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 (UNAUDITED)
As used in this Quarterly Report on Form 10-Q (the “Quarterly Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,” “we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries.
Nature of Operations
The Company is a provider of funeral and cemetery products and services in the death care industry in the United States. As of June 30, 2021, the Company operated 301 cemeteries in 24 states and Puerto Rico, of which 271 were owned and 30 were operated under lease, management or operating agreements. As of June 30, 2021, the Company also owned and operated 70 funeral homes, including 33 located on the grounds of cemetery properties that the Company owned, in 15 states and Puerto Rico.
The Company’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. Cemetery services include the installation of this merchandise and other service items. The Company 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 Company’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 and Principles of Consolidation
The accompanying condensed consolidated financial statements, which are unaudited, have been prepared in accordance with the requirements of the Quarterly Report on Form 10-Q and Generally Accepted Accounting Principles (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Annual Reports on Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods disclosed have been made. The balance sheet at December 31, 2020 has been derived from the audited consolidated financial statement as of December 31, 2020, as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with Securities and Exchange Commission ("SEC") on March 25, 2021 (the “Annual Report”). The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto presented in the Annual Report. The results of operations for the six months ended June 30, 2021 may not necessarily be indicative of the results of operations for the full year ending December 31, 2021.
The unaudited condensed consolidated financial statements include the accounts of each of the Company’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 30 cemeteries under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated.
The Company operates 14 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities, since the Company 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 Company 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 Company will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Company has also recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.
Refinancing
On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 (the “2029 Notes”). The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to an indenture (the “2029 Indenture”), dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as
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trustee and collateral agent. Substantially concurrently with the closing of the offering of the 2029 Notes, StoneMor Partners L.P. (the “Partnership”) and Cornerstone Family Services of West Virginia Subsidiary, Inc. (collectively, the “2024 Issuers”) deposited from the net cash proceeds from the offering of the 2029 Notes an amount sufficient to fund the full redemption of the outstanding 9.875%/11.500% Senior Secured PIK Toggle Notes due 2024 (the “2024 Notes”) with Wilmington Trust, National Association (the “2024 Trustee”) as trustee under the Indenture, dated as of June 27, 2019 (as amended, the “2024 Indenture”), among the 2024 Issuers, the guarantors party thereto and the 2024 Trustee governing the 2024 Notes. Upon deposit of such funds with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the guarantors of the 2024 Notes, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture. Refer to Note 8 Long-Term Debt for more detailed information.
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations are deemed essential by the state and local governments in which it operates, with the exception of Puerto Rico, and the Company has been working with federal, state and local government officials to ensure that it continues to satisfy their requirements for offering the Company’s essential services.
The Company’s top priority is the health and safety of its employees and the families it serves. Since the start of the outbreak in the U.S., the Company’s senior management team has taken actions to protect its employees and the families it serves, and to support its field locations as they adapt and adjust to the circumstances resulting from the COVID-19 Pandemic. The operation of all of the Company’s facilities is critically dependent on the employees who staff these locations. To ensure the wellbeing of the Company’s employees and their families, the Company provided all of its employees with detailed health and safety literature on COVID-19, such as the industry-specific guidelines from the Centers for Disease Control and Prevention (the “CDC”) for working with the deceased who were or may have been infected with COVID-19. In addition, the Company’s procurement and safety teams have consistently secured and distributed supplies to ensure that the Company’s locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide its essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the number of attendees. The Company also implemented additional safety and precautionary measures as it concerns the businesses’ day-to-day interaction with the families and communities it serves. The Company’s corporate office employees began working from home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting the field operations. The Company has not experienced any significant disruptions to its business as a result of the work from home policies in its corporate office. The Company monitors the CDC guidance on a regular basis, continually reviews and updates its processes and procedures and provides updates to its employees as needed to comply with regulatory guidelines.
The Company’s marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that the Company can continue to connect with and meet its customers’ needs in a safe, effective and productive manner. Some of the Company’s locations provide live video streaming of their funeral and burial services to its customers or provide other alternatives that respect social distancing, so that family and friends can connect during their time of grief.
Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. At the start of the Covid-19 Pandemic in early 2020, the Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, since May 2020, the Company experienced at-need sales growth, and since late 2020, it has experienced pre-need sales growth. The Company believes the implementation of its virtual meeting tools is one of several key steps that has mitigated this disruption. Throughout the COVID-19 Pandemic, the Company’s cemeteries and funeral homes have largely remained open and available to serve its families in all the locations in which it operates to the extent permitted by local authorities, with the exception of Puerto Rico, and the Company expects that this will continue. The Company has leveraged the relationships it has made with the families it has served during its response to the COVID-19 Pandemic, which has directly resulted in new sales leads and increased pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more available, the Company has experienced record growth in its pre-need cemetery sales. However, the Company had experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. During the year ended December 31, 2020, the Company incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic.
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The Company expects the COVID-19 Pandemic could have an adverse effect on its future results of operations and cash flows depending on COVID-19 variants and increased case counts. However the Company cannot presently predict the likely scope and severity of that impact. The Company may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of its facilities, the Company may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, the Company’s pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic.
Sources and Uses of Liquidity
The Company’s primary sources of liquidity are cash generated from operations, proceeds from asset sales and the remaining proceeds from the sale of the 2029 Notes. The Company’s primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service. 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 related (see “Summary of Significant Accounting Policies” section below regarding revenue recognition), which will reduce the amount of additional borrowings or asset sales needed. Based on the Company's forecasted operating performance, the issuance of the 2029 Notes and the redemption of the 2024 Notes, the Company believes that it will be able to continue as a going concern for the next twelve-month period.
Summary of Significant Accounting Policies
Refer to Note 1 General to the Company’s audited consolidated financial statements included in Item 8 of its Annual Report for the complete summary of significant accounting policies.
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as described in its Annual Report. 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 Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash and Cash Equivalents was $90.4 million and $39.2 million as of June 30, 2021 and December 31, 2020, respectively.
Restricted Cash
Cash that is restricted from withdrawal or use under the terms of certain contractual agreements is recorded as restricted cash. Restricted cash was $16.6 million and $20.8 million as of June 30, 2021 and December 31, 2020, respectively, which primarily related to cash collateralization of the Company’s letters of credit and surety bonds.
Revenue
The Company's revenues are derived from contracts with customers through sale and delivery of death care products and services. Primary sources of revenue are derived from (1) cemetery and funeral home operations generated both at-need and pre-need, which are classified on the unaudited condensed consolidated statements of operations as Interments, Merchandise and Services, (2) investment income, which includes income earned on assets maintained in perpetual care and merchandise trusts related to pre-need sales of cemetery and funeral home merchandise and services that are required to be maintained in the trust by state law and (3) interest earned on pre-need installment contracts. Investment income is presented within Investment and other for Cemetery revenue and Services for Funeral home revenue. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts collected on behalf of third parties. Pre-need contracts are price guaranteed, providing for future merchandise and services at prices prevailing when the agreements are signed.
Investment income is earned on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the merchandise and service trusts. Amounts are withdrawn from the merchandise trusts when the Company
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fulfills the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in total transaction price. Pre-need contracts are generally subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate at the time of origination plus 375 basis points in order to segregate the principal and interest component of the total contract value. The Company has elected to not adjust the transaction price for the effects of a significant financing component for contracts that have payment terms under one year.
At the time of a non-cancellable pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid. The revenue from both the sales and interest income from trusted funds are deferred until the merchandise is delivered or the services are performed. For a sale in a cancellable state, an account receivable is only recorded to the extent control has transferred to the customer for interment rights, merchandise or services for which the Company has not collected cash. The amounts collected from customers in states in which pre-need contracts are cancellable may be subject to refund provisions. The Company estimates the fair value of its refund obligation under such contracts on a quarterly basis and records such obligations within other long-term liabilities line item on its consolidated balance sheets.
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue in the amount to which the Company expect to be entitled to when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company only recognizes amounts due from a customer for unfulfilled performance obligations on a cancellable pre-need contract to the extent that control has transferred to the customer for interments, merchandise or services for which the Company has not collected cash. The Company defers the recognition of any nonrefundable up-front fees and incremental direct selling costs associated with its sales contracts with a customer (i.e., commissions and bonuses) until the underlying goods or services have been delivered to the customer if the amortization period associated with the deferred nonrefundable up-front fees and incremental direct selling is greater than a year; otherwise, these nonrefundable up-front fees and incremental direct selling costs are expensed immediately. Incremental direct selling costs are recognized by specific identification. The Company calculates the deferred selling costs asset by dividing total deferred selling and obtaining expenses by total deferrable revenues and multiplying such percentage by the periodic change in gross deferred revenues. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in deferred revenues. All other selling costs are expensed as incurred.
In addition, the Company maintains a reserve representing the fair value of the refund obligation that may arise due to state law provisions that include a guarantee of customer funds collected on unfulfilled performance obligations and maintained in trust to the extent that the funds are refundable upon a customer’s exercise of any cancellation rights.
Sales taxes assessed by governmental authorities are excluded from revenue. Any shipping and handling costs that are incurred after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
The following is a description of the principal activities within the Company’s two reportable segments from which the Company generates its revenue.
Cemetery Operations
The Company generates revenues in its Cemetery Operations segment principally from (1) providing rights to inter remains in a specific cemetery property inventory space such as burial lots and constructed mausoleum crypts (“Interments”), (2) sales of cemetery merchandise which includes markers (i.e., method of identifying a deceased person in a burial space, crypt or niche), base (i.e., the substrate upon which a marker is placed), vault (i.e., a container installed in the burial lot in which the casket is placed), caskets, cremation niches and other cemetery related items and (3) service revenues, including opening and closing, a service of digging and refilling burial spaces to install the burial vault and place the casket into the vault, cremation services and fees for installation of cemetery merchandise. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services in a package based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and reasonable ranges for both merchandise and services which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second interment rights), the Company estimates stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price
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broken down by each geographic location. Additionally, the Company considers typical sales promotions that could have impacted the stand-alone selling price estimates.
Interments revenue is recognized when control transfers, which is when the property is available for use by the customer. For pre-construction mausoleum contracts, the Company only recognizes revenue once the property is constructed and the customer has obtained substantially all of the remaining benefits of the property.
Merchandise revenue and deferred investment earnings on merchandise trusts are recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to the Company). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligation. The estimate of the refund obligation is reevaluated on a quarterly basis. In addition, the Company is entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a pre-need contract; these amounts are also recognized in revenue at the time the contract is cancelled.
Service revenue is recognized when the services are performed, and the performance obligation is thereby satisfied.
The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services and the value of cemetery property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific identification method under which the total value of the underlying cemetery property and the lots available to be sold at the location are used to determine the cost per lot.
Funeral Home Operations
The Company generates revenues in its Funeral Home Operations segment principally from (1) sales of funeral home merchandise which includes caskets and other funeral related items and (2) service revenues, which includes services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and services of remembrance. The Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which the Company earns a commission from the sales of these policies. Insurance commission revenue is reported within service revenues. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services based on their relative stand-alone selling prices. The relative stand-alone selling price is determined by management's best estimate of the stand-alone price based upon the list price at each location. The revenue generated by the Company through its Funeral Home Operations segment is principally derived from at-need sales.
Merchandise revenue is recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligations. The estimate of the refund obligation is reevaluated on a quarterly basis.
Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.
Costs related to the delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed.
Deferred Revenues
Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services are performed or the merchandise is delivered. In addition, for amounts deferred on new contracts and investment income and unrealized gains on our merchandise trusts, deferred revenues include deferred revenues from pre-need sales that were entered into by entities prior to the Company’s acquisition of those entities or the assets of those entities. The Company provides for a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. These revenues and their associated costs are recognized when the related merchandise is delivered or services are performed and are presented on a gross basis on the unaudited condensed consolidated statements of operations.
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Accounts Receivable, Net of Allowance
The Company sells pre-need cemetery contracts whereby the customer enters into arrangements for future pre-need merchandise and services. These sales are usually made using interest-bearing installment contracts not to exceed 60 months. The interest income is recorded as revenue when the interest amount is considered realizable and collectible, which typically coincides with cash payment. Interest income is not recognized until payments are collected in accordance with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income, unfulfilled performance obligations on cancellable contracts and any cash deposit paid. The Company recognizes an allowance for doubtful accounts by applying a cancellation rate to amounts included in accounts receivable, which is recorded as a reduction in accounts receivable and a corresponding offset to deferred revenues. The cancellation rate is based on a five year average rate by each specific location. Management evaluates customer receivables for impairment based upon historical experience, including the age of the receivables and customers’ payment histories.
Leases
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. The Company has both operating and finance leases. The Company’s operating leases primarily include office space, funeral homes and equipment. The Company’s finance leases primarily consist of vehicles and certain IT equipment. The Company 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 the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term in excess of 12 months, the Company 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 Company 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 Company applies them in the determination of lease expense. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that the Company will exercise the additional options.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company evaluates the term of the lease, type of asset and its weighted average cost of capital to determine its incremental borrowing rate used to measure the ROU asset and lease liability.
The Company calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. The Company considers reasonably assured renewal options, fixed escalation provisions and residual value guarantees in its 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 Company’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.
Income Taxes
The Company is subject to U.S. federal income taxes and certain state income and franchise taxes in the states in which it operates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
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Income tax expense during interim periods is based on our forecasted annual effective tax rate plus any discrete items on an estimated basis, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.
For the three months ended June 30, 2021 and 2020, we had an income tax benefit of $9.7 million and $3.5 million, respectively, and for the six months ended June 30, 2021 and 2020, we had an income tax benefit of $11.4 million and $2.2 million, respectively. Our operating tax rate before discrete items was 21.6% and 47.2% for the three months ended June 30, 2021 and 2020, respectively, and 22.2% and 76.4% for the six months ended June 30, 2021 and 2020, respectively.
Stock-Based Compensation
The Company has a long-term incentive plan under which it is authorized to grant stock-based compensation awards, such as restricted stock or restricted units to be settled in common stock and non-qualified stock options (“stock options”). The Company recognizes compensation expense in an amount equal to the fair value of the stock-based awards on the date of grant over the requisite service period. The fair value of restricted stock awards and restricted stock unit awards is determined based on the number of restricted stock or restricted stock units granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common stock of the Company. The Company has elected to recognize forfeiture credits for these stock-based compensation awards as they are incurred, as this method best reflects actual stock-based compensation expense.
Tax deductions on the stock-based compensation awards are not realized until the stock-based compensation awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based compensation award is greater than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for a stock-based compensation award is less than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the Company’s consolidated statements of cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted stock-based compensation awards by the Company withholding stock equal to such income tax obligations. However, employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to have stock withheld to satisfy such income tax obligations unless the Company’s Compensation, Nominating and Governance Committee provides that the employee must pay cash in lieu of having stock withheld. Shares of stock acquired from employees in connection with the settlement of the employees’ income tax obligations on these stock-based compensation awards are accounted for as treasury shares that are subsequently retired. Restricted stock awards, restricted stock units and stock options are not considered issued and outstanding for purposes of earnings per share calculations until vested.
Net Income (Loss) per Common Share (Basic and Diluted)
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shares by the sum of the weighted-average number of outstanding common shares and the dilutive effect of share-based awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common shares that are contingently issuable upon the satisfaction of certain vesting conditions for stock awards granted under the Company’s long-term incentive plan.
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The following table sets forth the reconciliation of the Company’s weighted-average number of outstanding common shares for the three and six months ended June 30, 2021 and 2020 used to compute basic net income (loss) attributable to common shares to those used to compute diluted net income (loss) per common share (in thousands):
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|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Weighted average number of outstanding common shares—basic
|
|
|
117,956
|
|
|
|
97,572
|
|
|
|
117,933
|
|
|
|
96,022
|
|
Plus effect of dilutive incentive awards(1):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of outstanding common shares—diluted
|
|
|
117,956
|
|
|
|
97,572
|
|
|
|
117,933
|
|
|
|
96,022
|
|
|
(1)
|
For the three and six months ended June 30, 2021, the diluted weighted-average number of outstanding common shares does not include 366,641 and 592,046 shares issuable upon the exercise of outstanding options, respectively, and 414,412 and 438,718 restricted common shares, respectively, as their effects would have been anti-dilutive. For the three and six months ended June 30, 2020, the diluted weighted-average number of outstanding common shares does not include 5,275,000 and 3,364,392 shares issuable upon the exercise of outstanding options, respectively, and 421,875 restricted common shares, as their effects would have been anti-dilutive.
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Recently Issued Accounting Standard Updates - Not Yet Effective
Credit Losses
In June 2016, FASB issued ASU 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. In November 2018, FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-09”), which clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842, Leases. In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which includes clarifications to the amendments issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326), which provides entities that have certain instruments within the scope of ASC 326-20 with an option to irrevocably elect the fair value option in ASC 825, Financial Instruments, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which modifies the effective dates for ASU 2016-13, ASU 2017-12 and ASU 2016-02 to reflect the FASB’s new policy of staggering effective dates between larger public companies and all other companies. With the issuance of ASU 2019-10, the Company’s effective date for adopting all amendments related to the new credit loss standard has been extended to January 1, 2023. In November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”), which includes clarifications to and addresses specific stakeholders’ issues concerning the amendments issued in ASU 2016-13. In February 2020, FASB issued ASU No, 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) and in March 2020 issued ASU No. 2020-03, Codification Improvements to Financial Instruments, both of which also provide updates and clarification. The Company plans to adopt the requirements of these amendments upon their effective date of January 1, 2023, using the modified-retrospective method and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
Reference Rate Reform
In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendment was effective beginning on March 12, 2020 and may be applied prospectively through December 31, 2022. In January 2021, FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify the scope of the guidance.
14
Table of Contents
The Company does not have hedging relationships or contracts that reference LIBOR or another reference rate expected to be discontinued, and it does not expect to utilize the optional expedients and exceptions provided by ASU 2020-04.
2.
|
ACQUISITIONS AND DIVESTITURES
|
On March 23, 2021, the Company signed a definitive agreement to acquire four cemeteries located within its East Coast geographic footprint for a total purchase price of $5.4 million, subject to customary working capital adjustments. The transaction is expected to close by late fall of 2021, subject to customary due diligence and regulatory approval.
In the fourth quarter of 2019, the Company launched an asset sale program designed to divest assets at attractive multiples, reduce debt levels and improve cash flow and liquidity. The following divestitures have resulted from this program.
On January 3, 2020, the Company sold substantially all of the assets of Oakmont Memorial Park, Oakmont Funeral Home, Redwood Chapel, Inspiration Chapel and Oakmont Crematory located in California pursuant to the terms of an asset sale agreement (the “Oakmont Agreement”) with Carriage Funeral Holdings, Inc. for an aggregate cash purchase price of $33.0 million (the “Oakmont Sale”). The divested assets consisted of one cemetery, one funeral home and certain related assets. The Oakmont Sale resulted in a gain of $24.4 million for the Company, which is included in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020. Net proceeds from the sale were used to redeem an aggregate $30.3 million principal amount of the 2024 Notes.
On April 7, 2020, the Company completed the sale of substantially all of the assets of the cemetery, funeral establishment and crematory commonly known as Olivet Memorial Park, Olivet Funeral and Cremation Services and Olivet Memorial Park & Crematory pursuant to the terms of an asset sale agreement (the “Olivet Agreement”) with Cypress Lawn Cemetery Association for an aggregate cash purchase price of $25.0 million, subject to certain adjustments (the “Olivet Sale”), and the assumption of certain liabilities, including $17.1 million in land purchase obligations. The Olivet Sale resulted in a gain of $7.2 million for the Company, which is included in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2020. The Company used net proceeds of $20.5 million to redeem additional 2024 Notes as required by the 2024 Indenture.
On November 3, 2020, the Company completed the sale of substantially all of the Company’s remaining California properties, consisting of five cemeteries, six funeral establishments and four crematories (the “Remaining California Assets”) pursuant to the terms of an asset sale agreement (the “California Agreement”) with certain entities owned by John Yeatman and Guy Saxton for a cash purchase price of $7.1 million, subject to certain closing adjustments (the “Remaining California Sale” and together with the Olivet Sale, the “Total California Sale”). The Company used net proceeds of $5.7 million to redeem $5.6 million in principal amount of additional 2024 Notes as required by the 2024 Indenture.
On April 2, 2021, the Company completed the sale of substantially all of the Company’s assets in Oregon and Washington, consisting of nine cemeteries, ten funeral establishments and four crematories (the “Clearstone Assets”) pursuant to the terms of an asset sale agreement entered into on November 6, 2020 (the “Clearstone Agreement”) with Clearstone Memorial Partners, LLC for a net cash purchase price of $6.2 million, subject to certain adjustments (the “Clearstone Sale”). The Company redeemed $6.7 million in principal amount of additional 2024 Notes as required by the 2024 Indenture.
The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020 described above, represented a strategic exit from the West Coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as discontinued operations on the accompanying consolidated statements of operations for the six months ended June 30, 2021 and the three and six months ended June 30, 2020. Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance sheets at December 31, 2020.
15
Table of Contents
The following table summarizes the results of discontinued operations for the three and six months ended June 30, 2021 and 2020 (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Cemetery revenues
|
|
$
|
—
|
|
|
$
|
2,069
|
|
|
$
|
1,142
|
|
|
$
|
5,338
|
|
Funeral home revenues
|
|
|
—
|
|
|
|
2,037
|
|
|
|
1,146
|
|
|
|
4,911
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
(293
|
)
|
|
|
(191
|
)
|
|
|
(804
|
)
|
Cemetery expense
|
|
|
—
|
|
|
|
(678
|
)
|
|
|
(233
|
)
|
|
|
(1,578
|
)
|
Selling expense
|
|
|
—
|
|
|
|
(403
|
)
|
|
|
(231
|
)
|
|
|
(1,401
|
)
|
General and administrative expense
|
|
|
—
|
|
|
|
(665
|
)
|
|
|
(151
|
)
|
|
|
(1,466
|
)
|
Depreciation and amortization
|
|
|
—
|
|
|
|
(41
|
)
|
|
|
(40
|
)
|
|
|
(186
|
)
|
Funeral home expenses
|
|
|
—
|
|
|
|
(1,641
|
)
|
|
|
(694
|
)
|
|
|
(3,809
|
)
|
Interest expense
|
|
|
—
|
|
|
|
(366
|
)
|
|
|
(166
|
)
|
|
|
(1,297
|
)
|
Income (loss) from discontinued operations before income taxes
|
|
|
—
|
|
|
|
19
|
|
|
|
582
|
|
|
|
(292
|
)
|
Net gain on sale of businesses
|
|
|
860
|
|
|
|
4,865
|
|
|
|
867
|
|
|
|
28,951
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income from discontinued operations
|
|
$
|
860
|
|
|
$
|
4,884
|
|
|
$
|
1,449
|
|
|
$
|
28,659
|
|
The following table summarizes the major classes of assets and liabilities that have been classified as held for sale on the Company’s unaudited condensed consolidated balance sheets at December 31, 2020:
|
|
December 31, 2020
|
|
|
|
Clearstone
|
|
|
Other
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
230
|
|
Prepaid expenses and other current assets
|
|
|
104
|
|
|
|
—
|
|
|
|
104
|
|
Total current assets held for sale
|
|
|
334
|
|
|
|
—
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term accounts receivable, net of allowance
|
|
|
193
|
|
|
|
—
|
|
|
|
193
|
|
Cemetery property
|
|
|
3,492
|
|
|
|
350
|
|
|
|
3,842
|
|
Property and equipment, net of accumulated depreciation
|
|
|
2,529
|
|
|
|
—
|
|
|
|
2,529
|
|
Merchandise trusts, restricted, at fair value
|
|
|
14,831
|
|
|
|
—
|
|
|
|
14,831
|
|
Perpetual care trusts, restricted, at fair value
|
|
|
4,518
|
|
|
|
—
|
|
|
|
4,518
|
|
Deferred selling and obtaining costs
|
|
|
1,865
|
|
|
|
—
|
|
|
|
1,865
|
|
Other assets
|
|
|
463
|
|
|
|
—
|
|
|
|
463
|
|
Total assets held for sale
|
|
$
|
28,225
|
|
|
$
|
350
|
|
|
$
|
28,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
51
|
|
Other current liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total current liabilities held for sale
|
|
|
51
|
|
|
|
—
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
18,456
|
|
|
|
—
|
|
|
|
18,456
|
|
Perpetual care trust corpus
|
|
|
4,518
|
|
|
|
—
|
|
|
|
4,518
|
|
Other long-term liabilities
|
|
|
381
|
|
|
|
—
|
|
|
|
381
|
|
Total liabilities held for sale
|
|
$
|
23,406
|
|
|
$
|
—
|
|
|
$
|
23,406
|
|
16
Table of Contents
The following table presents the depreciation and amortization, capital expenditures, sale proceeds and significant operating noncash items of the discontinued operations for the six months ended June 30, 2021 and 2020 (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from discontinued operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
40
|
|
|
$
|
186
|
|
Gain on sales of discontinued operations businesses
|
|
|
867
|
|
|
|
28,951
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
10
|
|
|
$
|
35
|
|
Proceeds from sales of discontinued businesses
|
|
|
5,898
|
|
|
|
48,336
|
|
On May 24, 2021, the Company completed the sale of three cemetery properties located in Missouri for a total purchase price of $720,000 (the “Missouri Sale”), resulting in a loss on sale of $1.7 million for the three and six months ended June 30, 2021.
3.
|
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
|
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Customer receivables
|
|
$
|
156,102
|
|
|
$
|
154,903
|
|
Unearned finance income
|
|
|
(15,261
|
)
|
|
|
(16,022
|
)
|
Allowance for doubtful accounts
|
|
|
(5,581
|
)
|
|
|
(5,711
|
)
|
Accounts receivable, net of allowance
|
|
|
135,260
|
|
|
|
133,170
|
|
Less: Current portion, net of allowance
|
|
|
58,661
|
|
|
|
57,869
|
|
Long-term portion, net of allowance
|
|
$
|
76,599
|
|
|
$
|
75,301
|
|
Activity in the allowance for doubtful accounts was as follows (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Balance, beginning of period
|
|
$
|
5,892
|
|
|
$
|
5,884
|
|
Provision for doubtful accounts
|
|
|
3,519
|
|
|
|
6,275
|
|
Charge-offs, net
|
|
|
(3,830
|
)
|
|
|
(6,267
|
)
|
Amounts related to assets held for sale
|
|
|
—
|
|
|
|
(181
|
)
|
Balance, end of period
|
|
$
|
5,581
|
|
|
$
|
5,711
|
|
Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the customers’ payment histories.
Cemetery property consisted of the following at the dates indicated (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Cemetery land
|
|
$
|
230,122
|
|
|
$
|
232,548
|
|
Mausoleum crypts and lawn crypts
|
|
|
66,407
|
|
|
|
66,978
|
|
Cemetery property
|
|
$
|
296,529
|
|
|
$
|
299,526
|
|
17
Table of Contents
5.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following at the dates indicated (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Buildings and improvements
|
|
$
|
112,903
|
|
|
$
|
112,345
|
|
Furniture and equipment
|
|
|
52,745
|
|
|
|
53,199
|
|
Funeral home land
|
|
|
11,005
|
|
|
|
11,005
|
|
Property and equipment, gross
|
|
|
176,653
|
|
|
|
176,549
|
|
Less: Accumulated depreciation
|
|
|
(96,261
|
)
|
|
|
(93,053
|
)
|
Property and equipment, net of accumulated depreciation
|
|
$
|
80,392
|
|
|
$
|
83,496
|
|
At June 30, 2021, property and equipment, net included $0.3 million of assets held for sale.
Depreciation expense was $1.7 million and $2.0 million for the three months ended June 30, 2021 and 2020, respectively, and $3.6 million and $4.0 million for the six months ended June 30, 2021 and 2020, respectively.
At June 30, 2021 and December 31, 2020, the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value hierarchy and 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. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which pre-need customers may cancel contracts with the Company comprises 48.2% of the total merchandise trust as of June 30, 2021. The merchandise trusts are variable interest entities (“VIE”) of which the Company 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 Company may be required to fund this shortfall.
The Company included $10.4 million and $10.0 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at June 30, 2021 and December 31, 2020, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.
A reconciliation of the Company’s merchandise trust activities for the six months ended June 30, 2021 and 2020 is presented below (in thousands):
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance—beginning of period
|
|
$
|
516,284
|
|
|
$
|
517,192
|
|
Contributions
|
|
|
28,574
|
|
|
|
22,779
|
|
Distributions
|
|
|
(53,020
|
)
|
|
|
(37,385
|
)
|
Interest and dividends
|
|
|
20,429
|
|
|
|
11,827
|
|
Capital gain distributions
|
|
|
1,650
|
|
|
|
289
|
|
Realized gains and losses, net
|
|
|
3,031
|
|
|
|
(516
|
)
|
Other than temporary impairment
|
|
|
(136
|
)
|
|
|
(1,655
|
)
|
Taxes
|
|
|
(14
|
)
|
|
|
471
|
|
Fees
|
|
|
(3,062
|
)
|
|
|
(4,107
|
)
|
Unrealized change in fair value
|
|
|
30,532
|
|
|
|
(24,589
|
)
|
Total
|
|
|
544,268
|
|
|
|
484,306
|
|
Less: Assets held for sale
|
|
|
—
|
|
|
|
(11,806
|
)
|
Balance—end of period
|
|
$
|
544,268
|
|
|
$
|
472,500
|
|
During the six months ended June 30, 2021 and 2020, purchases of available for sale securities were approximately $36.6 million and $23.0 million, respectively. During the six months ended June 30, 2021 and 2020, sales, maturities and paydowns of available for sale securities were approximately $32.6 million and $25.5 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s unaudited condensed consolidated statements of cash flows.
18
Table of Contents
The cost and market value associated with the assets held in the merchandise trusts as of June 30, 2021 and December 31, 2020 were as follows (in thousands):
June 30, 2021
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
61,256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,256
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Corporate debt securities
|
|
2
|
|
|
2,709
|
|
|
|
897
|
|
|
|
—
|
|
|
|
3,606
|
|
Other debt securities
|
|
2
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
|
|
|
2,710
|
|
|
|
897
|
|
|
|
—
|
|
|
|
3,607
|
|
Mutual funds—debt securities
|
|
1
|
|
|
6,097
|
|
|
|
206
|
|
|
|
—
|
|
|
|
6,303
|
|
Mutual funds—equity securities
|
|
1
|
|
|
26,245
|
|
|
|
10,742
|
|
|
|
—
|
|
|
|
36,987
|
|
Other investment funds(1)
|
|
|
|
|
347,273
|
|
|
|
44,687
|
|
|
|
(4,333
|
)
|
|
|
387,627
|
|
Equity securities
|
|
1
|
|
|
25,725
|
|
|
|
9,468
|
|
|
|
(968
|
)
|
|
|
34,225
|
|
Other invested assets
|
|
2
|
|
|
3,777
|
|
|
|
99
|
|
|
|
—
|
|
|
|
3,876
|
|
Total investments
|
|
|
|
|
473,083
|
|
|
|
66,099
|
|
|
|
(5,301
|
)
|
|
|
533,881
|
|
West Virginia Trust Receivable
|
|
|
|
|
10,531
|
|
|
|
—
|
|
|
|
(144
|
)
|
|
|
10,387
|
|
Total
|
|
|
|
$
|
483,614
|
|
|
$
|
66,099
|
|
|
$
|
(5,445
|
)
|
|
$
|
544,268
|
|
(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 zero to fifteen years with three potential one year extensions at the discretion of the funds’ general partners. As of June 30, 2021, there were $92.1 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
December 31, 2020
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
41,039
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
41,051
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Corporate debt securities
|
|
2
|
|
|
2,818
|
|
|
|
638
|
|
|
|
—
|
|
|
|
3,456
|
|
Other debt securities
|
|
2
|
|
|
23,165
|
|
|
|
1,578
|
|
|
|
(1,332
|
)
|
|
|
23,411
|
|
Total fixed maturities
|
|
|
|
|
25,984
|
|
|
|
2,216
|
|
|
|
(1,332
|
)
|
|
|
26,868
|
|
Mutual funds—debt securities
|
|
1
|
|
|
6,097
|
|
|
|
306
|
|
|
|
—
|
|
|
|
6,403
|
|
Mutual funds—equity securities
|
|
1
|
|
|
26,356
|
|
|
|
43
|
|
|
|
(154
|
)
|
|
|
26,245
|
|
Other investment funds(1)
|
|
|
|
|
337,565
|
|
|
|
32,461
|
|
|
|
(8,812
|
)
|
|
|
361,214
|
|
Equity securities
|
|
1
|
|
|
35,055
|
|
|
|
5,544
|
|
|
|
(19
|
)
|
|
|
40,580
|
|
Other invested assets
|
|
2
|
|
|
3,875
|
|
|
|
79
|
|
|
|
—
|
|
|
|
3,954
|
|
Total investments
|
|
|
|
|
475,971
|
|
|
|
40,661
|
|
|
|
(10,317
|
)
|
|
|
506,315
|
|
West Virginia Trust Receivable
|
|
|
|
|
10,190
|
|
|
|
—
|
|
|
|
(221
|
)
|
|
|
9,969
|
|
Total
|
|
|
|
$
|
486,161
|
|
|
$
|
40,661
|
|
|
$
|
(10,538
|
)
|
|
|
516,284
|
|
Less: Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,831
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
501,453
|
|
(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 zero to five years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2020, there were $47.8 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
19
Table of Contents
The contractual maturities of debt securities as of June 30, 2021 and December 31, 2020 were as follows (in thousands):
June 30, 2021
|
|
Less than
1 year
|
|
|
1 year
through
5 years
|
|
|
6 years
through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
3,606
|
|
|
|
—
|
|
|
|
—
|
|
Other debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
—
|
|
|
$
|
3,607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2020
|
|
Less than
1 year
|
|
|
1 year
through
5 years
|
|
|
6 years
through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
3,456
|
|
|
|
—
|
|
|
|
—
|
|
Other debt securities
|
|
|
18,392
|
|
|
|
5,019
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
18,392
|
|
|
$
|
8,476
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of June 30, 2021 and December 31, 2020 is presented below (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
June 30, 2021
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
297
|
|
|
$
|
—
|
|
|
$
|
297
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
620
|
|
|
|
—
|
|
|
|
620
|
|
|
|
—
|
|
Other debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
|
—
|
|
|
|
—
|
|
|
|
917
|
|
|
|
—
|
|
|
|
917
|
|
|
|
—
|
|
Mutual funds—debt securities
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Mutual funds—equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other investment funds
|
|
|
44,497
|
|
|
|
4,333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,497
|
|
|
|
4,333
|
|
Equity securities
|
|
|
2,952
|
|
|
|
968
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,952
|
|
|
|
968
|
|
Total
|
|
$
|
47,453
|
|
|
$
|
5,301
|
|
|
$
|
917
|
|
|
$
|
—
|
|
|
$
|
48,370
|
|
|
$
|
5,301
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2020
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other debt securities
|
|
|
18,392
|
|
|
|
1,332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,392
|
|
|
|
1,332
|
|
Total fixed maturities
|
|
|
18,392
|
|
|
|
1,332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,392
|
|
|
|
1,332
|
|
Mutual funds—debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mutual funds—equity securities
|
|
|
128
|
|
|
|
154
|
|
|
|
—
|
|
|
|
—
|
|
|
|
128
|
|
|
|
154
|
|
Other investment funds
|
|
|
75,799
|
|
|
|
8,812
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,799
|
|
|
|
8,812
|
|
Equity securities
|
|
|
82
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
19
|
|
Total
|
|
$
|
94,401
|
|
|
$
|
10,317
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
94,401
|
|
|
$
|
10,317
|
|
For all securities in an unrealized loss position, the Company 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 Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
20
Table of Contents
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the six months ended June 30, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate cost basis of approximately $0.3 million and an aggregate fair value of approximately $0.2 million, resulting in an impairment of $0.1 million, with such impairment considered to be other than temporary due to credit indicators. During the six months ended June 30, 2020, the Company determined, based on its review, that there were 2 securities with an aggregate costs basis of approximately $16.8 million and an aggregate fair value of approximately $15.1 million, resulting in an impairment of $1.7 million, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company 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 Company’s unaudited condensed consolidated statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.
At June 30, 2021 and December 31, 2020, the Company’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 Company is the primary beneficiary.
A reconciliation of the Company’s perpetual care trust activities for the six months ended June 30, 2021 and 2020 is presented below (in thousands):
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance—beginning of period
|
|
$
|
316,746
|
|
|
$
|
343,619
|
|
Contributions
|
|
|
4,420
|
|
|
|
3,616
|
|
Distributions
|
|
|
(24,966
|
)
|
|
|
(27,765
|
)
|
Interest and dividends
|
|
|
19,615
|
|
|
|
11,279
|
|
Capital gain distributions
|
|
|
1,077
|
|
|
|
318
|
|
Realized gains and losses, net
|
|
|
2,994
|
|
|
|
(831
|
)
|
Other than temporary impairment
|
|
|
(55
|
)
|
|
|
(930
|
)
|
Taxes
|
|
|
(890
|
)
|
|
|
(86
|
)
|
Fees
|
|
|
(2,374
|
)
|
|
|
(912
|
)
|
Unrealized change in fair value
|
|
|
10,391
|
|
|
|
(23,454
|
)
|
Total
|
|
|
326,958
|
|
|
|
304,854
|
|
Less: Assets held for sale
|
|
|
—
|
|
|
|
(6,633
|
)
|
Balance—end of period
|
|
$
|
326,958
|
|
|
$
|
298,221
|
|
During the six months ended June 30, 2021 and 2020, purchases of available for sale securities were approximately $19.0 million and $9.3 million, respectively. During the six months ended June 30, 2021 and 2020, sales, maturities and paydowns of available for sale securities were approximately $11.1 million and $22.0 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in Company’s unaudited condensed consolidated statements of cash flows.
21
Table of Contents
The cost and market value associated with the assets held in the perpetual care trusts as of June 30, 2021 and December 31, 2020 were as follows (in thousands):
June 30, 2021
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
19,971
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,971
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
15
|
|
|
|
2
|
|
|
|
—
|
|
|
|
17
|
|
Corporate debt securities
|
|
2
|
|
|
365
|
|
|
|
110
|
|
|
|
—
|
|
|
|
475
|
|
Other debt securities
|
|
2
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
|
|
|
380
|
|
|
|
112
|
|
|
|
—
|
|
|
|
492
|
|
Mutual funds—debt securities
|
|
1
|
|
|
1,982
|
|
|
|
43
|
|
|
|
(12
|
)
|
|
|
2,013
|
|
Mutual funds—equity securities
|
|
1
|
|
|
9,846
|
|
|
|
3,788
|
|
|
|
(4
|
)
|
|
|
13,630
|
|
Other investment funds(1)
|
|
|
|
|
257,247
|
|
|
|
21,205
|
|
|
|
(6,908
|
)
|
|
|
271,544
|
|
Equity securities
|
|
1
|
|
|
13,824
|
|
|
|
5,513
|
|
|
|
(39
|
)
|
|
|
19,298
|
|
Other invested assets
|
|
2
|
|
|
9
|
|
|
|
1
|
|
|
|
—
|
|
|
|
10
|
|
Total investments
|
|
|
|
$
|
303,259
|
|
|
$
|
30,662
|
|
|
$
|
(6,963
|
)
|
|
$
|
326,958
|
|
(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 zero to fifteen years with three potential one year extensions at the discretion of the funds’ general partners. As of June 30, 2021 there were $66.9 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
December 31, 2020
|
|
Fair Value
Hierarchy
Level
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments
|
|
1
|
|
$
|
21,217
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,217
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
2
|
|
|
48
|
|
|
|
4
|
|
|
|
—
|
|
|
|
52
|
|
Corporate debt securities
|
|
2
|
|
|
505
|
|
|
|
92
|
|
|
|
(44
|
)
|
|
|
553
|
|
Other debt securities
|
|
2
|
|
|
433
|
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
405
|
|
Total fixed maturities
|
|
|
|
|
986
|
|
|
|
96
|
|
|
|
(72
|
)
|
|
|
1,010
|
|
Mutual funds—debt securities
|
|
1
|
|
|
2,386
|
|
|
|
62
|
|
|
|
(9
|
)
|
|
|
2,439
|
|
Mutual funds—equity securities
|
|
1
|
|
|
9,240
|
|
|
|
1,244
|
|
|
|
(7
|
)
|
|
|
10,477
|
|
Other investment funds(1)
|
|
|
|
|
247,845
|
|
|
|
21,952
|
|
|
|
(10,813
|
)
|
|
|
258,984
|
|
Equity securities
|
|
1
|
|
|
21,748
|
|
|
|
873
|
|
|
|
(19
|
)
|
|
|
22,602
|
|
Other invested assets
|
|
2
|
|
|
16
|
|
|
|
1
|
|
|
|
—
|
|
|
|
17
|
|
Total investments
|
|
|
|
$
|
303,438
|
|
|
$
|
24,228
|
|
|
$
|
(10,920
|
)
|
|
|
316,746
|
|
Less: Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,518
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
312,228
|
|
(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 zero to six years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2020, there were $41.1 million in unfunded investment commitments to the private credit funds, which are callable at any time.
|
22
Table of Contents
The contractual maturities of debt securities as of June 30, 2021 and December 31, 2020 were as follows (in thousands):
June 30, 2021
|
|
Less than
1 year
|
|
|
1 year through
5 years
|
|
|
6 years through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
475
|
|
|
|
—
|
|
|
|
—
|
|
Other debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
—
|
|
|
$
|
476
|
|
|
$
|
—
|
|
|
$
|
16
|
|
December 31, 2020
|
|
Less than
1 year
|
|
|
1 year through
5 years
|
|
|
6 years through
10 years
|
|
|
More than
10 years
|
|
U.S. governmental securities
|
|
$
|
25
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
553
|
|
|
|
—
|
|
|
|
—
|
|
Other debt securities
|
|
|
405
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
$
|
430
|
|
|
$
|
559
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Temporary Declines in Fair Value
The Company 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 Company’s investments in debt and equity securities within the perpetual care trusts as of June 30, 2021 and December 31, 2020 is presented below (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
June 30, 2021
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
990
|
|
|
$
|
—
|
|
|
$
|
991
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,959
|
|
|
|
—
|
|
|
|
1,959
|
|
|
|
—
|
|
Other debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
|
1
|
|
|
|
—
|
|
|
|
2,949
|
|
|
|
—
|
|
|
|
2,950
|
|
|
|
—
|
|
Mutual funds—debt securities
|
|
|
1,084
|
|
|
|
12
|
|
|
|
2
|
|
|
|
—
|
|
|
|
1,086
|
|
|
|
12
|
|
Mutual funds—equity securities
|
|
|
214
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
215
|
|
|
|
4
|
|
Other investment funds
|
|
|
53,752
|
|
|
|
6,908
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,752
|
|
|
|
6,908
|
|
Equity securities
|
|
|
140
|
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
140
|
|
|
|
39
|
|
Total
|
|
$
|
55,191
|
|
|
$
|
6,960
|
|
|
$
|
2,952
|
|
|
$
|
3
|
|
|
$
|
58,143
|
|
|
$
|
6,963
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2020
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
990
|
|
|
$
|
—
|
|
|
$
|
990
|
|
|
$
|
—
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,959
|
|
|
|
44
|
|
|
|
1,959
|
|
|
|
44
|
|
Other debt securities
|
|
|
405
|
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
|
405
|
|
|
|
28
|
|
Total fixed maturities
|
|
|
405
|
|
|
|
28
|
|
|
|
2,949
|
|
|
|
44
|
|
|
|
3,354
|
|
|
|
72
|
|
Mutual funds—debt securities
|
|
|
600
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
600
|
|
|
|
9
|
|
Mutual funds—equity securities
|
|
|
288
|
|
|
|
7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
288
|
|
|
|
7
|
|
Other investment funds
|
|
|
74,885
|
|
|
|
10,813
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,885
|
|
|
|
10,813
|
|
Equity securities
|
|
|
45
|
|
|
|
4
|
|
|
|
19
|
|
|
|
15
|
|
|
|
64
|
|
|
|
19
|
|
Total
|
|
$
|
76,223
|
|
|
$
|
10,861
|
|
|
$
|
2,968
|
|
|
$
|
59
|
|
|
$
|
79,191
|
|
|
$
|
10,920
|
|
For all securities in an unrealized loss position, the Company 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 Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
23
Table of Contents
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the six months ended June 30, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate cost basis of approximately $84,000 and an aggregate fair value of approximately $30,000, resulting in an impairment of $54,000, with such impairment considered to be other than temporary due to credit indicators. During the six months ended June 30, 2020, the Company determined, based on its review, that there were 2 securities with an aggregate cost basis of approximately $9.4 million and an aggregate fair value of approximately $8.5 million, resulting in an impairment of $0.9 million, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value with the offset going against the liability for perpetual care trust corpus.
Total debt consisted of the following at the dates indicated (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
8.500% Senior Secured Notes due 2029
|
|
$
|
400,000
|
|
|
$
|
—
|
|
9.875%/11.500% Senior Secured PIK Toggle Notes due June 2024
|
|
|
—
|
|
|
|
335,328
|
|
Insurance and vehicle financing
|
|
|
1,870
|
|
|
|
361
|
|
Less deferred financing costs, net of accumulated amortization
|
|
|
(10,452
|
)
|
|
|
(14,657
|
)
|
Total debt
|
|
|
391,418
|
|
|
|
321,032
|
|
Less current maturities
|
|
|
(1,859
|
)
|
|
|
(317
|
)
|
Total long-term debt
|
|
$
|
389,559
|
|
|
$
|
320,715
|
|
2029 Notes
On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029. The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to the 2029 Indenture, dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent (“Wilmington”). Capitalized terms that are used in this description of the 2029 Notes but not defined herein shall have the meaning assigned to such terms in the 2029 Indenture.
Proceeds from the sale of the 2029 Notes were used to fund the redemption in full of approximately $338.1 million aggregate principal amount of the 2024 Notes together with an approximately $18.5 million prepayment premium and pay fees and expenses incurred in connection with the offering. Any remaining proceeds will be used for general corporate purposes, which may include acquisitions. Upon deposit of the funds to redeem the 2024 Notes with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the 2024 Guarantors, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture.
Interest; Maturity; Issue Price
Interest on the 2029 Notes accrues at a rate of 8.5% per year, payable in cash semiannually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2021. The Notes mature on May 15, 2029. Subject to the covenants contained in the 2029 Indenture, the Company may, without the consent of the holders of the 2029 Notes, issue additional notes under the 2029 Indenture (“Additional Notes”) having the same terms in all respects as the 2029 Notes, which shall be treated with the 2029 Notes as a single class under the 2029 Indenture. The issue price of the 2029 Notes was 100%.
24
Table of Contents
Redemption
The 2029 Notes are redeemable at the Company’s option, in whole or in part, on and after May 15, 2024 at the redemption prices (expressed as percentages of principal amount) set forth below, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date.
On or after May 15, 2024 and prior to May 15, 2025
|
|
104.250%
|
|
On or after May 15, 2025 and prior to May 15, 2026
|
|
102.125%
|
|
On or after May 15, 2026
|
|
100.000%
|
|
In addition, prior to May 15, 2024, the Company may utilize the net proceeds of one or more equity offerings to redeem up to 40% of the aggregate principal amount of the 2029 Notes originally issued under the 2029 Indenture, including any Additional Notes, at a redemption price of 108.500% of the principal amount of the 2029 Notes redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date, provided that at least 50% of the aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture remain outstanding following such redemption.
During each of the 12-month periods ending May 10, 2022, May 10, 2023 and May 10, 2024, respectively, the Company may redeem up to 10% of the aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture at a redemption price equal to 103% of the principal amount of the 2029 Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Prior to May 15, 2024, the 2029 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2029 Notes being redeemed plus an “applicable premium” (as defined in the 2029 Indenture) along with accrued and unpaid interest, if any, to, but excluding, the redemption date.
Upon the occurrence of a “change of control” (as defined in the 2029 Indenture), if the Company has not previously exercised its right to redeem all of the outstanding 2029 Notes pursuant to the optional redemption provisions as described above, the Company must offer to repurchase the 2029 Notes at a redemption price equal to 101% of the principal amount of the 2029 Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
Upon certain asset sales where the excess proceeds from all applicable asset sales exceed $10 million since the issue date of the 2029 Notes, the Company may be required in certain circumstances to make an offer to purchase 2029 Notes with the excess proceeds from such an asset sale in excess of such $10 million threshold at a price in cash equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to, but excluding, the date of purchase.
Guarantees and Collateral
The Company’s obligations under the 2029 Notes and the 2029 Indenture are jointly and severally guaranteed (the “Note Guarantees”) by each of the Company’s existing and future direct and indirect domestic subsidiaries, with certain exceptions, and will be guaranteed by each of the Company’s foreign subsidiaries that guarantees any future credit facility (each applicable foreign and domestic subsidiary, a “2029 Guarantor” and collectively, the “2029 Guarantors”). In connection with the Note Guarantees, the Company, the 2029 Guarantors and Wilmington entered into a Security Agreement, dated May 11, 2021 (the “Security Agreement”). Pursuant to the 2029 Indenture and the Security Agreement, the Company’s obligations under the 2029 Indenture and the 2029 Notes are secured by a lien and security interest (subject to permitted liens and security interests) in substantially all of the Company’s and the 2029 Guarantors’ existing and future property and assets, excluding certain assets which include, among others: (a) trust and other fiduciary accounts and amounts required to be deposited or held therein, (b) assets that may not be pledged as a matter of law or without governmental approvals, until such time such assets may be pledged without legal prohibition and (c) owned and leased real property that (i) may not be pledged as a matter of law or without the prior approval of any governmental authority or third person, (ii) is not operated or intended to be operated as a cemetery, crematory or funeral home or (iii) has a fair market value of less than $3.0 million.
25
Table of Contents
The 2029 Notes are the Company’s senior secured obligations and the guarantees are the 2029 Guarantors’ senior secured obligations. The obligations of the Company and each 2029 Guarantor will:
|
•
|
rank equal in right of payment with all of the Company and each 2029 Guarantor’s existing and future senior indebtedness, including any borrowings under any future credit facility;
|
|
•
|
rank senior in right of payment to all of the Company’s and each 2029 Guarantor’s existing and future subordinated indebtedness;
|
|
•
|
be effectively senior to all of the Company’s and each 2029 Guarantor’s unsecured senior indebtedness to the extent of the value of the collateral securing the 2029 Notes and the Note Guarantees;
|
|
•
|
be contractually subordinated to the Company’s and each 2029 Guarantor’s obligations under any future credit facility permitted by the 2029 Indenture to the extent of the value of the collateral securing such credit facility and subject to the terms of any future intercreditor agreement; and
|
|
•
|
structurally subordinated to all indebtedness and other obligations of the Company’s existing and future subsidiaries that do not guarantee the 2029 Notes.
|
Covenants
The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with various affirmative covenants regarding, among other matters, delivery to Wilmington of financial statements and certain other information or reports filed with the Securities and Exchange Commission.
The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with certain covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and 2029 Guarantors’ ability to: (i) incur additional indebtedness or issue disqualified capital stock; (ii) pay dividends, redeem subordinated debt or make other restricted payments; (iii) make certain investments; (iv) create or incur certain liens; (v) issue stock of subsidiaries; (vi) enter into certain transactions with affiliates; (vii) merge, consolidate or transfer substantially all of its respective assets; (viii) agree to dividend or other payment restrictions affecting the Restricted Subsidiaries; (ix) change the business it conducts; (x) withdraw any monies or other assets from, or make any investments of, its trust funds; and (xi) transfer or sell assets, including capital stock of a Restricted Subsidiary.
Events of Default
The 2029 Indenture contains customary events of default, which could, subject to certain conditions, cause the 2029 Notes to become immediately due and payable, including, but not limited to defaults by the Company in the payment of the principal of any 2029 Notes when the same becomes due and payable at maturity, upon acceleration or redemption, or otherwise (other than pursuant to an offer to purchase by the Company) or in the payment of interest on any 2029 Notes when the same becomes due and payable, and the default continues for a period of 30 days; failure to comply with certain repurchase obligations in the 2029 Indenture and certain other covenants the 2029 Indenture relating to mergers, consolidation or sales of assets; failure to comply with certain other covenants in the 2029 Indenture beyond the applicable cure period following notice by Wilmington or the holders of at least 30% in aggregate principal amount of the 2029 Notes then outstanding; failure to pay debt within any applicable grace period after the final maturity or acceleration of such debt by the holders thereof because of a default, if the total amount of such debt unpaid or accelerated exceeds $20.0 million; failure to pay final judgments entered by a court or courts of competent jurisdiction aggregating $20.0 million or more (excluding amounts covered by insurance), which judgments are not paid, discharged or stayed, for a period of 60 days; and certain events of bankruptcy or insolvency.
As of June 30, 2021, the Company was in compliance with the covenants of the 2029 Indenture.
Deferred Financing Costs
In connection with the full redemption of the 2024 Notes, the Company wrote off unamortized deferred financing fees of $13.1 million and original issue discount of $8.5 million, for the three and six months ended June 30, 2021, which are included in Loss on debt extinguishment in the accompanying condensed consolidated statements of operations.
For the three months ended June 30, 2021 and 2020, the Company recognized $0.7 million and $1.0 million, respectively, of amortization of deferred financing fees on its various debt facilities. For the six months ended June 30, 2021 and 2020, the Company recognized $1.7 million and $1.8 million, respectively, of amortization of deferred financing fees on its various debt facilities.
26
Table of Contents
Capital Stock
The Company is authorized to issue two classes of capital stock: common stock, $0.01 par value per share (“Common Stock”) and preferred stock, $0.01 par value per share (“Preferred Stock”).
At June 30, 2021, 117,964,891 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued or outstanding. At June 30, 2021, there were 82,035,109 shares of Common Stock available for issuance, including 853,333 shares available for issuance as stock-based incentive compensation under the Company’s Amended and Restated 2019 Long-Term Incentive Plan (as amended, the “Plan”), and 10,000,000 shares of Preferred Stock available for issuance.
Stock-based Compensation
The Plan permits the granting of awards covering a total of 9,875,000 common units of the Company. A “unit” under the Plan is defined as a common unit of the Company and such other securities as may be substituted or resubstituted for common units of the Company, including but not limited to shares of the Company’s Common Stock. The Plan is intended to promote the interests of the Company by providing to employees, consultants and directors of the Company incentive compensation awards to encourage superior performance and enhance the Company’s ability to attract and retain the services of individuals who are essential for its growth and profitability and to encourage them to devote their best efforts to advancing the Company’s business.
Stock Options
During the three and six months ended June 30, 2021, the Company did not grant any stock options and no options were exercised, forfeited or expired.
For the three months ended June 30, 2021 and 2020, non-cash compensation expense related to stock options was $0.2 million and $0.1 million, respectively. For the six months ended June 30, 2021 and 2020, non-cash compensation expense related to stock options was $0.4 million and $0.3 million, respectively. As of June 30, 2021, total unrecognized compensation cost related to unvested stock options was $1.2 million, which the Company expects to recognize over the remaining weighted-average period of 1.7 years.
Restricted Stock and Restricted Phantom Stock
A rollforward of restricted stock and phantom stock awards as of June 30, 2021 is as follows:
|
|
Number of Restricted Stock and Phantom Stock Awards
|
|
|
Weighted Average Grant Date Fair Value ($)
|
|
Total non-vested at December 31, 2020
|
|
|
1,277,907
|
|
|
$
|
2.17
|
|
Granted
|
|
|
27,029
|
|
|
|
2.22
|
|
Vested
|
|
|
(93,750
|
)
|
|
|
3.88
|
|
Total non-vested at June 30, 2021
|
|
|
1,211,186
|
|
|
$
|
2.04
|
|
For the three months ended June 30, 2021 and 2020, the Company recognized $0.3 million and $0.2 million, respectively, of non-cash compensation expense related to restricted stock and phantom stock awards into earnings. For the six months ended June 30, 2021 and 2020, the Company recognized $0.6 million and $0.4 million, respectively, of non-cash compensation expense related to restricted stock and phantom stock awards into earnings. As of June 30, 2021, total unamortized compensation cost related to unvested restricted stock awards was $1.8 million, which the Company expects to recognize over the remaining weighted-average period of 1.9 years.
10.
|
DEFERRED REVENUES AND COSTS
|
The Company 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 Company recognizes deferred merchandise and service revenues as customer contract liabilities within long-term liabilities on its consolidated balance sheets. The Company 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 Company also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in the customer contract liabilities. All other selling costs are expensed as incurred. Additionally, the Company has elected the practical expedient of not recognizing incremental costs to obtain a contract as incurred, as the associated amortization period is typically one year or less.
27
Table of Contents
Deferred revenues and related costs consisted of the following (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Deferred contract revenues
|
|
$
|
852,570
|
|
|
$
|
832,373
|
|
Deferred merchandise trust revenue
|
|
|
100,428
|
|
|
|
87,218
|
|
Deferred merchandise trust unrealized gains (losses)
|
|
|
60,655
|
|
|
|
29,573
|
|
Deferred revenues
|
|
$
|
1,013,653
|
|
|
$
|
949,164
|
|
Deferred selling and obtaining costs
|
|
$
|
120,229
|
|
|
$
|
116,900
|
|
For the six months ended June 30, 2021 and 2020, the Company recognized $42.9 million and $34.7 million, respectively, of the customer contract liabilities balance that existed at December 31, 2020 and 2019, respectively, as revenue.
The components of the customer contract liabilities, net in the Company’s consolidated balance sheets at June 30, 2021 and December 31, 2020 were as follows (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Customer contract liabilities, gross
|
|
$
|
1,039,189
|
|
|
$
|
973,444
|
|
Amounts due from customers for unfulfilled performance obligations on cancellable
pre-need contracts
|
|
|
(25,536
|
)
|
|
|
(24,280
|
)
|
Customer contract liabilities, net
|
|
$
|
1,013,653
|
|
|
$
|
949,164
|
|
The Company expects to service approximately 55% of its deferred revenue in the first 4-5 years and approximately 80% of its deferred revenue within 18 years. The Company 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.
11.COMMITMENTS AND CONTINGENCIES
Legal
The Company is subject to state law claims that certain of its officers and directors breached their fiduciary duties, as well as a claim under federal law that certain of the Company’s prior proxy disclosures were misleading. The Company 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 we do not prevail in any such proceedings, we 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 described below, the amount of the potential losses cannot be reasonably estimated at this time. These actions are summarized below.
|
•
|
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 the officers and directors of StoneMor GP LLC, a Delaware limited liability company and general partner of the Partnership (“StoneMor GP”), 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 the Partnership’s 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 Exchange Act. 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, provided that either party may terminate the stay on 30 days’ notice.
|
|
•
|
Fried v. Axelrod, et al., C.A. No. 2020-1065-SG, pending in the Chancery Court of the State of Delaware and filed on December 16, 2020. The plaintiff in this case brought an action he seeks to have certified as a class action that asserts claims against Axar, Andrew M. Axelrod and the other individuals who were directors at the time of the transactions in question and against the Company as a nominal defendant. The complaint includes direct claims against all
|
28
Table of Contents
|
|
individual defendants and derivative claims against the individual defendants other than Mr. Axelrod for breach of fiduciary duty in approving certain transactions in connection with the Company’s sale of preferred and common stock to Axar and certain accounts managed by Axar (the “Axar Stock Purchase”). The complaint also includes derivative claims against Axar for breach of fiduciary duty and unjust enrichment in connection with those same transactions as well as direct claims against both Axar and Mr. Axelrod for breach of fiduciary duty with respect to those transactions. Finally, the complaint includes a derivative claim against all individual defendants for breach of fiduciary duty in connection with the approval of a related-party investment disclosed by the Company. The plaintiff seeks rescission of the transactions contemplated by the Axar Stock Purchase and the related-party investment and/or an award of damages as well as attorneys’ fees and costs. On January 6, 2021, a motion to dismiss the complaint was filed on behalf of the Company and the individual defendants other than Mr. Axelrod and on January 11, 2021, a motion to dismiss the complaint was filed on behalf of Axar and Mr. Axelrod. On April 2, 2021, the plaintiff filed a First Amended Complaint, which included additional factual background regarding the plaintiff’s claims and alleged demand futility, but did not add additional defendants, claims or relief sought. Thereafter, the plaintiff and defendants filed a joint stipulation to stay the Fried litigation pending the resolution of a separate pending action described below, which the court granted on April 28, 2021.
|
|
•
|
Titterton v. StoneMor Inc., C.A. No.: 2021-0259-PAF, pending in the Court of Chancery of the State of Delaware and filed on March 25, 2021. The plaintiff in this case brought an action seeking expedited relief under Section 220 of the Delaware General Corporation Law. The plaintiff had previously made a demand for inspection of certain books and records of the Company allegedly related to potential corporate misconduct. The Company responded to the request by rejecting plaintiff’s demand as deficient under Delaware law for failure to state a proper purpose and being overbroad, but nonetheless provided certain of the requested materials. After the plaintiff made a further demand for inspection in March 2021, the Company again rejected the demand as deficient under Delaware law for failure to state a proper purpose and being overbroad. The plaintiff then brought this action seeking an order to compel additional books and records and reimbursement of attorney’s fees. On April 19, 2021, the Company filed its answer to the complaint. Trial was held on July 21, 2021, after which the Court issued an order permitting the requested inspection, in part, but denied the plaintiff’s request for attorneys’ fees. The Company is preparing its production of the requested materials.
|
The Company 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 Company 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 Company against all contingencies, Management believes that the insurance protection is reasonable in view of the nature and scope of the Company’s operations.
Moon Landscaping, Inc.
On April 2, 2020, the Company entered into two multi-year Master Services Agreements (the “MSAs”) with Moon Landscaping, Inc. and its affiliate, Rickert Landscaping, Inc. (collectively “Moon”). Under the terms of the MSAs, Moon provides all grounds and maintenance services at most of the funeral homes, cemeteries and other properties the Company owns or manages. The contractual annual amounts due to Moon as of June 30, 2021 by year and in total were as follows (in thousands):
2021
|
|
$
|
50,107
|
|
2022
|
|
$
|
51,109
|
|
2023
|
|
$
|
52,131
|
|
2024
|
|
$
|
53,174
|
|
Total
|
|
$
|
206,521
|
|
Each party has the right to terminate the MSAs at any time on six months’ prior written notice, provided that if we terminate the MSAs without cause, we will be obligated to pay Moon an equipment credit fee in the amount of $1.0 million for each year remaining in the term, prorated for the portion of the year in which any such termination occurs. The MSAs also contain representations, covenants and indemnity provisions that are customary for agreements of this nature.
The Company also has the right under the MSAs to take back the responsibility for grounds and maintenance services at the locations outsourced to Moon. Due to certain liquidity constraints and performance issues experienced by Moon, the Company has exercised this right with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021 and an additional 111 locations effective August 9, 2021, representing in the aggregate approximately 61% of the locations the Company had originally outsourced to Moon. The Company is continuing to evaluate Moon’s performance under the MSAs.
29
Table of Contents
In connection with these changes, the Company is now using its own equipment to service these locations and rehired the employees Moon had hired from the Company upon execution of the MSAs. These employees will continue to provide certain grounds services for the Company at these locations using the equipment previously leased to Moon. The Company is outsourcing substantially all of the landscaping and other maintenance services previously provided by Moon at these locations to other vendors who had previously been subcontractors to Moon. The Company does not anticipate that these changes will have any material impact on the cost of providing the services compared to the amounts paid to Moon under the MSAs.
From time to time, on the behalf of Moon, the Company incurred a higher level of expenses relating to services covered by the MSAs, including location materials and supplies, uniforms, repair of marker damage, customer refunds and payments to third party landscapers and repair shops. These additional payments, which were in addition to the payments specified in the MSAs, were recorded as cemetery operating expenses in the relevant periods and as of June 30, 2021 aggregated $5.2 million. The Company has the ability to seek reimbursement from Moon for these additional payments as outlined in the MSAs.
On August 12, 2021, Moon and certain of its affiliates filed a petition under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). As a result of this filing, the Company will not be able to exercise its right to take back additional properties or otherwise modify the terms of or seek to enforce its MSAs with Moon, including finalizing arrangements to seek the reimbursement of additional payments, absent Moon’s consent and/or approval of the Bankruptcy Court. Management believes the impact on the Company of Moon's bankruptcy filing has been partially mitigated because the Company has taken back the responsibilities under the MSAs for the locations noted above. However, given the uncertainty associated with the bankruptcy proceedings and the locations for which Moon will continue to be responsible under the MSAs, it is possible that the Company may experience disruptions in operations at those locations, particularly if it becomes necessary for the Company to assume the responsibility for servicing those locations in the near future on relatively short notice. In addition, the Company expects that it will incur additional expenses relating to services covered by the MSAs. If Moon is unable to obtain appropriate financing and have a plan of reorganization confirmed by the Bankruptcy Court, the Company would likely not be able to obtain reimbursement of any of the additional payments it has made or may hereafter make on Moon’s behalf under the MSAs.
It is expected that disruptions, if any, will not have a material adverse effect on the Company’s overall business given the number of locations for which it is responsible and the Company’s previous relationships, which were established before the transfer of responsibilities to Moon. The Company is closely monitoring the overall situation.
Archdiocese of Philadelphia
In May 2014, the Company entered into lease and management agreements with the Archdiocese of Philadelphia, pursuant to which the Company 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 six through 11, an aggregate of $6.0 million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements in accordance with their terms during lease year 11 or the Company terminates the agreements as a result of a default by the Archdiocese, the Company 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, 2025.
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. In addition the Company has a sale-leaseback related to one of its warehouses. Leases with an initial term of 12 months or less are not recorded on the Company’s consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term of more than 12 months, the Company 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 Company 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 Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that it will exercise the renewal options. The Company does have residual value guarantees on the finance leases for its vehicles, but no residual guarantees on any of its operating leases.
30
Table of Contents
Certain of the Company’s leases have variable payments with annual escalations based on the proportion by which the consumer price index (“CPI”) for all urban consumers increased over the CPI index for the prior comparative year.
The Company has the following balances recorded on its consolidated balance sheets related to leases:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Assets:
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
7,230
|
|
|
$
|
5,171
|
|
Finance
|
|
|
3,609
|
|
|
|
4,296
|
|
Total ROU assets(1)
|
|
$
|
10,839
|
|
|
$
|
9,467
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
1,161
|
|
|
$
|
1,182
|
|
Finance
|
|
|
1,325
|
|
|
|
1,416
|
|
Long-term
|
|
|
|
|
|
|
|
|
Operating
|
|
|
5,538
|
|
|
|
3,441
|
|
Finance
|
|
|
1,945
|
|
|
|
2,592
|
|
Total lease liabilities(2)
|
|
$
|
9,969
|
|
|
$
|
8,631
|
|
(1)
|
The Company’s ROU operating assets and finance assets are presented within Other assets and Property and equipment, net of accumulated depreciation, respectively, in its consolidated balance sheets.
|
(2)
|
The Company’s current lease liabilities and long-term are presented within Accounts payable and accrued liabilities and Other long-term liabilities, respectively, in its consolidated balance sheets.
|
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The Company 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 10.0% and 8.7%, respectively, as of June 30, 2021.
The components of lease expense were as follows:
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Lease cost
|
Classification
|
|
|
|
|
|
|
|
Operating lease costs(1)
|
General and administrative expense
|
$
|
1,009
|
|
|
$
|
1,597
|
|
Finance lease costs
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
Depreciation and Amortization
|
|
606
|
|
|
|
606
|
|
Interest on lease liabilities
|
Interest expense
|
|
166
|
|
|
|
225
|
|
Short-term lease costs(2)
|
General and administrative expense
|
|
—
|
|
|
|
—
|
|
Net lease costs
|
|
$
|
1,781
|
|
|
$
|
2,428
|
|
(1)
|
The Company includes its variable lease costs under operating lease costs as these variable lease costs are immaterial.
|
(2)
|
The Company does not have any short-term leases with lease terms greater than one month.
|
Maturities of the Company’s lease labilities as of June 30, 2021 were as follows:
Year ending December 31,
|
|
Operating
|
|
|
Finance
|
|
2021
|
|
$
|
1,070
|
|
|
$
|
920
|
|
2022
|
|
|
1,606
|
|
|
|
1,889
|
|
2023
|
|
|
1,438
|
|
|
|
649
|
|
2024
|
|
|
1,213
|
|
|
|
100
|
|
2025
|
|
|
1,102
|
|
|
|
50
|
|
Thereafter
|
|
|
2,578
|
|
|
|
18
|
|
Total
|
|
$
|
9,007
|
|
|
$
|
3,626
|
|
Less: Interest
|
|
|
(2,308
|
)
|
|
|
(357
|
)
|
Present value of lease liabilities
|
|
$
|
6,699
|
|
|
$
|
3,269
|
|
31
Table of Contents
Maturities of the Company’s lease labilities as of December 31, 2020 were as follows:
Year ending December 31,
|
|
Operating
|
|
|
Finance
|
|
2020
|
|
$
|
1,615
|
|
|
$
|
1,791
|
|
2021
|
|
|
1,186
|
|
|
|
1,939
|
|
2022
|
|
|
881
|
|
|
|
643
|
|
2023
|
|
|
702
|
|
|
|
107
|
|
2024
|
|
|
595
|
|
|
|
33
|
|
Thereafter
|
|
|
1,092
|
|
|
|
—
|
|
Total
|
|
$
|
6,071
|
|
|
$
|
4,513
|
|
Less: Interest
|
|
|
(1,448
|
)
|
|
|
(505
|
)
|
Present value of lease liabilities
|
|
$
|
4,623
|
|
|
$
|
4,008
|
|
Operating and finance lease payments include $1.3 million related to options to extend lease terms that are reasonably certain of being exercised and $1.7 million related to residual value guarantees. The weighted average remaining lease term for operating and finance leases was 6.0 years and 1.6 years, respectively, as of June 30, 2021.
As of June 30, 2021, the Company had no additional operating leases that had not yet commenced, and did not have any lease transactions with its related parties. In addition, as of June 30, 2021, the Company had not entered into any new sale-leaseback arrangements.
13.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Management has established a hierarchy to classify the inputs used to measure the Company’s financial instruments at fair value, pursuant to which the Company is required 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 Company’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.
|
|
•
|
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 based on 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 carrying value of the Company’s current assets and current liabilities on its consolidated balance sheets approximated or equaled their estimated fair values due to their short-term nature or imputed interest rates.
Recurring Fair Value Measurement
At June 30, 2021 and December 31, 2020, the two financial instruments measured by the Company at fair value on a recurring basis were its merchandise and perpetual care trusts, which consist of investments in debt and equity marketable securities and cash equivalents that are carried at fair value and are classified as either Level 1 or Level 2 (see Note 6 Merchandise Trusts and Note 7 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.
32
Table of Contents
Non-Recurring Fair Value Measurement
The Company may be required to measure certain assets and liabilities at fair value, such as its indefinite-lived assets and long-lived assets, on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from impairment charges.
Other Financial Instruments
The Company’s other financial instruments at June 30, 2021 consisted of its 2029 Notes and at December 31, 2020 consisted of its 2024 Notes (see Note 8 Long-Term Debt). At June 30, 2021 the carrying value of the 2029 Notes approximated their fair value due to the timing of the issuance of the 2029 Notes on May 11, 2021. At December 31, 2020, the estimated fair value of the Company’s 2024 Notes was $350.2 million, based on trades made on that date, compared with the carrying amount of $344.8 million.
Management operates the Company in two reportable operating segments: Cemetery Operations and Funeral Home Operations. These operating segments reflect the way the Company manages its operations and makes business decisions. Management evaluates the performance of these operating segments based on interments performed, interment rights sold, pre-need cemetery and at-need cemetery contracts written, revenue and segment profit (loss). As a percentage of revenue and assets, the Company’s major operations consist of its cemetery operations.
The following tables present financial information with respect to the Company’s segments (in thousands). Corporate costs represent those not directly associated with an operating segment, such as corporate overhead, interest expense and income taxes. Corporate assets primarily consist of cash and cash equivalents and restricted cash.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
72,128
|
|
|
$
|
56,863
|
|
|
$
|
139,108
|
|
|
$
|
111,660
|
|
Operating costs and expenses
|
|
|
(55,951
|
)
|
|
|
(47,834
|
)
|
|
|
(109,696
|
)
|
|
|
(95,762
|
)
|
Depreciation and amortization
|
|
|
(1,505
|
)
|
|
|
(1,606
|
)
|
|
|
(3,081
|
)
|
|
|
(3,259
|
)
|
Segment operating profit
|
|
$
|
14,672
|
|
|
$
|
7,423
|
|
|
$
|
26,331
|
|
|
$
|
12,639
|
|
Funeral Home Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
10,853
|
|
|
$
|
9,738
|
|
|
$
|
22,186
|
|
|
$
|
20,043
|
|
Operating costs and expenses
|
|
|
(9,194
|
)
|
|
|
(8,279
|
)
|
|
|
(18,535
|
)
|
|
|
(16,769
|
)
|
Depreciation and amortization
|
|
|
(423
|
)
|
|
|
(461
|
)
|
|
|
(854
|
)
|
|
|
(906
|
)
|
Segment operating profit
|
|
$
|
1,236
|
|
|
$
|
998
|
|
|
$
|
2,797
|
|
|
$
|
2,368
|
|
Reconciliation of segment operating profit to net loss from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
14,672
|
|
|
$
|
7,423
|
|
|
$
|
26,331
|
|
|
$
|
12,639
|
|
Funeral Home Operations
|
|
|
1,236
|
|
|
|
998
|
|
|
|
2,797
|
|
|
|
2,368
|
|
Total segment profit
|
|
|
15,908
|
|
|
|
8,421
|
|
|
|
29,128
|
|
|
|
15,007
|
|
Corporate overhead
|
|
|
(9,534
|
)
|
|
|
(8,756
|
)
|
|
|
(19,075
|
)
|
|
|
(17,257
|
)
|
Corporate depreciation and amortization
|
|
|
(99
|
)
|
|
|
(226
|
)
|
|
|
(194
|
)
|
|
|
(442
|
)
|
Loss on sale of business and other impairments
|
|
|
(2,220
|
)
|
|
|
—
|
|
|
|
(2,220
|
)
|
|
|
—
|
|
Other gains
|
|
|
69
|
|
|
|
—
|
|
|
|
69
|
|
|
|
—
|
|
Interest expense
|
|
|
(9,977
|
)
|
|
|
(11,729
|
)
|
|
|
(20,450
|
)
|
|
|
(23,082
|
)
|
Loss on debt extinguishment
|
|
|
(40,128
|
)
|
|
|
—
|
|
|
|
(40,128
|
)
|
|
|
—
|
|
Income tax benefit
|
|
|
9,736
|
|
|
|
3,492
|
|
|
|
11,412
|
|
|
|
2,204
|
|
Net loss from continuing operations
|
|
$
|
(36,245
|
)
|
|
$
|
(8,798
|
)
|
|
$
|
(41,458
|
)
|
|
$
|
(23,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
1,345
|
|
|
$
|
1,357
|
|
|
$
|
3,058
|
|
|
$
|
2,545
|
|
Funeral Home Operations
|
|
|
35
|
|
|
|
7
|
|
|
|
96
|
|
|
|
17
|
|
Corporate
|
|
|
207
|
|
|
|
354
|
|
|
|
207
|
|
|
|
1,229
|
|
Total capital expenditures
|
|
$
|
1,587
|
|
|
$
|
1,718
|
|
|
$
|
3,361
|
|
|
$
|
3,791
|
|
33
Table of Contents
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
1,472,646
|
|
|
$
|
1,445,217
|
|
Funeral Home Operations
|
|
|
127,126
|
|
|
|
130,687
|
|
Corporate
|
|
|
112,416
|
|
|
|
59,059
|
|
Total assets
|
|
$
|
1,712,188
|
|
|
$
|
1,634,963
|
|
Assets held for sale:
|
|
|
|
|
|
|
|
|
Cemetery Operations
|
|
$
|
—
|
|
|
$
|
23,500
|
|
Funeral Home Operations
|
|
|
—
|
|
|
|
5,075
|
|
Total assets held for sale
|
|
$
|
—
|
|
|
$
|
28,575
|
|
15.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 Company’s unaudited condensed consolidated statements of cash flows (in thousands):
|
|
Six months ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
Pre-need/at-need contract originations (sales on credit)
|
|
$
|
(68,390
|
)
|
|
$
|
(56,337
|
)
|
Cash receipts from sales on credit (post-origination)
|
|
|
56,868
|
|
|
|
48,103
|
|
Changes in accounts receivable, net of allowance
|
|
$
|
(11,522
|
)
|
|
$
|
(8,234
|
)
|
Customer Contract Liabilities
|
|
|
|
|
|
|
|
|
Deferrals:
|
|
|
|
|
|
|
|
|
Cash receipts from customer deposits at origination, net of refunds
|
|
$
|
90,108
|
|
|
$
|
74,613
|
|
Withdrawals of realized income from merchandise trusts during the period
|
|
|
8,018
|
|
|
|
5,163
|
|
Pre-need/at-need contract originations (sales on credit)
|
|
|
68,390
|
|
|
|
56,337
|
|
Undistributed merchandise trust investment earnings, net
|
|
|
11,406
|
|
|
|
(999
|
)
|
Recognition:
|
|
|
|
|
|
|
|
|
Merchandise trust investment income, net withdrawn as of end of period
|
|
|
(5,088
|
)
|
|
|
(3,456
|
)
|
Recognized maturities of customer contracts collected as of end of period
|
|
|
(110,984
|
)
|
|
|
(97,751
|
)
|
Recognized maturities of customer contracts uncollected as of end of period
|
|
|
(16,198
|
)
|
|
|
(14,244
|
)
|
Changes in customer contract liabilities
|
|
$
|
45,652
|
|
|
$
|
19,663
|
|
16.RELATED PARTIES
In January 2020, the Company’s trusts completed the purchase of a $30 million participation in a new $70 million debt facility issued by Payless Holdings LLC (“Payless”). Funds and accounts affiliated with Axar also invested $20 million in this facility. The investment was initially proposed by the Chairman of the Board, Mr. Axelrod. The investment was reviewed and approved in December 2019 in accordance with the Partnership’s governance policies in place at that time. At the time of the investment, the funds and accounts affiliated with Axar owned approximately 30% of the equity of Payless, and Mr. Axelrod serves on Payless’ board of directors. The Company’s investment in Payless represented approximately 4% of the total fair market value of the Company’s trust assets when the investment was made.
Axar beneficially owns 75.1% of the Company’s outstanding Common Stock, which constitutes a majority of the Company’s outstanding Common Stock. As a result, the Company is a “controlled company” within the meaning of NYSE corporate governance standards. For discussion of certain risks and uncertainties attributable to the Company being a controlled company, see Part I, Item 1A. Risk Factors of the Company’s Annual Report. For discussion on the security ownership of certain beneficial owners, directors and executives of the Company, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of the Annual Report.
On February 1, 2021, Cornerstone Trust Management Services LLC (“Cornerstone”), a wholly-owned subsidiary of the Company, entered into a Subadvisor Agreement (the “Agreement”) with Axar. The sole member of Axar’s general partner is
34
Table of Contents
Andrew M. Axelrod, who serves as the Chairman of the Company’s Board of Directors. In connection with the execution of the Agreement, Mr. Axelrod resigned as a member of the Trust and Compliance Committee (the “Trust Committee”) of the Company’s Board of Directors (the “Board”).
Pursuant to the charter of the Trust Committee, the retention of Axar as a subadvisor and the Agreement were first reviewed and approved by the Trust Committee, subject to the condition that the retention of Axar and the Agreement also be approved by a Board committee comprised exclusively of independent directors. Given the Axar relationship, the Board appointed a special committee to review the retention of Axar and the Agreement, which subsequently also approved the retention of Axar and the terms of the Agreement. Both the Trust Committee and the special committee concluded that Axar had the appropriate experience and performance record that would assist Cornerstone in performing its investment advisory obligations for the Company, that the retention of Axar would provide back-office operational efficiencies to Cornerstone and that the financial terms were at least as favorable to Cornerstone as the terms that would be available from other unaffiliated subadvisors, if not more favorable.
Under the terms of the Agreement, Axar agreed to provide the following services with respect to the assets held in the Company’s merchandise and perpetual care trust (the “Trusts”) and certain pooled investment vehicles administered by the trustee of the Trusts (the “Trustee”) in which certain of the Trusts participate or invest (collectively, the “Investment Assets”):
|
•
|
Advise Cornerstone with respect to the allocation and investment of the Investment Assets on a non-discretionary basis, including providing advice concerning portfolio allocation among investment strategies;
|
|
•
|
Oversee other subcontractors or external managers engaged by Cornerstone to provide advice with respect to the Investment Assets;
|
|
•
|
Provide quarterly investment performance reports to and meet on a quarterly basis with the Trust Committee;
|
|
•
|
As requested by Cornerstone from time to time, perform the tasks and responsibilities delegated by the Trust Committee to Cornerstone under the Company’s investment policy statement; and
|
|
•
|
As requested by Cornerstone, assist Cornerstone in performing its duties by providing general back office and administrative support to Cornerstone and, at Cornerstone’s reasonable request, the Trustee.
|
Under the Agreement, Axar is entitled to a quarterly fee equal to 0.0125% of the value of the Investment Assets through December 31, 2021 and, thereafter, a quarterly fee equal to 0.025% of the value of the Investment Assets. In each case, the value of the Investment Assets will be determined by the Trustee. During the three and six months ended June 30, 2021, the Company incurred fees of $103,000 and $172,000, respectively, due to Axar.
The initial term of the Agreement is through December 31, 2021 and it automatically renews for an unlimited number of one-year terms thereafter, provided that either party may terminate the Agreement on 90 days’ prior written notice. The Agreement also includes customary confidentiality and indemnification provisions.
On April 13, 2021, the Company reimbursed American Infrastructure Funds LLC (“AIM”), an entity controlled by Robert B. Hellman, Jr., a former Chairman and member of the Company's Board of Directors, $0.6 million for certain expenses incurred by AIM in responding to a document production request from the SEC in connection with an SEC investigation of the Company and StoneMor GP that was settled in December 2019.
The Company is a party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019, June 27, 2019, November 3, 2020 and November 20, 2020, the “DVA”) with Axar, certain funds and managed accounts for which it serves as investment manager and its general partner, Axar GP, LLC (collectively, the “Axar Entities”), StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole member of StoneMor GP (“GP Holdings”), and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of American Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, and subject to certain conditions and exceptions, the Axar Entities and their affiliates are prohibited from acquiring additional shares of the Company’s Common Stock. On April 13, 2021, the Axar Entities, the ACII Entities and the Company entered into a letter agreement (the “Waiver”) pursuant to which the Axar Entities were permitted to acquire some or all of the shares of the Company’s Common Stock held by ACII and its affiliates in a single privately negotiated transaction and not in the open market. The terms of the Waiver were approved by the Conflicts Committee of the Company’s Board of Directors. The waiver was subject to the following conditions:
|
•
|
any such purchase be consummated on or before May 31, 2021;
|
|
•
|
the Company, the Axar Entities and the ACII Entities have entered into a further amendment to the DVA to clarify that the standstill period applicable to the Axar Entities will expire on December 31, 2023;
|
35
Table of Contents
|
•
|
Axar will vote or direct the voting of all shares of the Company’s Common Stock it beneficially owns in favor of amendments to Article VIII of the Company’s Certificate of Incorporation (the “Charter”) relating to amendments of the Company’s Bylaws and Article X of the Charter with respect to any amendment or repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article X or Article XI of the Charter to increase the required stockholder approval required thereunder from “at least sixty six and two thirds percent (66 2/3%)” to “at least eighty-five percent (85%) (collectively, the “Supermajority Provisions”);” and
|
|
•
|
pending the effectiveness of such amendment to Article VIII and Article X of the Charter, Axar would not vote or direct the voting of any shares of the Company’s Common Stock in favor of any proposal to which the Supermajority Provisions are applicable unless such proposal has been approved by the Company’s Board of Directors and its Conflicts Committee.
|
As contemplated by the Waiver, on April 13, 2021, the Company, the Axar Entities and the ACII Entities also entered into the Fifth Amendment to the DVA pursuant to which the parties clarified that the standstill period applicable to the Axar Entities thereunder would expire on December 31, 2023.
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