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| 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, 2011, the Partnership owned 253 and operated 274 cemeteries in 26 states and Puerto Rico and owned and operated 69 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”).
Principles of Consolidation
The consolidated financial statements include the accounts of each of the Company’s 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 21 cemeteries under long-term operating or management contracts. The operations of 15 of these managed cemeteries have been consolidated in accordance with the provisions of ASC 810. The financial statements also include the effects of retroactive adjustments, resulting from the Company’s 2011 and 2010 acquisitions (see Note 14).
The 3 cemeteries that the Company began operating under a long-term operating agreement in the third quarter of 2010 and the 3 cemeteries the Company began operating under long-term operating agreements in 2009 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. See Note 14 for further details.
Total revenues derived from the cemeteries under long-term management or operating contracts totaled approximately $39.5 million, $33.9 million and $27.2 million for the years ended December 31, 2011, 2010 and 2009, 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 and constructed mausoleum crypts and lawn crypts and 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 | 5 to 10 years | |
| Leasehold improvements | over the shorter of the term of the lease or the life of the asset |
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 Company’s 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 Company’s 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 $6.4 million and $6.0 million at December 31, 2011 and 2010, 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 Company’s policy is to evaluate an asset for impairment when events or circumstances indicate that a long-lived asset’s 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, 2011, 2010 and 2009, 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 Company’s 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 the 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.
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 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.
Two Class Method of Accounting for Earnings per Share
The Company utilizes the two class method of accounting for earnings per share as required by Accounting Topic 260. Under this method:
| 1. | Periodic net income is reduced by the amount of distributions declared for each class of participating security in order to determine undistributed earnings. |
| 2. | Undistributed earnings are allocated to each participating security as if all earnings had been distributed in accordance with the distribution schedule per the partnership agreement. |
| 3. | Total periodic earnings (“TPE”) for each class is the sum of their share of distributions plus undistributed earnings. |
The Company’s general partner’s agreement contains incentive distribution rights (“IDR’s”) and such IDR’s are detachable from the general partner units (i.e. can be sold on a stand alone basis). As a result, the Company must consider the IDR’s to be a separate class of ownership interest and allocate and disclose TPE to such class by itself. For all periods presented, the Company made distributions in excess of earnings. As such, there was no allocation of TPE to the IDR’s. Accordingly, the Consolidated Statement of Partners’ Capital only reflects amounts allocated to general and common partners.
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 (this resulted in a rate of 4.75% for contracts entered into during the years ended December 31, 2011, 2010, and 2009) 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 management’s 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, 2011 and December 31, 2010, 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 vendor’s 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.
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.
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 or phantom unit options. All outstanding unit appreciation rights (See Note 12) 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. The diluted weighted average number of limited partners’ units outstanding presented on the consolidated statement of operations do not include 322,866 units, 213,261 units and 63,693 units for the years ended December 31, 2011, 2010, and 2009, respectively, as their effects would be anti-dilutive.
New Accounting Pronouncements
In the third quarter of 2011, the Financial Accounting Standards Board issued Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350) (“ASU 2011-08”). Prior to ASU 2011-08, the first step in the goodwill impairment test was to compare the fair value of a reporting unit to its carrying amount, including goodwill. ASU 2011-08 allows a Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after this assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, the goodwill test can be concluded and it is not necessary to calculate the fair value of the reporting unit. However, if the qualitative assessment does not lead to this conclusion, the full two step goodwill test, which has not been changed by ASU 2011-08, must be performed. The Company plans to adopt the provisions of ASU 2011-08 in 2012. This adoption is not expected to have a significant impact on the Company’s 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 trust and perpetual care trust, 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 sheets.
|
|||
| 2. | LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE |
Long-term accounts receivable, net, consisted of the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Customer receivables |
$ | 151,500 | $ | 135,530 | ||||
|
Unearned finance income |
(16,727 | ) | (14,488 | ) | ||||
|
Allowance for contract cancellations |
(17,582 | ) | (15,832 | ) | ||||
|
|
|
|
|
|||||
| 117,191 | 105,210 | |||||||
|
Less: current portion—net of allowance |
48,837 | 45,149 | ||||||
|
|
|
|
|
|||||
|
Long-term portion—net of allowance |
$ | 68,354 | $ | 60,061 | ||||
|
|
|
|
|
|||||
Activity in the allowance for contract cancellations is as follows:
| For the Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Balance—Beginning of period |
$ | 15,832 | $ | 13,350 | $ | 13,763 | ||||||
|
Provision for cancellations |
18,649 | 16,529 | 13,201 | |||||||||
|
Charge-offs—net |
(16,899 | ) | (14,047 | ) | (13,614 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance—End of period |
$ | 17,582 | $ | 15,832 | $ | 13,350 | ||||||
|
|
|
|
|
|
|
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The Company’s 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 a customer’s payment history. The Company’s 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 will be flexible with customers who have difficulty making payments and will try to create revised or alternative payment agreements with the customer. As a result, the Company does not write-off of a receivable until all possible collection efforts have been exhausted. As of December 31, 2011 and 2010, approximately 9% of the Company’s gross accounts receivable balance was 90 days past due.
|
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| 3. | CEMETERY PROPERTY |
Cemetery property consists of the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Developed land |
$ | 64,266 | $ | 61,849 | ||||
|
Undeveloped land |
164,723 | 159,386 | ||||||
|
Mausoleum crypts and lawn crypts |
69,949 | 62,225 | ||||||
|
|
|
|
|
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|
Total |
$ | 298,938 | $ | 283,460 | ||||
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|
|
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|
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| 4. | PROPERTY AND EQUIPMENT |
Major classes of property and equipment follow:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Building and improvements |
$ | 75,076 | $ | 67,247 | ||||
|
Furniture and equipment |
36,863 | 31,947 | ||||||
|
|
|
|
|
|||||
| 111,939 | 99,194 | |||||||
|
Less: accumulated depreciation |
(38,162 | ) | (32,945 | ) | ||||
|
|
|
|
|
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|
Property and equipment—net |
$ | 73,777 | $ | 66,249 | ||||
|
|
|
|
|
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Depreciation expense was $5.9 million, $5.8 million and $4.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.
|
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| 5. | MERCHANDISE TRUSTS |
At December 31, 2011 and December 31, 2010, the Company’s 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 (“REIT’s”); 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. At December 31, 2011, approximately 94.6% of these assets were Level 1 investments while approximately 5.4% were Level 2 assets. At December 31, 2010, approximately 94.6% of these assets were Level 1 investments while approximately 5.4% were Level 2 assets. 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 $6.9 million and $6.4 million of investments held in trust by the West Virginia Funeral Directors Association at December 31, 2011 and December 31, 2010, 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 fair value.
The cost and market value associated with the assets held in the merchandise trusts at December 31, 2011 and December 31, 2010 is presented below:
|
As of December 31, 2011 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Short-term investments |
$ | 38,312 | $ | — | $ | — | $ | 38,312 | ||||||||
|
Fixed maturities: |
||||||||||||||||
|
U.S. Government and federal agency |
— | — | — | — | ||||||||||||
|
U.S. State and local government agency |
23 | — | — | 23 | ||||||||||||
|
Corporate debt securities |
10,537 | 19 | (791 | ) | 9,765 | |||||||||||
|
Other debt securities |
1,100 | — | — | 1,100 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
11,660 | 19 | (791 | ) | 10,888 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Mutual funds—debt securities |
68,291 | 1,711 | (2,581 | ) | 67,421 | |||||||||||
|
Mutual funds—equity securities |
148,209 | 1,939 | (8,860 | ) | 141,288 | |||||||||||
|
Equity securities |
71,760 | 3,723 | (3,131 | ) | 72,352 | |||||||||||
|
Other invested assets |
7,326 | 34 | — | 7,360 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total managed investments |
$ | 345,558 | $ | 7,426 | $ | (15,363 | ) | $ | 337,621 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
West Virginia Trust Receivable |
6,894 | — | — | 6,894 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 352,452 | $ | 7,426 | $ | (15,363 | ) | $ | 344,515 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
As of December 31, 2010 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Short-term investments |
$ | 40,723 | $ | — | $ | — | $ | 40,723 | ||||||||
|
Fixed maturities: |
||||||||||||||||
|
U.S. Government and federal agency |
— | — | — | — | ||||||||||||
|
U.S. State and local government agency |
23 | — | — | 23 | ||||||||||||
|
Corporate debt securities |
9,973 | 119 | (152 | ) | 9,940 | |||||||||||
|
Other debt securities |
1,503 | 35 | — | 1,538 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
11,499 | 154 | (152 | ) | 11,501 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Mutual funds—debt securities |
49,717 | 3,087 | (286 | ) | 52,518 | |||||||||||
|
Mutual funds—equity securities |
124,177 | 6,444 | (3,956 | ) | 126,665 | |||||||||||
|
Equity securities |
69,462 | 6,708 | (909 | ) | 75,261 | |||||||||||
|
Other invested assets |
4,991 | 217 | — | 5,208 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total managed investments |
$ | 300,569 | $ | 16,610 | $ | (5,303 | ) | $ | 311,876 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
West Virginia Trust Receivable |
6,442 | — | — | 6,442 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 307,011 | $ | 16,610 | $ | (5,303 | ) | $ | 318,318 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The contractual maturities of debt securities as of December 31, 2011 and December 31, 2010 are presented below:
|
As of December 31, 2011 |
Less than 1 year |
1 year through 5 years |
6 years through 10 years |
More than 10 years |
||||||||||||
| (in thousands) | ||||||||||||||||
|
U.S. Government and federal agency |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
U.S. State and local government agency |
23 | — | — | — | ||||||||||||
|
Corporate debt securities |
— | 8,984 | 781 | — | ||||||||||||
|
Other debt securities |
1,100 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
$ | 1,123 | $ | 8,984 | $ | 781 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
As of December 31, 2010 |
Less than 1 year |
1 year through 5 years |
6 years through 10 years |
More than 10 years |
||||||||||||
| (in thousands) | ||||||||||||||||
|
U.S. Government and federal agency |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
U.S. State and local government agency |
— | 23 | — | — | ||||||||||||
|
Corporate debt securities |
85 | 2,887 | 6,064 | 904 | ||||||||||||
|
Other debt securities |
1,538 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
$ | 1,623 | $ | 2,910 | $ | 6,064 | $ | 904 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at December 31, 2011 and December 31, 2010 is presented below:
| Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
|
As of December 31, 2011 |
Fair Value |
Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||||||
|
U.S. Government and federal agency |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
U.S. State and local government agency |
— | — | — | — | — | — | ||||||||||||||||||
|
Corporate debt securities |
4,007 | 351 | 4,459 | 440 | 8,466 | 791 | ||||||||||||||||||
|
Other debt securities |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total fixed maturities |
4,007 | 351 | 4,459 | 440 | 8,466 | 791 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Mutual funds—debt securities |
19,691 | 1,109 | 31,916 | 1,472 | 51,607 | 2,581 | ||||||||||||||||||
|
Mutual funds—equity securities |
32,631 | 970 | 59,010 | 7,890 | 91,641 | 8,860 | ||||||||||||||||||
|
Equity securities |
20,349 | 1,941 | 5,775 | 1,190 | 26,124 | 3,131 | ||||||||||||||||||
|
Other invested assets |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 76,678 | $ | 4,371 | $ | 101,160 | $ | 10,992 | $ | 177,838 | $ | 15,363 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
|
As of December 31, 2010 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||||||
|
U.S. Government and federal agency |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
U.S. State and local government agency |
— | — | — | — | — | — | ||||||||||||||||||
|
Corporate debt securities |
4,887 | 95 | 813 | 57 | 5,700 | 152 | ||||||||||||||||||
|
Other debt securities |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total fixed maturities |
4,887 | 95 | 813 | 57 | 5,700 | 152 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Mutual funds—debt securities |
1,619 | 11 | 2,331 | 275 | 3,950 | 286 | ||||||||||||||||||
|
Mutual funds—equity securities |
364 | 48 | 56,316 | 3,908 | 56,680 | 3,956 | ||||||||||||||||||
|
Equity securities |
5,227 | 129 | 7,817 | 780 | 13,044 | 909 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 12,097 | $ | 283 | $ | 67,277 | $ | 5,020 | $ | 79,374 | $ | 5,303 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
A reconciliation of the Company’s merchandise trust activities for the years ended December 31, 2011 and December 31, 2010 is presented below:
Year ended December 31, 2011
|
Fair Value @ 12/31/2010 |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value @ 12/31/2011 |
|||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
|
$318,318 |
61,851 | (39,455 | ) | 13,597 | 9,706 | 3,723 | (1,592 | ) | (2,389 | ) | (19,244 | ) | $ | 344,515 | ||||||||||||||||||||||
Year ended December 31, 2010
|
Fair Value @ |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value @ 12/31/2010 |
|||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
|
$203,829 |
97,401 | (28,480 | ) | 1,993 | 1,601 | 7,025 | (904 | ) | (1,869 | ) | 37,722 | $ | 318,318 | |||||||||||||||||||||||
The Company made net deposits into the trusts of approximately $22.4 million and net deposits into the trusts of approximately $68.9 million during the years ended December 31, 2011 and 2010, respectively. During the year ended December 31, 2011, purchases and sales of securities available for sale included in trust investments were approximately $279.3 million and $262.6 million, respectively. During the year ended December 31, 2010, purchases and sales of securities available for sale included in trust investments were approximately $448.3 million and $365.0 million, respectively. Contributions include $15.5 million and $72.2 million of assets that were acquired through acquisitions during the years ended December 31, 2011 and 2010, respectively.
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 us to believe that impairment is other than temporary in nature. |
During the year ended December 31, 2011, the Company determined that there were 4 securities with an aggregate cost basis of approximately $1.5 million and an aggregate fair value of approximately $1.0 million, resulting in an impairment of $0.5 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.
During the year ended December 31, 2010, the Company determined that there were 17 securities, with an aggregate cost basis of approximately $40.9 million, an aggregate fair value of approximately $27.6 million and a resulting impairment of approximately $13.3 million, wherein such impairment is 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.
|
|||
| 6. | PERPETUAL CARE TRUSTS |
At December 31, 2011 and December 31, 2010, the Company’s perpetual care trust 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 REIT’s and Master Limited Partnerships; |
| • |
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. At December 31, 2011, approximately 91.0% of these assets were Level 1 investments while approximately 9.0% were Level 2 assets. At December 31, 2010, approximately 90.3% of these assets were Level 1 investments while approximately 9.7% were Level 2 assets. There were no Level 3 assets.
The cost and market value associated with the assets held in perpetual care trusts at December 31, 2011 and December 31, 2010 were as follows:
|
As of December 31, 2011 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Short-term investments |
$ | 22,607 | $ | — | $ | — | $ | 22,607 | ||||||||
|
Fixed maturities: |
||||||||||||||||
|
U.S. Government and federal agency |
408 | 105 | — | 513 | ||||||||||||
|
U.S. State and local government agency |
66 | 81 | — | 147 | ||||||||||||
|
Corporate debt securities |
23,359 | 229 | (1,434 | ) | 22,154 | |||||||||||
|
Other debt securities |
371 | — | — | 371 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
24,204 | 415 | (1,434 | ) | 23,185 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Mutual funds—debt securities |
61,700 | 185 | (1,079 | ) | 60,806 | |||||||||||
|
Mutual funds—equity securities |
104,824 | 4,295 | (9,621 | ) | 99,498 | |||||||||||
|
Equity Securities |
39,199 | 9,326 | (112 | ) | 48,413 | |||||||||||
|
Other invested assets |
327 | 156 | (313 | ) | 170 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 252,861 | $ | 14,377 | $ | (12,559 | ) | $ | 254,679 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
As of December 31, 2010 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Short-term investments |
$ | 20,583 | $ | — | $ | — | $ | 20,583 | ||||||||
|
Fixed maturities: |
||||||||||||||||
|
U.S. Government and federal agency |
515 | 85 | — | 600 | ||||||||||||
|
U.S. State and local government agency |
67 | 81 | — | 148 | ||||||||||||
|
Corporate debt securities |
22,047 | 879 | (234 | ) | 22,692 | |||||||||||
|
Other debt securities |
509 | — | (1 | ) | 508 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
23,138 | 1,045 | (235 | ) | 23,948 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Mutual funds—debt securities |
52,809 | 2,865 | (525 | ) | 55,149 | |||||||||||
|
Mutual funds—equity securities |
88,871 | 5,787 | (2,878 | ) | 91,780 | |||||||||||
|
Equity Securities |
48,054 | 9,379 | (181 | ) | 57,252 | |||||||||||
|
Other invested assets |
887 | 91 | — | 978 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 234,342 | $ | 19,167 | $ | (3,819 | ) | $ | 249,690 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The contractual maturities of debt securities as of December 31, 2011 and December 31, 2010 are as follows:
| Less than | 1 year through | 6 years through | More than | |||||||||||||
|
As of December 31, 2011 |
1 year | 5 years | 10 years | 10 years | ||||||||||||
| (in thousands) | ||||||||||||||||
|
U.S. Government and federal agency |
$ | — | $ | 388 | $ | 125 | $ | — | ||||||||
|
U.S. State and local government agency |
147 | — | — | — | ||||||||||||
|
Corporate debt securities |
128 | 19,762 | 2,264 | — | ||||||||||||
|
Other debt securities |
371 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
$ | 646 | $ | 20,150 | $ | 2,389 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Less than | 1 year through | 6 years through | More than | |||||||||||||
|
As of December 31, 2010 |
1 year | 5 years | 10 years | 10 years | ||||||||||||
| (in thousands) | ||||||||||||||||
|
U.S. Government and federal agency |
$ | 103 | $ | 381 | $ | 116 | $ | — | ||||||||
|
U.S. State and local government agency |
148 | — | — | — | ||||||||||||
|
Corporate debt securities |
292 | 6,377 | 14,667 | 1,356 | ||||||||||||
|
Other debt securities |
508 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed maturities |
$ | 1,051 | $ | 6,758 | $ | 14,783 | $ | 1,356 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at December 31, 2011 and December 31, 2010 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, 2011 |
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 |
7,967 | 727 | 8,471 | 707 | 16,438 | 1,434 | ||||||||||||||||||
|
Other debt securities |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total fixed maturities |
7,967 | 727 | 8,471 | 707 | 16,438 | 1,434 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Mutual funds—debt securities |
37,956 | 772 | 1,675 | 307 | 39,631 | 1,079 | ||||||||||||||||||
|
Mutual funds—equity securities |
21,483 | 3,023 | 44,416 | 6,598 | 65,899 | 9,621 | ||||||||||||||||||
|
Equity securities |
2,978 | 106 | 351 | 6 | 3,329 | 112 | ||||||||||||||||||
|
Other invested assets |
170 | 313 | — | — | 170 | 313 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 70,554 | $ | 4,941 | $ | 54,913 | $ | 7,618 | $ | 125,467 | $ | 12,559 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
|
As of December 31, 2010 |
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 |
9,195 | 145 | 1,196 | 89 | 10,391 | 234 | ||||||||||||||||||
|
Other debt securities |
137 | 1 | — | — | 137 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total fixed maturities |
9,332 | 146 | 1,196 | 89 | 10,528 | 235 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Mutual funds—debt securities |
1,444 | 127 | 2,702 | 398 | 4,146 | 525 | ||||||||||||||||||
|
Mutual funds—equity securities |
— | — | 45,268 | 2,878 | 45,268 | 2,878 | ||||||||||||||||||
|
Equity securities |
1,695 | 107 | 3,102 | 74 | 4,797 | 181 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 12,471 | $ | 380 | $ | 52,268 | $ | 3,439 | $ | 64,739 | $ | 3,819 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
A reconciliation of the Company’s perpetual care trust activities for the years ended December 31, 2011 and 2010 is presented below:
Year ended December 31, 2011
|
Fair Value @ |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value @ 12/31/2011 |
|||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
|
$249,690 |
15,307 | (13,720 | ) | 15,819 | 1,076 | 2,408 | (910 | ) | (1,461 | ) | (13,530 | ) | $ | 254,679 | ||||||||||||||||||||||
Year ended December 31, 2010
|
Fair Value @ |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value @ 12/31/2010 |
|||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
|
$196,276 |
32,967 | (15,414 | ) | 14,892 | 941 | (14,048 | ) | (425 | ) | (1,525 | ) | 36,026 | $ | 249,690 | ||||||||||||||||||||||
The Company made net deposits into the trusts of approximately $1.6 million and $17.6 million during the years ended December 31, 2011 and 2010, respectively. During the year ended December 31, 2011 purchases and sales of securities available for sale included in trust investments were approximately $139.9 million and $127.2 million, respectively. During the year ended December 31, 2010 purchases and sales of securities available for sale included in trust investments were approximately $311.1 million and $262.6 million, respectively. Contributions include $8.3 million and $19.8 million of assets that were acquired through acquisitions during the years ended December 31, 2011 and 2010, 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 Company’s procedures for evaluating whether impairment to assets are other than temporary.
During the year ended December, 2011, the Company determined that there was a single security with an aggregate cost basis of less than $0.1 million which was substantially impaired, and such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of this asset to its current value and offset this change against the liability for perpetual care trusts.
During the year ended December 31, 2010, the Company determined that there were 3 securities, with an aggregate cost basis of approximately $25.6 million, an aggregate fair value of approximately $10.8 million and a resulting impairment of approximately $14.8 million, wherein such impairment is 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.
|
|||
| 7. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill
The Company has recorded goodwill of approximately $36.4 million and $18.2 million as of December 31, 2011 and December 31, 2010, respectively. This amount represents the excess of the purchase price over the fair value of identifiable net assets acquired in acquisitions.
A rollforward of goodwill by reportable segment is as follows:
| Cemeteries | Funeral Homes |
Total | ||||||||||||||||||
| Southeast | Northeast | West | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Balance as of January 1, 2010 |
$ | — | $ | — | $ | — | $ | 480 | $ | 480 | ||||||||||
|
Goodwill acquired from acquisitions during 2010 |
456 | — | 11,801 | 5,416 | 17,673 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Balance as of December 31, 2010 |
456 | — | 11,801 | 5,896 | 18,153 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Goodwill acquired from acquisitions during 2011 |
6,815 | — | 147 | 11,324 | 18,286 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Balance as of December 31, 2011 |
$ | 7,271 | $ | — | $ | 11,948 | $ | 17,220 | $ | 36,439 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
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 Company’s goodwill has been identified during the years ended December 31, 2011 or 2010.
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:
| As of | As of | |||||||||||||||||||||||
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Intangible Asset |
Gross Carrying Amount |
Accumulated Amortization |
Net Intangible Asset |
|||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Amortized Intangible Assets: |
||||||||||||||||||||||||
|
Underlying contract value |
$ | 8,484 | $ | (546 | ) | $ | 7,938 | $ | 8,484 | $ | (328 | ) | $ | 8,156 | ||||||||||
|
Non-compete agreements |
3,820 | (1,413 | ) | 2,407 | 3,560 | (502 | ) | 3,058 | ||||||||||||||||
|
Other intangible assets |
205 | (67 | ) | 138 | 205 | (57 | ) | 148 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
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|
Total Intangible Assets |
$ | 12,509 | $ | (2,026 | ) | $ | 10,483 | $ | 12,249 | $ | (887 | ) | $ | 11,362 | ||||||||||
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|
|
|
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|
|
|
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|
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Underlying Contract Value of Long-Term Operating Agreements
The Company entered into three long-term operating agreements during 2009, wherein it became the exclusive operator of cemetery properties. These transactions did not qualify for acquisition accounting. The fair value of the consideration paid and liabilities assumed to enter into these agreements exceeded the fair value of assets acquired by approximately $8.5 million (See Note 14). 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 acquisitions entered into in the second and third quarters of 2010 and the first and third quarters of 2011, the Company entered into non-compete agreements with the former owners of the acquired entities. The non-compete agreements were valued in purchase accounting at a fair value of approximately $3.8 million. 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.
At December 31, 2011, 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) | ||||
|
2012 |
$ | 1,181 | ||
|
2013 |
940 | |||
|
2014 |
779 | |||
|
2015 |
329 | |||
|
2016 |
$ | 289 | ||
|
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| 8. | DERIVATIVE INSTRUMENTS |
On November 24, 2009, the Company entered into an interest rate swap (the “First Interest Rate Swap”) wherein the Company agreed to pay the counterparty interest in the amount of three month LIBOR plus 888 basis points in consideration for the counterparties agreement to pay the Company a fixed rate of interest of 10.25% on a principal amount of $108.0 million. On December 4, 2009, the Company entered into an interest rate swap (the “Second Interest Rate Swap”, together with the First Interest Rate Swap, the “Interest Rate Swaps”) wherein the Company agreed to pay the counterparty interest in the amount of three month LIBOR plus 869 basis points in consideration for the counterparties agreement to pay the Company a fixed rate of interest of 10.25% on a principal amount of $27.0 million.
The Interest Rate Swaps did not qualify for hedge accounting. Accordingly, the fair value of the Interest Rate Swaps were reported on the Company’s balance sheet and periodic changes in the fair value of the Interest Rate Swaps were recorded in earnings. On October 20, 2010, the Company elected to terminate the Interest Rate Swaps early. Upon termination, the Company received a payment of approximately $2.0 million to settle the Interest Rate Swaps. For the year ended December 31, 2010, the Company recognized a gain of approximately $4.7 million related to the change in fair value and termination payment of the Interest Rate Swaps.
|
|||
| 9. | LONG-TERM DEBT |
The Company had the following outstanding debt:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Insurance premium financing |
$ | 211 | $ | 215 | ||||
|
Vehicle Financing |
1,147 | 1,365 | ||||||
|
Acquisition Credit Facility, due January 2016 |
10,750 | 15,000 | ||||||
|
Revolving Credit Facility, due January 2016 |
33,000 | 18,500 | ||||||
|
Note Payable—Greenlawn acquisition |
1,321 | 1,400 | ||||||
|
Note Payable—Nelms acquisition (net of discount) |
623 | 866 | ||||||
|
Note Payable—acquisition non-competes (net of discounts) |
1,490 | 1,646 | ||||||
|
10.25% senior notes, due 2017 |
150,000 | 150,000 | ||||||
|
Class B Senior secured notes |
— | 17,500 | ||||||
|
Class C Senior secured notes |
— | 17,500 | ||||||
|
|
|
|
|
|||||
|
Total |
198,542 | 223,992 | ||||||
|
Less current portion |
1,487 | 1,386 | ||||||
|
Less unamortized bond discount |
3,220 | 3,598 | ||||||
|
|
|
|
|
|||||
|
Long-term portion |
$ | 193,835 | $ | 219,008 | ||||
|
|
|
|
|
|||||
10.25% Senior Notes due 2017
Purchase Agreement
On November 18, 2009, the Company entered into a Purchase Agreement (the “Purchase Agreement”) by and among StoneMor Operating LLC (the “Operating Company”), Cornerstone Family Services of West Virginia Subsidiary, Inc. (“CFS West Virginia”), Osiris Holding of Maryland Subsidiary, Inc. (“Osiris”), the Partnership, the subsidiary guarantors named in the Purchase Agreement (together with the Company, the “Note Guarantors”) and Bank of America Securities LLC (“BAS”), 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 Operating Company, CFS West Virginia and Osiris (collectively, the “Issuers”), each the Company’s wholly-owned subsidiary, as joint and several obligors, agreed to sell to the Initial Purchasers $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the “Senior Notes”), with an original issue discount of approximately $4.0 million, in a private placement exempt from the registration requirements under 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 November 24, 2009.
The Purchase Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which the Company, the Issuers, and other Note 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 Issuers, the Company and the other Note Guarantors also agreed to enter into a Registration Rights Agreement (described below) for the benefit of holders of the Senior Notes.
Indenture
On November 24, 2009, the Issuers, us and the other Note Guarantors entered into an indenture (the “Indenture”), among the Issuers, the Company, the other Note Guarantors and Wilmington Trust FSB, as trustee (the “Trustee”) governing the Senior Notes.
The Issuers will pay 10.25% 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, starting on June 1, 2010. The Senior Notes mature on December 1, 2017.
The Senior Notes are senior unsecured obligations of the Issuers and:
| • |
rank equally in right of payment with all existing and future senior unsecured 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 the Company and each subsidiary, other than the Issuers, that is a guarantor of any indebtedness under the Credit Agreement (as defined below), or is a borrower under the Credit Agreement and each other subsidiary that the Issuers shall otherwise cause to become a Note Guarantor pursuant to the terms of the Indenture (each, a “Restricted Subsidiary”).
At any time on or after December 1, 2013, 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 December 1 of the years indicated:
|
Year |
Optional Redemption Price |
|||
|
2013 |
105.125 | % | ||
|
2014 |
102.563 | % | ||
|
2015 and thereafter |
100 | % | ||
At any time prior to December 1, 2013, 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 date of redemption, including accrued and unpaid interest to the redemption date.
In addition, at any time prior to December 1, 2012, 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 of the equity offerings of the Company described in the Indenture at a redemption price equal to 110.250% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest 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 90 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 Senior Notes will have the right to require the Issuers to purchase that holder’s 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 Company, the Issuers and/or the Note Guarantors, as applicable, to comply with various covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its 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 Note Guarantors under the Indenture. The Company was in compliance with all financial covenants at December 31, 2011.
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:
| 1. | 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; |
| 2. | 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; |
| 3. | 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; |
| 4. | failure by the Company or 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 the Company by the Trustee or holders of at least 25% of the aggregate principal amount of the Senior Notes then outstanding; |
| 5. | 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; |
| 6. | 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; |
| 7. | certain judgments or orders that exceed $7.5 million 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; |
| 8. | certain events of bankruptcy of the Company, StoneMor GP LLC, the general partner of the Company (the “General Partner”), or any Restricted Subsidiary; or |
| 9. | other than in accordance with the terms of the Note Guarantee and the Indenture, any Note Guarantee 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, on November 24, 2009, the Issuers, the Company, the other Note Guarantors and BAS, as representative of the Initial Purchasers, entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Issuers, the Company and the other Note 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”). The Issuers, the Company and the other Note Guarantors agreed to use their commercially reasonable efforts to consummate such Exchange Offer on or before the 366 th day after the issuance of the Senior Notes.
In addition, upon the occurrence of certain events described in the Registration Rights Agreement which result in the inability to consummate the Exchange Offer, the Issuers, the Company and the other Note Guarantors agreed to file a shelf registration statement with the SEC covering resales of the Senior Notes and to use their commercially reasonable efforts to cause such shelf registration statement 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.
Note Purchase Agreement
On August 15, 2007, the Company entered into, along with the General Partner and certain of the Company’s subsidiaries, (collectively, the “Note Issuers”) the Amended and Restated Note Purchase Agreement (the “NPA”) with Prudential Investment Management Inc., The Prudential Insurance Company of America, Prudential Retirement Insurance and Annuity Company, certain Affiliates of Prudential Investment Management Inc., iStar Financial Inc., SFT I, Inc., and certain Affiliates of iStar Financial Inc. (collectively, the “Note Purchasers”). Capitalized terms which are not defined in the following description shall have the same meaning assigned to such terms in the NPA, as amended.
Pursuant to the NPA, the Note Issuers and the Note Purchasers agreed to (a) exchange certain senior secured notes previously issued by the Note Issuers to the Note Purchasers on September 20, 2004, for new Series A Notes, as defined in the NPA, due September 20, 2009, in the amount of $80.0 million; and (b) issue Series B Notes, as defined in the NPA, due August 15, 2012 in the aggregate amount of $35.0 million, subject to the option, on an uncommitted basis, to issue/purchase additional secured Shelf Notes in the aggregate amount of up to $35.0 million, and to issue/purchase additional secured Shelf Notes to refinance the Series A Notes. On December 21, 2007, pursuant to the NPA, as amended, certain of the Company’s subsidiaries issued Senior Secured Series C Notes (the “Series C Notes” and together with Series A Notes, Series B Notes and the Shelf Notes are referred to as the “Notes” ) in the aggregate principal amount of $17.5 million, due December 21, 2012.
The NPA was amended seven times prior to January 28, 2011 to amend borrowing levels, interest rates, maturity dates and covenants. On January 28, 2011, and in connection with the Company’s February 2011 follow-on public offering of common units, the Company entered into an amendment to its credit agreement. This amendment included the lenders’ consent to the use of a portion of the proceeds from the public offering of common units to redeem in full the outstanding $17.5 million of 12.5% Series B and $17.5 million of 12.5% Series C Notes and to pay an aggregate make-whole premium of $4.0 million related thereto, which represented the Company’s final obligations outstanding under the NPA. The make-whole premium has been classified as early extinguishment of debt on the consolidated statement of operations.
Acquisition Credit Facility and Revolving Credit Facility
On August 15, 2007, the Company, the General Partner, and 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 may not be reborrowed and amounts borrowed under the Revolving Credit Facility and repaid or prepaid during the term may 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 is a part of the Revolving Credit Facility. Loans outstanding under the Acquisition Credit Facility and the Revolving Credit Facility bear interest at rates set forth in the Credit Agreement, which have since been amended as described below.
The Original Credit Agreement was amended six times prior to September 22, 2010, to amend borrowing levels, interest rates and covenants. On September 22, 2010, concurrently with the closing of the common units offering from which the Company used $22.5 million of net proceeds to prepay amounts on the Acquisition Credit Facility and used $14.5 million of net proceeds to pay down amounts on the Revolving Credit Facility, the Company entered into the Seventh Amendment to the Original Credit Agreement to, among other things, reinstate the amount available on the Acquisition Credit Facility to a total of $55.0 million and reinstate the amount available on the Revolving Credit Facility to $45.0 million.
On January 28, 2011, and in connection with our February 2011 follow-on public offering of common units, the Company entered into the Eighth Amendment to the Original Credit Agreement which extended the Maturity Date from August 15, 2012 to January 29, 2016, changed the limit on Maintenance Capital Expenditures and reduced the applicable margins for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees and (ii) Base Rate Loans by 50 basis points, resulting in Pricing Level 3 of the Applicable Rate (the currently applicable pricing level) of 3.75% and 2.75%, respectively. The Eighth Amendment to the Original Credit Agreement also increased the Lenders’ aggregate commitments by $10.0 million under each of the Acquisition Credit Facility and the Revolving Credit Facility, resulting in an Acquisition Credit Facility of $65.0 million and a Revolving Credit Facility of $55.0 million.
On April 29, 2011, the Company entered into the Second Amended and Restated Credit Agreement (the “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 Credit Agreement are substantially the same as the terms of the Original Credit Agreement. The primary purpose of entering into the Credit Agreement was to consolidate the amendments to the Original Credit Agreement and to update outdated references. 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 provides for both an Acquisition Credit Facility of $65.0 million and a Revolving Credit Facility of $55.0 million, (together, the “Credit Facility”). Amounts borrowed may be either Base Rate Loans or Eurodollar Rate Loans and once repaid or prepaid, amounts under the Acquisition Credit Facility may not be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.75% to 2.75% and 2.75% to 3.75%, respectively, depending on the Company’s 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:
| • |
with respect to a Eurodollar Rate Loan, the higher of the British Bankers Association LIBOR Rate or 2.0%; and |
| • |
with respect to a Base Rate Loan, the British Bankers Association LIBOR Rate. |
The maturity date of the Credit Facility is January 29, 2016. The Company’s maximum Consolidated Leverage Ratio, which is the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA, is 3.65 to 1.0 for all Measurement Periods ending after December 31, 2010. In addition, the Company will not be permitted to have Maintenance Capital Expenditures, as defined in the Credit Agreement, for any Measurement Period ending in 2011, 2012 and 2013 exceeding $4.6 million, $5.2 million and $5.8 million, respectively, or $6.5 million for any Measurement Period ending in 2014 or thereafter. The Company will also not permit Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $52 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after February 9, 2011.
At the time of entering into the Credit Agreement, Consolidated Fixed Charge Coverage Ratio was required to be not less than 1.15x for any Measurement Period ending in 2011, or 1.20x for any Measurement Period thereafter.
On August 4, 2011, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”) to provide that the Company may not permit the Consolidated Fixed Charge Coverage Ratio to be less than 1.08x for any Measurement Period ending in the second and third fiscal quarters of 2011, 1.15x for any Measurement Period ending in the fourth quarter of 2011, or 1.20x thereafter. This amendment was effective on a retroactive basis to June 30, 2011.
On October 28, 2011, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”) to provide that the Company may not permit the Consolidated Fixed Charge Coverage Ratio to be less than 1.05x for any Measurement Period ending in the third and fourth fiscal quarters of 2011, or 1.20x thereafter. This amendment was effective on a retroactive basis to August 31, 2011.
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 Borrowers 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 ranges from 0.5% to 0.75% depending on the Company’s Consolidated Leverage Ratio.
The proceeds of the Acquisition Credit Facility may be used by the Borrowers to finance (i) Permitted Acquisitions, and (ii) the purchase and construction of mausoleums. The proceeds of the Revolving Credit Facility and Swing Line Loans may be utilized to finance working capital requirements, Capital Expenditures and for other general corporate purposes. The Borrowers’ obligationsunder the Credit Agreement are guaranteed by both the Partnership and StoneMor GP LLC.
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 Partner’s interest in the Partnership, the incentive distribution rights under the Partnership’s 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 |
| • |
any Change in Control. |
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. A material decrease in revenues could cause the Company to breach certain of its financial covenants, such as the Consolidated Leverage Ratio, Consolidated Fixed Charge Coverage Ratio and the Consolidated EBITDA covenant, under the Credit Agreement. Any such breach could allow the Lenders to accelerate (or create cross-default under) the Company’s debt which would have a material adverse effect on the Company’s business, financial condition or results of operations.
As of December 31, 2011, there were $10.8 million of outstanding borrowings under the Acquisition Credit Facility and $33.0 million of outstanding borrowings under the Revolving Credit Facility, and the Company was in compliance with applicable financial covenants. The Consolidated Leverage Ratio was 3.09 at December 31, 2011. The Consolidated Debt Service Coverage Ratio, which replaced the Consolidated Fixed Charge Coverage Ratio effective with our January 19, 2012 amendment, was 3.28 at December 31, 2011. At December 31, 2011, amounts outstanding under the Credit Facility bear interest at a rate of 5.75%.
On January 19, 2012, the Company entered into the Third Amended and Restated Credit Agreement (the “New Credit Agreement”) which amended the Credit Agreement. The terms of the New Credit Agreement and the Credit Agreement are substantially similar, and amendments to the Credit Agreement mostly relate to the following:
| • |
converting and consolidating the Acquisition Credit Facility of $65.0 million and the Revolving Credit Facility of $55.0 million into a single revolving credit facility (the “New Credit Facility”); |
| • |
eliminating the borrowing formula under the Credit Facility; |
| • |
increasing the Credit Facility to $130.0 million; |
| • |
extending the maturity date to January 19, 2017; |
| • |
effectively reducing the interest rate on the Credit Facility, as described below; and |
| • |
amending certain financial covenants, as described below. |
Amounts borrowed under the New Credit Facility and 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 2.75% and 2.25% to 3.75%, respectively, depending on the Company’s 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. The Commitment Fee under the New Credit Agreement ranges from 0.375% to 0.75% depending on the Company’s Consolidated Leverage Ratio.
Under the New Credit Agreement, certain financial covenants were amended as follows:
| • |
Consolidated EBITDA for the most recently completed four fiscal quarters of the Partnership (the “Measurement Period”) must not be less than the sum of (i) $53.5 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after September 30, 2011; |
| • |
Maintenance Capital Expenditures for any Measurement Period ending in 2012, 2013, 2014 and thereafter must not exceed $6.7 million, $7.3 million, and $8 million, respectively; and |
| • |
the Consolidated Fixed Charge Coverage Ratio under the Credit Agreement was replaced with the Consolidated Debt Service Coverage Ratio, the calculation of which does not include distributions made by the Partnership and which must not be less than 2.50 to 1.0 for any Measurement Period under the Credit Agreement. |
Green Lawn Note
In July of 2009, certain of the Company’s 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, 2011 and 2010, the liability related to the installment notes was stated on the Company’s balance sheet at approximately $1.3 million and $1.4 million, respectively.
Nelms Note
In June of 2010, certain of the Company’s subsidiaries issued two installment notes in connection with the second quarter acquisition discussed in Note 14. The Installment Notes are to be 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 Installment Notes were discounted approximately $0.7 million, and the discount will be amortized to interest expense over the life of the Installment Notes. The installment 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 StoneMor voluntarily files for bankruptcy or is involved in an involuntary bankruptcy proceeding, the entire principal balance of the installment notes will automatically become due and payable. At December 31, 2011 and 2010, the liability related to the installment notes was stated on the Company’s balance sheet at approximately $0.6 million and $0.9 million, respectively.
In June of 2010, certain of the Company’s subsidiaries also issued four notes in the aggregate principal amount of approximately $5.8 million in connection with the acquisition referenced above. These notes were paid at the closing of the acquisition referenced above by: (i) the issuance by the Company of 293,947 unregistered common units representing limited partnership interests of the Company valued at approximately $5.8 million and (ii) a cash payment of approximately $0.2 million.
Acquisition Non-Compete Notes
In connection with the Company’s third quarter 2011 acquisition in Virginia and its second and third quarter 2010 acquisitions, certain of the Company’s subsidiaries issued installment notes in consideration for non-compete agreements executed with the former owners of the acquired entities. The Installment Notes are to be paid over periods of 4 to 6 years and mature between April 1, 2014 and August 1, 2016. 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 $2.4 million. The face amounts of the Installment Notes were discounted approximately $0.5 million, and the discount will be amortized to interest expense over the life of the Installment Notes. At December 31, 2011 and 2010, the liability related to the Installment Notes was stated on the Company’s balance sheet at approximately $1.5 and $1.6 million, respectively.
|
|||
| 10. | INCOME TAXES |
Effective with the closing of the Partnership’s 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 Partnership’s tax attributes, except for those of its corporate subsidiaries, are to be included in the individual tax returns of its partners.
The tax on the Company’s 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 Company’s net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to the Company.
The Partnership’s 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 carry forwards.
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.
Components of the income tax provision (benefit) applicable to continuing operations for federal and state taxes are as follows:
| Years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Current provision: |
||||||||||||
|
Federal |
$ | 6 | $ | — | $ | 69 | ||||||
|
State |
(538 | ) | 306 | 567 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
(532 | ) | 306 | 636 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Deferred provision: |
||||||||||||
|
Federal |
(3,324 | ) | (5,138 | ) | (2,822 | ) | ||||||
|
State |
(163 | ) | (551 | ) | 241 | |||||||
|
|
|
|
|
|
|
|||||||
|
Total |
(3,487 | ) | (5,689 | ) | (2,581 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total income tax provision (benefit) |
$ | (4,019 | ) | $ | (5,383 | ) | $ | (1,945 | ) | |||
|
|
|
|
|
|
|
|||||||
The difference between the statutory federal income tax and the Company’s effective income tax is summarized as follows:
| Years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Computed tax provision (benefit) at the applicable statutory tax rate |
$ | (4,806 | ) | $ | (2,322 | ) | $ | (2,153 | ) | |||
|
State and local taxes net of federal income tax benefit |
(350 | ) | 202 | 374 | ||||||||
|
Tax exempt (income) loss |
300 | 238 | 365 | |||||||||
|
Change in valuation allowance |
3,930 | 3,210 | 3,506 | |||||||||
|
Partnership earnings not subject to tax |
(3,192 | ) | (6,882 | ) | (4,079 | ) | ||||||
|
Permanent differences |
99 | 171 | 42 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income taxes |
$ | (4,019 | ) | $ | (5,383 | ) | $ | (1,945 | ) | |||
|
|
|
|
|
|
|
|||||||
Deferred tax assets and liabilities result from the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Deferred tax assets |
||||||||
|
Prepaid expenses |
$ | 3,354 | $ | 2,279 | ||||
|
State net operating loss |
9,299 | 8,521 | ||||||
|
Federal net operating loss |
53,464 | 43,608 | ||||||
|
Alternative minimum tax credit |
67 | 67 | ||||||
|
Unrealized losses (gains) |
3,175 | (4,523 | ) | |||||
|
Valuation allowance |
(35,815 | ) | (23,140 | ) | ||||
|
|
|
|
|
|||||
|
Total deferred tax assets |
33,544 | 26,812 | ||||||
|
|
|
|
|
|||||
|
Deferred tax liabilities |
||||||||
|
Property, plant and equipment |
6,063 | 5,337 | ||||||
|
Deferred revenue related to future revenues and accounts receivable |
34,819 | 30,275 | ||||||
|
Deferred revenue related to cemetery property |
9,215 | 8,926 | ||||||
|
|
|
|
|
|||||
|
Total deferred tax liabilities |
50,097 | 44,538 | ||||||
|
|
|
|
|
|||||
|
Net deferred tax liabilities |
$ | 16,553 | $ | 17,726 | ||||
|
|
|
|
|
|||||
We had available, at December 31, 2011, approximately less than $0.2 million of alternative minimum tax credit carryforwards, which are available indefinitely, and $152.8 million of federal net operating loss carryforwards, which will begin to expire in 2019 and $184.1 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 2011, we concluded, based on the projected allocations of taxable income, that a deferred tax asset of approximately $0.4 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, 2011 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 asset is dependent upon, among other factors, the Partnership’s 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 recognize 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. At December 31, 2010, the Company had approximately $0.9 million of unrecognizable tax benefits related to uncertain tax positions. During the year ended December 31, 2011, the Company recorded an income tax benefit of $0.9 million related to the reversal of this uncertain tax position as the statute of limitation for this item expired. As of December 31, 2011, 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 Company’s 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. Several entities of the Company were recently under examination by the Internal Revenue Service for its separate company US income tax returns for the year ended December 31, 2005. These audits were completed in the third quarter of 2009 with no impact to the financial statements. 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 2008 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 Company’s management that there are no pending assessments that will result in a material effect on the Company’s 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 2011 was an increase of $12,675. This change in the valuation allowance is the result of the change in unrealized gains and losses of the Company’s investment portfolio, which is recorded within deferred revenues, net; the results of acquisition accounting; and 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.
|
|||
| 11. | DEFERRED CEMETERY REVENUES—NET / 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, 2011 and 2010, deferred cemetery revenues, net, consisted of the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Deferred cemetery revenue |
$ | 306,488 | $ | 266,754 | ||||
|
Deferred merchandise trust revenue |
50,419 | 30,937 | ||||||
|
Deferred merchandise trust unrealized gains (losses) |
(7,937 | ) | 11,307 | |||||
|
Deferred pre-acquisition margin |
135,243 | 115,371 | ||||||
|
Deferred cost of goods sold |
(42,335 | ) | (37,904 | ) | ||||
|
|
|
|
|
|||||
|
Deferred cemetery revenues, net |
$ | 441,878 | $ | 386,465 | ||||
|
|
|
|
|
|||||
|
Deferred selling and obtaining costs |
$ | 68,542 | $ | 59,422 | ||||
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.
|
|||
| 12. | LONG-TERM INCENTIVE AND RETIREMENT PLANS |
Long Term Incentive Plan
Overview
On November 8, 2006, the General Partner’s 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 Company’s general partner’s board of directors administers the plan. The plan will continue in effect until the earliest of (i) the date determined by the General Partner’s 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 Partner’s 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 Partner’s 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
Unit Awards
On November 8, 2006, the General Partner, acting on behalf of the Company, entered into a Key Employee Restricted Phantom Unit Agreement (the “Key Employee Agreement”) with certain of its employees (“Key Employees”).
Under the terms of the Key Employee Agreement, Key Employees received Restricted Phantom Units (“Employee Phantom Units”), which in turn were equal to the sum of Time Vested Units (“Time Vested Units”) and Performance Vested Units (“Performance Vested Units”). Employee Phantom Units are the economic equivalent of one common unit representing limited partner interests of the Company. Employee Phantom Units become payable, in cash or common units, at the Company’s election, upon the full vesting of the Employee Phantom Units. Employee Phantom Units contained no distribution equivalent rights during the vesting period.
Time Vested Units vest at a percentage rate which was equal to the smaller of:
| • |
The percentage of total subordinated units which had been converted to common units; or |
| • |
A fraction, the numerator of which was equal to the number of months that had passed since September 20, 2004 and the denominator of which was 48. |
Performance Vested Units vest at a percentage rate which is equal to the percentage of total subordinated units which have been converted to common units.
Except in the event of the Change of Control, when Employee Phantom Units vest automatically, Employee Phantom Units shall not vest until the Company is able to issue freely tradable common units to the participant in compliance with all applicable securities laws.
A total of 360,500 Employee Phantom Units were granted under the Key Employee Agreement. 90,125 of these units vested in 2007 and were converted into common units in January of 2008. An additional 90,125 of these units vested and were converted into common units in 2008. The remaining 180,250 of these units vested in 2009 and were converted into common units in 2010.
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 Company’s 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 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. There were approximately 60,395, 51,662 and 43,693 Director Phantom Units outstanding at December 31, 2011, 2010 and 2009, respectively.
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 Company’s executives (the “Executives”).
Under the terms of the Executive Agreement, each Executive was awarded 10,000 Restricted Phantom Units (“Executive Phantom Units”). Executive Phantom Units become payable, in cash or common units, at the Company’s 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 Company’s 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. There were approximately 23,982, 22,072 and 20,000 Executive Phantom Units outstanding at December 31, 2011, 2010 and 2009, respectively.
The table below reflects the LTIP activity for the years ended December 31, 2011, 2010 and 2009, respectively:
| Years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Outstanding, beginning of period |
73,734 | 63,693 | 213,430 | |||||||||
|
Granted (1) |
10,643 | 10,041 | 30,513 | |||||||||
|
Matured (2) |
— | — | 180,250 | |||||||||
|
Forfeited |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Outstanding, end of period |
84,377 | 73,734 | 63,693 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | The weighted-average price for unit awards on the date of grant was $27.79, $22.52, and $17.51 for the years ended December 31 2011, 2010, and 2009, respectively. |
| (2) | The 180,250 units that vested in 2009 were converted into common units in 2010. |
As of December 31, 2011, there was no unrecognized compensation cost related to any phantom or restricted unit. Total compensation expense for unit awards was approximately $0.3 million, $0.2 million and $1.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.
There were no modifications made to any existing unit awards in 2011. No unit awards were capitalized during the years ended December 31, 2011, 2010 or 2009.
Unit Equivalent 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 Company’s key employees (the “2006 Key Employees).
Under the terms of the 2006 UAR Agreement, 2006 Key Employees received Unit Appreciation Rights (“UAR’s”) wherein 2006 Key Employees became entitled to compensation in the form of units in an amount equal to the fair value of the Company’s common units upon exercise less $24.14 per unit multiplied by the total number of UAR’s exercised. Units to be issued should be equal to this amount divided by the fair value of common units upon exercise.
UAR’s granted under the 2006 UAR Agreement were subject to the exact same vesting requirements as Employee Phantom Units granted under the Key Employee Agreement, except for the limitation related to the Company’s ability to issue freely tradable common units to the participant in compliance with all applicable securities laws. A total of 120,000 UAR’s were granted under the 2006 UAR Agreement, all of which had vested at December 31, 2009. As of December 31, 2011, all 120,000 UAR’s were exercised.
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 Company’s 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 UAR’s and became entitled to compensation in the form of units, in an amount equal to the fair value of the Company’s common units upon exercise less $18.80 per unit multiplied by the total number of UAR’s exercised. Units to be issued should be equal to this amount divided by the fair value of common units upon exercise.
UAR’s 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. The exercise of such UARs may be subject to approval by the Company’s limited partners as required by the NYSE listing rules. A total of 814,000 UAR’s were granted under the 2009 UAR Agreement and 759,857 of these units remain outstanding at December 31, 2011.
The fair value of UAR’s granted under both the 2006 UAR Agreement and the 2009 UAR Agreements was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
| 2009 UAR Agreement |
2006 UAR Agreement |
|||||||
|
Expected dividend yield |
10.70 | % | 7.90 | % | ||||
|
Risk-free interest rate |
2.73 | % | 4.50 | % | ||||
|
Expected volatility |
38.70 | % | 24.20 | % | ||||
|
Expected life (in years) |
6.02 | 3.53 | ||||||
The fair value of UAR’s granted under the 2009 UAR Agreements was $2.39 per UAR and approximately $1.9 million in aggregate.
The fair value of UAR’s granted under the 2006 UAR Agreement was $2.47 per UAR and approximately $0.3 million in aggregate.
A summary of UAR activity for the years ended December 31, 2011, 2010 and 2009 follows:
| Years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Outstanding, beginning of period |
874,835 | 934,000 | 120,000 | |||||||||
|
Granted (1) |
— | — | 814,000 | |||||||||
|
Exercised |
(112,373 | ) | (47,602 | ) | — | |||||||
|
Forfeited |
(2,605 | ) | (11,563 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
|
Outstanding, end of period |
759,857 | 874,835 | 934,000 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Exercisable, end of period |
358,639 | 281,366 | 128,479 | |||||||||
| (1) | All UAR’s outstanding at December 31, 2011 were granted under 2009 UAR Agreements and have a fair value of $2.39. |
As of December 31, 2011, there was approximately $0.9 million of unrecognized compensation cost related to non-vested UARs. Such cost is expected to be recognized over a weighted-average period of 1.96 years. Total compensation expense for UARs was approximately $0.5 million, $0.5 million, and less than $0.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. The Company issued 24,682 and 10,936 common units as a result of exercised UARs in 2011 and 2010, respectively. There were no units issued in 2009.
During the years ended December 31, 2011, 2010 and 2009, 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.
|
|||
| 13. | 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 Company’s financial position, results of operations or liquidity.
Leases
At December 31, 2011, 2010 and 2009, 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 five years and options to renew at varying terms. Expenses under operating leases were $2.3 million, $2.1 million and $2.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.
At December 31, 2011 operating leases will result in future payments in the following approximate amounts:
| (in thousands) | ||||
|
2012 |
$ | 2,031 | ||
|
2013 |
1,670 | |||
|
2014 |
1,043 | |||
|
2015 |
694 | |||
|
2016 |
668 | |||
|
Thereafter |
1,868 | |||
|
|
|
|||
|
Total |
$ | 7,974 | ||
|
|
|
|||
Employment Agreements
The Company has employment agreements with four of its senior executives which are annually renewable, unless the Company or the senior executives provide notice ninety days prior to the expiration of the employment period.
|
|||
| 14. | ACQUISITIONS |
Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities. In addition, for the years ended December 31, 2011 and 2010, acquisition related costs include legal fees net of recoveries, of $1.2 million and $0.4 million, respectively, related to amounts paid to pursue the recovery of misappropriation claims related to our second quarter 2010 acquisition.
First Quarter 2011 Acquisition
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 table below reflects the Company’s assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill from the purchase. The Company obtained additional information in the fourth quarter of 2011 and has retrospectively adjusted these values as noted below.
| Preliminary Assessment |
Adjustments | Final Assessment |
||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable |
$ | 97 | $ | — | $ | 97 | ||||||
|
Cemetery property |
1,710 | — | 1,710 | |||||||||
|
Merchandise trusts, restricted, at fair value |
880 | — | 880 | |||||||||
|
Perpetual care trusts, restricted, at fair value |
344 | — | 344 | |||||||||
|
Property and equipment |
332 | — | 332 | |||||||||
|
Other assets |
100 | — | 100 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
3,463 | — | 3,463 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
795 | — | 795 | |||||||||
|
Merchandise liabilities |
734 | — | 734 | |||||||||
|
Deferred tax liabilities |
— | 64 | 64 | |||||||||
|
Perpetual care trust corpus |
344 | — | 344 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
1,873 | 64 | 1,937 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
1,590 | (64 | ) | 1,526 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration paid |
1,700 | — | 1,700 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Goodwill from purchase |
$ | 110 | $ | 64 | $ | 174 | ||||||
|
|
|
|
|
|
|
|||||||
Second Quarter 2011 Acquisition
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 table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill recorded during the second quarter of the year. The Company obtained additional information in the fourth quarter of 2011 and has retrospectively adjusted these values as noted below. The Company may make further retrospective adjustments to this provisional assessment if additional information were to become available.
| Preliminary Assessment |
Adjustments | Revised Assessment |
||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable |
$ | 104 | $ | (10 | ) | $ | 94 | |||||
|
Cemetery property |
880 | — | 880 | |||||||||
|
Merchandise trusts, restricted, at fair value |
2,622 | 5 | 2,627 | |||||||||
|
Perpetual care trusts, restricted, at fair value |
1,195 | (5 | ) | 1,190 | ||||||||
|
Property and equipment |
1,783 | 29 | 1,812 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
6,584 | 19 | 6,603 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
1,420 | (118 | ) | 1,302 | ||||||||
|
Merchandise liabilities |
1,701 | (53 | ) | 1,648 | ||||||||
|
Perpetual care trust corpus |
1,195 | (5 | ) | 1,190 | ||||||||
|
Deferred tax liability |
400 | 61 | 461 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
4,716 | (115 | ) | 4,601 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
1,868 | 134 | 2,002 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration paid |
2,150 | — | 2,150 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Goodwill from purchase |
$ | 282 | $ | (134 | ) | $ | 148 | |||||
|
|
|
|
|
|
|
|||||||
Third Quarter 2011 Acquisitions
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 table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill recorded in the third quarter of the year. The Company obtained additional information in the fourth quarter of 2011 and has retrospectively adjusted these values as noted below. The Company may make further retrospective adjustments to this provisional assessment if additional information were to become available.
| Preliminary | Revised | |||||||||||
| Assessment | Adjustments | Assessment | ||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable |
$ | 89 | $ | (69 | ) | $ | 20 | |||||
|
Cemetery property |
2,277 | (34 | ) | 2,243 | ||||||||
|
Merchandise trusts, restricted, at fair value |
577 | (15 | ) | 562 | ||||||||
|
Perpetual care trusts, restricted, at fair value |
898 | 6 | 904 | |||||||||
|
Property and equipment |
125 | 34 | 159 | |||||||||
|
Other assets |
160 | — | 160 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
4,126 | (78 | ) | 4,048 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
360 | — | 360 | |||||||||
|
Merchandise liabilities |
332 | 5 | 337 | |||||||||
|
Deferred tax liability |
810 | (48 | ) | 762 | ||||||||
|
Perpetual care trust corpus |
898 | 6 | 904 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
2,400 | (37 | ) | 2,363 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
1,726 | (41 | ) | 1,685 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration paid at closing |
1,850 | — | 1,850 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration to be paid |
280 | — | 280 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total consideration |
2,130 | — | 2,130 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Goodwill from purchase |
$ | 404 | $ | 41 | $ | 445 | ||||||
|
|
|
|
|
|
|
|||||||
Also, 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 table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill recorded in the third quarter of the year. The Company obtained additional information in the fourth quarter of 2011 and has retrospectively adjusted these values as noted below. The Company may make further retrospective adjustments to this provisional assessment if additional information were to become available.
| Preliminary Assessment |
Adjustments | Revised Assessment |
||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable |
$ | 3,844 | $ | 731 | $ | 4,575 | ||||||
|
Cemetery property |
4,730 | (64 | ) | 4,666 | ||||||||
|
Perpetual care trusts, restricted, at fair value |
594 | 387 | 981 | |||||||||
|
Property and equipment |
3,570 | 554 | 4,124 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
12,738 | 1,608 | 14,346 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
5,526 | (309 | ) | 5,217 | ||||||||
|
Merchandise liabilities |
5,100 | (301 | ) | 4,799 | ||||||||
|
Deferred tax liability |
640 | 126 | 766 | |||||||||
|
Perpetual care trust corpus |
594 | 387 | 981 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
11,860 | (97 | ) | 11,763 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
878 | 1,705 | 2,583 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration paid |
4,600 | — | 4,600 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Goodwill from purchase |
$ | 3,722 | $ | (1,705 | ) | $ | 2,017 | |||||
|
|
|
|
|
|
|
|||||||
Fourth Quarter 2011 Acquisitions
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 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 table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill recorded in the fourth quarter of the year. These amounts will be retrospectively adjusted as additional information is received.
| Preliminary | ||||
| Assessment | ||||
| (in thousands) | ||||
|
Assets: |
||||
|
Accounts receivable |
$ | 86 | ||
|
Cemetery property |
1,096 | |||
|
Merchandise trusts, restricted, at fair value |
10,122 | |||
|
Perpetual care trusts, restricted, at fair value |
4,373 | |||
|
Property and equipment |
2,257 | |||
|
|
|
|||
|
Total assets |
17,934 | |||
|
|
|
|||
|
Liabilities: |
||||
|
Deferred margin |
12,638 | |||
|
Merchandise liabilities |
11,666 | |||
|
Perpetual care trust corpus |
4,373 | |||
|
|
|
|||
|
Total liabilities |
28,677 | |||
|
|
|
|||
|
Fair value of net liabilities acquired |
(10,743 | ) | ||
|
|
|
|||
|
Consideration paid |
4,500 | |||
|
|
|
|||
|
Goodwill from purchase |
$ | 15,243 | ||
|
|
|
|||
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 table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill recorded in the fourth quarter of the year. These amounts will be retrospectively adjusted as additional information is received.
| Preliminary | ||||
| Assessment | ||||
| (in thousands) | ||||
|
Assets: |
||||
|
Accounts receivable |
$ | 66 | ||
|
Cemetery property |
1,331 | |||
|
Merchandise trusts, restricted, at fair value |
1,264 | |||
|
Perpetual care trusts, restricted, at fair value |
524 | |||
|
Property and equipment |
488 | |||
|
|
|
|||
|
Total assets |
3,673 | |||
|
|
|
|||
|
Liabilities: |
||||
|
Deferred margin |
832 | |||
|
Merchandise liabilities |
965 | |||
|
Deferred tax liability |
268 | |||
|
Perpetual care trust corpus |
524 | |||
|
|
|
|||
|
Total liabilities |
2,589 | |||
|
|
|
|||
|
Fair value of net assets acquired |
1,084 | |||
|
|
|
|||
|
Consideration paid |
1,342 | |||
|
|
|
|||
|
Goodwill from purchase |
$ | 258 | ||
|
|
|
|||
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 net income (loss) included in operations since the dates of acquisition are $4.3 million and $(0.3) million, respectively, for the year ended December 31, 2011.
Fourth Quarter 2011 Disposition
On December 30, 2011, we sold one funeral home in West Virginia for $0.1 million, resulting in a gain of $0.1 million.
First Quarter 2010 Acquisition
On March 30, 2010, the Operating Company, StoneMor Michigan LLC, a Michigan limited liability company (“Buyer LLC”) and StoneMor Michigan Subsidiary LLC, a Michigan limited liability company (“Buyer NQ Sub” and individually and collectively with StoneMor LLC and Buyer LLC, “Buyer”), each a wholly-owned subsidiary of StoneMor Partners L.P. (the “Company”), entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with SCI Funeral Services, LLC, an Iowa limited liability company (“Parent”), SCI Michigan Funeral Services, Inc., a Michigan corporation (“SCI Michigan”, and together with Parent, “SCI”), Hillcrest Memorial Company, a Delaware corporation (“Hillcrest”), Christian Memorial Cultural Center, Inc., a Michigan corporation (“Christian”), Sunrise Memorial Gardens Cemetery, Inc., a Michigan corporation (“Sunrise”), and Flint Memorial Park Association, a Michigan corporation (“Flint” and individually and collectively with Sunrise, Hillcrest and Christian, “Seller”).
In connection with the Purchase Agreement, on March 30, 2010, StoneMor LLC and Plymouth Warehouse Facilities LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“Plymouth” and individually and collectively with StoneMor LLC, “Warehouse Buyer”), entered into an Asset Purchase and Sale Agreement (the “Warehouse Purchase Agreement”) with SCI, Hillcrest, Sunrise, Flint, Buyer NQ Sub and Buyer LLC.
Pursuant to the Purchase Agreement, Buyer acquired nine cemeteries in Michigan, including certain related assets (the “Acquired Assets”), and assumed certain related liabilities (the “Assumed Liabilities”). In consideration for the transfer of the Acquired Assets and in addition to the assumption of the Assumed Liabilities, Buyer paid Seller approximately $14.1 million (the “Closing Purchase Price”) in cash.
Pursuant to the Warehouse Purchase Agreement, Warehouse Buyer acquired one warehouse in Michigan from SCI, including certain related assets, and assumed certain related liabilities for $0.5 million in cash, which was deemed part of the $14.1 million consideration paid in connection with the Purchase Agreement.
The Purchase Agreement and Warehouse Purchase Agreement also include various representations, warranties, covenants, indemnification and other provisions which are customary for transactions of this nature.
The table below reflects the Company’s final assessment of these fair values and all amounts have been retrospectively adjusted.
| Final Assessment | ||||
| (in thousands) | ||||
|
Assets: |
||||
|
Cemetery property |
$ | 33,761 | ||
|
Accounts receivable |
2,651 | |||
|
Merchandise trusts, restricted, at fair value |
48,027 | |||
|
Perpetual care trusts, restricted, at fair value |
15,084 | |||
|
Property and equipment |
5,768 | |||
|
|
|
|||
|
Total assets |
105,291 | |||
|
|
|
|||
|
Liabilities: |
||||
|
Deferred margin |
31,094 | |||
|
Merchandise liabilities |
30,126 | |||
|
Deferred income tax liability, net |
7,879 | |||
|
Perpetual care trust corpus |
15,084 | |||
|
|
|
|||
|
Total liabilities |
84,183 | |||
|
|
|
|||
|
Fair value of net assets acquired |
21,108 | |||
|
|
|
|||
|
Consideration paid |
14,015 | |||
|
|
|
|||
|
Gain on bargain purchase |
$ | 7,093 | ||
|
|
|
|||
Second Quarter 2010 Acquisition
On April 29, 2010, the Johnson County Circuit Court of Indiana entered the Order Approving Form of Amended and Restated Purchase Agreement and Authorizing Sale of Equity Interests and Assets (the “Indiana Order”). The Indiana Order, subject to certain conditions, permitted Lynette Gray, as receiver (the “Receiver”) of the business and assets of Ansure Mortuaries of Indiana, LLC (“Ansure”), Memory Gardens Management Corporation (“MGMC”), Forest Lawn Funeral Home Properties, LLC (“Forest Lawn”), Gardens of Memory Cemetery LLC (“Gardens of Memory”), Gill Funeral Home, LLC (“Gill”), Garden View Funeral Home, LLC (“Garden View”), Royal Oak Memorial Gardens of Ohio Ltd. (“Royal Oak”), Heritage Hills Memory Gardens of Ohio Ltd. (“Heritage”) and Robert E. Nelms (“Nelms” and collectively with Ansure, MGMC, Forest Lawn, Gardens of Memory, Gill, Garden View, Royal Oak and Heritage, the “Original Sellers”), to enter into and consummate an Amended and Restated Purchase Agreement (the “2nd Quarter Purchase Agreement”) with StoneMor Operating LLC, a Delaware limited liability company (“StoneMor LLC”), StoneMor Indiana LLC, an Indiana limited liability company (“StoneMor Indiana”), StoneMor Indiana Subsidiary LLC, an Indiana limited liability company (“StoneMor Subsidiary”) and Ohio Cemetery Holdings, Inc., an Ohio nonprofit corporation (“Ohio Nonprofit,” and collectively with StoneMor LLC, StoneMor Indiana and StoneMor Subsidiary, the “Buyer”), each a wholly-owned subsidiary of the Company. Subject to the receipt of the Indiana Order, the Purchase Agreement was executed by the Buyer and the Receiver on April 2, 2010.
Effective June 21, 2010, certain subsidiaries of the Company entered into Amendment No. 1 to the 2nd Quarter Purchase Agreement (“Amendment No. 1”) by and among the Buyer, the Original Sellers, Robert Nelms, LLC (“Nelms LLC,” and collectively with the Original Sellers, the “Sellers”) and the Receiver, which amended the Purchase Agreement executed by the Buyer and the Receiver. Amendment No. 1 amended the 2nd Quarter Purchase Agreement by: adding certain parties to the Purchase Agreement; modifying certain representations and warranties made by the Original Sellers in the 2nd Quarter Purchase Agreement; and providing that the Buyer will assume certain additional liabilities such as the obligation to pay for all claims incurred under the health benefit plans of the Original Sellers on or before the closing of the transactions contemplated by the Purchase Agreement and Amendment No. 1, but which had not been reported on or prior to the closing.
Effective June 21, 2010, pursuant to the 2nd Quarter Purchase Agreement and Amendment No. 1, the Buyer acquired the stock (the “Stock”) of certain companies owned by Ansure (the “Acquired Companies”) and certain assets (the “Assets”) owned by Nelms, Nelms LLC, Gill, Gardens of Memory, Garden View, Forest Lawn, Heritage, Royal Oak and MGMC, resulting in the acquisition of 8 cemeteries and 5 funeral homes in Indiana, Michigan and Ohio (the “Acquisition”). The Buyer acquired the Stock and Assets, advanced moneys to pay for trust shortfalls of the cemeteries, paid certain liabilities of the Sellers, which were offset by funds held in a Smith Barney Account acquired by the Buyer in the transaction, and paid certain legal fees of the parties to the transaction and other acquisition costs, for a total consideration, including the offset by the funds held in the Smith Barney Account, of approximately $32.5 million. The Acquisition was financed, in part, by borrowing $22.5 million from the Company’s acquisition facility under the Amended and Restated Credit Agreement dated August 15, 2007 among StoneMor LLC, certain of its subsidiaries, the Company, StoneMor GP LLC, Bank of America, N.A., the other lenders party thereto, and Bank of America Securities LLC, as amended.
Settlement Agreement
In connection with the Acquisition, effective June 21, 2010, StoneMor LLC and StoneMor Indiana (collectively, “StoneMor”) and the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Chapel Hill Associates, Inc., d/b/a Chapel Hill Memorial Gardens of Grand Rapids, Chapel Hill Funeral Home, Inc., Covington Memorial Funeral Home, Inc., Covington Memorial Gardens, Inc., Forest Lawn Memorial Chapel Inc., Forest Lawn Memory Gardens Inc., Fred W. Meyer, Jr. by James R. Meyer as Special Administrator to the Estate of Fred W. Meyer, Jr. (the “F. Meyer Estate”), James R. Meyer (“J. Meyer”), Thomas E. Meyer (“T. Meyer”), Nancy J. Cade (“Cade,” and collectively with the F. Meyer Estate, J. Meyer, and T. Meyer, the “Meyer Family”) and F.T.J. Meyer Associates, LLC (“FTJ”).
Pursuant to the Settlement Agreement, StoneMor agreed to assume, pay and discharge a portion of Ansure’s and Forest Lawn’s obligations under: (i) certain notes issued by Ansure in favor of Fred W. Meyer, Jr., J. Meyer, T. Meyer, and Cade (collectively, the “Original Meyer Family”); and (ii) a note issued by Forest Lawn to FTJ, which was later assigned to the Original Meyer Family.
StoneMor agreed to assume approximately $7.1 million of Ansure’s and Forest Lawn’s obligations under the notes they issued, with the remaining principal, interest and fees due under such notes forgiven by the Meyer Family. In connection with the assumption of these obligations, at Closing, StoneMor issued promissory notes to each member of the Meyer Family (the “Closing Notes”) and additional promissory notes payable in installments to certain members of the Meyer Family (the “Installment Notes”). The Closing Notes were issued effective June 21, 2010 in the aggregate principal amount of approximately $5.8 million, were unsecured subordinated obligations of StoneMor, bore no interest and were payable on demand at the Closing. The Closing Notes were paid at closing by: (i) the issuance by the Company of 293,947 unregistered common units representing limited partnership interests of the Company (the “Units”) valued at approximately $5.8 million pursuant to the terms of the Settlement Agreement; and (ii) a cash payment of approximately $0.2 million.
The Installment Notes were issued effective June 21, 2010 and mature April 1, 2014. The Installment Notes are to be paid over a 4 year period and 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 Installment Notes were discounted approximately $0.7 million, and the discount will be amortized to interest expense over the life of the Installment Notes. The Installment 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 the Company of any remedies following the occurrence and during the continuance of any event of default. In addition, if StoneMor voluntarily files for bankruptcy or is involved in an involuntary bankruptcy proceeding, the entire principal balance of the Installment Notes will automatically become due and payable.
J. Meyer, T. Meyer and Cade each entered into an Amended and Restated Agreement-Not-To-Compete with StoneMor, which amended the non-compete agreements each previously entered into with Ansure. In consideration for entering into an Amended and Restated Agreement-Not-To-Compete, StoneMor agreed to pay an aggregate of approximately $2.3 million to J. Meyer, T. Meyer, and Cade, with approximately $0.3 million paid at Closing, and the remainder to be paid in installments over 4 years.
The Settlement Agreement also provides that, if the annual distributions paid by the Company to its unitholders are less than $2.20, StoneMor will pay additional cash consideration to the Meyer Family annually for four years pursuant to a formula contained in the Settlement Agreement. StoneMor may also pay up to approximately $2.4 million to the Meyer Family from the proceeds of the Misappropriation Claims, subject to certain minimum thresholds before payments are required.
In addition, StoneMor provided an assignment from the Receiver to the Meyer Family of the Eminent Domain Claim, as defined in the Settlement Agreement, and the proceeds thereto, at closing. The Meyer Family agreed to assign its rights under the Fraud Claims, as defined in the Settlement Agreement, to StoneMor.
All obligations of StoneMor, the Company, and the Acquired Companies under the Settlement Agreement and other transaction documents are subordinate and junior to the obligations of StoneMor, the Company, and the Acquired Companies under any Senior Debt, as defined in the Settlement Agreement.
The Settlement Agreement also includes various representations, warranties, covenants, mutual releases, indemnification and other provisions, which are customary for a transaction of this nature.
Unregistered Sale of Securities
In connection with the Acquisition, StoneMor GP LLC, the general partner of the Company (“StoneMor GP”), entered into a Non-Competition Agreement (“Non-Competition Agreement”) dated as of June 21, 2010 with Ronald P. Robertson, pursuant to which Mr. Robertson agreed not to compete with StoneMor GP and the companies under its management and control. In consideration for Mr. Robertson’s covenant not to compete and as a partial payment of the Closing Notes to the Meyer Family pursuant to the Settlement Agreement, effective June 21, 2010, the Company issued 303,800 Units.
Pursuant to the Non-Competition Agreement, the Company is obligated to issue additional Units which were initially valued at a fair value of $0.5 million based on a unit price of $20.30 just prior to the date of acquisition. As a result, the Company issued 9,853 units in June of 2011, resulting in a charge to partners’ capital of approximately $0.3 million. The Company is also obligated to issue an additional 9,853 units and 4,924 units in June of 2012 and June of 2013, respectively.
The table below reflects the Company’s final assessment of the fair value of net assets received, the purchase price and the resulting goodwill from the purchase and displays the adjustment made from the adjusted values reported at December 31, 2010. The Company obtained additional information in the second quarter of 2011 and has retrospectively adjusted these preliminary values as noted below.
| Preliminary Assessment |
Adjustments | Final Assessment |
||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Cemetery land |
$ | 21,686 | $ | — | $ | 21,686 | ||||||
|
Cemetery and funeral home property |
9,039 | — | 9,039 | |||||||||
|
Accounts receivable |
2,138 | — | 2,138 | |||||||||
|
Merchandise trusts, restricted, at fair value |
17,142 | 1,806 | 18,948 | |||||||||
|
Perpetual care trusts, restricted, at fair value |
3,349 | 733 | 4,082 | |||||||||
|
Other assets |
4,369 | 422 | 4,791 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
57,723 | 2,961 | 60,684 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
15,939 | — | 15,939 | |||||||||
|
Merchandise liabilities |
15,543 | — | 15,543 | |||||||||
|
Deferred income tax liability, net |
9,426 | 302 | 9,728 | |||||||||
|
Perpetual care trust corpus |
3,349 | 733 | 4,082 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
44,257 | 1,035 | 45,292 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
13,466 | 1,926 | 15,392 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Paid at closing—purchase price |
10,417 | — | 10,417 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Paid at closing—units |
5,785 | 110 | 5,895 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Paid at closing—liabilities incurred |
$ | 3,648 | $ | — | $ | 3,648 | ||||||
|
|
|
|
|
|
|
|||||||
|
Goodwill from purchase |
$ | 18,914 | $ | (1,816 | ) | $ | 17,098 | |||||
|
Total purchase price |
19,850 | 110 | 19,960 | |||||||||
|
Paid at closing—trust underfunding |
12,530 | — | 12,530 | |||||||||
|
Total paid at closing |
32,380 | 110 | 32,490 | |||||||||
Third Quarter 2010 Acquisition and Long-Term Operating Agreement
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, of Detroit. The parties have agreed that the operating agreement will terminate on March 31, 2012. The parties are discussing their respective rights and obligations upon termination.
The Company has concluded that this Operating Agreement does not qualify as a variable interest entity because the Company does not control the entity. However, the existing merchandise trust, which had a fair value of approximately $3.5 million as of the contract date, has been consolidated as a variable interest entity as the Company controls and directly benefits from the operations of the merchandise trust. Other liabilities assumed by the Company have also been recorded as of the contract date. As no consideration was paid in this transaction, the Company has recorded a deferred gain of approximately $3.1 million within deferred cemetery revenues, net, which represent the excess of the value of the merchandise trust over the liabilities assumed. This amount will be amortized as the Company recognizes the benefits of ownership associated with the merchandise trust.
The table below reflects the amounts recorded on the contract date either through consolidation as a VIE or the assumption of a liability, resulting in a deferred gain:
| Final Assessment |
||||
| (in thousands) | ||||
|
Assets: |
||||
|
Merchandise trusts, restricted, at fair value |
$ | 3,493 | ||
|
Liabilities: |
||||
|
Deferred margin |
208 | |||
|
Merchandise liabilities |
192 | |||
|
|
|
|||
|
Net assets recorded |
3,093 | |||
|
Consideration paid |
— | |||
|
|
|
|||
|
Deferred gain |
$ | 3,093 | ||
|
|
|
|||
Also during the third quarter of 2010, the Company purchased a single cemetery for $1.5 million, which included the payoff of an existing mortgage of $0.3 million. At September 30, 2010, the Company had made a provisional assessment of the fair value of net assets acquired for this transaction. The Company obtained additional information in the fourth quarter of 2010 and had retrospectively adjusted these preliminary values as of December 31, 2010.
The table below reflects the Company’s final assessment of the fair value of net assets received, the purchase price and the resulting gain on a bargain purchase and displays the adjustment made from the adjusted values reported at December 31, 2010. The Company obtained additional information in the second quarter of 2011 and has retrospectively adjusted these preliminary values as noted below.
| Preliminary Assessment |
Adjustments | Final Assessment |
||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable |
$ | 1,003 | $ | (134 | ) | $ | 869 | |||||
|
Cemetery property |
2,831 | — | 2,831 | |||||||||
|
Property and equipment |
607 | — | 607 | |||||||||
|
Merchandise trusts, restricted, at fair value |
3,080 | — | 3,080 | |||||||||
|
Perpetual care trusts, restricted, at fair value |
1,089 | — | 1,089 | |||||||||
|
Intangible assets |
340 | — | 340 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
8,950 | (134 | ) | 8,816 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
2,537 | (133 | ) | 2,404 | ||||||||
|
Other liabilities |
318 | — | 318 | |||||||||
|
Merchandise liabilities |
2,342 | — | 2,342 | |||||||||
|
Deferred tax liabilities |
1,104 | — | 1,104 | |||||||||
|
Perpetual care trust corpus |
1,089 | — | 1,089 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
7,390 | (133 | ) | 7,257 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
1,560 | (1 | ) | 1,559 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration paid |
1,500 | — | 1,500 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Gain on bargain purchase |
$ | 60 | $ | (1 | ) | $ | 59 | |||||
|
|
|
|
|
|
|
|||||||
The results of operations and pro forma results related to this acquisition are not material to the financial statements taken as a whole.
Fourth Quarter 2010 Acquisition
On October 12, 2010, StoneMor LLC, StoneMor Kansas LLC, a Kansas limited liability company and StoneMor Kansas Subsidiary LLC, a Kansas limited liability company, each a wholly-owned subsidiary of the Company, entered into an Asset Purchase and Sale Agreement (the “4 th Quarter Purchase Agreement”) with Fairlawn Burial Park Association and Heritage II Inc., collectively the Sellers, and Edward J. Nazar as the Receiver.
Pursuant to the 4 th Quarter Purchase Agreement, Buyer acquired the assets of one cemetery and one funeral home in Kansas, purchased out of receivership. In consideration for the transfer, the Company paid approximately $0.7 million in cash, and posted a bond of approximately $0.3 million to fund permanent maintenance trust shortfalls and incurred approximately $0.6 million of liabilities in connection with this acquisition.
The table below reflects the Company’s final assessment of the fair value of net assets received, the purchase price and the resulting gain on a bargain purchase and displays the adjustment made from the adjusted values reported at December 31, 2010. The Company obtained additional information in the second quarter of 2011 and has retrospectively adjusted these preliminary values as noted below.
| Preliminary Assessment |
Adjustments | Final Assessment |
||||||||||
| (in thousands) | ||||||||||||
|
Assets: |
||||||||||||
|
Accounts receivable (net) |
$ | 198 | $ | (118 | ) | $ | 80 | |||||
|
Cemetery property |
986 | — | 986 | |||||||||
|
Merchandise trusts, restricted, at fair value |
535 | — | 535 | |||||||||
|
Perpetual care trusts, restricted, at fair value |
412 | — | 412 | |||||||||
|
Property and equipment |
520 | — | 520 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
2,651 | (118 | ) | 2,533 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||||
|
Deferred margin |
1,010 | — | 1,010 | |||||||||
|
Merchandise liabilities |
932 | — | 932 | |||||||||
|
Deferred tax liabilities |
89 | — | 89 | |||||||||
|
Perpetual care trust corpus |
412 | — | 412 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total liabilities |
2,443 | — | 2,443 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of net assets acquired |
208 | (118 | ) | 90 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Consideration paid |
665 | — | 665 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Goodwill from purchase |
$ | 457 | $ | 118 | $ | 575 | ||||||
|
|
|
|
|
|
|
|||||||
The results of operations and pro forma results related to this acquisition are not material to the consolidated financial statements taken as a whole.
If the acquisitions from the first and second quarters of 2010 had been consummated on January 1, 2010, on a pro forma basis, for the year ended December 31, 2010, consolidated revenues would have been $204.8 million, consolidated net income (loss) would have been $(2.3) million and net income (loss) per limited partner unit (basic and diluted) would have been $(0.16). These pro forma results are unaudited and have been prepared for comparative purposes only and include certain adjustments such as decreased cost of goods sold related to the step-down in the basis of the cemetery property acquired and increased interest on the acquisition debt. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on January 1, 2010 or of future results of operations of the locations. The results of operations of the acquired properties are included in the consolidated financial statements since the date of acquisition. Revenues and net income included in operations since the dates of acquisition are $25.6 million and $7.2 million, respectively, for the year ended December 31, 2011 and $11.1 million and $1.1 million, respectively, for the year ended December 31, 2011.
2nd Quarter 2009 Long-Term Operating Agreements
In the second quarter of 2009, the Company, through certain of its subsidiaries, entered into two long-term operating agreements wherein the Company has become the exclusive operator of the underlying cemetery land.
These operating agreements do not qualify as variable interest entities because the Company does not control the entities. However, the existing merchandise and perpetual care trusts, which had a fair value of approximately $1.4 million and $3.4 million, respectively, have been consolidated as a variable interest entity as the Company controls and directly benefits from the operations of the trusts. Other liabilities assumed by the Company and debt incurred related to this transaction have also been recorded as of the contract date. The cash paid and debt incurred related to these transactions exceeded the net assets recorded as of the contract date. This amount of approximately $4.8 million, recorded within other assets on the consolidated balance sheet, will be amortized over the expected life of the contract, which is 40 years.
The table below reflects the amounts recorded on the contract date either through consolidation as a VIE or the assumption of a liability.
| Final Assessment | ||||
| (in thousands) | ||||
|
Assets: |
||||
|
Merchandise trusts, restricted, at fair value |
$ | 1,385 | ||
|
Perpetual care trusts, restricted, at fair value |
3,428 | |||
|
Liabilities: |
||||
|
Merchandise liabilities |
1,635 | |||
|
Deferred margin |
1,322 | |||
|
Other liabilities |
46 | |||
|
Perpetual care trust corpus |
3,428 | |||
|
|
|
|||
|
Net assets recorded |
(1,618 | ) | ||
|
|
|
|||
|
Consideration paid |
3,220 | |||
|
|
|
|||
|
Other Assets |
$ | 4,838 | ||
|
|
|
|||
3rd Quarter 2009 Long-Term Operating Agreement
In the third quarter of 2009, the Company, through certain of its subsidiaries, entered into a single long-term operating agreement wherein the Company has become the exclusive operator of the underlying cemetery land.
The nature of the agreement and the accounting treatment utilized by the Company is essentially identical in nature as the 2nd Quarter 2009 long-term operating agreements described above.
The cash paid and debt incurred related to these transactions exceeded the net assets recorded as of the contract date. This amount of approximately $3.6 million, recorded within other assets on the consolidated balance sheet, will be amortized over the expected life of the contract, which is 40 years.
The table below reflects the amounts recorded on the contract date either through consolidation as a VIE or the assumption of a liability.
| Final Assessment | ||||
| (in thousands) | ||||
|
Assets: |
||||
|
Merchandise trusts, restricted, at fair value |
$ | 321 | ||
|
Perpetual care trusts, restricted, at fair value |
2,911 | |||
|
Liabilities: |
||||
|
Merchandise liabilities |
231 | |||
|
Deferred margin |
186 | |||
|
Perpetual care trust corpus |
2,911 | |||
|
|
|
|||
|
Net assets recorded |
(96 | ) | ||
|
|
|
|||
|
Consideration paid—cash |
1,400 | |||
|
Consideration paid—note issued |
1,400 | |||
|
Consideration paid—other liability assumed |
750 | |||
|
|
|
|||
|
Total consideration paid |
3,550 | |||
|
|
|
|||
|
Other assets |
$ | 3,646 | ||
|
|
|
|||
|
|||
| 15. | SEGMENT INFORMATION |
The Company is organized into five distinct reportable segments which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, 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 Company’s 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. The nature of the Company’s 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 Company’s 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 Company’s 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, 2011
| As of December 31, 2011 | ||||||||||||||||||||||||||||
| Cemeteries | Funeral Homes |
Corporate | Adjustment | Total | ||||||||||||||||||||||||
| Southeast | Northeast | West | ||||||||||||||||||||||||||
| (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 |
— | — | — | — | 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 |
$ | 472,472 | $ | 284,765 | $ | 383,696 | $ | 78,763 | $ | 29,429 | $ | — | $ | 1,249,125 | ||||||||||||||
|
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 |
$ | 7,271 | $ | — | $ | 11,948 | $ | 17,220 | $ | — | $ | — | $ | 36,439 | ||||||||||||||
As of and for the year ended December 31, 2010
| As of December 31, 2010 | ||||||||||||||||||||||||||||
| Cemeteries | Funeral Homes |
Corporate | Adjustment | Total | ||||||||||||||||||||||||
| Southeast | Northeast | West | ||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||||||||
|
Sales |
$ | 76,419 | $ | 34,314 | $ | 37,079 | $ | — | $ | 10 | $ | (40,043 | ) | $ | 107,779 | |||||||||||||
|
Service and other |
28,157 | 22,430 | 23,445 | — | — | (10,065 | ) | 63,967 | ||||||||||||||||||||
|
Funeral home |
— | — | — | 25,546 | — | — | 25,546 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total revenues |
104,576 | 56,744 | 60,524 | 25,546 | 10 | (50,108 | ) | 197,292 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Costs and expenses |
||||||||||||||||||||||||||||
|
Cost of sales |
15,477 | 8,455 | 5,927 | — | 6 | (6,336 | ) | 23,529 | ||||||||||||||||||||
|
Cemetery |
20,518 | 13,490 | 14,776 | — | — | — | 48,784 | |||||||||||||||||||||
|
Selling |
24,486 | 11,176 | 11,142 | — | 596 | (9,155 | ) | 38,245 | ||||||||||||||||||||
|
General and administrative |
11,835 | 6,108 | 6,631 | — | 17 | — | 24,591 | |||||||||||||||||||||
|
Corporate overhead |
— | — | — | — | 24,379 | — | 24,379 | |||||||||||||||||||||
|
Depreciation and amortization |
1,448 | 782 | 1,157 | 1,654 | 3,804 | — | 8,845 | |||||||||||||||||||||
|
Funeral home |
— | — | — | 19,937 | — | — | 19,937 | |||||||||||||||||||||
|
Acquisition related costs |
— | — | — | — | 5,715 | — | 5,715 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total costs and expenses |
73,764 | 40,011 | 39,633 | 21,591 | 34,517 | (15,491 | ) | 194,025 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Operating profit |
$ | 30,812 | $ | 16,733 | $ | 20,891 | $ | 3,955 | $ | (34,507 | ) | $ | (34,617 | ) | $ | 3,267 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total assets |
$ | 381,322 | $ | 266,745 | $ | 361,694 | $ | 49,461 | $ | 86,370 | $ | — | $ | 1,145,592 | ||||||||||||||
|
Amortization of cemetery property |
$ | 3,036 | $ | 3,398 | $ | 719 | $ | — | $ | — | $ | (235 | ) | $ | 6,918 | |||||||||||||
|
Long lived asset additions |
$ | 3,079 | $ | 3,703 | $ | 68,609 | $ | 8,441 | $ | 188 | $ | — | $ | 84,020 | ||||||||||||||
|
Goodwill |
$ | 456 | $ | — | $ | 11,801 | $ | 5,896 | $ | — | $ | — | $ | 18,153 | ||||||||||||||
As of and for the year ended December 31, 2009
| As of December 31, 2009 | ||||||||||||||||||||||||||||
| Cemeteries | Funeral Homes |
Corporate | Adjustment | Total | ||||||||||||||||||||||||
| Southeast | Northeast | West | ||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||||||||
|
Sales |
$ | 71,756 | $ | 33,743 | $ | 27,094 | $ | — | $ | 15 | $ | (19,933 | ) | $ | 112,675 | |||||||||||||
|
Service and other |
27,976 | 20,450 | 12,863 | — | — | (16,126 | ) | 45,163 | ||||||||||||||||||||
|
Funeral home |
— | — | — | 23,365 | — | — | 23,365 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total revenues |
99,732 | 54,193 | 39,957 | 23,365 | 15 | (36,059 | ) | 181,203 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Costs and expenses |
||||||||||||||||||||||||||||
|
Cost of sales |
15,410 | 7,207 | 4,422 | — | 4 | (5,249 | ) | 21,794 | ||||||||||||||||||||
|
Cemetery |
18,555 | 12,842 | 9,834 | — | 15 | — | 41,246 | |||||||||||||||||||||
|
Selling |
22,368 | 10,595 | 7,834 | — | 855 | (7,529 | ) | 34,123 | ||||||||||||||||||||
|
General and administrative |
11,453 | 6,127 | 4,884 | — | 34 | — | 22,498 | |||||||||||||||||||||
|
Corporate overhead |
— | — | — | — | 22,370 | — | 22,370 | |||||||||||||||||||||
|
Depreciation and amortization |
1,531 | 840 | 448 | 1,101 | 2,608 | — | 6,528 | |||||||||||||||||||||
|
Funeral home |
— | — | — | 19,006 | — | — | 19,006 | |||||||||||||||||||||
|
Acquisition related costs |
— | — | — | — | 1,072 | — | 1,072 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total costs and expenses |
69,317 | 37,611 | 27,422 | 20,107 | 26,958 | (12,778 | ) | 168,637 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Operating profit |
$ | 30,415 | $ | 16,582 | $ | 12,535 | $ | 3,258 | $ | (26,943 | ) | $ | (23,281 | ) | $ | 12,566 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total assets |
$ | 371,155 | $ | 252,522 | $ | 162,664 | $ | 35,436 | $ | 33,524 | $ | — | $ | 855,301 | ||||||||||||||
|
Amortization of cemetery property |
$ | 3,091 | $ | 2,332 | $ | 615 | $ | — | $ | — | $ | (237 | ) | $ | 5,801 | |||||||||||||
|
Long lived asset additions |
$ | 5,685 | $ | 912 | $ | 695 | $ | 627 | $ | 4,448 | $ | — | $ | 12,367 | ||||||||||||||
|
Goodwill |
$ | — | $ | — | $ | — | $ | 480 | $ | — | $ | — | $ | 480 | ||||||||||||||
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 accounting principles generally accepted in the United States of America; 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 Company’s 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 balance sheet, whereas the Company’s management accounting practices exclude these items.
|
|||
| 16. | 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. | |
|
Level 3: |
Any and all pricing inputs that are generally unobservable and not corroborated by market data. | |
The following table allocates the Company’s assets measured at fair value as of December 31, 2011 and December 31, 2010.
As of December 31, 2011
Merchandise Trust
|
Description |
Level 1 | Level 2 | Total | |||||||||
| (in thousands) | ||||||||||||
|
Assets |
||||||||||||
|
Short-term investments |
$ | 38,312 | $ | — | $ | 38,312 | ||||||
|
Fixed maturities: |
||||||||||||
|
U.S. government and federal agency |
— | — | — | |||||||||
|
U.S. state and local government agency |
— | 23 | 23 | |||||||||
|
Corporate debt securities |
— | 9,765 | 9,765 | |||||||||
|
Other debt securities |
— | 1,100 | 1,100 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total fixed maturity investments |
— | 10,888 | 10,888 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Mutual funds—debt securities |
67,421 | — | 67,421 | |||||||||
|
Mutual funds—equity securities—real estate sector |
22,847 | — | 22,847 | |||||||||
|
Mutual funds—equity securities—energy sector |
28,057 | — | 28,057 | |||||||||
|
Mutual funds—equity securities—MLP’s |
20,308 | — | 20,308 | |||||||||
|
Mutual funds—equity securities—other |
70,076 | — | 70,076 | |||||||||
|
Equity securities |
||||||||||||
|
Preferred REIT’s |
9,001 | — | 9,001 | |||||||||
|
Master limited partnerships |
41,469 | — | 41,469 | |||||||||
|
Global equity securities |
21,882 | — | 21,882 | |||||||||
|
Other invested assets |
— | 7,360 | 7,360 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 319,373 | $ | 18,248 | $ | 337,621 | ||||||
|
|
|
|
|
|
|
|||||||
Perpetual Care Trust
|
Description |
Level 1 | Level 2 | Total | |||||||||
| (in thousands) | ||||||||||||
|
Assets |
||||||||||||
|
Short-term investments |
$ | 22,607 | $ | — | $ | 22,607 | ||||||
|
Fixed maturities: |
||||||||||||
|
U.S. government and federal agency |
513 | — | 513 | |||||||||
|
U.S. state and local government agency |
— | 147 | 147 | |||||||||
|
Corporate debt securities |
— | 22,154 | 22,154 | |||||||||
|
Other debt securities |
— | 371 | 371 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total fixed maturity investments |
513 | 22,672 | 23,185 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Mutual funds—debt securities |
60,806 | — | 60,806 | |||||||||
|
Mutual funds—equity securities—real estate sector |
24,580 | — | 24,580 | |||||||||
|
Mutual funds—equity securities—energy sector |
20,069 | — | 20,069 | |||||||||
|
Mutual funds—equity securities—MLP’s |
13,515 | — | 13,515 | |||||||||
|
Mutual funds—equity securities—other |
41,334 | — | 41,334 | |||||||||
|
Equity securities |
||||||||||||
|
Preferred REIT’s |
19,720 | — | 19,720 | |||||||||
|
Master limited partnerships |
27,998 | — | 27,998 | |||||||||
|
Global equity securities |
695 | — | 695 | |||||||||
|
Other invested assets |
— | 170 | 170 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 231,837 | $ | 22,842 | $ | 254,679 | ||||||
|
|
|
|
|
|
|
|||||||
As of December 31, 2010
Merchandise Trust
|
Description |
Level 1 | Level 2 | Total | |||||||||
| (in thousands) | ||||||||||||
|
Assets |
||||||||||||
|
Short-term investments |
$ | 40,723 | $ | — | $ | 40,723 | ||||||
|
Fixed maturities: |
||||||||||||
|
U.S. government and federal agency |
— | — | — | |||||||||
|
U.S. state and local government agency |
— | 23 | 23 | |||||||||
|
Corporate debt securities |
— | 9,940 | 9,940 | |||||||||
|
Other debt securities |
— | 1,538 | 1,538 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total fixed maturity investments |
— | 11,501 | 11,501 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Mutual funds—debt securities |
52,518 | — | 52,518 | |||||||||
|
Mutual funds—equity securities—real estate sector |
12,761 | — | 12,761 | |||||||||
|
Mutual funds—equity securities—energy sector |
29,119 | — | 29,119 | |||||||||
|
Mutual funds—equity securities—MLP’s |
20,077 | — | 20,077 | |||||||||
|
Mutual funds—equity securities—other |
64,708 | — | 64,708 | |||||||||
|
Equity securities |
||||||||||||
|
Preferred REIT’s |
16,549 | — | 16,549 | |||||||||
|
Master limited partnerships |
36,520 | — | 36,520 | |||||||||
|
Global equity securities |
22,192 | — | 22,192 | |||||||||
|
Other invested assets |
— | 5,208 | 5,208 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 295,167 | $ | 16,709 | $ | 311,876 | ||||||
|
|
|
|
|
|
|
|||||||
Perpetual Care Trust
|
Description |
Level 1 | Level 2 | Total | |||||||||
| (in thousands) | ||||||||||||
|
Assets |
||||||||||||
|
Short-term investments |
$ | 20,583 | $ | — | $ | 20,583 | ||||||
|
Fixed maturities: |
||||||||||||
|
U.S. government and federal agency |
600 | — | 600 | |||||||||
|
U.S. state and local government agency |
— | 148 | 148 | |||||||||
|
Corporate debt securities |
— | 22,692 | 22,692 | |||||||||
|
Other debt securities |
— | 508 | 508 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total fixed maturity investments |
600 | 23,348 | 23,948 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Mutual funds—debt securities |
55,149 | — | 55,149 | |||||||||
|
Mutual funds—equity securities—real estate sector |
13,026 | — | 13,026 | |||||||||
|
Mutual funds—equity securities—energy sector |
21,340 | — | 21,340 | |||||||||
|
Mutual funds—equity securities—MLP’s |
13,564 | — | 13,564 | |||||||||
|
Mutual funds—equity securities—other |
43,850 | — | 43,850 | |||||||||
|
Equity securities |
||||||||||||
|
Preferred REIT’s |
31,050 | — | 31,050 | |||||||||
|
Master limited partnerships |
25,426 | — | 25,426 | |||||||||
|
Global equity securities |
776 | — | 776 | |||||||||
|
Other invested assets |
— | 978 | 978 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 225,364 | $ | 24,326 | $ | 249,690 | ||||||
|
|
|
|
|
|
|
|||||||
All level 2 assets are priced utilizing independent pricing services. There were no level 3 assets.
|
|||
| 17. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
The following summarizes certain quarterly results of operations:
| Three months ended | ||||||||||||||||
|
2011 |
March 31 | June 30 | September 30 | December 31 | ||||||||||||
| (in thousands, except unit data) | ||||||||||||||||
|
Revenues |
$ | 49,231 | $ | 60,107 | $ | 60,325 | $ | 58,725 | ||||||||
|
Net income (loss) |
(7,214 | ) | 815 | (223 | ) | (3,093 | ) | |||||||||
|
General partners’ interest in net income (loss) for the period |
(144 | ) | 16 | (4 | ) | (62 | ) | |||||||||
|
Limited partners’ interest in net income (loss) for the period |
(7,070 | ) | 799 | (219 | ) | (3,031 | ) | |||||||||
|
Net income (loss) per common unit |
||||||||||||||||
|
Basic |
$ | (0.40 | ) | $ | 0.04 | $ | (0.01 | ) | $ | (0.16 | ) | |||||
|
Diluted |
$ | (0.40 | ) | $ | 0.04 | $ | (0.01 | ) | $ | (0.16 | ) | |||||
| Three months ended | ||||||||||||||||
|
2010 |
March 31 | June 30 | September 30 | December 31 | ||||||||||||
| (in thousands, except unit data) | ||||||||||||||||
|
Revenues |
$ | 40,670 | $ | 48,737 | $ | 52,130 | $ | 55,755 | ||||||||
|
Net income (loss) |
5,895 | (1,460 | ) | (1,901 | ) | (3,981 | ) | |||||||||
|
General partners’ interest in net income (loss) for the period |
118 | (29 | ) | (38 | ) | (80 | ) | |||||||||
|
Limited partners’ interest in net income (loss) for the period |
5,777 | (1,431 | ) | (1,863 | ) | (3,901 | ) | |||||||||
|
Net income (loss) per common unit |
||||||||||||||||
|
Basic |
$ | 0.43 | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.25 | ) | |||||
|
Diluted |
$ | 0.43 | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.25 | ) | |||||
Net income (loss) per common 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 the annual per share amounts.
|
|||
| 18. | PARTNER’S CAPITAL |
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 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 September 22, 2010, the Company completed a follow-on public offering of 1,725,000 common units, including an option to purchase up to 225,000 common units to cover over-allotments which was exercised in full by the underwriters, at a price of $24.00 per unit, representing a 10.9% interest in the Company. Total gross proceeds from these transactions were approximately $41.4 million, before offering costs and underwriting discounts. Net proceeds of the offering, including the related capital contribution of our General Partner, after deducting underwriting discounts and offering expenses, were approximately $39.6 million.
|
|||
| 19. | SUBSEQUENT EVENT |
On January 19, 2012, the Company entered into the New Credit Agreement. For additional information, see Note 9.