Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-32270

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		80-0103159
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

311 Veterans Highway, Suite B Levittown, Pennsylvania		19056
(Address of principal executive offices)		(Zip Code)

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the registrant’s outstanding common units at July 31, 2013 was 21,350,236.

 

 

 

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Table of Contents

Index – Form 10-Q

 

				Page
Part I		Financial Information
Item 1.		Financial Statements (unaudited)			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			52
Item 4.		Controls and Procedures			53
Part II		Other Information
Item 1.		Legal Proceedings			54
Item 1A.		Risk Factors			54
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 3.		Defaults Upon Senior Securities			55
Item 4.		Mine Safety Disclosures			55
Item 5.		Other Information			55
Item 6.		Exhibits			56
		Signatures			58

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Part I – Financial Information

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheet

(in thousands)

(unaudited)

 

		June 30,				December 31,
		2013				2012
Assets
Current assets:
Cash and cash equivalents		$	14,075			$	7,946
Accounts receivable, net of allowance			54,396				51,895
Prepaid expenses			5,565				3,832
Other current assets			18,679				17,418
Total current assets			92,715				81,091
Long-term accounts receivable, net of allowance			77,297				71,521
Cemetery property			312,506				309,980
Property and equipment, net of accumulated depreciation			84,793				79,740
Merchandise trusts, restricted, at fair value			414,382				375,973
Perpetual care trusts, restricted, at fair value			302,773				282,313
Deferred financing costs, net of accumulated amortization			8,865				9,238
Deferred selling and obtaining costs			82,501				76,317
Deferred tax assets			381				381
Goodwill			47,570				42,392
Other assets			11,849				14,779
Total assets		$	1,435,632			$	1,343,725
Liabilities and partners’ capital
Current liabilities:
Accounts payable and accrued liabilities		$	32,992			$	28,973
Accrued interest			1,625				1,833
Current portion, long-term debt			6,936				2,175
Total current liabilities			41,553				32,981
Other long-term liabilities			1,616				1,835
Long-term debt			266,290				252,774
Deferred cemetery revenues, net			544,322				497,861
Deferred tax liabilities			12,554				14,910
Merchandise liability			127,875				125,869
Perpetual care trust corpus			302,773				282,313
Total liabilities			1,296,983				1,208,543
Commitments and contingencies
Partners’ capital
General partner			(893	)			386
Common partners			139,542				134,796
Total partners’ capital			138,649				135,182
Total liabilities and partners’ capital		$	1,435,632			$	1,343,725

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except per unit data)

(unaudited)

 

		Three months ended								Six months ended
		June 30,								June 30,
		2013				2012				2013				2012
Revenues:
Cemetery
Merchandise		$	28,669			$	30,337			$	55,321			$	57,481
Services			11,072				11,265				22,371				23,347
Investment and other			12,005				12,051				22,248				23,475
Funeral home
Merchandise			4,517				3,569				9,470				7,587
Services			6,159				4,286				12,624				9,205
Total revenues			62,422				61,508				122,034				121,095
Costs and Expenses:
Cost of goods sold (exclusive of depreciation shown separately below):
Perpetual care			1,500				1,415				2,781				2,782
Merchandise			6,212				5,821				11,221				10,874
Cemetery expense			15,408				14,775				28,193				27,567
Selling expense			12,218				13,123				23,442				24,910
General and administrative expense			7,898				7,195				15,480				14,388
Corporate overhead (including $360 and $210 in unit-based compensation for the three months ended June 30, 2013 and 2012, and $690 and $409 for the six months ended June 30, 2013 and 2012, respectively)			5,672				7,756				13,660				14,359
Depreciation and amortization			2,451				2,230				4,781				4,560
Funeral home expense
Merchandise			1,703				1,107				3,225				2,530
Services			4,768				3,302				9,325				6,707
Other			2,893				2,206				5,550				4,134
Acquisition related costs, net of recoveries			(625	)			782				658				1,113
Total cost and expenses			60,098				59,712				118,316				113,924
Operating profit			2,324				1,796				3,718				7,171
Gain (loss) on termination of operating agreement			—				(83	)			—				1,737
Gain on settlement agreement, net			11,349				—				12,261				—
Gain on acquisition			—				122				—				122
Loss on early extinguishment of debt			21,595				—				21,595				—
Gain on sale of other assets			155				—				155				—
Interest expense			5,132				4,870				10,595				9,836
Net loss before income taxes			(12,899	)			(3,035	)			(16,056	)			(806	)
Income tax expense (benefit)
State			165				97				221				242
Federal			(1,255	)			(963	)			(2,268	)			(909	)
Total income tax benefit			(1,090	)			(866	)			(2,047	)			(667	)
Net loss		$	(11,809	)		$	(2,169	)		$	(14,009	)		$	(139	)
General partner’s interest in net loss for the period		$	(218	)		$	(43	)		$	(258	)		$	(3	)
Limited partners’ interest in net loss for the period		$	(11,591	)		$	(2,126	)		$	(13,751	)		$	(136	)
Net loss per limited partner unit (basic and diluted)		$	(.54	)		$	(.11	)		$	(.67	)		$	(.01	)
Weighted average number of limited partners’ units outstanding (basic and diluted)			21,345				19,375				20,541				19,372
Distributions declared per unit		$	.595			$	.585			$	1.185			$	1.170

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital

(in thousands)

(unaudited)

 

		Partners’ Capital
		Common				General
		Unit Holders				Partner				Total
Balance, December 31, 2012		$	134,796			$	386			$	135,182
Proceeds from public offering			38,377				—				38,377
Issuance of common units			3,718				—				3,718
Compensation related to units awards			648				—				648
Net loss			(13,751	)			(258	)			(14,009	)
Cash distribution			(24,246	)			(1,021	)			(25,267	)
Balance, June 30, 2013		$	139,542			$	(893	)		$	138,649

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

		For the six months ended June 30,
		2013				2012
Operating activities:
Net loss		$	(14,009	)		$	(139	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cost of lots sold			4,194				3,979
Depreciation and amortization			4,781				4,560
Unit-based compensation			690				409
Accretion of debt discounts			1,011				723
Gain on termination of operating agreement			—				(1,737	)
Gain on acquisition			—				(122	)
Gain on sale of other assets			(155	)			—
Loss on early extinguishment of debt			21,595				—
Changes in assets and liabilities that provided (used) cash:
Accounts receivable			(7,199	)			(8,180	)
Allowance for doubtful accounts			(83	)			3,293
Merchandise trust fund			(22,611	)			(1,917	)
Prepaid expenses			(1,733	)			(1,169	)
Other current assets			(1,261	)			(860	)
Other assets			3,972				139
Accounts payable and accrued and other liabilities			3,677				348
Deferred selling and obtaining costs			(6,184	)			(3,380	)
Deferred cemetery revenue			33,766				23,699
Deferred taxes (net)			(2,356	)			(1,000	)
Merchandise liability			(1,612	)			(4,451	)
Net cash provided by operating activities			16,483				14,195
Investing activities:
Cash paid for cemetery property			(2,252	)			(3,600	)
Purchase of subsidiaries			(9,100	)			(3,426	)
Cash paid for property and equipment			(3,920	)			(1,835	)
Proceeds from sales of other assets			155				—
Net cash used in investing activities			(15,117	)			(8,861	)
Financing activities:
Cash distribution			(25,267	)			(23,563	)
Additional borrowings on long-term debt			217,106				29,200
Repayments of long-term debt			(205,800	)			(13,422	)
Proceeds from public offering			38,377				—
Fees paid related to early extinguishment of debt			(14,920	)			—
Cost of financing activities			(4,733	)			(1,820	)
Net cash provided by (used in) financing activities			4,763				(9,605	)
Net increase (decrease) in cash and cash equivalents			6,129				(4,271	)
Cash and cash equivalents - Beginning of period			7,946				12,058
Cash and cash equivalents - End of period		$	14,075			$	7,787
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	9,754			$	9,048
Cash paid during the period for income taxes		$	3,132			$	3,655
Non-cash investing and financing activities:
Acquisition of assets by financing		$	92			$	53
Issuance of limited partner units for cemetery acquisition		$	3,718			$	603
Acquisition of asset by assumption of directly related liability		$	3,924			$	544

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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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 June 30, 2013, the Partnership owned 258 and operated 276 cemeteries in 27 states and Puerto Rico and owned and operated 92 funeral homes in 18 states and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements included in the Company’s 2012 Annual Report on Form 10-K (“2012 Form 10-K”), but does not include all disclosures required by GAAP, which are presented in the Company’s 2012 Form 10-K.

Principles of Consolidation

The unaudited condensed 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 18 cemeteries under long-term operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810.

The Company operates 2 cemeteries under long-term operating agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of each of these cemeteries’ merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term operating agreements, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also recognized the existing merchandise liabilities that it assumed as part of these agreements.

Use of Estimates

Preparation of these unaudited condensed 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 unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated balance sheet.

 

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2.	LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Long-term accounts receivable, net, consist of the following:

 

		As of
		June 30,				December 31,
		2013				2012
		(in thousands)
Customer receivables		$	172,320			$	159,726
Unearned finance income			(19,929	)			(18,377	)
Allowance for contract cancellations			(20,698	)			(17,933	)
			131,693				123,416
Less: current portion, net of allowance			54,396				51,895
Long-term portion, net of allowance		$	77,297			$	71,521

Activity in the allowance for contract cancellations is as follows:

 

		For the six months ended June 30,
		2013				2012
		(in thousands)
Balance - Beginning of period		$	17,933			$	17,582
Provision for cancellations			10,651				9,791
Charge-offs - net			(7,886	)			(7,356	)
Balance - End of period		$	20,698			$	20,017

 

3.	CEMETERY PROPERTY

Cemetery property consists of the following:

 

		As of
		June 30,				December 31,
		2013				2012
		(in thousands)
Developed land		$	70,241			$	71,318
Undeveloped land			162,746				162,275
Mausoleum crypts and lawn crypts			69,721				69,525
Other land			9,798				6,862
Total		$	312,506			$	309,980

 

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4.	PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

		As of
		June 30,				December 31,
		2013				2012
		(in thousands)
Building and improvements		$	88,278			$	82,056
Furniture and equipment			44,336				42,353
			132,614				124,409
Less: accumulated depreciation			(47,821	)			(44,669	)
Property and equipment - net		$	84,793			$	79,740

Depreciation expense was $1.8 million and $3.5 million for the three and six months ended June 30, 2013, respectively, as compared to $1.7 million and $3.5 million during the same periods last year.

 

5.	MERCHANDISE TRUSTS

At June 30, 2013, 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. See Note 15 for further details. There were no Level 3 assets.

The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall.

The Company has included $7.7 million and $7.6 million of investments held in trust by the West Virginia Funeral Directors Association at June 30, 2013 and December 31, 2012, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value.

 

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The cost and market value associated with the assets held in merchandise trusts at June 30, 2013 and December 31, 2012 were as follows:

 

As of June 30, 2013		Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
Short-term investments		$	50,280			$	6			$	—			$	50,286
Fixed maturities:
U.S. Government and federal agency			—				—				—				—
U.S. State and local government agency			—				—				—				—
Corporate debt securities			9,067				78				(184	)			8,961
Other debt securities			7,810				—				(7	)			7,803
Total fixed maturities			16,877				78				(191	)			16,764
Mutual funds - debt securities			110,875				20				(7,606	)			103,289
Mutual funds - equity securities			139,974				12,583				(809	)			151,748
Equity securities			73,537				6,990				(1,309	)			79,218
Other invested assets			4,849				492				—				5,341
Total managed investments		$	396,392			$	20,169			$	(9,915	)		$	406,646
West Virginia Trust Receivable			7,736				—				—				7,736
Total		$	404,128			$	20,169			$	(9,915	)		$	414,382

 

As of December 31, 2012		Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
Short-term investments		$	27,890			$	—			$	—			$	27,890
Fixed maturities:
U.S. Government and federal agency			—				—				—				—
U.S. State and local government agency			—				—				—				—
Corporate debt securities			8,590				165				(41	)			8,714
Other debt securities			4,320				—				(3	)			4,317
Total fixed maturities			12,910				165				(44	)			13,031
Mutual funds - debt securities			105,388				3,425				(892	)			107,921
Mutual funds - equity securities			145,538				6,229				(6,697	)			145,070
Equity securities			68,714				3,448				(4,755	)			67,407
Other invested assets			7,376				165				(444	)			7,097
Total managed investments		$	367,816			$	13,432			$	(12,832	)		$	368,416
West Virginia Trust Receivable			7,557				—				—				7,557
Total		$	375,373			$	13,432			$	(12,832	)		$	375,973

The contractual maturities of debt securities as of June 30, 2013 are as follows:

 

As of June 30, 2013		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			—				—				—				—
Corporate debt securities			—				4,131				4,830				—
Other debt securities			6,518				1,285				—				—
Total fixed maturities		$	6,518			$	5,416			$	4,830			$	—

 

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An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at June 30, 2013 and December 31, 2012 is presented below:

 

		Less than 12 months								12 Months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
As of June 30, 2013		Value				Losses				Value				Losses				Value				Losses
		(in thousands)
Fixed maturities:
U.S. Government and federal agency		$	—			$	—			$	—			$	—			$	—			$	—
U.S. State and local government agency			—				—				—				—				—				—
Corporate debt securities			5,599				176				309				8				5,908				184
Other debt securities			3,984				7				—				—				3,984				7
Total fixed maturities			9,583				183				309				8				9,892				191
Mutual funds - debt securites			93,810				6,637				7,575				969				101,385				7,606
Mutual funds - equity securites			57,015				457				4,228				352				61,243				809
Equity securities			8,838				524				5,956				785				14,794				1,309
Other invested assets			—				—				—				—				—				—
Total		$	169,246			$	7,801			$	18,068			$	2,114			$	187,314			$	9,915

 

		Less than 12 months								12 Months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
As of December 31, 2012		Value				Losses				Value				Losses				Value				Losses
		(in thousands)
Fixed maturities:
U.S. Government and federal agency		$	—			$	—			$	—			$	—			$	—			$	—
U.S. State and local government agency			—				—				—				—				—				—
Corporate debt securities			2,140				20				297				21				2,437				41
Other debt securities			4,317				3				—				—				4,317				3
Total fixed maturities			6,457				23				297				21				6,754				44
Mutual funds - debt securites			6,388				463				4,198				429				10,586				892
Mutual funds - equity securites			48,255				5,500				19,655				1,197				67,910				6,697
Equity securities			17,932				1,527				15,538				3,228				33,470				4,755
Other invested assets			2,558				444				—				—				2,558				444
Total		$	81,590			$	7,957			$	39,688			$	4,875			$	121,278			$	12,832

A reconciliation of the Company’s merchandise trust activities for the six months ended June 30, 2013 is presented below:

 

Fair Value @ 12/31/2012				Contributions				Distributions				Interest/ Dividends				Capital Gain Distributions				Realized Gain/ Loss				Taxes				Fees				Unrealized Change in Fair Value				Fair Value @ 6/30/2013
(in thousands)
$	375,973				37,602				(20,454	)			8,361				—				7,324				(2,722	)			(1,356	)			9,654			$	414,382

The Company made net contributions into the trusts of approximately $17.1 million during the six months ended June 30, 2013. During the six months ended June 30, 2013, purchases and sales of securities available for sale included in trust investments were approximately $313.4 million and $324.2 million, respectively. Contributions include $4.9 million of assets that were acquired through acquisitions during the six months ended June 30, 2013.

 

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Other-Than-Temporary Impairments of Trust Assets

During the six months ended June 30, 2013, the Company determined that there were 4 securities with an aggregate cost basis of approximately $1.4 million and an aggregate fair value of approximately $0.7 million, resulting in an impairment of $0.7 million, wherein such impairment was considered to be other-than-temporary. During the three and six months ended June 30, 2012, the Company determined that there were six securities with an aggregate cost basis of approximately $1.6 million and an aggregate fair value of approximately $0.8 million, resulting in an impairment of $0.8 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against 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 three months ended June 30, 2013, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts.

 

6.	PERPETUAL CARE TRUSTS

At June 30, 2013, the Company’s perpetual care trusts consisted of the following types of assets:

 

•

Money Market Funds that invest in low risk short term securities;

 

•

Publicly traded mutual funds that invest in underlying debt securities;

 

•

Publicly traded mutual funds that invest in underlying equity securities;

 

•

Equity investments that are currently paying dividends or distributions. These investments include 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. See Note 15 for further details. There were no Level 3 assets.

 

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The cost and market value associated with the assets held in perpetual care trusts at June 30, 2013 and December 31, 2012 were as follows:

 

As of June 30, 2013		Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
Short-term investments		$	12,662			$	—			$	—			$	12,662
Fixed maturities:
U.S. Government and federal agency			408				95				—				503
U.S. State and local government agency			—				—				—				—
Corporate debt securities			24,188				212				(464	)			23,936
Other debt securities			371				—				—				371
Total fixed maturities			24,967				307				(464	)			24,810
Mutual funds - debt securities			117,429				211				(3,407	)			114,233
Mutual funds - equity securities			94,098				20,907				—				115,005
Equity securities			25,637				10,465				(39	)			36,063
Other invested assets			—				—				—				—
Total		$	274,793			$	31,890			$	(3,910	)		$	302,773

 

As of December 31, 2012		Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
Short-term investments		$	21,419			$	—			$	—			$	21,419
Fixed maturities:
U.S. Government and federal agency			408				104				—				512
U.S. State and local government agency			—				—				—				—
Corporate debt securities			22,690				702				(101	)			23,291
Other debt securities			371				—				—				371
Total fixed maturities			23,469				806				(101	)			24,174
Mutual funds - debt securities			103,909				3,429				(150	)			107,188
Mutual funds - equity securities			94,239				5,222				(249	)			99,212
Equity securities			23,797				6,563				(455	)			29,905
Other invested assets			113				302				—				415
Total		$	266,946			$	16,322			$	(955	)		$	282,313

The contractual maturities of debt securities as of June 30, 2013 are as follows:

 

As of June 30, 2013		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		$	382			$	121			$	—			$	—
U.S. State and local government agency			—				—				—				—
Corporate debt securities			154				10,792				12,990				—
Other debt securities			371				—				—				—
Total fixed maturities		$	907			$	10,913			$	12,990			$	—

 

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An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at June 30, 2013 and December 31, 2012 held in perpetual care trusts is presented below:

 

		Less than 12 months								12 Months or more								Total
As of June 30, 2013		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			13,959				441				897				23				14,856				464
Other debt securities			—				—				—				—				—				—
Total fixed maturities			13,959				441				897				23				14,856				464
Mutual funds - debt securities			94,480				3,003				16,002				404				110,482				3,407
Mutual funds - equity securities			—				—				—				—				—				—
Equity securities			1,098				39				—				—				1,098				39
Other invested assets			—				—				—				—				—				—
Total		$	109,537			$	3,483			$	16,899			$	427			$	126,436			$	3,910

 

		Less than 12 months								12 Months or more								Total
As of December 31, 2012		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			4,630				48				711				53				5,341				101
Other debt securities			—				—				—				—				—				—
Total fixed maturities			4,630				48				711				53				5,341				101
Mutual funds - debt securities			859				35				870				115				1,729				150
Mutual funds - equity securities			34,805				249				—				—				34,805				249
Equity securities			4,269				238				545				217				4,814				455
Other invested assets			—				—				—				—				—				—
Total		$	44,563			$	570			$	2,126			$	385			$	46,689			$	955

A reconciliation of the Company’s perpetual care trust activities for the six months ended June 30, 2013 is presented below:

 

Fair Value @ 12/31/2012				Contributions				Distributions				Interest/ Dividends				Capital Gain Distributions				Realized Gain/ Loss				Taxes				Fees				Unrealized Change in Fair Value				Fair Value @ 6/30/2013
(in thousands)
$	282,313				5,166				(6,118	)			7,345				—				3,191				(637	)			(1,100	)			12,613			$	302,773

The Company made net distributions from the trusts of approximately $1.0 million during the six months ended June 30, 2013. During the six months ended June 30, 2013, purchases and sales of securities available for sale included in trust investments were approximately $83.0 million and $84.2 million, respectively.

Other-Than-Temporary Impairments of Trust Assets

During the three and six months ended June 30, 2013 and 2012, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.

 

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7.	GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill 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
		Southeast				Northeast				West				Homes				Total
		(in thousands)
Balance as of December 31, 2012		$	6,174			$	—			$	11,948			$	24,270			$	42,392
Goodwill acquired from acquisitions during the six months ended June 30, 2013			—				—				—				5,178				5,178
Balance as of June 30, 2013		$	6,174			$	—			$	11,948			$	29,448			$	47,570

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 unaudited condensed consolidated balance sheet. All of the intangible assets are subject to amortization. The major classes of intangible assets are as follows:

 

		As of June 30, 2013								Net				As of December 31, 2012								Net
		Gross Carrying				Accumulated				Intangible				Gross Carrying				Accumulated				Intangible
		Amount				Amortization				Asset				Amount				Amortization				Asset
		(in thousands)
Amortized intangible assets:
Underlying contract value		$	6,239			$	(624	)		$	5,615			$	6,239			$	(555	)		$	5,684
Non-compete agreements			7,950				(3,332	)			4,618				6,023				(2,553	)			3,470
Other intangible assets			269				(89	)			180				269				(81	)			188
Total intangible assets		$	14,458			$	(4,045	)		$	10,413			$	12,531			$	(3,189	)		$	9,342

The increase in non-compete agreements was the result of an acquisition consummated in the first quarter of 2013. The fair value was determined by comparing the discounted cash flows of the acquired business with and without competition as of the date of acquisition. See Note 13 for further details.

 

8.	LONG-TERM DEBT

The Company had the following outstanding debt:

 

		As of
		June 30, 2013				December 31, 2012
		(in thousands)
7.875% Senior Notes, due 2021		$	175,000			$	—
10.25% Senior Notes, due 2017			—				150,000
Revolving Credit Facility, due January 2017			91,002				101,700
Notes payable - acquisition debt			4,244				1,465
Notes payable - acquisition non-competes			4,695				3,830
Insurance and vehicle financing			2,889				1,298
Total			277,830				258,293
Less current portion			6,936				2,175
Less unamortized bond and note payable discounts			4,604				3,344
Long-term portion		$	266,290			$	252,774

 

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This note includes a summary of material terms of the Company’s senior notes and credit facility. For a more detailed description of the Company’s long-term debt agreements, see the Company’s 2012 Form 10-K. The increase in notes payable acquisition debt and acquisition non-competes was the result of an acquisition consummated in the first quarter of 2013. See Note 13 for further details.

7.875% Senior Notes due 2021

On May 28, 2013, the Company issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Company pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2013. The net proceeds from the offering were used to retire 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.2 million. These costs and fees are deferred and will be amortized over the life of these notes. Based on trades made at the end of the quarter, the Company has estimated the fair value of its Senior Notes to be below par and trading at a discount of 0.9%, which would imply a fair value of $173.4 million at June 30, 2013. As of June 30, 2013, the Company was in compliance with all applicable covenants of the Senior Notes.

10.25% Senior Notes due 2017

Prior to their retirement in the second quarter of 2013, the Company had outstanding a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the “Prior Senior Notes”), with an original issue discount of approximately $4.0 million. The Company paid 10.25% interest per annum on the principal amount of the Prior Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year. The Prior Senior Notes were due to mature on December 1, 2017. In the second quarter of 2013, the Company retired the notes using the proceeds from the Senior Notes offering described above. The Company made a tender offer to repurchase the Prior Senior Notes and paid $14.9 million to retire the Prior Senior Notes inclusive of the tender premium and accrued interest from the date of repurchase through December 1, 2013, the first redemption date for the Prior Senior Notes. In addition the Company incurred expenses of $6.7 million related to the refinancing event inclusive of $2.6 million of unamortized original issue discount and $4.1 million of unamortized capitalized debt issue costs related to the Prior Senior Notes.

Credit Facility

On January 19, 2012, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”). The terms of the Credit Agreement are substantially the same as the terms of the Second Amended and Restated Credit Agreement, as amended. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement.

On February 19, 2013, the Company entered into the First Amendment to the Credit Agreement, which increased the total availability under the Revolving Credit Facility (the “Credit Facility”) by $10.0 million to $140.0 million (the “Credit Facility”) of which $91.0 million was outstanding at June 30, 2013. The Credit Facility may be used to finance working capital requirements, Permitted Acquisitions and Capital Expenditures. The maturity date of the Credit Facility is January 19, 2017.

On May 8, 2013, the Company entered into the Second Amendment to the Credit Agreement, which allowed the Company to incur additional indebtedness to be evidenced by the 2021 Senior Notes, to enter into the related indenture and to use the proceeds of the Senior Notes offering, in part, to fund the retirement of the Prior Senior Notes.

On June 18, 2013, the Company entered into the Third Amendment to the Credit Agreement. The Third Amendment amended certain financial covenants under the Credit Agreement as follows:

 

(i)

for any most recently completed four fiscal quarters, consolidated EBITDA shall not be less than the sum of $57,822,000 plus 80% of the aggregate of all consolidated EBITDA for each Permitted Acquisition completed after March 31, 2013; and

 

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(ii)

for the periods set forth below, Maximum Consolidated Leverage Ratio shall not be greater than as set forth below, subject to the Borrowers’ option to temporarily increase the Consolidated Leverage Ratio in connection with a Significant Permitted Acquisition Transaction as described below:

 

Measurement Period Ending		Maximum Consolidated Leverage Ratio
June 30, 2013 through December 31, 2013		4.000 to 1.0
March 31, 2014		3.875 to 1.0
June 30, 2014 and thereafter		3.750 to 1.0

The Third Amendment also increased the ranges of the Applicable Rates to 3.00%, 4.00%, and .800% for Base Rate loans, Eurodollar Rate Loans and Letter of Credit Fees, and Commitment Fees, respectively, when the Consolidated Leverage Ratio is greater than or equal to 3.75 to 1.0.

The Third Amendment also increased the amount of aggregate consideration that the Company may pay for a Permitted Acquisition after March 31, 2014, without Required Lender approval, to $10.0 million on an individual basis and $50.0 million when aggregated with the total Aggregate Consideration paid by or on behalf of the Company for all other Permitted Acquisitions which closed within the immediately preceding 365 days.

The Third Amendment added a defined term for Significant Permitted Acquisition Transaction to describe a Permitted Acquisition in which the Aggregate Consideration exceeds $35.0 million when aggregated with the total Aggregate Consideration for all other Permitted Acquisitions which closed within the immediately preceding 180 days. In the case of a Significant Permitted Acquisition Transaction, the Third Amendment permits the Borrowers, subject to certain limitations, to temporarily increase the Consolidated Leverage Ratio to 4.00 to 1.0 for one or more the four immediately succeeding covenant measurement periods.

In addition, the Third Amendment includes certain conforming changes to reflect the issuance of the Senior Notes.

At June 30, 2013, amounts outstanding under the Credit Facility bore interest at rates between 3.5% and 4.0%. Amounts borrowed may be either Base Rate Loans or Eurodollar Rate Loans and amounts repaid or prepaid during the term may be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.25% to 3.00% and 2.25% to 4.00%, respectively, depending on the 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. Amounts outstanding under the Credit Facility approximate their fair value.

The Credit Agreement requires the Company to pay an unused Commitment Fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments. The Commitment Fee Rate ranges from 0.375% to 0.800% depending on the Company’s Consolidated Leverage Ratio.

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. Any such breach could allow the Lenders to accelerate the Company’s debt which would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company’s covenants include a Consolidated Leverage Ratio and a Consolidated Debt Service Coverage Ratio. As of June 30, 2013, the Company was in compliance with all applicable financial covenants.

 

9.	INCOME TAXES

As of June 30, 2013, the Company’s taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $163.6 million, which will begin to expire in 2019 and $201.8 million in state net operating losses, a portion of which expires annually.

The Partnership is not a taxable entity for federal and state income tax purposes; rather, the Partnership’s tax attributes (except those of its corporate subsidiaries) are to be included in the individual tax returns of its partners. Neither the Partnership’s financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as “passive income” for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources.

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 basis and operating loss and tax credit carryforwards.

 

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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 provision for income taxes for the three and six months ended June 30, 2013 and 2012 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2013 and 2012, respectively. The Company’s effective tax rate differs from its statutory tax rate primarily because the Company’s legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

The Internal Revenue Service (“IRS”) audited the Company’s federal income tax return for the year ended December 31, 2010. The scope of this audit included an audit of the Company’s qualifying income. In order to be treated as a partnership for federal income tax purposes, at least 90% of the Company’s gross income must be qualifying income. The IRS concluded its audit and notified the Company on April 11, 2013 that it was not proposing any adjustments to the return as filed.

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 open from 2009 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.

 

10.	DEFERRED CEMETERY REVENUES, NET

At June 30, 2013 and December 31, 2012, deferred cemetery revenues, net, consisted of the following:

 

		As of
		June 30, 2013				December 31, 2012
		(in thousands)
Deferred cemetery revenue		$	376,027			$	346,621
Deferred merchandise trust revenue			76,100				65,728
Deferred merchandise trust unrealized gains (losses)			10,254				600
Deferred pre-acquisition margin			132,987				132,221
Deferred cost of goods sold			(51,046	)			(47,309	)
Deferred cemetery revenues, net		$	544,322			$	497,861
Deferred selling and obtaining costs		$	82,501			$	76,317

Deferred selling and obtaining costs are carried as an asset on the unaudited condensed consolidated balance sheet in accordance with the Financial Services – Insurance topic of the ASC.

 

11.	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 June 30, 2013, 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 ten years and options to renew at varying terms. Expenses under operating leases were $0.6 million and $1.3 million for the three and six months ended June 30, 2013, respectively, and $0.7 million and $1.3 million for the three and six months ended June 30, 2012, respectively.

 

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At June 30, 2013, operating leases will result in future payments in the following approximate amounts from January 1, 2014 and beyond:

 

		(in thousands)
2014		$	1,504
2015			952
2016			844
2017			796
2018			778
Thereafter			1,751
Total		$	6,625

 

12.	PARTNERS’ CAPITAL

Unit-Based Compensation

The Company has issued to certain key employees and management unit-based compensation in the form of unit appreciation rights and phantom partnership units.

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three and six months ended June 30, 2013 and 2012 are summarized in the table below:

 

		Three months ended June 30,								Six months ended June 30,
		2013				2012				2013				2012
		(in thousands)								(in thousands)
Unit appreciation rights		$	140			$	129			$	279			$	248
Restricted phantom units			220				81				411				161
Total unit-based compensation expense		$	360			$	210			$	690			$	409

As of June 30, 2013, there was approximately $0.4 million in non-vested unit appreciation rights outstanding. These unit appreciation rights will be expensed through the first half of 2017.

The diluted weighted average number of limited partners’ units outstanding presented on the unaudited condensed consolidated statement of operations does not include 335,547 units and 325,083 units for the three and six months ended June 30, 2013, respectively, as their effects would be anti-dilutive.

Other Unit Issuances

On February 19, 2013, the Company issued 159,635 units in connection with an acquisition. See Note 13. On June 21, 2013 and 2012, the Company issued 4,923 units and 9,853 units, respectively, in connection with an acquisition consummated in the second quarter of 2010. On June 6, 2012, the Company issued 13,720 units in connection with an acquisition. See Note 13.

On March 26, 2013, the Company completed a follow-on public offering of 1,610,000 common units at a price of $25.35 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $38.4 million. The proceeds from the offering were used to pay off debt on the Credit Facility.

 

13.	ACQUISITIONS

First Quarter 2013 Acquisition

On February 19, 2013, StoneMor Florida Subsidiary LLC, a subsidiary of the Company, (the “Buyer) entered into an Asset Purchase and Sale Agreement (the “Seawinds Agreement”) with several Florida limited liability companies and one individual (collectively the “Seller”). Pursuant to the Agreement, the Buyer acquired six funeral homes in Florida, including certain related assets, and assumed certain related liabilities.

 

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In consideration for the net assets acquired, the Buyer paid the Seller $9.1 million in cash and issued 159,635 common units, which equates to approximately $3.6 million worth of common units under the terms of the Seawinds Agreement. The Buyer also issued an unsecured promissory note in the amount of $3.0 million that is payable on February 19, 2014 and bears interest at 5.0%. In addition, the Buyer will also pay an aggregate amount of $1.2 million in six equal annual installments commencing on February 19, 2014 in exchange for a non-compete agreement with the Seller. The non-compete agreement will be amortized over the 6 year term of the agreement.

The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired. The resulting goodwill is recorded in the Company’s Funeral Homes operating segment. These amounts may be retrospectively adjusted as additional information is received.

 

		Preliminary Assessment
		(in thousands)
Assets:
Accounts receivable		$	995
Property and equipment			8,315
Merchandise trusts, restricted, at fair value			4,853
Non-compete agreements			1,927
Total assets			16,090
Liabilities:
Deferred margin			2,419
Merchandise liabilities			2,233
Total liabilities			4,652
Fair value of net assets acquired			11,438
Consideration paid - cash			9,100
Consideration paid - units			3,592
Fair value of note payable			3,000
Fair value of debt assumed for non-compete agreements			924
Total consideration paid			16,616
Goodwill from purchase		$	5,178

First Quarter 2012 Acquisition

In the second quarter of 2009, the Company entered into a long-term operating agreement (the “Operating Agreement”) with Kingwood Memorial Park Association (“Kingwood”) wherein the Company became the exclusive operator of the cemetery. At that time, the Operating Agreement did not qualify as an acquisition for accounting purposes. However, the existing merchandise and perpetual care trusts were consolidated as variable interest entities. In addition, merchandise and other liabilities assumed by the Company were also recorded as of the initial contract date. The consideration paid for this transaction, including cash and an assumed liability, exceeded the net assets recorded as of the initial contract date and an intangible asset was recorded for this amount.

In January of 2012, the Company entered into an amended and restated operating agreement (the “Amended Operating Agreement”), that supersedes the Operating Agreement. The Amended Operating Agreement has a term of 40 years and the Company remains the exclusive operator of the cemetery. As consideration for entering into the Amended Operating Agreement, the Company paid $1.7 million in cash and was relieved of a note payable to Kingwood. In addition, the prior trustees of Kingwood have resigned in favor of new trustees appointed by the Company. As a result of the changes in the Amended Operating Agreement, for accounting purposes, the Company has gained control of Kingwood, and acquisition accounting is now applicable.

 

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The table below reflects the Company’s final assessment of the fair value of net assets acquired, the elimination of debt and other assets, and the purchase price, which results in the recognition of goodwill recorded in the Company’s Cemetery Operations – Southeast segment.

 

		Final Assessment
		(in thousands)
Net assets acquired:
Accounts receivable		$	66
Cemetery property			3,001
Property and equipment			102
Total net assets acquired			3,169
Assets and liabilities divested:
Note payable to Kingwood			519
Intangible asset representing underlying contract value			(2,236	)
Fair value of net assets acquired and divested			1,452
Consideration paid			1,652
Goodwill from purchase		$	200

Second Quarter 2012 Acquisitions

On April 10, 2012, certain subsidiaries of the Company (collectively the “Buyer”) entered into a Stock Purchase Agreement with several individuals (collectively the “Seller”) to purchase all of the stock of Bronswood Cemetery, Inc., an Illinois Corporation. Through the purchase, the Buyer acquired one cemetery in Illinois, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.9 million in cash.

The table below reflects the Company’s final assessment of the fair value of net assets acquired, the purchase price and the resulting gain on bargain purchase.

 

		Final Assessment
		(in thousands)
Assets:
Accounts receivable		$	72
Cemetery property			842
Property and equipment			518
Perpetual care trusts, restricted, at fair value			2,780
Non-compete agreements			12
Total assets			4,224
Liabilities:
Perpetual care trust corpus			2,780
Other liabilities			24
Deferred tax liability			374
Total liabilities			3,178
Fair value of net assets acquired			1,046
Consideration paid			924
Gain on bargain purchase		$	122

 

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In addition, on June 6, 2012, certain subsidiaries of the Company (collectively the “Buyer”) entered into a Purchase Agreement with several individuals and Lodi Funeral Home, Inc. (collectively the “Seller”) to purchase certain assets and assume certain liabilities of Lodi Funeral Home, Inc., a California corporation and all of the stock of Lodi All Faiths Cremation, a California corporation. Through the purchase, the Buyer acquired two funeral homes in California including certain related assets, and assumed certain related liabilities. As part of the agreement, the building and underlying real estate of Lodi Funeral Home, Inc. is being leased from the Seller. The lease agreement is a ten year agreement that contains one five year renewal term at the Buyer’s election. In addition, at the end of the original lease or renewal term, the Buyer can elect to purchase the property for fair value less 10% of any rental amounts previously paid under the lease agreement. The Buyer also has a right of first refusal related to any potential sale of the property occurring during the lease term.

In consideration for the net assets acquired, the Buyer paid the Seller $0.85 million in cash and issued 13,720 units, which equates to $0.35 million worth of units. The Buyer will also pay an aggregate amount of $0.6 million in equal quarterly installments commencing on January 2, 2013 in exchange for non-compete agreements with the Seller.

The table below reflects the Company’s final assessment of the fair value of net assets acquired. The resulting goodwill is recorded in the Company’s Funeral Homes operating segment.

 

		Final Assessment
		(in thousands)
Assets:
Property and equipment		$	48
Merchandise trusts, restricted, at fair value			105
Underlying lease value			64
Non-compete agreements			40
Total assets			257
Liabilities:
Merchandise liabilities			105
Total liabilities			105
Fair value of net assets acquired			152
Consideration paid - cash			850
Consideration paid - units			350
Fair value of debt assumed for non-compete agreements			544
Total consideration paid			1,744
Goodwill from purchase		$	1,592

If the acquisitions from 2013 and 2012 had been consummated on January 1, 2012, on a pro forma basis, for the three and six months ended June 30, 2013 and 2012, consolidated revenues, consolidated net income (loss), and net income (loss) per limited partner unit (basic and diluted) would have been as follows:

 

		Three months ended June 30,								Six months ended June 30,
		2013				2012				2013				2012
		(in thousands)								(in thousands)
Revenue		$	62,422			$	62,779			$	122,609			$	123,981
Net income (loss)			(11,809	)			(1,948	)			(13,888	)			353
Net income (loss) per limited partner unit (basic and diluted)		$	(.54	)		$	(.10	)		$	(.66	)		$	.02

These pro forma results are unaudited and have been prepared for comparative purposes only and include certain adjustments such as increased interest on the acquisition of 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, 2012 or of future results of operations of the locations. The Company’s first quarter 2012 acquisition relates to the Amended Operating Agreement as noted above. Therefore, the results of operations for this property have been included in the Company’s results since 2009.

 

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Since their respective dates of acquisition, the properties acquired in 2013 have contributed $1.1 million and $1.5 million of revenue and $0.4 million and $0.5 million of operating profit for the three and six months ended June 30, 2013. The properties acquired in the first half 2012 have contributed $0.9 million and $1.6 million of revenue and $0.3 million and $0.4 million of operating profit for the three and six months ended June 30, 2013.

First Quarter 2012 Contract Termination

During the third quarter of 2010, certain subsidiaries of the Company entered into a long-term operating agreement (the “Operating Agreement”) with the Archdiocese of Detroit (the “Archdiocese”) wherein the Company became the exclusive operator of certain cemeteries in Michigan owned by the Archdiocese. The Operating Agreement did not qualify as an acquisition for accounting purposes. However, the existing merchandise trust had been consolidated as a variable interest entity as the Company controlled and directly benefited from the operations of the merchandise trust. In addition, liabilities assumed were also recorded as of the contract date. As no consideration was paid in this transaction, the Company had recorded a deferred gain of approximately $3.1 million within deferred cemetery revenues, net, which represented the excess of the value of the merchandise trust over the liabilities assumed.

Effective March 31, 2012, the Company and the Archdiocese agreed to terminate the Operating Agreement. As of the termination date, the Company no longer operated these properties. All activity occurring after March 31, 2012 is the responsibility of the Archdiocese and the Company has no remaining obligation to fulfill any merchandise liabilities or responsibility to perform any obligations of the properties.

The Company received payments of approximately $2.0 million from the Archdiocese as a result of the termination. Consequently, the Company recognized a gain of $1.7 million during the six months ended June 30, 2012, which is the amount by which the payments from the Archdiocese exceeded the value of the net assets transferred to the Archdiocese.

First and Second Quarter 2013 Settlement

During the six months ended June 30, 2013 the Company recovered $18.4 million, net of legal fees, costs, and contractual obligations related to the settlement of claims from locations that the Company acquired in 2010 and 2011. Of this amount $6.5 million was contributed directly to the related perpetual care and merchandise trusts on the Company’s behalf. $3.4 million of these direct payments represent a gain on settlement agreement on the unaudited condensed consolidated statement of operations due to an increase in the merchandise trusts not previously accrued for in purchase accounting.

The Company received $11.9 million in cash proceeds from the settlement. Of this amount, $1.7 million and $1.3 million are for the reimbursement of legal fees and are recorded as recoveries to corporate overhead and acquisition related costs, respectively. The remaining proceeds were recorded as a gain on settlement agreement on the unaudited condensed consolidated statement of operations. The total gain on settlement for the six months ended June 30, 2013 was $12.3 million. Of the amounts noted above, $1.3 million, inclusive of a gain on settlement agreement of $0.9 million and $0.4 million of recovery of legal fees, was recognized during the first quarter of 2013.

 

14.	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.

 

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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 three months ended June 30, 2013:

 

		Cemeteries												Funeral
		Southeast				Northeast				West				Homes				Corporate				Adjustment				Total
		(in thousands)
Revenues
Sales		$	24,767			$	9,724			$	12,284			$	—			$	—			$	(14,479	)		$	32,296
Service and other			8,474				5,754				6,611				—				—				(1,389	)			19,450
Funeral home			—				—				—				11,983				—				(1,307	)			10,676
Total revenues			33,241				15,478				18,895				11,983				—				(17,175	)			62,422
Costs and expenses
Cost of sales			5,399				2,658				2,088				—				—				(2,433	)			7,712
Cemetery			6,987				3,885				4,536				—				—				—				15,408
Selling			7,932				3,435				3,669				—				461				(3,279	)			12,218
General and administrative			4,216				1,608				2,074				—				—				—				7,898
Corporate overhead			—				—				—				—				5,672				—				5,672
Depreciation and amortization			584				233				525				749				360				—				2,451
Funeral home			—				—				—				9,498				—				(134	)			9,364
Acquisition related costs, net of recoveries			—				—				—				—				(625	)			—				(625	)
Total costs and expenses			25,118				11,819				12,892				10,247				5,868				(5,846	)			60,098
Operating profit		$	8,123			$	3,659			$	6,003			$	1,736			$	(5,868	)		$	(11,329	)		$	2,324
Total assets		$	546,851			$	310,187			$	419,902			$	130,832			$	27,860			$	—			$	1,435,632
Amortization of cemetery property		$	1,179			$	737			$	314			$	—			$	—			$	(304	)		$	1,926
Long lived asset additions		$	1,416			$	382			$	746			$	271			$	717			$	—			$	3,532
Goodwill		$	6,174			$	—			$	11,948			$	29,448			$	—			$	—			$	47,570

 

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As of and for the six months ended June 30, 2013:

 

		Cemeteries												Funeral
		Southeast				Northeast				West				Homes				Corporate				Adjustment				Total
		(in thousands)
Revenues
Sales		$	46,637			$	18,701			$	22,044			$	—			$	—			$	(25,102	)		$	62,280
Service and other			19,580				12,305				15,741				—				—				(9,966	)			37,660
Funeral home			—				—				—				24,810				—				(2,716	)			22,094
Total revenues			66,217				31,006				37,785				24,810				—				(37,784	)			122,034
Costs and expenses
Cost of sales			9,774				4,526				3,598				—				—				(3,896	)			14,002
Cemetery			12,959				7,118				8,116				—				—				—				28,193
Selling			15,144				6,593				6,762				—				833				(5,890	)			23,442
General and administrative			8,202				3,192				4,086				—				—				—				15,480
Corporate overhead			—				—				—				—				13,660				—				13,660
Depreciation and amortization			1,112				455				1,065				1,409				740				—				4,781
Funeral home			—				—				—				18,421				—				(321	)			18,100
Acquisition related costs, net of recoveries			—				—				—				—				658				—				658
Total costs and expenses			47,191				21,884				23,627				19,830				15,891				(10,107	)			118,316
Operating profit		$	19,026			$	9,122			$	14,158			$	4,980			$	(15,891	)		$	(27,677	)		$	3,718
Total assets		$	546,851			$	310,187			$	419,902			$	130,832			$	27,860			$	—			$	1,435,632
Amortization of cemetery property		$	2,030			$	1,358			$	561			$	—			$	—			$	(338	)		$	3,611
Long lived asset additions		$	2,326			$	1,259			$	1,258			$	8,925			$	748			$	—			$	14,516
Goodwill		$	6,174			$	—			$	11,948			$	29,448			$	—			$	—			$	47,570

As of and for the three months ended June 30, 2012:

 

		Cemeteries												Funeral
		Southeast				Northeast				West				Homes				Corporate				Adjustment				Total
		(in thousands)
Revenues
Sales		$	23,812			$	9,545			$	10,292			$	—			$	—			$	(9,535	)		$	34,114
Service and other			9,255				7,138				7,373				—				—				(4,227	)			19,539
Funeral home			—				—				—				8,189				—				(334	)			7,855
Total revenues			33,067				16,683				17,665				8,189				—				(14,096	)			61,508
Costs and expenses
Cost of sales			4,972				2,028				1,739				—				49				(1,552	)			7,236
Cemetery			6,746				3,814				4,215				—				—				—				14,775
Selling			7,691				3,322				3,395				—				370				(1,655	)			13,123
General and administrative			3,813				1,487				1,883				—				12				—				7,195
Corporate overhead			—				—				—				—				7,756				—				7,756
Depreciation and amortization			510				215				547				518				440				—				2,230
Funeral home			—				—				—				6,688				—				(73	)			6,615
Acquisition related costs, net of recoveries			—				—				—				—				782				—				782
Total costs and expenses			23,732				10,866				11,779				7,206				9,409				(3,280	)			59,712
Operating profit		$	9,335			$	5,817			$	5,886			$	983			$	(9,409	)		$	(10,816	)		$	1,796
Total assets		$	490,736			$	291,245			$	384,949			$	79,938			$	26,195			$	—			$	1,273,063
Amortization of cemetery property		$	1,022			$	853			$	275			$	—			$	—			$	(21	)		$	2,129
Long lived asset additions		$	802			$	825			$	2,630			$	401			$	194			$	—			$	4,852
Goodwill		$	5,934			$	—			$	11,948			$	16,056			$	—			$	—			$	33,938

 

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As of and for the six months ended June 30, 2012:

 

		Cemeteries												Funeral
		Southeast				Northeast				West				Homes				Corporate				Adjustment				Total
		(in thousands)
Revenues
Sales		$	44,692			$	18,003			$	20,324			$	—			$	—			$	(17,882	)		$	65,137
Service and other			18,783				13,713				14,894				—				—				(8,224	)			39,166
Funeral home			—				—				—				17,462				—				(670	)			16,792
Total revenues			63,475				31,716				35,218				17,462				—				(26,776	)			121,095
Costs and expenses
Cost of sales			9,263				3,701				3,403				—				52				(2,763	)			13,656
Cemetery			12,451				6,879				8,237				—				—				—				27,567
Selling			14,716				6,458				6,607				—				831				(3,702	)			24,910
General and administrative			7,436				3,013				3,923				—				16				—				14,388
Corporate overhead			—				—				—				—				14,359				—				14,359
Depreciation and amortization			1,046				440				1,114				1,138				822				—				4,560
Funeral home			—				—				—				13,487				—				(116	)			13,371
Acquisition related costs, net of recoveries			—				—				—				—				1,113				—				1,113
Total costs and expenses			44,912				20,491				23,284				14,625				17,193				(6,581	)			113,924
Operating profit		$	18,563			$	11,225			$	11,934			$	2,837			$	(17,193	)		$	(20,195	)		$	7,171
Total assets		$	490,736			$	291,245			$	384,949			$	79,938			$	26,195			$	—			$	1,273,063
Amortization of cemetery property		$	2,001			$	1,413			$	569			$	—			$	—			$	(3	)		$	3,980
Long lived asset additions		$	4,765			$	1,374			$	3,100			$	460			$	606			$	—			$	10,305
Goodwill		$	5,934			$	—			$	11,948			$	16,056			$	—			$	—			$	33,938

Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104; therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the 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 consolidated balance sheet, whereas the Company’s management accounting practices exclude these items.

 

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15.	FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosures topic of the ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy defined by this topic are described below.

Level 1: Quoted market prices available in active markets for identical assets or liabilities. The Company includes short-term investments, consisting primarily of money market funds, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.

Level 2: Quoted prices in active markets for similar assets; quoted prices in non-active markets for identical or similar assets; inputs other than quoted prices that are observable. The Company includes U.S. state and municipal, corporate and other fixed income debt securities in its level 2 investments.

Level 3: Any and all pricing inputs that are generally unobservable and not corroborated by market data.

On the Company’s unaudited condensed consolidated balance sheet, current assets, long-term accounts receivable and current liabilities are recorded at amounts that approximate fair value.

 

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The following table allocates the Company’s assets measured at fair value as of June 30, 2013 and December 31, 2012.

As of June 30, 2013

Merchandise Trust

 

Description		Level 1				Level 2				Total
		(in thousands)
Assets
Short-term investments		$	50,286			$	—			$	50,286
Fixed maturities:
U.S. government and federal agency			—				—				—
U.S. state and local government agency			—				—				—
Corporate debt securities			—				8,961				8,961
Other debt securities			—				7,803				7,803
Total fixed maturity investments			—				16,764				16,764
Mutual funds - debt securities			103,289				—				103,289
Mutual funds - equity securities - real estate sector			53,575				—				53,575
Mutual funds - equity securities - energy sector			—				—				—
Mutual funds - equity securities - MLP’s			37,966				—				37,966
Mutual funds - equity securities - other			60,207				—				60,207
Equity securities:
Preferred REIT’s			65				—				65
Master limited partnerships			46,951				—				46,951
Global equity securities			32,202				—				32,202
Other invested assets			—				5,341				5,341
Total		$	384,541			$	22,105			$	406,646

Perpetual Care Trust

 

Description		Level 1				Level 2				Total
		(in thousands)
Assets
Short-term investments		$	12,662			$	—			$	12,662
Fixed maturities:
U.S. government and federal agency			503				—				503
U.S. state and local government agency			—				—				—
Corporate debt securities			—				23,936				23,936
Other debt securities			—				371				371
Total fixed maturity investments			503				24,307				24,810
Mutual funds - debt securities			114,233				—				114,233
Mutual funds - equity securities - real estate sector			44,443				—				44,443
Mutual funds - equity securities - energy sector			15,707				—				15,707
Mutual funds - equity securities - MLP’s			45,721				—				45,721
Mutual funds - equity securities - other			9,134				—				9,134
Equity securities:
Preferred REIT’s			38				—				38
Master limited partnerships			35,234				—				35,234
Global equity securities			791				—				791
Other invested assets			—				—				—
Total		$	278,466			$	24,307			$	302,773

 

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As of December 31, 2012

Merchandise Trust

 

Description		Level 1				Level 2				Total
		(in thousands)
Assets
Short-term investments		$	27,890			$	—			$	27,890
Fixed maturities:
U.S. government and federal agency			—				—				—
U.S. state and local government agency			—				—				—
Corporate debt securities			—				8,714				8,714
Other debt securities			—				4,317				4,317
Total fixed maturity investments			—				13,031				13,031
Mutual funds - debt securities			107,921				—				107,921
Mutual funds - equity securities - real estate sector			51,986				—				51,986
Mutual funds - equity securities - energy sector			5,666				—				5,666
Mutual funds - equity securities - MLP’s			29,336				—				29,336
Mutual funds - equity securities - other			58,082				—				58,082
Equity securities:
Preferred REIT’s			563				—				563
Master limited partnerships			42,410				—				42,410
Global equity securities			24,434				—				24,434
Other invested assets			—				7,097				7,097
Total		$	348,288			$	20,128			$	368,416