Condition and Results of Operations, cemetery revenues and their associated costs as reported at the segment level are not deferred until such time that we satisfy the delivery criteria for revenue recognition.
Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services which were delivered
during the period. Accordingly, period over period changes to revenues can be impacted by:
|
|
|
Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origin and are recognized as revenue and not deferred as of the end of their period of
origination.
|
|
|
|
Changes in merchandise and services that are delivered during a period that had been originated during a prior period.
|
The table below analyzes results of operations and the changes therein for the year ended December 31, 2013 compared to the year ended
December 31, 2012. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/or changes in the timing of when
merchandise and services were delivered. During 2013 we acquired 1 cemetery and 6 funeral homes. During 2012 we acquired 5 cemeteries and 17 funeral homes. The results of operations for these properties have either a lesser or no impact on the
results for the year ended December 31, 2012, but are included in the results for the year ended December 31, 2013. These additions are contributing a significant portion of the increases to revenues and costs and expenses in the table
below. Effective March 31, 2012, we terminated our operating agreement with the Archdiocese of Detroit; consequently, the results of operations for these properties are included in 2012 up to that point, and are not included in 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Segment
Results
(non-GAAP)
|
|
|
GAAP
Adjustments
|
|
|
GAAP
Results
|
|
|
Segment
Results
(non-GAAP)
|
|
|
GAAP
Adjustments
|
|
|
GAAP
Results
|
|
|
Change in
GAAP results
($)
|
|
|
Change in
GAAP results
(%)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-need cemetery revenues
|
|
$
|
134,857
|
|
|
$
|
(43,714
|
)
|
|
$
|
91,143
|
|
|
$
|
128,437
|
|
|
$
|
(31,437
|
)
|
|
$
|
97,000
|
|
|
$
|
(5,857
|
)
|
|
|
-6.0
|
%
|
At-need cemetery revenues
|
|
|
80,000
|
|
|
|
(4,568
|
)
|
|
|
75,432
|
|
|
|
79,346
|
|
|
|
(4,552
|
)
|
|
|
74,794
|
|
|
|
638
|
|
|
|
0.9
|
%
|
Investment income from trusts
|
|
|
50,564
|
|
|
|
(26,158
|
)
|
|
|
24,406
|
|
|
|
38,571
|
|
|
|
(14,446
|
)
|
|
|
24,125
|
|
|
|
281
|
|
|
|
1.2
|
%
|
Interest income
|
|
|
6,926
|
|
|
|
|
|
|
|
6,926
|
|
|
|
6,698
|
|
|
|
|
|
|
|
6,698
|
|
|
|
228
|
|
|
|
3.4
|
%
|
Funeral home revenues
|
|
|
50,808
|
|
|
|
(5,853
|
)
|
|
|
44,955
|
|
|
|
37,988
|
|
|
|
(2,309
|
)
|
|
|
35,679
|
|
|
|
9,276
|
|
|
|
26.0
|
%
|
Other cemetery revenues
|
|
|
3,445
|
|
|
|
334
|
|
|
|
3,779
|
|
|
|
5,283
|
|
|
|
(973
|
)
|
|
|
4,310
|
|
|
|
(531
|
)
|
|
|
-12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
326,600
|
|
|
|
(79,959
|
)
|
|
|
246,641
|
|
|
|
296,323
|
|
|
|
(53,717
|
)
|
|
|
242,606
|
|
|
|
4,035
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
35,382
|
|
|
|
(7,523
|
)
|
|
|
27,859
|
|
|
|
33,807
|
|
|
|
(5,706
|
)
|
|
|
28,101
|
|
|
|
(242
|
)
|
|
|
-0.9
|
%
|
Cemetery expense
|
|
|
57,566
|
|
|
|
|
|
|
|
57,566
|
|
|
|
55,410
|
|
|
|
|
|
|
|
55,410
|
|
|
|
2,156
|
|
|
|
3.9
|
%
|
Selling expense
|
|
|
58,782
|
|
|
|
(10,950
|
)
|
|
|
47,832
|
|
|
|
54,641
|
|
|
|
(7,763
|
)
|
|
|
46,878
|
|
|
|
954
|
|
|
|
2.0
|
%
|
General and administrative expense
|
|
|
31,873
|
|
|
|
|
|
|
|
31,873
|
|
|
|
28,928
|
|
|
|
|
|
|
|
28,928
|
|
|
|
2,945
|
|
|
|
10.2
|
%
|
Corporate overhead
|
|
|
28,875
|
|
|
|
|
|
|
|
28,875
|
|
|
|
28,169
|
|
|
|
|
|
|
|
28,169
|
|
|
|
706
|
|
|
|
2.5
|
%
|
Depreciation and amortization
|
|
|
9,548
|
|
|
|
|
|
|
|
9,548
|
|
|
|
9,431
|
|
|
|
|
|
|
|
9,431
|
|
|
|
117
|
|
|
|
1.2
|
%
|
Funeral home expense
|
|
|
36,319
|
|
|
|
(665
|
)
|
|
|
35,654
|
|
|
|
28,977
|
|
|
|
(252
|
)
|
|
|
28,725
|
|
|
|
6,929
|
|
|
|
24.1
|
%
|
Acquisition related costs, net of recoveries
|
|
|
1,051
|
|
|
|
|
|
|
|
1,051
|
|
|
|
3,123
|
|
|
|
|
|
|
|
3,123
|
|
|
|
(2,072
|
)
|
|
|
-66.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
259,396
|
|
|
|
(19,138
|
)
|
|
|
240,258
|
|
|
|
242,486
|
|
|
|
(13,721
|
)
|
|
|
228,765
|
|
|
|
11,493
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
67,204
|
|
|
$
|
(60,821
|
)
|
|
$
|
6,383
|
|
|
$
|
53,837
|
|
|
$
|
(39,996
|
)
|
|
$
|
13,841
|
|
|
$
|
(7,458
|
)
|
|
|
-53.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Revenues
Pre-need cemetery revenues were $91.1 million for the year ended December 31, 2013, a decrease of $5.9 million, or 6.0%, as compared to
$97.0 million during 2012. An increase of $6.4 million in the value of pre-need cemetery contracts written was offset by an increase of $12.3 million in deferred revenue.
At-need cemetery revenues were $75.4 million for the year ended December 31, 2013, an increase of $0.6 million, or 0.9%, as compared to
$74.8 million during 2012. The increase was caused by an increase in the value of at-need cemetery contracts written.
Investment income
from trusts was $24.4 million for the year ended December 31, 2013, an increase of $0.3 million, or 1.2%, as compared to $24.1 million during 2012. On a segment basis, we had an increase of $12.0 million, which was offset by an adjustment of
$11.7 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing
of the recognition of gains within the trusts.
Interest income on accounts receivable was $6.9 million for the year ended
December 31, 2013, an increase of $0.2 million, or 3.4%, as compared to $6.7 million during 2012.
Funeral home revenues were $45.0
million for the year ended December 31, 2013, an increase of $9.3 million, or 26.0%, compared to $35.7 million during 2012. The increase was primarily attributable to the acquisitions of 23 funeral homes made during 2012 and 2013.
Other cemetery revenues include miscellaneous items that are not grouped with our cemetery merchandise and services. Other cemetery revenues
were $3.8 million for the year ended December 31, 2013, a decrease of $0.5 million, or 12.3%, as compared to $4.3 million during 2012. The decrease was primarily related to non-recurring other income from the sale of assets that occurred in
2012.
Costs and Expenses
Cost of goods sold were $27.9 million for the year ended December 31, 2013, a decrease of $0.2 million, or 0.9%, as compared to $28.1
million in 2012. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 16.7% for the year ended December 31, 2013 as compared to 16.4% during 2012. The change in the ratio primarily relates to changes in product mix.
Cemetery expenses were $57.6 million during the year ended December 31, 2013, an increase of $2.2 million, or 3.9%, compared to
$55.4 million during 2012. This increase was comprised of increases of $0.7 million in labor costs, $0.4 million in utility and fuel costs, $0.3 million in travel costs and $0.9 million in repair and maintenance expenses, which were partially offset
by a net decrease of $0.1 million in cemetery overhead and other costs. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a
margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs
relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the
ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully
implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to
segment level pre-need and at-need cemetery revenues was 26.8% during the year ended December 31, 2013 as compared to 26.7% during 2012.
Selling expenses were $47.8 million during the year ended December 31, 2013, an increase of $0.9 million, or 2.0%, as compared to $46.9
million in 2012. The expense increase is comprised of segment based increases of $2.3 million in commissions and personnel expenses, $1.1 million in advertising and telemarketing costs and $0.5 million in travel expenses and a net $0.2 million in
general selling costs, which were offset by an increase in deferred selling expenses of $3.2 million. The ratio of selling expenses to cemetery revenues was 28.7% for the year ended December 31, 2013 as compared to 27.3% during 2012. This ratio
gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to
changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to remain fairly consistent.
General and administrative expenses were $31.9 million during the year ended December 31, 2013, an increase of $3.0 million, or 10.2%, as
compared to $28.9 million during 2012. This increase was due to increases of $0.7 million in personnel costs, $0.6 million in insurance costs, $0.3 million in professional fees, $0.2 million in travel costs and $0.1 million increases each in
supplies, office rent, and repairs and maintenance. The remaining increase was due to general office and miscellaneous costs. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint,
the most effective gauge of measuring
51
general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our
general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value
of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by
our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decrease as many of the
expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 14.8% during the year ended December 31, 2013 as compared to 13.9% during 2012.
Total corporate overhead was $28.9 million during the year ended December 31, 2013, an increase of $0.7 million, or 2.5%, compared to
$28.2 million during 2012. The increase in total corporate overhead was attributable to increases of $2.2 million in personnel expenses and $0.4 million in unit-based compensation expense. These increases were partially offset by a $1.0 million
decrease in professional fees, primarily related to a recovery of legal fees from a legal settlement during the second quarter of 2013, and a $0.9 million decrease in advertising and public relations costs.
Depreciation and amortization was $9.5 million during the year ended December 31, 2013, an increase of $0.1 million, or 1.2%, as compared
to $9.4 million during the same period last year. The increase was primarily due to additional depreciation and amortization from our recent acquisitions offset by runoff of existing assets, including deferred financing fees.
Funeral home expenses were $35.7 million for the year ended December 31, 2013, an increase of $7.0 million, or 24.1%, compared to $28.7
million during 2012. The increase was primarily driven by our acquisitions and was attributable to segment increases of $4.3 million in personnel expenses, $0.6 million in merchandise costs, $0.4 million in other service and supplies expenses, $0.7
million in advertising costs, and $0.7 million in facility costs, with the remainder attributable to increases in other general expense categories. These increases were offset by an increase of $0.4 million in deferred funeral home expenses.
Acquisition related costs were $1.1 million for the year ended December 31, 2013, a decrease of $2.0 million, or 66.3%, as compared to
$3.1 million during 2012. The decrease was primarily due to a legal settlement which resulted in a recovery of legal fees in the first and second quarters of 2013. These costs will vary from period to period depending on the amount of acquisition
activity that takes place.
Non-segment Allocated Results
Certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our
consolidated statement of operations below operating profit and above net income (loss).
The table below summarizes these items and the
changes between the years ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
Gain on acquisitions
|
|
$
|
2,530
|
|
|
$
|
122
|
|
|
$
|
2,408
|
|
|
|
1,973.8
|
%
|
Gain on termination of operating agreement
|
|
|
|
|
|
|
1,737
|
|
|
|
(1,737
|
)
|
|
|
-100.0
|
%
|
Gain on settlement agreement, net
|
|
|
12,261
|
|
|
|
|
|
|
|
12,261
|
|
|
|
100.0
|
%
|
Gain on sale of other assets
|
|
|
155
|
|
|
|
|
|
|
|
155
|
|
|
|
100.0
|
%
|
Loss on early extinguishment of debt
|
|
|
21,595
|
|
|
|
|
|
|
|
21,595
|
|
|
|
100.0
|
%
|
Interest expense
|
|
|
21,070
|
|
|
|
20,503
|
|
|
|
567
|
|
|
|
2.8
|
%
|
Income tax expense (benefit)
|
|
$
|
(2,304
|
)
|
|
$
|
(1,790
|
)
|
|
$
|
(514
|
)
|
|
|
28.7
|
%
|
The gain on acquisition recorded during the year ended December 31, 2013 relates to our third quarter
2013 acquisition. The gain on acquisition recorded during the year ended December 31, 2012 relates to one of our second quarter 2012 acquisitions.
During the year ended December 31, 2012, we recognized a gain of $1.7 million related to the termination of an operating agreement. Refer
to Note 13 of our consolidated financial statements in Item 8 of this Form 10-K for a more detailed discussion.
52
During the year ended December 31, 2013, certain proceeds received from a legal settlement
were recorded as a gain on settlement agreement on the consolidated statement of operations, resulting in a total gain on settlement of $12.3 million.
The early extinguishment of debt charge of $21.6 million relates to the tender premium of $14.9 million we paid in connection with the early
repayment of $150.0 million of our 10.25% Senior Notes due 2017 and the write-off of $6.7 million of unamortized fees and discounts related to those notes.
Interest expense has increased during the year ended December 31, 2013 as compared to the same period last year. This increase is
primarily caused by an increase in the aggregate principal amount outstanding on our credit facility, partially offset by a reduction of interest expense related to the refinancing of our Senior Notes in the second quarter of 2013. Average amounts
outstanding under our credit facility were $101.3 million and $80.7 million during the years ended December 31, 2013 and 2012, respectively.
We had an income tax benefit of $2.3 million for the year ended December 31, 2013, an increase in the benefit of $0.5 million, or 28.7%,
compared to a benefit of $1.8 million during 2012. The increase in the income tax benefit is primarily due to an increase in pre-tax losses at our corporate subsidiaries that are subject to corporate tax. Our effective tax rate differs from our
statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Cemetery Segments
Cemetery Operations
Southeast
In 2011 and 2012, we made several acquisitions in our Cemetery Operations Southeast segment. Of these acquisitions, 6
occurred during the third quarter of 2011, 5 occurred during the fourth quarter of 2011 and 4 occurred during the third quarter of 2012. Therefore, the results of operations for these properties have less of an impact, and in some cases no impact,
on the year ended December 31, 2011, but are included in the results of operations for the year ended December 31, 2012. These additions are contributing to approximately two thirds of the increase in revenues and the entire increase in
costs and expenses for this segment.
The table below compares the results of operations for our Cemetery Operations Southeast for
the year ended December 31, 2012 to the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
129,212
|
|
|
$
|
113,756
|
|
|
$
|
15,456
|
|
|
|
13.6
|
%
|
Total costs and expenses
|
|
|
91,239
|
|
|
|
82,673
|
|
|
|
8,566
|
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
37,973
|
|
|
$
|
31,083
|
|
|
$
|
6,890
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $9.7 million in the value of
pre-need contracts and $2.8 million in the value of at-need contracts. We also had increases of $1.1 million in income from our trusts, $0.8 million in interest on accounts receivable and $1.1 million in other income. Our investment results can vary
from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total
costs and expenses
The increase in costs and expenses was primarily related to:
|
|
|
A $2.7 million increase in cost of goods sold. This was attributable to the corresponding increase in the value of contracts written.
|
53
|
|
|
A $1.6 million increase in selling expenses. This was primarily attributable to increases of $0.6 million in salary and benefit expenses and $1.3 million in commission related expenses, offset by a decrease of $0.4
million in advertising, telephone and telemarketing costs.
|
|
|
|
A $2.4 million increase in cemetery expenses. The increase was primarily due to increases of $0.9 million in labor costs, $1.0 million in repair and maintenance costs and $0.1 million in utility and fuel costs, with the
remainder attributable to equipment rental and other miscellaneous costs.
|
|
|
|
A $1.3 million increase in general and administrative expenses. This was primarily due to increases of $0.9 in labor costs, $0.1 in insurance costs, $0.1 million in professional fees and $0.2 million in other general
office and miscellaneous costs.
|
|
|
|
A $0.5 million increase in depreciation.
|
Cemetery Operations Northeast
The table below compares the results of operations for our Cemetery Operations Northeast for the year ended December 31, 2012 to
the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
60,357
|
|
|
$
|
57,263
|
|
|
$
|
3,094
|
|
|
|
5.4
|
%
|
Total costs and expenses
|
|
|
40,620
|
|
|
|
39,943
|
|
|
|
677
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
19,737
|
|
|
$
|
17,320
|
|
|
$
|
2,417
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $1.6 million in the value of
pre-need contracts and $0.4 million in the value of at-need contracts. In addition, we had an increase of $0.2 million in income from our trusts and $0.9 million in other income. Our investment results can vary from period to period based on a
number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The increase in costs and expenses was primarily related to:
|
|
|
A $0.6 million increase in cost of goods sold. This was attributable to the corresponding increase in the value of contracts written.
|
|
|
|
A $0.8 million increase in selling expenses. This was primarily attributable to increases of $0.3 million in labor costs, $0.2 million in commissions, and $0.2 million in advertising, telephone and telemarketing costs.
|
|
|
|
A $0.3 million decrease in cemetery expenses. The decrease was primarily due to decreases of $0.2 million in labor costs and $0.1 million in utility and fuel costs.
|
|
|
|
A $0.4 million decrease in general and administrative expenses primarily due to a decrease of $0.3 million in insurance costs and $0.1 million in other general office and miscellaneous costs.
|
Cemetery Operations West
Effective March 31, 2012, we terminated our operating agreement with the Archdiocese of Detroit. Therefore, the results of operations for
these properties are only included in the year ended December 31, 2012 up to that point, but are included in the entire year ended December 31, 2011. The removal of these properties from our results of operations resulted in a $6.5 million
decrease in revenues and $5.2 million decrease in costs and expenses period over period, and therefore is responsible for the majority of the decrease in revenues and costs and expenses.
Further, in the second quarter of 2011 we made 3 acquisitions and in the second quarter of 2012 we made one acquisition in our Cemetery
Operations West segment. Therefore, the results of operations for these properties have less of an impact on the year ended December 31, 2011, but are included in the results of operations for the year ended December 31, 2012. The
addition of these properties to our results of operations is responsible for a $1.5 million increase in revenues and $1.1 million increase in costs and expenses period over period.
54
The table below compares the results of operations for our Cemetery Operations West for
the year ended December 31, 2012 to the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
68,766
|
|
|
$
|
78,458
|
|
|
$
|
(9,692
|
)
|
|
|
-12.4
|
%
|
Total costs and expenses
|
|
|
45,437
|
|
|
|
52,992
|
|
|
|
(7,555
|
)
|
|
|
-14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
23,329
|
|
|
$
|
25,466
|
|
|
$
|
(2,137
|
)
|
|
|
-8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The decrease in revenues was driven by a decrease in the value of contracts written as a result of the aforementioned contract termination.
There was a decrease of $5.6 million in the value of pre-need contracts written, a decrease of $3.3 million in the value of at-need contracts written, and a decrease of $1.7 million in income from our trusts offset by an increase of $0.9 million in
other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The
decrease in costs and expenses was driven by reduced expenses as a result of the aforementioned contract termination and primarily related to:
|
|
|
A $0.6 million decrease in cost of goods sold. This was attributable to the corresponding decrease in the value of contracts written.
|
|
|
|
A $1.5 million decrease in selling expense. The decrease was primarily due to decreases of $0.6 million in labor, $0.8 million in commissions and $0.1 in telemarketing costs.
|
|
|
|
A $3.8 million decrease in cemetery expenses. The decrease was primarily due to decreases of $2.5 million in labor costs, $0.3 million in utility costs, $0.3 million in repair and maintenance costs and $0.4 million in
real estate taxes.
|
|
|
|
A $1.7 million decrease in general and administrative expenses. The decrease was primarily due to decreases of $0.5 million in labor costs, $0.3 million in insurance costs, $0.3 million in professional fees, $0.2
million in management information costs and $0.4 million in other office costs.
|
Funeral Homes Segment
In 2011 and 2012 we acquired several funeral homes. Of these acquisitions, 4 occurred during the second quarter of 2011, 4 occurred during the
third quarter of 2011, 4 occurred during the fourth quarter of 2011, 2 occurred during the second quarter of 2012, 14 occurred during the third quarter of 2012 and 1 occurred during the fourth quarter of 2012. Therefore, the results of operations
for these properties have either no impact or, in some cases, have less of an impact on the year ended December 31, 2011, but are included in the results of operations for the year ended December 31, 2012. These additions are primarily
responsible for the increase to revenues and costs and expenses for this segment.
55
The table below compares the results of operations for our Funeral Homes segment for the year
ended December 31, 2012 to the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Total revenues
|
|
$
|
37,988
|
|
|
$
|
31,163
|
|
|
$
|
6,825
|
|
|
|
21.9
|
%
|
Total costs and expenses
|
|
|
31,486
|
|
|
|
25,151
|
|
|
|
6,335
|
|
|
|
25.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
6,502
|
|
|
$
|
6,012
|
|
|
$
|
490
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The increase in revenues was primarily attributable to a $2.9 million increase in at-need revenues, a $1.9 million increase in pre-need
revenues and a $2.0 million increase in other revenues.
Total costs and expenses
The increase in costs and expenses was primarily attributable to increases of $2.9 million in personnel expenses, $0.6 million in facility
costs, $0.9 million in merchandise costs, $0.2 million in advertising costs, $0.1 million in vehicle costs and $0.9 million in depreciation, with the remainder attributable to increases in other general and administrative expense categories.
Corporate Segment
The table below
compares expenses incurred by the Corporate segment for the year ended December 31, 2012 to the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(in thousands)
|
|
|
|
(non-GAAP)
|
|
Selling, cemetery and general and administrative expenses
|
|
$
|
870
|
|
|
$
|
832
|
|
|
$
|
38
|
|
|
|
4.6
|
%
|
Depreciation and amortization
|
|
|
1,542
|
|
|
|
2,127
|
|
|
|
(585
|
)
|
|
|
-27.5
|
%
|
Acquisition related costs, net of recoveries
|
|
|
3,123
|
|
|
|
4,604
|
|
|
|
(1,481
|
)
|
|
|
-32.2
|
%
|
Corporate expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate personnel expenses
|
|
|
12,309
|
|
|
|
11,580
|
|
|
|
729
|
|
|
|
6.3
|
%
|
Other corporate expenses
|
|
|
15,860
|
|
|
|
12,186
|
|
|
|
3,674
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate overhead
|
|
|
28,169
|
|
|
|
23,766
|
|
|
|
4,403
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate expenses
|
|
$
|
33,704
|
|
|
$
|
31,329
|
|
|
$
|
2,375
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, cemetery and general and administrative expenses allocated to the Corporate segment remained
relatively consistent from period to period.
The decrease in depreciation and amortization was due to a decrease in amortized deferred
financing fees.
56
Acquisition related costs include legal fees and other third party costs incurred in acquisition
related activities. These costs will vary from period to period depending on the amount of acquisition activity that takes place. For the years ended December 31, 2012 and 2011, acquisition related costs include legal fees, net of recoveries,
of $0.3 million and $1.2 million, respectively, related to amounts paid to pursue the recovery of misappropriation claims related to our fourth quarter 2011 and second quarter 2010 acquisitions, respectively.
The increase in total corporate overhead was primarily attributable to increases of $0.7 million in personnel costs, $1.0 million in
professional fees, $1.0 million in advertising expenses, and $0.1 million in technology and management information costs, with the remainder attributable to various corporate expenses.
Reconciliation of Segment Results of Operations to Consolidated Results of Operations
As discussed in the segment sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations,
cemetery revenues and their associated costs as reported at the segment level are not deferred until such time that we satisfy the delivery criteria for revenue recognition.
Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services which were delivered
during the period. Accordingly, period over period changes to revenues can be impacted by:
|
|
|
Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origin and are recognized as revenue and not deferred as of the end of their period of
origination.
|
|
|
|
Changes in merchandise and services that are delivered during a period that had been originated during a prior period.
|
The table below analyzes results of operations and the changes therein for the year ended December 31, 2012 compared to the year ended
December 31, 2011. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/or changes in the timing of when
merchandise and services were delivered. During 2011 we acquired 17 cemeteries and 12 funeral homes. During 2012 we acquired another 5 cemeteries and 17 funeral homes. The results of operations for these properties have less of an impact, and in
some cases little or no impact, on the year ended December 31, 2011, but are included in the results of operations for the year ended December 31, 2012. These additions are contributing the majority of the increases to revenues and costs
and expenses in the table below.
Effective March 31, 2012, we terminated our operating agreement with the Archdiocese of Detroit;
consequently, the results of operations for these properties are only included in 2012 up to that point, but are included in the entire period for the year ended December 31, 2011.
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2012
|
|
|
Year ended
December 31, 2011
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Segment
Results
(non-GAAP)
|
|
|
GAAP
Adjustments
|
|
|
GAAP
Results
|
|
|
Segment
Results
(non-GAAP)
|
|
|
GAAP
Adjustments
|
|
|
GAAP
Results
|
|
|
Change in
GAAP results
($)
|
|
|
Change in
GAAP results
(%)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-need cemetery revenues
|
|
$
|
128,437
|
|
|
$
|
(31,437
|
)
|
|
$
|
97,000
|
|
|
$
|
122,789
|
|
|
$
|
(31,735
|
)
|
|
$
|
91,054
|
|
|
$
|
5,946
|
|
|
|
6.5
|
%
|
At-need cemetery revenues
|
|
|
79,346
|
|
|
|
(4,552
|
)
|
|
|
74,794
|
|
|
|
79,501
|
|
|
|
(5,141
|
)
|
|
|
74,360
|
|
|
|
434
|
|
|
|
0.6
|
%
|
Investment income from trusts
|
|
|
38,571
|
|
|
|
(14,446
|
)
|
|
|
24,125
|
|
|
|
38,943
|
|
|
|
(15,399
|
)
|
|
|
23,544
|
|
|
|
581
|
|
|
|
2.5
|
%
|
Interest income
|
|
|
6,698
|
|
|
|
|
|
|
|
6,698
|
|
|
|
5,864
|
|
|
|
|
|
|
|
5,864
|
|
|
|
834
|
|
|
|
14.2
|
%
|
Funeral home revenues
|
|
|
37,988
|
|
|
|
(2,309
|
)
|
|
|
35,679
|
|
|
|
31,163
|
|
|
|
(759
|
)
|
|
|
30,404
|
|
|
|
5,275
|
|
|
|
17.3
|
%
|
Other cemetery revenues
|
|
|
5,283
|
|
|
|
(973
|
)
|
|
|
4,310
|
|
|
|
2,380
|
|
|
|
782
|
|
|
|
3,162
|
|
|
|
1,148
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
296,323
|
|
|
|
(53,717
|
)
|
|
|
242,606
|
|
|
|
280,640
|
|
|
|
(52,252
|
)
|
|
|
228,388
|
|
|
|
14,218
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
33,807
|
|
|
|
(5,706
|
)
|
|
|
28,101
|
|
|
|
31,154
|
|
|
|
(5,039
|
)
|
|
|
26,115
|
|
|
|
1,986
|
|
|
|
7.6
|
%
|
Cemetery expense
|
|
|
55,410
|
|
|
|
|
|
|
|
55,410
|
|
|
|
57,145
|
|
|
|
|
|
|
|
57,145
|
|
|
|
(1,735
|
)
|
|
|
-3.0
|
%
|
Selling expense
|
|
|
54,641
|
|
|
|
(7,763
|
)
|
|
|
46,878
|
|
|
|
53,784
|
|
|
|
(8,493
|
)
|
|
|
45,291
|
|
|
|
1,587
|
|
|
|
3.5
|
%
|
General and administrative expense
|
|
|
28,928
|
|
|
|
|
|
|
|
28,928
|
|
|
|
29,547
|
|
|
|
(3
|
)
|
|
|
29,544
|
|
|
|
(616
|
)
|
|
|
-2.1
|
%
|
Corporate overhead
|
|
|
28,169
|
|
|
|
|
|
|
|
28,169
|
|
|
|
23,766
|
|
|
|
|
|
|
|
23,766
|
|
|
|
4,403
|
|
|
|
18.5
|
%
|
Depreciation and amortization
|
|
|
9,431
|
|
|
|
|
|
|
|
9,431
|
|
|
|
8,534
|
|
|
|
|
|
|
|
8,534
|
|
|
|
897
|
|
|
|
10.5
|
%
|
Funeral home expense
|
|
|
28,977
|
|
|
|
(252
|
)
|
|
|
28,725
|
|
|
|
23,554
|
|
|
|
|
|
|
|
23,554
|
|
|
|
5,171
|
|
|
|
22.0
|
%
|
Acquisition related costs, net of recoveries
|
|
|
3,123
|
|
|
|
|
|
|
|
3,123
|
|
|
|
4,604
|
|
|
|
|
|
|
|
4,604
|
|
|
|
(1,481
|
)
|
|
|
-32.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
242,486
|
|
|
|
(13,721
|
)
|
|
|
228,765
|
|
|
|
232,088
|
|
|
|
(13,535
|
)
|
|
|
218,553
|
|
|
|
10,212
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
53,837
|
|
|
$
|
(39,996
|
)
|
|
$
|
13,841
|
|
|
$
|
48,552
|
|
|
$
|
(38,717
|
)
|
|
$
|
9,835
|
|
|
$
|
4,006
|
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Pre-need cemetery revenues were $97.0 million for the year ended December 31, 2012, an increase of $5.9 million, or 6.5%, as compared to
$91.1 million during 2011. The increase was primarily caused by an increase of $5.6 million in the value of cemetery contracts written and a decrease of $0.3 million in deferred revenue.
At-need cemetery revenues were $74.8 million for the year ended December 31, 2012, an increase of $0.4 million, or 0.6%, as compared to
$74.4 million during 2011. The increase was primarily caused by a decrease of $0.2 million in the value of cemetery contracts written which was offset by a decrease of $0.6 million in deferred revenue.
The majority of the increase in the value of pre-need and at-need contracts was primarily driven by our Cemetery Operations-Southeast segment
where we acquired 6 cemeteries during the third quarter of 2011, 5 cemeteries during the fourth quarter of 2011 and 4 cemeteries during the third quarter of 2012. Therefore, the results of operations for these cemeteries are included in the year
ended December 31, 2012, but have little to no impact on the year ended December 31, 2011. In addition, the value of pre-need and at-need contracts was negatively impacted by the termination of our operating agreement with the Archdiocese
of Detroit that occurred March 31, 2012.
Investment income from trusts was $24.1 million for the year ended December 31, 2012,
an increase of $0.6 million, or 2.5%, as compared to $23.5 million during 2011. On a segment basis, we had a decrease of $0.4 million, which was offset by an adjustment of $1.0 million related to funds for which we have met the requirements that
would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Interest income on accounts receivable was $6.7 million for the year ended December 31, 2012, an increase of $0.8 million, or 14.2%, as
compared to $5.9 million during 2011.
Revenues for the Funeral
Homes segment were $35.7 million for the year ended December 31, 2012, an increase of $5.3 million, or 17.3%, compared to $30.4 million during 2011. The increase was primarily attributable to the acquisitions of 29 funeral homes made during
2011 and 2012.
Other cemetery revenues include miscellaneous items that are not grouped with our cemetery merchandise and services. Other
cemetery revenues were $4.3 million for the year ended December 31, 2012, an increase of $1.1 million, or 36.3%, as compared to $3.2 million during 2011. The increase was primarily related to non-recurring other income from the sale of assets.
58
Costs and Expenses
Cost of goods sold were $28.1 million for the year ended December 31, 2012, an increase of $2.0 million, or 7.6%, as compared to $26.1
million in 2011. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was16.4% for the year ended December 31, 2012 as compared to 15.8% during 2011. The change in the ratio primarily relates to changes in product mix.
Cemetery expenses were $55.4 million during the year ended December 31, 2012, a decrease of $1.7 million, or 3.0%, compared to $57.1
million during 2011. Overall, expense decreases of $1.8 million in labor costs, $0.3 million in utility and fuel cost, and $0.3 million in real estate taxes were partially offset by an increase of $0.7 million in repairs and maintenance expense.
Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery
expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio
indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the
value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any
unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 26.7%
during the year ended December 31, 2012 as compared to 28.2% during 2011.
Selling expenses were $46.9 million during the year ended
December 31, 2012, an increase of $1.6 million, or 3.5%, as compared to $45.3 million in 2011. The major components of the overall expense increase include $0.7 million in commissions and $0.3 million in salaries and benefits, as well as a
reduction in deferred selling expenses of $0.7 million, which were offset in part by a decrease of $0.3 million in advertising, telephone and telemarketing costs. The ratio of selling expenses to cemetery revenues was 27.3% for the year ended
December 31, 2012 as compared to 27.4% during 2011. This ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to
sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to remain fairly consistent.
General and administrative expenses were $28.9 million during the year ended December 31, 2012, a decrease of $0.6 million, or 2.1%, as
compared to $29.5 million during 2011. The major components of the overall expense decrease include decreases of $0.7 million in information system related charges, $0.6 million in insurance costs and $0.1 million in professional fees, which were
offset in part by increases $0.4 million in labor costs and $0.4 million in general office and miscellaneous costs. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most
effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative
costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while
a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including
such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decrease as many of the expenses in this category are fixed
in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 13.9% during the year ended December 31, 2012 as compared to 14.6% during 2011.
Total corporate overhead was $28.2 million during the year ended December 31, 2012, an increase of $4.4 million, or 18.5%, compared to
$23.8 million during 2011. The increase in total corporate overhead was primarily attributable to increases of $0.7 million in personnel costs, $1.0 million in professional fees, $1.0 million in advertising expenses, and $0.1 million in technology
and management information costs, with the remainder attributable to various corporate expenses.
Depreciation and amortization was $9.4
million during the year ended December 31, 2012, an increase of $0.9 million, or 10.5%, as compared to $8.5 million during the period last year. The increase was primarily due to additional depreciation and amortization from recent
acquisitions.
Funeral Home expenses were $28.7 million for the year ended December 31, 2012, an increase of $5.2 million, or 22.0%,
compared to $23.5 million during 2011. The increase in costs and expenses was primarily attributable to increases of $2.9 million in personnel expenses, $0.6 million in facility costs, $0.9 million in merchandise costs, $0.2 million in advertising
costs and $0.1 million in vehicle costs.
59
Acquisition related costs were $3.1 million for the year ended December 31, 2012, a decrease
of $1.5 million, or 32.2%, as compared to $4.6 million during 2011. Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities. These costs will vary from period to period depending on the
amount of acquisition activity that takes place. For the years ended December 31, 2012 and 2011, acquisition related costs include legal fees, net of recoveries, of $0.3 and $1.2 million, respectively, related to amounts paid to pursue the
recovery of misappropriation claims related to our fourth quarter 2011 acquisition and second quarter 2010 acquisition, respectively.
Non-segment
Allocated Results
As previously mentioned, certain income statement amounts are not allocated to segment operations. These amounts
are those line items that can be found on our consolidated statement of operations below operating profit and above net income (loss).
The table below summarizes these items and the changes between the years ended December 31, 2012 and 2011:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
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|
|
|
2012
|
|
|
2011
|
|
|
Change ($)
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|
|
Change (%)
|
|
|
|
(in thousands)
|
|
Gain on acquisitions
|
|
$
|
122
|
|
|
$
|
|
|
|
$
|
122
|
|
|
|
100.0
|
%
|
Gain on termination of operating agreement
|
|
|
1,737
|
|
|
|
|
|
|
|
1,737
|
|
|
|
100.0
|
%
|
Gain on sale of funeral home
|
|
|
|
|
|
|
92
|
|
|
|
(92
|
)
|
|
|
-100.0
|
%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
4,010
|
|
|
|
(4,010
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)
|
|
|
-100.0
|
%
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Expenses related to refinancing
|
|
|
|
|
|
|
453
|
|
|
|
(453
|
)
|
|
|
-100.0
|
%
|
Interest expense
|
|
|
20,503
|
|
|
|
19,198
|
|
|
|
1,305
|
|
|
|
6.8
|
%
|
Income tax expense (benefit)
|
|
$
|
(1,790
|
)
|
|
$
|
(4,019
|
)
|
|
$
|
2,229
|
|
|
|
-55.5
|
%
|
During the year ended December 31, 2012, we recognized a gain of $1.7 million related to the termination
of an operating agreement. The gain on acquisition relates to one of our second quarter 2012 acquisitions. Refer to Note 13 of our consolidated financial statements in Item 8 of this Form 10-K for a more detailed discussion.
The gain on sale of a funeral home in 2011 relates to the sale of one funeral home in West Virginia that we sold for $0.1 million.
During the year ended December 31, 2011, we incurred $0.5 million of expenses when we amended our credit facilities in January of 2011
and incurred an early extinguishment of debt charge of $4.0 million related to a one-time make-whole premium we paid in connection with the early repayment of our $35.0 million in Class B and Class C Senior Secured Notes.
Interest expense has increased during the year ended December 31, 2012 as compared to the same period last year. This increase is caused
by increased borrowings on our credit facility, which are offset in part by a change in our debt mix and reduced interest rates. Average amounts outstanding under our credit facility were $80.7 million and $15.9 million during the year ended
December 31, 2012 and 2011, respectively. However, amendments that we made to our credit facility have lowered our interest rate to a lower rate than what was in effect in the same period last year. In addition, we had $35.0 million of Senior
Secured Notes, which bore interest at 12.5%, outstanding at the beginning of 2011. The Senior Secured Notes were repaid in February of 2011.
We had an income tax benefit of $1.8 million for the year ended December 31, 2012, a decrease in the benefit of $2.2 million, or 55.5%,
compared to a benefit of $4.0 million during 2011. The decrease in the income tax benefit is due to a decrease in pre-tax losses at our corporate subsidiaries that are subject to corporate tax. Further, in 2011 we recorded a one-time income tax
benefit of $0.9 million related to the reversal of uncertain tax positions for which the statute of limitations had expired. In addition, our effective tax rate differs from our statutory tax rate primarily because our legal entity structure
includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.
Liquidity and Capital
Resources
Overview
Our
primary short-term liquidity needs are to fund general working capital requirements, repay our debt obligations, service our debt, make routine maintenance capital improvements and pay distributions. We will need additional liquidity to construct
mausoleum and lawn crypts on the grounds of our cemetery properties.
Our primary sources of liquidity are cash flow from operations and
amounts available under our revolving credit facility as described below. In the past, we have been able to increase our liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities,
including debt, subject to the restrictions in our revolving credit facility and under our senior notes.
60
We believe that cash generated from operations and our borrowing capacity under our revolving
credit facility, which is discussed below, will be sufficient to meet our working capital requirements as well as our anticipated capital expenditures for the foreseeable future.
In addition to macroeconomic conditions, our ability to satisfy our debt service obligations, fund planned capital expenditures, make
acquisitions and pay distributions to partners will depend upon our future operating performance. Our operating performance is primarily dependent on the sales volume of customer contracts, the cost of purchasing cemetery merchandise that we have
sold, the amount of funds withdrawn from merchandise trusts and perpetual care trusts and the timing and amount of collections on our pre-need installment contracts.
Offerings of Common Units
On
March 26, 2013, we completed a follow-on public offering of 1,610,000 common units at a price of $25.35 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $38.4 million. The
proceeds from the offering were used to pay down debt on the credit facility.
On February 27, 2014, we completed a follow-on public
offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.1 million. The proceeds were used to pay down borrowings outstanding
under our revolving credit facility.
Long-term Debt
7.875% Senior Notes due 2021
Purchase Agreement
On May 16, 2013, we, Cornerstone Family Services of West Virginia Subsidiary, Inc., our wholly owned subsidiary
(Cornerstone Co. and together with us, the Issuers), and certain subsidiary guarantors (the Guarantors) entered into a Purchase Agreement (the Purchase Agreement) with Merrill Lynch, Pierce,
Fenner & Smith Incorporated, acting on behalf of itself and as the representative for the other initial purchasers named in the Purchase Agreement (collectively, the Initial Purchasers). Pursuant to the Purchase Agreement, the
Issuers, as joint and several obligors, agreed to sell to the Initial Purchasers $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the Senior Notes), with an original issue discount of approximately $3.8 million,
in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the Securities Act), for resale by the Initial Purchasers (i) to qualified institutional buyers pursuant to Rule 144A
under the Securities Act or (ii) outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act (the Notes Offering). The Notes Offering closed on May 28, 2013.
The Purchase Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under
which the Issuers and the Guarantors, on one hand, and the Initial Purchasers, on the other, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
The net proceeds from the Notes Offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the
Prior Senior Notes), as described below, and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of
approximately $3.8 million. We incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and will be amortized over the life of these notes. We also entered into a Registration Rights Agreement (described
below) for the benefit of holders of the Senior Notes.
Indenture
On May 28, 2013, the Issuers, the Guarantors, and Wilmington Trust, National Association, as successor trustee by merger to Wilmington
Trust FSB (the Trustee), entered into an indenture (the Indenture) governing the Senior Notes.
The Issuers pay
7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2013. The Senior Notes mature on June 1, 2021.
61
The Senior Notes are senior unsecured obligations of the Issuers that:
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|
|
rank equally in right of payment with all existing and future senior debt of the Issuers;
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|
|
|
rank senior in right of payment to all existing and future senior subordinated and subordinated debt of the Issuers;
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|
are effectively subordinated in right of payment to existing and future secured debt of the Issuers, to the extent of the value of the assets securing such debt; and
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are structurally subordinated to all of the existing and future liabilities of each subsidiary of the Issuers that does not guarantee the Senior Notes.
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The Issuers obligations under the Senior Notes and the Indenture are jointly and severally guaranteed (the Note Guarantees)
by each of our subsidiary, other than Cornerstone Co., that we have caused or will cause to become a Guarantor pursuant to the terms of the Indenture (each, a Restricted Subsidiary).
At any time on or after June 1, 2016, the Issuers, at their option, may redeem the Senior Notes, in whole or in part, at the redemption
prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:
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|
|
|
|
Year
|
|
Percentage
|
|
2016
|
|
|
105.906
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%
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2017
|
|
|
103.938
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%
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2018
|
|
|
101.969
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%
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2019 and thereafter
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|
|
100.000
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%
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At any time prior to June 1, 2016, the Issuers may, on one or more occasions, redeem all or any portion
of the Senior Notes, upon not less than 30 nor more than 60 days notice, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus the Applicable Premium (as defined in the Indenture) as of the redemption
date, including accrued and unpaid interest to the redemption date.
In addition, at any time prior to June 1, 2016, the Issuers, at
their option, may redeem up to 35% of the aggregate principal amount of the Senior Notes issued under the Indenture with the net cash proceeds of certain our equity offerings described in the Indenture at a redemption price equal to 107.875% of the
principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date provided, however, that (i) at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture
remain outstanding immediately after the occurrence of such redemption and (ii) the redemption occurs within 180 days of the closing date of such offering.
Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will
have the right to require the Issuers to purchase that holders Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest to the date of purchase.
The Indenture requires the Issuers and/or the Guarantors, as applicable, to comply with various covenants including, but not limited to,
covenants that, subject to certain exceptions, limit our and our Restricted Subsidiaries ability to (i) incur additional indebtedness; (ii) make certain dividends, distributions, redemptions or investments; (iii) enter into
certain transactions with affiliates; (iv) create, incur, assume or permit to exist certain liens against their assets; (v) make certain sales of their assets; and (vi) engage in certain mergers, consolidations or sales of all or
substantially all of their assets. The Indenture also contains various affirmative covenants regarding, among other things, delivery of certain reports filed with the SEC and materials required pursuant to Rule 144A under the Securities Act to
holders of the Senior Notes and joinder of future subsidiaries as Guarantors under the Indenture. As of December 31, 2013, we were in compliance with all applicable covenants under the Indenture.
Events of default under the Indenture that could, subject to certain conditions, cause all amounts owing under the Senior Notes to become
immediately due and payable include, but are not limited to, the following:
|
|
|
failure by the Issuers to pay interest on any of the Senior Notes when it becomes due and the continuance of any such failure for 30 days;
|
62
|
|
|
failure by the Issuers to pay the principal on any of the Senior Notes when it becomes due and payable, whether at stated maturity, upon redemption, upon purchase, upon acceleration or otherwise;
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|
|
|
the Issuers failure to comply with the agreements and covenants relating to limitations on entering into certain mergers, consolidations or sales of all or substantially all of their assets or in respect of their
obligations to purchase the Senior Notes in connection with a Change of Control;
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|
|
|
failure by the Issuers to comply with any other agreement or covenant in the Indenture and the continuance of this failure for 60 days after notice of the failure has been given to the Company by the Trustee or holders
of at least 25% of the aggregate principal amount of the Senior Notes then outstanding;
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|
|
|
failure by the Company to comply with its covenant to deliver certain reports and the continuance of such failure to comply for a period of 120 days after written notice thereof has been given to the Company by the
Trustee or by the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding;
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|
|
|
certain defaults under mortgages, indentures or other instruments or agreements under which there may be issued or by which there may be secured or evidenced indebtedness of the Company or any Restricted Subsidiary,
whether such indebtedness now exists or is incurred after the date of the Indenture;
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certain judgments or orders that exceed $10.0 million in the aggregate for the payment of money have been entered by a court of competent jurisdiction against the Company or any Restricted Subsidiary and such judgments
have not been satisfied, stayed, annulled or rescinded within 60 days of being entered;
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|
|
|
certain events of bankruptcy of the Company, StoneMor GP LLC, the general partner of the Company (the General Partner), or any Significant Subsidiary (as defined in the Indenture); or
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|
|
|
other than in accordance with the terms of the Note Guarantee and the Indenture, the Note Guarantee of any Significant Subsidiary ceasing to be in full force and effect, being declared null and void and unenforceable,
found to be invalid or any Guarantor denying its liability under its Note Guarantee.
|
Registration Rights Agreement
In connection with the sale of the Senior Notes, the Issuers, the Guarantors party thereto and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as representative of the initial purchasers of the Senior Notes, entered into a Registration Rights Agreement (the Registration Rights Agreement), pursuant to which the Issuers and the Guarantors
agreed, for the benefit of the holders of the Senior Notes, to use their commercially reasonable efforts to file a registration statement with the SEC with respect to a registered offer to exchange the Senior Notes for new exchange notes
having terms substantially identical in all material respects to the Senior Notes, with certain exceptions (the Exchange Offer). If the Senior Notes are not freely tradable by persons other than affiliates pursuant to Rule 144 under the
Securities Act on or before the 366th day after the issuance of the Senior Notes (the Exchange Date), the Issuers and the Guarantors agreed to use their commercially reasonable efforts (i) to consummate such Exchange Offer on or
before the Exchange Date, and (ii) upon the occurrence of certain events described in the Registration Rights Agreement, which result in the inability to consummate the Exchange Offer, to cause a shelf registration statement covering resales of
the Senior Notes to be declared effective. The Issuers are required to pay additional interest to the holders of the Senior Notes under certain circumstances if they fail to comply with their obligations under the Registration Rights Agreement
.
10.25% Senior Notes due 2017
Prior to their retirement in the second quarter of 2013, we had outstanding a $150.0 million aggregate principal amount of Prior Senior Notes,
with an original issue discount of approximately $4.0 million. We paid 10.25% interest per annum on the principal amount of the Prior Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year. The Prior
Senior Notes were due to mature on December 1, 2017. In the second quarter of 2013, we retired the notes using the proceeds from the Senior Notes offering described above.
On May 13, 2013, StoneMor Operating LLC (the Operating Company), Cornerstone Co. and Osiris Holding of Maryland Subsidiary,
Inc. (Osiris Co., and together with the Operating Company and Cornerstone Co., the Prior Senior Notes Issuers), each of which is our subsidiary, commenced (i) cash tender offer to purchase any and all of their
outstanding $150.0 million aggregate principal amount of the Prior Senior Notes and (ii) consent solicitation to obtain consents to amendments to the Indenture dated as of November 24, 2009, as amended (the 2009 Indenture),
governing the Prior Senior Notes. Upon the expiration of the consent solicitation on May 24, 2013, the Prior Senior Notes Issuers received tenders and consents from the holders of approximately $132.2 million in aggregate principal amount, or
approximately 88.1%, of the outstanding Prior Senior Notes.
63
In connection with the expiration of the consent solicitation, on May 24, 2013, Prior Senior
Notes Issuers, we, the Guarantors named in the 2009 Indenture and the Trustee, entered into the Seventh Supplemental Indenture to the 2009 Indenture. The Seventh Supplemental Indenture amended the 2009 Indenture to shorten to three business days the
minimum notice period for optional redemptions and eliminated substantially all of the restrictive covenants and certain events of default contained in the 2009 Indenture.
On June 14, 2013, the remaining Prior Senior Notes were redeemed, pursuant to redemption provisions set forth in the 2009 Indenture, at a
price of 100% of the principal amount of the Prior Senior Notes, plus the Applicable Premium (as defined in the 2009 Indenture) equal to 9.554%, together with accrued and unpaid interest to, but not including, June 14, 2013. The 2009 Indenture
was satisfied and discharged in accordance with its terms, effective June 14, 2013.
We paid $14.9 million to retire the Prior Senior
Notes inclusive of the tender premium and accrued interest from the date of repurchase through December 1, 2013, the first redemption date for the Prior Senior Notes. In addition, we incurred expenses of $6.7 million related to the refinancing
event inclusive of $2.6 million of unamortized original issue discount and $4.1 million of unamortized capitalized debt issue costs related to the Prior Senior Notes.
Credit Facility
On
August 15, 2007, we, the General Partner, the Operating Company and various subsidiaries of the Operating Company (collectively, the Borrowers) entered into an Amended and Restated Credit Agreement (the Original Credit
Agreement) with Bank of America, N.A. (Bank of America), other lenders, and BAS (collectively, the Lenders). The Original Credit Agreement provided for both an acquisition credit facility (the Acquisition Credit
Facility) and a revolving credit facility (the Revolving Credit Facility). Capitalized terms which are not defined in the following description shall have the same meaning assigned to such terms in the Original Credit Agreement, as
amended.
The Original Credit Agreement initially provided that: (1) the Acquisition Credit Facility would have a maximum principal
amount of $40.0 million (with an option to increase such facility by an additional $15.0 million on an uncommitted basis) and the term of 5 years, and (2) the Revolving Credit Facility would have a maximum principal amount of $25.0 million
(with an option to increase such facility by up to $10.0 million on an uncommitted basis) and a term of 5 years. Amounts borrowed under the Acquisition Credit Facility and repaid or prepaid could not be reborrowed and amounts borrowed under the
Revolving Credit Facility and repaid or prepaid during the term could be reborrowed. In addition, Bank of America agreed to provide to the Borrowers swing line loans (Swing Line Loans) with a maximum limit of $5.0 million, which was a
part of the Revolving Credit Facility.
The Original Credit Agreement was amended eight times prior to April 29, 2011, to, among
other things, amend borrowing levels, interest rates and covenants.
On April 29, 2011, we entered into the Second Amended and
Restated Credit Agreement (the Revised Credit Agreement) among the Operating Company as the Borrower, each of the subsidiaries of the Operating Company as additional Borrowers, the General Partner and us as Guarantors, the Lenders
identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The terms of the Revised Credit Agreement were substantially the same as the terms of the Original Credit Agreement. The primary purpose of
entering into the Revised Credit Agreement was to consolidate the amendments to the Original Credit Agreement and to update outdated references. The Revised Credit Agreement provided for an Acquisition Credit Facility of $65.0 million and a
Revolving Credit Facility of $55.0 million. The Revised Credit Agreement was further amended two times prior to January 19, 2012.
On
January 19, 2012, we entered into the Third Amended and Restated Credit Agreement (the Credit Agreement). The terms of the Credit Agreement and the Revised Credit Agreement are substantially similar. The current terms of the Credit
Agreement are set forth below. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement. The Credit Agreement consolidated the Acquisition Credit Facility and the
Revolving Credit Facility into a single Revolving Credit Facility (the Credit Facility) with a borrowing limit of $130.0 million. The maturity date of the Credit Facility is January 19, 2017.
On February 19, 2013, we entered into the First Amendment to the Credit Agreement, which increased the total availability under the
Credit Facility by $10.0 million to $140.0 million.
On May 8, 2013, we entered into the Second Amendment to the Credit Agreement,
which allowed us to incur additional indebtedness to be evidenced by the Senior Notes, to enter into the Indenture governing the Senior Notes and to use the proceeds of the Notes offering, in part, to fund the tender offer and consent solicitation
with respect to the Prior Senior Notes.
64
On June 18, 2013, we entered into the Third Amendment to the Credit Agreement, which
increased our Consolidated Leverage Ratio to 4.00 through December 31, 2013, 3.875 at March 31, 2014, and 3.750 thereafter. The amendment also increased the ranges of the Applicable Rates to 3.00%, 4.00%, and .800% for Base Rate Loans,
Eurodollar Rate Loans and Letter of Credit Fees, and Commitment Fees, respectively, when the Consolidated Leverage Ratio is greater than or equal to 3.75 to 1.0. The Third Amendment also prohibits us to permit Consolidated EBITDA for any most
recently completed four fiscal quarters to be less than the sum of (i) $57.8 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after March 31, 2013.
The Third Amendment also increased the amount of aggregate consideration that we may pay for a Permitted Acquisition after March 31,
2014, without Required Lender approval, to $10.0 million on an individual basis and $50.0 million when aggregated with the total Aggregate Consideration paid by or on behalf of us for all other Permitted Acquisitions which closed within the
immediately preceding 365 days.
The Third Amendment also added a defined term for Significant Permitted Acquisition Transaction to
describe a Permitted Acquisition in which the Aggregate Consideration exceeds $35.0 million when aggregated with the total Aggregate Consideration for all other Permitted Acquisitions which closed within the immediately preceding 180 days. In the
case of a Significant Permitted Acquisition Transaction, the Third Amendment permits the Borrowers, subject to certain limitations, to temporarily increase the Consolidated Leverage Ratio to 4.00 to 1.0 for one or more the four immediately
succeeding covenant measurement periods. In addition, the Third Amendment included certain conforming changes to reflect the issuance of the Senior Notes.
At December 31, 2013, amounts outstanding under the Credit Facility bore interest at rates between 4.0% and 4.3%. Amounts borrowed may be
either Base Rate Loans or Eurodollar Rate Loans and amounts repaid or prepaid during the term may be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.25%
to 3.00% and 2.25% to 4.00%, respectively, depending on our Consolidated Leverage Ratio. The Base Rate is the highest of the Prime Rate, the Federal Funds Rate plus 0.50%, or the Eurodollar Rate plus 1.0%. The Eurodollar rate is the British Bankers
Association LIBOR Rate. Amounts outstanding under the Credit Facility approximate their fair value.
The Credit Agreement contains
restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require us to maintain certain financial covenants, including specified financial ratios. A material
decrease in revenues could cause us to breach certain of our financial covenants. Any such breach could allow the Lenders to accelerate our debt (and cause cross-default) which would have a material adverse effect on our business, financial
condition or results of operations. As of December 31, 2013, we were in compliance with all applicable financial covenants.
The
Borrowers under the Credit Agreement paid fees to Bank of America, as Administrative Agent, and BAS, as Arranger. In addition, the Credit Agreement requires us to pay an unused Commitment Fee, which is calculated based on the amount by which the
commitments under the Credit Agreement exceed the usage of such commitments. The Commitment Fee Rate ranges from 0.375% to 0.800% depending on our Consolidated Leverage Ratio.
The proceeds of the Credit Facility may be used by the Borrowers to finance working capital requirements, Permitted Acquisitions, and the
purchase and construction of mausoleums. The Borrowers obligations under the Credit Agreement are guaranteed by both us and the General Partner.
The Borrowers obligations under the Credit Facility are secured by a first priority lien and security interest in substantially all of
the Borrowers assets, whether then owned or thereafter acquired, excluding: (i) trust accounts, certain proceeds required by law to be placed into such trust accounts and funds held in trust accounts; (ii) the General Partners
interest in us, the incentive distribution rights under our partnership agreement and the deposit accounts of the General Partner into which distributions are received; (iii) Equipment subject to a purchase money security interest or equipment
lease permitted under the Credit Agreement and certain other contract rights under which contractual, legal or other restrictions on assignment would prohibit the creation of a security interest or such creation of a security interest would result
in a default thereunder.
Events of Default under the Credit Agreement include, but are not limited to, the following:
|
|
|
non-payment of any principal, interest or other amounts due under the Credit Agreement or any other Credit Document;
|
|
|
|
failure to observe or perform any covenants related to: (i) the delivery of financial statements, compliance certificates, reports and other information; (ii) providing prompt notice of Defaults and other
events; (iii) the preservation of the legal existence and good standing of each Borrower and Guarantor; (iv) the ability of the Administrative Agent and each Lender to visit and inspect properties, examine books and records, and discuss
financial and business affairs with directors, officers and independent public accountants of each Borrower and Guarantor; (v) restrictions on the use of proceeds; (vi) guarantees by new Subsidiaries; (vii) the maintenance of
corporate formalities for each Borrower and Guarantor; (viii) the maintenance of Trust Accounts and Trust Funds; and (ix) any of the negative covenants contained in the Credit Agreement;
|
65
|
|
|
failure to observe or perform any other covenant, if uncured 30 days after notice thereof is provided by the Administrative Agent or Lenders;
|
|
|
|
any default under any other Indebtedness of the Borrowers or Guarantors;
|
|
|
|
any insolvency proceedings by a Borrower or Guarantor;
|
|
|
|
the insolvency of any Borrower or Guarantor, or a writ of attachment or execution or similar process issuing or being levied against any material part of the property of a Borrower or Guarantor; and
|
Amounts outstanding under our Credit Facility fluctuated during the
years ended December 31, 2013 and 2012. At the beginning of 2012, we had $43.8 million outstanding on our Credit Facilities, which were combined into one facility in January of 2012. We borrowed an additional $7.3 million, $10.9 million, $22.7
million and $17.0 million in the first, second, third and fourth quarters, respectively, and had outstanding borrowings of $101.7 million on our Credit Facility at December 31, 2012. During the first quarter of 2013, we reduced our borrowings
on the Credit Facility by $19.8 million as we had borrowed $18.6 million prior to March 26, 2013 and then we used the net proceeds of approximately $38.4 million from our March 26, 2013 follow-on public offering to repay amounts
outstanding on our Credit Facility. We borrowed an additional $21.0 million during the second quarter of 2013 and then we used the remaining proceeds of approximately $11.9 million from our May 28, 2013 debt offering to further repay amounts
outstanding on our Credit Facility. During the third and fourth quarters of 2013, we had net borrowings of $8.5 million and $14.5 million, respectively, resulting in outstanding borrowings of $114.0 million on our Credit Facility at
December 31, 2013. The average amounts borrowed under our Credit Facility were $101.3 million and $80.7 million for the years ended December 31, 2013 and 2012, respectively.
Notes Payable Acquisitions
In
July of 2009, certain of our subsidiaries entered into a $1.4 million note purchase agreement in connection with an operating agreement in which we became the exclusive operator of Green Lawn Cemetery (the Green Lawn Note). The Green
Lawn Note bears interest at a rate of 6.5% per year on unpaid principal and is payable monthly, beginning on August 1, 2009. Principal on the note is due in 96 equal installments beginning on July 1, 2011. At December 31, 2013
the liability related to the installment note was stated on our consolidated balance sheet at approximately $1.0 million.
In February
2013, certain of our subsidiaries issued an unsecured promissory note in the principal amount of $3.0 million in connection with the first quarter 2013 acquisition discussed in Note 13 of our consolidated financial statements in Item 8
of this Form 10-K. The promissory note bears interest at a rate of 5.0% and any unpaid balance is due 12 months from closing. At December 31, 2013, the liability related to this promissory note was stated on our consolidated balance sheet
at approximately $0.5 million.
Acquisition Non-Compete Notes
In connection with several of our 2013, 2012, 2011 and 2010 acquisitions, certain of our subsidiaries issued installment notes in consideration
for non-compete agreements executed with the former owners of the acquired entities. The installment notes have varying payment terms and mature between April 1, 2014 and February 19, 2019. The installment notes do not have a stated rate
of interest. At inception, we recorded the installment notes at their fair market value of approximately $5.7 million. The face amounts of the installment notes were discounted approximately $1.2 million, and the discount is being amortized to
interest expense over the life of the installment notes. At December 31, 2013 the liability related to the installment notes, net of discounts, was stated on our consolidated balance sheet at approximately $3.4 million.
Agreements with the Archdiocese of Philadelphia
On September 26, 2013, we entered into the Lease and the Management Agreements with the Archdiocese of Philadelphia under which we will
operate 13 cemeteries in Pennsylvania for a term of 60 years, subject to certain closing conditions. For more details, see Note 13 to the consolidated financial statements included in Part II of this Annual Report on Form 10-K.
66
Cash Flow from Operating Activities
Cash flows provided by operating activities were $35.1 million during 2013, an increase of $3.2 million, compared to cash provided by operating
activities of $31.9 million during the same period last year. Factors contributing to a net increase in cash flows from operations include cash received in our legal settlement, more cash generated from normal revenue producing activities, and less
cash used for accounts payable, offset by increased uses of cash into our merchandise trusts.
Cash flows provided by operating activities
were $31.9 million during 2012, an increase of $26.4 million, compared to cash provided by operating activities of $5.5 million in 2011. The increase was caused in part by increased operating profit which was largely due to increased pre-need
cemetery sales. In addition, we had increased cash flows of $2.8 million from our accounts receivable and net deposits into our merchandise trusts decreased by $12.1 million.
Cash flows from operations in 2013, 2012 and 2011 exceeded our net loss of $19.0 million, $3.0 million and $9.7 million, respectively, during
the same periods. The differences between our operating cash flows and net loss are in large part attributable to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not and are not as of yet recognized
as revenues as we had not and have not met the delivery criteria for revenue recognition. Although there is no assurance, we expect that the trend of operating cash flows exceeding our net income or net loss will continue into the foreseeable
future.
Cash Flow from Investing Activities
Net cash used in investing activities was $26.7 million during 2013, a decrease in cash used of $13.2 million, compared to $39.9 million during
2012. Cash flows used for investing activities during 2013 primarily were $14.1 million for the acquisition of 6 funeral homes and one cemetery and $12.8 million for other capital expenditures, partially offset by $0.2 million in proceeds from the
sale of other assets, compared to $28.0 million utilized for the acquisition of 5 cemetery properties and 17 funeral homes and $11.9 million for other capital expenditures in 2012.
Net cash used in investing activities was $39.9 million during 2012, an increase of $10.7 million, compared to $29.2 million during 2011. Cash
flows used for investing activities during 2012 primarily were $28.0 million for the acquisition of 5 cemetery properties and 17 funeral homes and $11.9 million for other capital expenditures compared to $16.1 million utilized for the acquisition of
17 cemetery properties and 12 funeral homes and $13.2 million for other capital expenditures in 2011.
Cash Flow from Financing Activities
Net cash used in financing activities was $4.1 million during 2013, compared to $3.9 million net cash provided by financing
activities during 2012. Cash flows provided by financing activities during 2013 consisted of $38.4 million of proceeds from our follow-on public offering and $269.5 million from long term borrowings, inclusive of the issuance of $175.0 million of
Senior Notes. These in-flows were offset by repayments of long-term debt of $239.9 million, inclusive of the retirement of our $150.0 million of Prior Senior Notes, as well as fees associated with this retirement of $14.9 million, costs of financing
activities of $5.1 million and cash distributions to unit holders of $52.1 million. Cash flows provided by financing activities during 2012 primarily were $54.0 million of net borrowing of long-term debt, offset by cash distributions to unit holders
of $47.5 million and costs of financing activities of $2.4 million. Additionally, we borrow to fund working capital as a result of cash build-ups in our accounts receivable and merchandise trusts and to fund acquisitions related to pre-need sales
growth.
Net cash provided by financing activities was $3.9 million during 2012, a decrease of $24.3 million, compared to $28.2 million
net cash provided by financing activities during 2011. Cash flows provided by financing activities during 2012 primarily were $54.0 million of net borrowing of long-term debt, offset by cash distributions to unit holders of $47.5 million and costs
of financing activities of $2.4 million. Cash flows provided by financing activities during 2011 primarily were $103.2 million of proceeds from our public offering and a contribution from our general partner of $2.3 million offset by net repayments
of long-term debt of $27.1 million, cash distributions to unit holders of $44.6 million and the payment of a $4.0 million make-whole premium related to the pay-off of $35.0 million in senior secured notes.
67
Capital Expenditures
The following table summarizes total maintenance capital expenditures and expansion capital expenditures, including expenditures for the
construction of mausoleums and for acquisitions, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Maintenance capital expenditures
|
|
$
|
6,986
|
|
|
$
|
4,874
|
|
|
$
|
6,040
|
|
Expansion capital expenditures
|
|
|
19,866
|
|
|
|
35,074
|
|
|
|
23,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
26,852
|
|
|
$
|
39,948
|
|
|
$
|
29,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to our partnership agreement, in connection with determining operating cash flows available for
distribution, costs to construct mausoleum crypts and lawn crypts may be considered to be a combination of maintenance capital expenditures and expansion capital expenditures depending on the purposes for construction. Our general partner, with the
concurrence of its Conflicts Committee, has the discretion to determine how to allocate a capital expenditure for the construction of a mausoleum crypt or a lawn crypt between maintenance capital expenditures and expansion capital expenditures. In
addition, maintenance capital expenditures for the construction of a mausoleum crypt or a lawn crypt are not subtracted from operating surplus in the quarter incurred but rather are subtracted from operating surplus ratably during the estimated
number of years it will take to sell all of the available spaces in the mausoleum or lawn crypt. Estimated life is determined by our general partner, with the concurrence of its Conflicts Committee.
Off Balance Sheet Arrangements, Contractual Obligations and Contingencies
We have assumed various financial obligations and commitments in the ordinary course of conducting our business. We have contractual
obligations requiring future cash payments related to debt maturities, interest on debt, operating lease agreements, and liabilities to purchase merchandise related to our in force pre-need sales contracts.
A summary of our total contractual obligations as of December 31, 2013 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of 12/31/2013
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
|
|
(in thousands)
|
|
Debt (1)
|
|
$
|
413,603
|
|
|
$
|
21,374
|
|
|
$
|
39,270
|
|
|
$
|
143,213
|
|
|
$
|
209,746
|
|
Operating leases
|
|
|
7,625
|
|
|
|
1,712
|
|
|
|
2,156
|
|
|
|
1,830
|
|
|
|
1,927
|
|
Merchandise liabilities (2)
|
|
|
127,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
549,034
|
|
|
$
|
23,086
|
|
|
$
|
41,426
|
|
|
$
|
145,043
|
|
|
$
|
211,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the interest payable and par value of debt due and does not include the unamortized debt discounts of $4.1 million at December 31, 2013. This table assumes that current amounts outstanding under our
Credit Facility are not repaid until the maturity date of January 2017.
|
(2)
|
Total cannot be separated into periods because we are unable to anticipate when the merchandise will be needed.
|
We had no off-balance sheet arrangements as of December 31, 2013 or 2012.
68
Item 8.
|
Financial Statements and Supplementary Data
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of StoneMor Partners GP LLC and Unitholders of StoneMor Partners L.P.
Levittown, Pennsylvania
We have audited the accompanying
consolidated balance sheets of StoneMor Partners L.P. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, partners capital, and cash flows for each of the
three years in the period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of StoneMor Partners
L.P. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Companys internal control over financial reporting as of December 31, 2013, based on the criteria established in
Internal ControlIntegrated Framework
(1992)
issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 17, 2014 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 17, 2014
71
StoneMor Partners L.P.
Consolidated Balance Sheet
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,175
|
|
|
$
|
7,946
|
|
Accounts receivable, net of allowance
|
|
|
55,115
|
|
|
|
51,895
|
|
Prepaid expenses
|
|
|
3,622
|
|
|
|
3,832
|
|
Other current assets
|
|
|
22,667
|
|
|
|
17,418
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
93,579
|
|
|
|
81,091
|
|
|
|
|
Long-term accounts receivable, net of allowance
|
|
|
78,356
|
|
|
|
71,521
|
|
Cemetery property
|
|
|
316,469
|
|
|
|
309,980
|
|
Property and equipment, net of accumulated depreciation
|
|
|
85,007
|
|
|
|
79,740
|
|
Merchandise trusts, restricted, at fair value
|
|
|
431,556
|
|
|
|
375,973
|
|
Perpetual care trusts, restricted, at fair value
|
|
|
311,771
|
|
|
|
282,313
|
|
Deferred financing costs, net of accumulated amortization
|
|
|
8,308
|
|
|
|
9,238
|
|
Deferred selling and obtaining costs
|
|
|
87,998
|
|
|
|
76,317
|
|
Deferred tax assets
|
|
|
42
|
|
|
|
381
|
|
Goodwill
|
|
|
48,034
|
|
|
|
42,392
|
|
Other assets
|
|
|
12,209
|
|
|
|
14,779
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,473,329
|
|
|
$
|
1,343,725
|
|
|
|
|
|
|
|
|
|
|
Liabilities and partners capital
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
37,269
|
|
|
$
|
28,973
|
|
Accrued interest
|
|
|
1,512
|
|
|
|
1,833
|
|
Current portion, long-term debt
|
|
|
2,916
|
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
41,697
|
|
|
|
32,981
|
|
|
|
|
Other long-term liabilities
|
|
|
1,527
|
|
|
|
1,835
|
|
Long-term debt
|
|
|
289,016
|
|
|
|
252,774
|
|
Deferred cemetery revenues, net
|
|
|
581,585
|
|
|
|
497,861
|
|
Deferred tax liabilities
|
|
|
12,407
|
|
|
|
14,910
|
|
Merchandise liability
|
|
|
127,806
|
|
|
|
125,869
|
|
Perpetual care trust corpus
|
|
|
311,771
|
|
|
|
282,313
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,365,809
|
|
|
|
1,208,543
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Partners capital
|
|
|
|
|
|
|
|
|
General partner
|
|
|
(2,137
|
)
|
|
|
386
|
|
Common partners
|
|
|
109,657
|
|
|
|
134,796
|
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
107,520
|
|
|
|
135,182
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital
|
|
$
|
1,473,329
|
|
|
$
|
1,343,725
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Consolidated Financial Statements.
72
StoneMor Partners L.P.
Consolidated Statement of Operations
(in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
|
|
$
|
110,673
|
|
|
$
|
114,025
|
|
|
$
|
108,088
|
|
Services
|
|
|
44,054
|
|
|
|
46,094
|
|
|
|
46,995
|
|
Investment and other
|
|
|
46,959
|
|
|
|
46,808
|
|
|
|
42,901
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
|
|
|
18,922
|
|
|
|
15,551
|
|
|
|
12,810
|
|
Services
|
|
|
26,033
|
|
|
|
20,128
|
|
|
|
17,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
246,641
|
|
|
|
242,606
|
|
|
|
228,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation shown separately below):
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual care
|
|
|
5,656
|
|
|
|
5,715
|
|
|
|
5,727
|
|
Merchandise
|
|
|
22,203
|
|
|
|
22,386
|
|
|
|
20,388
|
|
Cemetery expense
|
|
|
57,566
|
|
|
|
55,410
|
|
|
|
57,145
|
|
Selling expense
|
|
|
47,832
|
|
|
|
46,878
|
|
|
|
45,291
|
|
General and administrative expense
|
|
|
31,873
|
|
|
|
28,928
|
|
|
|
29,544
|
|
Corporate overhead (including $1,370, $916 and $773 in unit-based compensation for 2013, 2012 and 2011, respectively)
|
|
|
28,875
|
|
|
|
28,169
|
|
|
|
23,766
|
|
Depreciation and amortization
|
|
|
9,548
|
|
|
|
9,431
|
|
|
|
8,534
|
|
Funeral home expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
|
|
|
5,569
|
|
|
|
5,200
|
|
|
|
4,473
|
|
Services
|
|
|
19,190
|
|
|
|
14,574
|
|
|
|
11,717
|
|
Other
|
|
|
10,895
|
|
|
|
8,951
|
|
|
|
7,364
|
|
Acquisition related costs, net of recoveries
|
|
|
1,051
|
|
|
|
3,123
|
|
|
|
4,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
240,258
|
|
|
|
228,765
|
|
|
|
218,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
6,383
|
|
|
|
13,841
|
|
|
|
9,835
|
|
Gain on acquisitions
|
|
|
2,530
|
|
|
|
122
|
|
|
|
|
|
Gain on termination of operating agreement
|
|
|
|
|
|
|
1,737
|
|
|
|
|
|
Gain on settlement agreement, net
|
|
|
12,261
|
|
|
|
|
|
|
|
|
|
Gain on sale of other assets
|
|
|
155
|
|
|
|
|
|
|
|
|
|
Gain on sale of funeral home
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Loss on early extinguishment of debt
|
|
|
21,595
|
|
|
|
|
|
|
|
4,010
|
|
Expenses related to refinancing
|
|
|
|
|
|
|
|
|
|
|
453
|
|
Interest expense
|
|
|
21,070
|
|
|
|
20,503
|
|
|
|
19,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(21,336
|
)
|
|
|
(4,803
|
)
|
|
|
(13,734
|
)
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(2,304
|
)
|
|
|
(1,790
|
)
|
|
|
(4,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,032
|
)
|
|
$
|
(3,013
|
)
|
|
$
|
(9,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners interest in net loss for the period
|
|
$
|
(350
|
)
|
|
$
|
(60
|
)
|
|
$
|
(194
|
)
|
|
|
|
|
Limited partners interest in net loss for the period
|
|
$
|
(18,682
|
)
|
|
$
|
(2,953
|
)
|
|
$
|
(9,521
|
)
|
|
|
|
|
Net loss per limited partner unit (basic and diluted)
|
|
$
|
(0.89
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.50
|
)
|
|
|
|
|
Weighted average number of limited partners units outstanding (basic and diluted)
|
|
|
20,954
|
|
|
|
19,445
|
|
|
|
18,947
|
|
Distributions declared per unit
|
|
$
|
2.385
|
|
|
$
|
2.350
|
|
|
$
|
2.340
|
|
See Accompanying Notes to the Consolidated Financial Statements.
73
StoneMor Partners L.P.
Consolidated Statement of Partners Capital
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners Capital
|
|
|
|
Common
|
|
|
General
|
|
|
|
|
|
|
Unit Holders
|
|
|
Partner
|
|
|
Total
|
|
Balance, December 31, 2010
|
|
$
|
126,382
|
|
|
$
|
1,809
|
|
|
$
|
128,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common units
|
|
|
264
|
|
|
|
|
|
|
|
264
|
|
Proceeds from public offering
|
|
|
103,207
|
|
|
|
|
|
|
|
103,207
|
|
General partner contribution
|
|
|
|
|
|
|
2,262
|
|
|
|
2,262
|
|
Compensation related to units awards
|
|
|
675
|
|
|
|
|
|
|
|
675
|
|
Net loss
|
|
|
(9,521
|
)
|
|
|
(194
|
)
|
|
|
(9,715
|
)
|
Cash distributions
|
|
|
(42,920
|
)
|
|
|
(1,685
|
)
|
|
|
(44,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
178,087
|
|
|
|
2,192
|
|
|
|
180,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common units
|
|
|
4,754
|
|
|
|
|
|
|
|
4,754
|
|
General partner contribution
|
|
|
|
|
|
|
89
|
|
|
|
89
|
|
Compensation related to units awards
|
|
|
527
|
|
|
|
|
|
|
|
527
|
|
Net loss
|
|
|
(2,953
|
)
|
|
|
(60
|
)
|
|
|
(3,013
|
)
|
Cash distributions
|
|
|
(45,619
|
)
|
|
|
(1,835
|
)
|
|
|
(47,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
134,796
|
|
|
|
386
|
|
|
|
135,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public offering
|
|
|
38,377
|
|
|
|
|
|
|
|
38,377
|
|
Issuance of common units
|
|
|
3,718
|
|
|
|
|
|
|
|
3,718
|
|
Compensation related to units awards
|
|
|
1,328
|
|
|
|
|
|
|
|
1,328
|
|
Net loss
|
|
|
(18,682
|
)
|
|
|
(350
|
)
|
|
|
(19,032
|
)
|
Cash distributions
|
|
|
(49,880
|
)
|
|
|
(2,173
|
)
|
|
|
(52,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
$
|
109,657
|
|
|
$
|
(2,137
|
)
|
|
$
|
107,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Consolidated Financial Statements.
74
StoneMor Partners L.P.
Consolidated Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,032
|
)
|
|
$
|
(3,013
|
)
|
|
$
|
(9,715
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of lots sold
|
|
|
8,019
|
|
|
|
7,818
|
|
|
|
6,664
|
|
Depreciation and amortization
|
|
|
9,548
|
|
|
|
9,431
|
|
|
|
8,534
|
|
Unit-based compensation
|
|
|
1,370
|
|
|
|
916
|
|
|
|
773
|
|
Accretion of debt discounts
|
|
|
2,303
|
|
|
|
1,739
|
|
|
|
1,354
|
|
Gain on termination of operating agreement
|
|
|
|
|
|
|
(1,737
|
)
|
|
|
|
|
Gain on acquisitions
|
|
|
(2,530
|
)
|
|
|
(122
|
)
|
|
|
|
|
Gain on sale of other assets
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of funeral home
|
|
|
|
|
|
|
|
|
|
|
(92
|
)
|
Loss on early extinguishment of debt
|
|
|
21,595
|
|
|
|
|
|
|
|
4,010
|
|
Write-off of deferred financing fees
|
|
|
|
|
|
|
|
|
|
|
453
|
|
Changes in assets and liabilities that provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,926
|
)
|
|
|
(5,475
|
)
|
|
|
(9,241
|
)
|
Allowance for doubtful accounts
|
|
|
92
|
|
|
|
1,210
|
|
|
|
2,217
|
|
Merchandise trust fund
|
|
|
(36,919
|
)
|
|
|
(11,806
|
)
|
|
|
(23,889
|
)
|
Prepaid expenses
|
|
|
210
|
|
|
|
527
|
|
|
|
1,273
|
|
Other current assets
|
|
|
(5,248
|
)
|
|
|
(2,165
|
)
|
|
|
(7,355
|
)
|
Other assets
|
|
|
2,861
|
|
|
|
128
|
|
|
|
291
|
|
Accounts payable and accrued and other liabilities
|
|
|
7,588
|
|
|
|
4,330
|
|
|
|
868
|
|
Deferred selling and obtaining costs
|
|
|
(11,681
|
)
|
|
|
(7,775
|
)
|
|
|
(9,120
|
)
|
Deferred cemetery revenue
|
|
|
72,708
|
|
|
|
47,548
|
|
|
|
47,598
|
|
Deferred taxes (net)
|
|
|
(2,865
|
)
|
|
|
(2,398
|
)
|
|
|
(3,488
|
)
|
Merchandise liability
|
|
|
(3,861
|
)
|
|
|
(7,260
|
)
|
|
|
(5,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
35,077
|
|
|
|
31,896
|
|
|
|
5,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for cemetery property
|
|
|
(5,766
|
)
|
|
|
(7,098
|
)
|
|
|
(7,126
|
)
|
Purchase of subsidiaries
|
|
|
(14,100
|
)
|
|
|
(27,976
|
)
|
|
|
(16,142
|
)
|
Proceeds from divestiture of funeral home
|
|
|
|
|
|
|
|
|
|
|
122
|
|
Cash paid for property and equipment
|
|
|
(6,986
|
)
|
|
|
(4,874
|
)
|
|
|
(6,040
|
)
|
Proceeds from sales of other assets
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(26,697
|
)
|
|
|
(39,948
|
)
|
|
|
(29,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
|
(52,053
|
)
|
|
|
(47,454
|
)
|
|
|
(44,605
|
)
|
Additional borrowings on long-term debt
|
|
|
269,502
|
|
|
|
84,000
|
|
|
|
48,050
|
|
Repayments of long-term debt
|
|
|
(239,932
|
)
|
|
|
(30,271
|
)
|
|
|
(75,184
|
)
|
Proceeds from public offering
|
|
|
38,377
|
|
|
|
|
|
|
|
103,207
|
|
Proceeds from general partner contributions
|
|
|
|
|
|
|
89
|
|
|
|
2,262
|
|
Fees paid related to early extinguishment of debt
|
|
|
(14,920
|
)
|
|
|
|
|
|
|
(4,010
|
)
|
Cost of financing activities
|
|
|
(5,125
|
)
|
|
|
(2,424
|
)
|
|
|
(1,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(4,151
|
)
|
|
|
3,940
|
|
|
|
28,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
4,229
|
|
|
|
(4,112
|
)
|
|
|
4,523
|
|
Cash and cash equivalents - Beginning of period
|
|
|
7,946
|
|
|
|
12,058
|
|
|
|
7,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - End of period
|
|
$
|
12,175
|
|
|
$
|
7,946
|
|
|
$
|
12,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
18,907
|
|
|
$
|
18,481
|
|
|
$
|
18,130
|
|
Cash paid during the period for income taxes
|
|
$
|
3,891
|
|
|
$
|
4,101
|
|
|
$
|
2,452
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets by financing
|
|
$
|
190
|
|
|
$
|
287
|
|
|
$
|
294
|
|
Issuance of limited partner units for cemetery acquisition
|
|
$
|
3,718
|
|
|
$
|
4,753
|
|
|
$
|
264
|
|
Acquisition of assets by assumption of directly related liability
|
|
$
|
3,924
|
|
|
$
|
2,469
|
|
|
$
|
|
|
See Accompanying Notes to the Consolidated Financial Statements.
75
1.
|
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
StoneMor Partners L.P. (StoneMor, the Company or the Partnership) is a provider of funeral and cemetery
products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need
and on a pre-need basis. As of December 31, 2013, the Partnership operated 277 cemeteries in 27 states and Puerto Rico, of which 259 are owned and 18 are operated under management or operating agreements. The Partnership also owned and operated
90 funeral homes in 18 states and Puerto Rico.
Basis of Presentation
The consolidated financial statements included in this Form 10-K have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP).
The Companys presentation of income tax expense (benefit) within its
consolidated statement of operations has changed. The components of the income tax expense (benefit), State and Federal, previously presented as two subcaptions, have been collapsed into one caption Income tax expense
(benefit). This change in the income tax expense (benefit) presentation has no effect on previously reported net income (loss).
Principles of
Consolidation
The consolidated financial statements include the accounts of each of the Companys 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 18 cemeteries under long-term operating or management contracts. The
operations of 16 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810. The financial statements also include the effects of retrospective adjustments, resulting from one
of the Companys 2013 acquisitions (see Note 13).
The Company operates 2 cemeteries under long-term operating 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 each of these
cemeteries merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term operating agreements, which are
subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the
maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also
recognized the existing merchandise liabilities that it assumed as part of these agreements.
Total revenues derived from the cemeteries
under long-term management or operating contracts totaled approximately $33.2 million, $39.2 million and $39.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Summary of Significant Accounting Policies
The significant accounting policies followed by the Company are summarized below:
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.
Cemetery Property
Cemetery
property consists of developed and undeveloped cemetery property, constructed mausoleum crypts and lawn crypts and other cemetery property. Cemetery property is valued at cost, which is not in excess of market value.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a straight-line basis. Maintenance and repairs
are charged to expense as incurred, whereas additions and major replacements are capitalized and depreciation is recorded over their estimated useful lives as follows:
|
|
|
Buildings and improvements
|
|
10 to 40 years
|
Furniture and equipment
|
|
3 to 10 years
|
Leasehold improvements
|
|
over the shorter of the term of the lease or the life of the asset
|
76
Merchandise Trusts
Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into trust (the merchandise
trust) until such time that the Company meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. All investment earnings generated by the assets in the merchandise trusts
(including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed (see Note 5).
Perpetual Care Trusts
Pursuant to
state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. The perpetual care trust principal does not belong to the Company and must remain in this trust into perpetuity while interest
and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. The Company consolidates the trust into the Companys financial statements in accordance with ASC 810-10-15-(13 through 22) because the
trust is considered a variable interest entity for which the Company is the primary beneficiary. Earnings from the perpetual care trusts are recognized in current cemetery revenues (see Note 6).
Inventories
Inventories are
classified within other current assets on the Companys consolidated balance sheet and include cemetery and funeral home merchandise valued at the lower of cost or net realizable value. Cost is determined primarily on a specific identification
basis on a first-in, first-out basis. Inventories were approximately $5.4 million and $4.7 million at December 31, 2013 and 2012, respectively.
Impairment of Long-Lived Assets
The Company monitors the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on
estimates using factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets. The Companys policy is to evaluate an
asset for impairment when events or circumstances indicate that a long-lived assets carrying value may not be recovered. An impairment charge is recorded to write-down the asset to its fair value if the sum of future undiscounted cash flows is
less than the carrying value of the asset. No impairment charges were recorded during the years ended December 31, 2013, 2012 and 2011, respectively.
Other-Than-Temporary Impairment of Trust Assets
The Company determines whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the
following:
|
|
|
Whether it is the Companys intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.
|
|
|
|
If there is no intent to sell, the Company evaluates if it is not more likely than not that the Company will be required to sell the debt security before its anticipated recovery. If the Company determines that it is
more likely than not that it will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary.
|
The Company has further evaluated whether or not all assets in the merchandise trusts have other-than-temporary impairments based upon a
number of criteria including the severity of the impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.
If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.
For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an
equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts,
any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
The trust footnotes (Notes 5
and 6) disclose the adjusted cost basis of the assets in both the merchandise and perpetual care trust. This adjusted cost basis includes any adjustments to the original cost basis due to other-than-temporary impairments.
77
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. The Company tests goodwill for
impairment using a two-step test. In the first step of the test, the Company compares the fair value of the reporting unit to its carrying amount, including goodwill. The Company determines the fair value of each reporting unit using the income
approach. The Company does not record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying amount. If the aggregate fair value of a reporting unit is less than the related carrying amount, the Company
proceeds to the second step of the test in which it records an impairment loss in an amount equal to the excess of the carrying amount of goodwill over the implied fair value. The goodwill impairment test is performed annually or more frequently if
events or circumstances indicate that impairment may exist.
Deferred Cemetery Revenues, Net
Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trust is deferred until such time
that the services are performed or the merchandise is delivered.
In addition to amounts deferred on new contracts, and investment income
and unrealized gains on our merchandise trust, deferred cemetery revenues, net, includes deferred revenues from pre-need sales that were entered into by entities prior to the acquisition of those entities by the Company, including entities that were
acquired by Cornerstone Family Services, Inc. upon its formation in 1999. The Company provides for a reasonable profit margin for these deferred revenues (deferred margin) to account for the future costs of delivering products and providing services
on pre-need contracts that the Company acquired through acquisition. Deferred margin amounts are deferred until the merchandise is delivered or services are performed.
Sales of Cemetery Merchandise and Services
The Company sells its merchandise and services on both a pre-need and at-need basis. Sales of at-need cemetery services and merchandise are
recognized as revenue when the service is performed or merchandise is delivered.
Pre-need sales are usually made on an installment
contract basis. Contracts are usually for a period not to exceed 60 months with payments of principal and interest required. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate
plus 150 basis points, which resulted in a rate of 4.75% for contracts entered into during the years ended December 31, 2013, 2012 and 2011, in order to segregate the principal and interest component of the total contract value.
At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less any cash deposit
paid, net of an estimated allowance for customer cancellations. The revenue from both the sales and interest component is deferred. Interest revenue is recognized utilizing the effective interest method. Sales revenue is recognized in accordance
with the rules discussed below.
The allowance for customer cancellations is established based on managements estimates of expected
cancellations and historical experiences and is currently averaging approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. Management will continue to evaluate cancellation rates and will make
changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at December 31, 2013 and December 31, 2012, respectively.
Revenue recognition related to sales of cemetery merchandise and services is governed by Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial Statements (SAB No. 104), and the retail land sales provisions of ASC 976. Per this guidance, revenue from the sale of burial lots and constructed mausoleum crypts is deferred
until such time that 10% of the sales price has been collected, at which time it is fully earned; revenues from the sale of unconstructed mausoleums are recognized using the percentage-of-completion method of accounting while revenues from
merchandise and services are recognized once such merchandise is delivered (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendors warehouse or a third-party
warehouse at no additional cost to us) or services are performed.
In order to appropriately match revenue and expenses, the Company
defers certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business. Such costs are accounted for under the provisions
of ASC 944, and are expensed as revenues are recognized.
The Company records a merchandise liability equal to the estimated cost to
provide services and purchase merchandise for all outstanding and unfulfilled pre-need contracts. The merchandise liability is established and recorded at the time of the sale but is not recognized as an expense until such time that the associated
revenue for the underlying contract is also recognized. The merchandise liability is established based on actual costs incurred or an estimate of future costs, which may include a provision for inflation. The merchandise liability is reduced when
services are performed or when payment for merchandise is made by the Company and title is transferred to the customer.
Sales of Funeral Home
Services
Revenue from funeral home services is recognized as services are performed and merchandise is delivered.
78
Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is
put into trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or
the services are performed. The balance of the amounts in these trusts is included within the merchandise trusts above.
Income Taxes
The Companys subsidiaries are subject to both federal and state income taxes. The Company records deferred tax assets and deferred tax
liabilities to recognize temporary differences between the bases of assets and liabilities in its tax and GAAP balance sheets and for federal and state net operating loss carryforwards and alternative minimum tax credits. The Company records a
valuation allowance against its deferred tax assets if it deems that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.
Net Income per Unit
Basic net
income per unit is determined by dividing net income, after deducting the amount of net income allocated to the general partner interest from its issuance date of September 20, 2004, by the weighted average number of units outstanding during
the period. Diluted net income per unit is calculated in the same manner as basic net income per unit, except that the weighted average number of outstanding units is increased to include the dilutive effect of outstanding unit options and phantom
unit awards. All outstanding unit appreciation rights (See Note 11) that would have a dilutive effect were assumed to be exercised and converted to common units using the average fair market value of a common unit for the period presented. Also, the
average phantom units outstanding during the period were assumed to be converted to common units for the period presented. The diluted weighted average number of limited partners units outstanding presented on the consolidated statement of
operations does not include 297,078 units, 253,384 units and 322,866 units for the years ended December 31, 2013, 2012 and 2011, respectively, as their effects would be anti-dilutive.
New Accounting Pronouncements
In
the third quarter of 2013, the Financial Accounting Standards Board issued Update No. 2013-11, Income Taxes (Topic 740) (ASU 2013-11). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax
benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This amendment requires an entity to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax
benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent that (i) a net operating loss carryforward, a similar tax loss, or a tax
credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position; or (ii) the tax law of the applicable
jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax
assets. The Company applied the provisions of ASU 2013-11 to all unrecognized tax benefits that existed at the effective date of December 15, 2013. This adoption did not have a significant impact on our financial position, results of
operations, or cash flows.
Use of Estimates
Preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. As a result, actual results could
differ from those estimates. The most significant estimates in the consolidated financial statements are the valuation of assets in the merchandise trusts and perpetual care trusts, allowance for cancellations, unit-based compensation, merchandise
liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs and income taxes. Deferred sales revenue, deferred margin and deferred merchandise trust investment earnings are included in
deferred cemetery revenues, net, on the consolidated balance sheet.
79
2.
|
LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
|
Long-term accounts receivable, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Customer receivables
|
|
$
|
173,751
|
|
|
$
|
159,726
|
|
Unearned finance income
|
|
|
(20,005
|
)
|
|
|
(18,377
|
)
|
Allowance for contract cancellations
|
|
|
(20,275
|
)
|
|
|
(17,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
133,471
|
|
|
|
123,416
|
|
Less: current portion - net of allowance
|
|
|
55,115
|
|
|
|
51,895
|
|
|
|
|
|
|
|
|
|
|
Long-term portion - net of allowance
|
|
$
|
78,356
|
|
|
$
|
71,521
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for contract cancellations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Balance - Beginning of period
|
|
$
|
17,933
|
|
|
$
|
17,582
|
|
|
$
|
15,832
|
|
Provision for cancellations
|
|
|
20,069
|
|
|
|
16,768
|
|
|
|
18,649
|
|
Charge-offs - net
|
|
|
(17,727
|
)
|
|
|
(16,417
|
)
|
|
|
(16,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - End of period
|
|
$
|
20,275
|
|
|
$
|
17,933
|
|
|
$
|
17,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys customer receivables are considered financing receivables as they primarily relate to
pre-need sales which are usually made on an installment contract basis. Contracts are usually for a period not to exceed 60 months with payments of principal and interest required. The Company has a standard contractual agreement that it executes
related to these receivables and therefore the Company only has one portfolio segment of receivables with no separate classes of receivables within that segment.
Management evaluates customer receivables for impairment on an individual contract basis based upon the age of the receivable and the
customers payment history. The Companys receivables primarily relate to pre-need sales and therefore the Company has not performed the service or fulfilled all of its obligations for the merchandise to which the receivable relates. As a
result, the Company has some leverage with its customers in terms of collecting its receivables. Further, the Company is flexible with customers who have difficulty making payments and will try to create revised or alternative payment arrangements
with such customers. As a result, the Company does not write-off a receivable until all possible collection efforts have been exhausted. As of December 31, 2013 and 2012, approximately 10% and 9%, respectively, of the Companys gross
accounts receivable balance was 90 days past due.
80
Cemetery property consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Developed land
|
|
$
|
72,458
|
|
|
$
|
71,318
|
|
Undeveloped land
|
|
|
163,997
|
|
|
|
162,275
|
|
Mausoleum crypts and lawn crypts
|
|
|
70,216
|
|
|
|
69,525
|
|
Other land
|
|
|
9,798
|
|
|
|
6,862
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
316,469
|
|
|
$
|
309,980
|
|
|
|
|
|
|
|
|
|
|
4.
|
PROPERTY AND EQUIPMENT
|
Major classes of property and equipment follow:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Building and improvements
|
|
$
|
91,575
|
|
|
$
|
82,056
|
|
Furniture and equipment
|
|
|
44,828
|
|
|
|
42,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,403
|
|
|
|
124,409
|
|
Less: accumulated depreciation
|
|
|
(51,396
|
)
|
|
|
(44,669
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment - net
|
|
$
|
85,007
|
|
|
$
|
79,740
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $7.5 million, $7.2 million and $5.9 million for the years ended
December 31, 2013, 2012 and 2011, respectively.
At December 31, 2013 and December 31, 2012, the Companys merchandise trusts consisted of the following types
of assets:
|
|
|
Money Market Funds that invest in low risk short term securities;
|
|
|
|
Publicly traded mutual funds that invest in underlying debt securities;
|
|
|
|
Publicly traded mutual funds that invest in underlying equity securities;
|
|
|
|
Equity investments that are currently paying dividends or distributions. These investments include Real Estate Investment Trusts (REITs), Master Limited Partnerships and global equity securities;
|
|
|
|
Fixed maturity debt securities issued by various corporate entities;
|
|
|
|
Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and
|
|
|
|
Fixed maturity debt securities issued by U.S. states and local government agencies.
|
All of
these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level
2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.
The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the
merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall.
The Company has included $8.3 million and $7.6 million of investments held in trust by the West Virginia Funeral Directors Association at
December 31, 2013 and December 31, 2012, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia
Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value.
81
The cost and market value associated with the assets held in the merchandise trusts at
December 31, 2013 and December 31, 2012 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
As of December 31, 2013
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Short-term investments
|
|
$
|
46,518
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
46,518
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
9,105
|
|
|
|
162
|
|
|
|
(96
|
)
|
|
|
9,171
|
|
Other debt securities
|
|
|
7,336
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
7,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,441
|
|
|
|
162
|
|
|
|
(108
|
)
|
|
|
16,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
117,761
|
|
|
|
729
|
|
|
|
(7,157
|
)
|
|
|
111,333
|
|
Mutual funds - equity securities
|
|
|
144,249
|
|
|
|
16,610
|
|
|
|
(3,329
|
)
|
|
|
157,530
|
|
|
|
|
|
|
Equity securities
|
|
|
81,520
|
|
|
|
5,267
|
|
|
|
(1,092
|
)
|
|
|
85,695
|
|
Other invested assets
|
|
|
5,809
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
5,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total managed investments
|
|
$
|
412,298
|
|
|
$
|
22,768
|
|
|
$
|
(11,772
|
)
|
|
$
|
423,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Virginia Trust Receivable
|
|
|
8,262
|
|
|
|
|
|
|
|
|
|
|
|
8,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
420,560
|
|
|
$
|
22,768
|
|
|
$
|
(11,772
|
)
|
|
$
|
431,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
As of December 31, 2012
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Short-term investments
|
|
$
|
27,890
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,890
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
8,590
|
|
|
|
165
|
|
|
|
(41
|
)
|
|
|
8,714
|
|
Other debt securities
|
|
|
4,320
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
4,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
12,910
|
|
|
|
165
|
|
|
|
(44
|
)
|
|
|
13,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
105,388
|
|
|
|
3,425
|
|
|
|
(892
|
)
|
|
|
107,921
|
|
Mutual funds - equity securities
|
|
|
145,538
|
|
|
|
6,229
|
|
|
|
(6,697
|
)
|
|
|
145,070
|
|
|
|
|
|
|
Equity securities
|
|
|
68,714
|
|
|
|
3,448
|
|
|
|
(4,755
|
)
|
|
|
67,407
|
|
Other invested assets
|
|
|
7,376
|
|
|
|
165
|
|
|
|
(444
|
)
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total managed investments
|
|
$
|
367,816
|
|
|
$
|
13,432
|
|
|
$
|
(12,832
|
)
|
|
$
|
368,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Virginia Trust Receivable
|
|
|
7,557
|
|
|
|
|
|
|
|
|
|
|
|
7,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
375,373
|
|
|
$
|
13,432
|
|
|
$
|
(12,832
|
)
|
|
$
|
375,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
The contractual maturities of debt securities as of December 31, 2013 and December 31,
2012 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 year through
|
|
|
6 years through
|
|
|
More than
|
|
As of December 31, 2013
|
|
1 year
|
|
|
5 years
|
|
|
10 years
|
|
|
10 years
|
|
|
|
(in thousands)
|
|
U.S. Government and federal agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
4,332
|
|
|
|
4,839
|
|
|
|
|
|
Other debt securities
|
|
|
2,150
|
|
|
|
5,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
2,150
|
|
|
$
|
9,506
|
|
|
$
|
4,839
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 year through
|
|
|
6 years through
|
|
|
More than
|
|
As of December 31, 2012
|
|
1 year
|
|
|
5 years
|
|
|
10 years
|
|
|
10 years
|
|
|
|
(in thousands)
|
|
U.S. Government and federal agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
3,861
|
|
|
|
4,853
|
|
|
|
|
|
Other debt securities
|
|
|
4,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
4,317
|
|
|
$
|
3,861
|
|
|
$
|
4,853
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
An aging of unrealized losses on the Companys investments in fixed maturities and equity
securities at December 31, 2013 and December 31, 2012 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As of December 31, 2013
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(in thousands)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
2,812
|
|
|
|
43
|
|
|
|
1,249
|
|
|
|
53
|
|
|
|
4,061
|
|
|
|
96
|
|
Other debt securities
|
|
|
5,329
|
|
|
|
8
|
|
|
|
995
|
|
|
|
4
|
|
|
|
6,324
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
8,141
|
|
|
|
51
|
|
|
|
2,244
|
|
|
|
57
|
|
|
|
10,385
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
87,113
|
|
|
|
6,724
|
|
|
|
6,485
|
|
|
|
433
|
|
|
|
93,598
|
|
|
|
7,157
|
|
Mutual funds - equity securities
|
|
|
29,993
|
|
|
|
2,444
|
|
|
|
4,217
|
|
|
|
885
|
|
|
|
34,210
|
|
|
|
3,329
|
|
Equity securities
|
|
|
25,379
|
|
|
|
1,031
|
|
|
|
1,492
|
|
|
|
61
|
|
|
|
26,871
|
|
|
|
1,092
|
|
Other invested assets
|
|
|
2,266
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
2,266
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152,892
|
|
|
$
|
10,336
|
|
|
$
|
14,438
|
|
|
$
|
1,436
|
|
|
$
|
167,330
|
|
|
$
|
11,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As of December 31, 2012
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(in thousands)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
2,140
|
|
|
|
20
|
|
|
|
297
|
|
|
|
21
|
|
|
|
2,437
|
|
|
|
41
|
|
Other debt securities
|
|
|
4,317
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
4,317
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
6,457
|
|
|
|
23
|
|
|
|
297
|
|
|
|
21
|
|
|
|
6,754
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
6,388
|
|
|
|
463
|
|
|
|
4,198
|
|
|
|
429
|
|
|
|
10,586
|
|
|
|
892
|
|
Mutual funds - equity securities
|
|
|
48,255
|
|
|
|
5,500
|
|
|
|
19,655
|
|
|
|
1,197
|
|
|
|
67,910
|
|
|
|
6,697
|
|
Equity securities
|
|
|
17,932
|
|
|
|
1,527
|
|
|
|
15,538
|
|
|
|
3,228
|
|
|
|
33,470
|
|
|
|
4,755
|
|
Other invested assets
|
|
|
2,558
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
2,558
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,590
|
|
|
$
|
7,957
|
|
|
$
|
39,688
|
|
|
$
|
4,875
|
|
|
$
|
121,278
|
|
|
$
|
12,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys merchandise trust activities for the years ended December 31, 2013
and December 31, 2012 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
Capital
|
|
Realized
|
|
|
|
|
|
Unrealized
|
|
Fair
|
Value at
|
|
|
|
|
|
Interest/
|
|
Gain
|
|
Gain/
|
|
|
|
|
|
Change in
|
|
Value at
|
12/31/2012
|
|
Contributions
|
|
Distributions
|
|
Dividends
|
|
Distributions
|
|
Loss
|
|
Taxes
|
|
Fees
|
|
Fair Value
|
|
12/31/2013
|
(in thousands)
|
$375,973
|
|
68,305
|
|
(55,891)
|
|
18,176
|
|
968
|
|
19,502
|
|
(2,986)
|
|
(2,887)
|
|
10,396
|
|
$431,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
Capital
|
|
Realized
|
|
|
|
|
|
Unrealized
|
|
Fair
|
Value at
|
|
|
|
|
|
Interest/
|
|
Gain
|
|
Gain/
|
|
|
|
|
|
Change in
|
|
Value at
|
12/31/2011
|
|
Contributions
|
|
Distributions
|
|
Dividends
|
|
Distributions
|
|
Loss
|
|
Taxes
|
|
Fees
|
|
Fair Value
|
|
12/31/2012
|
(in thousands)
|
$344,515
|
|
55,754
|
|
(52,618)
|
|
16,045
|
|
788
|
|
8,862
|
|
(3,486)
|
|
(2,424)
|
|
8,537
|
|
$375,973
|
84
The Company made net contributions into the trusts of approximately $12.4 million and $3.1
million during the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, purchases and sales of securities available for sale included in trust investments were approximately $536.2 million and
$540.9 million, respectively. During the year ended December 31, 2012, purchases and sales of securities available for sale included in trust investments were approximately $464.7 million and $461.0 million, respectively. Contributions include
$10.3 million and $12.0 million of assets that were acquired through acquisitions during the years ended December 31, 2013 and 2012, respectively. Distributions include $5.8 million of assets that were divested as a result of the termination of
an operating agreement during the year ended December 31, 2012.
Other-Than-Temporary Impairment of Trust Assets
In accordance with ASC 320-10-65-1, the Company assesses whether an impairment is other-than-temporary by performing each of the following:
Fixed Maturity Debt Securities
|
|
|
The Company assesses whether it has the intent to sell any impaired debt security; or
|
|
|
|
The Company assesses whether it is more likely than not it will be required to sell any impaired debt security before its anticipated recovery;
|
|
|
|
If either of these conditions exists, the impairment is considered to be other than temporary;
|
|
|
|
The Company assesses whether or not there is a credit loss on an impaired security. A credit loss is the excess of the amortized cost of the security over the present value of future expected cash flows. If there is a
credit loss, the Company recognizes an other-than-temporary impairment in earnings in an amount equal to the credit loss. This amount becomes the new cost basis of the asset and will not be adjusted for subsequent changes in the fair value of the
asset;
|
|
|
|
The Company assesses the overall credit quality of each issue by evaluating its credit rating as reported by any credit rating agency. The Company also determines if there has been any downgrade in its creditworthiness
as reported by such credit rating agency;
|
|
|
|
The Company determines if there has been any suspension of interest payments or any announcements of any intention to do so;
|
|
|
|
The Company evaluates the length of time until the principal becomes due and whether the ability to satisfy this payment has been impaired.
|
Equity Securities
|
|
|
The Company compares the proportional decline in value to the overall sector decline as measured via certain specific indices;
|
|
|
|
The Company determines whether there has been further periodic decline from prior periods or whether there has been a recovery in value.
|
For all securities
|
|
|
The Company evaluates the severity of the impairment and length of time that a security has been in a loss position;
|
|
|
|
The Company determines if there is any publicly available information that would cause the Company to believe that impairment is other than temporary in nature.
|
During the year ended December 31, 2013, the Company determined that there were 7 securities with an aggregate cost basis of
approximately $2.6 million and an aggregate fair value of approximately $1.6 million, resulting in an impairment of $1.0 million, wherein such impairment was considered to be other-than-temporary. During the year ended December 31, 2012, the
Company determined that there were 8 securities with an aggregate cost basis of approximately $2.0 million and an aggregate fair value of approximately $1.0 million, resulting in an impairment of $1.0 million, wherein such impairment was considered
to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods
as the underlying merchandise is delivered or the underlying service is performed.
85
At December 31, 2013 and December 31, 2012, the Companys perpetual care trusts consisted of the following
types of assets:
|
|
|
Money Market Funds that invest in low risk short term securities;
|
|
|
|
Publicly traded mutual funds that invest in underlying debt securities;
|
|
|
|
Publicly traded mutual funds that invest in underlying equity securities;
|
|
|
|
Equity investments that are currently paying dividends or distributions. These investments include REITs, Master Limited Partnerships and global equity securities;
|
|
|
|
Fixed maturity debt securities issued by various corporate entities;
|
|
|
|
Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and
|
|
|
|
Fixed maturity debt securities issued by U.S. states and local government agencies.
|
All of
these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level
2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.
86
The cost and market value associated with the assets held in perpetual care trusts at
December 31, 2013 and December 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
As of December 31, 2013
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Short-term investments
|
|
$
|
16,686
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,686
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
|
302
|
|
|
|
70
|
|
|
|
|
|
|
|
372
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
24,378
|
|
|
|
340
|
|
|
|
(208
|
)
|
|
|
24,510
|
|
Other debt securities
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
25,051
|
|
|
|
410
|
|
|
|
(208
|
)
|
|
|
25,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
121,493
|
|
|
|
466
|
|
|
|
(5,946
|
)
|
|
|
116,013
|
|
Mutual funds - equity securities
|
|
|
93,243
|
|
|
|
22,521
|
|
|
|
(171
|
)
|
|
|
115,593
|
|
Equity securities
|
|
|
25,580
|
|
|
|
12,283
|
|
|
|
(19
|
)
|
|
|
37,844
|
|
Other invested assets
|
|
|
172
|
|
|
|
210
|
|
|
|
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
282,225
|
|
|
$
|
35,890
|
|
|
$
|
(6,344
|
)
|
|
$
|
311,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
As of December 31, 2012
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Short-term investments
|
|
$
|
21,419
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,419
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
|
408
|
|
|
|
104
|
|
|
|
|
|
|
|
512
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
22,690
|
|
|
|
702
|
|
|
|
(101
|
)
|
|
|
23,291
|
|
Other debt securities
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
23,469
|
|
|
|
806
|
|
|
|
(101
|
)
|
|
|
24,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
103,909
|
|
|
|
3,429
|
|
|
|
(150
|
)
|
|
|
107,188
|
|
Mutual funds - equity securities
|
|
|
94,239
|
|
|
|
5,222
|
|
|
|
(249
|
)
|
|
|
99,212
|
|
Equity securities
|
|
|
23,797
|
|
|
|
6,563
|
|
|
|
(455
|
)
|
|
|
29,905
|
|
Other invested assets
|
|
|
113
|
|
|
|
302
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
266,946
|
|
|
$
|
16,322
|
|
|
$
|
(955
|
)
|
|
$
|
282,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
The contractual maturities of debt securities as of December 31, 2013 and December 31,
2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 year through
|
|
|
6 years through
|
|
|
More than
|
|
As of December 31, 2013
|
|
1 year
|
|
|
5 years
|
|
|
10 years
|
|
|
10 years
|
|
|
|
(in thousands)
|
|
U.S. Government and federal agency
|
|
$
|
253
|
|
|
$
|
119
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
115
|
|
|
|
11,943
|
|
|
|
12,451
|
|
|
|
1
|
|
Other debt securities
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
739
|
|
|
$
|
12,062
|
|
|
$
|
12,451
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 year through
|
|
|
6 years through
|
|
|
More than
|
|
As of December 31, 2012
|
|
1 year
|
|
|
5 years
|
|
|
10 years
|
|
|
10 years
|
|
|
|
(in thousands)
|
|
U.S. Government and federal agency
|
|
$
|
128
|
|
|
$
|
384
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
78
|
|
|
|
10,847
|
|
|
|
12,366
|
|
|
|
|
|
Other debt securities
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
577
|
|
|
$
|
11,231
|
|
|
$
|
12,366
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An aging of unrealized losses on the Companys investments in fixed maturities and equity securities at
December 31, 2013 and December 31, 2012 held in perpetual care trusts is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As of December 31, 2013
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(in thousands)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
5,664
|
|
|
|
93
|
|
|
|
3,122
|
|
|
|
115
|
|
|
|
8,786
|
|
|
|
208
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
5,664
|
|
|
|
93
|
|
|
|
3,122
|
|
|
|
115
|
|
|
|
8,786
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
93,473
|
|
|
|
4,781
|
|
|
|
16,367
|
|
|
|
1,165
|
|
|
|
109,840
|
|
|
|
5,946
|
|
Mutual funds - equity securities
|
|
|
1,185
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
1,185
|
|
|
|
171
|
|
Equity securities
|
|
|
513
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
513
|
|
|
|
19
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,835
|
|
|
$
|
5,064
|
|
|
$
|
19,489
|
|
|
$
|
1,280
|
|
|
$
|
120,324
|
|
|
$
|
6,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As of December 31, 2012
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(in thousands)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. State and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
4,630
|
|
|
|
48
|
|
|
|
711
|
|
|
|
53
|
|
|
|
5,341
|
|
|
|
101
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
4,630
|
|
|
|
48
|
|
|
|
711
|
|
|
|
53
|
|
|
|
5,341
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
859
|
|
|
|
35
|
|
|
|
870
|
|
|
|
115
|
|
|
|
1,729
|
|
|
|
150
|
|
Mutual funds - equity securities
|
|
|
34,805
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
34,805
|
|
|
|
249
|
|
Equity securities
|
|
|
4,269
|
|
|
|
238
|
|
|
|
545
|
|
|
|
217
|
|
|
|
4,814
|
|
|
|
455
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,563
|
|
|
$
|
570
|
|
|
$
|
2,126
|
|
|
$
|
385
|
|
|
$
|
46,689
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys perpetual care trust activities for the years ended December 31,
2013 and 2012 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
Capital
|
|
Realized
|
|
|
|
|
|
Unrealized
|
|
Fair
|
Value at
|
|
|
|
|
|
Interest/
|
|
Gain
|
|
Gain/
|
|
|
|
|
|
Change in
|
|
Value at
|
12/31/2012
|
|
Contributions
|
|
Distributions
|
|
Dividends
|
|
Distributions
|
|
Loss
|
|
Taxes
|
|
Fees
|
|
Fair Value
|
|
12/31/2013
|
(in thousands)
|
$282,313
|
|
11,000
|
|
(13,176)
|
|
15,699
|
|
|
|
4,725
|
|
(739)
|
|
(2,230)
|
|
14,179
|
|
$311,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
Capital
|
|
Realized
|
|
|
|
|
|
Unrealized
|
|
Fair
|
Value at
|
|
|
|
|
|
Interest/
|
|
Gain
|
|
Gain/
|
|
|
|
|
|
Change in
|
|
Value at
|
12/31/2011
|
|
Contributions
|
|
Distributions
|
|
Dividends
|
|
Distributions
|
|
Loss
|
|
Taxes
|
|
Fees
|
|
Fair Value
|
|
12/31/2012
|
(in thousands)
|
$254,679
|
|
12,535
|
|
(15,025)
|
|
16,740
|
|
123
|
|
2,208
|
|
(659)
|
|
(1,837)
|
|
13,549
|
|
$282,313
|
The Company made net withdrawals out of the trust of approximately $2.2 million and $2.5 million during the
years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, purchases and sales of securities available for sale included in trust investments were approximately $114.6 million and $110.8 million,
respectively. During the year ended December 31, 2012, purchases and sales of securities available for sale included in trust investments were approximately $299.9 million and $297.8 million, respectively. Contributions include $5.9 million and
$5.0 million of assets that were acquired through acquisitions during the years ended December 31, 2013 and 2012, respectively.
Other-Than-Temporary Impairment of Trust Assets
Refer to Note 5 for a detailed discussion of the accounting rules related to other-than-temporarily impaired assets and the Companys
procedures for evaluating whether impairment to assets is other than temporary.
During the year ended December 31, 2013, the Company
determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.
During the year
ended December 31, 2012, the Company determined that there were 2 securities with an aggregate cost basis of approximately $10.6 million and an aggregate fair value of approximately $7.8 million, resulting in an impairment of $2.8 million,
wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against the liability for perpetual care trusts corpus.
89
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
The Company
has recorded goodwill of approximately $48.0 million and $42.4 million as of December 31, 2013 and 2012, respectively. This amount represents the excess of the purchase price over the fair value of identifiable net assets acquired in
acquisitions. See Note 13 for further details.
A rollforward of goodwill by reportable segment is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries
|
|
|
Funeral
|
|
|
|
|
|
|
Southeast
|
|
|
Northeast
|
|
|
West
|
|
|
Homes
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance as of January 1, 2012
|
|
$
|
5,734
|
|
|
$
|
|
|
|
$
|
11,948
|
|
|
$
|
14,463
|
|
|
$
|
32,145
|
|
Goodwill acquired from acquisitions during 2012
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
9,807
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
6,174
|
|
|
|
|
|
|
|
11,948
|
|
|
|
24,270
|
|
|
|
42,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired from acquisitions during 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,642
|
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
6,174
|
|
|
$
|
|
|
|
$
|
11,948
|
|
|
$
|
29,912
|
|
|
$
|
48,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates the carrying value of goodwill during the fourth quarter of each year or more frequently
if events and circumstances indicate that the asset may have been impaired. No impairment of the Companys goodwill has been identified during the years ended December 31, 2013, 2012 or 2011.
Other Acquired Intangible Assets
The
Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term operating agreements. These amounts are included within other assets on the consolidated balance sheet. All of the intangible
assets are subject to amortization. The major classes of intangible assets are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net
Intangible
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net
Intangible
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Asset
|
|
|
Amount
|
|
|
Amortization
|
|
|
Asset
|
|
|
|
(in thousands)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying contract value
|
|
$
|
6,239
|
|
|
$
|
(702
|
)
|
|
$
|
5,537
|
|
|
$
|
6,239
|
|
|
$
|
(555
|
)
|
|
$
|
5,684
|
|
Non-compete agreements
|
|
|
7,950
|
|
|
|
(4,003
|
)
|
|
|
3,947
|
|
|
|
6,023
|
|
|
|
(2,553
|
)
|
|
|
3,470
|
|
Other intangible assets
|
|
|
269
|
|
|
|
(98
|
)
|
|
|
171
|
|
|
|
269
|
|
|
|
(81
|
)
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
14,458
|
|
|
$
|
(4,803
|
)
|
|
$
|
9,655
|
|
|
$
|
12,531
|
|
|
$
|
(3,189
|
)
|
|
$
|
9,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Underlying Contract Value of Long-Term Operating Agreements
The Company entered into two long-term operating agreements during 2009, wherein it became the exclusive operator of cemetery properties. These
long-term operating agreements did not qualify for acquisition accounting. The fair value of the consideration paid and liabilities assumed to enter into the operating agreements exceeded the fair value of assets acquired by approximately $6.2
million. This amount, which represents the underlying contract values, has been recorded as an intangible asset and is being amortized on the straight-line basis over the expected life of the contracts, which is 40 years. The amortization expense is
included as a component of depreciation and amortization in the consolidated statement of operations.
Non-Compete Agreements
In connection with certain acquisitions entered into in 2013, 2012, 2011 and 2010, the Company entered into non-compete agreements with the
former owners of the acquired entities (See Note 13 for further details). The non-compete agreements were valued in purchase accounting at a fair value of approximately $8.0 million. The fair value was determined by comparing the discounted cash
flows of the acquired business with and without competition as of the date of acquisition. The non-compete agreements are being amortized on the straight-line basis over the life of the agreements, which is 4 to 6 years. The amortization expense is
included as a component of depreciation and amortization in the consolidated statement of operations.
90
At December 31, 2013, amortization expense related to intangible assets with definite lives
is estimated to be the following for each of the next five years:
|
|
|
|
|
For the Year Ending
December 31,
|
|
Amortization
Expense
|
|
|
|
(in thousands)
|
|
2014
|
|
$
|
1,515
|
|
2015
|
|
|
1,038
|
|
2016
|
|
|
967
|
|
2017
|
|
|
743
|
|
2018
|
|
$
|
494
|
|
The Company had the following outstanding debt:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
7.875% Senior Notes, due 2021
|
|
$
|
175,000
|
|
|
$
|
|
|
10.25% Senior Notes, due 2017
|
|
|
|
|
|
|
150,000
|
|
Revolving Credit Facility, due January 2017
|
|
|
114,002
|
|
|
|
101,700
|
|
Notes payable - acquisition debt
|
|
|
1,571
|
|
|
|
1,465
|
|
Notes payable - acquisition non-competes
|
|
|
3,945
|
|
|
|
3,830
|
|
Insurance and vehicle financing
|
|
|
1,529
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
296,047
|
|
|
|
258,293
|
|
Less current portion
|
|
|
2,916
|
|
|
|
2,175
|
|
Less unamortized bond and note payable discounts
|
|
|
4,115
|
|
|
|
3,344
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
289,016
|
|
|
$
|
252,774
|
|
|
|
|
|
|
|
|
|
|
7.875% Senior Notes due 2021
Purchase Agreement
On May 16,
2013, the Company, Cornerstone Family Services of West Virginia Subsidiary, Inc., a wholly owned subsidiary of the Company (Cornerstone Co. and together with the Company, the Issuers), and certain subsidiary guarantors (the
Guarantors) entered into a Purchase Agreement (the Purchase Agreement) with Merrill Lynch, Pierce, Fenner & Smith Incorporated, acting on behalf of itself and as the representative for the other initial purchasers
named in the Purchase Agreement (collectively, the Initial Purchasers). Pursuant to the Purchase Agreement, the Issuers, as joint and several obligors, agreed to sell to the Initial Purchasers $175.0 million aggregate principal amount of
7.875% Senior Notes due 2021 (the Senior Notes), with an original issue discount of approximately $3.8 million, in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the
Securities Act), for resale by the Initial Purchasers (i) to qualified institutional buyers pursuant to Rule 144A under the Securities Act or (ii) outside the United States to non-U.S. persons in compliance with Regulation S
under the Securities Act (the Notes Offering). The Notes Offering closed on May 28, 2013.
The Purchase Agreement
contains customary representations and warranties of the parties and indemnification and contribution provisions under which the Issuers and the Guarantors, on one hand, and the Initial Purchasers, on the other, have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The net proceeds from the Notes Offering were used to retire
a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the Prior Senior Notes), as described below, and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par
resulting in gross proceeds of $171.2 million with an original issue discount of
91
approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and will be amortized over the life of these notes.
The Senior Notes are valued using Level 2 inputs as defined by the Fair Value Measurements and Disclosures topic of the ASC in Note 15. Based on trades made on December 31, 2013, the Company has estimated the fair value of its Senior Notes to
be in excess of par and trading at a premium of 4.19%, which would imply a fair value of $182.3 million, at December 31, 2013.
Indenture
On May 28, 2013, the Issuers, the Guarantors, and Wilmington Trust, National Association, as successor trustee by merger to
Wilmington Trust FSB (the Trustee), entered into an indenture (the Indenture) governing the Senior Notes.
The
Issuers pay 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2013. The Senior Notes mature on June 1,
2021.
The Senior Notes are senior unsecured obligations of the Issuers that:
|
|
|
rank equally in right of payment with all existing and future senior debt of the Issuers;
|
|
|
|
rank senior in right of payment to all existing and future senior subordinated and subordinated debt of the Issuers;
|
|
|
|
are effectively subordinated in right of payment to existing and future secured debt of the Issuers, to the extent of the value of the assets securing such debt; and
|
|
|
|
are structurally subordinated to all of the existing and future liabilities of each subsidiary of the Issuers that does not guarantee the Senior Notes.
|
The Issuers obligations under the Senior Notes and the Indenture are jointly and severally guaranteed (the Note Guarantees)
by each subsidiary of the Company other than Cornerstone Co., that the Company has caused or will cause to become a Guarantor pursuant to the terms of the Indenture (each, a Restricted Subsidiary).
At any time on or after June 1, 2016, the Issuers, at their option, may redeem the Senior Notes, in whole or in part, at the redemption
prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:
|
|
|
Year
|
|
Percentage
|
2016
|
|
105.906%
|
2017
|
|
103.938%
|
2018
|
|
101.969%
|
2019 and thereafter
|
|
100.000%
|
At any time prior to June 1, 2016, the Issuers may, on one or more occasions, redeem all or any portion
of the Senior Notes, upon not less than 30 nor more than 60 days notice, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus the Applicable Premium (as defined in the Indenture) as of the redemption
date, including accrued and unpaid interest to the redemption date.
In addition, at any time prior to June 1, 2016, the Issuers, at
their option, may redeem up to 35% of the aggregate principal amount of the Senior Notes issued under the Indenture with the net cash proceeds of certain equity offerings of the Company described in the Indenture at a redemption price equal to
107.875% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date provided, however, that (i) at least 65% of the aggregate principal amount of the Senior Notes issued under
the Indenture remain outstanding immediately after the occurrence of such redemption and (ii) the redemption occurs within 180 days of the closing date of such offering.
Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will
have the right to require the Issuers to purchase that holders Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest to the date of purchase.
The Indenture requires the Issuers and/or the Guarantors, as applicable, to comply with various covenants including, but not limited to,
covenants that, subject to certain exceptions, limit the Companys and its Restricted Subsidiaries ability to (i) incur
92
additional indebtedness; (ii) make certain dividends, distributions, redemptions or investments; (iii) enter into certain transactions with affiliates; (iv) create, incur, assume
or permit to exist certain liens against their assets; (v) make certain sales of their assets; and (vi) engage in certain mergers, consolidations or sales of all or substantially all of their assets. The Indenture also contains various
affirmative covenants regarding, among other things, delivery of certain reports filed with the SEC and materials required pursuant to Rule 144A under the Securities Act to holders of the Senior Notes and joinder of future subsidiaries as Guarantors
under the Indenture. As of December 31, 2013, the Company was in compliance with all applicable covenants under the Indenture.
Events of default under the Indenture that could, subject to certain conditions, cause all amounts owing under the Senior Notes to become
immediately due and payable include, but are not limited to, the following:
|
|
|
failure by the Issuers to pay interest on any of the Senior Notes when it becomes due and the continuance of any such failure for 30 days;
|
|
|
|
failure by the Issuers to pay the principal on any of the Senior Notes when it becomes due and payable, whether at stated maturity, upon redemption, upon purchase, upon acceleration or otherwise;
|
|
|
|
the Issuers failure to comply with the agreements and covenants relating to limitations on entering into certain mergers, consolidations or sales of all or substantially all of their assets or in respect of their
obligations to purchase the Senior Notes in connection with a Change of Control;
|
|
|
|
failure by the Issuers to comply with any other agreement or covenant in the Indenture and the continuance of this failure for 60 days after notice of the failure has been given to the Company by the Trustee or holders
of at least 25% of the aggregate principal amount of the Senior Notes then outstanding;
|
|
|
|
failure by the Company to comply with its covenant to deliver certain reports and the continuance of such failure to comply for a period of 120 days after written notice thereof has been given to the Company by the
Trustee or by the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding;
|
|
|
|
certain defaults under mortgages, indentures or other instruments or agreements under which there may be issued or by which there may be secured or evidenced indebtedness of the Company or any Restricted Subsidiary,
whether such indebtedness now exists or is incurred after the date of the Indenture;
|
|
|
|
certain judgments or orders that exceed $10.0 million in the aggregate for the payment of money have been entered by a court of competent jurisdiction against the Company or any Restricted Subsidiary and such judgments
have not been satisfied, stayed, annulled or rescinded within 60 days of being entered;
|
|
|
|
certain events of bankruptcy of the Company, StoneMor GP LLC, the general partner of the Company (the General Partner), or any Significant Subsidiary (as defined in the Indenture); or
|
|
|
|
other than in accordance with the terms of the Note Guarantee and the Indenture, the Note Guarantee of any Significant Subsidiary ceasing to be in full force and effect, being declared null and void and unenforceable,
found to be invalid or any Guarantor denying its liability under its Note Guarantee.
|
10.25% Senior Notes due 2017
Prior to their retirement in the second quarter of 2013, the Company had outstanding a $150.0 million aggregate principal amount of Prior
Senior Notes, with an original issue discount of approximately $4.0 million. The Company paid 10.25% interest per annum on the principal amount of the Prior Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of
each year. The Prior Senior Notes were due to mature on December 1, 2017. In the second quarter of 2013, the Company retired the notes using the proceeds from the Senior Notes offering described above.
On May 13, 2013, StoneMor Operating LLC (the Operating Company), Cornerstone Co. and Osiris Holding of Maryland Subsidiary,
Inc. (Osiris Co., and together with the Operating Company and Cornerstone Co., the Prior Senior Notes Issuers), each of which is a subsidiary of the Company, commenced (i) cash tender offer to purchase any and all of
their outstanding $150.0 million aggregate principal amount of the Prior Senior Notes and (ii) consent solicitation to obtain consents to amendments to the Indenture dated as of November 24, 2009, as amended (the 2009
Indenture), governing the Prior Senior Notes. Upon the expiration of the consent solicitation on May 24, 2013, the Prior Senior Notes Issuers received tenders and consents from the holders of approximately $132.2 million in aggregate
principal amount, or approximately 88.1%, of the outstanding Prior Senior Notes.
93
In connection with the expiration of the consent solicitation, on May 24, 2013, Prior Senior
Notes Issuers, the Company, the Guarantors named in the 2009 Indenture and the Trustee, entered into the Seventh Supplemental Indenture to the 2009 Indenture. The Seventh Supplemental Indenture amended the 2009 Indenture to shorten to three business
days the minimum notice period for optional redemptions and eliminated substantially all of the restrictive covenants and certain events of default contained in the 2009 Indenture.
On June 14, 2013, the remaining Prior Senior Notes were redeemed, pursuant to redemption provisions set forth in the 2009 Indenture, at a
price of 100% of the principal amount of the Prior Senior Notes, plus the Applicable Premium (as defined in the 2009 Indenture) equal to 9.554%, together with accrued and unpaid interest to, but not including, June 14, 2013. The 2009 Indenture
was satisfied and discharged in accordance with its terms, effective June 14, 2013.
The Company paid $14.9 million to retire the
Prior Senior Notes inclusive of the tender premium and accrued interest from the date of repurchase through December 1, 2013, the first redemption date for the Prior Senior Notes. In addition, the Company incurred expenses of $6.7 million
related to the refinancing event inclusive of $2.6 million of unamortized original issue discount and $4.1 million of unamortized capitalized debt issue costs related to the Prior Senior Notes.
Credit Facility
On August 15, 2007,
the Company, the General Partner, the Operating Company and various subsidiaries of the Operating Company (collectively, the Borrowers) entered into an Amended and Restated Credit Agreement (the Original Credit Agreement)
with Bank of America, N.A. (Bank of America), other lenders, and BAS (collectively, the Lenders). The Original Credit Agreement provided for both an acquisition credit facility (the Acquisition Credit Facility)
and a revolving credit facility (the Revolving Credit Facility). Capitalized terms which are not defined in the following description shall have the same meaning assigned to such terms in the Original Credit Agreement, as amended.
The Original Credit Agreement initially provided that: (1) the Acquisition Credit Facility would have a maximum principal amount of $40.0
million (with an option to increase such facility by an additional $15.0 million on an uncommitted basis) and the term of 5 years, and (2) the Revolving Credit Facility would have a maximum principal amount of $25.0 million (with an option to
increase such facility by up to $10.0 million on an uncommitted basis) and a term of 5 years. Amounts borrowed under the Acquisition Credit Facility and repaid or prepaid could not be reborrowed and amounts borrowed under the Revolving Credit
Facility and repaid or prepaid during the term could be reborrowed. In addition, Bank of America agreed to provide to the Borrowers swing line loans (Swing Line Loans) with a maximum limit of $5.0 million, which was a part of the
Revolving Credit Facility.
The Original Credit Agreement was amended eight times prior to April 29, 2011, to, among other things,
amend borrowing levels, interest rates and covenants.
On April 29, 2011, the Company entered into the Second Amended and Restated
Credit Agreement (the Revised Credit Agreement) among the Operating Company as the Borrower, each of the subsidiaries of the Operating Company as additional Borrowers, the General Partner and the Company as Guarantors, the Lenders
identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The terms of the Revised Credit Agreement were substantially the same as the terms of the Original Credit Agreement. The primary purpose of
entering into the Revised Credit Agreement was to consolidate the amendments to the Original Credit Agreement and to update outdated references. The Revised Credit Agreement provided for an Acquisition Credit Facility of $65.0 million and a
Revolving Credit Facility of $55.0 million. The Revised Credit Agreement was further amended two times prior to January 19, 2012.
On
January 19, 2012, the Company entered into the Third Amended and Restated Credit Agreement (the Credit Agreement). The terms of the Credit Agreement and the Revised Credit Agreement are substantially similar. The current terms of
the Credit Agreement are set forth below. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement. The Credit Agreement consolidated the Acquisition Credit Facility
and the Revolving Credit Facility into a single Revolving Credit Facility (the Credit Facility) with a borrowing limit of $130.0 million. The maturity date of the Credit Facility is January 19, 2017.
On February 19, 2013, the Company entered into the First Amendment to the Credit Agreement, which increased the total availability under
the Credit Facility by $10.0 million to $140.0 million.
On May 8, 2013, the Company entered into the Second Amendment to the Credit
Agreement, which allowed the Company to incur additional indebtedness to be evidenced by the Senior Notes, to enter into the Indenture governing the Senior Notes and to use the proceeds of the Notes offering, in part, to fund the tender offer and
consent solicitation with respect to the Prior Senior Notes.
94
On June 18, 2013, the Company entered into the Third Amendment to the Credit Agreement. The
Third Amendment amended certain financial covenants under the Credit Agreement as follows:
|
(i)
|
for any most recently completed four fiscal quarters, Consolidated EBITDA shall not be less than the sum of $57,822,000 plus 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after
March 31, 2013; and
|
|
(ii)
|
for the periods set forth below, Maximum Consolidated Leverage Ratio shall not be greater than as set forth below, subject to the Borrowers option to temporarily increase the Consolidated Leverage Ratio in
connection with a Significant Permitted Acquisition Transaction as described below:
|
|
|
|
Measurement Period Ending
|
|
Maximum Consolidated Leverage Ratio
|
June 30, 2013 through December 31, 2013
|
|
4.000 to 1.0
|
March 31, 2014
|
|
3.875 to 1.0
|
June 30, 2014 and thereafter
|
|
3.750 to 1.0
|
The Third Amendment also increased the ranges of the Applicable Rates to 3.00%, 4.00%, and .800% for Base Rate
loans, Eurodollar Rate Loans and Letter of Credit Fees, and Commitment Fees, respectively, when the Consolidated Leverage Ratio is greater than or equal to 3.75 to 1.0.
The Third Amendment also increased the amount of aggregate consideration that the Company may pay for a Permitted Acquisition after
March 31, 2014, without Required Lender approval, to $10.0 million on an individual basis and $50.0 million when aggregated with the total Aggregate Consideration paid by or on behalf of the Company for all other Permitted Acquisitions which
closed within the immediately preceding 365 days.
In addition, the Third Amendment added a defined term for Significant Permitted
Acquisition Transaction to describe a Permitted Acquisition in which the Aggregate Consideration exceeds $35.0 million when aggregated with the total Aggregate Consideration for all other Permitted Acquisitions which closed within the immediately
preceding 180 days. In the case of a Significant Permitted Acquisition Transaction, the Third Amendment permits the Borrowers, subject to certain limitations, to temporarily increase the Consolidated Leverage Ratio to 4.00 to 1.0 for one or more the
four immediately succeeding covenant measurement periods. Also, the Third Amendment included certain conforming changes to reflect the issuance of the Senior Notes.
At December 31, 2013, amounts outstanding under the Credit Facility bore interest at rates between 4.0% and 4.3%. Amounts borrowed may be
either Base Rate Loans or Eurodollar Rate Loans and amounts repaid or prepaid during the term may be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.25%
to 3.00% and 2.25% to 4.00%, respectively, depending on the Companys Consolidated Leverage Ratio. The Base Rate is the highest of the Prime Rate, the Federal Funds Rate plus 0.50%, or the Eurodollar Rate plus 1.0%. The Eurodollar rate is the
British Bankers Association LIBOR Rate. Amounts outstanding under the Credit Facility approximate their fair value.
The Credit Agreement
contains restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require the Company to maintain certain financial covenants, including specified financial
ratios. Financial covenants include a certain measure of Consolidated EBITDA, and a Consolidated Leverage Ratio, as described above. In addition, the Consolidated Debt Service Coverage Ratio, which replaced the Consolidated Fixed Charge Coverage
Ratio and whose calculation does not include distributions made by the Company, must not be less than 2.5 to 1.0 for any Measurement Period. Further, the Company will not be permitted to have Maintenance Capital Expenditures, as defined in the
Credit Agreement, for any Measurement Period ending in 2012, 2013, and 2014 and thereafter exceeding $6.7 million, $7.3 million and $8.0 million, respectively. A material decrease in revenues could cause the Company to breach certain of its
financial covenants. Any such breach could allow the Lenders to accelerate the Companys debt (and cause cross-default) which would have a material adverse effect on the Companys business, financial condition or results of operations.
As of December 31, 2013, there were $114.0 million of outstanding borrowings under the Credit Facility. The carrying amount of the
debt approximates its fair value. At December 31, 2013, the Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio was 3.88 and 3.33, respectively. As of December 31, 2013, the Company was in compliance with all
applicable financial covenants.
The Borrowers under the Credit Agreement paid fees to Bank of America, as Administrative Agent, and BAS,
as Arranger. In addition, the Credit Agreement requires the Company to pay an unused Commitment Fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments. The Commitment Fee
Rate ranges from 0.375% to 0.800% depending on the Companys Consolidated Leverage Ratio.
95
The proceeds of the Credit Facility may be used by the Borrowers to finance working capital
requirements, Permitted Acquisitions, and the purchase and construction of mausoleums. The Borrowers obligations under the Credit Agreement are guaranteed by both the Company and the General Partner.
The Borrowers obligations under the Credit Facility are secured by a first priority lien and security interest in substantially all of
the Borrowers assets, whether then owned or thereafter acquired, excluding: (i) trust accounts, certain proceeds required by law to be placed into such trust accounts and funds held in trust accounts; (ii) the General Partners
interest in the Company, the incentive distribution rights under the Companys partnership agreement and the deposit accounts of the General Partner into which distributions are received; (iii) Equipment subject to a purchase money
security interest or equipment lease permitted under the Credit Agreement and certain other contract rights under which contractual, legal or other restrictions on assignment would prohibit the creation of a security interest or such creation of a
security interest would result in a default thereunder.
Events of Default under the Credit Agreement include, but are not limited to, the
following:
|
|
|
non-payment of any principal, interest or other amounts due under the Credit Agreement or any other Credit Document;
|
|
|
|
failure to observe or perform any covenants related to: (i) the delivery of financial statements, compliance certificates, reports and other information; (ii) providing prompt notice of Defaults and other
events; (iii) the preservation of the legal existence and good standing of each Borrower and Guarantor; (iv) the ability of the Administrative Agent and each Lender to visit and inspect properties, examine books and records, and discuss
financial and business affairs with directors, officers and independent public accountants of each Borrower and Guarantor; (v) restrictions on the use of proceeds; (vi) guarantees by new Subsidiaries; (vii) the maintenance of
corporate formalities for each Borrower and Guarantor; (viii) the maintenance of Trust Accounts and Trust Funds; and (ix) any of the negative covenants contained in the Credit Agreement;
|
|
|
|
failure to observe or perform any other covenant, if uncured 30 days after notice thereof is provided by the Administrative Agent or Lenders;
|
|
|
|
any default under any other Indebtedness of the Borrowers or Guarantors;
|
|
|
|
any insolvency proceedings by a Borrower or Guarantor;
|
|
|
|
the insolvency of any Borrower or Guarantor, or a writ of attachment or execution or similar process issuing or being levied against any material part of the property of a Borrower or Guarantor; and
|
The Company routinely incurs debt financing costs and fees when
borrowing under, or making amendments to the Credit Facility. These costs and fees are deferred and are amortized over the life of the Credit Facility.
Notes Payable Acquisitions
In July of
2009, certain of the Companys subsidiaries entered into a $1.4 million note purchase agreement in connection with an operating agreement in which the Company became the exclusive operator of Green Lawn Cemetery (the Green Lawn
Note). The Green Lawn Note bears interest at a rate of 6.5% per year on unpaid principal and is payable monthly, beginning on August 1, 2009. Principal on the note is due in 96 equal installments beginning on July 1, 2011. At
December 31, 2013 and 2012, the liability related to the installment note was stated on the Companys consolidated balance sheet at approximately $1.0 million and $1.2 million, respectively.
In June of 2010, certain of the Companys subsidiaries issued two installment notes in connection with the second quarter acquisition
(the Nelms Notes). The Nelms Notes are being paid over a 4 year period and mature April 1, 2014. The installment notes do not have a stated rate of interest. The Company has recorded the installment notes at their fair market value
of approximately $2.6 million. The face amounts of the Nelms Notes were discounted approximately $0.7 million, and the discount is being amortized to interest expense over the life of the installment notes. The notes bear 10.25% interest per annum
on the portion of the outstanding balance after the maturity date or while there exists any uncured event of default or the exercise by lender of any remedies following the occurrence and during the continuance of any event of default. In addition,
if the Company voluntarily files for bankruptcy or is involved in an involuntary bankruptcy proceeding, the entire principal balance of the installment notes automatically becomes due and payable. At December 31, 2013 and 2012, the liability
related to the Nelms Notes was stated on the Companys consolidated balance sheet at approximately $0.1 million and $0.3 million, respectively.
96
In February 2013, certain of the Companys subsidiaries issued an unsecured promissory note
in the principal amount of $3.0 million in connection with the first quarter acquisition discussed in Note 13. The promissory note bears interest at a rate of 5% and any unpaid balance is due 12 months from closing. At December 31, 2013, the
liability related to this promissory note was stated on the Companys consolidated balance sheet at approximately $0.5 million.
The
carrying amounts of the notes payable approximate their fair value.
Acquisition Non-Compete Notes
In connection with several of the Companys 2013, 2012, 2011 and 2010 acquisitions, certain of the Companys subsidiaries issued
installment notes in consideration for non-compete agreements executed with the former owners of the acquired entities. The installment notes have varying payment terms and mature between April 1, 2014 and February 19, 2019. The
installment notes do not have a stated rate of interest. At inception, the Company recorded the installment notes at their fair market value of approximately $5.7 million. The face amounts of the installment notes were discounted approximately $1.2
million, and the discount is being amortized to interest expense over the life of the installment notes. At December 31, 2013 and 2012, the liability related to the installment notes, net of discounts, was stated on the Companys
consolidated balance sheet at approximately $3.4 million and $3.3 million, respectively. The carrying amounts of the installment notes approximate their fair value.
Effective with the closing of the Partnerships initial public offering on September 20, 2004 (see Note 1), the
Company was no longer a taxable entity for federal and state income tax purposes; rather, the Partnerships tax attributes, except those of its corporate subsidiaries, are to be included in the individual tax returns of its partners.
The tax on the Companys net income is borne by its general and limited partners. Net income for financial statement purposes may differ
significantly from the taxable income of such partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the partnership agreement. The
aggregate difference in the basis of the Companys net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partners tax attributes is not available to the Company.
The Partnerships corporate subsidiaries account for their income taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The tax returns of the Partnership are subject to examination by state and federal tax authorities. If such examinations result in changes to
taxable income, the tax liability of the partners could be changed accordingly.
97
Components of the income tax expense (benefit) applicable to continuing operations for federal,
state and foreign taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
$
|
685
|
|
|
$
|
616
|
|
|
$
|
(538
|
)
|
Federal
|
|
|
|
|
|
|
(8
|
)
|
|
|
6
|
|
Foreign
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
560
|
|
|
|
608
|
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
292
|
|
|
|
(196
|
)
|
|
|
(163
|
)
|
Federal
|
|
|
(3,156
|
)
|
|
|
(2,202
|
)
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(2,864
|
)
|
|
|
(2,398
|
)
|
|
|
(3,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(2,304
|
)
|
|
$
|
(1,790
|
)
|
|
$
|
(4,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the statutory federal income tax and the Companys effective income tax is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Computed tax provision (benefit) at the applicable statutory tax rate
|
|
$
|
(7,468
|
)
|
|
$
|
(1,681
|
)
|
|
$
|
(4,806
|
)
|
State and local taxes net of federal income tax benefit
|
|
|
464
|
|
|
|
400
|
|
|
|
(350
|
)
|
Tax exempt (income) loss
|
|
|
1,542
|
|
|
|
697
|
|
|
|
300
|
|
Change in valuation allowance
|
|
|
9,203
|
|
|
|
3,857
|
|
|
|
3,930
|
|
Partnership earnings not subject to tax
|
|
|
(2,540
|
)
|
|
|
(5,088
|
)
|
|
|
(3,192
|
)
|
Permanent differences
|
|
|
(3,337
|
)
|
|
|
25
|
|
|
|
99
|
|
Other
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,304
|
)
|
|
$
|
(1,790
|
)
|
|
$
|
(4,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities result from the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
4,452
|
|
|
$
|
3,628
|
|
State net operating loss
|
|
|
11,483
|
|
|
|
9,978
|
|
Federal net operating loss
|
|
|
68,008
|
|
|
|
57,269
|
|
Alternative minimum tax credit
|
|
|
77
|
|
|
|
73
|
|
Unrealized losses (gains)
|
|
|
(4,398
|
)
|
|
|
(240
|
)
|
Valuation allowance
|
|
|
(43,027
|
)
|
|
|
(36,489
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
36,595
|
|
|
|
34,219
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
5,565
|
|
|
|
5,908
|
|
Deferred revenue related to future revenues and accounts receivable
|
|
|
34,100
|
|
|
|
33,525
|
|
Deferred revenue related to cemetery property
|
|
|
9,295
|
|
|
|
9,315
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
48,960
|
|
|
|
48,748
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
12,365
|
|
|
$
|
14,529
|
|
|
|
|
|
|
|
|
|
|
98
At December 31, 2013, the Company had available approximately less than $0.2 million of
alternative minimum tax credit carryforwards, which are available indefinitely, and $194.3 million of federal net operating loss carryforwards, which will begin to expire in 2019 and $238.2 million in state net operating losses, a portion of which
expires annually.
Management periodically evaluates all evidence, both positive and negative, in determining whether a valuation
allowance to reduce the carrying value of deferred tax assets is required. In 2013, the Company concluded, based on the projected allocations of taxable income, that a deferred tax asset of less than $0.1 million will more likely than not be
realized on several subsidiaries. In addition, several separate taxable subsidiaries were in a deferred tax liability position at December 31, 2013 and recognized those liabilities. The vast majority of the taxable subsidiaries continue to
accumulate deferred tax assets that will not more likely than not be realized. A full valuation allowance continues to be maintained on these taxable subsidiaries. Ultimate realization of the deferred tax assets is dependent upon, among other
factors, the Partnerships corporate subsidiaries ability to generate sufficient taxable income within the carryforward periods and is subject to change depending on the tax laws in effect in the years in which the carryforwards are used.
The Company follows the provisions of ASC Topic 740 (ASC 740) which requires that the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. During the year ended December 31, 2011, the Company recorded an income tax
benefit of $0.9 million reversing an unrecognized tax benefit related to uncertain tax positions as the statute of limitations for this item expired. As of December 31, 2013 and 2012, the Company does not have any unrecognized tax benefits
related to uncertain tax positions.
The Company and its subsidiaries are subject to US federal income tax as well as income taxes of
multiple state jurisdictions. The Companys effective tax rate fluctuates over time based on income tax rates in the various tax jurisdictions in which the Company operates and based on the level of earnings in those jurisdictions.
The Internal Revenue Service (IRS) audited the Companys federal income tax return for the year ended December 31, 2010.
The scope of this audit included an audit of the Companys qualifying income. In order to be treated as a partnership for federal income tax purposes, at least 90% of the Companys gross income must be qualifying income.
The IRS concluded its audit and notified the Company on April 11, 2013 that it was not proposing any adjustments to the return as filed.
If the Company were treated as a corporation for federal income tax purposes for any taxable year for which the statute of limitations remains
open or for any future taxable year, the Company would pay federal income tax on its taxable income for such year(s) at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates.
Distributions would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to unitholders. Because a tax would be imposed upon the Company as a corporation, including taxes with respect to
prior periods, the Companys cash available for distribution would be substantially reduced.
In connection with each public offering
of the Companys common units, including its initial public offering of common units, outside counsel reviewed the various categories of the Companys gross income and opined that it would be classified as a partnership for federal income
tax purposes. Although no assurance can be given, the Company does not anticipate any change in its status as a partnership for federal income tax purposes or any change in prior period taxable income.
The Company is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state
statutes of limitations are opened from 2010 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about
future events. On the basis of present information, it is the opinion of the Companys management that there are no pending assessments that will result in a material effect on the Companys consolidated financial statements over the next
twelve months.
The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and penalties in
operating expenses for all periods presented. The Company has not recorded any material interest or penalties during any of the years presented.
The net change in the valuation allowance for 2013 was an increase of $6.5 million. This change in the valuation allowance is the result of
the change in unrealized gains and losses of the Companys investment portfolio, which is recorded within deferred revenues, net; the results of acquisition accounting; net operating losses that are more likely than not to be realized and net
operating losses that do not meet the more likely than not standard.
99
10.
|
DEFERRED CEMETERY REVENUESNET / DEFERRED SELLING AND OBTAINING COSTS
|
In accordance with SAB No. 104, the Company defers the 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 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 (see Note 1).
At December 31, 2013 and 2012, deferred cemetery revenues, net,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Deferred cemetery revenue
|
|
$
|
403,250
|
|
|
$
|
346,621
|
|
Deferred merchandise trust revenue
|
|
|
88,730
|
|
|
|
65,728
|
|
Deferred merchandise trust unrealized gains (losses)
|
|
|
10,996
|
|
|
|
600
|
|
Deferred pre-acquisition margin
|
|
|
132,866
|
|
|
|
132,221
|
|
Deferred cost of goods sold
|
|
|
(54,257
|
)
|
|
|
(47,309
|
)
|
|
|
|
|
|
|
|
|
|
Deferred cemetery revenues, net
|
|
$
|
581,585
|
|
|
$
|
497,861
|
|
|
|
|
|
|
|
|
|
|
Deferred selling and obtaining costs
|
|
$
|
87,998
|
|
|
$
|
76,317
|
|
Deferred selling and obtaining costs are carried as an asset on the consolidated balance sheet in accordance
with the Financial Services Insurance topic of the ASC.
11.
|
LONG-TERM INCENTIVE AND RETIREMENT PLANS
|
Long Term Incentive Plan
Overview
On November 8, 2006,
the General Partners board of directors adopted the StoneMor Partners L.P. Long-Term Incentive Plan, as amended, (LTIP) for its employees, consultants and directors, who perform services for the Company. The LTIP permits the grant
of awards covering an aggregate of 1,124,000 common units in the form of unit options, unit appreciation rights (UARs), restricted units and phantom units. The compensation committee of the Companys General Partners board of
directors administers the plan. The plan will continue in effect until the earliest of (i) the date determined by the General Partners board of directors; (ii) the date that common units are no longer available for payment of awards
under the plan; or (iii) the tenth anniversary of the plan.
The General Partners board of directors or compensation committee
may, in their discretion, terminate, suspend or discontinue the LTIP at any time with respect to any units for which a grant has not yet been made. The General Partners board of directors also has the right to alter or amend the LTIP or any
part of the plan from time to time, including increasing the number of units that may be delivered in accordance with awards under the plan, subject to any approvals if required by the exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would materially impair the rights of the participant without the consent of the participant.
Awards Made Under the LTIP
Phantom Unit
Awards
On November 8, 2006, the General Partner, acting on behalf of the Company, entered into a Director Restricted
Phantom Unit Agreement (the Director Agreement) with certain of its outside directors (the Directors). Under the terms of the Director Agreement, each of five directors was awarded 3,000 Restricted Phantom Units
(Director Phantom Units). Director Phantom Units become payable, in cash or common units, at the Companys election, upon the separation of the Director from service as a director or upon the occurrence of certain other events
specified in the Director Agreement. Each Director Phantom Unit contains a distribution equivalent right which entitles each Director to additional Director Phantom Units upon each distribution made to common unit holders. The calculation of
additional Director Phantom Units granted upon each distribution to common unit holders is equal to a
100
Directors total cumulative Director Phantom Units at the time of a distribution multiplied by the per unit monetary distribution divided by the fair value of a common unit at the time of the
distribution. Each Director also receives a portion of their annual retainer in deferred restricted phantom units.
On December 16,
2009, the General Partner, acting on behalf of the Company, entered into an Executive Restricted Phantom Unit Agreement (the Executive Agreement) with certain of the Companys executives (the Executives). Under the terms
of the Executive Agreement, 20,000 Restricted Phantom Units (Executive Phantom Units) were issued. These units were vested upon issuance.
On November 7, 2012, the General Partner, acting on behalf of the Company, entered into an Executive Restricted Phantom Unit Agreement
(the 2012 Executive Agreement) with an executive of the Company (the Executive). Under the terms of the 2012 Executive Agreement, the Executive was awarded 45,000 Restricted Phantom Units (Executive Phantom Units)
that vest over 3 years as follows: 15,000 Phantom Units vest one year after the Grant Date, 15,000 Phantom Units vest two years after the Grant Date, and 15,000 Phantom Units vest three years after the Grant Date.
Executive Phantom Units become payable, in cash or common units, at the Companys election, upon the separation of the Executive from
service as an executive or upon the occurrence of certain other events specified in the Executive Agreement. The exercise of Executive Phantom Units may be subject to approval by the Companys limited partners as required by the NYSE listing
rules. Each Executive Phantom Unit contains a distribution equivalent right which entitles each Executive to additional Executive Phantom Units upon each distribution made to common unit holders. The calculation of additional Executive Phantom Units
granted upon each distribution to common unit holders is equal to an Executives total cumulative Executive Phantom Units at the time of a distribution multiplied by the per unit monetary distribution divided by the fair value of a common unit at the
time of the distribution.
The table below reflects the LTIP Phantom Unit Award activity for the years ended December 31, 2013, 2012
and 2011, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Outstanding, beginning of period
|
|
|
143,213
|
|
|
|
84,377
|
|
|
|
73,734
|
|
Granted (1)
|
|
|
18,890
|
|
|
|
58,836
|
|
|
|
10,643
|
|
Matured
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
162,103
|
|
|
|
143,213
|
|
|
|
84,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Phantom Units (2)
|
|
|
98,195
|
|
|
|
71,767
|
|
|
|
60,395
|
|
Executive Phantom Units (2)
|
|
|
63,908
|
|
|
|
71,446
|
|
|
|
23,982
|
|
(1)
|
The weighted-average price for unit awards on the date of grant was $25.29, $23.84 and $27.79 for the years ended December 31, 2013, 2012 and 2011, respectively.
|
(2)
|
The phantom units of one of the Executives that retired from the Company and simultaneously entered into a two year consulting agreement where the Executive also agreed to become the Vice Chairman of the Companys
Board of Directors are presented as Director Phanthom Units in 2013, whereas they were previously presented as Executive Phanthom Units. This individual owned approximately 14,514 and 13,223 of the Phantom Units outstanding at December 31, 2013
and 2012, respectively.
|
There was approximately $0.7 million and $1.0 million of unrecognized compensation cost related to
the units issued in the 2012 Executive Agreement as of December 31, 2013 and 2012, respectively. Total compensation expense for phantom unit awards was approximately $0.8 million, $0.4 million and $0.3 million for the years ended
December 31, 2013, 2012 and 2011, respectively.
There were no modifications made to any existing unit awards in 2013. No unit awards
were capitalized during the years ended December 31, 2013, 2012 and 2011.
Unit Appreciation Rights Awards
On November 27, 2006, the General Partner, acting on behalf of the Company, entered into a Key Employee Unit Appreciation Rights Agreement
(the 2006 UAR Agreement) with certain of the Companys key employees (the 2006 Key Employees). Under the terms of the 2006 UAR Agreement, 2006 Key Employees received Unit Appreciation Rights (UARs) wherein 2006 Key
Employees became entitled to compensation in the form of units in an amount equal to the fair value of the Companys common units upon exercise less $24.14 per unit multiplied by the total number of UARs exercised. Units to be issued should be
equal to this amount divided by the fair value of common units upon exercise. A total of 120,000 UARs were granted under the 2006 UAR Agreement, all of which had vested at December 31, 2009 and were exercised by December 31, 2011.
101
On December 16, 2009, the General Partner, acting on behalf of the Company, entered into a
Key Employee Unit Appreciation Rights Agreement (the 2009 UAR Agreement) with certain of the Companys key employees (the 2009 Key Employees) and non-employee directors. Under the terms of the 2009 UAR Agreement, 2009 Key
Employees and non-employee directors received UARs and became entitled to compensation in the form of units, in an amount equal to the fair value of the Companys common units upon exercise less $18.80 per unit multiplied by the total number of
UARs exercised. Units to be issued should be equal to this amount divided by the fair value of common units upon exercise.
UARs granted
under the 2009 UAR Agreement vest at a percentage rate which is equal to a fraction the numerator of which is the number of calendar months which have elapsed since December 16, 2009 and the denominator of which is 48, subject to forfeiture
upon certain conditions set forth in the UAR Agreement. The exercise of such UARs may be subject to approval by the Companys limited partners as required by the NYSE listing rules. A total of 814,000 UARs were granted under the 2009 UAR
Agreement and 565,716 of these units remained outstanding at December 31, 2013.
In the second quarter of 2012, the General Partner,
acting on behalf of the Company, entered into a Key Employee Unit Appreciation Rights Agreements (the 2012 UAR Agreements) with certain of the Companys key employees (the 2012 Key Employees). Under the terms of the 2012 UAR
Agreements, 2012 Key Employees received UARs wherein 2012 Key Employees became entitled to compensation in the form of units in an amount equal to the fair value of the Companys common units upon exercise less $24.36 per unit multiplied by the
total number of UARs exercised. Units to be issued should be equal to this amount divided by the fair value of common units upon exercise.
UARs granted under the 2012 UAR Agreements vest at a percentage rate which is equal to a fraction the numerator of which is the number of
calendar months which have elapsed since the date of issuance and the denominator of which is 48, subject to forfeiture upon certain conditions set forth in the UAR Agreements. The exercise of such UARs may be subject to approval by the
Companys limited partners as required by the NYSE listing rules. A total of 80,500 UARs were granted under the 2012 UAR Agreements and 55,500 of these units remained outstanding at December 31, 2013.
On May 9, 2013 and October 22, 2013, the General Partner, acting on behalf of the Company, entered into Key Employee Unit
Appreciation Rights Agreements (the 2013 UAR Agreements) with certain of the Companys key employees (the 2013 Key Employees). Under the terms of the 2013 UAR Agreements, 2013 Key Employees received UARs wherein 2013 Key
Employees became entitled to compensation in the form of units in an amount equal to the fair value of the Companys common units upon exercise, less $26.68 and $25.61 for the May and October awards, respectively, per unit multiplied by the
total number of UARs exercised. Units to be issued should be equal to this amount divided by the fair value of common units upon exercise.
UARs granted under the 2013 UAR Agreements vest at a percentage rate which is equal to a fraction the numerator of which is the number of
calendar months which have elapsed since the date of issuance and the denominator of which is 48, subject to forfeiture upon certain conditions set forth in the UAR Agreements. The exercise of such UARs may be subject to approval by the
Companys limited partners as required by the NYSE listing rules. A total of 52,500 UARs were granted under the 2013 UAR Agreements and 52,500 of these units remained outstanding at December 31, 2013.
All UARs granted under the LTIP have a five year contractual term beginning on the grant date.
The fair value of UARs granted under the 2013 UAR Agreements, 2012 UAR Agreements and 2009 UAR Agreement was estimated on the date of grant
using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 UAR
|
|
|
2012 UAR
|
|
|
2009 UAR
|
|
|
|
Agreements
|
|
|
Agreements
|
|
|
Agreement
|
|
Expected dividend yield
|
|
|
9.14
|
%
|
|
|
9.60
|
%
|
|
|
10.70
|
%
|
Risk-free interest rate
|
|
|
0.63
|
%
|
|
|
0.63
|
%
|
|
|
2.73
|
%
|
Expected volatility
|
|
|
28.57
|
%
|
|
|
42.60
|
%
|
|
|
38.70
|
%
|
Expected life (in years)
|
|
|
3.52
|
|
|
|
3.52
|
|
|
|
6.02
|
|
102
The fair value of UARs granted under the 2009 UAR Agreement was $2.39 per UAR and approximately
$1.9 million in aggregate.
The fair value of UARs granted under the 2012 UAR Agreements was approximately $3.70 per UAR and approximately
$0.3 million in aggregate.
The fair value of UARs granted under the 2013 UAR Agreements was approximately $2.09 per UAR and approximately
$0.1 million in aggregate.
A summary of UAR activity for the years ended December 31, 2013, 2012 and 2011 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Outstanding, beginning of period
|
|
|
774,598
|
|
|
|
759,857
|
|
|
|
874,835
|
|
Granted
|
|
|
52,500
|
|
|
|
80,500
|
|
|
|
|
|
Exercised
|
|
|
(133,110
|
)
|
|
|
(65,759
|
)
|
|
|
(112,373
|
)
|
Forfeited
|
|
|
(20,272
|
)
|
|
|
|
|
|
|
(2,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
673,716
|
|
|
|
774,598
|
|
|
|
759,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
594,248
|
|
|
|
514,993
|
|
|
|
358,639
|
|
As of December 31, 2013, there was approximately $0.2 million of unrecognized compensation cost related
to non-vested UARs. $0.1 million of this cost is expected to be recognized within 1 year, with the remainder being recognized through 2017. Total compensation expense for UARs was approximately $0.5 million for the years ended December 31,
2013, 2012 and 2011. The Company issued 34,096, 19,452 and 24,682 common units as a result of exercised UARs in 2013, 2012 and 2011, respectively.
During the years ended December 31, 2013, 2012 and 2011, the Company:
|
|
|
Made no modifications to any existing UAR awards;
|
|
|
|
Did not capitalize any UAR awards;
|
|
|
|
Did not receive any cash due to the exercise of UARs;
|
|
|
|
Did not recognize any tax benefits due to exercised UARs.
|
Retirement Plan
The Company has a 401(k) retirement savings plan for employees who may defer up to 15% of their compensation. The Company does not currently
match any of the employee contributions.
12.
|
COMMITMENTS AND CONTINGENCIES
|
Legal
The Company is
party to 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 effect on the Companys financial position, results of operations or
liquidity.
Leases
At
December 31, 2013, 2012, and 2011, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to twenty five years and options to renew
at varying terms. Expenses under operating leases were $2.7 million, $2.5 million and $2.3 million for the years ended December 31, 2013, 2012, and 2011, respectively.
103
At December 31, 2013, operating leases will result in future payments in the following
approximate amounts from January 1, 2014 and beyond:
|
|
|
|
|
|
|
(in thousands)
|
|
2014
|
|
$
|
1,712
|
|
2015
|
|
|
1,140
|
|
2016
|
|
|
1,016
|
|
2017
|
|
|
948
|
|
2018
|
|
|
882
|
|
Thereafter
|
|
|
1,927
|
|
|
|
|
|
|
Total
|
|
$
|
7,625
|
|
|
|
|
|
|
Employment Agreements
As of December 31, 2013, the Company has an employment agreement with one of its senior executives for a term of three years beginning
July 22, 2013. The Company also has an employment agreement with the Vice Chairman of the Board of Directors which is effective for two years beginning April 1, 2012.
Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities. For the
year ended December 31, 2013 acquisition related costs include a $1.3 million recovery related to misappropriation claims related to certain acquisitions. For the years ended December 31, 2012 and 2011, acquisition related costs included
legal fees, net of recoveries, of $0.3 million and $1.2 million, respectively, related to amounts paid to pursue the recovery of those claims.
First
Quarter 2013 Acquisition
On February 19, 2013, StoneMor Florida Subsidiary LLC, a subsidiary of the Company, (the Buyer)
entered into an Asset Purchase and Sale Agreement (the Seawinds Agreement) with several Florida limited liability companies and one individual (collectively the Seller). Pursuant to the Agreement, the Buyer acquired six
funeral homes in Florida, including certain related assets, and assumed certain related liabilities.
In consideration for the net assets
acquired, the Buyer paid the Seller $9.1 million in cash and issued 159,635 common units, which equates to approximately $3.6 million worth of common units under the terms of the Seawinds Agreement. The Buyer also issued an unsecured promissory note
in the amount of $3.0 million that is payable on February 19, 2014 and bears interest at 5.0%. In addition, the Buyer will also pay an aggregate amount of $1.2 million in six equal annual installments commencing on February 19, 2014 in
exchange for a non-compete agreement with the Seller. The non-compete agreement will be amortized over the 6 year term of the agreement.
The table below reflects the Companys revised assessment of the fair value of net assets acquired. The Company obtained additional
information and has retrospectively adjusted these values as noted below. These amounts may be adjusted as additional information is received. The resulting goodwill is recorded in the Companys Funeral Homes operating segment.
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
|
|
|
|
|
|
Revised
|
|
|
|
Assessment
|
|
|
Adjustments
|
|
|
Assessment
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
995
|
|
|
$
|
(300
|
)
|
|
$
|
695
|
|
Property and equipment
|
|
|
8,315
|
|
|
|
|
|
|
|
8,315
|
|
Merchandise trusts, restricted, at fair value
|
|
|
4,853
|
|
|
|
|
|
|
|
4,853
|
|
Non-compete agreements
|
|
|
1,927
|
|
|
|
|
|
|
|
1,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
16,090
|
|
|
|
(300
|
)
|
|
|
15,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred margin
|
|
|
2,419
|
|
|
|
|
|
|
|
2,419
|
|
Merchandise liabilities
|
|
|
2,233
|
|
|
|
|
|
|
|
2,233
|
|
Other liabilities
|
|
|
|
|
|
|
164
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,652
|
|
|
|
164
|
|
|
|
4,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
|
11,438
|
|
|
|
(464
|
)
|
|
|
10,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration paid - cash
|
|
|
9,100
|
|
|
|
|
|
|
|
9,100
|
|
Consideration paid - units
|
|
|
3,592
|
|
|
|
|
|
|
|
3,592
|
|
Fair value of note payable
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Fair value of debt assumed for non-compete agreement
|
|
|
924
|
|
|
|
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
|
16,616
|
|
|
|
|
|
|
|
16,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill from purchase
|
|
$
|
5,178
|
|
|
$
|
464
|
|
|
$
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2013 Acquisition
On August 1, 2013, certain subsidiaries of the Company (collectively the Buyer) entered into an Asset Purchase and Sale
Agreement with Carriage Cemetery Services, Inc. (the Seller). Pursuant to the agreement, the Buyer acquired 1 cemetery in Virginia, including certain related assets, and assumed certain related liabilities. In consideration for the net
assets acquired, the Buyer paid the Seller $5.0 million in cash.
The table below reflects the Companys preliminary assessment of
the fair value of net assets acquired and the resulting gain on bargain purchase. These amounts may be retrospectively adjusted as additional information is received.
|
|
|
|
|
|
|
Preliminary
|
|
|
|
Assessment
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
525
|
|
Cemetery property
|
|
|
3,900
|
|
Property and equipment
|
|
|
1,047
|
|
Merchandise trusts, restricted, at fair value
|
|
|
5,461
|
|
Perpetual care trusts, restricted, at fair value
|
|
|
5,888
|
|
|
|
|
|
|
Total assets
|
|
|
16,821
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Merchandise liabilities
|
|
|
1,252
|
|
Deferred margin
|
|
|
1,356
|
|
Perpetual care trust corpus
|
|
|
5,888
|
|
Other liabilities
|
|
|
94
|
|
Deferred tax liability
|
|
|
701
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,291
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
|
7,530
|
|
|
|
|
|
|
Consideration paid
|
|
|
5,000
|
|
|
|
|
|
|
Gain on bargain purchase
|
|
$
|
2,530
|
|
|
|
|
|
|
105
First Quarter 2012 Acquisition
In the second quarter of 2009, the Company entered into a long-term operating agreement (the Operating Agreement) with Kingwood
Memorial Park Association (Kingwood) wherein the Company became the exclusive operator of the cemetery. At that time, the Operating Agreement did not qualify as an acquisition for accounting purposes. However, the existing merchandise
and perpetual care trusts were consolidated as variable interest entities. In addition, merchandise and other liabilities assumed by the Company were also recorded as of the initial contract date. The consideration paid for this transaction,
including cash and an assumed liability, exceeded the net assets recorded as of the initial contract date and an intangible asset was recorded for this amount.
In January of 2012, the Company entered into an amended and restated operating agreement (the Amended Operating Agreement), that
supersedes the Operating Agreement. The Amended Operating Agreement has a term of 40 years and the Company remains the exclusive operator of the cemetery. As consideration for entering into the Amended Operating Agreement, the Company paid $1.7
million in cash and was relieved of a note payable to Kingwood. In addition, the prior trustees of Kingwood have resigned in favor of new trustees appointed by the Company. As a result of the changes in the Amended Operating Agreement, for
accounting purposes, the Company has gained control of Kingwood, and acquisition accounting is now applicable.
The table below reflects
the Companys final assessment of the fair value of net assets acquired, the elimination of debt and other assets, and the purchase price, which results in the recognition of goodwill recorded in the Companys Cemetery Operations
Southeast segment.
|
|
|
|
|
|
|
Final
|
|
|
|
Assessment
|
|
|
|
(in thousands)
|
|
Net assets acquired:
|
|
|
|
|
Accounts receivable
|
|
$
|
66
|
|
Cemetery property
|
|
|
3,001
|
|
Property and equipment
|
|
|
102
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
3,169
|
|
|
|
|
|
|
Assets and liabilities divested:
|
|
|
|
|
Note payable to Kingwood
|
|
|
519
|
|
Intangible asset representing underlying contract value
|
|
|
(2,236
|
)
|
|
|
|
|
|
Fair value of net assets acquired and divested
|
|
|
1,452
|
|
|
|
|
|
|
Consideration paid
|
|
|
1,652
|
|
|
|
|
|
|
Goodwill from purchase
|
|
$
|
200
|
|
|
|
|
|
|
Second, Third and Fourth Quarter 2012 Acquisitions
The table below reflects the Companys final assessment of the fair value of net assets acquired, the purchase price and the resulting
gain (goodwill) from these acquisitions.
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
2nd Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
Bronswood
|
|
|
Lodi
|
|
|
Farnstrom
|
|
|
Lohman
|
|
|
Harden
|
|
|
|
Final Assessment
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
72
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,005
|
|
|
$
|
|
|
Cemetery property
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
6,100
|
|
|
|
|
|
Property and equipment
|
|
|
518
|
|
|
|
48
|
|
|
|
1,296
|
|
|
|
5,864
|
|
|
|
952
|
|
Merchandise trusts, restricted , at fair value
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
11,884
|
|
|
|
|
|
Perpetual care trusts, restricted, at fair value
|
|
|
2,780
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
Underlying lease value
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
12
|
|
|
|
40
|
|
|
|
170
|
|
|
|
1,777
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
4,224
|
|
|
|
257
|
|
|
|
1,466
|
|
|
|
28,984
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,746
|
|
|
|
|
|
Merchandise liabilities
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
3,458
|
|
|
|
|
|
Deferred tax liability
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual care trust corpus
|
|
|
2,780
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
|
|
|
|
Other liabilities
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,178
|
|
|
|
105
|
|
|
|
|
|
|
|
9,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
|
1,046
|
|
|
|
152
|
|
|
|
1,466
|
|
|
|
19,548
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration paid - cash
|
|
|
924
|
|
|
|
850
|
|
|
|
2,300
|
|
|
|
20,000
|
|
|
|
2,250
|
|
Consideration paid - units
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
3,500
|
|
|
|
650
|
|
Fair value of debt assumed for non-compete agreements
|
|
|
|
|
|
|
544
|
|
|
|
274
|
|
|
|
1,230
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
|
924
|
|
|
|
1,744
|
|
|
|
2,574
|
|
|
|
24,730
|
|
|
|
3,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on bargain purchase
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill from purchase
|
|
$
|
|
|
|
$
|
1,592
|
|
|
$
|
1,108
|
|
|
$
|
5,182
|
|
|
$
|
2,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 10, 2012, certain subsidiaries of the Company (collectively the Buyer) entered into
a Stock Purchase Agreement with several individuals (collectively the Seller) to purchase all of the stock of Bronswood Cemetery, Inc., an Illinois Corporation. Through the purchase, the Buyer acquired one cemetery in Illinois, including
certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.9 million in cash. This acquisition resulted in a gain on the bargain purchase.
On June 6, 2012, certain subsidiaries of the Company (collectively the Buyer) entered into a Purchase Agreement with several
individuals and Lodi Funeral Home, Inc. (collectively the Seller) to purchase certain assets and assume certain liabilities of Lodi Funeral Home, Inc., a California corporation and all of the stock of Lodi All Faiths Cremation, a
California corporation. Through the purchase, the Buyer acquired two funeral homes in California including certain related assets, and assumed certain related liabilities. As part of the agreement, the building and underlying real estate of Lodi
Funeral Home, Inc. is being leased from the Seller. The lease agreement is a ten year agreement that contains one five year renewal term at the Buyers election. In addition, at the end of the original lease or renewal term, the Buyer can elect
to purchase the property for fair value less 10% of any rental amounts previously paid under the lease agreement. The Buyer also has a right of first refusal related to any potential sale of the property occurring during the lease term. In
consideration for the net assets acquired, the Buyer paid the Seller $0.85 million in cash and issued 13,720 units, which equates to $0.35 million worth of units. The Buyer will also pay an aggregate amount of $0.6 million in 16 equal quarterly
installments commencing on January 2, 2013 in exchange for non-compete agreements with the Seller. The acquired goodwill is recorded in the Companys Funeral Homes operating segment.
On July 2, 2012, certain subsidiaries of the Company (collectively the Buyer) entered into an Asset Purchase and Sale Agreement
(the Farnstrom Agreement) with Farnstrom Mortuary, LLC and Farnstrom Properties, LLC, both Oregon limited liability companies, Farnstrom Family, Inc. and Care Cremation Society, Inc., both Oregon corporations and two individuals
(collectively the Seller). Pursuant to the Agreement, the Buyer acquired five funeral homes in Oregon, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer
paid the Seller $2.3 million in cash. The Buyer will also pay an aggregate amount of $0.3 million in 12 equal quarterly installments commencing on July 2, 2012 in exchange for non-compete agreements with the Seller. The acquired goodwill is
recorded in the Companys Funeral Homes operating segment.
On July 31, 2012, certain subsidiaries of the Company (collectively
the Buyer) entered into an Asset Purchase and Sale Agreement (the Lohman Agreement) with certain Florida corporations, limited liability companies and four individuals (collectively the Seller). Pursuant to the
Agreement, the Buyer acquired nine funeral homes and four cemeteries in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $20.0
107
million in cash and issued 128,299 units, which equates to $3.5 million worth of units. The Buyer will also pay an aggregate amount of $1.5 million in five equal annual installments commencing on
August 1, 2013 in exchange for a consulting and non-compete agreement with the Seller. The acquired goodwill is recorded in both the Companys Cemetery Operations Southeast segment and Funeral Homes operating segment.
On December 13, 2012, StoneMor Florida Subsidiary LLC, a subsidiary of the Company, (the Buyer) entered into an Asset Purchase and
Sale Agreement (the Harden Agreement) with a Florida corporation and two individuals (collectively the Seller). Pursuant to the Agreement, the Buyer acquired one funeral home in Florida, including certain related assets, and
assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $2.25 million in cash and issued 28,863 units, which equates to $0.7 million worth of units. The Buyer will also pay an aggregate amount of
$0.5 million in twenty equal quarterly installments commencing on March 13, 2013 in exchange for a non-compete agreement with the Seller. The acquired goodwill is recorded in the Companys Funeral Homes operating segment.
If the acquisitions from 2013 and 2012 had been consummated on January 1, 2012 and January 1, 2011, respectively, on a pro forma
basis, for the years ended December 31, 2013, 2012 and 2011, consolidated revenues, consolidated net income (loss) and net income (loss) per limited partner unit (basic and diluted) would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
247,844
|
|
|
$
|
252,270
|
|
|
$
|
237,228
|
|
Net loss
|
|
|
(21,712
|
)
|
|
|
(994
|
)
|
|
|
(9,705
|
)
|
Net loss per limited partner unit (basic and diluted)
|
|
$
|
(1.02
|
)
|
|
$
|
(.05
|
)
|
|
$
|
(.50
|
)
|
These pro forma results are unaudited and have been prepared for comparative purposes only and include certain
adjustments such as increased interest from debt related to the acquisitions and recognition of gains on acquisitions occurring during 2013 in 2012 rather than in the current period. They do not purport to be indicative of the results of operations
which actually would have resulted had the 2013 acquisitions been in effect on January 1, 2012 and the 2012 acquisitions had been in effect on January 1, 2011 or of future results of operations of the locations. The Companys first
quarter 2012 acquisition relates to the Amended Operating Agreement as noted above. Therefore, the results of operations for this property have been included in the Companys results since 2009.
Since their respective dates of acquisition, the properties acquired in 2013 have contributed $3.9 million of revenue and $0.1 million of
operating profit for the year ended December 31, 2013. The properties acquired in 2012 have contributed $10.4 million of revenue and $0.5 million of operating profit for the year ended December 31, 2013 and $4.2 million of revenue and $0.1
million of operating profit for the year ended December 31, 2012.
First, Second, Third and Fourth Quarter 2011 Acquisitions
The table below reflects the Companys final assessment of the fair value of net assets (liabilities) acquired, the purchase price and the
resulting goodwill from these acquisitions.
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
4th Quarter
|
|
|
|
North Carolina
|
|
|
Missouri
|
|
|
Virginia
|
|
|
Puerto Rico
|
|
|
Tennessee
|
|
|
Mississippi
|
|
|
|
Final Assessment
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
97
|
|
|
$
|
94
|
|
|
$
|
20
|
|
|
$
|
4,600
|
|
|
$
|
126
|
|
|
$
|
66
|
|
Cemetery property
|
|
|
1,710
|
|
|
|
880
|
|
|
|
2,243
|
|
|
|
4,666
|
|
|
|
1,096
|
|
|
|
1,331
|
|
Property and equipment
|
|
|
332
|
|
|
|
1,812
|
|
|
|
159
|
|
|
|
4,124
|
|
|
|
2,257
|
|
|
|
488
|
|
Merchandise trusts, restricted , at fair value
|
|
|
880
|
|
|
|
2,627
|
|
|
|
562
|
|
|
|
|
|
|
|
10,122
|
|
|
|
1,264
|
|
Perpetual care trusts, restricted, at fair value
|
|
|
344
|
|
|
|
1,190
|
|
|
|
904
|
|
|
|
981
|
|
|
|
4,373
|
|
|
|
524
|
|
Other assets
|
|
|
100
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
3,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,463
|
|
|
|
6,603
|
|
|
|
4,048
|
|
|
|
14,371
|
|
|
|
21,836
|
|
|
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred margin
|
|
|
795
|
|
|
|
1,302
|
|
|
|
360
|
|
|
|
5,017
|
|
|
|
12,638
|
|
|
|
832
|
|
Merchandise liabilities
|
|
|
734
|
|
|
|
1,648
|
|
|
|
337
|
|
|
|
4,632
|
|
|
|
11,666
|
|
|
|
965
|
|
Deferred tax liability
|
|
|
64
|
|
|
|
461
|
|
|
|
762
|
|
|
|
766
|
|
|
|
|
|
|
|
268
|
|
Perpetual care trust corpus
|
|
|
344
|
|
|
|
1,190
|
|
|
|
904
|
|
|
|
981
|
|
|
|
4,373
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,937
|
|
|
|
4,601
|
|
|
|
2,363
|
|
|
|
11,396
|
|
|
|
28,677
|
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets (liabilities) acquired
|
|
|
1,526
|
|
|
|
2,002
|
|
|
|
1,685
|
|
|
|
2,975
|
|
|
|
(6,841
|
)
|
|
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration paid - cash
|
|
|
1,700
|
|
|
|
2,150
|
|
|
|
1,850
|
|
|
|
4,600
|
|
|
|
4,500
|
|
|
|
1,342
|
|
Fair value of debt assumed for non-compete agreements
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
|
1,700
|
|
|
|
2,150
|
|
|
|
2,130
|
|
|
|
4,600
|
|
|
|
4,500
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill from purchase
|
|
$
|
174
|
|
|
$
|
148
|
|
|
$
|
445
|
|
|
$
|
1,625
|
|
|
$
|
11,341
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 5, 2011, the Operating Company, StoneMor North Carolina LLC, a North Carolina limited
liability company and StoneMor North Carolina Subsidiary LLC, a North Carolina limited liability company, each a wholly-owned subsidiary of the Company (collectively the Buyer), entered into an Asset Purchase and Sale Agreement (the
1st Quarter Purchase Agreement) with Heritage Family Services, Inc., a North Carolina corporation and an individual (collectively the Seller). Pursuant to the 1st Quarter Purchase Agreement, the Buyer acquired three
cemeteries in North Carolina, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $1.7 million in cash. The acquired goodwill is recorded in the
Companys Cemetery Operations Southeast segment.
On June 22, 2011, the Operating Company, StoneMor Missouri LLC, a
Missouri limited liability company and StoneMor Missouri Subsidiary LLC, a Missouri limited liability company, each a wholly-owned subsidiary of the Company (collectively the Buyer), entered into an Asset Purchase and Sale Agreement (the
2nd Quarter Purchase Agreement) with SCI International, LLC, a Delaware limited liability company and Keystone America, Inc., a Delaware corporation (collectively the Seller or SCI Missouri). Pursuant to the 2nd
Quarter Purchase Agreement, the Buyer acquired three cemeteries and four funeral homes in Missouri, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller
$2.15 million in cash. The acquired goodwill is recorded in both the Companys Cemetery Operations West segment and Funeral Homes operating segment.
On August 1, 2011, the Operating Company and CFS West Virginia, an affiliate of the Operating Company, (collectively the
Buyer) entered into a Stock Purchase Agreement with three individuals (collectively the Seller) to purchase all of the stock of Prince George Cemetery Corporation, a Virginia corporation. Through the purchase of Prince George
Cemetery Corporation, the Buyer acquired one cemetery in Virginia. In consideration for the stock acquired, the Buyer paid the Seller approximately $1.9 million in cash. The Buyer will also pay $0.3 million in cash in even quarterly installments
over a five year period in exchange for non-compete agreements with the Seller. The acquired goodwill is recorded in the Companys Cemetery Operations Southeast segment.
On August 17, 2011, the Operating Company, StoneMor Puerto Rico LLC, a Puerto Rico limited liability
company and StoneMor Puerto Rico Subsidiary LLC, a Puerto Rico limited liability company, each a wholly-owned subsidiary of the Company (collectively the Buyer), entered into a Stock Purchase Agreement with Alderwoods Group, LLC, a
Delaware limited liability company (the Seller or SCI Puerto Rico) to purchase all of the stock of SCI Puerto Rico Funeral and Cemetery Services, Inc., a Puerto Rico corporation. Through the purchase of SCI Puerto Rico
Funeral and Cemetery Services, Inc., the Buyer acquired five cemeteries and four funeral homes in Puerto Rico. In consideration for the stock acquired, the Buyer paid the Seller $4.6 million in cash. The acquired goodwill is recorded in both the
Companys Cemetery Operations Southeast segment and Funeral Homes operating segment.
On October 4, 2011, the Operating
Company and StoneMor Tennessee Subsidiary LLC, a Tennessee limited liability company, each a wholly-owned subsidiary of the Company (collectively the Buyer), entered into an Asset Purchase and Sale Agreement (the 4th Quarter
Tennessee Purchase Agreement) with Forest Hill Funeral Home and Memorial Park-East, LLC, a Tennessee limited liability company (Seller) and a state court-appointed receiver (Receiver). Pursuant to the 4th Quarter
Tennessee Purchase Agreement, the Buyer acquired three cemeteries and three funeral homes in Tennessee out of a state court appointed receivership, including certain related assets, and assumed certain related liabilities. In consideration for the
net assets acquired, the Buyer paid $4.5 million, the components of which were $1.6 million in cash and $2.9 million in cash to lend monies to the merchandise trusts of these
109
properties to fund their current underfunded status. In addition, the Buyer assumed a commitment to spend $0.5 million for capital improvements or deferred maintenance on the properties within 18
months of the closing date. The acquired goodwill is recorded in both the Companys Cemetery Operations Southeast segment and Funeral Homes operating segment.
On November 3, 2011, the Operating Company, StoneMor Mississippi LLC, a Mississippi limited liability company, and StoneMor Mississippi
Subsidiary LLC, a Mississippi limited liability company, each a wholly-owned subsidiary of the Company (collectively the Buyer), entered into an Asset Purchase and Sale Agreement (the 4th Quarter Mississippi Purchase
Agreement) with Serenity Cemeteries III, LLC, an Arizona limited liability company (Seller) and two individuals. Pursuant to the 4th Quarter Mississippi Purchase Agreement, the Buyer acquired two cemeteries and one funeral home in
Mississippi, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $1.3 million in cash and made a deposit into trust of less than $0.1 million. The
acquired goodwill is recorded in both the Companys Cemetery Operations Southeast segment and Funeral Homes operating segment.
The results of operations and pro forma results related to the acquisitions made in 2011 are not material to the consolidated financial
statements taken as a whole.
In the aggregate, for the acquisitions consummated during 2011, revenues and operating profit (loss)
included in operations since the dates of acquisition are $15.6 million and $0.7 million, respectively, for the year ended December 31, 2013, $15.7 million and $1.0 million, respectively, for the year ended December 31, 2012 and $4.3
million and $(0.3) million, respectively, for the year ended December 31, 2011.
First Quarter 2012 Contract Termination
During the third quarter of 2010, certain subsidiaries of the Company entered into a long-term operating agreement (the Operating
Agreement) with the Archdiocese of Detroit (the Archdiocese) wherein the Company became the exclusive operator of certain cemeteries in Michigan owned by the Archdiocese. The Operating Agreement did not qualify as an acquisition
for accounting purposes. However, the existing merchandise trust had been consolidated as a variable interest entity as the Company controlled and directly benefited from the operations of the merchandise trust. In addition, liabilities assumed were
also recorded as of the contract date. As no consideration was paid in this transaction, the Company had recorded a deferred gain of approximately $3.1 million within deferred cemetery revenues, net, which represented the excess of the value of the
merchandise trust over the liabilities assumed.
Effective March 31, 2012, the Company and the Archdiocese agreed to terminate the
Operating Agreement. As of the termination date, the Company no longer operated these properties. All activity occurring after March 31, 2012 is the responsibility of the Archdiocese and the Company has no remaining obligation to fulfill any
merchandise liabilities or responsibility to perform any obligations of the properties.
The Company received payments of approximately
$2.0 million from the Archdiocese as a result of the termination. Consequently, the Company recognized a gain of $1.7 million during the year ended December 31, 2012, which is the amount by which the payments from the Archdiocese exceeded the
value of the net assets transferred to the Archdiocese.
First and Second Quarter 2013 Settlement
During the year ended December 31, 2013 the Company recovered $18.4 million, net of legal fees, costs, and contractual obligations related
to the settlement of claims from locations that the Company acquired in 2010 and 2011. Of this amount $6.5 million was contributed directly to the related perpetual care and merchandise trusts on the Companys behalf. $3.4 million of these
direct payments represent a gain on settlement agreement on the consolidated statement of operations due to an increase in the merchandise trusts not previously accrued for in purchase accounting.
The Company received $11.9 million in cash proceeds from the settlement. Of this amount, $1.7 million and $1.3 million are for the
reimbursement of legal fees and are recorded as recoveries to corporate overhead and acquisition related costs, respectively. The remaining proceeds were recorded as a gain on settlement agreement on the consolidated statement of operations. The
total gain on settlement for the year ended December 31, 2013 was $12.3 million.
Third Quarter 2013 Agreements with the Archdiocese of
Philadelphia
On September 26, 2013, StoneMor Operating, LLC (Operating Company), StoneMor Pennsylvania LLC
(StoneMor Pennsylvania) and StoneMor Pennsylvania Subsidiary LLC (Subsidiary and together with the Operating Company and StoneMor Pennsylvania, Tenant), each of which is a direct or indirect subsidiary of StoneMor
Partners L.P. (StoneMor), and the Archdiocese of Philadelphia, an archdiocese governed by Canon Law of the Roman Catholic Church (Landlord) entered into a Lease Agreement (the Lease) and a Management Agreement
(the Management Agreement), pursuant to which Tenant will operate 13 cemeteries in Pennsylvania. StoneMor joined the Lease and the Management Agreement as a guarantor of all Tenants obligations under this operating arrangement.
110
Subject to certain closing conditions described below, Landlord agreed to lease to Tenant eight
cemetery sites in the Philadelphia area. The Lease granted Tenant a sole and exclusive license (the License) to maintain and construct improvements in the operation of the cemeteries and to sell burial rights and all related merchandise
and services, subject to the terms and conditions of the Lease. The Management Agreement enabled Tenant, subject to certain closing conditions set forth in the Lease, to serve as the exclusive operator of the remaining five cemeteries.
The term of the Lease and the Management Agreement shall commence (the Commencement Date) after the satisfaction or waiver of the
Tenants and Landlords Pre-Commencement Conditions, as such term is defined below, and shall expire on the last day of the month on which the 60th anniversary of the Commencement Date occurs, subject to earlier termination as
provided in the Lease (such date, the Termination Date). The Lease may be terminated pursuant to the terms of the Lease, including, but not limited to, by notice of termination given by Landlord to Tenant at any time during Lease year 11
(a Lease Year 11 Termination) or by either party due to the default or bankruptcy of the other party in accordance with the termination provisions of the Lease. If the Lease is terminated by Landlord or Tenant pursuant to the terms of
the Lease, the Management Agreement will also be terminated. The term of the License shall commence on the Commencement Date and shall expire upon the Termination Date, at which time Tenants rights under the License shall revert to Landlord.
Tenant shall pay to Landlord an up-front rental payment of $53.0 million (the Up-Front Rent) on the Commencement Date. Tenant
shall also pay to Landlord aggregate fixed rent of $36.0 million (the Fixed Rent) for the Cemeteries in the following amounts:
|
|
|
Lease Years 1-5
|
|
None
|
Lease Years 6-20
|
|
$1,000,000 per Lease Year
|
Lease Years 21-25
|
|
$1,200,000 per Lease Year
|
Lease Years 26-35
|
|
$1,500,000 per Lease Year
|
Lease Years 36-60
|
|
None
|
The Fixed Rent for Lease Years 6 through 11 (the Deferred Fixed Rent) shall be deferred. If
Landlord terminates the Lease pursuant to a Lease Year 11 Termination or Tenant terminates the Lease as a result of a Landlords default prior to the end of Lease Year 11 (collectively, a Covered Termination), the Deferred Fixed
Rent shall be forfeited by Landlord and shall be retained by Tenant. If the Lease is not terminated by a Covered Termination, the Deferred Fixed Rent shall become due and payable 30 days after the end of Lease Year 11.
If Landlord terminates the Lease pursuant to a Lease Year 11 Termination, Landlord must repay to Tenant all $53.0 million of the Up-Front
Rent. If the Lease is terminated for cause at any time, Landlord must repay to Tenant the unamortized portion of the Up-Front Rent: (i) based on a 60 year amortization schedule if terminated by Tenant due to Landlords default and
(ii) based on a 30 year amortization schedule if terminated by Landlord due to Tenants default.
Each of Tenant and Landlord
shall have the right to terminate the Lease after December 31, 2013 (the Pre-Commencement Expiration Date) and prior to the Commencement Date if certain conditions are not satisfied. These conditions include, but are not limited to,
the Tenants obtaining of financing for the Up-Front Rent.
Generally, 51% of gross revenues from any source received by Tenant on
account of the Cemeteries but unrelated to customary operations of the Cemeteries less Tenants and Landlords reasonable costs and expenses applicable to such unrelated activity shall be paid to Landlord as additional rent. In addition,
Tenant shall have the right to request from time to time that Landlord sell (to a party that is independent and not an affiliate of StoneMor or any party that is a Tenant) all or portions of undeveloped land at the leased Cemeteries. If Landlord
approves the sale of such undeveloped land, Tenant shall pay to Landlord, as additional rent, 51% of the net proceeds of any such sale.
Fourth Quarter
2011 Disposition
On December 30, 2011, the Company sold one funeral home in West Virginia for $0.1 million, resulting in a gain
of $0.1 million.
14. SEGMENT INFORMATION
The Company is organized into five distinct reportable segments which are classified as Cemetery OperationsSoutheast, Cemetery
OperationsNortheast, Cemetery OperationsWest, Funeral Homes, and Corporate.
The Company has chosen this level of organization
of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from other segments; b) the Company has organized its management personnel at these operational levels; and c) it is the level at
which the Companys chief decision makers and other senior management evaluate performance.
111
The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches,
markers and other cemetery related merchandise. The nature of the Companys customers differs in each of its regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the
Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The
disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.
The Companys Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and
preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the cemetery operations segments.
The Companys Corporate segment includes various home office selling and administrative expenses that are not allocable to the other
operating segments.
Segment information is as follows:
As of and for the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries
|
|
|
Funeral
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
|
Northeast
|
|
|
West
|
|
|
Homes
|
|
|
Corporate
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
93,085
|
|
|
$
|
36,537
|
|
|
$
|
43,426
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(47,996
|
)
|
|
$
|
125,052
|
|
Service and other
|
|
|
40,961
|
|
|
|
26,573
|
|
|
|
35,210
|
|
|
|
|
|
|
|
|
|
|
|
(26,110
|
)
|
|
|
76,634
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,808
|
|
|
|
|
|
|
|
(5,853
|
)
|
|
|
44,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
134,046
|
|
|
|
63,110
|
|
|
|
78,636
|
|
|
|
50,808
|
|
|
|
|
|
|
|
(79,959
|
)
|
|
|
246,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
19,422
|
|
|
|
8,144
|
|
|
|
7,816
|
|
|
|
|
|
|
|
|
|
|
|
(7,523
|
)
|
|
|
27,859
|
|
Cemetery
|
|
|
26,495
|
|
|
|
14,615
|
|
|
|
16,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,566
|
|
Selling
|
|
|
30,760
|
|
|
|
13,140
|
|
|
|
13,910
|
|
|
|
|
|
|
|
972
|
|
|
|
(10,950
|
)
|
|
|
47,832
|
|
General and administrative
|
|
|
16,717
|
|
|
|
6,484
|
|
|
|
8,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,873
|
|
Corporate overhead
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,875
|
|
|
|
|
|
|
|
28,875
|
|
Depreciation and amortization
|
|
|
2,332
|
|
|
|
900
|
|
|
|
2,104
|
|
|
|
3,036
|
|
|
|
1,176
|
|
|
|
|
|
|
|
9,548
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,319
|
|
|
|
|
|
|
|
(665
|
)
|
|
|
35,654
|
|
Acquisition related costs, net of recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,051
|
|
|
|
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
95,726
|
|
|
|
43,283
|
|
|
|
48,958
|
|
|
|
39,355
|
|
|
|
32,074
|
|
|
|
(19,138
|
)
|
|
|
240,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
38,320
|
|
|
$
|
19,827
|
|
|
$
|
29,678
|
|
|
$
|
11,453
|
|
|
$
|
(32,074
|
)
|
|
$
|
(60,821
|
)
|
|
$
|
6,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
567,999
|
|
|
$
|
312,492
|
|
|
$
|
429,799
|
|
|
$
|
134,218
|
|
|
$
|
28,821
|
|
|
$
|
|
|
|
$
|
1,473,329
|
|
Amortization of cemetery property
|
|
$
|
4,234
|
|
|
$
|
2,483
|
|
|
$
|
1,202
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(572
|
)
|
|
$
|
7,347
|
|
Long lived asset additions
|
|
$
|
9,418
|
|
|
$
|
2,121
|
|
|
$
|
3,767
|
|
|
$
|
9,637
|
|
|
$
|
1,471
|
|
|
$
|
|
|
|
$
|
26,414
|
|
Goodwill
|
|
$
|
6,174
|
|
|
$
|
|
|
|
$
|
11,948
|
|
|
$
|
29,912
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
48,034
|
|
112
As of and for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries
|
|
|
Funeral
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
|
Northeast
|
|
|
West
|
|
|
Homes
|
|
|
Corporate
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
91,682
|
|
|
$
|
34,807
|
|
|
$
|
39,590
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(36,096
|
)
|
|
$
|
129,983
|
|
Service and other
|
|
|
37,530
|
|
|
|
25,550
|
|
|
|
29,176
|
|
|
|
|
|
|
|
|
|
|
|
(15,312
|
)
|
|
|
76,944
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,988
|
|
|
|
|
|
|
|
(2,309
|
)
|
|
|
35,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
129,212
|
|
|
|
60,357
|
|
|
|
68,766
|
|
|
|
37,988
|
|
|
|
|
|
|
|
(53,717
|
)
|
|
|
242,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
19,358
|
|
|
|
7,704
|
|
|
|
6,745
|
|
|
|
|
|
|
|
|
|
|
|
(5,706
|
)
|
|
|
28,101
|
|
Cemetery
|
|
|
25,479
|
|
|
|
13,693
|
|
|
|
16,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,410
|
|
Selling
|
|
|
29,032
|
|
|
|
12,251
|
|
|
|
12,490
|
|
|
|
|
|
|
|
868
|
|
|
|
(7,763
|
)
|
|
|
46,878
|
|
General and administrative
|
|
|
15,206
|
|
|
|
6,072
|
|
|
|
7,648
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
28,928
|
|
Corporate overhead
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,169
|
|
|
|
|
|
|
|
28,169
|
|
Depreciation and amortization
|
|
|
2,164
|
|
|
|
900
|
|
|
|
2,316
|
|
|
|
2,509
|
|
|
|
1,542
|
|
|
|
|
|
|
|
9,431
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,977
|
|
|
|
|
|
|
|
(252
|
)
|
|
|
28,725
|
|
Acquisition related costs, net of recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,123
|
|
|
|
|
|
|
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
91,239
|
|
|
|
40,620
|
|
|
|
45,437
|
|
|
|
31,486
|
|
|
|
33,704
|
|
|
|
(13,721
|
)
|
|
|
228,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
37,973
|
|
|
$
|
19,737
|
|
|
$
|
23,329
|
|
|
$
|
6,502
|
|
|
$
|
(33,704
|
)
|
|
$
|
(39,996
|
)
|
|
$
|
13,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
519,918
|
|
|
$
|
299,166
|
|
|
$
|
394,685
|
|
|
$
|
107,059
|
|
|
$
|
22,897
|
|
|
$
|
|
|
|
$
|
1,343,725
|
|
Amortization of cemetery property
|
|
$
|
4,346
|
|
|
$
|
2,394
|
|
|
$
|
1,048
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92
|
|
|
$
|
7,880
|
|
Long lived asset additions
|
|
$
|
12,832
|
|
|
$
|
3,594
|
|
|
$
|
4,757
|
|
|
$
|
9,415
|
|
|
$
|
849
|
|
|
$
|
|
|
|
$
|
31,447
|
|
Goodwill
|
|
$
|
6,174
|
|
|
$
|
|
|
|
$
|
11,948
|
|
|
$
|
24,270
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,392
|
|
113
As of and for the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries
|
|
|
Funeral
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
|
Northeast
|
|
|
West
|
|
|
Homes
|
|
|
Corporate
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
80,485
|
|
|
$
|
32,894
|
|
|
$
|
46,961
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(36,550
|
)
|
|
$
|
123,790
|
|
Service and other
|
|
|
33,271
|
|
|
|
24,369
|
|
|
|
31,497
|
|
|
|
|
|
|
|
|
|
|
|
(14,943
|
)
|
|
|
74,194
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,163
|
|
|
|
|
|
|
|
(759
|
)
|
|
|
30,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
113,756
|
|
|
|
57,263
|
|
|
|
78,458
|
|
|
|
31,163
|
|
|
|
|
|
|
|
(52,252
|
)
|
|
|
228,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
16,653
|
|
|
|
7,140
|
|
|
|
7,361
|
|
|
|
|
|
|
|
|
|
|
|
(5,039
|
)
|
|
|
26,115
|
|
Cemetery
|
|
|
23,090
|
|
|
|
14,033
|
|
|
|
20,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,145
|
|
Selling
|
|
|
27,457
|
|
|
|
11,468
|
|
|
|
14,029
|
|
|
|
|
|
|
|
830
|
|
|
|
(8,493
|
)
|
|
|
45,291
|
|
General and administrative
|
|
|
13,820
|
|
|
|
6,411
|
|
|
|
9,314
|
|
|
|
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
29,544
|
|
Corporate overhead
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,766
|
|
|
|
|
|
|
|
23,766
|
|
Depreciation and amortization
|
|
|
1,653
|
|
|
|
891
|
|
|
|
2,266
|
|
|
|
1,597
|
|
|
|
2,127
|
|
|
|
|
|
|
|
8,534
|
|
Funeral home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,554
|
|
|
|
|
|
|
|
|
|
|
|
23,554
|
|
Acquisition related costs, net of recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,604
|
|
|
|
|
|
|
|
4,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
82,673
|
|
|
|
39,943
|
|
|
|
52,992
|
|
|
|
25,151
|
|
|
|
31,329
|
|
|
|
(13,535
|
)
|
|
|
218,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
31,083
|
|
|
$
|
17,320
|
|
|
$
|
25,466
|
|
|
$
|
6,012
|
|
|
$
|
(31,329
|
)
|
|
$
|
(38,717
|
)
|
|
$
|
9,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
472,105
|
|
|
$
|
284,765
|
|
|
$
|
383,696
|
|
|
$
|
78,763
|
|
|
$
|
29,429
|
|
|
$
|
|
|
|
$
|
1,248,758
|
|
Amortization of cemetery property
|
|
$
|
3,483
|
|
|
$
|
2,185
|
|
|
$
|
1,005
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(81
|
)
|
|
$
|
6,592
|
|
Long lived asset additions
|
|
$
|
13,883
|
|
|
$
|
1,823
|
|
|
$
|
7,816
|
|
|
$
|
10,214
|
|
|
$
|
588
|
|
|
$
|
|
|
|
$
|
34,324
|
|
Goodwill
|
|
$
|
5,734
|
|
|
$
|
|
|
|
$
|
11,948
|
|
|
$
|
14,463
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,145
|
|
Results of individual business units are presented based on our management accounting practices and management
structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other
company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and
associated expenses are not deferred in accordance with SAB No. 104; therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the Companys managerial financial statements to those prepared
in accordance with GAAP. Pre-need sales revenues included within the sales category consist primarily of the sale of burial lots, burial vaults, mausoleum crypts, grave markers and memorials, and caskets. Management accounting practices included in
the Southeast, Northeast, and Western Regions reflect these pre-need sales when contracts are signed by the customer and accepted by the Company. Pre-need sales reflected in the consolidated financial statements, prepared in accordance with GAAP,
recognize revenues for the sale of burial lots and mausoleum crypts when the product is constructed and at least 10% of the sales price is collected. With respect to the other products, the consolidated financial statements prepared under GAAP
recognize sales revenues when the criteria for delivery under SAB No. 104 are met. These criteria include, among other things, purchase of the product, delivery and installation of the product in the ground, and transfer of title to the
customer. In each case, costs are accrued in connection with the recognition of revenues; therefore, the consolidated financial statements reflect Deferred Cemetery Revenue, Net, and Deferred Selling and Obtaining Costs on the consolidated balance
sheet, whereas the Companys management accounting practices exclude these items.
15.
|
FAIR VALUE MEASUREMENTS
|
The Fair Value Measurements and Disclosures topic of the ASC defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs.
The three levels of the fair value hierarchy defined by this topic are described below.
Level 1: Quoted market prices available in active
markets for identical assets or liabilities. The Company includes short-term investments, consisting primarily of money market funds, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.
Level 2: Quoted prices in active markets for similar assets; quoted prices in non-active markets for identical or similar assets; inputs
other than quoted prices that are observable. The Company includes U.S. state and municipal, corporate and other fixed income debt securities in its level 2 investments.
114
Level 3: Any and all pricing inputs that are generally unobservable and not corroborated by
market data.
On the Companys consolidated balance sheet, current assets, long-term accounts receivable and current liabilities are
recorded at amounts that approximate fair value.
The following table displays the Companys assets measured at fair value as of
December 31, 2013 and December 31, 2012.
As of December 31, 2013
Merchandise Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
46,518
|
|
|
$
|
|
|
|
$
|
46,518
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
9,171
|
|
|
|
9,171
|
|
Other debt securities
|
|
|
|
|
|
|
7,324
|
|
|
|
7,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
|
|
|
|
|
16,495
|
|
|
|
16,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
111,333
|
|
|
|
|
|
|
|
111,333
|
|
Mutual funds - equity securities - real estate sector
|
|
|
49,103
|
|
|
|
|
|
|
|
49,103
|
|
Mutual funds - equity securities - energy sector
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - equity securities - MLPs
|
|
|
36,193
|
|
|
|
|
|
|
|
36,193
|
|
Mutual funds - equity securities - other
|
|
|
72,234
|
|
|
|
|
|
|
|
72,234
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred REITs
|
|
|
|
|
|
|
|
|
|
|
|
|
Master limited partnerships
|
|
|
57,258
|
|
|
|
|
|
|
|
57,258
|
|
Global equity securities
|
|
|
28,437
|
|
|
|
|
|
|
|
28,437
|
|
Other invested assets
|
|
|
|
|
|
|
5,723
|
|
|
|
5,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
401,076
|
|
|
$
|
22,218
|
|
|
$
|
423,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Care Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
16,686
|
|
|
$
|
|
|
|
$
|
16,686
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency
|
|
|
372
|
|
|
|
|
|
|
|
372
|
|
U.S. state and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
24,510
|
|
|
|
24,510
|
|
Other debt securities
|
|
|
|
|
|
|
371
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
|
372
|
|
|
|
24,881
|
|
|
|
25,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
116,013
|
|
|
|
|
|
|
|
116,013
|
|
Mutual funds - equity securities - real estate sector
|
|
|
40,763
|
|
|
|
|
|
|
|
40,763
|
|
Mutual funds - equity securities - energy sector
|
|
|
14,761
|
|
|
|
|
|
|
|
14,761
|
|
Mutual funds - equity securities - MLPs
|
|
|
46,817
|
|
|
|
|
|
|
|
46,817
|
|
Mutual funds - equity securities - other
|
|
|
13,252
|
|
|
|
|
|
|
|
13,252
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred REITs
|
|
|
|
|
|
|
|
|
|
|
|
|
Master limited partnerships
|
|
|
36,925
|
|
|
|
|
|
|
|
36,925
|
|
Global equity securities
|
|
|
919
|
|
|
|
|
|
|
|
919
|
|
Other invested assets
|
|
|
|
|
|
|
382
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
286,508
|
|
|
$
|
25,263
|
|
|
$
|
311,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
As of December 31, 2012
Merchandise Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
27,890
|
|
|
$
|
|
|
|
$
|
27,890
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
8,714
|
|
|
|
8,714
|
|
Other debt securities
|
|
|
|
|
|
|
4,317
|
|
|
|
4,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
|
|
|
|
|
13,031
|
|
|
|
13,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
107,921
|
|
|
|
|
|
|
|
107,921
|
|
Mutual funds - equity securities - real estate sector
|
|
|
51,986
|
|
|
|
|
|
|
|
51,986
|
|
Mutual funds - equity securities - energy sector
|
|
|
5,666
|
|
|
|
|
|
|
|
5,666
|
|
Mutual funds - equity securities - MLPs
|
|
|
29,336
|
|
|
|
|
|
|
|
29,336
|
|
Mutual funds - equity securities - other
|
|
|
58,082
|
|
|
|
|
|
|
|
58,082
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred REITs
|
|
|
563
|
|
|
|
|
|
|
|
563
|
|
Master limited partnerships
|
|
|
42,410
|
|
|
|
|
|
|
|
42,410
|
|
Global equity securities
|
|
|
24,434
|
|
|
|
|
|
|
|
24,434
|
|
Other invested assets
|
|
|
|
|
|
|
7,097
|
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
348,288
|
|
|
$
|
20,128
|
|
|
$
|
368,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Care Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
21,419
|
|
|
$
|
|
|
|
$
|
21,419
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency
|
|
|
512
|
|
|
|
|
|
|
|
512
|
|
U.S. state and local government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
23,291
|
|
|
|
23,291
|
|
Other debt securities
|
|
|
|
|
|
|
371
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity investments
|
|
|
512
|
|
|
|
23,662
|
|
|
|
24,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - debt securities
|
|
|
107,188
|
|
|
|
|
|
|
|
107,188
|
|
Mutual funds - equity securities - real estate sector
|
|
|
42,365
|
|
|
|
|
|
|
|
42,365
|
|
Mutual funds - equity securities - energy sector
|
|
|
13,061
|
|
|
|
|
|
|
|
13,061
|
|
Mutual funds - equity securities - MLPs
|
|
|
34,805
|
|
|
|
|
|
|
|
34,805
|
|
Mutual funds - equity securities - other
|
|
|
8,981
|
|
|
|
|
|
|
|
8,981
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred REITs
|
|
|
486
|
|
|
|
|
|
|
|
486
|
|
Master limited partnerships
|
|
|
28,693
|
|
|
|
|
|
|
|
28,693
|
|
Global equity securities
|
|
|
726
|
|
|
|
|
|
|
|
726
|
|
Other invested assets
|
|
|
|
|
|
|
415
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258,236
|
|
|
$
|
24,077
|
|
|
$
|
282,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
Level 2 securities primarily consist of corporate and other fixed income debt securities. The
Company obtains pricing information for these securities from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and
assumptions to the pricing vendors model are derived from market observable sources including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since
many fixed income securities do not trade on a daily basis, the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Thus, certain securities may not
be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. The Company reviews the information provided by the pricing vendor on a regular basis. In addition, the pricing
vendor has an established process in place for the identification and resolution of potentially erroneous prices.
There were no level 3
assets.
16.
|
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|
The following summarizes certain quarterly results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
2013
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(in thousands, except unit data)
|
|
Revenues
|
|
$
|
59,612
|
|
|
$
|
62,422
|
|
|
$
|
61,539
|
|
|
$
|
63,068
|
|
Net loss
|
|
|
(2,200
|
)
|
|
|
(11,809
|
)
|
|
|
(1,484
|
)
|
|
|
(3,539
|
)
|
General partners interest in net loss for the period
|
|
|
(40
|
)
|
|
|
(218
|
)
|
|
|
(26
|
)
|
|
|
(66
|
)
|
Limited partners interest in net loss for the period
|
|
|
(2,160
|
)
|
|
|
(11,591
|
)
|
|
|
(1,458
|
)
|
|
|
(3,473
|
)
|
Net loss per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
Three months ended
|
|
2012
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(in thousands, except unit data)
|
|
Revenues
|
|
$
|
59,587
|
|
|
$
|
61,508
|
|
|
$
|
62,197
|
|
|
$
|
59,314
|
|
Net income (loss)
|
|
|
2,030
|
|
|
|
(2,169
|
)
|
|
|
1,061
|
|
|
|
(3,935
|
)
|
General partners interest in net income (loss) for the period
|
|
|
41
|
|
|
|
(43
|
)
|
|
|
21
|
|
|
|
(79
|
)
|
Limited partners interest in net income (loss) for the period
|
|
|
1,989
|
|
|
|
(2,126
|
)
|
|
|
1,040
|
|
|
|
(3,856
|
)
|
Net income (loss) per limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.20
|
)
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.20
|
)
|
Net income (loss) per limited partner unit is computed independently for each quarter and the full year
based upon respective average units outstanding. Therefore, the sum of the quarterly per share amounts may not equal to the annual per share amounts
.
Partners capital consists of common units representing limited partner interests and the general partners
interest. Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors. Also, our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Excluding the impact of the incentive distribution rights held by the general partner, holders of our common units share proportionately in the distributions of the Company.
Our general partner has rights separate from the common unitholders including the ability to direct the operations of the Company and to
transfer its ownership interest without unitholder consent under certain circumstances. The general partner also holds incentive distribution rights that entitle it to receive increasing percentages of the cash we distribute from operating surplus
in excess of specific per unit distribution amounts. Our general partner also has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest.
On March 26, 2013, the Company completed a follow-on public offering of 1,610,000 common units at a price of $25.35 per unit. Net
proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $38.4 million. The proceeds from the offering were used to pay off debt on the Credit Facility.
On February 9, 2011, the Company completed a follow-on public offering of 3,756,155 common units, including an option to purchase up to
731,155 common units to cover over-allotments which was exercised in full by the underwriters, at a price of $29.25
117
per unit, representing a 19.4% interest in the Company. Total gross proceeds from these transactions were approximately $109.9 million, before offering costs and underwriting discounts. Net
proceeds of the offering, including the related capital contribution of the General Partner, after deducting underwriting discounts and offering expenses, were approximately $105.6 million. As part of this transaction, selling unitholders also sold
1,849,366 common units. The Company did not receive any of the proceeds generated by the sale of any units held by the selling unitholders.
On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit.
Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.1 million. The proceeds were used to pay down borrowings outstanding under our Credit Facility.