Attached files

file filename
EX-31.2 - SECTION 302 CFO CERTIFICATION - STONEMOR PARTNERS LPdex312.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - STONEMOR PARTNERS LPdex321.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - STONEMOR PARTNERS LPdex211.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - STONEMOR PARTNERS LPdex322.htm
EX-23.1 - CONSENT OF DELOITTE & TOUCHE LLP - STONEMOR PARTNERS LPdex231.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - STONEMOR PARTNERS LPdex311.htm
EX-10.2.8 - DIRECTOR UNIT APPRECIATION RIGHTS AGREEMENT - STONEMOR PARTNERS LPdex1028.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

FOR THE FISCAL YEAR ENDED December 31, 2009

OR

 

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

FOR THE TRANSITION PERIOD FROM              TO             .

Commission File Number: 000-50910

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

311 Veterans Highway, Suite B

Levittown, Pennsylvania

  19056
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (215) 826-2800

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Units   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

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

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

The aggregate market value of the common units held by non-affiliates of the registrant was approximately $139.7 million as of June 30, 2009 based on $15.00 per unit, the closing price of the common units as reported on the NASDAQ Global Select Market on that date.1

The number of the registrant’s outstanding common units at March 16, 2010 was 13,357,585.

Documents incorporated by reference: None

The aggregate market value of the common units set forth above equals the number of the registrant’s common units outstanding, reduced by the number of common units held by executive officers, directors and persons owning 10% or more of the registrant’s common units, multiplied by the last reported sale price for the registrant’s common units on June 30, 2009, the last day of the registrant’s most recently completed second fiscal quarter. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from this figure is an affiliate of the registrant or that any person whose holdings are included in this figure is not an affiliate of the registrant and any such admission is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission.

 

 

 


Table of Contents

FORM 10-K OF STONEMOR PARTNERS, L.P.

TABLE OF CONTENTS

 

PART I

Item 1.

  

Business

   1

Item 1A.

  

Risk Factors

   10

Item 1B.

  

Unresolved Staff Comments

   22

Item 2.

  

Properties

   23

Item 3.

  

Legal Proceedings

   25

Item 4.

  

(Removed and Reserved).

   25
PART II

Item 5.

  

Market for Registrant Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   25

Item 6.

  

Selected Financial Data

   31

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   34

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   80

Item 8.

  

Financial Statements and Supplementary Data

   82

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   129

Item 9A.

  

Controls and Procedures

   129

Item 9B.

  

Other Information

   131
PART III

Item 10.

  

Directors, Executive Officers and Corporate Governance

   132

Item 11.

  

Executive Compensation

   137

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   149

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   151

Item 14.

  

Principal Accountant Fees and Services

   156
PART IV

Item 15.

  

Exhibits, Financial Statement Schedules

   157


Table of Contents

Item 1.—Business

Overview

We were formed as a Delaware limited partnership in April 2004 to own and operate the assets and businesses previously owned and operated by Cornerstone Family Services, Inc., (“Cornerstone”), which was converted into CFSI LLC, a limited liability company, prior to our initial public offering of common units representing limited partner interests on September 20, 2004. Cornerstone had been founded in 1999 by members of our management team and a private equity investment firm, which we refer to as McCown De Leeuw, in order to acquire a group of 123 cemetery properties and 4 funeral homes.

We are currently the second largest owner and operator of cemeteries in the United States. As of December 31, 2009, we operated 235 cemeteries in 24 states and Puerto Rico. We own 219 of these cemeteries, and we operate the remaining 16 under management or operating agreements with the non-profit cemetery corporations that own the cemeteries. As of December 31, 2009, we also owned, operated and/ or 58 funeral homes in 16 states and in Puerto Rico. Twenty-six of these funeral homes are located on the grounds of the cemeteries that we own.

The cemetery products and services that we sell are:

 

Interment Rights

 

Merchandise

 

Services

•   burial lots

•   lawn crypts

•   mausoleum crypts

•   cremation niches

•   perpetual care rights

 

•   burial vaults

•   caskets

•   grave markers and grave marker bases

•   memorials

 

•   installation of burial vaults

•   installation of caskets

•   installation of other cemetery merchandise

•   other service items

We sell these products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Our sales of real property, including burial lots (with and without installed vaults), lawn and mausoleum crypts and cremation niches, generate qualifying income sufficient for us to be treated as a partnership for federal income tax purposes. In 2009, we performed 37,782 burials and sold 25,842 interment rights (net of cancellations). Based on our sales of interment spaces in 2009, our cemeteries have an aggregated weighted average remaining sales life of 226 years.

Our cemetery properties are located in Alabama, California, Colorado, Delaware, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Virginia, Washington and West Virginia. One cemetery in Hawaii that we acquired in December 2007, pursuant to the Transition Agreement discussed below in “Acquisition”, is still awaiting regulatory approval and has not yet been conveyed to us. Our cemetery operations accounted for approximately 87.1%, 86.9% and 92.6% of our revenues in 2009, 2008 and 2007 respectively.

Our funeral homes are located in Alabama, Arkansas, California, Florida, Illinois, Kansas, Maryland, Missouri, Ohio, Oregon, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Virginia, Washington and West Virginia. Our funeral home revenues accounted for approximately 12.9%, 13.1% and 7.4% of our revenues in 2009, 2008 and 2007 respectively.

Operations

Segment Reporting and Related Information

We have five distinct reportable segments which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, Funeral Homes, and Corporate.

 

1


Table of Contents

We have chosen this level of organization and disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from other segments; b) we have organized our management personnel at these operational levels; c) and it is the level at which our chief decision makers and other senior management evaluate performance.

Our Cemetery Operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of our customers differs in each of our regionally based Cemetery Operations segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

Our Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the Cemetery Operations segments.

Our Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.

Cemetery Operations

Our cemetery operations include sales of cemetery interment rights, merchandise and services and the performance of cemetery maintenance and other services. An interment right entitles a customer to burial space in one of our cemeteries and the perpetual care of that burial space. Burial spaces, or lots, are parcels of property that hold interred human remains. Our cemeteries require a burial vault be placed in each burial lot. A burial vault is a rectangular container, usually made of concrete but also made of steel or plastic, which sits in the burial lot and in which the casket is placed. The top of the burial vault is buried approximately 18 to 24 inches below the surface of the ground, and the casket is placed inside the vault. Burial vaults prevent ground settling that otherwise occurs when a casket placed directly in the ground begins to decay creating uneven ground surface. Ground settling typically results in higher maintenance costs and increased potential liability for slip-and-fall accidents on the property. Lawn crypts are a series of closely spaced burial lots with preinstalled vaults and other improvements, such as landscaping, sprinkler systems and drainage. A mausoleum crypt is an above-ground structure that may be designed for a particular customer, which we refer to as a private mausoleum; or it may be a larger building that serves multiple customers, which we refer to as a community mausoleum. Cremation niches are spaces in which the ashes remaining after cremation, sometimes referred to as cremains, are stored. Cremation niches are often part of community mausoleums, although we sell a variety of cremation niches to accommodate our customers’ preferences.

Grave markers, monuments and memorials are above-ground products that serve as memorials by showing who is remembered, the dates of birth and death and other pertinent information. These markers, monuments and memorials include simple plates, such as those used in a community mausoleum or cremation niche, flush-to-the-ground granite or bronze markers, headstones or large stone obelisks.

One of the principal services we provide at our cemeteries is an “opening and closing,” which is the digging and refilling of burial spaces to install the vault and place the casket into the vault. With pre-need sales, there are usually two openings and closings. During the initial opening and closing, we install the burial vault in the burial space. We usually perform this service shortly after the customer signs a pre-need contract. Advance installation allows us to withdraw the related funds from our merchandise trusts, making the amount in excess of our cost to purchase and install the vault available to us for other uses, and eliminates future merchandise trusting requirements for the burial vault and its installation. During the final opening and closing, we remove the dirt

 

2


Table of Contents

above the vault, open the lid of the vault, place the casket into the vault, close the vault lid and replace the ground cover. With at-need sales, we typically perform the initial opening and closing at the time we perform the final opening and closing. Our other services include the installation of other cemetery merchandise and the perpetual care related to interment rights.

As of December 31, 2009, we provided management services to 16 cemeteries under management or operating agreements with the non-profit cemetery corporations that own the cemeteries. These nonprofit cemeteries are organized as such either because state law requires cemetery properties to be owned by nonprofit entities, such as in New Jersey, or because they were originally established as nonprofit entities. We have voting rights, along with member owners of burial spaces, in the five New Jersey nonprofit cemeteries as a result of owning all of their outstanding certificates of indebtedness or interest. To obtain the benefit of professional management services, the remaining 11 nonprofit cemeteries have entered into agreements with us. The agreements under which we operate these 16 non-profit cemeteries generally have terms ranging from 3 to 40 years (but some are subject to early termination rights and obligations) and provide us with management fees that approximate what we would earn if we owned those cemeteries and held them in for-profit entities.

Funeral Home Operations

As of December 31, 2009, we owned, operated and/ or managed 58 funeral homes, 26 of which are located on the grounds of cemetery properties that we own. Our funeral homes offer a range of services to meet a family’s funeral needs, including family consultation, the removal and preparation of remains, provision of caskets and related funeral merchandise, the use of funeral home facilities for visitation, worship and funeral services and transportation services. Funeral home operations primarily generate revenues from at-need sales, for which there is a smaller potential customer base than pre-need sales, and have low barriers to entry by competitors. By focusing primarily on cemeteries and deriving significant revenues from pre-need sales, we minimize our exposure to these types of challenges.

We purchase caskets from Thacker Caskets, Inc. under a supply agreement that expires on December 31, 2015. This agreement entitles us to specified discounts on the price of caskets but gives Thacker Caskets, Inc. the right of first refusal on all of our casket purchases. We do not have minimum purchase requirements under this supply agreement.

Cremation Products and Services

We operate crematories at some of our cemeteries or funeral homes, but our primary cremation operations are sales of receptacles for cremains, such as urns, and the inurnment of cremains in niches or scattering gardens. While cremation products and services usually cost less than traditional burial products and services, they yield higher margins on a percentage basis and take up less space than burials. We sell cremation products and services on both a pre-need and at-need basis.

Seasonality

The death care business is relatively stable and predictable. Although we experience seasonal increases in deaths due to extreme weather conditions and winter flu, these increases have not historically had any significant impact on our results of operations. In addition, we perform fewer initial openings and closings in the winter when the ground is frozen.

Sales Contracts

Pre-need products and services are typically sold on an installment basis. At-need products and services are generally required to be paid for in full in cash by the customer at the time of sale. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operations—Cemetery Operations—Pre-need Sales” and “—At-need Sales” for a description of our pre-need and at-need products and services.

 

3


Table of Contents

Trusts

Sales of cemetery products and services are subject to a variety of state regulations. In accordance with these regulations, we are required to establish and fund two types of trusts, merchandise trusts and perpetual care trusts, to ensure that we can meet our future obligations. Our funding obligations are generally equal to a percentage of sales proceeds of the products and services we sell. For a detailed discussion of these trusts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trusting.”

Sales Personnel, Training and Marketing

As of December 31, 2009, we employed approximately 688 commissioned salespeople and 62 sales support and telemarketing employees. We have seven regional sales managers covering our cemeteries, who report to our Senior Vice President of Sales. Individual salespersons are typically located at the cemeteries they serve and report directly to the cemetery manager. We have made a strong commitment to the ongoing education and training of our sales force and to salesperson retention in order to ensure that our customers receive the highest quality customer service. Our training program includes classroom training at our headquarters, field training, continuously updated training materials that utilize media, such as the Internet, for interactive training and participation in industry seminars. We place special emphasis on training property sales managers, who are key elements to a successful pre-need sales program.

We reward our salespeople with incentives for generating new customers. Sales force performance is evaluated by sales budgets, sales mix and closing ratios, which are equal to the number of contracts written divided by the number of presentations that are made. Substantially all of our sales force is compensated based solely on performance. Commissions are augmented with various bonus and incentive packages to ensure a high quality, motivated sales force. We pay commissions to our sales personnel on pre-need contracts based upon a percentage of the value of the underlying contracts. Such commissions vary depending upon the type of merchandise and services sold. We also pay commissions on at-need contracts that are generally equal to a fixed percentage of the contract amount. In addition, cemetery managers receive an override commission that is equal to a percentage of the gross sales price of the contracts entered into by the salespeople assigned to the cemeteries they manage.

We generate sales leads through focused telemarketing, direct mail, television advertising, funeral follow-up and sales force cold calling, with the assistance of database mining and other marketing resources. We have created a marketing department to allow us to use more sophisticated marketing techniques to more effectively focus our telemarketing and direct sales efforts. Sales leads are referred to the sales force to schedule an appointment, most often at the customer’s home.

Acquisitions

2010

Certain of our subsidiaries are in the process of negotiating the purchases of seventeen cemeteries, five funeral homes and various related assets for an aggregate purchase price ranging between $44 million and $47 million, approximately $1-5 million of which is presently proposed to be paid in the form of our common units. The transactions are expected to close on or after March 30, 2010 but prior to May 1, 2010. The completion of both acquisitions is subject to the execution of the definitive agreements, which will include certain material conditions to closing. There is no assurance that our subsidiaries will enter into definitive final agreements related to these acquisitions, that such agreements will contain the provisions referenced above or that the applicable conditions to closing will be satisfied.

 

4


Table of Contents

2009

In 2009 we entered into, through certain of our subsidiaries, three long-term operating agreements (subject to certain early termination rights and obligations) wherein we have become the exclusive operator of the underlying cemetery land. Two of these agreements were entered into during the second quarter of 2009, while the third was entered into during the third quarter of 2009.

Total consideration paid for the rights acquired under these agreements was approximately $7.0 million. This consisted of $4.1 million in cash, a note payable of $1.4 million, a commitment to make capital improvements on one of the properties ($0.8 million) and an agreement to reimburse prior operators for certain liabilities ($0.9 million) offset by an agreement wherein we will receive approximately $0.2 million over the next four years. The agreement to reimburse prior operators for certain liabilities does not include a market rate of interest. The $0.9 million consists of a notional amount of approximately $1.9 million offset by a discount of approximately $1.0 million. The $0.2 million to be received does not bear interest and is recorded on our financial statements net of a discount of less than $0.1 million.

The operating results of these cemeteries have been consolidated into our financial statements from their respective date of acquisition and are immaterial to the financial statements taken as a whole.

2008

We made four acquisitions in 2008. The first acquisition took place during the first quarter of the year and consisted of a single cemetery (the “2008 First Quarter Acquisition”). The second acquisition took place in the third quarter of the year and consisted of six cemeteries and two funeral homes (the “2008 Third Quarter Acquisition”) and the third and fourth acquisitions took place in the fourth quarter of the year and consisted of two cemeteries and one funeral home (the “2008 Fourth Quarter Acquisition”).

We paid $600,000 in cash and $500,000 in common units representing limited partner interests to the sellers for the 2008 First Quarter Acquisition. Including the acquisition transaction costs, the transaction was valued at $1.2 million for accounting purposes.

We paid approximately $800,000 in cash to the sellers for the 2008 Third Quarter Acquisition. Including the acquisition transaction costs, the transaction was valued at $1.4 million for accounting purposes.

We paid approximately $1.6 million in cash to the sellers for the 2008 Fourth Quarter Acquisition. Including the acquisition transaction costs, the transaction was valued at $1.8 million for accounting purposes.

2007

On December 21, 2007 we entered into the Asset Purchase and Sale Agreement with Service Corporation International (NYSE: SCI) and certain other entities, pursuant to which we agreed to acquire or manage, as applicable, 45 cemeteries and 30 funeral homes, except for the conveyance of one cemetery in Hawaii, the acquisition of which is subject to state regulatory approval. Pending the conveyance of this location, we entered into a Transition Agreement with SCI (the “Transition Agreement”) pursuant to which SCI will continue to operate, for our benefit, any elements of the business for which regulatory approval to transfer ownership has not been obtained. Under the Transition Agreement, we are obligated to reimburse SCI for all costs incurred by SCI while operating this location for our benefit. We paid $68.0 million in cash for this transaction with SCI and assumed the merchandise and service liabilities associated with certain pre-arranged contracts related to the properties.

The properties are located in Alabama (2 cemeteries and 2 funeral homes), Arkansas (2 funeral homes), California (7 cemeteries and 10 funeral homes), Florida (1 funeral home), Hawaii (1 cemetery), Iowa (1 cemetery), Illinois (5 cemeteries and 2 funeral homes), Indiana (5 cemeteries), Kentucky (1 cemetery), Missouri

 

5


Table of Contents

(2 cemeteries and 1 funeral home), North Carolina (3 cemeteries), Ohio (7 cemeteries and 1 funeral home), Oregon (2 cemeteries and 3 funeral homes), South Carolina (2 cemeteries and 2 funeral homes), Tennessee (3 cemeteries and 4 funeral homes), Washington (2 cemeteries), West Virginia (1 funeral home), and Puerto Rico (2 cemeteries and 1 funeral home).

We acquired two additional cemeteries during the third quarter of 2007 with an aggregate purchase price of approximately $2.4 million.

Competition

Our cemeteries and funeral homes generally serve customers that live within a 10- to 15-mile radius of a property’s location. We face competition from other cemeteries and funeral homes located in the area. Most of these cemeteries and funeral homes are independently owned and operated, and most of these owners and operators are smaller than we are and have fewer resources than we do. We generally face limited competition from the three publicly held death care companies that have U.S. operations—Service Corporation International, Stewart Enterprises, Inc. and Carriage Services, Inc.—as they do not directly operate cemeteries in the same local geographic areas where we operate.

Within a localized area of competition, we compete primarily for at-need sales because many of the independently owned, local competitors either do not have pre-need sales programs or have pre-need programs that are not as developed as ours. Most of these competitors do not have as many of the resources that are available to us to launch and grow a substantial pre-need sales program. The number of customers that cemeteries and funeral homes are able to attract is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well maintained and conveniently located facilities are also important factors. The sale of cemetery and funeral home products and services on a pre-need basis has increasingly been used by many companies as an important marketing tool. Due to the importance of reputation and heritage, increases in customer base are usually gained over a long period of time.

Competitors within a localized area have an advantage over us if a potential customer’s family members are already buried in the competitor’s cemetery. If any of the three publicly held death care companies operated, or in the future were to operate, cemeteries within close proximity of our cemeteries, they may have a competitive advantage over us because they have greater financial resources available to them because of their size and access to the capital markets.

We believe that we currently face limited competition for cemetery acquisitions. The three publicly held death care companies identified above have historically been the industry’s primary consolidators but have largely curtailed cemetery acquisition activity since 1999. Furthermore, these companies continue to generate a majority of their revenues from funeral home operations. Based on the relative levels of cemetery operations and funeral home operations of the three publicly traded death care companies, which are disclosed in their SEC filings, we believe that we are the only public death care company that focuses a significant portion of their efforts on cemetery operations.

Robert B. Hellman Jr., who serves as one of our directors, as the Chief Executive Officer and a Managing Director of McCown De Leeuw & Co., LLC and in various other positions with McCown De Leeuw, has applied for a U.S. patent on a technology entitled, “Apparatus and Method for Operating a Death Care Business as a Master Limited Partnership.” The computer-implemented method defines death care master limited partnership assets based upon qualifying death care business income sources and non-qualifying death care business income sources. The pending patent application was filed on November 27, 2002, and claims priority to an earlier patent application filed November 30, 2001 Mr. Hellman assigned the patent application to McCown De Leeuw & Co. IV, L.P. in February 2003 and recorded the assignment in the United States Patent and Trademark Office in March 2003. McCown De Leeuw & Co. IV, L.P. assigned a 50% ownership interest in the patent application and, if issued, the patent to the partnership. That patent application is still pending. We cannot assure you that the patent will be issued or, if it is issued and subsequently challenged, that it will be determined to be valid.

 

6


Table of Contents

If a patent is issued relating to this patent application, no other entity will be able to practice the claimed invention without the consent of McCown De Leeuw & Co. IV, L.P. and us. The patent will not prevent corporations, such as the three publicly held death care companies, or privately held partnerships that do not operate as master limited partnerships from competing with us in the death care business. As a result, the issuance of the patent is not expected to have a material impact on our business.

Regulation

General

Our operations are subject to regulation, supervision and licensing under federal, state and local laws which impacts the goods and services that we may sell and the manner in which we may furnish goods and services.

Cooling-Off Legislation

Each of the states where our current cemetery properties are located has “cooling-off” legislation with respect to pre-need sales of cemetery and funeral home products and services. This legislation requires us to refund proceeds from pre-need sales contracts if canceled by the customer for any reason within three to thirty days, from the date of the contract, depending on the state.

Trusting

Sales of cemetery interment rights and pre-need sales of cemetery and funeral home merchandise and services are subject to trusting requirements imposed by state laws in virtually all of the states where we operate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trusting.”

Truth in Lending Act and Regulation Z

Our pre-need installment contracts are subject to the federal Truth-in-Lending Act, or TILA, and the regulations thereunder, which are referred to as Regulation Z. TILA and Regulation Z promote the informed use of consumer credit by requiring us to disclose, among other things, the annual percentage rate, finance charges and amount financed when extending credit to customers.

Do Not Call Implementation Act

We are subject to the requirements of two federal statutes governing telemarketing practices, the Telephone Consumer Protection Act, or TCPA, and the Telemarketing and Consumer Fraud and Abuse Prevention Act, or TCFAPA. These statutes impose significant penalties on those who fail to comply with their mandates. The Federal Communications Commission, or FCC, is the federal agency with authority to enforce the TCPA, and the Federal Trade Commission, or FTC, has jurisdiction under the TCFAPA. The FTC has established and implemented a national no-call registry under the TCFAPA. The legislation also establishes a private right of action for consumers against telemarketing entities under certain circumstances. The FCC has adopted regulations that mirror the no-call registry legislation. Primarily as a result of implementation of the do not call legislation, the percentage of our pre-need sales generated from telemarketing leads has decreased substantially in the past ten years. We are also subject to similar telemarketing consumer protection laws in the states of Alabama, Arkansas, California, Colorado, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Maryland, Michigan, Missouri, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Washington, West Virginia and Puerto Rico. These states’ statutes permit consumers to prevent unwanted telephone solicitations.

Occupational Safety and Health Act and Environmental Law Requirements

We are subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state statutes. OSHA’s regulatory requirement known as the Hazard Communication Standard, the Emergency Planning and Community Right-to-Know Act (“EPCRA”) and similar state statutes require us to report

 

7


Table of Contents

information about hazardous materials used or maintained for our operations to state, federal and local authorities. We may also be subject to Tier 1 or Tier 2 Emergency and Hazardous Chemical Inventory reporting requirements under EPCRA depending on the amount of hazardous materials maintained on-site at a particular facility. We are also subject to the federal Americans with Disabilities Act and similar laws which, among other things, may require that we modify our facilities to comply with minimum accessibility requirements for disabled persons.

Federal Trade Commission

Our funeral home operations are comprehensively regulated by the FTC under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder referred to as the “Funeral Rule.” The Funeral Rule requires funeral service providers to disclose the prices for their goods and services as soon as the subject of price arises in a discussion with a potential customer (this entails presenting an itemized price list, referred to as the General Price List, if the consultation is in person, and readily answering all price-related questions posed over the telephone), and to offer their goods and services on an unbundled basis. Through these regulations, the FTC sought to give consumers the ability to compare prices among funeral service providers and to avoid buying packages containing goods or services that they did not want. The unbundling of goods from services has also opened the way for third-party, discount casket sellers to enter the market, although they currently do not possess substantial market share.

Future Enactments and Regulation

Federal and state legislatures and regulatory agencies frequently propose new laws, rules and regulations and new interpretations of existing laws, rules and regulations which, if enacted or adopted, could have a material adverse effect on our operations and on the death care industry in general. A significant portion of our operations is located in California, Pennsylvania, New Jersey, Virginia, Maryland, North Carolina and West Virginia and any material adverse change in the regulatory requirements of those states applicable to our operations could have a material adverse effect on our results of operations. We cannot predict the outcome of any proposed legislation or regulations or the effect that any such legislation or regulations, if enacted or adopted, might have on us.

Environmental Regulations and Liabilities

Our operations are subject to federal, state and local environmental regulations in three principal areas: (1) crematories for emissions to air that may trigger requirements under the Clean Air Act, (2) funeral homes for the management of hazardous materials and medical wastes and (3) cemeteries and funeral homes for the management of solid waste, underground and above-ground storage tanks and discharges to wastewater treatment systems and/ or septic systems.

Clean Air Act

The Federal Clean Air Act and similar state laws, which regulate emissions into the air, can affect crematory operations through permitting and emissions control requirements. Our cremation operations may be subject to Clean Air Act regulations under federal and state law and may be subject to enforcement actions if these operations do not conform to the requirements of these laws.

Emergency Planning and Community Right-to-Know Act

As noted above, federal, state and local regulations apply to the use of hazardous materials at our funeral homes. Depending on the types and quantities of materials we manage at any particular facility, we may be required to maintain and submit to authorities’ inventories of these materials present at that location and reports in compliance with EPCRA or similar state statutes.

 

8


Table of Contents

Comprehensive Environmental Response, Compensation, and Liability Act

The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, and similar state laws affect our cemetery and funeral home operations by, among other things, imposing remediation obligations for threatened or actual releases of hazardous substances that may endanger public health or welfare or the environment. Under CERCLA and similar state laws, strict joint and several liability may be imposed on generators, site owners and operators, and others regardless of fault or the legality of the original disposal activity. Our operations include the use of some materials that may meet the definition of “hazardous substances” under CERCLA or state laws and thus may give rise to liability if released to the environment through a spill or release. Should we acquire new properties with pre-existing conditions triggering CERCLA or similar state liability, we may become liable for responding to those conditions under CERCLA or similar state laws. We may become involved in proceedings, litigation or investigations at one or more sites where releases of hazardous substances have occurred, and we cannot assure you that the associated costs and potential liabilities would not be material.

Underground and Aboveground Storage Tank Laws and Solid Waste Laws

Federal, state and local laws regulate the installation, removal, operations and closure of underground storage tanks, or USTs and above-ground storage tanks, or ASTs, which are located at some of our facilities as well as the management and disposal of solid waste. Most of the USTs and ASTs contain petroleum for heating our buildings or are used for vehicle maintenance, or general operations. Depending upon the age and integrity of the USTs and ASTs, they may require upgrades, removal and/or closure, and remediation may be required if there has been a discharge or release of petroleum into the environment. All of the aforementioned activities may require us to incur capital costs and expenses to ensure continued compliance with environmental requirements. Should we acquire properties with existing USTs and ASTs that are not in compliance with environmental requirements, we may become liable for responding to releases to the environment or for costs associated with upgrades, removal and/or closure costs, and we can not assure you that the costs or liabilities will not be material in that event. Solid wastes have been disposed of at some of our cemeteries, both lawfully and unlawfully. Prior to acquiring a cemetery, an environmental site assessment is usually conducted to determine, among other conditions, if a solid waste disposal area or landfill exists on the parcel which requires removal, cleaning or management. Depending upon the existence of any such solid waste disposal areas, we may be required by the applicable regulatory authority to remove the waste materials or to conduct remediation and we cannot assure you that the costs or liabilities will not be material in that event.

Employees

As of December 31, 2009, our general partner and its affiliates employed approximately 2,156 full-time and approximately 114 part-time employees. A total of 5 full time employees at one of our cemeteries located in New Jersey are represented by one union and are subject to collective bargaining agreements that expire in December 2010, 24 employees at 11 of our cemeteries located in Pennsylvania are represented by 3 different unions and are subject to collective bargaining agreements that expire between June 2010 and November 2011, 3 employees at 1 of our cemeteries located in Illinois are represented by a union and are subject to collective bargaining agreements that expired and are in the process of being renegotiated, 11 employees at 1 of our locations in California are represented by a union and are subject to a collective bargaining agreement that expired in January 2010, this agreement is currently being renegotiated, a total of 8 employees at 1 cemetery in Ohio are represented by a union and are subject to collective bargaining agreements that expire in December 2010. We believe that our relationship with our employees is good.

Available Information

We maintain an internet website with the address of http://www.stonemor.com. The information on this website is not, and should not be considered part, of this Annual Report on Form 10-K and is not incorporated by reference into this document. This website address is only intended to be an inactive textual reference. Copies of

 

9


Table of Contents

our reports filed with, or furnished to, the SEC on Forms 10-K, 10-Q, and 8-K and any amendments to such reports are available for viewing and copying at such internet website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC.

Financial Information

Information for each of our segments is presented in Part II—Item 8 “—Financial Statements and Supplementary Data” in this report.

Item 1A. —Risk Factors

Risk Factors Related to Our Business

Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks set forth below. The risks described below should not be considered comprehensive and all-inclusive. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations, financial condition and results of operations. If any events occur that give rise to the following risks, our business, financial condition or results of operations could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes. Many such factors are beyond our ability to control or predict. Investors are cautioned not to put undue reliance on forward-looking statements.

We may not have sufficient cash from operations to pay the minimum quarterly distribution after we have paid our expenses, including the expenses of our general partner, funded merchandise and perpetual care trusts and established necessary cash reserves.

The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from operations, which fluctuates from quarter to quarter based on, among other things:

 

   

the volume of our sales;

 

   

the prices at which we sell our products and services; and

 

   

the level of our operating and general and administrative costs.

In addition, the actual amount of cash we will have available for distribution will depend on other factors, such as working capital borrowings, capital expenditures and funding requirements for trusts and our ability to withdraw amounts from trusts.

If we do not generate sufficient cash to pay the minimum quarterly distribution on the common units, the market price of the common units may decline materially. We expect that we will need working capital borrowings of approximately $12.7 million during the twelve-month period ending December 31, 2010 in order to have sufficient operating surplus to pay the full minimum quarterly distributions on all of our common units for that period, although the actual amount of working capital borrowings could be materially more or less. These working capital borrowings enable us to finance the build up in our accounts receivables, and to construct mausoleums and purchase products for our pre-need sales in advance of the time of need which, in turn, allows us to generate available cash for operating surplus over time by accessing the funds held in trust for the products purchased.

Our substantial level of indebtedness could materially adversely affect our ability to generate sufficient cash for distribution to our partners, to fulfill our debt obligations and to operate our business.

We have a substantial amount of debt, which requires significant interest and principal payments. As of December 31, 2009, we had $ 183.2 million of total debt outstanding and $13.5 million in cash and cash equivalents. Leverage makes us more vulnerable to economic downturns. Because we are obligated to dedicate a

 

10


Table of Contents

portion of our cash flow to service our debt obligations, our cash flow available for operations and for distribution to our partners will be reduced. The amount of indebtedness we have could limit our flexibility in planning for, or reacting to, changes in the markets in which we compete, limit our ability to obtain additional financing, if necessary, for working capital expenditures, acquisitions or other purposes, and require us to dedicate more cash flow to service our debt than we desire. Our ability to satisfy our indebtedness as required by the terms of our debt will be dependent on, among other things, the successful execution of our long-term strategic plan. Subject to limitations in our debt obligations, we may incur additional debt in the future, for acquisitions or otherwise, and servicing this debt could further limit our cash flow.

Restrictions in our existing and future debt agreements could limit our ability to make distributions to you or capitalize on acquisition and other business opportunities.

The operating and financial restrictions and covenants in our debt obligations and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our debt obligations contain covenants that restrict or limit our ability to:

 

   

enter into a new line of business;

 

   

enter into any agreement of merger or acquisition;

 

   

sell, transfer, assign or convey assets;

 

   

grant certain liens;

 

   

incur or guarantee additional indebtedness;

 

   

make certain loans, advances and investments;

 

   

declare and pay dividends and distributions;

 

   

enter into transactions with affiliates; and

 

   

make voluntary payments or modifications of indebtedness.

In addition, these debt obligations contain covenants requiring us to maintain certain financial ratios and tests. These restrictions may also limit our ability to obtain future financings. Our ability to comply with the covenants and restrictions contained in our debt obligations may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions continue to deteriorate, our ability to comply with these covenants may be impaired. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-Term Debt” If we violate any of the restrictions, covenants, ratios or tests in our debt obligations, the lenders will be able to accelerate the maturity of all borrowings thereunder and demand repayment of amounts outstanding, and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our obligations or any new indebtedness could have similar or greater restrictions.

Current economic conditions may result in a decrease in cemetery merchandise and services revenues.

During the months of November and December of 2008, we experienced a reduction in the value of contracts written for pre-need cemetery merchandise and services, which we believed resulted from the current economic downturn. While the value of contracts written increased in 2009, any further economic downturn could have a negative effect on future revenues from pre-need cemetery merchandise and services. It is also possible that any further economic downturn might lead to a decline in sales of at-need and funeral home merchandise and services.

 

11


Table of Contents

Adverse conditions in the financial markets have reduced the principal and may reduce the earnings of the investments held in merchandise and perpetual care trusts and adversely affect our revenues and cash flow.

A substantial portion of our revenue is generated from investment returns that we realize from merchandise and perpetual care trusts. The 2008 and early 2009 decline in the prices of most corporate debt and equity securities significantly reduced the fair value of the assets held in these trusts. Future cash flows could be negatively impacted if we are forced to liquidate assets that are in impaired positions.

We invest primarily for current income. We rely on the interest and dividends paid by the assets in our trusts to provide both revenue and cash flow. Interest income from fixed-income securities is particularly susceptible to changes in interest rates and declines in credit worthiness while dividends from equity securities are susceptible to the issuer’s ability to make such payments.

Any decline in the interest rate environment or the credit worthiness of our debt issuers or any suspension or reduction of dividends could have a material adverse effect on our financial condition and results of operations.

In addition, any significant or sustained unrealized investment losses could result in merchandise trusts having insufficient funds to cover our cost of delivering products and services. In this scenario, we would be required to use our operating cash to deliver those products and perform those services, which could decrease our cash available for distribution.

Pre-need sales typically generate low or negative cash flow in the periods immediately following sales which could adversely affect our ability to make distributions to our partners.

When we sell cemetery merchandise and services on a pre-need basis, we pay commissions on the sale to our salespeople and are required by state law to deposit a portion of the sales proceeds into a merchandise trust. In addition, most of our customers finance their pre-need purchases under installment contracts payable over a number of years. Depending on the trusting requirements of the states in which we operate, the applicable sales commission rates and the amount of the down payment, our cash flow from sales to customers through installment contracts is typically negative until we have paid the sale commission due on the sale or until we purchase the products or perform the services and are permitted to withdraw funds we have deposited in the merchandise trust. To the extent we increase pre-need sales, state trusting requirements are increased or we delay the purchase of the products or performance of the services we sell on a pre-need basis, our cash flow immediately following pre-need sales may be further reduced, and our ability to make distributions to our partners could be adversely affected.

Because fixed costs are inherent in our business, a decrease in our revenues can have a disproportionate effect on our cash flow and profits.

Our business requires us to incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on our cemetery properties and funeral homes regardless of the number of interments or funeral services we perform. If we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause our margins, profits and cash flow to decline at a greater rate than the decline in our revenues.

Our failure to attract and retain qualified sales personnel and management could have an adverse effect on our business and financial condition.

Our ability to attract and retain a qualified sales force and other personnel is an important factor in achieving future success. Buying cemetery and funeral home products and services, especially at-need products and services, is very emotional for most customers, so our sales force must be particularly sensitive to our customers’

 

12


Table of Contents

needs. We cannot assure you that we will be successful in our efforts to attract and retain a skilled sales force. If we are unable to maintain a qualified and productive sales force, our revenues may decline, and our cash available for distribution may decrease.

We are also dependent upon the continued services of our key officers. The loss of any of our key officers could have a material adverse effect on our business, financial condition and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or key employees if their services were no longer available. We do not maintain key employee insurance on any of our executive officers.

We may not be able to identify, complete, fund or successfully integrate additional cemetery acquisitions which could have an adverse affect on our results of operations.

A primary component of our business strategy is to grow through acquisitions of cemeteries and, to a lesser extent, funeral homes. We cannot assure you that we will be able to identify and acquire cemeteries on terms favorable to us or at all. We may face competition from other death care companies in making acquisitions. Historically, we have funded a significant portion of our acquisitions through borrowings Our ability to make acquisitions in the future may be limited by our inability to secure adequate financing, restrictions under our existing or future debt agreements, competition from third parties or a lack of suitable properties. As of December 31, 2009, we had approximately $45.0 million of available borrowing capacity under our acquisition credit facility.

In, addition, if we complete acquisitions, we may encounter various associated risks, including the possible inability to integrate an acquired business into our operations, diversion of management’s attention and unanticipated problems or liabilities, some or all of which could have a material adverse effect on our operations and financial performance. Also, when we acquire cemeteries that do not have an existing pre-need sales program or a significant amount of pre-need products and services that have been sold but not yet purchased or performed, the operation of the cemetery and implementation of a pre-need sales program after acquisition may require significant amounts of working capital. This may make it more difficult for us to make acquisitions.

If the trend toward cremation in the United States continues, our revenues may decline which could have an adverse effect on our business and financial condition.

We and other death care companies that focus on traditional methods of interment face competition from the increasing number of cremations in the United States. Because the products and services associated with a cremation, such as niches and urns, produce lower revenues than the products and services associated with a traditional interment, a continuing trend toward cremations may reduce our revenues and profitability.

Declines in the number of deaths in our markets can cause a decrease in revenues.

Declines in the number of deaths could cause at-need sales of cemetery and funeral home merchandise and services to decline and could cause a decline in the number of pre-need sales, both of which could decrease revenues. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. However, generally, the number of deaths fluctuates with the seasons with more deaths occurring during the winter months primarily resulting from pneumonia and influenza. These variations can cause revenues to fluctuate.

The financial condition of third-party insurance companies that fund our pre-need funeral contracts may impact our financial condition, results of operations, or cash flows.

Where permitted, customers may arrange their pre-need funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to our funeral home to pay for the pre-need funeral contract at the time of need. If the financial condition of the

 

13


Table of Contents

third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance policy, including the annual increase in the death benefit. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations, or cash flows.

Regulatory and Legal Risks

Our operations are subject to regulation, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive regulations concerning trusts, pre-need sales, cemetery ownership, marketing practices, crematories, environmental matters and various other aspects of our business.

If state laws or interpretations of existing state laws change or if new laws are enacted, we may be required to increase trust deposits or to alter the timing of withdrawals from trusts, which may have a negative impact on our revenues and cash flow.

We are required by state laws to deposit specified percentages of the proceeds from our pre-need and at-need sales of interment rights into perpetual care trusts and proceeds from our pre-need sales of cemetery products and services into merchandise trusts. These laws also determine when we are allowed to withdraw funds from those trusts. If those laws or the interpretations of those laws change or if new laws are enacted, we may be required to deposit more of the sales proceeds we receive from our sales into the trusts or to defer withdrawals from the trusts, thereby decreasing our cash flow until we are permitted to withdraw the deposited amounts. This could also reduce our cash available for distribution.

If state laws or their interpretations change, or new laws are enacted relating to the ownership of cemeteries and funeral homes, our business, financial condition and results of operations could be adversely affected.

Some states require cemeteries to be organized in the nonprofit form but permit those nonprofit entities to contract with for-profit companies for management services. If state laws change or new laws are enacted that prohibit us from managing cemeteries in those states, then our business, financial condition and results of operations could be adversely affected.

We are subject to legal restrictions on our marketing practices that could reduce the volume of our sales which could have an adverse effect on our business, operations and financial condition.

The enactment or amendment of legislation or regulations relating to marketing activities may make it more difficult for us to sell our products and services. For example, the federal “do not call” legislation has adversely affected our ability to market our products and services using telephone solicitation by limiting who we may call and increasing our costs of compliance. As a result, we rely heavily on direct mail marketing and telephone follow-up with existing contacts. Additional laws or regulations limiting our ability to market through direct mail, over the telephone, through internet and e-mail advertising or door-to-door may make it difficult to identify potential customers, which could increase our costs of marketing. Both increases in marketing costs and restrictions on our ability to market effectively could reduce our revenues and could have an adverse effect on our business, operations and financial condition, as well as our ability to make cash distributions to you.

We are subject to environmental and health and safety regulations that may adversely affect our operating results.

Our cemetery and funeral home operations are subject to numerous federal, state and local environmental and health and safety regulations. We may become subject to liability for the removal of hazardous substances and solid waste under CERCLA and other federal and state laws. Under CERCLA and similar state laws, strict, joint and several liability may be imposed on various parties, regardless of fault or the legality of the original disposal activity. Our funeral home, cemetery and crematory operations include the use of some materials that

 

14


Table of Contents

may meet the definition of “hazardous substances” under CERCLA or state laws and thus may give rise to liability if released to the environment through a spill or release. We cannot assure you that we will not face liability under CERCLA for any conditions at our properties, and we cannot assure you that these liabilities will not be material. Our cemetery and funeral home operations are subject to regulation of underground and above ground storage tanks and laws managing the disposal of solid waste. If new requirements under local, state or federal laws were to be adopted, and were more stringent than existing requirements, new permits or capital expenditures may be required.

Our funeral home operations are generally subject to federal and state regulations regarding the disposal of medical waste, and are also subject to regulation by federal, state or local authorities under the EPCRA. We are required by EPCRA to maintain, and report, if applicable thresholds are met, a list of any hazardous chemicals, which are stored or used at our facilities, we use to state, federal, and local agencies.

Our crematory operations may be subject to regulation under the federal Clean Air Act and any analogous state laws. If new regulations applicable to our crematory operations were to be adopted, they could require permits or capital expenditures that could increase our costs of operation and compliance.

Risks Inherent in an Investment in Us

Our general partner and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to your detriment.

As of December 31, 2009, CFSI LLC owned an aggregate 15.7% limited partner interest in us and owned all of the Class A units of our general partner. Conflicts of interest may arise between CFSI LLC and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of the unitholders. These conflicts include, among others, the following situations:

 

   

The board of directors of our general partner is elected by the owners of our general partner. Although our general partner has a fiduciary duty to manage us in good faith, the directors of our general partner also have a fiduciary duty to manage our general partner in a manner beneficial to the owners of our general partner. By purchasing common units, unitholders will be deemed to have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable law.

 

   

Our partnership agreement limits the liability of our general partner, reduces its fiduciary duties and restricts the remedies available to unitholders for actions that might, without the limitations, constitute breaches of fiduciary duty.

 

   

Our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuances of additional limited partner interests and reserves, each of which can affect the amount of cash that is distributed to unitholders.

 

   

Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.

 

   

Our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates.

 

   

In some instances, our general partner may cause us to borrow funds or sell assets outside of the ordinary course of business in order to permit the payment of distributions, even if the purpose or effect of the borrowing is to make distributions in an amount such that incentive distribution rights will be paid.

 

15


Table of Contents

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units will trade.

Unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not select our general partner or elect the board of directors of our general partner and will have no right to select our general partner or elect its board of directors in the future. We are not required to have a majority of independent directors on our board. The board of directors of our general partner, including the independent directors, is chosen entirely by the owners of our general partner and not our unitholders. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than the general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter. In addition, the partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Our general partner can transfer its ownership interest in us without unitholder consent under certain circumstances, and the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in the partnership agreement on the ability of the owners of our general partner to transfer their ownership interest in the general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of the general partner with its own choices and thereby influence the decisions taken by the board of directors and officers.

We may issue additional common units without your approval, which would dilute your existing ownership interests.

We may issue an unlimited number of limited partner interests of any type without the approval of the unitholders. You will not have the right to approve our issuance at any time of equity securities ranking junior to the common units.

The issuance of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

your proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each unit may decrease;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline; and

 

   

the ratio of taxable income to distributions may increase.

 

16


Table of Contents

Cost reimbursements due our general partner may be substantial and will reduce the cash available for distribution to you.

Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates, including CFSI LLC and the officers and directors of our general partner, for all expenses they incur on our behalf. The reimbursement of expenses could adversely affect our ability to pay cash distributions to you. Our general partner determines the amount of these expenses. In addition, our general partner and its affiliates may provide us with other services for which we will be charged fees as determined by our general partner.

In establishing cash reserves, our general partner may reduce the amount of available cash for distribution to you.

Subject to the limitations on restricted payments contained in the indenture governing the 10.25% Senior Notes due 2017 and other indebtedness, the master partnership distributes all of our “available cash” each quarter to its limited partners and general partner. “Available cash” is defined in the master partnership’s partnership agreement, and it generally means, for each fiscal quarter, all cash and cash equivalents on hand on the date of determination for that quarter less the amount of cash reserves established at the discretion of the general partner to:

 

   

provide for the proper conduct of our business;

 

   

comply with applicable law, the terms of any of our debt instruments or other agreements; or

 

   

provide funds for distributions to its unitholders and general partner for any one or more of the next four calendar quarters.

These reserves will affect the amount of cash available for distribution to you.

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

If, at any time, our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon the sale of your common units.

You may be required to repay distributions that you have received from us.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Assignees who become substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership. However, assignees are not liable for obligations unknown to the assignee at the time the assignee became a limited partner if the liabilities could not be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

17


Table of Contents

Tax Risks to Common Unitholders

Audit adjustments to the taxable income of our corporate subsidiaries for prior taxable years may reduce the net operating loss carryforwards of such subsidiaries and thereby increase their tax liabilities for future taxable periods.

Our business was conducted by an affiliated group of corporations during periods prior to the completion of our initial public offering and, since the initial public offering, continues to be conducted in part by corporate subsidiaries. The amount of cash distributions we receive from our corporate subsidiaries over the next several years will depend in part upon the amount of net operating losses available to those subsidiaries to reduce the amount of income subject to federal income tax they would otherwise pay. These net operating losses will begin to expire in 2019. The amount of net operating losses available to reduce the income tax liability of our corporate subsidiaries in future taxable years could be reduced as a result of audit adjustments in respect to prior taxable years.

CFSI LLC has agreed to indemnify us against additional income tax liabilities, if any, that arise from our operations prior to our initial public offering, and income tax liabilities, if any, that arise from the consummation of the transactions related to our formation in excess of $600,000 if those liabilities are asserted by the IRS or any state taxing authority prior to the expiration of the applicable statutes of limitations for income taxes of Cornerstone, for its taxable period ending with the conversion of Cornerstone into CFSI LLC (generally, three years from the filing of the tax return for such period). Also, CFSI LLC has agreed to indemnify us against any liabilities we may be subject to in the future resulting from a reduction in our net operating losses as a result of such prior operations or as a result of such formation transactions in excess of that which is believed to result from them at the time of our initial public offering. We cannot assure you that we will not ultimately be responsible for any or all of these liabilities, if they occur. Any increase in the tax liabilities of our corporate subsidiaries because of a reduction in net operating losses not recouped under the indemnity will reduce our cash available for distribution.

Changes in the ownership of our units, including the changes occurring as a result of our initial public offering may result in annual limitations on our use of net operating losses available to reduce taxable income, which could increase our tax liabilities and decrease cash available for distribution in future taxable periods.

The use of the net operating losses by our corporate subsidiaries may be limited if the ownership of our units changes such that our corporate subsidiaries are deemed to have an “ownership change” under applicable provisions of the Internal Revenue Code. In general, an ownership change will occur if the percentage of our units, based on the value of the units, owned by certain unitholders or groups of unitholders increases by more than fifty percentage points during a three-year period. For this purpose, the unitholders who acquired interests in us pursuant to our initial public offering will be treated as a single group, as will those persons who acquire units in any subsequent offering we may make. The public group that acquired units in our initial public offering acquired approximately 49% of the total partnership interests that were outstanding immediately after completion of the initial public offering. Those units likely constituted more than 50% of the value of all ownership interests in us. However, applicable Treasury Regulations provide generally that if in a public offering units are issued solely for cash, for purposes of calculating the percentage of ownership change resulting from the transaction, the acquiring unitholders will be deemed to acquire only up to 50% of the number of units they actually acquire. At the time of our initial public offering, our tax counsel opined that the initial public offering should not result in an ownership change. No ruling has been or will be requested from the IRS regarding this issue, and an opinion of counsel represents only the counsel’s legal judgment and does not bind the IRS or the courts. Thus there remains some risk that our initial public offering resulted in an ownership change. If an ownership change did occur, each of our corporate subsidiaries would be restricted annually in its ability to use its net operating losses to reduce its federal taxable income to an amount equal to the value of the corporation on the date of the ownership change multiplied by the applicable federal long-term tax-exempt rate in effect at such time. In the event that the initial public offering did not create an ownership change, our issuance of common units in November of 2005 likely

 

18


Table of Contents

created an ownership change with respect to the shares of our corporate subsidiaries for the purposes of Section 382 of the Internal Revenue Code. However, we do not believe this ownership change will have a material effect on the use by our corporate subsidiaries of their remaining net operating losses. Nonetheless, to the extent that an annual net operating loss limitation for any one year does restrict the ability of our corporate subsidiaries to use their remaining net operating losses, an increase in tax liabilities of our corporate subsidiaries could result, which would reduce the amount of cash available for distribution to you.

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of additional entity-level taxation by individual states. If the IRS treats us as a corporation for federal tax purposes or we become subject to additional entity-level taxation for state tax purposes, it would reduce the amount of cash available for distribution to you.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe based upon our current operations that we are so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35% and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units. Moreover, treatment of us as a corporation could materially and adversely affect our ability to make payment on our debt.

Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. In addition, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. If any of these states were to impose a tax on us, the cash available for distribution to you would be reduced. The partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that law on us.

We have subsidiaries that will be treated as corporations for federal income tax purposes and subject to corporate-level income taxes.

Some of our operations are conducted through subsidiaries that are organized as C corporations. Accordingly, these corporate subsidiaries are subject to corporate-level tax, which reduces the cash available for distribution to our partnership and, in turn, to you. If the IRS were to successfully assert that these corporations have more tax liability than we anticipate or legislation was enacted that increased the corporate tax rate, the cash available for distribution could be further reduced.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted, and the cost of any IRS contest will reduce our cash available for distribution to you.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may

 

19


Table of Contents

materially and adversely impact the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

You may be required to pay taxes on income from us even if you do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, you will be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income even if you receive no cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

Tax gain or loss on disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.

Tax-exempt entities and non- U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans individual retirement accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRA’s and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Due to a number of factors, including our inability to match transferors and transferees of common units, we take depreciation and amortization positions that may not conform to all aspects of the existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns

We have adopted certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our

 

20


Table of Contents

unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our termination would, among other things, result in the closing of our taxable year for all unitholders which would result in our filing two tax returns for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership will be required to provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs.

You will likely be subject to state and local taxes and filing requirements in jurisdictions where you do not live as a result of an investment in units.

In addition to federal income taxes, you will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property, even if you do not live in any of those jurisdictions. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We own assets or conduct business in a majority of states and in Puerto Rico. Most of these various jurisdictions currently impose, or may in the future impose, an income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may own assets or do business in additional states that impose a personal income tax. It is your responsibility to file all United States federal, state and local tax returns.

A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of the loaned units, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may

 

21


Table of Contents

recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is put in service. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, however, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress have recently considered substantive changes to the existing federal income tax laws that would have affected certain publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be applied retroactively. Although the recently considered legislation would not have appeared to affect our federal income tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will be reconsidered or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

 

Item 1B. Unresolved Staff Comments

None.

 

22


Table of Contents
Item 2. Properties

Cemeteries and Funeral Homes

The following table summarizes the distribution of our cemetery and funeral properties by state as of December 31, 2009 as well as the weighted average estimated remaining sales life in years for our cemeteries based upon number of interment spaces sold during 2009:

 

    Cemeteries   Funeral Homes   Total
Net acres
  Weighted
Average
Estimated Net
Sales Life
  Number of
Interment
Spaces Sold
in 2009

Alabama

  9   6   305   200   1,308

Arkansas

  —     2   —     —     —  

California

  7   9   270   44   1,787

Colorado

  2   —     12   471   30

Delaware

  1   —     12   206   23

Florida

  —     1   —     —     —  

Georgia

  7   —     135   125   1,004

Hawaii

  1   —     6   201   —  

Illinois

  7   2   243   204   787

Indiana

  6   —     422   338   732

Iowa

  1   —     89   300   108

Kansas

  2   1   35   163   250

Kentucky

  2   —     59   102   296

Maryland

  10   1   716   131   1,870

Michigan

  3   —     87   494   209

Missouri

  3   1   116   298   333

New Jersey

  6   —     341   44   1,785

North Carolina

  13   —     331   149   2,246

Ohio

  12   2   875   204   2,248

Oregon

  7   8   181   228   807

Pennsylvania

  51   8   2,479   525   2,737

Puerto Rico

  2   1   64   110   517

Rhode Island

  2   —     70   1,067   24

South Carolina

  8   3   395   162   1,166

Tennessee

  8   5   428   285   1,077

Virginia

  29   2   773   169   2,385

Washington

  3   2   33   56   161

West Virginia

  33   4   1,404   389   1,954
                   

Total

  235   58   9,881   226   25,842
                   

We calculated estimated remaining sales life for each of our cemeteries by dividing the number of unsold interment spaces by the number of interment spaces sold at that cemetery in the most recent year. For purposes of estimating remaining sales life, we defined unsold interment spaces as unsold burial lots and unsold spaces in existing mausoleum crypts as of December 31, 2009. We defined interment spaces sold in 2009 as:

 

   

the number of burial lots sold, net of cancellations;

 

   

the number of spaces sold in existing mausoleum crypts, net of cancellations; and

 

   

the number of spaces sold in mausoleum crypts that we have not yet built, net of cancellations.

We count the sale of a double-depth burial lot as the sale of one interment space even though a double-depth burial lot includes two interment rights. We count an unsold double-depth burial lot as one unsold interment space. Because our sales of cremation niches were immaterial, we did not include cremation niches in the

 

23


Table of Contents

calculation of estimated remaining sales life. When calculating estimated remaining sales life, we did not take into account any future cemetery expansion. In addition, sales of an unusually high or low number of interment spaces in a particular year affect our calculation of estimated remaining sales life. Future sales may differ from previous years’ sales, and actual remaining sales life may differ from our estimates. We calculated the weighted average estimated remaining sales life by aggregating unsold interment spaces and interment spaces sold on a state-by-state or company-wide basis. Based on the number of interment spaces sold in 2009, we estimate that our cemeteries have an aggregate weighted average remaining sales life of 226 years.

The following table shows the cemetery properties that we owned or operated as of December 31, 2009, grouped by estimated remaining sales life:

 

    0 - 25
years
  26 - 49
years
  50 - 100
years
  101 - 150
years
  151 - 200
years
  Over 200
years

Alabama

  —     —     3   2   1   3

California

  3   1   2   —     —     1

Colorado

  —     —     —     —     —     2

Delaware

  —     —     —     —     —     1

Georgia

  1   —     2   2   —     2

Hawaii

  —     —     —     —     —     1

Illinois

  —     —     1   2   2   2

Indiana

  —     1   —     —     —     5

Iowa

  —     —     —     —     —     1

Kansas

  —     —     1   —     —     1

Kentucky

  —     1   —     —     1   —  

Maryland

  1   1   4   —     —     4

Michigan

  —     —     —     —     —     3

Missouri

  —     —     —     1   —     2

New Jersey

  1   3   2   —     —     —  

North Carolina

  —     —     2   3   5   3

Ohio

  —     1   3   —     —     8

Oregon

  —     —     1   3   —     3

Pennsylvania

  3   2   1   7   3   35

Puerto Rico

  —     —     1   —     —     1

Rhode Island

  —     —     —     —     —     2

South Carolina

  —     2   —     2   1   3

Tennessee

  —     —     —     —     1   7

Virginia

  2   1   3   3   4   16

Washington

  1   —     2   —     —     —  

West Virginia

  4   2   2   —     4   21
                       

Total

  16   15   30   25   22   127
                       

We believe that we have either satisfactory title to or valid rights to use all of our cemetery properties. The 16 cemetery properties that we operate under long-term operating agreements are held by cemetery associations that are owned by the cemetery lot holders or have no legal owners. We believe that the cemetery associations have either satisfactory title to or valid rights to use these 16 cemetery properties and that we have valid rights to use these properties under the operating agreements. Although title to the cemetery properties is subject to encumbrances such as liens for taxes, encumbrances securing payment obligations, easements, restrictions and immaterial encumbrances, we do not believe that any of these burdens should materially detract from the value of these properties or from our interest in these properties, nor should these burdens materially interfere with the use of our cemetery properties in the operation of our business as described above. Many of our cemetery properties are located in zoned regions, and we believe that cemetery use is permitted for those cemeteries either (1) as expressly permitted under applicable zoning ordinances; (2) through a special exception to applicable zoning designations; or (3) as an existing non-conforming use.

 

24


Table of Contents

Other

In January of 2008, we relocated our home office to a 37,000 square foot leased space in Levittown, Pennsylvania. The lease has a term expiring in 2020, and we consider the space to be adequate for our present and anticipated future requirements. We are also tenants under various leases covering office spaces other than our corporate headquarters.

In addition, we own a 13,500-square-foot plant in Butler County, Pennsylvania, where we manufacture burial vaults used in our cemetery operations, and we own a 4,800-square-foot building in Marion, Virginia, which is no longer being used in our business.

 

Item 3. Legal Proceedings

We, and certain of our subsidiaries, are parties to legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our results of operations and adequate financial condition or cash flows. We carry insurance with coverage and coverage limits that we believe to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

 

Item 4. (Removed and Reserved)

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common units are listed on the NASDAQ Global Select Market (“Nasdaq”) under the symbol “STON”. As of March 15, 2010, there were 13,357,585 common units outstanding, representing a 98.0% limited partner interest in us. As of February 26, 2010, there were 55 unitholders of record, representing approximately 11,234 beneficial holders. The following table sets forth the high and low sale prices of our common units for the periods indicated, based on the daily composite listing of common unit transactions for the Nasdaq.

 

     Price range    Declared
Distributions (1)

Quarter ended

   High    Low   

March 31, 2008

   $ 20.22    $ 16.60    $ 0.5150

June 30, 2008

   $ 19.85    $ 16.65    $ 0.5350

September 30, 2008

   $ 18.73    $ 13.50    $ 0.5550

December 31, 2008

   $ 14.80    $ 8.69    $ 0.5550

March 31, 2009

   $ 15.42    $ 9.55    $ 0.5550

June 30, 2009

   $ 17.15    $ 11.15    $ 0.5550

September 30, 2009

   $ 18.00    $ 14.50    $ 0.5550

December 31, 2009

   $ 20.00    $ 16.50    $ 0.5550

 

(1) Distributions were declared and paid within 45 days of the close of each quarter.

 

25


Table of Contents

CASH DISTRIBUTION POLICY

Quarterly Distributions of Available Cash

General

Within 45 days after the end of each quarter, we will distribute all of our available cash to unitholders of record on the applicable record date.

Available cash for any quarter consists of cash on hand at the end of that quarter, plus cash on hand from working capital borrowings made after the end of the quarter but before the date of determination of available cash for the quarter, less cash reserves. Cash and other investments held in merchandise trusts and perpetual care trusts are not treated as available cash until they are distributed to us.

Conversion of Subordinated Units

During the quarter ended September 30, 2009, we met the final early conversion test of our subordinated units and accordingly, all remaining subordinated units converted into common units on November 13, 2009.

Any reference to, or any explanation related to subordinated units and their respective distribution rights are no longer applicable. All prior units considered to be subordinated units are now common units with equal distribution priority rights of all other common units.

General Partner Interest and Incentive Distribution Rights

Our general partner is entitled to 2% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its 2% general partner interest. The general partner’s 2% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest.

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50%, of the cash we distribute from operating surplus in excess of $0.5125 per unit. The maximum distribution of 50% includes distributions paid to the general partner on its 2% general partner interest but does not include any distributions that the general partner may receive on units that it owns.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders is characterized as either “operating surplus” or “capital surplus.” We distribute available cash from operating surplus differently than available cash from capital surplus. We treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since we began operations equals the operating surplus as of the most recent date of determination of available cash. We will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus.

Operating Surplus

Operating surplus consists of:

 

   

our cash balance on September 20, 2004; plus

 

   

$5.0 million (as described below); plus

 

   

cash receipts from our operations, including cash withdrawn from merchandise and perpetual care trusts; plus

 

   

working capital borrowings made after the end of a quarter but before the date of determination of operating surplus for that quarter; less

 

26


Table of Contents
   

operating expenditures, including cash deposited in merchandise and perpetual care trusts, maintenance capital expenditures and the repayment of working capital borrowings; less

 

   

the amount of cash reserves for future operating expenditures and maintenance capital expenditures.

As reflected above, operating surplus includes $5.0 million in addition to our cash balance on September 20, 2004, cash receipts from our operations and cash from working capital borrowings. This amount does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, it is a provision that will enable us, if we choose, to distribute as operating surplus up to $5.0 million of cash we receive in the future from non-operating sources, such as asset sales outside the ordinary course of business, sales of our equity and debt securities, and long-term borrowings, that would otherwise be distributed as capital surplus.

As described above, operating surplus is reduced by the amount of our maintenance capital expenditures but not our expansion capital expenditures. For our purposes, maintenance capital expenditures are those capital expenditures required to maintain, over the long term, the operating capacity of our capital assets, and expansion capital expenditures are those capital expenditures that increase, over the long term, the operating capacity of our capital assets.

Examples of maintenance capital expenditures include costs to build roads and install sprinkler systems on our cemetery properties and purchases of equipment for those purposes and, in most instances, costs to develop new areas of our cemeteries. Examples of expansion capital expenditures include costs to identify and complete acquisitions of new cemeteries and funeral homes and to construct new funeral homes. Costs to construct mausoleum crypts and lawn crypts may be considered to be a combination of maintenance capital expenditures and expansion capital expenditures. Our general partner, with the concurrence of its conflicts committee, may allocate capital expenditures between maintenance capital expenditures and expansion capital expenditures and may determine the period over which maintenance capital expenditures will be subtracted from operating surplus.

As described above, operating surplus is reduced by the amount of our operating expenditures. Our partnership agreement specifically excludes certain items from the definition of operating expenditures, such as cash expenditures made for acquisitions or capital improvements, including, without limitation, all cash expenditures, whether or not expensed or capitalized for tax or accounting purposes, incurred during the first four years following an acquisition in order to bring the operating capacity of the acquisition to the level expected to be achieved in the projections forming the basis on which our general partner approved the acquisition. Examples of such cash expenditures include certain maintenance capital expenditures and cash expenditures that we believe are necessary to develop the pre-need sales programs of businesses or assets we acquire. Where cash expenditures are made in part for acquisitions or capital improvements and in part for other purposes, our general partner, with the concurrence of our conflicts committee, will determine the allocation between the amounts paid for each and the period over which cash expenditures made for other purposes will be subtracted from operating surplus.

Capital Surplus

Capital surplus consists of:

 

   

Borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities; and

 

   

sales or other dispositions of assets for cash (other than sales or other dispositions of excess cemetery property up to an aggregate amount in any four-quarter period calculated pursuant to our Partnership Agreement; sales or other dispositions of inventory, accounts receivable and other current assets in the ordinary course of business; and sales or other dispositions of assets as a part of normal retirements or replacements).

 

27


Table of Contents

The exception for sales of excess cemetery property in any four-quarter period beginning with the quarter ending September 30, 2008 generally is calculated by multiplying $1 million by a fraction, the numerator of which is the number of cemeteries and funeral homes owned and operated by us on the last day of the quarter in which the sale occurs and the denominator of which is 139. Prior to the third quarter of 2008, the exception for sales of excess cemetery property was $1 million, which was subject to increase by our general partner, with the concurrence of its conflicts committee, if the size of our operations increased as a result of acquisitions or other expansions.

Distributions of Available Cash from Operating Surplus

The following table illustrates the priority of distributions of available cash from operating surplus between the unitholders and our general partner as a result of the conversion of all subordinated units during the subordination period, which ended in the fourth quarter of 2009. During the subordination period the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.4625 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. The amounts set forth in the table in the column titled “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column titled “Total Quarterly Distribution Target Amount,” until the available cash from operating surplus that we distribute reaches the next target distribution level, if any. The percentage interests shown for our general partner include its 2% general partner interest and assume the general partner has contributed any additional capital required to maintain its 2% general partner interest and has not transferred the incentive distribution rights.

 

    Total Quarterly Distribution
Target Amount
  Marginal Percentage
Interest in Distributions
 
    Common
Unitholders
    General
Partner
 

Minimum Quarterly Distribution

  up to $0.4625   98   2

Arrearages on Minimum Quarterly Distribution

  up to $0.4625   98   2

Second Target Distribution

  Above $0.5125 to $0.5875   85   15

Third Target Distribution

  Above $0.5875 to $0.7125   75   25

Thereafter

  Above $0.7125   50   50

Distributions of Available Cash from Capital Surplus

We do not currently expect to make any distributions of available cash from capital surplus. However, to the extent that we make any distributions of available cash from capital surplus, they will be made in the following manner:

 

   

first, 98% to common unitholders, pro rata, and 2% to our general partner, until we have distributed for each common unit an amount of available cash from capital surplus equal to the initial public offering price;

 

   

second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we have distributed for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus

The partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from the initial public offering, which is a return of capital. The initial public offering price less any distributions

 

28


Table of Contents

of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price.

Because distributions of capital surplus will reduce the minimum quarterly distribution, after any of these distributions are made, it may be easier for the general partner to receive incentive distributions. Any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied, however, to the payment of the minimum quarterly distribution or any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters.

If we distribute capital surplus on a unit in an amount equal to the initial unit price and have paid all arrearages on the common units, the minimum quarterly distribution and the target distribution levels will be reduced to zero. Once the minimum quarterly distribution and target distribution levels are reduced to zero, all subsequent distributions will be from operating surplus, with 50% being paid to the holders of units and 50% to our general partner.

Adjustment of Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

the minimum quarterly distribution;

 

   

the target distribution levels;

 

   

the unrecovered initial unit price;

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level. We will not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if legislation is enacted or if existing law is modified or interpreted in a manner that causes us to become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, we will reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter and the denominator of which is the sum of available cash for that quarter plus our general partner’s estimate of our aggregate liability for the income taxes payable by reason of that legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.

Distributions of Cash Upon Liquidation

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their respective capital account balances, as adjusted to reflect any taxable gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of taxable gain upon liquidation are intended, to the extent possible, to allow the holders of common units to receive proceeds equal to their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters prior to any allocation of gain to the common

 

29


Table of Contents

units. There may not be sufficient taxable gain upon our liquidation to enable the holders of common units to fully recover all of these amounts. Any additional taxable gain will be allocated in a manner intended to allow our general partner to receive proceeds in respect of its incentive distribution rights.

If there are losses upon liquidation, they will first be allocated to the general partner and then to the common units and the general partner interest until the capital accounts of the common units have been reduced to zero. Any remaining loss will be allocated to the general partner interest.

Equity Compensation Plan Information

See the equity compensation plan table set forth in Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

30


Table of Contents
Item 6. Selected Financial Data

The following tables present selected financial and operating data of the Company for the periods and as of the dates indicated derived from our audited consolidated financial statements. The following tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical consolidated financial statements and accompanying notes thereto set forth in this Annual Report on Form 10-K.

Table 1: Operating and net income data

 

    Year ended December 31,
    2009     2008     2007   2006   2005
    (in, thousands, except for unit data)

Cemetery revenues

         

Merchandise

  $ 87,836      $ 90,968      $ 74,509   $ 58,219   $ 54,421

Services

    36,947        36,894        28,547     25,555     19,346

Investment and other

    33,055        31,623        31,476     25,221     24,095

Funeral home revenues

         

Merchandise

    9,701        9,249        4,655     2,696     1,200

Services

    13,665        14,714        6,127     3,422     1,598
                                 

Total revenues

    181,203        183,448        145,314     115,113     100,660
                                 

Cost of goods sold (exclusive of depreciation shown separately below):

         

Perpetual care

    4,727        4,326        3,553     3,109     2,575

Merchandise

    17,120        18,556        16,118     11,583     11,323

Cemetery expense

    41,246        41,651        30,767     24,344     20,942

Selling expense

    34,123        34,806        29,245     23,186     20,072

General and administrative expense

    22,498        21,372        15,684     12,801     10,553

Overhead (including unit-based compensation of $1,576
in 2009, $2,262 in 2008, $4,741 in 2007 and $1,212 in 2006 (1)

    22,370        21,293        24,991     19,795     16,304

Depreciation and amortization

    6,390        5,029        3,891     3,501     3,510

Funeral home expense

         

Merchandise

    3,716        3,684        1,575     1,004     397

Services

    9,275        9,073        4,198     2,285     1,082

Other

    6,014        6,308        2,649     1,547     903

Acquisition related costs

    2,292        —          —       —       —  
                                 

Total costs and expenses

    169,772        166,098        132,671     103,155     87,661
                                 

Operating profit

    11,431        17,350        12,643     11,958     12,999

Gain on sale of funeral home

    434        —          —       —       —  

Gain on acquisitions

    4,435        —          —       —       —  

(Decrease) in fair value of interest rate swap

    (2,681     —          —       —       —  

Expenses related to refinancing (2)

    2,242        —          157     —       —  

Interest expense

    14,409        12,714        9,075     7,491     6,457
                                 

Income (loss) before income taxes

    (3,031     4,636        3,411     4,467     6,542

Income taxes (benefit)

         

State

    808        304        398     438     587

Federal

    (2,762     (224     227     989     1,250
                                 

Total income taxes

    (1,954     80        625     1,427     1,837
                                 

Net income (loss)

  $ (1,077   $ 4,556      $ 2,786   $ 3,040   $ 4,705
                                 

Net income (loss) per limited partner (common) unit (basic and diluted)

  $ (0.09   $ 0.38      $ 0.30   $ 0.34   $ 0.54

 

31


Table of Contents

 

(1) Includes a write-off of $571,000 in 2007 incurred in connection with a potential acquisition of a group of cemeteries in Michigan that we determined were unlikely to take place. Also includes bonuses of $3.2 million and $2.0 million in 2007 and 2006 respectively, unit-based compensation of $1.6 million, $2.3 million, $4.7 million and $1.2 million in 2009, 2008, 2007 and 2006 respectively and an $883,000 reserve for the write-off of our investment in a management agreement in 2006 for an agreement that was subsequently terminated.
(2) Represents write-downs in previously capitalized debt issuance costs.

Table 2: Balance Sheet Data

 

    Year ended December 31,
    2009   2008   2007   2006   2005
    (in thousands)

Cemetery property

  $ 235,357   $ 228,499   $ 187,552   $ 171,714   $ 164,772

Total assets (1)

    858,889     738,240     816,862     629,592     551,487

Deferred cemetery revenues, net (2)

    258,978     193,017     220,942     196,103     167,035

Total debt

    183,199     160,934     146,164     103,492     86,945

Total unit-holder equity

  $ 115,248   $ 119,389   $ 136,746   $ 101,288   $ 109,600
                             

 

(1) Includes the fair value of assets held in the merchandise and perpetual care trusts. Refer to Note 1 of our Consolidated Financial Statements for a detailed discussion of the consolidation rules for these assets.
(2) Represents revenues to be recognized from the sale of merchandise and services. Refer to Note 1 of our Consolidated Financial Statements for a detailed discussion on the revenue recognition rules.

Table 3: Cash Flow and Other Financial Data

 

    Year ended December 31,  
    2009     2008     2007     2006     2005  
    (in thousands, except unit data)  

Net cash provided by (used in):

         

Operating activities

  $ 13,498      $ 21,144      $ 18,973      $ 18,339      $ 17,589   

Investing activities

    (10,949     (17,046     (86,777     (14,625     (15,286

Financing activities

    3,862        (10,830     71,690        (725     (9,852

Change in assets and liabilities that provided (used) cash:

         

Merchandise trust

    (6,133     (453     (5,223     (3,517     10,473   

Merchandise liability

    (4,343     (5,366     (7,171     (8,109     (7,224

Capital expenditures

         

Maintenance capital expenditures

    2,524        4,809        3,051        2,059        2,192   

Expansion capital expenditures, including acquisitions

    8,859        12,237        83,726        20,532        18,994   

Distributions declared per common unit

  $ 2.2200      $ 2.1600      $ 2.0450      $ 1.9500      $ 1.8625   

 

32


Table of Contents

Table 4: Operating Data

 

    Year ended December 31,
    2009   2008   2007   2006   2005

Interments performed

    37,782     38,863     29,380     26,003     22,263

Cemetery revenues per interment performed (1)

  $ 4,196   $ 4,104   $ 4,579   $ 4,192   $ 4,396

Interment rights sold (2)

         

Lots (1)

    22,637     22,552     17,509     13,769     12,758

Mausoleum crypts (including pre-construction)

    2,316     1,881     2,314     2,361     2,163

Niches

    889     864     602     440     409
                             

Net interment rights sold (1) (2)

    25,842     25,297     20,425     16,570     15,330
                             

Number of contracts written

    83,043     80,144     63,026     54,675     46,510

Aggregate contract amount, in thousands (excluding interest)

  $ 197,787   $ 187,093   $ 138,588   $ 116,407   $ 96,642

Average amount per contract (excluding interest)

  $ 2,382   $ 2,334   $ 2,199   $ 2,129   $ 2,078

Number of pre-need contracts written

    39,043     35,599     29,546     24,999     21,306

Aggregate pre-need contract amount, in thousands (excluding interest)

  $ 124,997   $ 115,024   $ 89,486   $ 74,301   $ 63,415

Average amount per pre-need contract (excluding interest)

  $ 3,202   $ 3,231   $ 3,029   $ 2,972   $ 2,976

Number of at-need contracts written

    44,000     44,545     33,480     29,676     25,204

Aggregate at-need contract amount, in thousands (excluding interest)

  $ 72,790   $ 72,068   $ 49,102   $ 42,106   $ 33,227

Average amount per at-need contract (excluding interest)

  $ 1,654   $ 1,618   $ 1,467   $ 1,419   $ 1,318
                             

 

(1) Excludes the sale of a tract of land equivalent to 1,881 burial lots at $1.7 million in 2005.
(2) Net of cancellations. Sales of double-depth burial lots are counted as two sales.

 

33


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K. Those notes also give more detailed information regarding the basis of presentation for the following information.

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future performance and plans, and any financial guidance provided, as well as certain information in other filings with the SEC and elsewhere are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “may,” “will,” “estimate,” “continues,” “anticipate,” “intend,” “project,” “expect,” “predict” and similar expressions identify these forward-looking statements. These forward-looking statements are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated, including, but not limited to, the following: uncertainties associated with future revenue and revenue growth; the impact of our significant leverage on our operating plans; our ability to service our debt; changes in the fair value of certain equity and debt securities held in our trusts; our ability to attract, train and retain an adequate number of sales people; uncertainties associated with the volume and timing of pre-need sales of cemetery services and products; increased use of cremation; changes in the death rate; changes in the political or regulatory environments, including potential changes in tax accounting and trusting policies; our ability to successfully implement a strategic plan relating to producing operating improvements; and various other uncertainties associated with the death care industry and our operations in particular.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth under Risk Factors in Part I, “Item 1A”. We assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Organization

We were organized on April 2, 2004 to own and operate the cemetery and funeral home business conducted by Cornerstone and its subsidiaries. On September 20, 2004, in connection with our initial public offering of common units representing limited partner interests, Cornerstone contributed to us substantially all of its assets, liabilities and businesses, and then converted into CFSI LLC, a limited liability company. This transfer represented a reorganization of entities under common control and was recorded at historical cost. In exchange for these assets, liabilities and businesses, CFSI LLC received 564,782 common units and 4,239,782 subordinated units representing limited partner interests in us.

Cornerstone had been founded in 1999 by members of our management team and a private equity investment firm, which we refer to as McCown De Leeuw, in order to acquire a group of 123 cemetery properties and 4 funeral homes. Since that time, Cornerstone, succeeded by us, acquired 111 additional cemeteries and 54 funeral homes, entered into three long term cemetery operating agreements, built two funeral homes, exited from one long term cemetery operating agreement and sold one cemetery and two funeral homes.

Capitalization

On September 20, 2004, we completed our initial public offering of 3,675,000 common units at a price of $20.50 per unit representing a 42.5% interest in us. On September 23, 2004, we sold an additional 551,250 common units to the underwriters in connection with the exercise of their over-allotment option and redeemed an

 

34


Table of Contents

equal number of common units from CFSI LLC at a cost of $5.3 million. Subsequent to this transaction, there were 4,239,782 common units and 4,239,782 subordinated units outstanding. Total gross proceeds from the initial public offering and the exercise of the over-allotment option were $86.6 million, before offering costs and underwriting discounts. Net proceeds, after deducting underwriting discounts but before paying offering costs, from these sales of common units was $80.8 million.

Concurrent with the initial public offering, our wholly owned subsidiary, StoneMor Operating LLC, and its subsidiaries (collectively “StoneMor LLC”), all as borrowers, issued and sold $80.0 million in aggregate principal amount of senior secured notes in a private placement and entered into a $12.5 million revolving credit facility and a $22.5 million acquisition facility with a group of banks. The net proceeds of the initial public offering and the sale of senior secured notes were used to repay the debt and associated accrued interest of approximately $135.1 million of CFSI LLC and $15.7 million of fees and expenses associated with the initial public offering and the sale of senior secured notes. The remaining funds have been used for general partnership purposes, including the construction of mausoleum crypts and lawn crypts, the purchases of equipment needed to install burial vaults and the acquisition of cemetery and funeral home locations.

On December 21, 2007, we completed a follow on public offering of 2,650,000 common units at a price of $20.26 per unit representing a 22.2% interest in us, making a total of 8,505,725 common units outstanding. In conjunction with this offering, our general partner contributed $1.1 million to maintain its 2% general partner interest. Total gross proceeds from this public offering were $54.8 million, before offering costs and underwriting discounts. Net proceeds, after deducting underwriting discounts but before paying offering costs, from these sales of common units were $51.8 million.

Concurrent with this follow on public offering, StoneMor LLC, all as borrowers, issued $17.5 million in aggregate principal amount of senior secured notes. The net proceeds of the public offering and the sale of senior secured notes and borrowings of $6.3 million under our acquisition line of credit were used to purchase 45 cemeteries and 30 funeral homes from Service Corporation International (NYSE: SCI).

On November 24, 2009, we completed the second follow on public offering of 1,275,000 common units at a price of $17.00 per unit representing a 9.5% interest in us. On December 7, 2009, we sold an additional 191,250 common units in connection with the exercise of the underwriter’s over-allotment option. In conjunction with this offering, our general partner contributed $0.51 million to maintain its 2% general partner interest. Total gross proceeds from these transactions were $25.4 million, before offering costs and underwriting discounts. Net proceeds, after deducting underwriting discounts and offering expenses were $24.2 million.

Concurrent with this second follow on public offering, certain of our subsidiaries made a private offering to eligible purchasers of $150.0 million aggregate principal amount of senior notes due 2017. The net proceeds from this offering, after deducting the original issue discount and fees were approximately $138.1 million. The net proceeds of the second follow on public offering, the general partner contribution and the offering of senior notes of $162.5 million was used to pay off debt and accrued interest of approximately $154.9.The remaining proceeds will be used for general partnership purposes.

Overview

Cemetery Operations

General

We are currently the second largest owner and operator of cemeteries in the United States. As of December 31, 2009, we operated 235 cemeteries in 24 states and Puerto Rico. We own 219 of these cemeteries, and we operate the remaining 16 under management or operating agreements with the non-profit cemetery corporations that own the cemeteries. As a result of the agreements, other control arrangements and applicable accounting rules, we consolidate the results of such 16 cemeteries in our consolidated financial statements.

 

35


Table of Contents

We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. During the year ended December 31, 2009, we performed approximately 37,782 burials and sold approximately 25,842 interment rights (net of cancellations) compared to 38,863 and 25,297 in 2008 and 29,380 and 20,425 in 2007, respectively. Cemetery revenues accounted for approximately 87.1%, 86.9% and 92.6% during the years ended December 31, 2009, 2008 and 2007 respectively.

Revenues

We derive our cemetery revenues primarily from:

 

   

at-need sales of cemetery interment rights, merchandise and services, which we recognize as revenue when we have delivered the underlying merchandise or performed the underlying services;

 

   

pre-need sales of cemetery interment rights, which we generally recognize as revenue when we have collected 10% of the sales price from the customer;

 

   

pre-need sales of cemetery merchandise, which we recognize as revenue when we have delivered the underlying merchandise or performed the underlying services. The criteria for meeting this delivery requirement generally means that;

 

  1. the merchandise has been completed; and

 

  2. the merchandise is either installed or stored at an independent off-site location, at no additional cost to us, and specifically identified with a particular customer; and

 

  3. the risks and rewards of ownership have passed on to the customer.

 

   

pre-need sales of cemetery services, which we recognize as revenues when we perform the services for the customer;

 

   

investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as discussed above;

 

   

investment income from perpetual care trusts, which we recognize as revenues as the income is earned in the trust; and

 

   

other items, such as interest income on pre-need installment contracts and sales of land.

Pre-need Sales

Pre-need products and services are typically sold on an installment basis. Pre-need sales are subject to state law “cooling-off” periods, during which the customer may elect to cancel the contract and receive a full refund of amounts paid.

As previously noted, we do not recognize revenue on pre-need sales of merchandise and services until we have delivered the merchandise or performed the services. Accordingly, pre-need sales for which we have not as of yet recognized revenue are carried as a liability on our balance sheet (“deferred revenues”).

In certain cases, pre-need contracts will be cancelled before they are fully paid. In these circumstances, we are generally permitted to retain amounts already paid to us, including any amounts that were required to be deposited into trust.

In certain other cases, the products and services purchased under a pre-need contract are needed for interment before payment has been made in full. In these cases, we are generally entitled to be immediately paid in full for any amounts still outstanding.

 

36


Table of Contents

Pre-need sales contracts normally contain provisions for both principal and interest. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate plus 150 basis points (this resulted in a rate of 4.75% for contracts entered into during 2009, 9.0% for contracts entered into during 2008 and 9.75% for contracts entered into during 2007 respectively) in order to segregate the principal and interest component of the total contract value.

We normally offer prepayment incentives to customers whose pre-need contracts are longer than 36 months and bear interest. If those customers pay their contracts in full in less than 12 months, we rebate the interest that we have collected from them. Even though this rebate policy reduces the amount of interest income we receive on our accounts receivable, the net effect is an increase in our immediate cash flow.

At-need Sales

Revenue on at-need merchandise sales is deferred until the time that such merchandise is delivered. The lag between the contract origination and delivery is normally minimal. We are not required to deposit any amounts from our at-need sales into merchandise trusts.

Expenses

We analyze and categorize our operating expenses as follows:

 

  1. Cost of goods sold and selling expenses

Cost of goods sold reflects the actual cost of purchasing products and performing services. Sales of cemetery lots and interment rights, whether at-need or pre-need, typically have a lower cost of goods sold than other merchandise that we sell.

Selling expenses consist of salesperson and sales management payroll costs, including selling commissions, bonuses and employee benefits. We self-insure medical expenses of our employees up to certain individual and aggregate limits over which we have stop-loss insurance coverage. Our self-insurance policy may result in variability in our future operating expenses. Selling expenses also includes other costs of obtaining product and service sales, such as advertising, marketing, postage and telephone.

Direct costs associated with pre-need sales of cemetery merchandise and services, such as sales commissions and cost of goods sold, are reflected in the balance sheet in deferred selling and obtaining costs and deferred cemetery revenues, net, respectively and are expensed as the merchandise is delivered or the services are performed. Indirect costs, such as marketing and advertising costs, are expensed in the period in which they are incurred.

 

  2. Cemetery Expenses

Cemetery expenses represent the cost to maintain and repair our cemetery properties and consist primarily of labor and equipment, utilities, real estate taxes and other maintenance items. Repairs necessary to maintain our cemeteries are expensed as they are incurred. Other maintenance costs required over the long term to maintain the operating capacity of our cemeteries, such as to build roads and install sprinkler systems, are capitalized.

 

  3. General and administrative expenses

General and administrative expenses, which do not include corporate overhead, primarily includes personnel costs, insurance and other costs necessary to maintain our cemetery offices.

 

  4. Depreciation and amortization

We depreciate our property and equipment on a straight-line basis over their estimated useful lives.

 

37


Table of Contents
  5. Acquisition related costs

On January 1, 2009, we adopted Accounting Standards Codification No. 805 (“ASC 805”). Among other things, ASC 805 requires that costs incurred in acquisition related activities be expensed as incurred. Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities.

Funeral Home Operations

As of December 31, 2009, we owned and operated 58 funeral homes. These properties are located within the contiguous United States and in Puerto Rico. Twenty six of our 58 funeral homes are located on the grounds of cemeteries that we own.

We derive revenues at our funeral homes from the sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation services. We sell these services and merchandise almost exclusively at the time of need utilizing salaried licensed funeral directors. Funeral home revenues accounted for approximately 12.9%, 13.1% and 7.4% during the years ended December 31, 2009, 2008 and 2007 respectively.

Our funeral home operating expenses consist primarily of compensation to our funeral directors, day to day costs of managing the business and the cost of caskets.

Corporate

We incur fixed costs for corporate overhead primarily for centralized functions, such as payroll, accounting, collections and professional fees. We also incur expenses relating to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.

Revenues by State

The following table shows the percentage of revenues attributable to each of the states in which we operate for the periods presented:

 

     Year ended December 31,  
     2009     2008     2007  

Alabama

   4.6   4.7   4.6

California

   10.3   11.0   0.2

Florida

   0.1   1.8   0.0

Georgia

   1.6   1.8   2.0

Illinois

   2.4   2.4   0.5

Indiana

   2.4   2.6   0.3

Kansas

   1.6   1.5   2.1

Maryland

   7.3   8.0   8.6

Michigan

   1.3   1.3   1.7

Missouri

   1.5   1.6   1.3

New Jersey

   8.0   9.8   12.4

North Carolina

   6.3   5.7   5.9

Ohio

   8.2   6.6   4.2

Oregon

   4.2   3.7   2.9

Pennsylvania

   17.0   17.6   27.8

Tennessee

   2.4   2.1   1.2

Virginia

   8.1   8.5   12.6

West Virginia

   7.3   6.7   9.7

All others

   5.5   2.6   2.0
                  

Total

   100.0   100.0   100.0
                  

 

38


Table of Contents

Principal Products and Services

The following table shows the percentage of revenues attributable to our principal products, services and other items during the periods presented:

 

     Year ended December 31,  
     2009     2008     2007  

Pre-need sales:

      

Burial lots

   9.7   9.1   7.3

Mausoleum crypts

   4.7   5.7   6.1

Markers

   5.6   4.8   7.0

Grave marker bases

   1.4   1.2   2.7

Burial vaults

   5.0   4.4   5.6

Lawn crypts

   1.0   0.8   0.9

Caskets

   1.5   2.5   4.3

Initial openings and closings (1)

   5.9   5.1   5.9

Other (2)

   5.3   3.5   2.8
                  

Total pre-need sales

   40.2   37.1   42.7
                  

Interest from pre-need sales

   3.2   2.9   3.2
                  

Investment income from trusts:

      

Perpetual care trusts

   7.0   7.5   8.8

Merchandise trusts

   3.8   3.6   5.4
                  

Total investment income from trusts

   10.8   11.1   14.2
                  

At-need sales

      

Openings and closings (3)

   12.5   12.8   11.9

Markers

   7.5   9.3   7.9

Burial lots

   3.9   4.0   3.0

Mausoleum crypts

   1.6   1.5   1.5

Grave marker bases

   1.5   2.2   2.4

Foundations and inscriptions (4)

   1.0   1.2   1.2

Burial vaults

   1.8   2.0   1.4

Other (5)

   1.8   1.9   1.4
                  

Total at-need sales

   31.7   35.0   30.8
                  

Funeral home revenues

   12.9   13.1   7.4

Other revenues (6)

   1.2   0.8   1.7
                  

Total revenues

   100.0   100.0   100.0
                  

 

(1) Installation of the burial vault into the ground.
(2) Includes revenues from niches, mausoleum lights, cremations, pet cemeteries, installation of burial vaults and markers sold to our customers by third parties and pre-need sales made in connection with the relocation of other cemetery interment rights. Also includes document processing fees on pre-need contracts and fees from sales of travel care protection, which covers shipping costs of a body if death occurs more than 100 miles from the place of residence.
(3) Installation of the burial vault into the ground and the placement of the casket into the vault.
(4) Installation of the marker on the ground and its inscription.
(5) Includes revenues from lawn crypts, decorative lights installed on mausoleum crypts, installations of burial vaults, markers sold to our customers by third parties, cremation fees and document-processing fees on at-need contracts.
(6) Includes sales of manufactured burial vaults to third parties, sales of cemetery and undeveloped land, commissions from sales of pre-need funeral and death benefit insurance policies provided through a third-party insurer and other miscellaneous revenues.

 

39


Table of Contents

Cash Flow

Pre-need sales often generate short-term cash flow deficits due to the timing of when we receive amounts from customers, pay related commissions and deposit amounts into the perpetual care and merchandise trusts.

We generally require customers to make a down payment on a pre-need contract of at least 5% of the total sales price. When we receive a payment from a customer on a pre-need contract, we first deposit the requisite portion into trust as required by state law. Then, we pay all or a portion of the commission due to the salesperson responsible for the sale up to a maximum of total cash received. In many cases, the sum of the commission paid and amount deposited into the trust exceeds the total cash received, causing a short-term cash flow deficit.

If the down payment received from the customer is not sufficient to cover the entire commission, the remaining commission is paid from subsequent installments, but only to the extent of 80% of the cash received from the customer in each installment. Again, in the near-term there is a possibility that the sum of the commission paid and amount deposited into the trust exceeds the total cash received, causing an additional short-term cash flow deficit. These short-term deficits are eventually recaptured as the total amount received exceeds the commissions paid and we meet the requirements for withdrawing amounts deposited into the merchandise trust.

The following example assumes a pre-need contract with a total sales price of $1,000, a 10% down payment, a 40% perpetual care and merchandise trusting requirement, a 15% sales commission and a one-year term without interest, our short-term cash flow would be as follows:

 

   

When we receive the $100 down payment from the customer, we would deposit 40% of the payment, or $40 in trust and pay 100% of the commission due to the salesperson, or $150, but only to the extent that we received cash from the customer, or $100. Our total cash obligations would be $140 even though we only received $100 from the customer. We would use $40 of our operating cash to pay the sales commission and, at this time, would be cash flow negative on the contract.

 

   

In month one, when we receive the first $75 installment from the customer, we would deposit 40%, or $30, into trust and pay 100% of the balance of the commission due to the sales person, or $50. Our total cash obligations would be $80 even though we only received $75 from the customer. We would use $5 of our operating cash to pay sales commission and would still be cash flow negative on the contract.

 

   

In month two, when we receive the next $75 installment from the customer, we would deposit 40%, or $30, into trust, but we would have no further commission due on the sale. The remaining $45 received from the customer would go back into our operating cash, and we would break even on the contract on a cash-flow basis.

 

   

In month three, when we receive the next $75 installment from the customer, we would deposit 40%, or $30, into trust and the remaining $45 would go back into our operating cash. In this month, we would become cash flow positive on the contract.

We can accelerate our operating cash flow by purchasing and delivering many of our products in advance of the time of customer need, either by installing them in the customer’s burial space (in the case of burial vaults) or storing them for the customer, and by performing certain services prior to the time of need. For example, within the allowances of state law, we purchase burial vaults, grave markers and caskets, and perform initial openings and closings to install the burial vault in the ground before the time of need. When we satisfy the criteria for delivery of pre-need products or perform pre-need services, we are permitted to withdraw the related principal and any income and capital gains that we have not already withdrawn from the merchandise trust, and we recognize the amounts withdrawn, including amounts previously withdrawn, as revenues. Advance purchasing helps us avoid the negative cash flow impact of depositing significant portions of our sales proceeds in trusts while earning rates on those trusts that are currently less than interest rates we pay on our debt. To the extent that we can purchase and deliver products and perform services in advance of the time of need, we can accelerate,

 

40


Table of Contents

within the limitations of GAAP, the timing of our revenue recognition for these products and services. As a result, decisions made by our management to purchase and deliver products or perform services in advance, for cash flow or other reasons, affects the timing of revenue recognition from the underlying sales.

We are somewhat limited, however, in our ability to purchase some products in advance of the time of need because of their availability. Given our large volume of pre-need sales, it is unlikely that our suppliers could provide, or we could manufacture, all of the products included in our pre-need backlog at any given time. For example, we generally need more vaults per year to fulfill our pre-need contract obligations, than we currently manufacture at our plant. We must purchase any excess from third party suppliers who must also meet the demands of other cemetery operators.

We currently purchase burial vaults from third-party providers to assist us in meeting the demands of our accelerated purchase and delivery program. We are also limited in our ability to perform certain services in advance of the time of need because of their nature or our resources. For example, we cannot perform the final opening and closing, which is the placing of the casket into the ground, or inscribe the date of death on the monument or marker until the time of need. Even if we chose to perform all of the services in our pre-need backlog that could be performed in advance of need, such as installing all of the burial vaults in our pre-need backlog, we would not currently have the labor, equipment or other resources to perform all of those services in a short period of time.

Trusting

We are required to deposit a portion of amounts received on sales of certain cemetery merchandise and services into a perpetual care and/ or merchandise trust. These amounts are invested by third-party investment managers who are selected by the Trust and Compliance Committee of the board of directors of our general partner. These investment managers are required to invest our trust funds in accordance with applicable state law and internal investment guidelines adopted by the Trust and Compliance Committee. Our investment managers are monitored by third-party investment advisors selected by the Trust and Compliance Committee who advise the committee on the determination of asset allocations, evaluate the investment managers and provide detailed monthly reports on the performance of each merchandise and perpetual care trust.

Perpetual Care Trust

Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. While this amount varies, it is generally 10% to 20% of the sales price of the interment right. All principal must remain in this trust into perpetuity while interest and dividends may be released to us and used to defray cemetery maintenance costs, which are expensed as incurred. Earnings from the perpetual care trusts are recognized in current cemetery revenues. To maximize this income, we have established investment guidelines for the third-party investment managers that manage the trust so that substantially all of the funds are invested in intermediate-term investment-grade fixed-income securities, high-yield fixed-income securities, master limited partnerships and real estate investment trusts.

We fund these amounts pro-rata on an “as received” basis. As payments are received from the customer, we deposit a pro rata amount of the payment into a perpetual care trust. For example, if we receive a payment of 20% of the sales price from the customer, we would deposit into the perpetual care trust 20% of the total amount required to be placed into trust for that sale.

We consolidate the assets of the trust in accordance with the provisions of ASC 810, as the trust is considered to be a variable interest entity for which we are the primary beneficiary. Assets are reflected at fair market value on the asset portion of our balance sheet as an asset entitled “perpetual care trusts, restricted, at fair value,” and an equal amount is reflected as a liability as “perpetual care trust corpus.”

 

41


Table of Contents

Merchandise Trust

We are generally required by state law to deposit a portion of the sales price of pre-need cemetery merchandise and services, or the estimated current cost of providing that merchandise and those services, into a merchandise trust to ensure that we will have sufficient funds in the future to purchase the merchandise or perform the services. The amount we are required to deposit into a merchandise trust varies from state to state but is generally 40% to 70% of the sales price of the merchandise or services.

We fund these amounts pro-rata on an “as received” basis. As payments are received from the customer, we deposit a pro rata amount of the payment into a merchandise trust. For example, if we receive a payment of 20% of the sales price from the customer, we would deposit into the merchandise trust 20% of the total amount required to be placed into trust for the merchandise and services sold.

We consolidate the assets of the trust in accordance with the provisions of ASC 810, as the trust is considered to be a variable interest entity for which we are the primary beneficiary. Assets are reflected at fair market value on the asset portion of our balance sheet as an asset entitled “merchandise trusts, restricted, at fair value”.

Unlike assets in the perpetual care trusts, assets in the merchandise trusts will be released to us at the time we meet the requirements. These requirements vary from state to state depending upon applicable laws.

Earnings on funds held in merchandise trusts, including investment income and capital gains, are deferred and included in our balance sheet in deferred cemetery revenues, net, until such time that we recognize the revenue from the related sale.

We are permitted to withdraw the investment income, such as interest and dividends, as well as capital gains, from merchandise trusts at varying times depending on the applicable state law. In some states, we are permitted to make monthly withdrawals of investment income, but in other states we are permitted to withdraw income less frequently or only upon death. In all states, however, we are permitted to withdraw trust principal and earnings to purchase the merchandise or perform the services or, generally, when the customer cancels the contract. Some states impose additional restrictions on our ability to withdraw merchandise trust earnings if those trusts have realized losses. For example, if a Pennsylvania merchandise trust realizes a loss, the trust is required to recover the amount of the realized loss, either by earning income or generating capital gains, before we are allowed to withdraw earnings, except to purchase the related products or perform the related services. Other states, such as Virginia, permit continued withdrawals of merchandise trust earnings following a realized loss so long as the fair market value of the funds held in trust equals or exceeds the cost of the related products and services.

We invest the amounts deposited into merchandise trusts, within specified investment guidelines, primarily in intermediate-term, investment-grade fixed-income securities, high-yield fixed-income securities, real estate investment trusts and, to a lesser extent, equity securities and cash.

The income earned on funds held in perpetual care trusts and merchandise trusts can be materially affected by fluctuations in interest rates, dividend payments, and in the case of merchandise trusts, by the performance of the stock market. Investment income from trusts accounted for 10.8%, 11.1% and 14.2% of our 2009, 2008 and 2007 total revenues respectively. During 2009, 2008 and 2007 our average annual rates of return (not including changes in unrealized gains and losses) on funds held in merchandise trusts were 7.2%, 6.1% and 12.0%, respectively, while our average annual rates of return on funds held in perpetual care trusts were 8.3%, 8.1% and 6.8%, respectively. Past performance is not indicative of future performance.

Unrealized gains and losses in merchandise trusts are deferred and accordingly have no immediate impact on our revenues, earnings or cash flow unless the fair market value of the funds declines below the estimated costs to deliver the related products and services, in which case we would be required to record a current charge to earnings equal to the difference between the fair market value of the funds and the estimated costs.

 

42


Table of Contents

We determine whether or not the assets in the merchandise and perpetual care trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer and our ability and intent to hold securities until they recover their value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value.

For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.

For assets held in the merchandise trust, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.

The trust footnotes (notes 5 and 6 of our consolidated financial statements included in Item 8) disclose the adjusted cost basis of the assets in the trust and contain a more detailed discussion of other-than-temporarily impaired assets.

Current Market Conditions and Economic Developments

Beginning in the fourth quarter of 2008, we began discussing the significant instability in various financial markets and in economic conditions. Amongst other things, we noted that there had been a decline in the fair value of equity and (to a lesser degree) fixed-maturity debt securities and that there was a contraction in the credit market as well as an overall downturn in economic activity.

We have seen substantial improvement in certain areas since that time. The ratio of the fair value to the amortized cost of our merchandise trust assets has improved to 88.5% at December 31, 2009 as compared to 70.4% at December 31, 2008. We were able to raise capital via both a private offering of senior debt and a follow on public offering of our common units, representing a limited partnership interest in us. The value of pre-need and at-need contracts written has not deteriorated and totals for the year ended December 31, 2009 generally outpace totals from 2008.

We will continue to monitor evolving economic conditions and plan accordingly.

Decline in Market Value of Trust Assets

We have a substantial portfolio of invested assets in both our merchandise trust and the perpetual care trust. Both trusts have a mix of cash and cash equivalents, fixed maturity debt securities and equity securities. A critical issue for us had been the decline in the fair value of equity and (to a lesser degree) fixed maturity debt securities held in our trusts. This decline took place primarily during the last six months of 2008. As of December 31, 2009, the fair value of our fixed maturity debt securities had recovered to the point where such value exceeds the cost of these assets in both our merchandise and perpetual care trusts. While the fair value of equity securities in these trusts continues to be less than their cost, the amount of this impairment has declined substantially during 2009.

Funds in our trusts are managed by third-party investment managers who are in turn monitored by a third-party investment advisor selected by our Trust and Compliance Committee. The third-party investment advisor is providing the committee with frequent updates on the performance of the investments. We will continue to monitor performance closely. See “Item 3. Quantitative and Qualitative Disclosure About Market Risk” for more information.

The perpetual care trust and merchandise trust serve vastly different purposes and the risks and implications of changes in trust asset values are dissimilar.

 

43


Table of Contents

Perpetual Care Trust

Pursuant to state law, a portion of the proceeds from the sale of cemetery property must be deposited into a perpetual care trust.

The perpetual care trust principal does not belong to us and must remain in the trust into perpetuity. We consolidate the trust into our financial statements in accordance with ASC 810-10-15-(13 through 22) because the trust is considered a variable interest entity for which we are the primary beneficiary.

The fair value of trust assets is recorded as an asset on our balance sheet and is entirely offset by a liability. This liability is recorded as “Perpetual care trust corpus”. Changes in fair value of trust assets are recognized by adjusting both the trust asset and the offsetting liability. Impairment of the value of trust assets, whether temporary or other-than-temporary, will not impact periodic earnings or comprehensive income nor will it impact our financial position or liquidity at any point in time.

Our primary risk related to the assets in the perpetual care trust relate to the interest and dividends paid and released to us and used to defray cemetery maintenance costs. Any material reduction in this income stream could have a material effect on our financial condition, results of operations and liquidity. Interest income earned on perpetual care trust assets was approximately $12.6 million, $13.7 million and $12.8 million during the year ended December 31, 2009, 2008 and 2007 respectively.

Merchandise Trust

Pursuant to state law, a portion of the proceeds from the sale of pre-need cemetery and funeral home merchandise and services must be deposited into a merchandise trust.

Unlike the perpetual care trust, the principal in the merchandise trust will ultimately revert to us. This will occur once we have met the various requirements for its release which is generally the delivery of merchandise or performance of underlying services. Accordingly, changes in the fair value of trust assets, both temporary and other-than-temporary, may ultimately impact our periodic earnings, comprehensive income and financial position or liquidity at any point in time.

Managing the cash flow associated with the release of trust assets and investment income is a critical component of our overall corporate strategy. Our investment strategy reflects the fact that the release of trust assets and the resultant cash flow is critical to our ability to meet our profitability goals and liquidity needs. Accordingly, we set such strategy to balance the potential for return with the need to maintain asset value.

A decline in the market value of the assets in the merchandise trust could ultimately impair our profitability and resulting financial position and liquidity should we be forced to liquidate such assets at an amount significantly below our original expectation, which is ultimately asset cost.

We mitigate this risk by ensuring that a sufficient portion of trust assets is invested in cash and cash equivalents that do not have significant risk to principal. We can then manage trust assets so that released amounts are liquidated from this pool as opposed to any pool of assets that are currently valued below cost.

At December 31, 2009, the merchandise trust had approximately $47.5 million in cash and cash equivalents. This amount functions to mitigate the risk of liquidating impaired assets. In evaluating the sufficiency of this amount as to its effectiveness in mitigating the risk of liquidating impaired assets, we have considered the net inflows and outflows of cash into the trust in recent prior periods. These net inflows and outflows are a function of both sales originations and the corresponding trust deposits and meeting the criteria for releasing funds. Total net cash inflows into the merchandise trust for the year ended December 31, 2009 were approximately $6.1 million.

Absent a substantial downturn in pre-need sales, we believe that the cash and cash equivalent allocation of merchandise trust assets is sufficient to mitigate the risk of liquidating impaired assets in the near future.

 

44


Table of Contents

Impact of Current Market Conditions on Our Ability to Meet Our Debt Covenants

Current market conditions have not negatively impacted our ability to meet our significant debt covenants. These covenants specifically relate to a certain measure of profitability (the “Profitability Measure”) and certain coverage and leverage ratios as defined in the Credit Agreement described below.

The Profitability Measure is primarily related to the current period value of contracts written and their associated expense. We have not seen any material decline in the value of contracts written due to current economic conditions. Additionally, associated expenses have remained relatively stable.

The coverage ratio relates to the excess of the Profitability Measure less distributions made to partners over fixed charges. This ratio has not been negatively impacted in so much that the Profitability Measure has not eroded while distributions paid to partners and fixed charges have remained relatively stable.

The leverage ratio relates to the ratio of consolidated debt to the Profitability Measure. Once again, the Profitability Measure has not eroded which in turn has caused this ratio to stay within an acceptable range.

Net Income, Operating Cash Flows and Partner Distributions

The table below details net income, operating cash flows and partner distributions made in 2007, 2008 and 2009 respectively:

 

     Year ended December 31,
     2009     2008    2007
     (in thousands)

Net income (loss)

   $ (1,077   $ 4,556    $ 2,786

Operating cash flows

     13,498        21,144      18,973

Partner distributions

     27,253        25,658      18,724

Cash flows from operations for the years ended December 31, 2009, 2008 and 2007 ($13.5 million, $21.1 million and $19.0 million, respectively) significantly outpaced our net income (loss) (($1.1 million), $4.6 million and $2.8 million, respectively) during the same periods. This is in large part attributable to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not and are not as of yet recognized as revenues as we had not and have not met the delivery criteria for revenue recognition. Although there is no assurance, we expect that the trend of operating cash flows outpacing net income will continue into the foreseeable future.

Segment Reporting and Related Information

We disaggregate our operations into five distinct reportable segments which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, Funeral Homes, and Corporate.

We chose this level of organization and disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.

The Cemetery Operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of our customers differs in each of our regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region . Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other

 

45


Table of Contents

methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

Our Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the Cemetery Operations segments.

Our Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.

Consolidation

Our historical operations are part of a consolidated group for financial reporting purposes that include the cemeteries we operate under long-term operating agreements. We currently operate 16 cemeteries under these long-term operating agreements. Intercompany balances and transactions have been eliminated in consolidation.

Income Taxes

Our historical financial statements include the effects of applicable U.S. federal and state income taxes in order to comply with GAAP. We are a limited partnership that has elected to be treated as a partnership for U.S. federal income tax purposes and therefore not be subject to U.S. federal or applicable state income taxes. See “Material Tax Considerations” included in our Registration Statement on Form S-3 (Registration No. 333-144453) filed with the SEC. In order to be treated as a partnership for federal income tax purposes, at least 90% of our gross income must be qualifying income, which includes income from the sale of real property, including burial lots (with and without installed vaults), lawn and mausoleum crypts and cremation niches. Most of our activities that do not generate qualifying income, such as the sale of other cemetery products, the provision of perpetual care services, the operation of our managed cemeteries and all funeral home operations, will be owned by and conducted through corporate subsidiaries, which will be subject to tax on their net taxable income. Dividends we receive from corporate subsidiaries will be qualifying income.

Seasonality

The death care business is relatively stable and predictable. Although we experience seasonal increases in deaths due to extreme weather conditions and winter flu, these increases have not historically had any significant impact on our results of operations. In addition, we perform fewer initial openings and closings in the winter when the ground is frozen.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our historical consolidated financial statements. We prepared these financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates, judgments and assumptions on historical experience and known facts and other assumptions that we believed to be reasonable under the circumstances. In future periods, we expect to make similar estimates, judgments and assumptions on the same basis as we have historically. Our actual results in future periods may differ from these estimates under different assumptions and conditions. We believe that the following accounting policies or estimates had or will have the greatest potential impact on our consolidated financial statements for the periods discussed and for future periods.

 

46


Table of Contents

Revenue Recognition

We sell our merchandise and services on both a pre-need and at-need basis. All at-need sales are recognized as revenues and recorded in earnings at the time that merchandise is delivered and services are performed.

Revenues from pre-need sales of cemetery interment rights in constructed burial property are deferred until at least 10% of the sales price has been collected, at which time they are fully earned.

Revenues from pre-need sales of cemetery interment rights in unconstructed burial property, such as mausoleum crypts and lawn crypts are recognized using the percentage-of-completion method of accounting, with no revenue being recognized until at least 10% of the sales price has been received. The percentage-of-completion method of accounting requires us to make certain estimates as of our reporting dates. These estimates are made based upon information available at the reporting date and are updated on a specific identification method at the end of each reporting period. Periodic earnings are calculated based upon the total sales price, estimated costs to complete and the percentage completed during a given reporting period.

Revenues from pre-need sales of cemetery merchandise and services are deferred until the merchandise is delivered or the services are performed, at which time they are fully earned.

Investment earnings, including realized gains and losses, generated by assets in our merchandise trusts are deferred until the associated merchandise is delivered or the services are performed.

In order to appropriately match revenue and expenses, we defer certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business until such time that the associated revenue is recognized.

Accounts Receivable Allowance for Cancellations

At the time of a pre-need sale, we record an account receivable in an amount equal to the total contract value less any cash deposit paid net of an estimated allowance for cancellations.

The allowance for cancellations is established based upon our estimate of expected cancellations and historical experiences and is currently approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. We will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at December 31, 2009 and December 31, 2008, respectively.

Merchandise Trust Assets

Assets held in our merchandise trusts are carried at fair value. Any change in unrealized gains and losses are reflected in the carrying value of the assets and is recognized as deferred revenue. Any and all investment income streams, including interest, dividends or gains and losses from the sale of trust assets are offset against deferred revenue until such time that we deliver the underlying merchandise. Investment income generated from our merchandise trust is included in Cemetery revenues—investment and other.

We evaluate whether or not the assets in the merchandise trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer and our ability and intent to hold the security until it regains its value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value. Any reduction in the cost basis of assets held in our merchandise trust due to an other-than-temporary impairment is offset against deferred revenue. Refer to Notes 5 and 6 of our financial statements included in this Annual Report on Form 10-K for a more detailed discussion of other-than-temporarily impaired assets.

 

47


Table of Contents

Perpetual Care Trust Assets

Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All principal must remain in this trust into perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred.

Assets in our perpetual care trusts are carried at fair value. Any change in unrealized gains and losses are reflected in the carrying value of the assets and is offset against perpetual care trust corpus.

We evaluate whether or not the assets in our perpetual care trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer and our ability and intent to hold the security until it recovers its value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value.

Any reduction in the cost basis of assets held in our perpetual care trusts due to an other-than-temporary impairment is offset against perpetual care trust corpus. There is no impact on earnings. Refer to Notes 5 and 6 of our financial statements included in this Annual Report on Form 10-K for a more detailed discussion of other-than-temporarily impaired assets.

Impairment of Long-Lived Assets

We monitor the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets. Our policy is to evaluate an asset for impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. An impairment charge is recorded to write-down the asset to its fair value if the sum of future undiscounted cash flows is less than the carrying value of the asset.

Property and Equipment

Property and equipment is recorded at cost and depreciated on a straight-line basis. Maintenance and repairs are charged to expense as incurred, whereas additions and major replacements are capitalized and depreciation is recorded over their estimated useful lives as follows:

 

Buildings and improvements

   10 to 40 years

Furniture and equipment

   5 to 10 years

Leasehold improvements

   over the term of the lease

These estimates could be impacted in the future by changes in market conditions or other factors.

Income Taxes

Our corporate subsidiaries are subject to both federal and state income taxes. We record deferred tax assets and liabilities to recognize temporary differences between the bases of assets and liabilities in our tax and GAAP balance sheets and for federal and state net operating loss carryforwards and alternative minimum tax credits.

We record a valuation allowance against our deferred tax assets if we deem that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of

 

48


Table of Contents

temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

As of December 31, 2009, our taxable corporate subsidiaries had a federal net operating loss carryover of approximately $90.7 million, which will begin to expire in 2019 and a state net operating loss carry-forward of approximately $140.7 million, a portion of which expires annually. Our ability to use such federal net operating losses may be limited by changes in the ownership of our units deemed to result in an “ownership change” under the applicable provisions of the Internal Revenue Code of 1986, as amended.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB ASC, also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. The Codification is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies to financial statements beginning in third quarter of 2009. Accordingly, all accounting references contained herein have been updated to reflect the Codification and all SFAS references have been replaced with ASC references. In those cases when previous GAAP references related to specific paragraphs, we have referred specifically to that paragraph in the ASC. Broader references have been referred to the most detailed level (topic, subtopic or section) applicable.

In June 2009, the FASB adopted ASC Topic 810, Subtopic 10, Sections 30 and 65 (“ASC 810-10-30/65”), the purpose of which is to amend certain requirements of ASC Topic 810, Subtopic 10, Section 5, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. Amongst other things, ASC 810-10-30/65 requires a change in the determination of which entity’s qualify as variable interest entities (“VIE’s”), changes in an entity that is involved in VIE’s method of determining whether they are the primary beneficiary of such VIE, and changes to disclosures required by all entities involved with VIE. ASC 810-10-30/65 is effective for each reporting period beginning after November 15, 2009. Early adoption is prohibited. We have reviewed the requirements of ASC 810-10-30/65 and determined that there will be no changes to our current determination of those entities with which we are involved as to their status of being VIE’s nor to our determination of our status with regards to our position as the primary beneficiary of such VIE’s. We have also determined that we will be required to modify our disclosures with regards to those VIE’s with which we are involved and will adopt such disclosure changes beginning in the first quarter of 2010.

In April of 2009, the FASB issued ASC 320-10-65-1, which relates to investments in both debt and equity securities. ASC 320-10-65-1 amended previous guidance related to the determination of whether impairments in debt securities were other-than-temporary, and provides guidance as to which other-than-temporary impairments should be reflected in the income statement and which other-than-temporary impairments should be reflected in other comprehensive income. ASC 320-10-65-1 also modifies the presentation and disclosures related to both debt and equity securities. ASC 320-10-65-1 is effective for interim periods ending after June 15, 2009, and we adopted it for the second quarter of 2009. ASC 320-10-65-1 did not have a significant impact on our financial position or results of operations.

In April of 2009, the FASB issued ASC 825-10-65-1, which relates to financial instruments. ASC 825-10-65-1amends ASC 825-10-50-10 to require disclosures about fair value of financial instruments in interim

 

49


Table of Contents

financial statements as well as in annual financial statements. ASC 825-10-65-1 is effective for interim periods ending after June 15, 2009 and we adopted it for second quarter of 2009. ASC 825-10-65-1 did not have a significant impact on our financial statements.

In April of 2009, the FASB issued ASC 820-10-65-4, which relates to fair value measurements and disclosures. ASC 820-10-65-4 provides additional guidance in estimating fair value under ASC 820-10-5-1 when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. ASC 820-10-65-4 also provides additional guidance on circumstances that may indicate a transaction is not orderly. ASC 820-10-65-4 is effective for interim periods ending after June 15, 2009, and we adopted it for the second quarter of 2009. ASC 820-10-65-4 did not have a significant impact on our financial position or results of operations.

In December 2007, the FASB issued ASC 805, which relates to the accounting for business combinations. ASC 805 requires that acquirers in a business combination identify and record at fair value all of the assets and liabilities acquired as well as any non-controlling interest resulting from such business combination. Goodwill will be recognized when the fair value of consideration paid or transferred to the acquiree plus the fair value of any non-controlling interest exceeds the fair value of identified assets acquired less the fair value of liabilities assumed. A gain from a bargain purchase will be recognized when the fair value of consideration paid or transferred to the acquiree plus the fair value of any non-controlling interest is less than the fair value of identified assets acquired less the fair value of liabilities assumed. Gains from bargain purchases will be recognized in earnings in the period in which the acquisition occurs. ASC 805 also requires that costs incurred in a business transaction be recorded as an expense as opposed to part of the cost of the acquisition. ASC 805 provides the Company with three options with regards to accumulated costs incurred and currently capitalized for acquisitions that had not as of yet been finalized prior to the adoption of ASC 805:

 

   

Immediately expense such costs;

 

   

Continue to carry such costs as an asset and immediately expense such costs upon the adoption of ASC 805; or

 

   

Account for the change as a change in accounting principle and restate prior year financial statements to reflect these costs as expenses in the period in which they occurred.

We adopted ASC 805 on January 1, 2009. At December 31, 2008, there was approximately $1.4 million in accumulated acquisition costs that had been capitalized and were included in “Other current assets” on our balance sheet. These costs were expensed in the first quarter of 2009 and are included on our income statement as part of “Acquisition related costs”.

In December 2007, the FASB issued ASC 810-10-65-1 which provides guidance for the accounting and reporting of non-controlling interests. ASC 810-10-65-1 states that accounting and reporting for minority interests will be recharacterized as non-controlling interests and classified as a component of equity. ASC 810-10-65-1applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. We adopted this guidance effective January 1, 2009. This adoption caused us to reclassify amounts previously shown as “Non-controlling interests in perpetual care trusts” to “Perpetual care trust corpus” and to include this amount in total liabilities rather than as a “Commitment and contingency” The adoption of this standard had no effect on our partners capital, results of operations or liquidity.

In February 2008, the FASB issued ASC 260-10-5, which relates to earnings per share. Amongst other guidance, ASC 260-10-5 addresses earnings per share for master limited partnerships and states that a master limited partnership that contains incentive distribution rights (“IDR’s”) should classify said IDR’s as a separate class of units for which a separate earnings per unit calculation should be made. We adopted ASC 260-10-5 in the first quarter of 2009. The adoption of ASC 260-10-5 had no impact on the calculation of earnings per share as allocated to common unit holders.

 

50


Table of Contents

In December 2008, the FASB issued ASC 810-10-50, which relates to disclosure requirements for consolidations. Amongst other things, ASC 810-10-50 requires public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. We adopted this guidance effective December 31, 2008. This adoption had no effect on our financial position, results of operations or liquidity.

In December 2008, the FASB issued ASC 820-10-35, which relates to the subsequent measurement of financial instruments. Amongst other things ASC 820-10-35 provides clarification for measuring fair value in a market that is not active. ASC 820-10-35 was effective upon issuance, including prior periods for which financial statements had not been issued. Our adoption of ASC 820-10-35 for the year ended December 31, 2008 had no effect on our financial position, results of operations or liquidity.

Results of Operations—Segments

Year Ended December 31, 2009 versus Year Ended December 31, 2008

Cemetery Segments

Our cemetery operations are disaggregated into three different geographically based segments. We have chosen this level of disaggregation due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.

We account for and analyze the results of operations for each of these segments on a basis of accounting that is different from generally accepted accounting principals in so much that we record revenues and related expenses based upon the value of contracts written rather than upon the delivery of merchandise and services. We reconcile these non-GAAP accounting results of operations to GAAP based amounts at the consolidated level. This reconciliation is included in Note 14 to the financial statements included in this Annual Report on Form 10-K.

The method of accounting we utilize to analyze our segment results of operation provides for a production based view of our business. We believe that this allows for a critical understanding of any economic value added during a given period of time.

Cemetery Operations—Southeast

The table below compares the results of operations for our Cemetery Operations—Southeast for the year ended December 31, 2009 as compared to the year ended December 31, 2008:

 

     Year ended December 31,  
     2009    2008    Change ($)    Change (%)  
     (In thousands)  

Total revenues

   $ 99,732    $ 88,638    $ 11,094    12.5

Total costs and expenses

     69,232      64,018      5,214    8.1
                           

Operating earnings

     30,500      24,620      5,880    23.9
                           

Interest expense

     6,515      5,163      1,352    26.2
                           

Earnings (losses) before taxes

   $ 23,985    $ 19,457    $ 4,528    23.3
                           

Revenues

Revenues for Cemetery Operations—Southeast were $99.7 million for the year ended December 31, 2009, an increase of $11.1 million, or 12.5%, compared to $88.6 million during 2008.

 

51


Table of Contents

The increase was primarily due to an increase in the value of pre-need contracts written ($7.4 million), the value of at-need contracts written ($1.9 million) and investment income from our merchandise trusts ($1.1 million). Other increases were less material.

Total costs and expenses

Total costs and expenses for Cemetery Operations—Southeast were $69.2 million for the year ended December 31, 2009, an increase of $5.2 million, or 8.1%, compared to $64.0 million during 2008.

The increase was primarily related to:

 

   

A $1.4 million increase in cost of goods sold. This was directly attributable to the corresponding increase in the value of pre-need and at-need contracts written. The ratio of cost of goods sold to the total value of contracts written actually declined by 30 basis points to 17.9% during the year ended December 31, 2009 compared to 18.2% during 2008.

 

   

A $2.1 million increase in selling expenses. This was also directly attributable to the corresponding increase in the value of pre-need and at-need contracts written. The ratio of selling expenses to the total value of contracts written declined by 40 basis points to 25.9% during the year ended December 31, 2009 compared to 26.3% during 2008.

 

   

A $0.8 million increase in cemetery expenses. The increase was due to a corresponding increase in labor costs ($0.9 million). Other cemetery expenses declined by $0.1 million.

 

   

A $1.0 million increase in general and administrative expenses. This was primarily due to a $0.8 million increase in labor costs and a $0.2 million increase in insurance expense.

Interest Expense

Interest expense for Cemetery Operations – Southeast was $6.5 million for the year ended December 31, 2009, an increase of $1.4 million, or 26.2%, compared to $5.1 million during the same period last year. This was primarily due to an overall increase in corporate wide interest expense which in turn was primarily due to an increase in total debt outstanding.

Cemetery Operations—Northeast

The table below compares the results of operations for our Cemetery Operations—Northeast for the year ended December 31, 2009 as compared to the year ended December 31, 2008:

 

     Year ended December 31,  
     2009    2008    Change ($)     Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 54,193    $ 54,190    $ 3      0.0

Total costs and expenses

     37,611      39,281      (1,670   -4.3
                            

Operating earnings

     16,582      14,909      1,673      11.2
                            

Interest expense

     2,649      2,657      (8   -0.3
                            

Earnings (losses) before taxes

   $ 13,933    $ 12,252    $ 1,681      13.7
                            

Revenues

Revenues for Cemetery Operations – Northeast were $54.2 million for both the year ended December 31, 2009 and 2008. A $1.3 million increase in the value of pre-need contracts written was offset by a $0.6 million decrease in the value of at-need contracts written and a $0.7 million decrease in investment income from trusts.

 

52


Table of Contents

Total costs and expenses

Total costs and expenses for Cemetery Operations—Northeast were $37.6 million for the year ended December 31, 2009, a decrease of $1.7 million, or 4.3%, compared to $39.3 million during 2008.

The decrease was primarily related to:

 

   

A $0.8 million decrease in cost of goods sold. The ratio of cost of goods sold to the total value of contracts written declined by 220 basis points to 16.2% during the year ended December 31, 2009 as compared to 18.4% during 2008.

 

   

A $0.7 million decrease in cemetery expenses. This consisted of a $0.5 million decrease in personnel costs and a $0.2 million decrease in fuel costs.

Interest Expense

Interest expense for Cemetery Operations—Northeast was $2.6 million for both the year ended December 31, 2009 and 2008. An increase in corporate wide interest expense was not allocable to the Northeast segment.

Cemetery Operations—West

The table below compares the results of operations for our Cemetery Operations—West for the year ended December 31, 2009 as compared to the year ended December 31, 2008:

 

     Year ended December 31,  
     2009    2008    Change ($)     Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 39,956    $ 42,371    $ (2,415   -5.7

Total costs and expenses

     27,423      28,210      (787   -2.8
                            

Operating earnings

     12,533      14,161      (1,628   -11.5
                            

Interest expense

     3,082      2,696      386      14.3
                            

Earnings (losses) before taxes

   $ 9,451    $ 11,465    $ (2,014   -17.6
                            

Revenues

Revenues for Cemetery Operations—West were $40.0 million for the year ended December 31, 2009, a decrease of $2.4 million, or 5.7%, compared to $42.4 million during 2008. The decrease was primarily related to a $1.2 million decrease in both investment income from trusts and in the value of at-need contracts written.

Total costs and expenses

Total costs and expenses for Cemetery Operations—West were $27.4 million for the year ended December 31, 2009, a decrease of $0.8 million, or 2.8%, compared to $28.2 million during 2008.

The decrease was primarily related to:

 

   

A $0.2 million decrease in cost of goods sold. The ratio of cost of goods sold to the total value of contracts written declined by 10 basis points to 13.4% during the year ended December 31, 2009 as compared to 13.5% during 2008.

 

   

A $0.4 million decrease in cemetery expenses. This consisted of a $0.4 million decrease in real estate taxes and a $0.1 million decrease in utilities, maintenance and gas and oil offset by a $0.3 million increase in personnel costs.

 

53


Table of Contents

Interest Expense

Interest expense for Cemetery Operations—West was $3.1 million for the year ended December 31, 2009, a $0.4 million increase, or 14.3%, compared to $2.7 million during 2008. This was due to the overall corporate wide increase in interest expense, which in turn was due to an increase in average debt outstanding.

Funeral Homes Segment

Unlike our cemetery operations segment, there is no substantial lag between the sale and delivery of funeral home product and services. Accordingly, the production based view and resulting numbers that management utilizes to analyze our funeral home business does not differ from GAAP accounting for this segment.

The table below compares the results of operations for our Funeral Home segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:

 

     Year ended December 31,  
     2009    2008    Change ($)     Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 23,366    $ 23,963    $ (627   -2.6

Depreciation and amortization

     1,101      849      252      29.7

Total costs and expenses

     19,004      19,066      (62   -0.3
                            

Operating earnings

     3,231      4,048      (817   -20.2
                            

Interest expense (a)

     2,123      2,198      (75   -3.4
                            

Earnings (losses) before taxes

   $ 1,108    $ 1,850    $ (742   -40.1
                            

 

(a) Included in interest income on the income statement.

Revenues

Revenues for the Funeral Home segment were $23.4 million for the year ended December 31, 2009, a decrease of $0.6 million, or 2.5%, compared to $24.0 million during 2008.

The decrease was primarily attributable to a decrease in at-need revenues ($1.2 million) offset by increase in pre-need revenues ($0.4 million) and other revenues ($0.2 million).

Depreciation and amortization

Depreciation and amortization for the Funeral Home segment was $1.1 million for the year ended December 31, 2009, an increase of $0.3 million, or 29.7%, compared to $0.8 million during 2008. The increase was primarily related to an increase in depreciable assets.

Total costs and expenses

Total costs and expenses for the Funeral Home segment were $19.0 million for the year ended December 31, 2009, a decrease of $0.1 million, or 0.4%, compared to $19.1 million during 2008.

There was stability across all expense categories. The largest increase was $0.2 million in wages and benefits. The largest decrease was $0.1 million in fixed facility costs.

 

54


Table of Contents

Interest Expense

Interest expense for the Funeral Home segment was $2.1 million for the year ended December 31, 2009, a decrease of $0.1 million, or 3.4%, compared to $2.2 million during 2008. The slight decrease in the allocation of interest expense to the funeral home operations was primarily due to the slight decrease in funeral home revenues and the funeral home divested in 2009.

Corporate Segment

Amounts allocated to the Corporate segment include each of the following:

 

   

Miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments.

 

   

Various home office and other expenses. These expenses equal the total corporate expenses as shown on the face of the income statement.

 

   

Certain depreciation and amortization expenses.

 

   

Gains and losses and purchases and sales of cemetery and funeral home properties.

 

   

Gains and losses from changes in the fair value of derivatives.

 

   

Certain costs related to refinancing.

 

   

Acquisition related costs.

The table below details expenses incurred by the Corporate segment for the year ended December 31, 2009 and December 31, 2008:

 

     Year ended December 31,  
     2009     2008    Change ($)     Change (%)  
     (In thousands)  

Selling, cemetery and general and administrative expenses

   $ 876      $ 1,390    $ (514   -37.0

Depreciation and amortization

     2,608        1,370      1,238      90.4

Acquisition related costs

     2,292        —        2,292      n/a   

Corporate expenses

         

Corporate personnel expenses

     10,382        10,031      351      3.5

Other corporate expenses (a)

     11,988        11,256      732      6.5
                             

Total corporate expenses

     22,370        21,287      1,083      5.1
                             

Operating loss

   $ 28,146      $ 24,047      4,099      17.0
                             

Gain on sale of funeral home

     434        —        434      n/a   

Gain on acquisitions

     4,435        —        4,435      n/a   

Decrease in the value of interest rate swaps

     (2,681     —        (2,681   n/a   

Expenses related to refinancing

     2,242        —        2,242      n/a   

Interest expense

     39        —        39      n/a   
                             

Losses before taxes

   $ 28,240      $ 24,047    $ 4,193      17.4
                             

Selling, cemetery and general administrative expenses that were allocated to the corporate segment were $0.9 million during the year ended December 31, 2009, a decrease of $0.5 million, or 37.0%, compared to $1.4 million for the year ended December 31, 2008. The decrease was primarily caused by a decrease in salesperson’s bonuses and other personnel expenses allocated to the corporate segment ($0.3 million) and sales training ($0.1 million)

 

55


Table of Contents

Depreciation and amortization allocated to the corporate segment was $2.6 million during the year ended December 31, 2009, an increase of $1.3 million, or 90.4%, compared to $1.4 million for the year ended December 31, 2007. The increase was primarily caused by an increased in the amortization of deferred financing fees.

On January 1, 2009, we adopted ASC 805. Amongst other things, ASC 805 requires that costs incurred in acquisition related activities be expensed as incurred. Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities. These costs totaled approximately $2.3 million in 2009 of which approximately $1.4 million that had been capitalized as of December 31, 2008 and expensed in 2009.

Total corporate expenses were $22.4 million during the year ended December 31, 2009, an increase of $0.7 million, or 5.1%, compared to $21.3 million during the year ended December 31, 2008. The increase was equally distributed between personnel related expenses ($0.4 million) and non-personnel expenses ($0.3 million). The increase in personnel related expenses was primarily attributable to an increase in employee benefits ($0.4 million). The increase in non-personnel related expenses was primarily attributable to an increase in professional fees ($1.1 million) offset by a decrease in unit-based compensation ($0.7 million).

The 2009 gain on the sale of the funeral home relates to the second quarter disposition of a funeral home. Proceeds from this disposition were approximately $0.5 million.

The 2009 gain on the acquisition of cemetery properties discussed in Note 13 of the Financial Statements in this Annual Report on Form 10-K is allocated to our corporate segment. Refer to this note for a more detailed discussion of this gain.

The 2009 decrease in the value of our interest rate swaps as discussed in Note 7 of the Financial Statements in this Annual Report on Form 10-K is allocated to the corporate segment. Refer to this note for a more detailed discussion of this loss.

Expenses related to refinancing of $2.2 million during the year ended December 31, 2009 relate to the write-down of unamortized debt issuance costs made as a result of our November 2009 private debt offering and the use of some of these funds to pay down certain previous debt amounts.

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the consolidated level are deferred until such time that we meet the delivery component for revenue recognition.

Accordingly, GAAP consolidated revenues reflect the amount of total merchandise and services which were delivered during the period. Period over period changes to revenues can be impacted by:

 

   

Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origin and are recognized as revenue and not deferred as of the end of their period of origination.

 

   

Changes in merchandise and services that are delivered during a period that had been originated during a prior period.

 

56


Table of Contents

The table below analyzes results of operations and the changes therein for the year ended December 31, 2009 compared to the year ended December 31, 2008. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:

 

    Year ended December 31, 2009     Year ended December 31, 2008              
    (in thousands)     (in thousands)              
    Segment
Results
(non-GAAP)
    Changes in
Deferred
Revenues
and Expenses
    GAAP
Results
    Segment
Results
(non-GAAP)
    Changes in
Deferred
Revenues
and Expenses
    GAAP
Results
    Change in
GAAP results ($)
    Change in
GAAP results (%)
 

Revenues

               

Pre-need cemetery revenues

  $ 99,771      $ (26,930   $ 72,841      $ 91,050      $ (22,987   $ 68,063      $ 4,778      7.0

At-need cemetery revenues

    63,970        (6,549     57,421        63,874        (39     63,835        (6,414   -10.0

Investment income from trusts

    22,706        (3,180     19,526        23,519        (3,237     20,282        (756   -3.7

Interest income

    5,834        —          5,834        5,384        —          5,384        450      8.4

Funeral home revenues

    23,365        —          23,365        23,963        —          23,963        (598   -2.5

Other cemetery revenues

    1,613        601        2,215        1,376        545        1,921        294      15.3
                                                             

Total revenues

    217,261        (36,059     181,203        209,168        (25,718     183,448        (2,245   -1.2
                                                             

Costs and expenses

               

Cost of goods sold

    27,096        (5,249     21,847        26,687        (3,805     22,882        (1,035   -4.5

Cemetery expense

    41,246        —          41,246        41,651        —          41,651        (405   -1.0

Selling expense

    41,652        (7,529     34,123        40,379        (5,573     34,806        (683   -2.0

General and administrative expense

    22,498        —          22,498        21,372        —          21,372        1,126      5.3

Corporate overhead

    22,370        —          22,370        21,293        —          21,293        1,077      5.1

Depreciation and amortization

    6,390        —          6,390        5,029        —          5,029        1,361      27.1

Funeral home expense

    19,004        —          19,004        19,065        —          19,065        (61   -0.3

Acquisition related costs

    2,292        —          2,292        —          —          —          2,292      n/a   
                                                             

Total costs and expenses

    182,548        (12,778     160,772        175,476        (9,378     166,095        3,677      2.2
                                                             

Operating profit

    34,712        (23,281     11,431        33,690        (16,340     17,350        5,919      (34.1 %) 
                                                             

Gain on sale of funeral home

    434        —          434        —          —          —          434      n/a   

Gain on acquisitions

    4,435        —          4,435        —          —          —          4,435      n/a   

Decrease in the value of interest rate swaps

    (2,681     —          (2,681     —          —          —          (2,681   n/a   

Expenses related to refinancing

    2,242        —          2,242        —          —          —          2,242      n/a   

Interest expense

    14,409        —          14,409        12,714        —          12,714        1,695      13.3
                                                             

Income (loss) before taxes

    20,249        (23,281     (3,031     20,976        (16,340     4,636        (7,667   (165.4 %) 
                                                             

State income taxes

    808        —          808        304        —          304        504      n/a   

Federal income taxes

    (2,762     —          (2,762     (224     —          (224     (2,538   n/a   
                                                             

Total income taxes

    (1,954     —          (1,954     80        —          80        (2,034   n/a   
                                                             

Net income (loss)

  $ 22,203      $ (23,281   $ (1,077   $ 20,896      $ (16,340   $ 4,556      $ (5,633   n/a   
                                                             

 

57


Table of Contents

Revenues

Pre-need cemetery revenues were $72.8 million for the year ended December 31, 2009, an increase of $4.8 million, or 7.0%, as compared to $68.0 million during 2008. There was a substantial increase in the value of contracts written ($8.7 million) which was offset by a lower increase in deferred revenue ($4.0 million). The overall increase was primarily caused by an increase in the delivery of pre-need markers ($2.5 million), vaults ($1.8 million), grave openings ($1.4 million) and installations and other ($1.4 million).

At-need cemetery revenues were $57.4 million for the year ended December 31, 2009, a decrease of $6.4 million, or 10.0%, as compared to $63.8 million during 2008. The value of contracts written increased slightly to $64.0 million from $63.9 million while deferred revenues increased by $6.5 million. The overall decrease was due to a decline in deliveries of markers ($3.4 million), bases ($1.4 million), openings and closings ($0.8 million), vaults ($0.4 million) and lots ($0.4 million).

Investment income from trusts was $19.5 million for the year ended December 31, 2009, a decrease of $0.8 million, or 3.7%, as compared to $20.3 million during 2008. The decrease was primarily related to a decline in variable interest rates and a late year repositioning of assets from fixed maturity debt securities to money market funds in anticipation of a further repositioning in the first quarter of 2010.

Interest income on accounts receivable was $5.8 million for the year ended December 31, 2009, an increase of $0.5 million, or 8.4%, as compared to $5.3 million during 2008. The change was related to the continuing increase in the value of pre-need contracts written.

Revenues for the Funeral Home segment were $23.4 million for the year ended December 31, 2009, a decrease of $0.6 million, or 2.5%, compared to $24.0 million during 2008. The decrease was primarily attributable to a decrease in at-need revenues ($1.2 million) offset by increase in pre-need revenues ($0.4 million) and other revenues ($0.2 million).

Other cemetery revenues include miscellaneous items that are not grouped with our other cemetery merchandise and services. Other cemetery revenues were $1.6 million for the year ended December 31, 2009, an increase of $0.2 million, or 15.3%, as compared to $1.4 million during 2008. The increase was primarily caused by a $0.2 million increase in asset sales revenue.

Costs and Expenses

Cost of goods sold were $21.8 million for the year ended December 31, 2009, a decrease of $1.0 million, or 4.5%, as compared to $22.9 million in 2008. The decrease was primarily due to the associated decrease in (combined) pre-need and at-need cemetery revenues. The ratio of cost of goods sold to pre-need and at-need cemetery revenues decreased to 16.8% for the year ended December 31, 2009 as compared to 17.3% during 2008.

Cemetery expenses were $41.2 million during the year ended December 31, 2009, a decrease of $0.4 million, or 1.0%, compared to $41.6 million during 2008. There was a $1.1 million decrease in non-labor costs offset by a $0.7 million increase in labor costs. The non-labor cost decreases primarily related to decreases in gas and oil ($0.5 million), real estate taxes ($0.4 million) and repairs and maintenance ($0.1 million) while the increase in labor costs was primarily due to an increase in employee benefits ($1.4 million) offset by a reduction in other labor costs ($0.7 million). Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of segment level pre-need and at-need cemetery revenues. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 25.2% during the year ended December 31, 2009 as compared to 26.9% during 2008.

 

58


Table of Contents

Selling expenses were $34.1 million during the year ended December 31, 2009, a decrease of $0.7 million, or 2.0%, as compared to $34.8 million in 2008. The decrease was primarily caused by the associated decrease in (combined) pre-need and at-need cemetery revenues. The ratio of cost of selling expenses to pre-need and at-need cemetery revenues decreased to 26.1% for the year ended December 31, 2009 as compared to 26.4% during 2008.

General and administrative expenses were $22.5 million during the year ended December 31, 2009, an increase of $1.1 million, or 5.2%, as compared to $21.4 million during 2008. The increase was split between an increase in labor costs ($0.5 million) and non-labor costs ($0.6 million). The increase in labor costs was primarily attributable to an increase in employee benefits ($0.5 million). The increase in non-labor costs was primarily attributable to an increase in corporate insurance ($0.3 million) and a number of smaller changes. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 13.7% during the year ended December 31, 2009 as compared to 13.8% during 2008.

Total corporate overhead was $22.4 million during the year ended December 31, 2009, an increase of $1.1 million, or 5.1%, compared to $21.3 million during 2008. The increase was distributed between personnel related expenses ($0.4 million) and non-personnel expenses ($0.7 million). The increase in personnel related expenses was primarily attributable to an increase in employee benefits ($0.4 million). The increase in non- personnel related expenses was primarily attributable to an increase in professional fees ($1.1 million) offset by a decrease in unit-based compensation ($0.7 million).

Depreciation and amortization was $6.4 million during the year ended December 31, 2009, an increase of $1.4 million, or 27.1%, as compared to $5.0 million during the period last year. The increase was primarily due to an increase in the amortization of debt issuance costs.

Funeral Home expenses were $19.0 million for the year ended December 31, 2009, a decrease of $0.1 million, or 0.3%, compared to $19.1 million during 2008. There was stability across all expense categories. The largest increase was $0.2 million in wages and benefits. The largest decrease was $0.1 million in fixed facility costs.

On January 1, 2009, we adopted ASC 805. Amongst other things, ASC 805 requires that costs incurred in acquisition related activities be expensed as incurred. Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities. These costs totaled approximately $2.3 million in 2009 of which approximately $1.4 million that had been capitalized as of December 31, 2008 and expensed in 2009.

We recorded a gain on the acquisition of cemetery properties (discussed in Note 13) of approximately $4.4 million during 2009.

We entered into two interest rate swaps during the fourth quarter of 2009. At December 31, 2009, these swaps had a fair value of ($2.7 million). We recorded this as a loss during 2009. The change in the value in interest rate swaps was due to a change in market expectations at December 31, 2009 as compared to the date that the swaps were originated. Upon maturation, the fair value of the swaps will be the exact same as the fair value of the swaps upon origination ($0.0 million). There will be no cumulative loss or gain on the fair value of the swaps. The loss recorded in 2009 will be offset by equal and opposite gains in future periods.

The $2.2 million in expenses incurred due to refinancing activities related to the write-down of deferred financing fees that were accorded due to our fourth quarter 2009 private debt offering for which certain of the funds were used to pay down prior existing debt.

 

59


Table of Contents

Interest expense was $14.4 million during the year ended December 31, 2009, an increase of $1.7 million, or 13.3%, as compared to $12.7 million during 2008. The increase was primarily due to an overall increase in the average amount of debt outstanding.

Year Ended December 31, 2008 versus Year Ended December 31, 2007

Cemetery Operations—Southeast

The table below compares the results of operations for our Cemetery Operations—Southeast for the year ended December 31, 2008 as compared to the year ended December 31, 2007:

 

     Year ended December 31,  
     2008    2007    Change ($)    Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 88,638    $ 74,479    $ 14,159    19.0

Total costs and expenses

     64,018      50,927      13,091    25.7
                           

Operating earnings

     24,620      23,552      1,068    4.5
                           

Interest expense

     5,163      4,480      683    15.2
                           

Earnings (losses) before taxes

   $ 19,457    $ 19,072    $ 385    2.0
                           

Revenues

Revenues for Cemetery Operations—Southeast were $88.6 million for the year ended December 31, 2008, an increase of $14.1 million, or 19.0%, compared to $74.5 million during the year ended December 31, 2007.

The increase was primarily due to an increase in the value of pre-need contracts written ($8.5 million), the value of at-need contracts written ($7.5 million) and interest and other income ($0.7 million) offset by a decrease in investment income from the merchandise and perpetual care trusts ($2.5 million).

Total costs and expenses

Total costs and expenses for Cemetery Operations—Southeast were $64.0 million for the year ended December 31, 2008, an increase of $13.1 million, or 25.7%, compared to $50.9 million during the year ended December 31, 2007.

The increase was primarily related to:

 

   

A $2.5 million increase in cost of goods sold. This was directly attributable to the corresponding increase in the value of pre-need and at-need contracts written. The ratio of cost of goods sold to the total value of pre-need and at-need contracts written declined by 60 basis points to 18.2% in 2008 as compared to 18.8% during 2007.

 

   

A $3.8 million increase in selling expenses. This was also directly attributable to the corresponding increase in the value of pre-need and at-need contracts written. The ratio of selling expenses to the total value of pre-need and at-need contracts written declined by 70 basis points to 26.3% during 2008 as compared to 27.0% during 2007.

 

   

A $4.2 million increase in cemetery expenses. The increase was due to a $2.3 million increase in labor costs and a $1.9 million increase in non-labor costs. Non-labor cost significant increases included maintenance ($0.7 million), utilities ($0.6 million), real estate taxes ($0.2 million) and routine repairs ($0.2 million).

 

60


Table of Contents
   

A $2.4 million increase in general and administrative expenses. The increase was due to a $0.9 million increase in labor costs and a $1.5 million increase in non-labor costs. Non-labor cost significant increases included insurance ($0.4 million), professional fees ($0.3 million) and supplies and travel ($0.1 million each).

 

   

A $0.2 million increase in depreciation expense which was primarily caused by an increase in depreciable assets.

Interest Expense

Interest expense for Cemetery Operations—Southeast was $5.2 million for the year ended December 31, 2008, an increase of $0.7 million, or 15.2%, compared to $4.5 million during the year ended December 31, 2007. The increase was primarily due to the overall corporate wide increase in interest expense, which in turn was due to an increase in the average debt outstanding.

Cemetery Operations—Northeast

The table below compares the results of operations for our Cemetery Operations – Northeast for the year ended December 31, 2008 as compared to the year ended December 31, 2007:

 

     Year ended December 31,  
     2008    2007    Change ($)     Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 54,190    $ 61,720    $ (7,530   -12.2

Total costs and expenses

     39,281      39,240      41      0.1
                            

Operating earnings

     14,909      22,480      (7,571   -33.7
                            

Interest expense

     2,657      3,555      (898   -25.3
                            

Earnings (losses) before taxes

   $ 12,252    $ 18,925    $ (6,673   -35.3
                            

Revenues

Revenues for Cemetery Operations—Northeast were $54.2 million for the year ended December 31, 2008, a decrease of $7.5 million, or 12.2%, compared to $61.7 million during the year ended December 31, 2007.

The decrease was primarily due to a decrease in investment income from the merchandise and perpetual care trusts ($6.1 million) and asset sales ($1.3 million). The value of pre-need and at-need contracts written was relatively flat year over year.

Total costs and expenses

Total costs and expenses for Cemetery Operations—Northeast were $39.3 million for the year ended December 31, 2008, an increase of $0.1 million, or 0.1%, compared to $39.2 million during the year ended December 31, 2007.

As with total operating expenses, the different components of operating expenses did not significantly vary during the year ended December 31, 2008 as compared to the year ended December 31, 2007.

 

   

Cost of goods sold increased by $0.2 million. The ratio of cost of goods sold to the total value of pre-need and at-need contracts written increased by 40 basis points to 18.4% in 2008 as compared to 18.0% during 2007.

 

61


Table of Contents
   

Selling expenses declined by $0.2 million. The ratio of selling expenses to the total value of pre-need and at-need contracts written declined by 30 basis points to 24.4% during 2008 as compared to 24.7% during 2007.

 

   

Cemetery expenses declined by $0.1 million. Labor costs declined by $0.2 million while non-labor costs increased by $0.1 million.

 

   

General and administrative expenses increased by $0.1 million. Labor costs were flat while non-labor costs increased by $0.1 million.

Interest Expense

Interest expense for Cemetery Operations—Northeast was $2.7 million for the year ended December 31, 2008, a decrease of $0.9 million, or 25.3%, compared to $3.6 million during the year ended December 31, 2007. Interest expense allocations are primarily made based upon certain revenue factors. Accordingly, while overall corporate wide interest expense increased, the allocation to the Northeast region decreased, causing overall interest in the region to decrease.

Cemetery Operations—West

The table below compares the results of operations for our Cemetery Operations—West for the year ended December 31, 2008 as compared to the year ended December 31, 2007:

 

     Year ended December 31,  
     2008    2007    Change ($)    Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 42,371    $ 15,760    $ 26,611    168.9

Total costs and expenses

     28,210      9,951      18,259    183.5
                           

Operating earnings

     14,161      5,809      8,352    143.8
                           

Interest expense

     2,696      425      2,271    534.4
                           

Earnings (losses) before taxes

   $ 11,465    $ 5,384    $ 6,081    112.9
                           

Our Cemetery Operations—West grew significantly during the year ended December 31, 2008 as compared to the year ended December 31, 2007 primarily due to the December 2007 acquisition of 45 cemeteries from Service Corp International.

Revenues

Revenues for Cemetery Operations—West were $42.4 million for the year ended December 31, 2008, an increase of $26.6 million, or 168.9%, compared to $15.8 million during the year ended December 31, 2007.

The increase was across the board, with increases in the value of pre-need and at-need cemetery contracts written ($23.3 million), investment income from merchandise and perpetual care trusts ($2.8 million), other income ($0.3 million) and interest income on accounts receivable ($0.2 million).

Total costs and expenses

Total costs and expenses for Cemetery Operations—West were $28.2 million for the year ended December 31, 2008, an increase of $18.3 million, or 183.5%, compared to $9.9 million during the year ended December 31, 2007.

 

62


Table of Contents

The increase was primarily related to:

 

   

A $2.8 million increase in cost of goods sold. This was directly attributable to the corresponding increase in the value of pre-need and at-need contracts written. The ratio of cost of goods sold to the total value of pre-need and at-need contracts written declined by 370 basis points to 13.5% in 2008 as compared to 17.2% during 2007.

 

   

A $5.4 million increase in selling expenses. This was also directly attributable to the corresponding increase in the value of pre-need and at-need contracts written. The ratio of selling expenses to the total value of pre-need and at-need contracts written declined by 220 basis points to 24.0% during 2008 as compared to 26.2% during 2007.

 

   

A $6.8 million increase in cemetery expenses. The increase was due to a $4.0 million increase in labor costs and a $2.8 million increase in non-labor costs. Non-labor cost significant increases included maintenance ($1.1 million), utilities ($0.9 million), real estate taxes ($0.4 million) and routine repairs ($0.2 million).

 

   

A $3.0 million increase in general and administrative expenses. The increase was due to a $1.8 million increase in labor costs and a $1.2 million increase in non-labor costs. Non-labor cost significant increases included insurance ($0.3 million), routine overhead ($0.2 million), supplies ($0.2 million) and a number of smaller increases.

 

   

A $0.3 million increase in depreciation expense which was primarily caused by an increase in depreciable assets.

Interest Expense

Interest expense for Cemetery Operations—West was $2.7 million for the year ended December 31, 2008, an increase of $2.3 million, or 534.4%, compared to $0.4 million during the year ended December 31, 2007. The increase was primarily due to the overall increase in corporate interest.

Funeral Home Segment

Unlike our cemetery operations segment, there is no substantial lag between the sale and delivery of funeral home product and services. Accordingly, the production based view and resulting numbers that management utilizes to analyze our funeral home business does not differ from GAAP accounting for this segment.

The table below compares the results of operations for our Funeral Home segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:

 

     Year ended December 31,  
     2008    2007    Change ($)    Change (%)  
     (In thousands)  
     (non-GAAP)  

Total revenues

   $ 23,963    $ 10,782    $ 13,181    122.3

Depreciation and amortization

     838      386      452    117.1

Total costs and expenses

     19,065      8,422      10,643    126.4
                           

Operating earnings

     4,060      1,974      2,086    105.7
                           

Interest expense (a)

     2,198      615      1,583    257.4
                           

Earnings (losses) before taxes

   $ 1,862    $ 1,359    $ 503    37.0
                           

 

(a) Included in interest income on the income statement.

 

63


Table of Contents

Our Funeral Home segment grew significantly during the year ended December 31, 2008 as compared to the year ended December 31, 2007 primarily due to the December 2007 acquisition of 30 funeral homes from Service Corp International.

Revenues

Revenues for the Funeral Home segment were $24.0 million for the year ended December 31, 2008, an increase of $13.2 million, or 122.3%, compared to $10.8 million during the year ended December 31, 2007.

The increase was primarily attributable to an increase in at-need revenues ($9.3 million), pre-need revenues ($2.3 million) and other revenues ($1.6 million).

Depreciation and amortization

Depreciation and amortization for the Funeral Home segment was $0.8 million for the year ended December 31, 2008, an increase of $0.5 million, or 117.1%, compared to $0.3 million during the year ended December 31, 2007. The increase was primarily related to an increase in depreciable assets.

Total costs and expenses

Total costs and expenses for the Funeral Home segment were $19.1 million for the year ended December 31, 2008, an increase of $10.6 million, or 126.4%, compared to $8.4 million during the year ended December 31, 2007.

The increase was primarily related to increases in personnel expenses ($4.9 million), merchandise ($2.1 million), fixed facility costs ($1.0 million), general and administrative expenses ($0.8 million) and variable facility costs ($0.5 million).

Interest Expense

Interest expense for the Funeral Home segment was $2.2 million for the year ended December 31, 2008, an increase of $1.6 million, or 257.4%, compared to $0.6 million during the year ended December 31, 2007. The increase was primarily attributable to an increase in the total amount of debt outstanding.

Corporate Segment

Amounts allocated to the Corporate segment include each of the following:

 

   

Miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments.

 

   

Various home office and other expenses. These expenses equal the total corporate expenses as shown on the face of the income statement.

 

   

Certain depreciation and amortization expenses.

 

   

Gains and losses and purchases and sales of cemetery and funeral home properties.

 

   

Certain costs related to refinancing.

 

   

Acquisition related costs.

 

64


Table of Contents

The table below details expenses incurred by the Corporate segment for the year ended December 31, 2008 and December 31, 2007:

 

     Year ended December 31,  
     2008     2007     Change ($)     Change (%)  
     (In thousands)  

Selling, cemetery and general and administrative expenses (a)

   $ 1,385      $ 978      $ 407      41.6

Depreciation and amortization

     1,381        1,248        133      10.7

Corporate expenses

        

Corporate personnel expenses

     10,031        11,871        (1,840   -15.5

Other corporate expenses

     11,262        13,120        (1,858   -14.2
                              

Total corporate expenses

     21,293        24,991        (3,698   -14.8
                              

Operating loss

   $ 24,059      $ 27,217        (3,158   -11.6
                              

Expenses related to refinancing

     —          157        (157   -100.0

Interest expense

     —          —          —        n/a   
                              

Losses before taxes

   $ 24,059      $ 27,374      $ (3,315   -12.1
                              

Personnel expenses as a % of segment revenues

     5.6     9.4    

Other expenses as a % of segment revenues

     6.3     10.4    
                    

Total expenses as a % of segment revenue

     11.9     19.8    
                    

Selling, cemetery and general and administrative expenses that were allocated to the corporate segment were $1.4 million during the year ended December 31, 2008, an increase of $0.4 million, or 41.6%, compared to $1.0 million for the year ended December 31, 2007. The increase was primarily caused by an increase in salesperson’s bonuses and other personnel expenses allocated to the corporate segment ($0.3 million).

Depreciation and amortization allocated to the corporate segment was $1.4 million during the year ended December 31, 2008, an increase of $0.1 million, or 10.7%, compared to $1.3 million for the year ended December 31, 2007. The increase was primarily caused by an increase in depreciable assets.

Total corporate expenses were $21.3 million during the year ended December 31, 2008, a decrease of $3.7 million, or 14.8%, compared to $25.0 million during 2007. The decrease was equally distributed between personnel related expenses ($1.8 million) and non-personnel expenses ($1.9 million). For the purpose of this comparison, non-cash unit based compensation is included in non-personnel expenses. The decrease in personnel related expenses was primarily attributable to a bonus expense in 2007 ($3.2 million) that was not incurred in 2008. The decrease in non-personnel related expenses was primarily attributable to a reduction in unit-based compensation ($2.5 million) offset by a number of small increases.

Expenses related to refinancing of $0.2 million during the year ended December 31, 2007 related to the write-down of previously capitalized and deferred financing fees.

 

65


Table of Contents

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the consolidated level are deferred until such time that we meet the delivery component for revenue recognition.

Periodic consolidated revenues reflect the amount of total merchandise and services which were delivered during the period. Accordingly, period over period changes to revenues can be impacted by:

 

   

Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origin and are recognized as revenue and not deferred as of the end of their period of origination.

 

   

Changes in merchandise and services that are delivered during a period that had been originated during a prior period.

 

66


Table of Contents

The table below analyzes results of operations and the changes therein for the year ended December 31, 2008 compared to the year ended December 31, 2007. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:

 

    Year ended December 31, 2008     Year ended December 31, 2007            
    (in thousands)     (in thousands)            
    Segment
Results
    Changes in
Deferred
Revenues
and Expenses
    Consolidated
Results
    Segment
Results
  Changes in
Deferred
Revenues
and Expenses
    Consolidated
Results
  Change in
consolidated
results ($)
    Change in
consolidated
results (%)
 

Revenues

               

Pre-need cemetery revenues

  $ 91,050      $ (22,987   $ 68,063      $ 71,422   $ (9,443   $ 61,979   $ 6,084      9.8

At-need cemetery revenues

    63,874        (39     63,835        44,348     (6     44,342     19,493      44.0

Investment income from trusts

    23,519        (3,237     20,282        29,375     (8,748     20,627     (345   -1.7

Interest income

    5,384        —          5,384        4,711     —          4,711     673      14.3

Funeral home revenues

    23,963        —          23,963        10,784     —          10,784     13,179      122.2

Other cemetery revenues

    1,376        545        1,921        2,104     767        2,871     (950   -33.1
                                                         

Total revenues

    209,168        (25,718     183,450        162,744     (17,430     145,314     38,136      26.2
                                                         

Costs and expenses

               

Cost of goods sold

    26,687        (3,805     22,882        21,256     (1,585     19,671     3,211      16.3

Cemetery expense

    41,651        —          41,651        30,767     —          30,767     10,884      35.4

Selling expense

    40,379        (5,573     34,806        31,134     (1,889     29,245     5,561      19.0

General and administrative expense

    21,372        —          21,372        15,684     —          15,684     5,688      36.3

Corporate overhead

    21,293        —          21,293        24,991     —          24,991     (3,698   -14.8

Depreciation and amortization

    5,029        —          5,029        3,891     —          3,891     1,138      29.2

Funeral home expense

    19,065          19,065        8,422     —          8,422     10,643      126.4
                                                         

Total costs and expenses

    175,476        (9,378     166,098        136,145     (3,474     132,671     33,427      25.2
                                                         

Operating profit

    33,690        (16,340     17,350        26,599     (13,956     12,643     4,707      37.2
                                                         

Expenses related to refinancing

    —          —          —          157     —          157     (157   n/a   
                                                         

Interest expense

    12,714        —          12,714        9,075     —          9,075     3,639      40.1
                                                         

Income before taxes

    20,976        (16,340     4,636        17,367     (13,956     3,411     1,225      35.9
                                                         

State income taxes

    304        —          304        398     —          398     (94   -23.6

Federal income taxes

    (224     —          (224     227     —          227     (451   -198.7
                                                         

Total income taxes

    80        —          80        625     —          625     (545   -87.2
                                                         

Net income

  $ 20,896      $ (16,340   $ 4,556      $ 16,742   $ (13,956   $ 2,786   $ 1,770      63.5
                                                         

 

67


Table of Contents

Revenues

In December of 2007, we completed our acquisition of 45 cemeteries and 30 funeral homes from Service Corp International. This acquisition led to substantial increases in revenue for the year ended December 31, 2008 as compared to the year ended December 31, 2007.

Pre-need cemetery revenues were $68.1 million for the year ended December 31, 2008, an increase of $6.1 million, or 9.8%, as compared to $62.0 million during 2007. There was a substantial increase in the value of contracts written ($19.6 million) which was offset by a substantial increase in deferred revenue ($13.5 million). The overall increase was primarily caused by an increase in the delivery of pre-need lots ($7.1 million), mausoleums ($1.9 million), niches ($1.3 million), grave openings ($0.9 million) and document fees ($0.5 million) offset by a decrease in the delivery of caskets ($2.0 million), bases ($2.0 million) and markers ($1.9 million).

At-need cemetery revenues were $63.8 million for the year ended December 31, 2008, an increase of $19.5 million, or 44.0%, as compared to $44.3 million during 2007. The overall increase was primarily related to an increase in grave openings and closings ($6.2 million), markers ($5.6 million), lots ($3.0 million), vaults ($1.6 million), crypts ($0.9 million) and mausoleums and bases ($0.6 million each).

Investment income from trusts was $20.3 million for the year ended December 31, 2008, a slight decrease of $0.3 million, or 1.7%, as compared to $20.6 million during 2007. There were no major variances in income items.

Interest income on accounts receivable was $5.4 million for the year ended December 31, 2008, an increase of $0.7 million, or 14.3%, as compared to $4.7 million during 2007. The change was related to the increase in the value of contracts written.

Revenues for the Funeral Home segment were $24.0 million for the year ended December 31, 2008, an increase of $13.2 million, or 122.2%, compared to $10.8 million during 2007. The increase was primarily attributable to an increase in at-need revenues ($9.3 million), pre-need revenues ($2.3 million) and other revenues ($1.6 million).

Other cemetery revenues include miscellaneous items that are not grouped with our other cemetery merchandise and services. Other cemetery revenues were $1.9 million for the year ended December 31, 2008, a decrease of $1.0 million, or 33.1%, as compared to $2.9 million during 2007. The decrease was primarily caused by a $1.3 million decrease in asset sales revenue offset by a $0.3 increase in other miscellaneous revenues.

Costs and Expenses

Cost of goods sold were $22.9 million for the year ended December 31, 2008, an increase of $3.2 million, or 16.3%, as compared to $19.7 million in 2007. The increase was primarily due to the increase in associated revenues. The ratio of cost of goods sold to pre-need and at-need cemetery revenues decreased to 17.3% for the year ended December 31, 2008 as compared to 18.5% during 2007.

Cemetery expenses were $41.7 million during the year ended December 31, 2008, an increase of $10.9 million, or 35.4%, compared to $30.8 million during 2007. The increase was split between an increase in labor costs ($6.0 million) and non-labor costs ($4.9 million). The increase in non-labor costs was primarily attributable to an increase in maintenance ($2.0 million), utilities ($1.6 million) and real estate taxes ($0.5 million). Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of segment level pre-need and at-need cemetery revenues. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 26.9% during the year ended December 31, 2008 as compared to 26.6% during 2007.

 

68


Table of Contents

Selling expenses were $34.8 million during the year ended December 31, 2008, an increase of $5.6 million, or 19.0%, as compared to $29.2 million in 2007. The ratio of cost of selling expenses to pre-need and at-need cemetery revenues decreased to 26.4% for the year ended December 31, 2008 as compared to 27.5% during 2007.

General and administrative expenses were $21.4 million during the year ended December 31, 2008, an increase of $5.7 million, or 36.3%, as compared to $15.7 million during 2007. The increase was equally split between an increase in labor costs ($2.8 million) and non-labor costs ($2.9 million). The increase in non-labor costs was primarily attributable to an increase in corporate insurance ($0.7 million), professional fees ($0.4 million), supplies ($0.3 million) and a number of smaller changes. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 13.8% during the year ended December 31, 2008 as compared to 13.5% during 2007.

Total corporate overhead was $21.3 million during the year ended December 31, 2008, a decrease of $3.7 million, or 14.8%, compared to $25.0 million during 2007. The decrease was equally distributed between personnel related expenses ($1.8 million) and non-personnel expenses ($1.9 million). For the purpose of this comparison, non-cash unit based compensation is included in non-personnel expenses. The decrease in personnel related expenses was primarily attributable to a bonus expense in 2007 ($3.2 million) that was not incurred in 2008. The decrease in non-personnel related expenses was primarily attributable to a reduction in unit-based compensation ($2.5 million) offset by a number of small increases.

Depreciation and amortization was $5.0 million during the year ended December 31, 2008, an increase of $1.1 million, or 29.2%, as compared to $3.9 million during the period last year. The increase was primarily due to an increase in the basis of depreciable assets.

Funeral Home expenses were $19.1 million for the year ended December 31, 2008, an increase of $10.6 million, or 126.4%, compared to $8.4 million during 2007. The increase was primarily related to increases in personnel expenses ($4.9 million), merchandise ($2.1 million), fixed facility costs ($1.0 million), general and administrative expenses ($0.8 million) and variable facility costs ($0.5 million).

Interest expense was $12.7 million during the year ended December 31, 2008, an increase of $3.6 million, or 40.1%, as compared to $9.1 million during 2007. The increase was primarily due to an overall increase in the average amount of debt outstanding.

Liquidity and Capital Resources

Overview

Our primary short-term liquidity needs are to fund general working capital requirements, repay our debt obligations, service our debt and make routine maintenance capital improvements. We will need additional liquidity to construct mausoleum and lawn crypts on the grounds of our cemetery properties.

Our primary sources of liquidity are cash flow from operations and amounts available under our credit facilities as described below. In the past, we have been able to increase our liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities, including debt, subject to the restrictions in our credit facility and under our senior secured notes.

We believe that cash generated from operations and our borrowing capacity under our Credit Agreement, which is discussed below, will be sufficient to meet our working capital requirements as well as our anticipated capital expenditures for the foreseeable future.

 

69


Table of Contents

In addition to macroeconomic conditions, our ability to satisfy our debt service obligations, fund planned