10-Q 1 d560995d10q.htm FORM 10-Q Form 10-Q
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.

 

 

 


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   


Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents
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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Table of Contents
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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Table of Contents
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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents
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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Table of Contents

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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Table of Contents
  (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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Table of Contents
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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Table of Contents

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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Table of Contents

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   
  

 

 

    

 

 

    

 

 

 

Perpetual Care Trust

 

Description

   Level 1