See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations
StoneMor Partners L.P. (the "Partnership") is a provider of funeral and cemetery products and services in the death care industry in the United States. As of March 31, 2019, the Partnership operated 322 cemeteries in 27 states and Puerto Rico, of which 291 were owned and 31 were operated under lease, management or operating agreements. The Partnership also owned and operated 90 funeral homes, including 42 located on the grounds of cemetery properties that the Partnership owns, in 17 states and Puerto Rico.
The Partnership’s cemeteries provide cemetery property interment rights such as burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery merchandise is comprised of burial vaults, caskets, grave markers and memorials and cemetery services include the installation of this merchandise and other service items. The Partnership sells these products and services both at the time of death, which is referred to as at-need, and prior to the time of death, which is referred to as pre-need.
The Partnership’s funeral home services include family consultation, the removal and preparation of remains, insurance products and the use of funeral home facilities for visitation and memorial services.
Basis of Presentation
The accompanying condensed consolidated financial statements, which are unaudited except for the balance sheet at December 31, 2018, which has been derived from audited financial statements, have been prepared in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Partnership’s financial position, results of operations and cash flows for the periods disclosed have been made. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto presented in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the three months ended March 31, 2019 may not necessarily be indicative of the results of operations for the full year ended December 31, 2019.
Principles of Consolidation
The unaudited condensed financial statements include the accounts of each of the Partnership’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Partnership has a variable interest and is the primary beneficiary. The Partnership operates 31 cemeteries under long-term lease, operating or management agreements. The operations of 16 of these managed cemeteries have been consolidated.
The Partnership operates 15 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Partnership did not consolidate all of the existing assets and liabilities related to these cemeteries. The Partnership has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities since the Partnership controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Partnership is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services and interment rights, and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these agreements, the Partnership will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Partnership has also recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.
Proposed Merger and Reorganization
On September 27, 2018, the Partnership, StoneMor GP LLC, a Delaware limited liability company and the general partner of the Partnership (“GP”), StoneMor GP Holdings LLC, a Delaware limited liability company and the sole member of GP (“GP Holdings”), and Hans Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of GP (“Merger Sub”), entered into a Merger and Reorganization Agreement (the “Merger Agreement”) pursuant to which, among other things, GP will convert from a Delaware limited liability company into a Delaware corporation to be named StoneMor Inc. (the “Company” when referring to StoneMor Inc. subsequent to such conversion), the Partnership will become a wholly owned subsidiary of the Company and the unitholders of the Partnership will become stockholders in the Company. The Merger remains subject to unitholder approval.
7
Table of Contents
Per the terms of the Merger Agreement each Party shall bear its own expenses, costs and fees (including attorneys’, auditors’ and financing fees, if any) in connection with the preparation and delivery of the Merger Agreement and compliance therewith, whether or not the transactions contemplated by the Merger Agreement are effected. The Partnership has incurred $2.5 million in legal and other expenses for the transactions contemplated by the Merger Agreement through March 31, 2019, of which $2.2 million was incurred through December 31, 2018 and $0.3 million was incurred in the three months ended March 31, 2019.
January 2019 Restructuring
On January 31, 2019, the Partnership announced a restructuring initiative implemented as part of its ongoing organizational review. This restructuring was intended to further integrate, streamline and optimize the Partnership’s operations.
As part of this restructuring, the Partnership undertook certain cost reduction initiatives, including a reduction of approximately 45 positions of its workforce, primarily related to corporate functions in Trevose, a streamlining of general and administrative expenses and an optimization of location spend. The Partnership expects to incur cash charges of $0.6 million
of employee separation and other benefit-related costs in connection with the January 2019 restructuring initiative. Substantially all of these cash payments are anticipated to be made by the end of 2019 and the Partnership anticipates that substantially all of the actions associated with this restructuring will be completed by the end of 2019. Under this restructuring, separation costs are expensed over the requisite service period, if any.
Uses and Sources of Liquidity
The Partnership’s primary sources of liquidity are cash generated from operations and borrowings under its revolving credit facility. As a master limited partnership (“MLP”), the Partnership's primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds, debt service and cash distributions. In general, as part of its operating strategy, the Partnership expects to fund:
|
•
|
working capital deficits through cash generated from operations, additional borrowings, and sales of underperforming properties;
|
|
•
|
expansion capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service obligations through available cash, cash generated from operations, additional borrowings or asset sales. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold to which the contribution relates (see "Summary of Significant Accounting Policies" section below regarding revenue recognition), which will reduce the amount of additional borrowings or asset sales needed; and
|
|
•
|
any cash distributions the Partnership is permitted and determines to pay in accordance with its partnership agreement and maintenance capital expenditures through available cash and cash flows from operating activities.
|
While the Partnership relies heavily on its cash flows from operating activities and borrowings under its credit facility to execute its operational strategy and meet its financial commitments and other short-term financial needs, the Partnership cannot be certain that sufficient capital will be generated through operations or available to the Partnership to the extent required and on acceptable terms. Moreover, although the Partnership's cash flows from operating activities have been positive, the Partnership has experienced negative financial trends which, when considered in the aggregate, raise substantial doubt about the Partnership’s ability to continue as a going concern. These negative financial trends include:
|
•
|
the Partnership has continued to incur net losses for the three months ended March 31, 2019 and has an accumulated deficit as of March 31, 2019, due to an increased competitive environment, increased expenses due to the proposed conversion of the Partnership to a C-corporation and increases in professional fees and compliance costs;
|
|
•
|
a decline in billings coupled with the increase in professional, compliance and consulting expenses, tightened the Partnership's liquidity position and increased reliance on long-term financial obligations, which, in turn, eliminated the Partnership's ability to pay distributions;
|
|
•
|
the Partnership's failure to comply with certain debt covenants required by the Partnership’s credit facility due to the Partnership's inability to complete a timely filing of its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, as well as exceeding of the maximum consolidated leverage ratio financial covenant for the quarters ended December 31, 2017 and March 31, 2018, exceeding the maximum consolidated secured net leverage ratio financial covenant for the periods ended June 30, 2018, September 30, 2018 and December 31, 2018 and not being able to achieve the minimum consolidated fixed charge coverage ratio for the periods ended June 30, 2018, September 30,
|
8
Table of Contents
|
|
2018 and December 31, 2018. As further disclosed in the credit facility subsection in Note 9 Long-Term D
ebt, these failures constituted defaults that the Partnership's lenders agreed to waive; and
|
|
•
|
the provision for ticking fees assessed on the amount of outstanding loans made under the Tranche A Revolving Credit Facility (the “Tranche A Revolving Loans”) and payable to the Tranche A Revolving Lenders (i) in-kind, by increasing the outstanding principal amount of such Lender’s Tranche A Revolving Loans (“PIK”) or (ii) in cash in the following amounts and on the following dates:
|
|
•
|
3.00% on July 1, 2019, of which (x) 2.00% shall PIK and (y) 1.00% shall be payable in cash, unless Required Lenders agree to PIK;
|
|
•
|
1.00% on August 1, 2019, payable in cash, unless the Required Lenders agree to PIK;
|
|
•
|
1.00% on September 1, 2019, payable in cash, unless the Required Lenders agree to PIK; and
|
|
•
|
1.00% on October 1, 2019, PIK.
|
During 2018 and 2019, the Partnership implemented (and will continue to implement) various actions to improve profitability and cash flows to fund operations. A summary of these actions is as follows:
|
•
|
continue to manage recurring operating expenses and seek to limit non-recurring operating expenses over the next twelve-month period;
|
|
•
|
the Partnership engaged a financial advisor to advise the Partnership in the arrangement of the refinancing in full of the obligations with respect to the Tranche A Revolving Credit Facility including debt and equity financing vehicles, however, at this time the Partnership has no commitments to obtain any additional funds, and there can be no assurance that such funds will be available on acceptable terms or at all;
|
|
•
|
complete sales of certain assets and businesses to provide supplemental liquidity; and
|
|
•
|
for the reasons disclosed above, the Partnership was not in compliance with certain of its amended credit facility covenants as of December 31, 2017, March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018. These failures constituted defaults that the lenders agreed to waive pursuant to the Sixth Amendment and Waiver, the Seventh Amendment and Waiver and the Eighth Amendment and Waiver to the Partnership's credit facility on June 12, 2018, July 13, 2018 and February 4, 2019, respectively, as disclosed in the credit facility subsection in Note 9 Long-Term Debt. Moreover, based on the Partnership's forecasted operating performance, cash flows and projected plans to file financial statements on a timely basis consistent with the debt covenants, the Partnership does not believe it is probable that the Partnership will further breach the covenants under its amended credit facility for the next twelve-month period. However, there is no certainty that the Partnership's actual operating performance and cash flows will not be substantially different from forecasted results, and no certainty the Partnership will not need further amendments to its credit facility in the future. Factors that could impact the significant assumptions used by the Partnership in assessing its ability to satisfy its financial covenants include the following:
|
|
•
|
operating performance not meeting reasonably expected forecasts;
|
|
•
|
failing to generate profitable sales;
|
|
•
|
investments in the Partnership's trust funds experiencing significant declines due to factors outside its control;
|
|
•
|
being unable to compete successfully with other cemeteries and funeral homes in the Partnership's markets;
|
|
•
|
the number of deaths in the Partnership's markets declining; and
|
|
•
|
the mix of funeral and cemetery revenues between burials and cremations.
|
If the Partnership's planned and implemented actions are not completed and cash savings realized and the Partnership fails to improve its operating performance and cash flows, or the Partnership is not able to comply with the covenants under its amended credit facility, the Partnership may be forced to limit its business activities, implement further modifications to its operations, further amend its credit facility and/or seek other sources of capital, and the Partnership may be unable to continue
9
Table of Contents
as a going concern. Additionally, a failure to generate additional liquidity could negatively impa
ct the Partnership's access to inventory or services that are important to the operation of the Partnership's business. Given the Partnership's level of cash and cash equivalents, to preserve capital resources and liquidity, the Board of Directors of the G
eneral Partner concluded that it was not in the best interest of unitholders to pay distributions to unitholders after the first quarter of 2017. In addition, the Partnership's revolving credit facility effectively prohibits the Partnership from making dis
tributions to unitholders. Any of these events may have a material adverse effect on the Partnership's results of operations and financial condition. The ability of the Partnership to meet its obligations at March 31, 2019, and to continue as a going conce
rn, is dependent upon achieving the action plans noted above. The unaudited condensed consolidated financial statements for the three months ended March 31, 2019
,
were prepared on the basis of a going concern which contemplates that the Partnership will b
e able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments, if any, that would be necessary should the Partnership be required to liquidate its assets. The ability of the Partn
ership to meet its obligations at March 31, 2019, and to continue as a going concern is dependent upon the availability of a refinancing in full of the obligations with respect to the Tranche A Revolving Credit Facility, continued ability to manage expense
s and increased sales. As such, the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q do not include any adjustments that might result from the outcome of these uncertainties.
Summary of Significant Accounting Policies
Refer to Note 1 to the Partnership’s audited consolidated financial statements included in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with
Securities and Exchange Commission ("SEC") on April 3, 2019,
for the complete summary of significant accounting policies.
Use of Estimates
The preparation of the Partnership’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as described in its Annual Report on Form 10-k for the year ended December 31, 2018. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from those estimates.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash and Cash Equivalents of $24.4 million and $18.1 million as of March 31, 2019 and December 31, 2018, respectively, includes $4.5 million and $0, respectively, of restricted cash. Cash that is restricted from withdrawal or use under the terms of certain contractual agreement is recorded as restricted cash and included within cash and cash equivalents.
Leases
The Partnership leases a variety of assets throughout the organization, such as office space, funeral homes, warehouses, and equipment. The Partnership has both operating and finance leases. The Partnership’s operating leases primarily include office space, funeral homes and equipment. The Partnership’s finance leases primarily consist of vehicles and certain IT equipment. The Partnership determines whether an arrangement is or contains a lease at the inception of the arrangement based on the facts and circumstances in each contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet and Partnership recognizes lease expense for these leases on a straight-line basis over the lease term. For leases agreements with an initial term in excess of 12 months, the Partnership records the lease liability and Right of Use (“ROU”) asset at commencement date based upon
the present value of the sum of the remaining minimum rental payments, which exclude executory costs. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
Certain leases provide the Partnership with the option to renew for additional periods
, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years.
Where leases contain escalation clauses, rent abatements and/or concessions, the Partnership applies them in the determination of lease expense.
The exercise of lease renewal options is at the Partnership’s sole discretion and the Partnership is only including the renewal option in the lease term when the Partnership can be reasonably certain that the Partnership will exercise the additional options.
10
Table of Contents
As most of the Partnership’s leases do not provide an implicit rate, the Partnership
uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Partnership evaluates the term of the lease, type of asset and our weighted average cost of capital to
determine our incremental borrowing rate used to measure the ROU asset and lease liability
.
The Partnership calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. We consider reasonably assured renewal options, fixed escalation provisions and residual value guarantees in our calculation. Leasehold improvements are amortized over the shorter of the lease term or asset life, which may include renewal periods where the renewal is reasonably assured, and are included in the determination of straight-line rent expense. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
The Partnership’s leases also typically have lease and non-lease components, which are generally accounted for separately and not included in the measurement of the ROU asset and lease liability.
Net Loss per Common Unit
Basic net loss attributable to common limited partners per unit is computed by dividing net loss attributable to common limited partners, which is determined after the deduction of the general partner’s interest, by the weighted average number of common limited partner units outstanding during the period. Net loss attributable to common limited partners is determined by deducting net loss attributable to participating securities, if applicable, and net loss attributable to the general partner’s units. The general partner’s interest in net loss is calculated on a quarterly basis based upon its units and incentive distributions to be distributed for the quarter, with a priority allocation of net income to the general partner’s incentive distributions, if any, in accordance with the partnership agreement, and the remaining net loss allocated with respect to the general partner’s and limited partners’ ownership interests.
The Partnership presents net loss per unit under the two-class method for MLPs, which considers whether the incentive distributions of an MLP represent a participating security when considered in the calculation of earnings per unit under the two-class method. The two-class method considers whether the partnership agreement contains any contractual limitations concerning distributions to the incentive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. If distributions are contractually limited to the incentive distribution rights’ share of currently designated available cash for distributions as defined under the partnership agreement, undistributed earnings in excess of available cash should not be allocated to the incentive distribution rights. Under the two-class method, management of the Partnership believes the partnership agreement contractually limits cash distributions to available cash; therefore, undistributed earnings in excess of available cash are not allocated to the incentive distribution rights.
The following is a reconciliation of net loss allocated to the common limited partners for purposes of calculating net loss attributable to common limited partners per unit (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(22,534
|
)
|
|
$
|
(17,923
|
)
|
Less: Incentive distribution right (“IDR”) payments to general partner
|
|
|
—
|
|
|
|
—
|
|
Net loss to allocate to general and limited partners
|
|
|
(22,534
|
)
|
|
|
(17,923
|
)
|
General partner’s interest excluding IDRs
|
|
|
(234
|
)
|
|
|
(187
|
)
|
Net loss attributable to common limited partners
|
|
$
|
(22,300
|
)
|
|
$
|
(17,736
|
)
|
Diluted net loss attributable to common limited partners per unit is calculated by dividing net loss attributable to common limited partners, less income allocable to participating securities, by the sum of the weighted average number of common limited partner units outstanding and the dilutive effect of unit awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common units that are contingently issuable upon the satisfaction of certain vesting conditions and common units issuable upon the exercise of certain unit appreciation rights awards under the terms of the Partnership’s long-term incentive plans.
11
Table of Contents
The following table sets forth the reconciliation of the Partnership’s weighted average number of common limited partner units used
to compute basic net loss attributable to common limited partners per unit with those used to compute diluted net loss attributable to common limited partners per unit (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted average number of common limited partner units—basic
|
|
|
38,031
|
|
|
|
37,959
|
|
Add effect of dilutive incentive awards (1)
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of common limited partner units—diluted
|
|
|
38,031
|
|
|
|
37,959
|
|
(1)
|
The diluted weighted average number of limited partners’ units outstanding presented on the unaudited condensed consolidated statement of operations does not include 977,166 units (747,142 time-based employee phantom units and 230,024 director phantom units) and 452,558 units (175,211 time-based phantom employee units and 277,347 director phantom units) for the three months ended March 31, 2019 and 2018, respectively, as their effects would be anti-dilutive. For the three months ended March 31, 2019 and 2018 anti-dilutive units excludes 46,734 and 126,768 units, respectively that are contingently issuable for which the contingency has not been met. See Note 17 Subsequent Events, for further detail of unit grants under the Partnership’s Amended and Restated 2019 Long-Term Incentive Plan.
|
Recently Issued Accounting Standard Updates - Adopted in the Current Period
Leases
The Partnership adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), using the modified retrospective approach, as of January 1, 2019. The core principle of ASU 2016-02 is that all leases create an asset and a liability for lessees and recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases or disclosure of key information about leasing arrangements. In addition, the new standard offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
ASU 2016-02 provides for certain practical expedients when adopting the guidance. The Partnership elected the package of practical expedients allowing the Partnership to not reassess whether any expired or existing contracts are, or contain, leases, the lease classification for any expired or existing leases or initial direct costs for any expired or existing leases. The Partnership did not apply the hindsight practical expedient. The Partnership applied the land easements practical expedient allowing the Partnership to not assess whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the existing leasing guidance. Instead, the Partnership will continue to apply its existing accounting policies to historical land easements. The Partnership elected to apply the short-term lease exception; therefore, the Partnership did not record a right-of-use asset or corresponding lease liability for leases with a term of twelve months or less and instead recognized a single lease cost allocated over the lease term, generally on a straight-line basis. The Partnership is separating lease components from non-lease components, as it did not elect the applicable practical expedient. The Partnership has excluded maintenance, taxes and insurance costs from the calculation of the initial lease liability in the transition.
Non-lease components are accounted for separately from the lease and recorded as maintenance, taxes, and insurance and expense as incurred.
The Partnership adopted the new guidance on January 1, 2019 and as a result of the adoption, the Partnership recorded:
|
•
|
a $1.1 million reclassification from Intangible assets to Other assets for below market lease intangibles,
|
|
•
|
a $0.1 million and $0.2 million reclassification from Accounts payable and accrued liabilities and Other long-term liabilities, respectively, to Other assets for a deferred gain on a sale leaseback transaction,
|
|
•
|
a $0.3 million and $3.5 million reclassification from Accounts payable and accrued liabilities and Other long-term liabilities, respectively, to Other assets for a rent incentive,
|
|
•
|
a $15.3 million increase to Other assets for operating lease right-of-use assets, and
|
|
•
|
a $2.2 million and $13.1 million increase to Accounts payable and accrued liabilities and Other long-term liabilities, respectively, for operating lease liabilities.
|
The foregoing adjustments r
esulted in the creation of a net right-of-use asset of $12.3 million and operating lease liability of $15.3 million as of the adoption date.
12
Table of Contents
Presentation
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of partners’ deficit for interim financial statements. Under the amendments, an analysis of changes in each caption of shareholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule was effective on November 5, 2018; as such, the Partnership used the new presentation of a condensed consolidated statement of Partners' deficit within its interim financial statements in this Form 10-Q for the quarter ended March 31, 2019.
Recently Issued Accounting Standard Updates - Not Yet Effective
Credit Losses
In the second quarter of 2016, the FASB issued Update No. 2016-13,
Credit Losses (Topic 326)
("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. The amendment is effective for annual reporting periods beginning after December 15, 2019. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-13 upon its effective date of January 1, 2020, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
On January 19, 2018, the Partnership acquired six cemetery properties in Wisconsin and their related assets, net of certain assumed liabilities, for cash consideration of $2.5 million, of which $0.8 million was paid at closing. These properties had been managed by the Partnership since August 2016. The Partnership has accounted for the purchase of these properties, which were not material individually or in the aggregate, under the acquisition method of accounting.
The Partnership did not complete any acquisitions during the three months ended March 31, 2019.
3.
|
IMPAIRMENT & OTHER LOSSES
|
Inventory
Merchandise is sold to both at-need and pre-need customers. Merchandise allocated to service pre-need contractual obligations is recorded at cost and managed and stored by the Partnership until the Partnership services the underlying customer contract.
Merchandise stored at certain locations may be exposed to changes in weather conditions. Primarily due to weather related deterioration over a number of years, the Partnership recorded inventory impairment charges of approximately $1.9 million for the three months ended March 31, 2018. This impairment loss related to damaged and excess inventory and is included in cost of goods sold for the three months ended March 31, 2018 in the accompanying consolidated statements of operations as this merchandise was utilized to fulfill the Partnership’s contractual obligations to at-need and pre-need customers.
Due to enhanced inventory control procedures implemented in late 2018, the Partnership determined that certain merchandise inventory allocated to pre-need customers had been damaged due to weather related deterioration occurring over a number of years or had otherwise been deemed impractical for use by management as a result of past operating practices relating to inventory. For the three months ended March 31, 2018, the Partnership recorded an estimated impairment loss of approximately $5.0 million related to this damaged and unusable merchandise. The impairment loss is included in other losses in the accompanying consolidated statement of operations for three months ended March 31, 2018. The loss recorded represents management’s best estimate. This impairment was based on estimates and assumptions that have been deemed reasonable by management and included percentages of merchandise deemed unusable. Management’s assessment process relied on estimates and assumptions that are inherently uncertain, and unanticipated events or circumstances may occur that might cause the Partnership to change those estimates and assumptions.
13
Table of Contents
4.
|
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
|
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Customer receivables
|
|
$
|
163,533
|
|
|
$
|
167,017
|
|
Unearned finance income
|
|
|
(16,650
|
)
|
|
|
(17,000
|
)
|
Allowance for bad debt
|
|
|
(4,907
|
)
|
|
|
(4,941
|
)
|
Accounts receivable, net of allowance
|
|
|
141,976
|
|
|
|
145,076
|
|
Less: Current portion, net of allowance
|
|
|
58,398
|
|
|
|
57,928
|
|
Long-term portion, net of allowance
|
|
$
|
83,578
|
|
|
$
|
87,148
|
|
Activity in the allowance for bad debt was as follows (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance, beginning of period
|
|
$
|
4,941
|
|
|
$
|
19,795
|
|
Cumulative effect of accounting changes
|
|
|
—
|
|
|
|
(12,876
|
)
|
Provision for bad debt
|
|
|
2,043
|
|
|
|
600
|
|
Charge-offs, net
|
|
|
(2,077
|
)
|
|
|
(1,309
|
)
|
Balance, end of period
|
|
$
|
4,907
|
|
|
$
|
6,210
|
|
Cemetery property consisted of the following at the dates indicated (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Cemetery land
|
|
$
|
256,163
|
|
|
$
|
255,708
|
|
Mausoleum crypts and lawn crypts
|
|
|
74,805
|
|
|
|
75,133
|
|
Cemetery property
|
|
$
|
330,968
|
|
|
$
|
330,841
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following at the dates indicated (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
$
|
130,384
|
|
|
$
|
129,971
|
|
Furniture and equipment
|
|
|
59,841
|
|
|
|
58,706
|
|
Funeral home land
|
|
|
14,185
|
|
|
|
14,185
|
|
Property and equipment, gross
|
|
|
204,410
|
|
|
|
202,862
|
|
Less: Accumulated depreciation
|
|
|
(92,268
|
)
|
|
|
(90,146
|
)
|
Property and equipment, net of accumulated depreciation
|
|
$
|
112,142
|
|
|
$
|
112,716
|
|
Depreciation expense was $2.4 million and $2.6 million for the three months ended March 31, 2019 and 2018, respectively.
At March 31, 2019 and December 31, 2018, the Partnership’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds. All of these investments are carried at fair value. All of these investments subject to the fair value hierarchy are considered either Level 1 or
14
Table of Contents
Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. When the Partnership receives a paym
ent from a customer, the Partnership deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the customer. The Partnership’s merchandise trusts related to states in which customers may cancel contrac
ts with the Partnership comprises 53.4% of the total merchandise trust as of March 31, 2019. The merchandise trusts are variable interest entities (“VIE”) of which the Partnership is deemed the primary beneficiary. The assets held in the merchandise trusts
are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Partnership may be required to fund this s
hortfall.
The Partnership included $9.1 million and $8.7 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at March 31, 2019 and December 31, 2018 respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.
A reconciliation of the Partnership’s merchandise trust activities for the three months ended March 31, 2019 and 2018 is presented below (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance—beginning of period
|
|
$
|
488,248
|
|
|
$
|
515,456
|
|
Contributions
|
|
|
13,883
|
|
|
|
17,109
|
|
Distributions
|
|
|
(13,639
|
)
|
|
|
(14,652
|
)
|
Interest and dividends
|
|
|
7,325
|
|
|
|
6,247
|
|
Capital gain distributions
|
|
|
99
|
|
|
|
64
|
|
Realized gains and losses, net
|
|
|
(281
|
)
|
|
|
(464
|
)
|
Other than temporary impairment
|
|
|
(2,314
|
)
|
|
|
(11,153
|
)
|
Taxes
|
|
|
4
|
|
|
|
283
|
|
Fees
|
|
|
(873
|
)
|
|
|
(1,351
|
)
|
Unrealized change in fair value
|
|
|
22,613
|
|
|
|
(2,853
|
)
|
Balance—end of period
|
|
$
|
515,065
|
|
|
$
|
508,686
|
|
During the three months ended March 31, 2019 and 2018, purchases of available for sale securities were approximately $21.3 million and $32.5 million, respectively. During the three months ended March 31, 2019 and 2018, sales, maturities and paydowns of available for sale securities were approximately $9.1 million and $24.9 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Partnership’s unaudited condensed consolidated statement of cash flows.
The cost and market value associated with the assets held in the merchandise trusts as of March 31, 2019 and December 31, 2018 were as follows (in thousands):
March 31, 2019
|
|
Fair Value
Hierarchy Level
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
|
1
|
|
|
$
|
10,761
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,761
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
|
2
|
|
|
|
416
|
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
269
|
|
Corporate debt securities
|
|
|
2
|
|
|
|
1,250
|
|
|
|
16
|
|
|
|
(316
|
)
|
|
|
950
|
|
Total fixed maturities
|
|
|
|
|
|
|
1,666
|
|
|
|
16
|
|
|
|
(463
|
)
|
|
|
1,219
|
|
Mutual funds—debt securities
|
|
|
1
|
|
|
|
188,195
|
|
|
|
4,295
|
|
|
|
(602
|
)
|
|
|
191,888
|
|
Mutual funds—equity securities
|
|
|
1
|
|
|
|
45,045
|
|
|
|
6,506
|
|
|
|
—
|
|
|
|
51,551
|
|
Other investment funds (1)
|
|
|
|
|
|
|
220,198
|
|
|
|
2,001
|
|
|
|
(1,982
|
)
|
|
|
220,217
|
|
Equity securities
|
|
|
1
|
|
|
|
18,178
|
|
|
|
3,955
|
|
|
|
(146
|
)
|
|
|
21,987
|
|
Other invested assets
|
|
|
2
|
|
|
|
8,322
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,322
|
|
Total investments
|
|
|
|
|
|
$
|
492,365
|
|
|
$
|
16,773
|
|
|
$
|
(3,193
|
)
|
|
$
|
505,945
|
|
West Virginia Trust Receivable
|
|
|
|
|
|
|
9,120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,120
|
|
Total
|
|
|
|
|
|
$
|
501,485
|
|
|
$
|
16,773
|
|
|
$
|
(3,193
|
)
|
|
$
|
515,065
|
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit
|
15
Table of Contents
|
|
funds, which have lockup periods of one to
seven years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2019, there were $60.0 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
December 31,
2018
|
|
Fair Value
Hierarchy Level
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
|
1
|
|
|
$
|
16,903
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,903
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
|
2
|
|
|
|
392
|
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
245
|
|
Corporate debt securities
|
|
|
2
|
|
|
|
1,311
|
|
|
|
29
|
|
|
|
(328
|
)
|
|
|
1,012
|
|
Total fixed maturities
|
|
|
|
|
|
|
1,703
|
|
|
|
29
|
|
|
|
(475
|
)
|
|
|
1,257
|
|
Mutual funds—debt securities
|
|
|
1
|
|
|
|
187,840
|
|
|
|
262
|
|
|
|
(2,645
|
)
|
|
|
185,457
|
|
Mutual funds—equity securities
|
|
|
1
|
|
|
|
45,023
|
|
|
|
110
|
|
|
|
(18
|
)
|
|
|
45,115
|
|
Other investment funds (1)
|
|
|
|
|
|
|
210,655
|
|
|
|
388
|
|
|
|
(7,784
|
)
|
|
|
203,259
|
|
Equity securities
|
|
|
1
|
|
|
|
18,097
|
|
|
|
1,327
|
|
|
|
(213
|
)
|
|
|
19,211
|
|
Other invested assets
|
|
|
2
|
|
|
|
8,398
|
|
|
|
2
|
|
|
|
(17
|
)
|
|
|
8,383
|
|
Total investments
|
|
|
|
|
|
$
|
488,619
|
|
|
$
|
2,118
|
|
|
$
|
(11,152
|
)
|
|
$
|
479,585
|
|
West Virginia Trust Receivable
|
|
|
|
|
|
|
8,663
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,663
|
|
Total
|
|
|
|
|
|
$
|
497,282
|
|
|
$
|
2,118
|
|
|
$
|
(11,152
|
)
|
|
$
|
488,248
|
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of two to seven years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2018, there were $71.0 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
The contractual maturities of debt securities as of March 31, 2019 and December 31, 2018 were as follows below (in thousands):
March 31, 2019
|
|
Less than
1 year
|
|
|
1 year
through
5 years
|
|
|
6 years
through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
238
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
78
|
|
|
|
816
|
|
|
|
37
|
|
|
|
16
|
|
Total fixed maturities
|
|
$
|
78
|
|
|
$
|
848
|
|
|
$
|
275
|
|
|
$
|
16
|
|
December 31, 2018
|
|
Less than
1 year
|
|
|
1 year
through
5 years
|
|
|
6 years
through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
137
|
|
|
$
|
108
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
68
|
|
|
|
873
|
|
|
|
55
|
|
|
|
16
|
|
Total fixed maturities
|
|
$
|
68
|
|
|
$
|
1,010
|
|
|
$
|
163
|
|
|
$
|
16
|
|
Temporary Declines in Fair Value
The Partnership evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
16
Table of Contents
An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the merchandise trusts as of March 31, 2019 and December 31, 2018 is presented below (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
March 31, 2019
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
267
|
|
|
$
|
147
|
|
|
$
|
267
|
|
|
$
|
147
|
|
Corporate debt securities
|
|
|
50
|
|
|
|
—
|
|
|
|
557
|
|
|
|
316
|
|
|
|
607
|
|
|
|
316
|
|
Total fixed maturities
|
|
|
50
|
|
|
|
—
|
|
|
|
824
|
|
|
|
463
|
|
|
|
874
|
|
|
|
463
|
|
Mutual funds—debt securities
|
|
|
155
|
|
|
|
5
|
|
|
|
1,231
|
|
|
|
597
|
|
|
|
1,386
|
|
|
|
602
|
|
Mutual funds—equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other investment funds
|
|
|
83,779
|
|
|
|
1,982
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83,779
|
|
|
|
1,982
|
|
Equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
555
|
|
|
|
146
|
|
|
|
555
|
|
|
|
146
|
|
Other invested assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
83,984
|
|
|
$
|
1,987
|
|
|
$
|
2,610
|
|
|
$
|
1,206
|
|
|
$
|
86,594
|
|
|
$
|
3,193
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2018
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
243
|
|
|
$
|
147
|
|
|
$
|
243
|
|
|
$
|
147
|
|
Corporate debt securities
|
|
|
103
|
|
|
|
2
|
|
|
|
549
|
|
|
|
326
|
|
|
|
652
|
|
|
|
328
|
|
Total fixed maturities
|
|
|
103
|
|
|
|
2
|
|
|
|
792
|
|
|
|
473
|
|
|
|
895
|
|
|
|
475
|
|
Mutual funds—debt securities
|
|
|
46,005
|
|
|
|
2,011
|
|
|
|
1,195
|
|
|
|
634
|
|
|
|
47,200
|
|
|
|
2,645
|
|
Mutual funds—equity securities
|
|
|
131
|
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
131
|
|
|
|
18
|
|
Other investment funds
|
|
|
169,929
|
|
|
|
7,784
|
|
|
|
—
|
|
|
|
—
|
|
|
|
169,929
|
|
|
|
7,784
|
|
Equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
597
|
|
|
|
213
|
|
|
|
597
|
|
|
|
213
|
|
Other invested assets
|
|
|
—
|
|
|
|
4
|
|
|
|
790
|
|
|
|
13
|
|
|
|
790
|
|
|
|
17
|
|
Total
|
|
$
|
216,168
|
|
|
$
|
9,819
|
|
|
$
|
3,374
|
|
|
$
|
1,333
|
|
|
$
|
219,542
|
|
|
$
|
11,152
|
|
For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.
Other-Than-Temporary Impairment of Trust Assets
The Partnership assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2019, the Partnership determined, based on its review, that there were 89 securities
with an aggregate cost basis of approximately $91.9 million and an aggregate fair value of approximately $89.6 million, resulting in an impairment of $2.3 million, with such impairment considered to be other-than-temporary due to credit indicators.
During the three months ended March 31, 2018, the Partnership determined,
based on its review, that there were 94 securities with an aggregate cost basis of approximately $165.8 million and an aggregate fair value of approximately $154.6 million, resulting in an impairment of $11.2 million, with such impairment considered to be other-than-temporary due to credit indicators.
Accordingly, the Partnership adjusted the cost basis of these assets to their current value and offset these changes against deferred merchandise trust revenue.
These adjustments to deferred revenue will be reflected within the Partnership’s unaudited condensed consolidated statement of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.
8
.
|
PERPETUAL CARE TRUSTS
|
At March 31, 2019 and December 31, 2018, the Partnership’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.
All of these investments are
carried at fair value
. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. The perpetual care trusts are VIEs for which the Partnership is the primary beneficiary.
17
Table of Contents
A reconciliation of the Partnership’s perpetual care trust activities for the three months ended March 31, 2019 and 2018 is presented below (
in thousands):
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance—beginning of period
|
|
$
|
330,562
|
|
|
$
|
339,928
|
|
Contributions
|
|
|
1,983
|
|
|
|
5,504
|
|
Distributions
|
|
|
(4,403
|
)
|
|
|
(4,189
|
)
|
Interest and dividends
|
|
|
5,148
|
|
|
|
5,894
|
|
Capital gain distributions
|
|
|
114
|
|
|
|
124
|
|
Realized gains and losses, net
|
|
|
977
|
|
|
|
57
|
|
Other than temporary impairment
|
|
|
(713
|
)
|
|
|
(6,834
|
)
|
Taxes
|
|
|
4
|
|
|
|
8
|
|
Fees
|
|
|
(704
|
)
|
|
|
(2,441
|
)
|
Unrealized change in fair value
|
|
|
11,857
|
|
|
|
(1,804
|
)
|
Balance—end of period
|
|
$
|
344,825
|
|
|
$
|
336,247
|
|
During the three months ended March 31, 2019 and 2018, purchases of available for sale securities were approximately $35.3 million and $20.7 million, respectively. During the three months ended March 31, 2019 and 2018, sales, maturities and paydowns of available for sale securities were approximately $31.9 million and $18.2 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in Partnership’s unaudited condensed consolidated statement of cash flows.
The cost and market value associated with the assets held in the perpetual care trusts as of March 31, 2019 and December 31, 2018 were as follows (in thousands):
March 31, 2019
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
11,671
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,671
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
957
|
|
|
|
4
|
|
|
|
(92
|
)
|
|
|
869
|
|
Corporate debt securities
|
|
2
|
|
|
3,165
|
|
|
|
23
|
|
|
|
(265
|
)
|
|
|
2,923
|
|
Total fixed maturities
|
|
|
|
|
4,122
|
|
|
|
27
|
|
|
|
(357
|
)
|
|
|
3,792
|
|
Mutual funds—debt securities
|
|
1
|
|
|
107,649
|
|
|
|
2,386
|
|
|
|
(187
|
)
|
|
|
109,848
|
|
Mutual funds—equity securities
|
|
1
|
|
|
14,396
|
|
|
|
2,174
|
|
|
|
(2
|
)
|
|
|
16,568
|
|
Other investment funds (1)
|
|
|
|
|
176,600
|
|
|
|
6,719
|
|
|
|
(4,096
|
)
|
|
|
179,223
|
|
Equity securities
|
|
1
|
|
|
20,122
|
|
|
|
3,678
|
|
|
|
(77
|
)
|
|
|
23,723
|
|
Other invested assets
|
|
2
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Total investments
|
|
|
|
$
|
334,560
|
|
|
$
|
14,984
|
|
|
$
|
(4,719
|
)
|
|
$
|
344,825
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from one to eight years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2019 there were $82.0 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
18
Table of Contents
December 31, 2018
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
12,835
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,835
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
960
|
|
|
|
4
|
|
|
|
(121
|
)
|
|
|
843
|
|
Corporate debt securities
|
|
2
|
|
|
4,883
|
|
|
|
161
|
|
|
|
(321
|
)
|
|
|
4,723
|
|
Total fixed maturities
|
|
|
|
|
5,843
|
|
|
|
165
|
|
|
|
(442
|
)
|
|
|
5,566
|
|
Mutual funds—debt securities
|
|
1
|
|
|
108,451
|
|
|
|
227
|
|
|
|
(837
|
)
|
|
|
107,841
|
|
Mutual funds—equity securities
|
|
1
|
|
|
19,660
|
|
|
|
304
|
|
|
|
(142
|
)
|
|
|
19,822
|
|
Other investment funds (1)
|
|
|
|
|
165,284
|
|
|
|
3,039
|
|
|
|
(4,607
|
)
|
|
|
163,716
|
|
Equity securities
|
|
1
|
|
|
20,025
|
|
|
|
826
|
|
|
|
(145
|
)
|
|
|
20,706
|
|
Other invested assets
|
|
2
|
|
|
56
|
|
|
|
20
|
|
|
|
—
|
|
|
|
76
|
|
Total investments
|
|
|
|
$
|
332,154
|
|
|
$
|
4,581
|
|
|
$
|
(6,173
|
)
|
|
$
|
330,562
|
|
(1)
|
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from two to eight years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2018 there were $94.5 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
The contractual maturities of debt securities as of March 31, 2019 and December 31, 2018, were as follows below (in thousands):
March 31, 2019
|
|
Less than
1 year
|
|
|
1 year through
5 years
|
|
|
6 years through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
793
|
|
|
$
|
32
|
|
Corporate debt securities
|
|
|
213
|
|
|
|
2,513
|
|
|
|
147
|
|
|
|
51
|
|
Total fixed maturities
|
|
$
|
213
|
|
|
$
|
2,558
|
|
|
$
|
940
|
|
|
$
|
83
|
|
December 31, 2018
|
|
Less than
1 year
|
|
|
1 year through
5 years
|
|
|
6 years through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
416
|
|
|
$
|
395
|
|
|
$
|
32
|
|
Corporate debt securities
|
|
|
705
|
|
|
|
3,702
|
|
|
|
265
|
|
|
|
51
|
|
Total fixed maturities
|
|
$
|
705
|
|
|
$
|
4,118
|
|
|
$
|
660
|
|
|
$
|
83
|
|
Temporary Declines in Fair Value
The Partnership evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.
An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the perpetual care trusts as of March 31, 2019 and December 31, 2018 is presented below (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
March 31, 2019
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
818
|
|
|
$
|
92
|
|
|
$
|
818
|
|
|
$
|
92
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,530
|
|
|
|
265
|
|
|
|
2,530
|
|
|
|
265
|
|
Total fixed maturities
|
|
|
—
|
|
|
|
—
|
|
|
|
3,348
|
|
|
|
357
|
|
|
|
3,348
|
|
|
|
357
|
|
Mutual funds—debt securities
|
|
|
223
|
|
|
|
9
|
|
|
|
2,969
|
|
|
|
178
|
|
|
|
3,192
|
|
|
|
187
|
|
Mutual funds—equity securities
|
|
|
207
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207
|
|
|
|
2
|
|
Other investment funds
|
|
|
59,569
|
|
|
|
4,096
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,569
|
|
|
|
4,096
|
|
Equity securities
|
|
|
201
|
|
|
|
10
|
|
|
|
642
|
|
|
|
67
|
|
|
|
843
|
|
|
|
77
|
|
Total
|
|
$
|
60,200
|
|
|
$
|
4,117
|
|
|
$
|
6,959
|
|
|
$
|
602
|
|
|
$
|
67,159
|
|
|
$
|
4,719
|
|
19
Table of Contents
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2018
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
790
|
|
|
$
|
121
|
|
|
$
|
790
|
|
|
$
|
121
|
|
Corporate debt securities
|
|
|
405
|
|
|
|
15
|
|
|
|
2,902
|
|
|
|
306
|
|
|
|
3,307
|
|
|
|
321
|
|
Total fixed maturities
|
|
|
405
|
|
|
|
15
|
|
|
|
3,692
|
|
|
|
427
|
|
|
|
4,097
|
|
|
|
442
|
|
Mutual funds—debt securities
|
|
|
21,867
|
|
|
|
591
|
|
|
|
2,814
|
|
|
|
246
|
|
|
|
24,681
|
|
|
|
837
|
|
Mutual funds—equity securities
|
|
|
1,382
|
|
|
|
141
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,382
|
|
|
|
142
|
|
Other investment funds
|
|
|
101,536
|
|
|
|
4,607
|
|
|
|
—
|
|
|
|
—
|
|
|
|
101,536
|
|
|
|
4,607
|
|
Equity securities
|
|
|
241
|
|
|
|
16
|
|
|
|
583
|
|
|
|
129
|
|
|
|
824
|
|
|
|
145
|
|
Total
|
|
$
|
125,431
|
|
|
$
|
5,370
|
|
|
$
|
7,089
|
|
|
$
|
803
|
|
|
$
|
132,520
|
|
|
$
|
6,173
|
|
For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.
Other-Than-Temporary Impairment of Trust Assets
The Partnership assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2019, the Partnership determined that there were 66 securities
with an aggregate cost basis of approximately $29.2 million and an aggregate fair value of approximately $28.5 million, resulting in an impairment of $0.7 million, with such impairment considered to be other-than-temporary.
During the three months ended March 31, 2018, the Partnership determined that there were
105 securities with an aggregate cost basis of approximately $118.0 million and an aggregate fair value of approximately $111.2 million, resulting in an impairment of $6.8 million, with such impairment considered to be other-than-temporary.
Accordingly, the Partnership adjusted the cost basis of these assets to their current value and offset these changes against the liability for perpetual care trust corpus.
Total debt consisted of the following at the dates indicated (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
$
|
180,132
|
|
|
$
|
155,739
|
|
7.875% Senior Notes, due June 2021
|
|
|
173,748
|
|
|
|
173,613
|
|
Notes payable—acquisition debt
|
|
|
37
|
|
|
|
92
|
|
Notes payable—acquisition non-competes
|
|
|
-
|
|
|
|
-
|
|
Insurance and vehicle financing
|
|
|
1,366
|
|
|
|
1,294
|
|
Less deferred financing costs, net of accumulated amortization
|
|
|
(8,397
|
)
|
|
|
(9,692
|
)
|
Total debt
|
|
|
346,886
|
|
|
|
321,046
|
|
Less current maturities
|
|
|
(953
|
)
|
|
|
(798
|
)
|
Total long-term debt
|
|
$
|
345,933
|
|
|
$
|
320,248
|
|
Credit Agreements
On August 4, 2016,
our 100% owned subsidiary, StoneMor Operating LLC (the “Operating Company”) entered into a Credit Agreement (the “Original Credit Agreement”) among each of the Subsidiaries of the Operating Company (together with the Operating Company, “Borrowers”), the Lenders identified therein, Capital One, National Association (“Capital One”), as Administrative Agent, Issuing Bank and Swingline Lender, Citizens Bank N.A., as Syndication Agent, and TD Bank, N.A. and Raymond James Bank, N.A., as Co-Documentation Agents. In addition, on the same date, the Partnership, the Borrowers and Capital One, as Administrative Agent, entered into the Guaranty and Collateral Agreement (the “Guaranty Agreement,” and together with the Credit Agreement, “New Agreements”). Capitalized terms which are not defined in the following description of the New Agreements shall have the meaning assigned to such terms in the New Agreements, as amended
.
20
Table of Contents
On March 15, 2017, the Borrowers, Capital One, as Administrative Agent
and acting in accordance with the written consent of the Required Lenders, entered into the First Amendment to Credit Agreement. Those parties subsequently entered into a Second Amendment and Limited Waiver on July 26, 2017, a Third Amendment and Limited
Waiver effective as of August 15, 2017, a Fourth Amendment to Credit Agreement dated September 29, 2017, a Fifth Amendment to Credit Agreement dated as of December 22, 2017 but effective as of September 29, 2017
, a Sixth Amendment and Waiver to Credit Agre
ement dated June 12, 2018, a Seventh Amendment and Waiver to the Credit Agreement dated July 13, 2018 and the
Eighth Amendment and Waiver to Credit Agreement (the “Eighth Amendment”) dated February 4, 2019
.
We refer to the Original Credit Agreement, as so
amended, as the “Original Amended Agreement.”
Prior to the Eighth Amendment, the Amended Credit Agreement provided for up to $175.0 million initial aggregate amount of Revolving Commitments, which were subject to borrowing base limitations.
The Eighth Amendment added to the Amended Credit Agreement a separate last out revolving credit facility (the “Tranche B Revolving Credit Facility”) in the aggregate amount of $35.0 million to be provided by certain affiliates of Axar Capital Management as the initial lenders under the Tranche B Revolving Credit Facility (the “Tranche B Revolving Lenders”) on the following terms (as further detailed in the Eighth Amendment):
|
•
|
the aggregate amount of the Tranche B Revolving Commitments is $35.0 million; such Commitments were utilized in the amount of $25.0 million, which was reduced by a $0.7 million Original Issue Discount on the effective date of the Eighth Amendment (the “Eighth Amendment Effective Date”). The borrowings were subject to a fairness opinion, which has been received, in accordance with provisions of the Tranche B conditions of such borrowings. The remaining $10 million in commitments may be utilized in the amount of $5.0 million (or any integral multiple thereof) from time to time until April 30, 2019;
|
|
•
|
Tranche B Revolving Credit Facility Maturity Date is one business day after the maturity date of the original revolving credit facility (the “Tranche A Revolving Credit Facility”);
|
|
•
|
the interest rate applicable to the loans made under the Tranche B Revolving Credit Facility is 8.00% per annum, payable quarterly in arrears;
|
|
•
|
borrowings under the Tranche B Revolving Credit Facility on the Eighth Amendment Effective Date were subject to an original issue discount in the amount of $0.7 million; and
|
|
•
|
upon the repayment or prepayment of the Tranche B Revolving Credit Facility in full, the Tranche B Revolving Lenders will receive additional interest in the amount of $0.7 million.
|
The Eighth Amendment also amended certain terms of the Original Amended Agreement to:
|
•
|
reduce the Tranche A Revolving Credit Availability Period to end on the Eighth Amendment Effective Date, which precludes borrowings under the Tranche A Revolving Credit Facility after such date;
|
|
•
|
reduce the amount of the Letter of Credit Sublimit from $15.0 million to $9.4 million, plus the principal amount of loans under the Tranche A Revolving Credit Facility that become subject to optional prepayment after the Eighth Amendment Effective Date, and permit the issuance of letters of credit under the Tranche A Revolving Credit Facility after the Eight Amendment Effective Date;
|
|
•
|
modify the Tranche A Revolving Credit Facility Maturity Date to be the earlier of (i) May 1, 2020 and (ii) the date that is six months prior to the earliest scheduled maturity date of any outstanding Permitted Unsecured Indebtedness;
|
|
•
|
redetermine the Applicable Rate to be 4.50% for Eurodollar Rate Loans and 3.50% for Base Rate Loans from the Eighth Amendment Effective Date to February 28, 2019; 4.75% and 3.75%, respectively, from March 1, 2019 to March 31, 2019; 5.50% and 4.50%, respectively, from April 1, 2019 to April 30, 2019; 5.75% and 4.75%, respectively, from May 1, 2019 to May 31, 2019; and 6.00% and 5.00%, respectively, from June 1, 2019;
|
|
•
|
discontinue the accrual of the commitment fee after the Eighth Amendment Effective Date;
|
|
•
|
provide for ticking fees assessed on the amount of outstanding loans made under the Tranche A Revolving Credit Facility (the “Tranche A Revolving Loans”) and payable to the Tranche A Revolving Lenders (i) in-kind, by
|
21
Table of Contents
|
|
increasing the outstanding principal amount of such Lender’s Tranche A Revolving Loans (“PIK”) or (ii) in cash, in the following amounts and on the following dates:
|
|
o
|
3.00% on July 1, 2019, of which (x) 2.00% shall PIK and (y) 1.00% shall be payable in cash, unless the Required Lenders agree to PIK;
|
|
o
|
1.00% on August 1, 2019, payable in cash, unless the Required Lenders agree to PIK;
|
|
o
|
1.00% on September 1, 2019, payable in cash, unless the Required Lenders agree to PIK; and
|
|
o
|
1.00% on October 1, 2019, PIK;
|
|
•
|
amend the definition of “Consolidated Net Income” for purposes of calculating the Consolidated EBITDA to exclude, for the time period from January 1, 2018 to January 1, 2019, (i) any non-recurring charges for adjustments made to cost of goods sold for merchandise inventory impairment related to excess and damaged inventory of the Partnership or a subsidiary of the Partnership (and any reversal thereof) incurred during the fiscal year ended December 31, 2018 in an aggregate amount not to exceed $5.0 million and (ii) any non-recurring charges for the establishment of liability reserves required for future obligations of the Partnership or a Subsidiary of the Partnership to deliver allocated merchandise to customers (and any reversal thereof) incurred during the Fiscal Year ended December 2018 in an aggregate amount not to exceed $15.0 million;
|
|
•
|
amend the definition of “Consolidated EBITDA” for purposes of calculating the financial covenant to (i) adjust the limit on add backs for non-recurring cash expenses, losses, costs and charges to $17.0 million for each Measurement Period ended on or after April 1, 2018 and (ii) remove a separate add back for non-recurring cash expenses, costs and charges relating to “non-ordinary course of business” legal matters;
|
|
•
|
remove the Consolidated Secured Net Leverage Ratio and Consolidated Fixed Charge Coverage Ratio and replace them with a covenant requiring the Partnership to ensure that its Consolidated EBITDA is not less than the following amounts for the four quarters ending on the following dates: (i) $18.0 million for the period ended March 31, 2018; (ii) $13.0 million for the period ended June 30, 2018; (iii) $2.5 million for the period ended September 30, 2018; (iv) ($3.0 million) for the period ended December 31, 2018; (v) $1.0 million for the period ending March 31, 2019; (vi) $3.5 million for the period ending June 30, 2019; (vii) $8.0 million for the period ending September 30, 2019; (viii) $8.25 million for the period ending December 31, 2019; and (ix) $9.25 million for the period ending March 31, 2020;
|
|
•
|
provide for mandatory prepayments in an amount equal to 100% of the net cash proceeds from (i) sale/leaseback transactions and certain other permitted dispositions of assets and (ii) incurrence of certain indebtedness (including any indebtedness not permitted under the Amended Credit Agreement) in an amount exceeding $5.0 million;
|
|
•
|
extend the deadline for filing the Partnership’s Form 10-Q for the period ended March 31, 2018 to the later of February 6, 2019 and the date that is two Business Days following the Eighth Amendment Effective Date and for the periods ended June 30, 2018 and September 30, 2018 to February 15, 2019;
|
|
•
|
add a covenant requiring the Partnership and the Administrative Borrower to use their reasonable best efforts to consummate the transactions contemplated under the Merger Agreement (as defined below) by May 15, 2019 (the “C-Corporation Conversion”); modify the definition of “Change in Control” and several covenants, including but not limited to reporting covenants and covenants restricting fundamental changes, dispositions, investments, acquisitions and transactions with affiliates to permit the C-Corporation Conversion and to permit the Partnership to be a wholly-owned subsidiary of StoneMor Inc. (as defined below);
|
|
•
|
add a covenant requiring the Administrative Borrower to engage Houlihan Lokey or any other acceptable financial advisor by no later than the second business day after the Eighth Amendment Effective Date to advise it in the arrangement of the refinancing in full of the obligations with respect to the Tranche A Revolving Credit Facility (such refinancing, the “Refinancing”);
|
|
•
|
add a covenant requiring the Administrative Borrower to retain Carl Marks & Co. or another acceptable consultant of recognized national standing on or prior to the Eighth Amendment Effective Date, who shall (i) assist the Administrative Borrower in further developing its financial planning and analysis function; (ii) prepare a detailed analysis of G&A expenses and other overhead and develop cost savings initiatives and (iii) present a monthly written update to the Administrative Agent and the Lenders on progress; and
|
22
Table of Contents
|
•
|
amend other provisions of the agreement in connection with the foregoing.
|
In addition, in the Eighth Amendment, the Administrative Agent and Lenders party thereto waived existing defaults under the Original Amended Agreement as a result of the Partnership’s failure to (i) deliver the financial statements for the periods ended March 31, 2018, June 30, 2018 and September 30, 2018 and the related compliance certificates; (ii) comply with the facility’s maximum Consolidated Secured Net Leverage Ratio for each period ended June 30, 2018, September 30, 2018 and December 31, 2018 (iii) comply with the facility’s minimum Fixed Charge Coverage Ratio for each period ended June 30, 2018, September 30, 2018 and December 31, 2018; and (iv) inaccuracies in representations and warranties resulting from such defaults. The effectiveness of the Eighth Amendment was subject to the satisfaction of certain conditions, including the payment to the Tranche A Revolving Lenders of a fee in the aggregate amount of $0.8 million.
Additional covenants include customary limitations, subject to certain exceptions, on, among others: (i) the incurrence of Indebtedness; (ii) granting of Liens; (iii) fundamental changes and dispositions; (iv) investments, loans, advances, guarantees and acquisitions; (v) swap agreements; (vi) transactions with Affiliates; (vii) Restricted Payments; (viii) restrictive agreements; (ix) amendments to organizational documents and indebtedness; (x) prepayment of indebtedness; and (xi) Sale and Leaseback Transactions. The Original Amended Agreement also prohibited distributions to the Partnership’s partners unless the Consolidated Leverage Ratio (determined based on Consolidated EBITDA calculated giving effect to amendments under the Sixth Amendment) was not greater than 7.50:1.00 and the Revolving Credit Availability was at least $25.0 million.
The Borrowers’ obligations under the Original Amended Agreement are guaranteed by the Partnership and the Borrowers. Pursuant to the Guaranty Agreement, the Borrowers’ obligations under the Original Amended Agreement are secured by a first priority lien and security interest (subject to permitted liens and security interests) in substantially all of the Partnership’s and Borrowers’ assets, whether then owned or thereafter acquired, excluding certain excluded assets, which include, among others: (i) Trust Accounts, certain proceeds required by law to be placed into such Trust Accounts and funds held in such Trust Accounts; and (ii) Excluded Real Property, including owned and leased real property that may not be pledged as a matter of law.
As of March 31, 2019, the outstanding amount of borrowings under the Original Amended Agreement was
$180.7 million
, which was used to pay down outstanding obligations under the Partnership’s prior credit agreement, to pay fees, costs and expenses related to the New Agreements and to fund working capital needs.
Each Borrowing under the Original Amended Credit Agreement is comprised of Base Rate Loans or Eurodollar Loans. The Loans comprising each Base Rate Borrowing (including each Swingline Loan) bear interest at the Base Rate plus the Applicable Rate, and the Loans comprising each Eurodollar Borrowing bear interest at the Eurodollar Rate plus the Applicable Rate.
Prior to the Sixth Amendment and Waiver, the Applicable Rate was determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries and ranged from 1.75% to 3.75% for Eurodollar Rate Loans and 0.75% to 2.75% for Base Rate Loans and between 0.30% and 0.50% for unused commitment fee. The Sixth Amendment and Waiver redetermined the Applicable Rate based on the Consolidated Secured Net Leverage Ratio of the Partnership and its Subsidiaries and increased the minimum and maximum Applicable Rate by 0.50% to be in the range between 2.25% to 4.25% for Eurodollar Rate Loans and 1.25% to 3.75% for Base Rate Loans (but in no event less that the Applicable Rate that would be in effect if calculated as set forth in the Original Amended Agreement not giving effect to the Sixth Amendment and Waiver and the Seventh Amendment and Waiver). As of March 31, 2019, the Applicable Rate for Eurodollar Rate Loans was 4.75% and for Base Rate Loans was 3.75%. Prior to the Eighth Amendment, the Borrowers were also required to pay a quarterly unused commitment fee, which accrued at the Applicable Rate on the amount by which the commitments under the Original Amended Agreement exceeded the usage of such commitments, and which was included within interest expense on the Partnership’s condensed consolidated statements of operations. On March 31, 2019, the weighted average interest rate on outstanding borrowings under the Original Amended Agreement was 7.66%.
23
Table of Contents
Senior Notes
On May 28, 2013, the Partnership issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the "Senior Notes"). The Partnership 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. The net proceeds from the offering of the Senior Notes were used to retire a $150.0 million aggregate principal amount of 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 Partnership incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and will be amortized over the life of the Senior Notes. The Senior Notes mature on June 1, 2021.
The Partnership may redeem the Senior Notes at any time, in whole or in part, at the redemption prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:
Year
|
|
Percentage
|
|
2018
|
|
|
101.969
|
%
|
2019 and thereafter
|
|
|
100.000
|
%
|
Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Partnership to purchase that holder’s Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest.
The Senior Notes are jointly and severally guaranteed by certain of the Partnership’s subsidiaries. The Indenture governing the Senior Notes contains covenants, including limitations of the Partnership’s ability to incur additional indebtedness and liens, make certain dividends, distributions, redemptions or investments, enter into certain transactions with affiliates, make certain asset sales, and engage in certain mergers, consolidations or sales of all or substantially all of the Partnership’s assets, among other items. As of March 31, 2019, the Partnership was in compliance with these covenants.
10.
|
DEFERRED REVENUES AND COSTS
|
The Partnership defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Partnership recognizes deferred merchandise and service revenues as deferred revenues within long-term liabilities on its consolidated balance sheets. The Partnership recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its consolidated balance sheets. The Partnership also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts.
Deferred revenues and related costs consisted of the following at the dates indicated (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Deferred contract revenues
|
|
$
|
833,050
|
|
|
$
|
830,602
|
|
Deferred merchandise trust revenue
|
|
|
94,410
|
|
|
|
92,718
|
|
Deferred merchandise trust unrealized gains (losses)
|
|
|
13,580
|
|
|
|
(9,034
|
)
|
Deferred revenues
|
|
$
|
941,040
|
|
|
$
|
914,286
|
|
Deferred selling and obtaining costs
|
|
$
|
112,643
|
|
|
$
|
112,660
|
|
For the three months ended March 31, 2019, the Partnership recognized $22.6 million of the deferred revenue balance at December 31, 2018 as revenue. Also during the three months ended March 31, 2019, the Partnership had no change in the deferred selling and obtaining costs as recognition offset deferrals of new incremental direct selling costs.
24
Table of Contents
The components of deferred revenues, net in the Partnership’s Unaudited Condensed Consolidated Balance Sheet at March 31, 2019 and December 31, 2018 were as follows (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
963,612
|
|
|
$
|
937,708
|
|
Amounts due from customers for unfulfilled performance obligations on cancellable pre-need contracts
|
|
|
(22,572
|
)
|
|
|
(23,422
|
)
|
Deferred revenue, net
|
|
$
|
941,040
|
|
|
$
|
914,286
|
|
The Partnership cannot estimate the period when it expects its remaining performance obligations will be recognized because certain performance obligations will only be satisfied at the time of death. The Partnership expects to service 55% of its deferred revenue in the first 4-5 years and approximately 80% of its deferred revenue within 18 years.
11.
COMMITMENTS AND CONTINGENCIES
Legal
The Partnership is currently subject to class or collective actions under the Securities Exchange Act of 1934 and for related state law claims that certain of our officers and directors breached their fiduciary duty to the Partnership and its unitholders. The Partnership could also become subject to additional claims and legal proceedings relating to the factual allegations made in these actions. While management cannot reasonably estimate the potential exposure in these matters at this time, if the Partnership does not prevail in any such proceedings, the Partnership could be required to pay substantial damages or settlement costs, subject to certain insurance coverages. Management has determined that, based on the status of the claims and legal proceedings against us, the amount of the potential losses cannot be reasonably estimated at this time. These actions are summarized below.
|
•
|
Anderson v. StoneMor Partners, LP, et al., No. 2:16-cv-6111, filed on November 21, 2016, in the United States District Court for the Eastern District of Pennsylvania. The plaintiffs in this case (as well as Klein v. StoneMor Partners, LP, et al., No. 2:16-cv-6275, filed in the United States District Court for the Eastern District of Pennsylvania on December 2, 2016, which has been consolidated with this case) brought an action on behalf of a putative class of the holders of Partnership units and allege that the Partnership made misrepresentations to investors in violation of Section 10(b) of the Securities Exchange Act of 1934 by, among other things and in general, failing to clearly disclose the use of proceeds from debt and equity offerings by making allegedly false or misleading statements concerning (a) the Partnership’s strength or health in connection with a particular quarter’s distribution announcement, (b) the connection between operations and distributions and (c) the Partnership’s use of cash from equity offerings and its credit facility. Plaintiffs sought damages from the Partnership and certain of its officers and directors on behalf of the class of Partnership unitholders, as well as costs and attorneys' fees. Lead plaintiffs have been appointed in this case, and filed a Consolidated Amended Class Action Complaint on April 24, 2017. Defendants filed a motion to dismiss that Consolidated Amended Complaint on June 8, 2017. The motion was granted on October 31, 2017, and the court entered judgment dismissing the case on November 30, 2017. Plaintiffs filed a notice of appeal on December 29, 2017.
Oral argument was held before the United States Court of Appeals for the Third Circuit on November 1, 2018. The Partnership expects the court to render a decision in the near future, but there can be no assurance as to when the court will issue its ruling.
|
|
•
|
Bunim v. Miller, et al., No. 2:17-cv-519-ER, pending in the United States District Court for the Eastern District of Pennsylvania, and filed on February 6, 2017. The plaintiff in this case brought, derivatively on behalf of the Partnership, claims that StoneMor GP’s officers and directors aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in its public filings, by allegedly failing to clearly disclose the use of proceeds from debt and equity offerings, and by allegedly approving unsustainable distributions. The plaintiff also claims that these actions and misrepresentations give rise to causes of action for gross mismanagement, unjust enrichment, and (in connection with a purportedly misleading proxy statement filed in 2014) violations of Section 14(a) of the Securities Exchange Act of 1934. The derivative plaintiff seeks an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as general compliance and governance changes. This case has been stayed, by the agreement of the parties, pending final resolution of the motion to dismiss filed in the Anderson case, provided that either party may terminate the stay on 30 days' notice.
|
25
Table of Contents
|
•
|
Muth v. StoneMor G.P. LLC, et al., December Term, 2016, No. 1196 and Binder v. StoneMo
r G.P. LLC, et al., January Term, 2017, No. 4872, both pending in the Court of Common Pleas for Philadelphia County, Pennsylvania, and filed on December 20, 2016 and February 3, 2017, respectively. In these cases, the plaintiffs brought, derivatively on be
half of the Partnership, claims that StoneMor GP’s officers and directors aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accou
nting standards in its public filings and by failing to clearly disclose the use of proceeds from debt and equity offerings, as well as approving unsustainable distributions. The plaintiffs also claim that these actions and misrepresentations give rise to
a cause of action for unjust enrichment. The derivative plaintiffs seek an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as alterations to the procedures for electing members to the board of StoneMor
GP, and other compliance and governance changes. These cases have been consolidated and stayed, by the agreement of the parties, pending final resolution of the motion to dismiss filed in the Anderson case, provided that either party may terminate the stay
on 30 days' notice.
|
The Philadelphia Regional Office of the Securities and Exchange Commission, Enforcement Division, is continuing its investigation of the Partnership as to whether violations of federal securities laws have occurred. The investigation relates to, among other things, our prior restatements, financial statements, internal control over financial reporting, public disclosures, use of non-GAAP financial measures, matters pertaining to unitholder distributions and the sources of funds therefor and information relating to protection of our confidential information and our policies regarding insider trading. We are continuing to cooperate with the SEC staff.
The Partnership is party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows. The Partnership carries insurance with coverage and coverage limits that it believes to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect the Partnership against all contingencies, management believes that the insurance protection is reasonable in view of the nature and scope of the operations.
Other
In connection with the Partnership’s 2014 lease and management agreements with the Archdiocese of Philadelphia, it has committed to pay aggregate fixed rent of $36.0 million in the following amounts:
Lease Years 1-5 (May 28, 2014-May 31, 2019)
|
|
None
|
Lease Years 6-20 (June 1, 2019-May 31, 2034)
|
|
$1,000,000 per Lease Year
|
Lease Years 21-25 (June 1, 2034-May 31, 2039)
|
|
$1,200,000 per Lease Year
|
Lease Years 26-35 (June 1, 2039-May 31, 2049)
|
|
$1,500,000 per Lease Year
|
Lease Years 36-60 (June 1, 2049-May 31, 2074)
|
|
None
|
The fixed rent for lease years 6 through 11, an aggregate of $6.0 million, is deferred. If, prior to May 31, 2024, the Archdiocese terminates the agreements pursuant to a lease year 11 termination or the Partnership terminates the agreements as a result of a default by the Archdiocese, the Partnership is entitled to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2024.
The Partnership leases a variety of assets throughout the organization, such as office space, funeral homes, warehouses, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Partnership recognizes lease expense for these leases on a straight-line basis over the lease term. For leases agreements with an initial term of more than 12 months, the Partnership
measures the lease liability at the present value of the sum of the remaining minimum rental payments, which exclude executory costs.
Certain leases provide the Partnership with the option to renew for additional periods
, with renewal terms that can extend the lease term for periods ranging from 1 to
30
years. The exercise of lease renewal options is at the Partnership’s sole discretion and the Partnership is only including the renewal option in the lease term when the Partnership can be reasonably certain that we will exercise the additional options.
The Partnership has the following balances recorded on the unaudited condensed balance sheet related to leases:
26
Table of Contents
|
|
March 31, 2019
|
|
Assets:
|
|
|
|
|
Operating
|
|
$
|
11,667
|
|
Finance
|
|
|
6,005
|
|
Total Leased Assets
|
|
$
|
17,672
|
|
Liabilities:
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
|
$
|
2,016
|
|
Finance
|
|
|
1,282
|
|
Long-term
|
|
|
|
|
Operating
|
|
|
12,692
|
|
Finance
|
|
|
4,434
|
|
Total Lease Liabilities
|
|
$
|
20,424
|
|
As most of the Partnership’s leases do not provide an implicit rate, the Partnership uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Partnership used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date
. The weighted average borrowing rates for Operating and Finance leases were 9.9% and 8.1%, respectively as of
March 31, 2019
.
The components of lease expense were as follows:
|
|
Three months ended March 31, 2019
|
|
Lease cost
|
Classification
|
|
|
|
Operating lease costs
|
General and administrative expense
|
$
|
920
|
|
Finance lease costs
|
|
|
|
|
Amortization of leased assets
|
Depreciation and Amortization
|
|
320
|
|
Interest on lease liabilities
|
Interest expense
|
|
116
|
|
Net Lease costs
|
|
$
|
1,356
|
|
Maturities of lease labilities as of March 31, 2019 were as follows:
|
|
Operating
|
|
|
Financing
|
|
2019
|
|
$
|
2,576
|
|
|
$
|
1,306
|
|
2020
|
|
|
3,107
|
|
|
|
1,479
|
|
2021
|
|
|
2,616
|
|
|
|
1,627
|
|
2022
|
|
|
2,346
|
|
|
|
1,897
|
|
2023
|
|
|
2,155
|
|
|
|
519
|
|
Thereafter
|
|
|
8,469
|
|
|
|
—
|
|
Total
|
|
$
|
21,269
|
|
|
$
|
6,828
|
|
Less: Interest
|
|
|
6,561
|
|
|
|
1,113
|
|
Present value of lease liabilities
|
|
$
|
14,708
|
|
|
$
|
5,715
|
|
Operating and finance lease payments include $3.5 million related to options to extend lease terms that are reasonably certain of being exercised and $1.9 million related to residual value guarantees. The weighted average remaining lease term for operating and finance leases was 7.6 years and 3.3 years, respectively as of
March 31, 2019
.
13.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Management has established a hierarchy to measure the Partnership’s financial instruments at fair value, which requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Partnership’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
|
•
|
Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
27
Table of Contents
|
•
|
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same
contractual term of the asset or liability.
|
|
•
|
Level 3 – Unobservable inputs that the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.
|
The Partnership’s current assets and liabilities and customer receivables on its unaudited condensed consolidated balance sheets are similar to cash basis financial instruments, and their estimated fair values approximate their carrying values due to their short-term nature and thus are categorized as Level 1. The Partnership’s merchandise and perpetual care trusts consist of investments in debt and equity marketable securities and cash equivalents, are carried at fair value, and are considered either Level 1 or Level 2 (see Note 7 Merchandise Trusts and Note 8 Perpetual Care Trusts). Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurement hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy. Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP. These funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy.
The Partnership’s other financial instruments at March 31, 2019 and December 31, 2018 consisted of its Senior Notes and outstanding borrowings under its revolving credit facility (see Note 9 Long-Term Debt). The estimated fair values of the Partnership’s Senior Notes at March 31, 2019 and December 31, 2018 were $157.3 million and $162.5 million, respectively, based on trades made on those dates, compared with the carrying amounts of $173.7 million and $173.6 million, respectively. At March 31, 2019 and December 31, 2018, the carrying values of outstanding borrowings under the Partnership’s revolving credit facility (see Note 9 Long-Term Debt), which bears interest at variable interest rates with maturities of 90 days or less, approximated their estimated fair values. The Senior Notes and the credit facility are valued using Level 2 inputs.
The Partnership may be required to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from impairment charges.
The lower of cost or estimated fair value of assets held for sale at March 31, 2019 and December 31, 2018 was $0.8 million . Assets held for sale are valued at lower of cost or estimated fair value based on broker comparables and estimates at the time the assets are classified as held for sale. These assets held for sale are classified as Level 3 pursuant to the fair value measurement hierarchy.
14.
|
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
|
The Partnership’s Senior Notes are guaranteed by StoneMor Operating LLC and its 100% owned subsidiaries, other than the co-issuer, as described below. The guarantees are full, unconditional, joint and several. The Partnership, or the "Parent," and its 100% owned subsidiary, Cornerstone Family Services of West Virginia Subsidiary Inc., are the co-issuers of the Senior Notes. The Partnership’s consolidated financial statements as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018 include the accounts of cemeteries operated under long-term lease, operating or management agreements. For the purposes of this note, these entities are deemed non-guarantor subsidiaries, as they are not 100% owned by the Partnership. The Partnership’s consolidated financial statements also contain merchandise and perpetual care trusts that are also non-guarantor subsidiaries for the purposes of this note.
The financial information presented below reflects the Partnership’s standalone accounts, the combined accounts of the subsidiary co-issuer, the combined accounts of the guarantor subsidiaries, the combined accounts of the non-guarantor subsidiaries, the consolidating adjustments and eliminations and the Partnership’s consolidated accounts as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018. For the purpose of the following financial information, the Partnership’s investments in its subsidiaries and the guarantor subsidiaries’ investments in their respective subsidiaries are presented in accordance with the equity method of accounting (in thousands):
28
Table of Contents
CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
March 31, 2019
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,021
|
|
|
$
|
1,427
|
|
|
$
|
—
|
|
|
$
|
24,448
|
|
Assets held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
757
|
|
|
|
—
|
|
|
|
—
|
|
|
|
757
|
|
Other current assets
|
|
|
—
|
|
|
|
3,677
|
|
|
|
68,590
|
|
|
|
12,665
|
|
|
|
—
|
|
|
|
84,932
|
|
Total current assets
|
|
|
—
|
|
|
|
3,677
|
|
|
|
92,368
|
|
|
|
14,092
|
|
|
|
—
|
|
|
|
110,137
|
|
Long-term accounts receivable
|
|
|
—
|
|
|
|
2,902
|
|
|
|
69,040
|
|
|
|
11,636
|
|
|
|
—
|
|
|
|
83,578
|
|
Cemetery and funeral home property and
equipment
|
|
|
—
|
|
|
|
776
|
|
|
|
408,713
|
|
|
|
33,621
|
|
|
|
—
|
|
|
|
443,110
|
|
Merchandise trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
515,065
|
|
|
|
—
|
|
|
|
515,065
|
|
Perpetual care trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
344,825
|
|
|
|
—
|
|
|
|
344,825
|
|
Deferred selling and obtaining costs
|
|
|
—
|
|
|
|
5,476
|
|
|
|
88,843
|
|
|
|
18,324
|
|
|
|
—
|
|
|
|
112,643
|
|
Goodwill and intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
24,493
|
|
|
|
60,319
|
|
|
|
—
|
|
|
|
84,812
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
30,398
|
|
|
|
2,911
|
|
|
|
—
|
|
|
|
33,309
|
|
Investments in and amounts due from affiliates
eliminated upon consolidation
|
|
|
39,671
|
|
|
|
—
|
|
|
|
570,680
|
|
|
|
—
|
|
|
|
(610,351
|
)
|
|
|
—
|
|
Total assets
|
|
$
|
39,671
|
|
|
$
|
12,831
|
|
|
$
|
1,284,535
|
|
|
$
|
1,000,793
|
|
|
$
|
(610,351
|
)
|
|
$
|
1,727,479
|
|
Liabilities and Partners’ Capital (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
169
|
|
|
$
|
65,134
|
|
|
$
|
1,322
|
|
|
$
|
—
|
|
|
$
|
66,625
|
|
Long-term debt, net of deferred financing costs
|
|
|
68,506
|
|
|
|
105,242
|
|
|
|
172,185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
345,933
|
|
Deferred revenues
|
|
|
—
|
|
|
|
32,628
|
|
|
|
793,209
|
|
|
|
115,203
|
|
|
|
—
|
|
|
|
941,040
|
|
Perpetual care trust corpus
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
344,825
|
|
|
|
—
|
|
|
|
344,825
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
42,393
|
|
|
|
15,498
|
|
|
|
—
|
|
|
|
57,891
|
|
Due to affiliates
|
|
|
—
|
|
|
|
25,979
|
|
|
|
173,748
|
|
|
|
567,399
|
|
|
|
(767,126
|
)
|
|
|
—
|
|
Total liabilities
|
|
|
68,506
|
|
|
|
164,018
|
|
|
|
1,246,669
|
|
|
|
1,044,247
|
|
|
|
(767,126
|
)
|
|
|
1,756,314
|
|
Partners’ capital (deficit)
|
|
|
(28,835
|
)
|
|
|
(151,187
|
)
|
|
|
37,866
|
|
|
|
(43,454
|
)
|
|
|
156,775
|
|
|
|
(28,835
|
)
|
Total liabilities and partners’ capital (deficit)
|
|
$
|
39,671
|
|
|
$
|
12,831
|
|
|
$
|
1,284,535
|
|
|
$
|
1,000,793
|
|
|
$
|
(610,351
|
)
|
|
$
|
1,727,479
|
|
29
Table of Contents
CONDENSED CONSOLIDATING BALANC
E SHEETS (UNAUDITED) (continued)
December 31, 2018
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,298
|
|
|
$
|
1,849
|
|
|
$
|
—
|
|
|
$
|
18,147
|
|
Assets held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
757
|
|
|
|
—
|
|
|
|
—
|
|
|
|
757
|
|
Other current assets
|
|
|
—
|
|
|
|
3,718
|
|
|
|
64,167
|
|
|
|
11,527
|
|
|
|
—
|
|
|
|
79,412
|
|
Total current assets
|
|
|
—
|
|
|
|
3,718
|
|
|
|
81,222
|
|
|
|
13,376
|
|
|
|
—
|
|
|
|
98,316
|
|
Long-term accounts receivable
|
|
|
—
|
|
|
|
3,118
|
|
|
|
71,708
|
|
|
|
12,322
|
|
|
|
—
|
|
|
|
87,148
|
|
Cemetery and funeral home property and
equipment
|
|
|
—
|
|
|
|
806
|
|
|
|
409,201
|
|
|
|
33,550
|
|
|
|
—
|
|
|
|
443,557
|
|
Merchandise trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
488,248
|
|
|
|
—
|
|
|
|
488,248
|
|
Perpetual care trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
330,562
|
|
|
|
—
|
|
|
|
330,562
|
|
Deferred selling and obtaining costs
|
|
|
—
|
|
|
|
5,511
|
|
|
|
88,705
|
|
|
|
18,444
|
|
|
|
—
|
|
|
|
112,660
|
|
Goodwill and intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
25,676
|
|
|
|
60,607
|
|
|
|
—
|
|
|
|
86,283
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
19,403
|
|
|
|
2,924
|
|
|
|
—
|
|
|
|
22,327
|
|
Investments in and amounts due from affiliates
eliminated upon consolidation
|
|
|
61,875
|
|
|
|
(586
|
)
|
|
|
539,997
|
|
|
|
—
|
|
|
|
(601,286
|
)
|
|
|
-
|
|
Total assets
|
|
$
|
61,875
|
|
|
$
|
12,567
|
|
|
$
|
1,235,912
|
|
|
$
|
960,033
|
|
|
$
|
(601,286
|
)
|
|
$
|
1,669,101
|
|
Liabilities and Partners’ Capital (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
184
|
|
|
$
|
60,216
|
|
|
$
|
1,400
|
|
|
$
|
—
|
|
|
$
|
61,800
|
|
Long-term debt, net of deferred financing costs
|
|
|
68,453
|
|
|
|
105,160
|
|
|
|
146,635
|
|
|
|
—
|
|
|
|
—
|
|
|
|
320,248
|
|
Deferred revenues
|
|
|
—
|
|
|
|
32,147
|
|
|
|
770,337
|
|
|
|
111,802
|
|
|
|
—
|
|
|
|
914,286
|
|
Perpetual care trust corpus
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
330,562
|
|
|
|
—
|
|
|
|
330,562
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
33,553
|
|
|
|
15,230
|
|
|
|
—
|
|
|
|
48,783
|
|
Due to affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
173,613
|
|
|
|
543,543
|
|
|
|
(717,156
|
)
|
|
|
-
|
|
Total liabilities
|
|
|
68,453
|
|
|
|
137,491
|
|
|
|
1,184,354
|
|
|
|
1,002,537
|
|
|
|
(717,156
|
)
|
|
|
1,675,679
|
|
Partners’ capital (deficit)
|
|
|
(6,578
|
)
|
|
|
(124,924
|
)
|
|
|
51,556
|
|
|
|
(42,502
|
)
|
|
|
115,870
|
|
|
|
(6,578
|
)
|
Total liabilities and partners’ capital (deficit)
|
|
$
|
61,875
|
|
|
$
|
12,567
|
|
|
$
|
1,235,910
|
|
|
$
|
960,035
|
|
|
$
|
(601,286
|
)
|
|
$
|
1,669,101
|
|
30
Table of Contents
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 2019
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
1,564
|
|
|
$
|
59,752
|
|
|
$
|
11,132
|
|
|
$
|
(979
|
)
|
|
$
|
71,469
|
|
Total costs and expenses
|
|
|
—
|
|
|
|
(4,520
|
)
|
|
|
(65,935
|
)
|
|
|
(11,356
|
)
|
|
|
979
|
|
|
|
(80,832
|
)
|
Other loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss from equity investment in
subsidiaries
|
|
|
(21,176
|
)
|
|
|
(18,925
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
40,101
|
|
|
|
—
|
|
Interest expense
|
|
|
(1,358
|
)
|
|
|
(2,087
|
)
|
|
|
(9,456
|
)
|
|
|
(270
|
)
|
|
|
—
|
|
|
|
(13,171
|
)
|
Income (loss) from continuing operations
before income taxes
|
|
|
(22,534
|
)
|
|
|
(23,968
|
)
|
|
|
(15,639
|
)
|
|
|
(494
|
)
|
|
|
40,101
|
|
|
|
(22,534
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
(22,534
|
)
|
|
$
|
(23,968
|
)
|
|
$
|
(15,639
|
)
|
|
$
|
(494
|
)
|
|
$
|
40,101
|
|
|
$
|
(22,534
|
)
|
Three Months Ended March 31, 2018
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
1,625
|
|
|
$
|
65,789
|
|
|
$
|
12,860
|
|
|
$
|
(2,329
|
)
|
|
$
|
77,945
|
|
Total costs and expenses
|
|
|
—
|
|
|
|
(3,310
|
)
|
|
|
(70,913
|
)
|
|
|
(14,077
|
)
|
|
|
2,329
|
|
|
|
(85,971
|
)
|
Other loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,205
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,205
|
)
|
Net loss from equity investment in
subsidiaries
|
|
|
(16,565
|
)
|
|
|
(14,793
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
31,358
|
|
|
|
—
|
|
Interest expense
|
|
|
(1,358
|
)
|
|
|
(2,087
|
)
|
|
|
(3,416
|
)
|
|
|
(252
|
)
|
|
|
—
|
|
|
$
|
(7,113
|
)
|
Income (loss) from continuing operations
before income taxes
|
|
|
(17,923
|
)
|
|
|
(18,565
|
)
|
|
|
(13,745
|
)
|
|
|
(1,469
|
)
|
|
|
31,358
|
|
|
|
(20,344
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
2,421
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,421
|
|
Net income (loss)
|
|
$
|
(17,923
|
)
|
|
$
|
(18,565
|
)
|
|
$
|
(11,324
|
)
|
|
$
|
(1,469
|
)
|
|
$
|
31,358
|
|
|
$
|
(17,923
|
)
|
31
Table of Contents
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2019
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash provided by operating activities
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
(9,509
|
)
|
|
$
|
(268
|
)
|
|
$
|
(3,445
|
)
|
|
$
|
(13,103
|
)
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions and capital
expenditures, net of proceeds from
divestitures and asset sales
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
(1,717
|
)
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
(1,903
|
)
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
(1,717
|
)
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
(1,903
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments to affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,445
|
)
|
|
|
—
|
|
|
|
3,445
|
|
|
|
—
|
|
Net borrowings and repayments of debt
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
24,030
|
|
|
|
(74
|
)
|
|
|
—
|
|
|
|
23,943
|
|
Other financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,636
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,636
|
)
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
17,949
|
|
|
|
(74
|
)
|
|
|
3,445
|
|
|
|
21,307
|
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
6,723
|
|
|
|
(422
|
)
|
|
|
—
|
|
|
|
6,301
|
|
Cash and cash equivalents and restricted cash—Beginning of
period
|
|
|
—
|
|
|
|
—
|
|
|
|
16,298
|
|
|
|
1,849
|
|
|
|
—
|
|
|
|
18,147
|
|
Cash and cash equivalents and restricted cash—End of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,021
|
|
|
$
|
1,427
|
|
|
$
|
—
|
|
|
$
|
24,448
|
|
Three Months Ended March 31, 2018
|
|
Parent
|
|
|
Subsidiary
Issuer
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash provided by operating activities
|
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
10,340
|
|
|
$
|
(890
|
)
|
|
$
|
(3,445
|
)
|
|
$
|
6,150
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions and capital
expenditures, net of proceeds from
divestitures and asset sales
|
|
|
—
|
|
|
|
(145
|
)
|
|
|
(4,952
|
)
|
|
|
(105
|
)
|
|
|
—
|
|
|
|
(5,202
|
)
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(145
|
)
|
|
|
(4,952
|
)
|
|
|
(105
|
)
|
|
|
—
|
|
|
|
(5,202
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments to affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,445
|
)
|
|
|
—
|
|
|
|
3,445
|
|
|
|
—
|
|
Net borrowings and repayments of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
2,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,850
|
|
Other financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(207
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(207
|
)
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(802
|
)
|
|
|
—
|
|
|
|
3,445
|
|
|
|
2,643
|
|
Net decrease in cash and cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
4,586
|
|
|
|
(995
|
)
|
|
|
—
|
|
|
|
3,591
|
|
Cash and cash equivalents—Beginning of
period
|
|
|
—
|
|
|
|
—
|
|
|
|
4,216
|
|
|
|
2,605
|
|
|
|
—
|
|
|
|
6,821
|
|
Cash and cash equivalents—End of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,802
|
|
|
$
|
1,610
|
|
|
$
|
—
|
|
|
$
|
10,412
|
|
32
Table of Contents
The Partnership’s operations include two reportable operating segments, Cemetery Operations and Funeral Home Operations. These operating segments reflect the way the Partnership manages its operations and makes business decisions as of March 31, 2019. Operating segment data for the periods indicated was as follows (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
Cemetery Operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
57,910
|
|
|
$
|
62,243
|
|
Operating costs and expenses
|
|
|
(53,162
|
)
|
|
|
(58,063
|
)
|
Depreciation and amortization
|
|
$
|
(1,962
|
)
|
|
|
(2,074
|
)
|
Segment income
|
|
$
|
2,786
|
|
|
$
|
2,106
|
|
Funeral Home Operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,559
|
|
|
$
|
15,702
|
|
Operating costs and expenses
|
|
|
(11,500
|
)
|
|
|
(13,036
|
)
|
Depreciation and amortization
|
|
|
(588
|
)
|
|
|
(713
|
)
|
Segment income
|
|
$
|
1,471
|
|
|
$
|
1,953
|
|
Reconciliation of segment income to net loss:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
2,786
|
|
|
$
|
2,106
|
|
Funeral Home Operations
|
|
|
1,471
|
|
|
|
1,953
|
|
Total segment income
|
|
|
4,257
|
|
|
|
4,059
|
|
Corporate overhead
|
|
|
(13,413
|
)
|
|
|
(11,827
|
)
|
Corporate depreciation and amortization
|
|
|
(207
|
)
|
|
|
(258
|
)
|
Other losses, net
|
|
|
—
|
|
|
|
(5,205
|
)
|
Interest expense
|
|
|
(13,171
|
)
|
|
|
(7,113
|
)
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
2,421
|
|
Net loss
|
|
$
|
(22,534
|
)
|
|
$
|
(17,923
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
890
|
|
|
$
|
4,299
|
|
Funeral Home Operations
|
|
|
976
|
|
|
|
44
|
|
Corporate
|
|
|
37
|
|
|
|
26
|
|
Total capital expenditures
|
|
$
|
1,903
|
|
|
$
|
4,369
|
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
1,545,620
|
|
|
$
|
1,508,667
|
|
Funeral Home Operations
|
|
|
143,420
|
|
|
|
136,064
|
|
Corporate
|
|
|
38,439
|
|
|
|
24,370
|
|
Total assets
|
|
$
|
1,727,479
|
|
|
$
|
1,669,101
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
24,862
|
|
|
$
|
24,862
|
|
33
Table of Contents
16.
|
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
|
The tables presented below provide supplemental information to the unaudited condensed consolidated statements of cash flows regarding contract origination and maturity activity included in the pertinent captions on the Partnership’s unaudited condensed consolidated statements of cash flows (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Pre-need/at-need contract originations (sales on credit)
|
|
$
|
(27,587
|
)
|
|
$
|
(35,987
|
)
|
Cash receipts from sales on credit (post-origination)
|
|
|
25,622
|
|
|
|
32,319
|
|
Changes in Accounts receivable, net of allowance
|
|
$
|
(1,965
|
)
|
|
$
|
(3,668
|
)
|
Deferrals:
|
|
|
|
|
|
|
|
|
Cash receipts from customer deposits at origination, net of refunds
|
|
$
|
34,205
|
|
|
$
|
36,416
|
|
Withdrawals of realized income from merchandise trusts during the
period
|
|
|
2,124
|
|
|
|
2,101
|
|
Pre-need/at-need contract originations (sales on credit)
|
|
|
27,587
|
|
|
|
35,987
|
|
Undistributed merchandise trust investment earnings, net
|
|
|
3,610
|
|
|
|
2,393
|
|
Recognition:
|
|
|
|
|
|
|
|
|
Merchandise trust investment income, net withdrawn as of end
of period
|
|
|
(2,255
|
)
|
|
|
(1,769
|
)
|
Recognized maturities of customer contracts collected as of end
of period
|
|
|
(46,131
|
)
|
|
|
(45,900
|
)
|
Recognized maturities of customer contracts uncollected as of end
of period
|
|
|
(10,556
|
)
|
|
|
(13,437
|
)
|
Changes in Deferred revenues
|
|
$
|
8,584
|
|
|
$
|
15,791
|
|
Appointment of Senior Vice President and Chief Financial Officer
On April 15, 2019, the Partnership announced the appointment of Garry P. Herdler as Senior Vice President and Chief Financial Officer of StoneMor GP LLC, the general partner of the Partnership (“StoneMor GP”), and the retirement of Mark L. Miller as Chief Financial Officer and Senior Vice President of StoneMor GP, effective on April 15, 2019.
Awards of Phantom Units
On April 15, 2019, an aggregate of 494,421 phantom units subject to time-based vesting and an aggregate of 520,626 phantom units subject to performance-based vesting were awarded under the Partnership’s Amended and Restated 2019 Long-Term Incentive Plan. Also on April 15, 2019, an additional 275,000 restricted units were awarded to an officer of the General Partner pursuant to his employment agreement, which units vest in equal quarterly installments over a four year period commencing three months after the grant date.
Existing Loan Agreement with a Related Party
In accordance with the Eighth Amendment to the Credit Agreement and under the provisions of the Tranche B Revolving Credit Facility, the Partnership was able to increase borrowings under Tranche B until April 30, 2019 under the existing documentation. On April 26, 2019, the Partnership had drawn down the remaining $10.0 million under the Tranche B Revolving Credit Facility to fully utilize the $35.0 million commitment.
First Amendment to Merger and Reorganization Agreement
As previously disclosed, on September 27, 2018, StoneMor Partners L.P., a Delaware limited partnership (the “Partnership”), StoneMor GP LLC, a Delaware limited liability company and the general partner of the Partnership (“GP”), StoneMor GP Holdings LLC, a Delaware limited liability company and the sole member of GP (“GP Holdings”), and Hans Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of GP (“Merger Sub”), entered into a Merger and Reorganization Agreement (the “Merger Agreement”) pursuant to which, among other things, GP will convert from a Delaware limited liability company into a Delaware corporation to be named StoneMor Inc. (the “Company”) and Merger Sub will merge with and into the Partnership (the “Merger”) with the Partnership surviving and with the Company as its sole general partner.
34
Table of Contents
On April 30, 2019, the parties to the Merger Agreement executed that certai
n First Amendment to Merger and Reorganization Agreement (the “First Amendment to Merger Agreement”) to extend the Termination Date (as defined in the Merger Agreement) to October 1, 2019.
Second Amendment to Voting and Support Agreement
As previously disclosed, and in connection with the execution and delivery of the Merger Agreement, on September 27, 2018, the Partnership, GP, GP Holdings, Robert B. Hellman, Jr., in his capacity as trustee under the Voting and Investment Trust Agreement for the benefit of American Cemeteries Infrastructure Investors, LLC (“ACII” and together with GP Holdings, the “ACII Entities”), Axar Capital Management, LP, a Delaware limited partnership (“Axar”), Axar GP, LLC, a Delaware limited liability company (“Axar GP”) and Axar Master Fund, Ltd., a Cayman Islands exempted limited partnership (the “Axar Funds,” and together with Axar and Axar GP, the “Axar Entities”) entered into a voting and support agreement (the “Original Voting and Support Agreement”), pursuant to which, among other things, the Axar Entities were restricted from owning or acquiring more than 19.99% in aggregate of the outstanding common units representing limited partner interests in the Partnership (the “Common Units”) prior to the closing of the Merger. The Original Voting and Support Agreement was subsequently amended on February 4, 2019 (such amendment, the “First Amendment to Voting and Support Agreement”) to permit the Axar Entities to acquire up to 27.49% in the aggregate of the outstanding Common Units prior to the closing of the Merger.
On April 30, 2019, and in connection with the execution of the First Amendment to Merger Agreement, the parties to the Original Voting and Support Agreement and First Amendment to Voting and Support Agreement executed that certain Second Amendment to Voting and Support Agreement (the “Second Amendment to Voting and Support Agreement”) to extend the termination date set forth therein to October 1, 2019.
35
Table of Contents