13.	ACQUISITIONS

First Quarter 2014 Acquisition

On January 16, 2014, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the “Seller”). Pursuant to the Agreement, the Buyer acquired one cemetery in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.2 million in cash.

 

The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired and the resulting gain on bargain purchase. These amounts may be retrospectively adjusted as additional information is received.

 

		Preliminary
		Assessment
		(in thousands)
Assets:
Accounts receivable		$	47
Cemetery property			470
Property and equipment			140
Merchandise trusts, restricted, at fair value			2,607
Perpetual care trusts, restricted, at fair value			691
Total assets			3,955
Liabilities:
Deferred margin			1,035
Merchandise liabilities			956
Deferred tax liability			641
Perpetual care trust corpus			691
Other liabilities			20
Total liabilities			3,343
Fair value of net assets acquired			612
Consideration paid			200
Gain on bargain purchase		$	412

Second Quarter 2014 Acquisition

On June 10, 2014, certain subsidiaries of the Company (collectively the “Buyers”) closed the transaction under the Asset Sale Agreements (the “Agreements”), with certain subsidiaries of Service Corporation International (collectively the “Sellers”) to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, the Buyers paid the Sellers $53.8 million in cash. This amount is subject to post-closing adjustments dependent upon the actual amounts of accounts receivable, merchandise trusts net of merchandise liabilities and perpetual care trusts transferred.

The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired and the resulting goodwill from purchase. These amounts may be retrospectively adjusted as additional information is received. The acquired goodwill is recorded in the Company’s Cemetery Operations – Southeast, Cemetery Operations – Northeast and Funeral Homes operating segments.

 

		Preliminary
		Assessment
		(in thousands)
Assets:
Accounts receivable		$	6,191
Cemetery property			26,033
Property and equipment			15,782
Merchandise trusts, restricted, at fair value			29,512
Perpetual care trusts, restricted, at fair value			15,350
Other assets			1,408
Total assets			94,276
Liabilities:
Deferred margin			11,233
Merchandise liabilities			20,918
Deferred tax liability			1,315
Perpetual care trust corpus			15,350
Other liabilities			51
Total liabilities			48,867
Fair value of net assets acquired			45,409
Consideration paid			53,800
Goodwill from purchase		$	8,391

Agreements with the Archdiocese of Philadelphia

On May 28, 2014, certain subsidiaries of the Company (“Tenant”) and the Archdiocese of Philadelphia, an archdiocese governed by Canon Law of the Roman Catholic Church (“Landlord”) closed a Lease Agreement (the “Lease”) and a Management Agreement (the “Management Agreement”), pursuant to which Tenant will operate 13 cemeteries in Pennsylvania for a term of 60 years. The Company joined the Lease and the Management Agreement as a guarantor of all of Tenant’s obligations under this operating arrangement.

Landlord agreed to lease to Tenant eight cemetery sites in the Philadelphia area. The Lease granted Tenant a sole and exclusive license (the “License”) to maintain and construct improvements in the operation of the cemeteries and to sell burial rights and all related merchandise and services, subject to the terms and conditions of the Lease. The Management Agreement enabled Tenant, subject to certain closing conditions, to serve as the exclusive operator of the remaining five cemeteries. The Lease may be terminated pursuant to the terms of the Lease, including, but not limited to, by notice of termination given by Landlord to Tenant at any time during Lease year 11 (a “Lease Year 11 Termination”) or by either party due to the default or bankruptcy of the other party in accordance with the termination provisions of the Lease. If the Lease is terminated by Landlord or Tenant pursuant to the terms of the Lease, the Management Agreement will also be terminated.

At closing, Tenant paid to Landlord an up-front rental payment of $53.0 million (the “Up-Front Rent”). Tenant shall also pay to Landlord aggregate fixed rent of $36.0 million (the “Fixed Rent”) for the Cemeteries in the following amounts:

 

Lease Years 1-5		None
Lease Years 6-20		$1,000,000 per Lease Year
Lease Years 21-25		$1,200,000 per Lease Year
Lease Years 26-35		$1,500,000 per Lease Year
Lease Years 36-60		None

The Fixed Rent for Lease Years 6 through 11 (the “Deferred Fixed Rent”) shall be deferred. If Landlord terminates the Lease pursuant to a Lease Year 11 Termination or Tenant terminates the Lease as a result of a Landlord’s default prior to the end of Lease Year 11 (collectively, a “Covered Termination”), the Deferred Fixed Rent shall be forfeited by Landlord and shall be retained by Tenant. If the Lease is not terminated by a Covered Termination, the Deferred Fixed Rent shall become due and payable 30 days after the end of Lease Year 11.

 

If Landlord terminates the Lease pursuant to a Lease Year 11 Termination, Landlord must repay to Tenant all $53.0 million of the Up-Front Rent. If the Lease is terminated for cause at any time, Landlord must repay to Tenant the unamortized portion of the Up-Front Rent: (i) based on a 60 year amortization schedule if terminated by Tenant due to Landlord’s default and (ii) based on a 30 year amortization schedule if terminated by Landlord due to Tenant’s default.

Generally, 51% of gross revenues from any source received by Tenant on account of the Cemeteries but unrelated to customary operations of the Cemeteries less Tenant’s and Landlord’s reasonable costs and expenses applicable to such unrelated activity shall be paid to Landlord as additional rent. In addition, Tenant shall have the right to request from time to time that Landlord sell (to a party that is independent and not an affiliate of StoneMor or any party that is a Tenant) all or portions of undeveloped land at the leased Cemeteries. If Landlord approves the sale of such undeveloped land, Tenant shall pay to Landlord, as additional rent, 51% of the net proceeds of any such sale.

The table below reflects the assets and liabilities recognized:

 

		(in thousands)
Assets:
Accounts receivable		$	1,610
Intangible asset			59,758
Total assets			61,368
Liabilities:
Obligation for lease and management agreements			36,000
Discount on obligation for lease and management agreements			(27,632	)
Obligation for lease and management agreements, net			8,368
Total liabilities			8,368
Total net assets		$	53,000

The Company recorded the underlying value of the Lease and Management Agreements as a contract-based intangible asset at the present value of the consideration, less the fair value of net assets received, consisting of acquired accounts receivable. A liability of $8.4 million was also recorded for the present value of the Fixed Rent, which is equal to the $36.0 million gross amount due to the Archdiocese of Philadelphia in the future, net of a discount $27.6 million. The discounted values were determined using an effective annual rate of 8.3%, which represents an estimate of the return an investor would require to make this type of investment in the Company over the rent payment period.

First Quarter 2013 Acquisition

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

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

The table below reflects the Company’s final assessment of the fair value of net assets acquired and displays the adjustments made to the revised values reported at December 31, 2013. The Company obtained additional information in the first quarter of 2014 and has retrospectively adjusted these values as noted below. The resulting goodwill is recorded in the Company’s Funeral Homes operating segment.

 

		Revised								Final
		Assessment				Adjustments				Assessment
		(in thousands)
Assets:
Accounts receivable		$	695			$	311			$	1,006
Property and equipment			8,315				—				8,315
Merchandise trusts, restricted, at fair value			4,853				—				4,853
Non-compete agreements			1,927				—				1,927
Total assets			15,790				311				16,101
Liabilities:
Deferred margin			2,419				(1,592	)			827
Merchandise liabilities			2,233				2,606				4,839
Other liabilities			164				—				164
Total liabilities			4,816				1,014				5,830
Fair value of net assets acquired			10,974				(703	)			10,271
Consideration paid—cash			9,100				—				9,100
Consideration paid—units			3,592				—				3,592
Fair value of note payable			3,000				—				3,000
Fair value of debt assumed for non-compete agreement			924				—				924
Total consideration paid			16,616				—				16,616
Goodwill from purchase		$	5,642			$	703			$	6,345

Third Quarter 2013 Acquisition

On August 1, 2013, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the “Seller”). Pursuant to the agreement, the Buyer acquired 1 cemetery in Virginia, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $5.0 million in cash.

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

 

		Final
		Assessment
		(in thousands)
Assets:
Accounts receivable		$	525
Cemetery property			3,900
Property and equipment			1,047
Merchandise trusts, restricted, at fair value			5,461
Perpetual care trusts, restricted, at fair value			5,888
Total assets			16,821
Liabilities:
Merchandise liabilities			1,252
Deferred margin			1,356
Perpetual care trust corpus			5,888
Other liabilities			94
Deferred tax liability			701
Total liabilities			9,291
Fair value of net assets acquired			7,530
Consideration paid			5,000
Gain on bargain purchase		$	2,530

 

If the acquisitions from 2014 and 2013 had been consummated at the beginning of the comparable prior annual reporting period, on a pro forma basis, for the three and nine months ended September 30, 2014 and 2013, consolidated revenues, consolidated net losses and net losses per limited partner unit (basic and diluted) would have been as follows:

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2013				2014				2013
		(in thousands, except per unit data)
Revenue		$	78,174			$	69,616			$	227,593			$	208,327
Net loss			(3,268	)			(1,108	)			(2,625	)			(13,980	)
Net loss per limited partner unit (basic and diluted)		$	(.11	)		$	(.04	)		$	(.09	)		$	(.53	)

These pro forma results are unaudited and have been prepared for comparative purposes only and include certain adjustments such as increased interest on the acquisition of debt, changes in the timing of financing events and the recognition of a gain on acquisition occurring during 2014 in 2013 rather than in the current period. They do not purport to be indicative of the results of operations which actually would have resulted had the combinations been in effect at the beginning of the comparable prior annual reporting period or of future results of operations of the locations.

The properties acquired in 2014 have contributed $8.0 million and $10.3 million of revenue, for the three and nine months ended September 30, 2014, respectively, and $0.4 million of operating profit for both the three and nine months ended September 30, 2014. The properties acquired in 2013 have contributed $1.6 million and $4.3 million of revenue for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.3 million of operating profit for the three and nine months ended September 30, 2014, respectively.

Second Quarter 2014 Settlement

During the nine months ended September 30, 2014, the Company received $1.5 million in cash proceeds related to the settlement of claims from locations acquired by the Company in 2010. Of this amount, $0.3 million is for the reimbursement of legal fees and is recorded as a recovery to corporate overhead and another $0.3 million has been accrued for contingent legal fees payable. A gain of $0.9 million has been recorded as gain on settlement agreement, net, on the unaudited condensed consolidated statement of operations for the proceeds received, net of legal fees.

First and Second Quarter 2013 Settlement

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

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