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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2011

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)

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

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

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

 

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

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

 

 

 


Table of Contents

The number of the registrant’s outstanding common units at May 10, 2011 was 19,339,079.

Index – Form 10-Q

 

         Page  
Part I   Financial Information   

Item 1.

  Financial Statements (unaudited)      1   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      41   

Item 4.

  Controls and Procedures      43   
Part II   Other Information   

Item 1.

  Legal Proceedings      44   

Item 1A.

  Risk Factors      44   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 3.

  Defaults Upon Senior Securities      44   

Item 4.

  (Removed and Reserved)      44   

Item 5.

  Other Information      44   

Item 6.

  Exhibits      45   
  Signatures      46   


Table of Contents

Part I – Financial Information

 

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheets

(in thousands)

 

     March 31,
2011
     December 31,
2010
 
     (unaudited)         

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 27,494       $ 7,535   

Accounts receivable, net of allowance

     45,975         45,149   

Prepaid expenses

     3,111         3,783   

Other current assets

     8,690         8,580   
                 

Total current assets

     85,270         65,047   

Long-term accounts receivable, net of allowance

     61,749         60,314   

Cemetery property

     286,704         283,460   

Property and equipment, net of accumulated depreciation

     65,032         66,249   

Merchandise trusts, restricted, at fair value

     331,939         318,318   

Perpetual care trusts, restricted, at fair value

     257,027         249,690   

Deferred financing costs, net of accumulated amortization

     8,613         9,801   

Deferred selling and obtaining costs

     62,701         59,422   

Deferred tax assets

     518         605   

Goodwill

     19,961         19,851   

Other assets

     13,973         14,362   
                 

Total assets

   $ 1,193,487       $ 1,147,119   
                 

Liabilities and partners’ capital

     

Current liabilities:

     

Accounts payable and accrued liabilities

   $ 17,975       $ 23,444   

Accrued interest

     5,115         2,034   

Current portion, long-term debt

     1,258         1,386   
                 

Total current liabilities

     24,348         26,864   

Other long-term liabilities

     3,485         3,577   

Long-term debt

     150,595         219,008   

Deferred cemetery revenues, net

     409,487         388,403   

Deferred tax liabilities

     17,062         18,029   

Merchandise liability

     113,836         113,356   

Perpetual care trust corpus

     257,027         249,690   
                 

Total liabilities

     975,840         1,018,927   
                 

Commitments and Contingencies

     

Partners’ capital

     

General partner

     3,572         1,809   

Common partners

     214,075         126,383   
                 

Total partners’ capital

     217,647         128,192   
                 

Total liabilities and partners’ capital

   $ 1,193,487       $ 1,147,119   
                 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except unit data)

(unaudited)

 

     Three months ended March 31,  
     2011     2010  

Revenues:

    

Cemetery

    

Merchandise

   $ 21,435      $ 18,798   

Services

     10,798        7,987   

Investment and other

     9,666        8,007   

Funeral home

    

Merchandise

     3,139        2,500   

Services

     4,193        3,378   
                

Total revenues

     49,231        40,670   
                

Costs and Expenses:

    

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

    

Perpetual care

     1,325        1,087   

Merchandise

     3,668        3,313   

Cemetery expense

     12,086        9,247   

Selling expense

     9,544        7,616   

General and administrative expense

     6,427        5,598   

Corporate overhead (including $189 and $175 in unit-based compensation for the three months ended March 31, 2011 and 2010, respectively)

     5,958        5,089   

Depreciation and amortization

     2,446        1,810   

Funeral home expense

    

Merchandise

     1,206        913   

Services

     2,546        2,088   

Other

     1,557        1,430   

Acquisition related costs

     933        990   
                

Total cost and expenses

     47,696        39,181   
                

Operating profit

     1,535        1,489   

Expenses related to refinancing

     453        —     

Gain on acquisitions

     —          7,093   

Early extinguishment of debt

     4,010        —     

Increase in fair value of interest rate swaps

     —          1,671   

Interest expense

     5,090        4,858   
                

Income (loss) before income taxes

     (8,018     5,395   

Income tax expense (benefit)

    

State

     4        28   

Federal

     (808     (528
                

Total income tax expense (benefit)

     (804     (500
                

Net income (loss)

   $ (7,214   $ 5,895   
                

General partner’s interest in net income (loss) for the period

   $ (144   $ 118   

Limited partners’ interest in net income (loss) for the period

   $ (7,070   $ 5,777   

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

   $ (.40   $ .43   

Weighted average number of limited partners’ units outstanding (basic and diluted)

     17,709        13,385   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital

(in thousands)

(unaudited)

 

     Partners’ Capital  
     Common
Unit Holders
     General
Partner
    Total  

Balance, December 31, 2010

   $ 126,383       $ 1,809      $ 128,192   

Proceeds from public offering

     103,564         —          103,564   

Compensation related to UARs

     156         —          156   

General partner contribution

     —           2,242        2,242   

Net loss

     (7,070)         (144     (7,214

Cash distribution

     (8,958)         (335     (9,293
                         

Balance, March 31, 2011

   $ 214,075       $ 3,572      $ 217,647   
                         

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

     For the three months ended March 31,  
     2011     2010  

Operating activities:

    

Net income (loss)

   $ (7,214   $ 5,895   

Adjustments to reconcile net income (loss) to net cash provided by operating activity:

    

Cost of lots sold

     1,478        1,419   

Depreciation and amortization

     2,446        1,810   

Unit-based compensation

     189        175   

Accretion of debt discount

     383        82   

Change in fair value of interest rate swaps

     —          (1,671

Write-off of deferred financing fees

     453        —     

Gain on acquisitions

     —          (7,093

Financing fees paid for early extinguishment of debt

     4,010        —     

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

    

Accounts receivable

     (2,835     (6,879

Allowance for doubtful accounts

     671        648   

Merchandise trust fund

     (8,612     (4,026

Prepaid expenses

     671        855   

Other current assets

     (110     (40

Other assets

     197        125   

Accounts payable and accrued and other liabilities

     (2,510     2,669   

Deferred selling and obtaining costs

     (3,279     (3,309

Deferred cemetery revenue

     16,319        13,563   

Deferred taxes (net)

     (880     (572

Merchandise liability

     (739     379   
                

Net cash provided by operating activities

     638        4,030   
                

Investing activities:

    

Cash paid for cemetery property

     (706     (415

Purchase of subsidiaries

     (1,700     (14,015

Cash paid for property and equipment

     (1,759     (388
                

Net cash used in investing activities

     (4,165     (14,818
                

Financing activities:

    

Cash distribution

     (9,293     (7,653

Additional borrowings on long-term debt

     4,300        18,200   

Repayments of long-term debt

     (73,317     (157

Proceeds from public offerings

     103,564        —     

Proceeds from general partner contribution

     2,242        68   

Financing fees paid for early extinguishment of debt

     (4,010     —     

Cost of financing activities

     —          (69
                

Net cash provided by financing activities

     23,486        10,389   
                

Net increase (decrease) in cash and cash equivalents

     19,959        (399

Cash and cash equivalents - Beginning of period

     7,535        13,479   
                

Cash and cash equivalents - End of period

   $ 27,494      $ 13,080   
                

Supplemental disclosure of cash flow information

    

Cash paid during the period for interest

   $ 1,472      $ 3,177   

Cash paid during the period for income taxes

   $ 87      $ 280   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

StoneMor Partners L.P. (“StoneMor”, the “Company” or the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of March 31, 2011, the Partnership operated 260 cemeteries, 239 of which are owned, in 25 states and Puerto Rico and owned and operated 58 funeral homes in 17 states and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim period. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2010 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2010 Form 10-K.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of each of the Company’s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The operations of 15 of the 21 managed cemeteries that the Company operates under long-term operating or management contracts are also consolidated. There are 6 cemeteries that the Company began operating under long-term operating agreements that did not qualify as acquisitions for accounting purposes. The Company has consolidated the existing merchandise and perpetual care trusts related to these cemeteries as variable interest entities as the Company controls and benefits from the operations of the trusts. The results of operations of these 6 cemeteries are included in our results of operations from the date the Company began operating the properties.

Total revenues derived from the cemeteries under long-term operating or management contracts totaled approximately $8.2 million for the three months ended March 31, 2011, as compared to $6.8 million during the same period last year.

Use of Estimates

Preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. As a result, actual results could differ from those estimates. The most significant estimates in the unaudited condensed consolidated financial statements are the valuation of assets in the merchandise trust and perpetual care trust, allowance for cancellations, unit-based compensation, merchandise liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs and income taxes. Deferred sales revenue, deferred margin and deferred merchandise trust investment earnings are included in deferred cemetery revenues, net, on the unaudited condensed consolidated balance sheets.

 

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Table of Contents
2. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Long-term accounts receivable, net, consist of the following:

 

     As of  
     March 31,
2011
    December 31,
2010
 
     (in thousands)  

Customer receivables

   $ 139,341      $ 135,783   

Unearned finance income

     (15,115     (14,488

Allowance for contract cancellations

     (16,502     (15,832
                
     107,724        105,463   

Less: current portion, net of allowance

     45,975        45,149   
                

Long-term portion, net of allowance

   $ 61,749      $ 60,314   
                

Activity in the allowance for contract cancellations is as follows:

 

     For the three months ended March 31,  
     2011     2010  
     (in thousands)  

Balance - Beginning of period

   $ 15,832      $ 13,350   

Provision for cancellations

     4,250        3,149   

Charge-offs - net

     (3,580     (2,500
                

Balance - End of period

   $ 16,502      $ 13,999   
                

 

3. CEMETERY PROPERTY

Cemetery property consists of the following:

 

     As of  
     March 31,
2011
     December 31,
2010
 
     (in thousands)  

Developed land

   $ 62,862       $ 61,849   

Undeveloped land

     159,272         159,386   

Mausoleum crypts and lawn crypts

     64,570         62,225   
                 

Total

   $ 286,704       $ 283,460   
                 

 

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Table of Contents
4. PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

     As of  
     March 31,
2011
    December 31,
2010
 
     (in thousands)  

Building and improvements

   $ 65,910      $ 67,247   

Furniture and equipment

     33,465        31,947   
                
     99,375        99,194   

Less: accumulated depreciation

     (34,343     (32,945
                

Property and equipment - net

   $ 65,032      $ 66,249   
                

Depreciation expense was $1.4 million and $1.1 million during the three months ended March 31, 2011, and 2010, respectively.

 

5. MERCHANDISE TRUSTS

At March 31, 2011, the Company’s merchandise trusts consisted of the following types of assets:

 

 

Money Market Funds that invest in low risk short term securities;

 

 

Publicly traded mutual funds that invest in underlying debt securities;

 

 

Publicly traded mutual funds that invest in underlying equity securities;

 

 

Equity investments that are currently paying dividends or distributions. These investments include Real Estate Investment Trusts (“REIT’s”); Master Limited Partnerships and global equity securities;

 

 

Fixed maturity debt securities issued by various corporate entities;

 

 

Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and

 

 

Fixed maturity debt securities issued by U.S. states and local government agencies.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the Accounting Standards Codification (ASC). Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. At March 31, 2011, approximately 92.6% of these assets were Level 1 investments while approximately 7.4% were Level 2 assets. There were no Level 3 assets. Other invested assets held in the trust at March 31, 2011 and December 31, 2010 include $6.6 million and $6.4 million, respectively, of assets that are managed and held by the state of West Virginia as required by law.

The merchandise trusts are variable interest entities for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company would be required to fund this shortfall.

 

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Table of Contents

The cost and market value associated with the assets held in merchandise trusts at March 31, 2011 and December 31, 2010 were as follows:

 

As of March 31, 2011

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (in thousands)  

Short-term investments

   $ 27,984       $ —         $ —        $ 27,984   

Fixed maturities:

          

U.S. Government and federal agency

     —           —           —          —     

U.S. State and local government agency

     23         —           —          23   

Corporate debt securities

     10,050         58         (75     10,033   

Other debt securities

     2,461         —           —          2,461   
                                  

Total fixed maturities

     12,534         58         (75     12,517   
                                  

Mutual funds - debt securities

     67,184         2,275         (493     68,966   

Mutual funds - equity securities

     128,823         6,726         (2,576     132,973   

Equity securities

     72,183         6,444         (1,058     77,569   

Other invested assets

     13,210         —           (1,280     11,930   
                                  

Total

   $ 321,918       $ 15,503       $ (5,482   $ 331,939   
                                  

As of December 31, 2010

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (in thousands)  

Short-term investments

   $ 40,723       $ —         $ —        $ 40,723   

Fixed maturities:

          

U.S. Government and federal agency

     —           —           —          —     

U.S. State and local government agency

     23         —           —          23   

Corporate debt securities

     9,973         119         (152     9,940   

Other debt securities

     1,503         35         —          1,538   
                                  

Total fixed maturities

     11,499         154         (152     11,501   
                                  

Mutual funds - debt securities

     49,717         3,087         (286     52,518   

Mutual funds - equity securities

     124,177         6,444         (3,956     126,665   

Equity securities

     69,462         6,708         (909     75,261   

Other invested assets

     11,433         217         —          11,650   
                                  

Total

   $ 307,011       $ 16,610       $ (5,303   $ 318,318   
                                  

The contractual maturities of debt securities as of March 31, 2011 and December 31, 2010 are as follows:

 

As of March 31, 2011

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. Government and federal agency

   $ —         $ —         $ —         $ —     

U.S. State and local government agency

     23         —           —           —     

Corporate debt securities

     —           8,652         1,381         —     

Other debt securities

     2,461         —           —           —     
                                   

Total fixed maturities

   $ 2,484       $ 8,652       $ 1,381       $ —     
                                   

As of December 31, 2010

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. Government and federal agency

   $ —         $ —         $ —         $ —     

U.S. State and local government agency

     —           23         —           —     

Corporate debt securities

     85         2,887         6,064         904   

Other debt securities

     1,538         —           —           —     
                                   

Total fixed maturities

   $ 1,623       $ 2,910       $ 6,064       $ 904   
                                   

 

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Table of Contents

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at March 31, 2011 and December 31, 2010 is presented below:

 

     Less than 12 months      12 Months or more      Total  

As of March 31, 2011

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

Fixed maturities:

                 

U.S. Government and federal agency

   $ —         $ —         $ —         $ —         $ —         $ —     

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     6,148         51         199         24         6,347         75   

Other debt securities

     —           —           —           —           —           —     
                                                     

Total fixed maturities

     6,148         51         199         24         6,347         75   
                                                     

Mutual funds - debt securities

     32,627         238         1,967         255         34,594         493   

Mutual funds - equity securities

     —           —           57,916         2,576         57,916         2,576   

Equity securities

     7,790         384         6,369         674         14,159         1,058   

Other invested assets

     762         1,280         —           —           762         1,280   
                                                     

Total

   $ 47,327       $ 1,953       $ 66,451       $ 3,529       $ 113,778       $ 5,482   
                                                     
     Less than 12 months      12 Months or more      Total  

As of December 31, 2010

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

Fixed maturities:

                 

U.S. Government and federal agency

   $ —         $ —         $ —         $ —         $ —         $ —     

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     4,887         95         813         57         5,700         152   

Other debt securities

     —           —           —           —           —           —     
                                                     

Total fixed maturities

     4,887         95         813         57         5,700         152   
                                                     

Mutual funds - debt securities

     1,619         11         2,331         275         3,950         286   

Mutual funds - equity securities

     364         48         56,316         3,908         56,680         3,956   

Equity securities

     5,227         129         7,817         780         13,044         909   
                                                     

Total

   $ 12,097       $ 283       $ 67,277       $ 5,020       $ 79,374       $ 5,303   
                                                     

A reconciliation of the Company’s merchandise trust activities for the three months ended March 31, 2011 is presented below:

 

Three months ended March 31, 2011

 

Fair

Value @
12/31/2010

    Contributions     Distributions     Interest/
Dividends
    Capital Gain
Distributions
    Realized
Gain/
Loss
    Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value  @
3/31/2011
 
(in thousands)  
$ 318,318        15,110        (7,079     1,370        15        5,998        (4     (503     (1,286   $ 331,939   

The Company made net deposits into the trusts of approximately $8.0 million during the three months ended March 31, 2011. During the three months ended March 31, 2011, purchases and sales of securities available for sale included in trust investments were approximately $144.1 million and $136.7 million, respectively. Contributions included $0.9 million of assets that were acquired through acquisitions during the three months ended March 31, 2011.

Other-than-temporary Impairments of Trust Assets

During the three months ended March 31, 2011, the Company determined that there were no other than temporary impairments to the investment portfolio in the Merchandise Trusts due to credit losses.

 

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During the three months ended March 31, 2010, the Company determined that there was a single security, with an aggregate cost basis of approximately $0.3 million, an aggregate fair value of less than $0.1 million and a resulting impairment of value of approximately $0.2 million, wherein such impairments were considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of this asset to its current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.

 

6. PERPETUAL CARE TRUSTS

At March 31, 2011, the Company’s perpetual care trusts consisted of the following types of assets:

 

 

Money Market Funds that invest in low risk short term securities;

 

 

Publicly traded mutual funds that invest in underlying debt securities;

 

 

Publicly traded mutual funds that invest in underlying equity securities;

 

 

Equity investments that are currently paying dividends or distributions. These investments include REIT’s and Master Limited Partnerships;

 

 

Fixed maturity debt securities issued by various corporate entities;

 

 

Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and

 

 

Fixed maturity debt securities issued by U.S. states and local agencies.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. At March 31, 2011, approximately 90.6% of these assets were Level 1 investments while approximately 9.4% were Level 2 assets. There were no Level 3 assets.

 

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The cost and market value associated with the assets held in perpetual care trusts at March 31, 2011 and December 31, 2010 were as follows:

 

As of March 31, 2011

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (in thousands)  

Short-term investments

   $ 16,353       $ —         $ —        $ 16,353   

Fixed maturities:

          

U.S. Government and federal agency

     515         93         —          608   

U.S. State and local government agency

     67         81         —          148   

Corporate debt securities

     22,696         490         (114     23,072   

Other debt securities

     371         —           —          371   
                                  

Total fixed maturities

     23,649         664         (114     24,199   
                                  

Mutual funds - debt securities

     58,785         4,020         (557     62,248   

Mutual funds - equity securities

     94,395         7,055         (1,478     99,972   

Equity Securities

     44,097         9,631         (92     53,636   

Other invested assets

     633         126         (140     619   
                                  

Total

   $ 237,912       $ 21,496       $ (2,381   $ 257,027   
                                  

As of December 31, 2010

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (in thousands)  

Short-term investments

   $ 20,583       $ —         $ —        $ 20,583   

Fixed maturities:

          

U.S. Government and federal agency

     515         85         —          600   

U.S. State and local government agency

     67         81         —          148   

Corporate debt securities

     22,047         879         (234     22,692   

Other debt securities

     509         —           (1     508   
                                  

Total fixed maturities

     23,138         1,045         (235     23,948   
                                  

Mutual funds - debt securities

     52,809         2,865         (525     55,149   

Mutual funds - equity securities

     88,871         5,787         (2,878     91,780   

Equity Securities

     48,054         9,379         (181     57,252   

Other invested assets

     887         91         —          978   
                                  

Total

   $ 234,342       $ 19,167       $ (3,819   $ 249,690   
                                  

 

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The contractual maturities of debt securities as of March 31, 2011 and December 31, 2010 were as follows:

 

As of March 31, 2011

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. Government and federal agency

   $ 102       $ 389       $ 117       $ —     

U.S. State and local government agency

     148         —           —           —     

Corporate debt securities

     76         19,236         3,760         —     

Other debt securities

     371         —           —           —     
                                   

Total fixed maturities

   $ 697       $ 19,625       $ 3,877       $ —     
                                   

As of December 31, 2010

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. Government and federal agency

   $ 103       $ 381       $ 116       $ —     

U.S. State and local government agency

     148         —           —           —     

Corporate debt securities

     292         6,377         14,667         1,356   

Other debt securities

     508         —           —           —     
                                   

Total fixed maturities

   $ 1,051       $ 6,758       $ 14,783       $ 1,356   
                                   

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at March 31, 2011 and December 31, 2010 held in perpetual care trusts is presented below:

 

     Less than 12 months      12 Months or more      Total  

As of March 31, 2011

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

Fixed maturities:

                 

U.S. Government and federal agency

   $ —         $ —         $ —         $ —         $ —         $ —     

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     12,632         111         219         3         12,851         114   

Other debt securities

     —           —           —           —           —           —     
                                                     

Total fixed maturities

     12,632         111         219         3         12,851         114   
                                                     

Mutual funds - debt securities

     1,360         164         2,707         393         4,067         557   

Mutual funds - equity securities

     —           —           46,586         1,478         46,586         1,478   

Equity securities

     1,449         73         1,869         19         3,318         92   

Other invested assets

     —           —           412         140         412         140   
                                                     

Total

   $ 15,441       $ 348       $ 51,793       $ 2,033       $ 67,234       $ 2,381   
                                                     

 

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     Less than 12 months      12 Months or more      Total  

As of December 31, 2010

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

Fixed maturities:

                 

U.S. Government and federal agency

   $ —         $ —         $ —         $ —         $ —         $ —     

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     9,195         145         1,196         89         10,391         234   

Other debt securities

     137         1         —           —           137         1   
                                                     

Total fixed maturities

     9,332         146         1,196         89         10,528         235   
                                                     

Mutual funds - debt securities

     1,444         127         2,702         398         4,146         525   

Mutual funds - equity securities

     —           —           45,268         2,878         45,268         2,878   

Equity securities

     1,695         107         3,102         74         4,797         181   
                                                     

Total

   $ 12,471       $ 380       $ 52,268       $ 3,439       $ 64,739       $ 3,819   
                                                     

A reconciliation of the Company’s perpetual care trust activities for the three months ended March 31, 2011 is presented below:

 

Three months ended March 31, 2011

 

Fair
Value @
12/31/2010

    Contributions     Distributions     Interest/
Dividends
    Capital
Gain
Distributions
    Realized
Gain/
Loss
    Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value @
3/31/2011
 
(in thousands)  
$ 249,690        1,168        (2,383     3,825        —          1,482        (109     (413     3,767      $ 257,027   

The Company made net withdrawals out of the trusts of approximately $1.2 million during the three months ended March 31, 2011. During the three months ended March 31, 2011, purchases and sales of securities available for sale included in trust investments were approximately $53.7 million and $52.1 million, respectively. Contributions included $0.3 million of assets that were acquired through acquisitions during the three months ended March 31, 2011.

Other-than-temporary Impairments of Trust Assets

During the three months ended March 31, 2011 and 2010, the Company determined that there were no other than temporary impairments to the investment portfolio in the Perpetual Care Trusts due to credit losses.

 

7. DERIVATIVE INSTRUMENTS

On November 24, 2009, the Company entered into an interest rate swap (the “First Interest Rate Swap”) wherein the Company agreed to pay the counterparty interest in the amount of three month LIBOR plus 888 basis points in consideration for the counterparties agreement to pay the Company a fixed rate of interest of 10.25% on a principal amount of $108.0 million. On December 4, 2009, the Company entered into an interest rate swap (the “Second Interest Rate Swap”, together with the First Interest Rate Swap, the “Interest Rate Swaps”) wherein the Company agreed to pay the counterparty interest in the amount of three month LIBOR plus 869 basis points in consideration for the counterparties agreement to pay the Company a fixed rate of interest of 10.25% on a principal amount of $27.0 million.

The Interest Rate Swaps did not qualify for hedge accounting. Accordingly, the fair value of the Interest Rate Swaps were reported on the Company’s balance sheet and periodic changes in the fair value of the Interest Rate Swaps were recorded in earnings. At March 31, 2010, the Company recorded a liability (the “Fair value of interest rate swaps”) of approximately $1.0 million, which represented the fair value of the Interest Rate Swaps at March 31, 2010. The fair value of the Interest Rate Swaps’ liability had been approximately $2.7 million at December 31, 2009. Accordingly, the Company recorded a gain on the fair value of interest rate swaps of approximately $1.7 million during the three months ended March 31, 2010. The Interest Rate Swaps were terminated in October of 2010.

 

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8. LONG-TERM DEBT

The Company had the following outstanding debt:

 

     As of  
     March 31,
2011
     December 31,
2010
 
     (in thousands)  

Insurance premium financing

   $ 67       $ 215   

Vehicle Financing

     1,331         1,365   

Acquisition Credit Facility, due September 2012 (interest rate-Libor + 4.25%)

     —           15,000   

Revolving Credit Facility, due September 2012 (interest rate-Libor + 3.25%)

     —           18,500   

Note payable - Greenlawn Acquisition

     1,400         1,400   

Note Payable - Nelms acquisition (net of discount)

     938         866   

Note Payable - Acquisition non-competes

     1,623         1,646   

10.25% senior notes, due 2017

     150,000         150,000   

Class B Senior secured notes, due 2012 (interest rate-12.50%)

     —           17,500   

Class C Senior secured notes, due 2012 (interest rate-12.50%)

     —           17,500   
                 

Total

     155,359         223,992   

Less current portion

     1,258         1,386   

Less unamortized bond discount

     3,506         3,598   
                 

Long-term portion

   $ 150,595       $ 219,008   
                 

This note includes a summary of material terms of the Company’s senior notes, senior secured notes and credit facilities. For a more detailed description of the Company’s long-term debt agreements, see the Company’s 2010 Form 10-K.

10.25% Senior Notes due 2017

Purchase Agreement

On November 18, 2009, the Company entered into a Purchase Agreement (the “Purchase Agreement”) by and among StoneMor Operating LLC (the “Operating Company”), Cornerstone Family Services of West Virginia Subsidiary, Inc. (“CFS West Virginia”), Osiris Holding of Maryland Subsidiary, Inc. (“Osiris”), the Partnership, the subsidiary guarantors named in the Purchase Agreement (together with the Company, the “Note Guarantors”) and Bank of America Securities LLC (“BAS”), acting on behalf of itself and as the representative for the other initial purchasers named in the Purchase Agreement (collectively, the “Initial Purchasers”). Pursuant to the Purchase Agreement, the Operating Company, CFS West Virginia and Osiris (collectively, the “Issuers”), each the Company’s wholly-owned subsidiary, as joint and several obligors, agreed to sell to the Initial Purchasers $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the “Senior Notes”), with an original issue discount of approximately $4.0 million, in a private placement exempt from the registration requirements under the Securities Act, for resale by the Initial Purchasers (i) to qualified institutional buyers pursuant to Rule 144A under the Securities Act or (ii) outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act (the “Notes Offering”). The Notes Offering closed on November 24, 2009.

Indenture

On November 24, 2009, the Issuers, the Company, and the other Note Guarantors entered into an indenture (the “Indenture”), among the Issuers, the Company, the other Note Guarantors and Wilmington Trust FSB, as trustee (the “Trustee”) governing the Senior Notes.

The Issuers pay 10.25% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, starting on June 1, 2010. The Senior Notes mature on December 1, 2017.

The Indenture requires the Company, the Issuers and/or the Note Guarantors, as applicable, to comply with various covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its subsidiaries’ ability to (i) incur additional indebtedness; (ii) make certain dividends, distributions, redemptions or investments; (iii) enter into certain transactions with affiliates; (iv) create, incur, assume or permit to exist certain liens against their assets; (v) make certain sales of their assets; and (vi) engage in certain mergers, consolidations or sales of all or substantially all of their assets. The Indenture also contains various affirmative covenants regarding, among other things, delivery of certain reports filed with the SEC and materials required pursuant to Rule 144A under the Securities Act to holders of the Senior Notes and joinder of future subsidiaries as Note Guarantors under the Indenture. The Company was in compliance with all financial covenants at March 31, 2011.

 

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Note Purchase Agreement

On August 15, 2007, the Company entered into, along with the General Partner and certain of the Company’s subsidiaries, (collectively, the “Note Issuers”) the Amended and Restated Note Purchase Agreement (the “NPA”) with Prudential Investment Management Inc., The Prudential Insurance Company of America, Prudential Retirement Insurance and Annuity Company, certain Affiliates of Prudential Investment Management Inc., iStar Financial Inc., SFT I, Inc., and certain Affiliates of iStar Financial Inc. (collectively, the “Note Purchasers”). The NPA was amended seven times prior to January 28, 2011 to amend borrowing levels, interest rates and covenants. Capitalized terms which are not defined in the following description shall have the same meaning assigned to such terms in the NPA, as amended.

On January 28, 2011, and in connection with the Company’s February 2011 follow on public offering of common units, the Company entered into the Eighth Amendment to the Amended and Restated Credit Agreement. This amendment included the Lenders’ consent to the use of a portion of the proceeds from the public offering of common units to redeem in full the outstanding $17.5 million of 12.5% Series B and $17.5 million of 12.5% Series C Senior secured notes due August 2012 and to pay an aggregate make-whole premium of $4.0 million related thereto, which represented the Company’s final obligations outstanding under the Note Purchase Agreement. The make-whole premium has been classified as early extinguishment of debt on the unaudited condensed consolidated statement of operations.

Acquisition Credit Facility and Revolving Credit Facility

On August 15, 2007, the Company, the General Partner, and the Operating Company and various subsidiaries of the Operating Company (collectively, the “Borrowers”), entered into the Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), other lenders, and BAS (collectively, the “Lenders”). The Credit Agreement provides for both an acquisition credit facility (the “Acquisition Credit Facility”) and a revolving credit facility (the “Revolving Credit Facility”). The Credit Agreement was amended seven times prior to January 28, 2011. The current terms of the agreement are set forth below. Capitalized terms which are not defined in the following description shall have the same meaning assigned to such terms in the Credit Agreement, as amended.

On January 28, 2011, and in consideration of the Company’s February 2011 follow on public offering of common units, the Company entered into the Eighth Amendment to its Amended and Restated Credit Agreement. Pursuant to the Eighth Amendment to the Credit Agreement, the Maturity Date has been extended from August 15, 2012 to January 29, 2016 and the applicable margins for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees and (ii) Base Rate Loans are reduced by 50 basis points, resulting in Pricing Level 3 of the Applicable Rate (the currently applicable pricing level) of 3.75% and 2.75%, respectively.

In addition, the Company’s maximum Consolidated Leverage Ratio shall be 3.65 to 1.0 for Measurement Periods ending after December 31, 2010, and the Company will not be permitted to have Maintenance Capital Expenditures, as defined in the agreement, for any Measurement Period ending in 2011, 2012 and 2013 exceeding $4.6 million, $5.2 million and $5.8 million, respectively.

The Lenders also agreed to reinstate the maximum aggregate principal amount of the acquisition credit facility to $55.0 million and to increase the Lenders’ aggregate commitments by $10.0 million under each of the acquisition credit facility and the revolving credit facility, resulting in an acquisition credit facility of $65.0 million and a revolving credit facility of $55.0 million.

The Credit Agreement, as amended, requires the Borrowers to pay an unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement, as amended, exceed the usage of such commitments.

The agreements governing the Revolving Credit Facility and the Acquisition Credit Facility contain restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require the Company to maintain certain financial covenants, including specified financial ratios. A material decrease in sales could cause the Company to breach certain of its financial covenants, such as the leverage ratio and the interest coverage ratio, under the Company’s Credit Agreement, as amended. Any such breach could allow the lenders to accelerate (or create cross-default under) the Company’s debt which would have a material adverse effect on the Company’s business, financial condition or results of operations. As of March 31, 2011, the Company was in compliance with all applicable financial covenants.

On April 29, 2011, the Company entered into the Second Amended and Restated Credit Agreement (the “New Credit Agreement”) among the Operating Company as the Borrower, each of the subsidiaries of the Operating Company as additional Borrowers, the General Partner and the Company as Guarantors, the Lenders identified therein, and Bank of America, as Administrative Agent, Swing Line Lender and L/C Issuer. The terms of the New Credit Agreement are substantially the same as the terms of the prior agreement. The primary purpose of entering into the New Credit Agreement was to consolidate the amendments to the prior agreement and to update outdated references.

 

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Table of Contents
9. INCOME TAXES

As of March 31, 2011, the Company’s taxable corporate subsidiaries had a federal net operating loss carryover of approximately $124.9 million, which will begin to expire in 2019 and $170.4 million in state net operating losses which begin to expire this year.

The Partnership is not a taxable entity for federal and state income tax purposes; rather, the Partnership’s tax attributes (except those of its corporate subsidiaries) are to be included in the individual tax returns of its partners. Neither the Partnership’s financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as “passive income” for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources.

The Partnership’s corporate subsidiaries account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The provision for income taxes for the three months ended March 31, 2011 and 2010 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2010 and 2009, respectively.

The Company is not currently under examination by any state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2007 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. On the basis of present information, it is the opinion of the Company’s management that there are no pending assessments that will result in a material adverse effect on the Company’s unaudited condensed consolidated financial statements over the next twelve months.

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and any penalties in operating expenses. The Company has not recorded any material interest or penalties during the three months ended March 31, 2011 or 2010.

 

10. DEFERRED CEMETERY REVENUES, NET

At March 31, 2011 and December 31, 2010, deferred cemetery revenues, net, consisted of the following:

 

     As of  
     March 31,
2011
    December 31,
2010
 
     (in thousands)  

Deferred cemetery revenue

   $ 280,072      $ 266,754   

Deferred merchandise trust revenue

     41,717        30,937   

Deferred merchandise trust unrealized gains

     10,021        11,307   

Deferred pre-acquisition margin

     117,339        117,309   

Deferred cost of goods sold

     (39,662     (37,904
                

Deferred cemetery revenues, net

   $ 409,487      $ 388,403   
                

Deferred selling and obtaining costs

   $ 62,701      $ 59,422   

Deferred selling and obtaining costs are carried as an asset on the unaudited condensed consolidated balance sheet in accordance with the Financial Services – Insurance topic of the ASC.

 

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Table of Contents
11. COMMITMENTS AND CONTINGENCIES

Legal

The Company is party to legal proceedings in the ordinary course of its business but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Leases

At March 31, 2011, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to five years and options to renew at varying terms. Expenses under operating leases were $0.6 million for the three months ended March 31, 2011 and $0.5 million for the three months ended 2010.

At March 31, 2011, operating leases will result in future payments in the following approximate amounts:

 

     (in thousands)  

2012

     1,612   

2013

     1,463   

2014

     915   

2015

     655   

2016

     647   

Thereafter

     1,868   
        

Total

   $ 7,160   
        

 

12. PARTNERS’ CAPITAL

Unit-Based Compensation

The Company has issued to certain key employees and management unit-based compensation in the form of unit appreciation rights and phantom partnership units. Each of these awards qualifies as an equity award.

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three months ended March 31, 2011 and 2010 are summarized in the table below:

 

     Three months ended March 31,  
     2011      2010  
     (in thousands)  

Unit appreciation rights

   $ 119       $ 121   

Restricted phantom units

     70         54   
                 

Total unit-based compensation expense

   $ 189       $ 175   
                 

As of March 31, 2011, there was approximately $1.3 million in non-vested unit appreciation rights outstanding. These unit appreciation rights will be expensed over the next 3 years.

On February 9, 2011, the Company completed a follow on public offering of 3,756,155 common units, including an option to purchase up to 731,155 common units to cover over-allotments which was exercised in full by the underwriters, at a price of $29.25 per unit, representing a 19.4% interest in the Company. Total gross proceeds from these transactions were approximately $109.9 million, before offering costs and underwriting discounts. Net proceeds of the offering, including the related capital contribution of the General Partner, after deducting underwriting discounts and offering expenses, were approximately $105.8 million. As part of this transaction, selling unitholders also sold 1,849,366 common units. The Company did not receive any of the proceeds generated by the sale of any units held by the selling unitholders.

 

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13. ACQUISITIONS

First Quarter 2011 acquisition

On January 5, 2011, the Operating Company, StoneMor North Carolina LLC, a North Carolina limited liability company and StoneMor North Carolina Subsidiary LLC, a North Carolina limited liability company, each a wholly-owned subsidiary of the Company (collectively the “Buyer”), entered into an Asset Purchase and Sale Agreement (the “1st Quarter Purchase Agreement”) with Heritage Family Services, Inc., a North Carolina corporation and an individual (collectively the “Seller”).

Pursuant to the 1st Quarter Purchase Agreement, the Buyer acquired three cemeteries in North Carolina, including certain related assets, and assumed certain related liabilities. In consideration for the transfer, the Buyer paid the Seller $1.7 million in cash.

The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill that was made in the first quarter of the year. These amounts will be retrospectively adjusted as additional information is received.

 

     As of
March 31, 2011
 
     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable (net)

   $ 97   

Cemetery property

     1,710   

Merchandise trusts, restricted, at fair value

     880   

Perpetual care trusts, restricted, at fair value

     344   

Property and equipment

     332   

Other assets

     100   
        

Total assets

     3,463   
        

Liabilities

  

Deferred margin

     795   

Merchandise liabilities

     734   

Perpetual care trust corpus

     344   
        

Total liabilities

     1,873   
        

Fair value of net assets acquired

     1,590   
        

Consideration paid

     1,700   
        

Goodwill from purchase

   $ 110   
        

The results of operations related to this acquisition are not material to the unaudited condensed consolidated financial statements taken as a whole.

First Quarter 2010 acquisition

On March 30, 2010, the Operating Company, StoneMor Michigan LLC, a Michigan limited liability company (“Buyer LLC”) and StoneMor Michigan Subsidiary LLC, a Michigan limited liability company (“Buyer NQ Sub” and individually and collectively with StoneMor LLC and Buyer LLC, “Buyer”), each a wholly-owned subsidiary of StoneMor Partners L.P. (the “Company”), entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with SCI Funeral Services, LLC,

 

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an Iowa limited liability company (“Parent”), SCI Michigan Funeral Services, Inc., a Michigan corporation (“SCI Michigan”, and together with Parent, “SCI”), Hillcrest Memorial Company, a Delaware corporation (“Hillcrest”), Christian Memorial Cultural Center, Inc., a Michigan corporation (“Christian”), Sunrise Memorial Gardens Cemetery, Inc., a Michigan corporation (“Sunrise”), and Flint Memorial Park Association, a Michigan corporation (“Flint” and individually and collectively with Sunrise, Hillcrest and Christian, “Seller”).

In connection with the Purchase Agreement, on March 30, 2010, StoneMor LLC and Plymouth Warehouse Facilities LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“Plymouth” and individually and collectively with StoneMor LLC, “Warehouse Buyer”), entered into an Asset Purchase and Sale Agreement (the “Warehouse Purchase Agreement”) with SCI, Hillcrest, Sunrise, Flint, Buyer NQ Sub and Buyer LLC.

Pursuant to the Purchase Agreement, Buyer acquired nine cemeteries in Michigan, including certain related assets (the “Acquired Assets”), and assumed certain related liabilities (the “Assumed Liabilities”). In consideration for the transfer of the Acquired Assets and in addition to the assumption of the Assumed Liabilities, Buyer paid Seller approximately $14.1 million (the “Closing Purchase Price”) in cash.

Pursuant to the Warehouse Purchase Agreement, Warehouse Buyer acquired one warehouse in Michigan from SCI, including certain related assets, and assumed certain related liabilities for $0.5 million in cash, which was deemed part of the $14.1 million consideration paid in connection with the Purchase Agreement.

The Purchase Agreement and Warehouse Purchase Agreement also include various representations, warranties, covenants, indemnification and other provisions which are customary for transactions of this nature.

In the fourth quarter of 2010, the Company obtained additional information regarding the fair value of the net assets acquired in the Purchase Agreement. This change to the provisional purchase price allocation resulted in a recast of amounts originally reported on Form 10-Q for the first quarter of 2010. The table below reflects the Company’s final assessment of these fair values and all amounts have been retrospectively adjusted.

 

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     Final
Assessment
 
     (in thousands)  

Assets:

  

Cemetery property

   $ 33,761   

Accounts receivable (net)

     2,651   

Merchandise trusts, restricted, at fair value

     48,027   

Perpetual care trusts, restricted, at fair value

     15,084   

Property and equipment

     5,768   
        

Total assets

     105,291   
        

Liabilities

  

Deferred margin

     31,094   

Merchandise liabilities

     30,126   

Deferred income tax liability, net

     7,879   

Perpetual care trust corpus

     15,084   
        

Total liabilities

     84,183   
        

Fair value of net assets acquired

     21,108   
        

Consideration paid

     14,015   
        

Gain on bargain purchase

   $ 7,093   
        

If this acquisition had been consummated on January 1, 2010, on a pro forma basis, for the three months ended March 31, 2010, consolidated revenues would have been $42.2 million, consolidated net income would have been $5.8 million and consolidated net income per unit (basic and diluted) would not have changed.

The accounting for other acquisitions made in 2010 have still not been finalized and are subject to adjustment during 2011.

 

14. SEGMENT INFORMATION

The Company is organized into five distinct reportable segments which are classified as Cemetery Operations – Southeast, Cemetery Operations – Northeast, Cemetery Operations – West, Funeral Homes, and Corporate.

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

The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of the Company’s customers differs in each of 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 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.

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

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

 

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Segment information is as follows:

As of and for the three months ended March 31, 2011

 

     Cemeteries      Funeral
Homes
                    
     Southeast      Northeast      West         Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 18,743       $ 7,969       $ 10,091       $ —         $ 2      $ (12,277   $ 24,528   

Service and other

     8,360         5,962         8,815         —           —          (5,766     17,371   

Funeral home

     —           —           —           7,480         —          (148     7,332   
                                                            

Total revenues

     27,103         13,931         18,906         7,480         2        (18,191     49,231   
                                                            

Costs and expenses

                  

Cost of sales

     3,718         1,600         1,554         —           —          (1,879     4,993   

Cemetery

     4,951         3,070         4,065         —           —          —          12,086   

Selling

     6,416         2,818         2,931         —           583        (3,204     9,544   

General and administrative

     2,976         1,527         1,927         —           (3     —          6,427   

Corporate overhead

     —           —           —           —           5,958        —          5,958   

Depreciation and amortization

     331         214         509         397         995        —          2,446   

Funeral home

     —           —           —           5,309         —          —          5,309   

Acquisition related costs

     —           —           —           —           933        —          933   
                                                            

Total costs and expenses

     18,392         9,229         10,986         5,706         8,466        (5,083     47,696   
                                                            

Operating profit

   $ 8,711       $ 4,702       $ 7,920       $ 1,774       $ (8,464   $ (13,108   $ 1,535   
                                                            

Total assets

   $ 429,203       $ 290,432       $ 366,253       $ 62,309       $ 45,290      $ —        $ 1,193,487   

Amortization of cemetery property

   $ 753       $ 549       $ 179       $ —         $ —        $ (98   $ 1,383   

Long lived asset additions

   $ 2,188       $ 926       $ 419       $ 67       $ 112      $ —        $ 3,712   

Goodwill

   $ 110       $ —         $ —         $ 19,851       $ —        $ —        $ 19,961   

 

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As of and for the three months ended March 31, 2010:

 

     Cemeteries      Funeral
Homes
                    
     Southeast      Northeast      West         Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 18,656       $ 7,953       $ 6,893       $ —         $ —        $ (13,330   $ 20,172   

Service and other

     7,419         5,616         3,501         —           15        (1,931     14,620   

Funeral home

     —           —           —           6,040         —          (162     5,878   
                                                            

Total revenues

     26,075         13,569         10,394         6,040         15        (15,423     40,670   
                                                            

Costs and expenses

                  

Cost of sales

     3,771         1,582         1,011         —           5        (1,969     4,400   

Cemetery

     4,292         2,845         2,110         —           —          —          9,247   

Selling

     6,161         2,606         2,068         —           61        (3,280     7,616   

General and administrative

     2,827         1,505         1,262         —           4        —          5,598   

Corporate overhead

     —           —           —           —           5,089        —          5,089   

Depreciation and amortization

     364         190         123         279         854        —          1,810   

Funeral home

     —           —           —           4,441         —          (10     4,431   

Acquisition related costs

     —           —           —           —           990        —          990   
                                                            

Total costs and expenses

     17,415         8,728         6,574         4,720         7,003        (5,259     39,181   
                                                            

Operating profit

   $ 8,660       $ 4,841       $ 3,820       $ 1,320       $ (6,988   $ (10,164   $ 1,489   
                                                            

Total assets

   $ 385,783       $ 261,467       $ 274,823       $ 34,935       $ 31,311      $ —        $ 988,319   

Amortization of cemetery property

   $ 791       $ 511       $ 119       $ —         $ —        $ (177   $ 1,244   

Long lived asset additions

   $ 92       $ 31       $ 27,751       $ 49       $ 62      $ —        $ 27,985   

Goodwill

   $ —         $ —         $ —         $ 480       $ —        $ —        $ 480   

Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104 therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the Company’s managerial financial statements to those prepared in accordance with GAAP. Pre-need sales revenues included within the sales category consist primarily of the sale of burial lots, burial vaults, mausoleum crypts, grave markers and memorials, and caskets. Management accounting practices included in the Southeast, Northeast, and Western Regions reflect these pre-need sales when contracts are signed by the customer and accepted by the Company. Pre-need sales reflected in the unaudited condensed consolidated financial statements, prepared in accordance with GAAP, recognize revenues for the sale of burial lots and mausoleum crypts when the product is constructed and at least 10% of the sales price is collected. With respect to the other products, the unaudited condensed consolidated financial statements prepared under GAAP recognize sales revenues when the criteria for delivery under SAB No. 104 are met. These criteria include, among other things, purchase of the product, delivery and installation of the product in the ground, and transfer of title to the customer. In each case, costs are accrued in connection with the recognition of revenues; therefore, the unaudited condensed consolidated financial statements reflect Deferred Cemetery Revenue, Net and Deferred Selling and Obtaining Costs on the balance sheet, whereas the Company’s management accounting practices exclude these items.

 

15. FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosures topic of the ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy defined by this topic are described below.

 

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Level 1: Quoted market prices available in active markets for identical assets or liabilities. The Company includes cash and cash equivalents, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.

Level 2: Quoted prices in active markets for similar assets; quoted prices in non-active markets for identical or similar assets; inputs other than quoted prices that are observable. The Company includes U.S. state and municipal, corporate and other fixed income debt securities in its level 2 investments.

Level 3: Any and all pricing inputs that are generally unobservable and not corroborated by market data.

The following table allocates the Company’s assets and liabilities measured at fair value as of March 31, 2011 and December 31, 2010.

 

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As of March 31, 2011:

Merchandise Trust

 

Description

   Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 27,984       $ —         $ 27,984   

Fixed maturities:

        

U.S. government and federal agency

     —           —           —     

U.S. state and local government agency

     —           23         23   

Corporate debt securities

     —           10,033         10,033   

Other debt securities

     —           2,461         2,461   
                          

Total fixed maturity investments

     —           12,517         12,517   
                          

Mutual funds - debt securities

     68,966         —           68,966   

Mutual funds - equity securities - real estate sector

     16,269         —           16,269   

Mutual funds - equity securities - energy sector

     29,849         —           29,849   

Mutual funds - equity securities - MLP’s

     20,805         —           20,805   

Mutual funds - equity securities - other

     66,050         —           66,050   

Equity securities

        

Preferred REIT’s

     16,951         —           16,951   

Master limited partnerships

     37,965         —           37,965   

Global equity securities

     22,653         —           22,653   

Other invested assets

     —           11,930         11,930   
                          

Total

   $ 307,492       $ 24,447       $ 331,939   
                          

Perpetual Care Trust

 

Description

   Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 16,353       $ —         $ 16,353   

Fixed maturities:

        

U.S. government and federal agency

     608         —           608   

U.S. state and local government agency

     —           148         148   

Corporate debt securities

     —           23,072         23,072   

Other debt securities

     —           371         371   
                          

Total fixed maturity investments

     608         23,591         24,199   
                          

Mutual funds - debt securities

     62,248         —           62,248   

Mutual funds - equity securities - real estate sector

     13,721         —           13,721   

Mutual funds - equity securities - energy sector

     21,120         —           21,120   

Mutual funds - equity securities - MLP’s

     14,727         —           14,727   

Mutual funds - equity securities - other

     50,404         —           50,404   

Equity securities

        

Preferred REIT’s

     26,783         —           26,783   

Master limited partnerships

     26,084         —           26,084   

Global equity securities

     769         —           769   

Other invested assets

     —           619         619   
                          

Total

   $ 232,817       $ 24,210       $ 257,027   
                          

 

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As of December 31, 2010:

Merchandise Trust

 

Description

   Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 40,723       $       $ 40,723   

Fixed maturities:

        

U.S. government and federal agency

     —           —           —     

U.S. state and local government agency

     —           23         23   

Corporate debt securities

     —           9,940         9,940   

Other debt securities

     —           1,538         1,538   
                          

Total fixed maturity investments

     —           11,501         11,501   
                          

Mutual funds - debt securities

     52,518         —           52,518   

Mutual funds - equity securities - real estate sector

     12,761         —           12,761   

Mutual funds - equity securities - energy sector

     29,119         —           29,119   

Mutual funds - equity securities - MLP's

     20,077         —           20,077   

Mutual funds - equity securities - other

     64,708         —           64,708   

Equity securities

        

Preferred REIT's

     16,549         —           16,549   

Master limited partnerships

     36,520         —           36,520   

Global equity securities

     22,192         —           22,192   

Other invested assets

     —           11,650         11,650   
                          

Total

   $ 295,167       $ 23,151       $ 318,318   
                          

Perpetual Care Trust

 

Description

   Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 20,583       $       $ 20,583   

Fixed maturities:

        

U.S. government and federal agency

     600         —           600   

U.S. state and local government agency

     —           148         148   

Corporate debt securities

     —           22,692         22,692   

Other debt securities

     —           508         508   
                          

Total fixed maturity investments

     600         23,348         23,948   
                          

Mutual funds - debt securities

     55,149         —           55,149   

Mutual funds - equity securities - real estate sector

     13,026         —           13,026   

Mutual funds - equity securities - energy sector

     21,340         —           21,340   

Mutual funds - equity securities - MLP's

     13,564         —           13,564   

Mutual funds - equity securities - other

     43,850         —           43,850   

Equity securities

        

Preferred REIT's

     31,050         —           31,050   

Master limited partnerships

     25,426         —           25,426   

Global equity securities

     776            776   

Other invested assets

     —           978         978   
                          

Total

   $ 225,364       $ 24,326       $ 249,690   
                          

All level 2 assets are priced utilizing independent pricing services. There were no level 3 assets.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The words “we,” “us,” “our,” “StoneMor,” the “Partnership,” the “Company” and similar words, when used in a historical context prior to the closing of the initial public offering of StoneMor Partners L.P. on September 20, 2004, refer to Cornerstone Family Services, Inc. (“Cornerstone”), (and, after its conversion, CFSI LLC), and its subsidiaries and thereafter refer to StoneMor Partners L.P. and its subsidiaries.

This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q (including the notes thereto).

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, 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,” “continue,” “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 effect of the current economic downturn; the impact of our significant leverage on our operating plans; our ability to service our debt and pay distributions; the decline 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, strong cash flows and further deleveraging; uncertainties associated with the integration or anticipated benefits of our recent acquisitions or any future acquisitions; our ability to complete and fund additional acquisitions; our ability to maintain effective disclosure controls and procedures and internal control over financial reporting; 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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, this Quarterly Report on Form 10-Q and our other reports filed with the SEC. 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.

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, has acquired additional cemeteries and funeral homes, entered into long term cemetery operating agreements, built funeral homes, and sold cemeteries and funeral homes, resulting in the operation of 260 cemeteries and 58 funeral homes.

Capitalization

In September of 2004, we completed our initial public offering. Since that time, we have completed additional follow on public offerings and debt offerings.

On February 9, 2011, we completed a follow on public offering of 3,756,155 common units, including an option to purchase up to 731,155 common units to cover over-allotments which was exercised in full by the underwriters, at a price of $29.25 per unit, representing a 19.4% interest in us. Total gross proceeds from these transactions were approximately $109.9 million, before offering costs and underwriting discounts. Net proceeds of the offering, including the related capital contribution of our General Partner, after deducting underwriting discounts and offering expenses, were approximately $105.8 million. The proceeds were used to pay off $33.5 million of debt under our credit facilities and $35.0 million of debt outstanding on our Amended NPA Notes. As part of this transaction, selling unitholders also sold 1,849,366 common units. We did not receive any of the proceeds generated by the sale of any units held by the selling unitholders.

 

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Overview

Cemetery Operations

We are currently the second largest owner and operator of cemeteries in the United States. As of March 31, 201, we operated 260 cemeteries in 25 states and Puerto Rico. We own 239 of these cemeteries, and we operate the remaining 21 under management or operating agreements with the nonprofit cemetery corporations that own the cemeteries. As a result of the agreements, other control arrangements and applicable accounting rules, we have treated 15 of these cemeteries as acquisitions for accounting purposes. There were three cemeteries to which we entered into a long-term operating agreement in the third quarter of 2010, and three cemeteries to which we entered into long-term operating agreements in 2009 that did not qualify as acquisitions for accounting purposes. The results of operations of these 6 cemeteries are included in our results of operations from the date we began operating the properties.

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. Revenues from cemetery operations accounted for approximately 85.1% and 85.5% of our revenues during the three months ended March 31, 2011 and 2010, respectively.

Our results of operations for our Cemetery Operations are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. 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 related merchandise or performed the service;

 

   

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

 

   

pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise 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, excluding realized gains and losses on the sale of trust assets, 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.

The criteria for recognizing revenue related to the sale of cemetery merchandise is that such merchandise is “delivered” to our customer, which generally means that:

 

   

the merchandise is complete and ready for installation; or

 

   

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

 

   

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

We generally satisfy these delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the customer’s request, in third-party warehouses, at no additional cost to us, until the time of need. With respect to burial vaults, we install the vaults rather than storing them to satisfy the delivery criteria. When merchandise is stored for a customer, we may issue a certificate of ownership to the customer to evidence the transfer to the customer of the risks and rewards of ownership.

Pre-need Sales

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, deferred revenues from pre-need sales and related merchandise trust earnings are reflected as a liability on our balance sheet in deferred cemetery revenues, net.

 

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Total deferred cemetery revenues, net, also includes deferred revenues from pre-need sales that were entered into by entities we acquired prior to the time we acquired them. This includes both those entities that we acquired at the time of the formation of Cornerstone and other subsequent acquisitions. Our profit margin on pre-need sales entered into by entities we subsequently acquired is generally less than our profit margin on other pre-need sales because, in accordance with industry practice at the time these acquired pre-need sales were made, none of the selling expenses were recognized at the time of sale. As a result, we are required to recognize all of the expenses (including deferred selling expenses) associated with these acquired pre-need sales when we recognize the revenues from that sale.

Pre-need products and services are typically sold on an installment basis. Subject to state law, these contracts are normally subject to “cooling-off” periods, generally between three and thirty days, during which the customer may elect to cancel the contract and receive a full refund of amounts paid. Also subject to applicable state law, we are generally permitted to retain the amounts already paid on contracts, including any amounts that were required to be deposited into trust, on contracts cancelled after the “cooling-off” period. Historical post “cooling-off” period cancellations total approximately 10% of our pre-need sales (based on contract dollar amounts). If the products and services purchased under a pre-need contract are needed for interment before payment has been made in full, generally the balance due must be immediately paid in full.

Contracts related to pre-need installment sales are usually for a period not to exceed 60 months, with payments of principal and interest required. 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, which resulted in a rate of 4.75% for the three months ended March 31, 2011 and 2010.

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.

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.

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. At-need sales of products and services are generally required to be paid for in full at the time of sale. At that time, we will deposit amounts, as legally required, into our perpetual care trusts. We are not required to deposit any amounts into merchandise trusts for products or services that have already been delivered.

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.

 

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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.

5. Acquisition related costs

Acquisition related costs which include legal fees and other third party costs incurred in acquisition related activities are expensed as incurred.

Funeral Home Operations

As of March 31, 2011, we owned and operated 58 funeral homes. These properties are located in seventeen states and Puerto Rico. Thirty one of our 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 14.9% and 14.5% of our revenues during the three months ended March 31, 2011 and 2010, respectively.

Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is put into trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The balance of the amounts in these trusts is included within the merchandise trusts above.

We generally include revenues from pre-need casket sales in the results of our cemetery operations. However, some states require that caskets be sold by funeral homes, and revenues from casket sales in those states are included in our funeral home results.

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.

2011 Developments

Significant business developments for the three months ended March 31, 2011 include the following:

 

   

On January 5, 2011, we entered into an Asset Purchase and Sale Agreement with Heritage Family Services, Inc., a North Carolina Corporation and an individual. Pursuant to this agreement, we acquired three cemeteries in North Carolina, including certain related assets and liabilities. In consideration for the transfer we paid $1.7 million in cash.

 

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On February 9, 2011, we completed a follow on public offering of 3,756,155 common units, including an option to purchase up to 731,155 common units to cover over-allotments which was exercised in full by the underwriters, at a price of $29.25 per unit, representing a 19.4% interest in us. Total gross proceeds from these transactions were approximately $109.9 million, before offering costs and underwriting discounts. Net proceeds of the offering, including the related capital contribution of the General Partner, after deducting underwriting discounts and offering expenses, were approximately $105.8 million. As part of this transaction, selling unitholders also sold 1,849,366 common units. We did not receive any of the proceeds generated by the sale of any units held by the selling unitholders.

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.

As of March 31, 2011 and December 31, 2010, the market value of the assets in our merchandise trust exceeds its amortized cost by 3.1% and 3.7%, respectively and the market value of the assets in our perpetual care trust exceeds its amortized cost by 8.0% and 6.5%, respectively.

Further, we were able to raise capital via a follow on public offering of our common units, representing a limited partnership interest in us, in February of 2011 and September of 2010. In addition, as of March 31, 2011, the majority of our long-term debt consists of $150.0 million in Senior Notes which is due in 2017. We also have availability on our acquisition and revolving lines of credit of $65.0 million and $55.0 million, respectively.

The value of pre-need and at-need contracts written has not deteriorated and the aggregate values of contracts written were $56.9 million and $ 49.4 million for the three months ended March 31, 2011 and 2010, respectively. See Supplemental Data included in this Item 2 for further discussion.

Impact 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.

The Profitability Measure is primarily related to the current period value of contracts written, investment income from the merchandise and perpetual care trust and current expenses incurred. The revenue recognition rules that we must follow for GAAP purposes is not considered. We have not seen any material decline in the value of contracts written due to current economic conditions.

The coverage ratio relates to the excess of the Profitability Measure less distributions made to partners over fixed charges. We believe that this ratio will be prospectively improved as fixed charges will be reduced due to the pay down of debt from proceeds from our February 2011 follow on public offering of common units. We do not believe we are currently in danger of defaulting on this debt covenant.

The leverage ratio relates to the ratio of consolidated debt to the Profitability Measure. This measure was significantly improved due to the pay down of debt using proceeds from our February 2011 follow on public offering of common units as well as the third quarter public offering of common units. Our leverage ratio is 2.2 at March 31, 2011 as opposed to a maximum allowed ratio of 3.65. We do not believe we are currently in danger of defaulting on this debt covenant.

Segment Reporting and Related Information

The Company is organized into five distinct reportable segments which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, Funeral Homes, and Corporate.

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.

 

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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 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.

Critical Accounting Policies and Estimates

The unaudited condensed consolidated financial statements are prepared 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 (see Note 1 to the unaudited condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2010 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2010 Form 10-K.

Results of Operations – Segments

Three Months Ended March 31, 2011 Compared to the Three Months ended March 31, 2010

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 unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

The method of accounting we utilize to analyze our segment results of operations provides for a production based view of our business. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from generally accepted accounting principles. We believe that this method allows for a critical understanding of any economic value added during a given period of time.

 

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Cemetery Operations – Southeast

The table below compares the results of operations for our Cemetery Operations – Southeast for the three months ended March 31, 2011 to the same period last year:

 

     Three months ended March 31,  
     2011      2010      Change ($)      Change (%)  
           

(In thousands)

(non-GAAP)

        

Total revenues

   $ 27,103       $ 26,075       $ 1,028         3.9

Total costs and expenses

     18,392         17,415         977         5.6
                                   

Operating profit

   $ 8,711       $ 8,660       $ 51         0.6
                                   

Revenues

Revenues for Cemetery Operations – Southeast were $27.1 million for the three months ended March 31, 2011, an increase of $1.0 million, or 3.9%, compared to $26.1 million during the same period last year.

The increase was related to an overall increase in the value of contracts written, with an increase of $0.6 million in the value of at-need contracts, offset by a decrease of $0.2 million in the value of pre-need contracts. In addition, we had an increase of $0.5 million in income from our trusts.

Total costs and expenses

Total costs and expenses for Cemetery Operations – Southeast were $18.4 million for the three months ended March 31, 2011, an increase of $1.0 million, or 5.6%, compared to $17.4 million during the same period last year.

The increase was primarily related to:

 

   

A $0.1 million decrease in cost of goods sold. This was attributable to the corresponding increase in the value of contracts written.

 

   

A $0.3 million increase in selling expenses. This was primarily attributable to an increase in advertising expenses.

 

   

A $0.7 million increase in cemetery expenses. The increase was primarily due to increases of $0.3 million in labor costs, $0.2 million in repair and maintenance costs, an increase of $0.1 million in real estate taxes and an increase of $0.1 million in utility and fuel costs.

 

   

A $0.2 million increase in general and administrative expense primarily due to an increase in labor costs and insurance expense.

Cemetery Operations – Northeast

The table below compares the results of operations for our Cemetery Operations – Northeast for the three months ended March 31, 2011 to the same period last year:

 

     Three months ended March 31,  
     2011      2010      Change ($)     Change (%)  
           

(In thousands)

(non-GAAP)

       

Total revenues

   $ 13,931       $ 13,569       $ 362        2.7

Total costs and expenses

     9,229         8,728         501        5.7
                                  

Operating profit

   $ 4,702       $ 4,841       $ (139     -2.9
                                  

 

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Revenues

Revenues for Cemetery Operations – Northeast were $13.9 million for the three months ended March 31, 2011, an increase of $0.4 million, or 2.7%, compared to $13.6 million during the same period last year.

The increase was related to an overall increase in the value of contracts written, with an increase of $0.8 million in the value of at-need contracts, offset by a decrease of $0.3 million in the value of pre-need contracts. In addition, we had a decrease of $0.1 million in income from our trusts.

Total costs and expenses

Total costs and expenses for Cemetery Operations – Northeast were $9.2 million for the three months ended March 31, 2011, an increase of $0.5 million, or 5.7%, compared to $8.7 million during the same period last year.

The increase was primarily related to:

 

 

A $0.2 million increase in selling expense. This was primarily attributable to an increase of $0.1 million in advertising costs and $0.1 million in labor costs.

 

 

A $0.2 million increase in cemetery expenses. The increase was primarily due to increases of $0.2 million in labor costs and $0.1 million in utility and fuel costs, offset by a decrease of $0.1 million in repair and maintenance costs.

Cemetery Operations – West

In 2010, we acquired 19 cemeteries in our Cemetery Operations – West segment. All of these acquisitions occurred subsequent to March 30, 2010. Therefore, the results of operations for these properties are included in the three months ended March 31, 2011, but not in the three months ended March 31, 2010. These additions are the main factor causing the increases to all revenue and expense categories across this segment. The table below compares the results of operations for our Cemetery Operations – West for the three months ended March 31, 2011 to the same period last year:

 

     Three months ended March 31,  
     2011      2010      Change ($)      Change (%)  
            (In thousands)         
            (non-GAAP)         

Total revenues

   $ 18,906       $ 10,394       $ 8,512         81.9

Total costs and expenses

     10,986         6,574         4,412         67.1
                                   

Operating profit

   $ 7,920       $ 3,820       $ 4,100         107.3
                                   

Revenues

Revenues for Cemetery Operations – West were $18.9 million for the three months ended March 31, 2011, an increase of $8.5 million, or 81.9%, compared to $10.4 million during the same period last year.

The increase was primarily related to an increase of $2.0 million in the value of pre-need contracts written, an increase of $2.8 million in the value of at-need contracts written and an increase of $3.5 million in income from our trusts.

 

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Total costs and expenses

Total costs and expenses for Cemetery Operations – West were $11.0 million for the three months ended March 31, 2011, an increase of $4.4 million, or 67.1%, compared to $6.6 million during the same period last year.

The increase was primarily related to:

 

 

A $0.5 million increase in the cost of goods sold. This was attributable to the corresponding increase in the value of contracts written.

 

 

A $0.9 million increase in selling expense. The increase was primarily due to labor costs and commissions and is directly related to the increase in revenues.

 

 

A $1.9 million increase in cemetery expenses. The increase was primarily due to increases of $1.3 million in labor costs, $0.3 million in utility and fuel costs, $0.2 million in repair and maintenance costs and $0.1 million in real estate taxes.

 

 

A $0.7 million increase in general and administrative expenses. The increase was primarily due to increases of $0.5 million in labor costs and several other small increases.

 

 

A $0.4 million increase in depreciation and amortization.

Funeral Home Segment

In 2010, we acquired 6 funeral homes. All of these acquisitions occurred subsequent to March 31, 2010. Therefore, the results of operations for these funeral homes are included in the three months ended March 31, 2011, but not in the three months ended March 31, 2010. These additions are the main factor causing the increases to all revenue and expense categories across this segment. The table below compares the results of operations for our Funeral Home segment for the three months ended March 31, 2011 as compared to the same period last year:

 

     Three months ended March 31,  
     2011      2010      Change ($)      Change (%)  
            (In thousands)         
            (non-GAAP)         

Total revenues

   $ 7,480       $ 6,040       $ 1,440         23.8

Total costs and expenses

     5,706         4,720         986         20.9
                                   

Operating profit

   $ 1,774       $ 1,320       $ 454         34.4
                                   

Revenues

Revenues for the Funeral Home segment were $7.5 million for the three months ended March 31, 2011, an increase of $1.5 million, or 23.8%, compared to $6.0 million during the same period last year.

The increase was primarily attributable to a $0.7 million increase in at-need revenues, a $0.5 million increase in pre-need revenues and a $0.3 million increase in other revenues.

Total costs and expenses

Total costs and expenses for the Funeral Home segment were $5.7 million for the three months ended March 31, 2011, an increase of $1.0 million, or 20.9%, compared to $4.7 million during the same period last year.

The increase was primarily attributable to an increase of $0.5 million in personnel expenses and $0.3 million in merchandise costs.

 

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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.

 

 

Acquisition related costs.

The table below details expenses incurred by the Corporate segment for the three months ended March 31, 2011 and for the same period last year:

 

     Three months ended March 31,  
     2011      2010      Change ($)     Change (%)  
     (In thousands)  
     (non-GAAP)  

Selling, cemetery and general and administrative expenses

   $ 580       $ 70       $ 510        728.6

Depreciation and amortization

     995         854         141        16.5

Acquisition related costs

     933         990         (57     -5.8

Corporate expenses

          

Corporate personnel expenses

     2,764         2,532         232        9.2

Other corporate expenses

     3,194         2,557         637        24.9
                                  

Total corporate overhead

     5,958         5,089         869        17.1
                                  

Total corporate expenses

   $ 8,466       $ 7,003       $ 1,463        20.9
                                  

Selling, cemetery and general administrative expenses allocated to the Corporate segment were $0.6 million for the three months ended March 31, 2011, an increase of $0.5 million, or 728.6% compared to $0.1 million during the same period last year. The increase is primarily related to a new sales training program started in the current year.

Total corporate expenses were $6.0 million for the three months ended March 31, 2011, an increase of $0.9 million, or 17.1% compared to the same period last year. The increase was primarily attributable to an increase of $0.2 million in labor costs, $0.2 million in professional fees, and $0.2 million in advertising costs. The remaining increase relates to various corporate office expenses including information technology, postage and utility costs.

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 segment 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.

 

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The table below analyzes results of operations and the changes therein for the three months ended March 31, 2011 as compared to the same period last year. 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:

 

     Three months ended
March 31, 2011
     Three months ended
March 31, 2010
              
     (in thousand’s)      (in thousand’s)               

Revenues

   Segment
Results
(non-GAAP)
     Non-segment
Results
    GAAP
Results
     Segment
Results
(non-GAAP)
     Non-segment
Results
    GAAP
Results
     Change in
GAAP  results
($)
    Change in
GAAP  results
(%)
 
                    
                    

Pre-need cemetery revenues

   $ 27,820       $ (10,408   $ 17,412       $ 26,523       $ (10,954   $ 15,569       $ 1,843        11.8

At-need cemetery revenues

     19,645         (2,328     17,317         15,214         (2,051     13,163         4,154        31.6

Investment income from trusts

     10,290         (5,521     4,769         6,377         (2,400     3,977         792        19.9

Interest income

     1,543         —          1,543         1,550         —          1,550         (7     -0.5

Funeral home revenues

     7,480         (148     7,332         6,040         (162     5,878         1,454        24.7

Other cemetery revenues

     644         214        858         389         144        533         325        61.0
                                                                    

Total revenues

     67,422         (18,191     49,231         56,093         (15,423     40,670         8,561        21.0
                                                                    

Costs and expenses

                    

Cost of goods sold

     6,872         (1,879     4,993         6,369         (1,969     4,400         593        13.5

Cemetery expense

     12,086         —          12,086         9,247         —          9,247         2,839        30.7

Selling expense

     12,748         (3,204     9,544         10,896         (3,280     7,616         1,928        25.3

General and administrative expense

     6,427         —          6,427        </