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EX-32.2 - EXHIBIT 32.2 - STONEMOR PARTNERS LPston-03312017xex322.htm
EX-32.1 - EXHIBIT 32.1 - STONEMOR PARTNERS LPston-03312017xex321.htm
EX-31.2 - EXHIBIT 31.2 - STONEMOR PARTNERS LPston-03312017xex312.htm
EX-31.1 - EXHIBIT 31.1 - STONEMOR PARTNERS LPston-03312017xex311.htm


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, 2017
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: 001-32270 
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.)
 
 
3600 Horizon Boulevard
Trevose, Pennsylvania
 
19053
(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  ¨ No  x
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 x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x

 
Accelerated filer
¨
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
Emerging growth company
¨
 
 
 

If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
The number of the registrant’s outstanding common units at October 15, 2017 was 37,957,482.




Explanatory Note
On September 18, 2017, the Partnership filed its Annual Report on Form 10-K for the year ended December 31, 2016, which amended the Partnership's audited consolidated financial statements as of December 31, 2015, and for each of the two years in the period ended December 31, 2015 and the related notes thereto. This Form 10-Q amends the Partnership’s unaudited condensed consolidated financial information for the three months ended March 31, 2016 and the related notes thereto, included on Form 10-Q/A filed on November 9, 2016 ("Original Filing").
The Original Filing included the restatement of the Partnership’s unaudited condensed consolidated financial information as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015, correcting errors related to:
1.
The allocation of net loss to the General Partner and the limited partners for the purposes of determining the general partner’s and limited partners’ capital accounts presented within “Partners’ Capital,” and the corresponding effect on “Net loss per limited partner unit (basic and diluted)” for the three months ended March 31, 2016 and 2015;
2.
The presentation of certain components of “Cemetery property”, “Property and equipment, net of accumulated depreciation”, “Deferred cemetery revenues, net”, “Merchandise liability”, “Accounts payable and accrued liabilities” and “Common limited partners’ interest” as of March 31, 2016 and December 31, 2015;
3.
The presentation of “Cemetery merchandise revenues”, Cemetery service revenues” and “Cost of goods sold” related to assumed performance obligations from acquisitions for the three months ended March 31, 2016 and 2015;
4.
The recording of incorrect amounts of investment revenues and expenses related to merchandise and perpetual care trusts on the condensed consolidated statements of operations and the incorrect tracking of perpetual care-trusting obligations on the condensed consolidated balance sheets;
5.
The recognition of incorrect amounts of revenue from deferred pre-acquisition contracts in the condensed consolidated statements of operations based on inaccurate system inputs;
6.
Other adjustments principally relating to the recognition, accuracy and/or classification of certain amounts in “Deferred cemetery revenues, net”, “Merchandise liability” and “Other current assets”; and
7.
The corresponding effect of the foregoing accounting errors on the Partnership’s income tax accounts, condensed consolidated statement of partners’ capital, condensed consolidated statements of cash flows and the related notes thereto, disclosed in the Partnership’s condensed consolidated financial information as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015.
The restatement of the Partnership’s unaudited condensed consolidated financial information for the three months ended March 31, 2016 in this Form 10-Q (“Restatement”) reflects the correction of the aforementioned errors and the following additional errors identified subsequent to the Original Filing:
1)
The timing and accuracy of the recognition of revenues and certain associated costs related to the Partnership’s cemetery and funeral home performance obligations in the condensed consolidated statement of operations in improper accounting periods and the related effects on “Deferred revenues” and “Partners’ Capital”;
2)
The presentation of certain components of “Other current assets” and “Accounts payable and accrued liabilities” in the condensed consolidated balance sheet;
3)
The corresponding effect of the foregoing accounting errors on the Partnership’s condensed consolidated statement of cash flows and the related notes thereto;
4)
The recording and presentation of incorrect amounts of individual cemetery and funeral home location-level equity and intercompany balances—the impact of which is limited to Note 11, Supplemental Condensed Consolidating Financial Information; and
5)
The presentation of changes in “Accounts receivable, net of allowance” and “Deferred revenues” on a gross versus net basis in the Partnership’s condensed consolidated statement of cash flows and Note 2, Accounts Receivable, Net of Allowance, and omission of related disclosures.




Note 1, General, (“Note 1”) in the Partnership’s unaudited condensed consolidated financial information included in Item 1 provides further information regarding the Restatement.
The following sections in the Original Filing have been corrected in this Form 10-Q to reflect the Restatement:
Part I—Item 1—Financial Statements
Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Part I—Item 4—Controls and Procedures” to this Form 10-Q discloses the material weaknesses in the Partnership’s internal controls associated with the Restatement, as well as management’s conclusion that the Partnership’s internal control over financial reporting was not effective as of March 31, 2017. As disclosed therein, we continued to make improvements to our internal control over financial reporting with respect to material weaknesses that had been identified at that time, and those remediation efforts as well as other remediation efforts relating to material weaknesses we identified subsequent to March 31, 2017 remain ongoing.
This Form 10-Q does not reflect events occurring after the filing of the Original Filing except to the extent otherwise required to be included herein and does not substantively modify or update the disclosures therein other than as required to reflect the adjustments described above. See Note 1 to the accompanying unaudited condensed consolidated financial information, set forth in Item 1 of this Form 10-Q, for additional information.
We are also filing currently dated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q.
Unless the context otherwise requires, references to “we,” “us,” “our,” “StoneMor,” the “Company,” or the “Partnership” are to StoneMor Partners L.P. and its subsidiaries.





FORM 10-Q OF STONEMOR PARTNERS L.P.
TABLE OF CONTENTS





PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,723

 
$
12,570

Accounts receivable, net of allowance
76,430

 
77,253

Prepaid expenses
6,072

 
5,532

Other current assets
21,739

 
23,466

Total current assets
117,964

 
118,821

 
 
 
 
Long-term accounts receivable, net of allowance
98,879

 
98,886

Cemetery property
335,290

 
337,315

Property and equipment, net of accumulated depreciation
116,906

 
118,281

Merchandise trusts, restricted, at fair value
523,858

 
507,079

Perpetual care trusts, restricted, at fair value
341,479

 
333,780

Deferred selling and obtaining costs
120,113

 
116,890

Deferred tax assets
64

 
64

Goodwill
70,436

 
70,436

Intangible assets
64,852

 
65,438

Other assets
21,429

 
20,023

Total assets
$
1,811,270

 
$
1,787,013

 
 
 
 
Liabilities and Partners' Capital
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
39,035

 
$
35,547

Accrued interest
5,443

 
1,571

Current portion, long-term debt
1,617

 
1,775

Total current liabilities
46,095

 
38,893

 
 
 
 
Long-term debt, net of deferred financing costs
303,618

 
300,351

Deferred revenues
891,356

 
866,633

Deferred tax liabilities
20,556

 
20,058

Perpetual care trust corpus
341,479

 
333,780

Other long-term liabilities
38,019

 
36,944

Total liabilities
1,641,123

 
1,596,659

Commitments and contingencies

 

Partners' capital (deficit):
 
 
 
General partner interest
(2,135
)
 
(1,914
)
Common limited partners' interest
172,282

 
192,268

Total partners' capital
170,147

 
190,354

Total liabilities and partners' capital
$
1,811,270

 
$
1,787,013

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

1



STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per unit data)
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
(As restated -
see Note 1)
Revenues:
 
 
 
Cemetery:
 
 
 
Merchandise
$
38,003

 
$
33,690

Services
14,949

 
13,719

Investment and other
12,575

 
14,414

Funeral home:
 
 
 
Merchandise
7,836

 
7,482

Services
9,583

 
8,867

Total revenues
82,946

 
78,172

 
 
 
 
Costs and Expenses:
 
 
 
Cost of goods sold
13,519

 
10,720

Cemetery expense
16,697

 
15,856

Selling expense
16,459

 
14,733

General and administrative expense
9,957

 
9,204

Corporate overhead
11,104

 
10,311

Depreciation and amortization
3,455

 
3,065

Funeral home expenses:
 
 
 
Merchandise
1,760

 
2,149

Services
5,699

 
6,455

Other
5,345

 
5,140

Total costs and expenses
83,995

 
77,633

 
 
 
 
Other gains (losses), net

 
(882
)
Interest expense
(6,706
)
 
(5,790
)
Loss from continuing operations before income taxes
(7,755
)
 
(6,133
)
Income tax expense
(806
)
 
(260
)
Net loss
$
(8,561
)
 
$
(6,393
)
General partner's interest
$
(89
)
 
$
1,101

Limited partners' interest
$
(8,472
)
 
$
(7,494
)
Net loss per limited partner unit (basic and diluted)
$
(0.22
)
 
$
(0.23
)
Weighted average number of limited partners' units outstanding (basic and diluted)
37,918

 
32,539

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.


2



STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL (UNAUDITED)
(dollars in thousands)
 
Partners' Capital
 
Outstanding Common Units
 
Common Limited Partners
 
General Partner
 
Total
December 31, 2016
37,863,496

 
$
192,268

 
$
(1,914
)
 
$
190,354

Issuance of common units

 
744

 

 
744

Common unit awards under incentive plans
15,644

 
241

 

 
241

Net loss

 
(8,472
)
 
(89
)
 
(8,561
)
Cash distributions

 
(11,755
)
 
(132
)
 
(11,887
)
Unit distributions paid in kind
78,342

 
(744
)
 

 
(744
)
March 31, 2017
37,957,482

 
$
172,282

 
$
(2,135
)
 
$
170,147

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.


3



STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
(As restated -
see Note 1)
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(8,561
)
 
$
(6,393
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Cost of lots sold
3,551

 
2,006

Depreciation and amortization
3,455

 
3,065

Provision for cancellations
1,828

 
2,718

Non-cash compensation expense
241

 
407

Non-cash interest expense
1,085

 
757

Other (gains) losses, net

 
882

Changes in assets and liabilities:
 
 
 
Accounts receivable, net of allowance
(1,284
)
 
(3,945
)
Merchandise trust fund
(3,430
)
 
(11,613
)
Other assets
(809
)
 
(2,469
)
Deferred selling and obtaining costs
(3,223
)
 
(3,220
)
Deferred revenues
12,802

 
15,711

Deferred taxes, net
498

 
17

Payables and other liabilities
6,198

 
7,311

Net cash provided by operating activities
12,351

 
5,234

Cash Flows From Investing Activities:
 
 
 
Cash paid for capital expenditures
(1,496
)
 
(4,560
)
Proceeds from asset sales

 
138

Net cash used in investing activities
(1,496
)
 
(4,422
)
Cash Flows From Financing Activities:
 
 
 
Cash distributions
(11,887
)
 
(21,387
)
Proceeds from borrowings
24,000

 
10,500

Repayments of debt
(21,072
)
 
(10,355
)
Proceeds from issuance of common units, net of costs

 
18,763

Cost of financing activities
(743
)
 

Net cash used in financing activities
(9,702
)
 
(2,479
)
Net increase (decrease) in cash and cash equivalents
1,153

 
(1,667
)
Cash and cash equivalents - Beginning of period
12,570

 
15,153

Cash and cash equivalents - End of period
$
13,723

 
$
13,486

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
1,802

 
$
1,513

Cash paid during the period for income taxes
$
2,371

 
$
376

Non-cash investing and financing activities:
 
 
 
Acquisition of assets by financing
$
652

 
$
56

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

4



STONEMOR PARTNERS L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2017
1.
GENERAL
Nature of Operations
StoneMor Partners L.P. (the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. As of March 31, 2017, the Partnership operated 316 cemeteries in 27 states and Puerto Rico, of which 285 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 99 funeral homes, including 45 located on the grounds of cemetery properties that we own, in 18 states and Puerto Rico.
Basis of Presentation
The accompanying condensed consolidated financial statements, which are unaudited except for the balance sheet at December 31, 2016, which is derived from audited financial statements, have been prepared in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Partnership’s financial position, results of operations and cash flows for the periods disclosed have been made. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto presented in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three months ended March 31, 2017 may not necessarily be indicative of the results of operations for the full year ending December 31, 2017.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of each of the Partnership’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Partnership has a variable interest and is the primary beneficiary. The Partnership operates 31 cemeteries under long-term lease, operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated.
The Partnership operates 15 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Partnership did not consolidate all of the existing assets and liabilities related to these cemeteries. The Partnership has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities since the Partnership controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Partnership is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services, and interment rights, and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Partnership will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Partnership has also recognized the existing customer contract related performance obligations that it assumed as part of these agreements.

Restatement of Previously Issued Unaudited Condensed Consolidated Financial Statements
On September 18, 2017, the Partnership filed its Annual Report on Form 10-K for the year ended December 31, 2016, which amended the Partnership's audited consolidated financial statements as of December 31, 2015, and for each of the two years in the period ended December 31, 2015 and the related notes thereto. This Form 10-Q amends the Partnership’s unaudited condensed consolidated financial statements for the three months ended March 31, 2016 and the related notes thereto, included on Form 10-Q/A filed on November 9, 2016 ("Original Filing"). The Restatement reflects the correction of the following errors identified subsequent to the Original Filing:
A.
The Partnership understated recognized revenues from the satisfaction of cemetery and funeral home performance obligations in its condensed consolidated statement of operations. The understatement was primarily due to lags in or omissions of the data entry of a contract servicing event. The adjustments to correct these accounting errors resulted in a net increase of $1.2 million in revenues, of which $1.0 million related to merchandise revenues, for the three months ended March 31, 2016.

5



B.
In conjunction with the foregoing revenue recognition errors, on its condensed consolidated balance sheet, the Partnership had historically (i) deferred incorrect and imprecise amounts of investment revenues and expenses related to its merchandise trusts, (ii) reserved incorrect amounts for future cancellations related to its cemetery and funeral home performance obligations, and (iii) deferred incorrect amounts of selling costs. The correction of these accounting errors resulted in a net increase in “Cemetery investment and other revenues” of $0.1 million for the three months ended March 31, 2016 due to changes in the inputs used to calculate trust income recognition. This also resulted in a decrease in “Cemetery merchandise revenues” of $0.1 million for the three months ended March 31, 2016 due to an increase in cancellation reserve expense, and an increase in “Selling expense” of $0.2 million for the three months ended March 31, 2016.
C.
Certain components of “Other current assets” and “Accounts payable and accrued liabilities” on its condensed consolidated balance sheet were determined to be inappropriate in the Partnership’s review of accounting policies during its ongoing remediation. The Partnership had historically presented intercompany deposits due to its merchandise and perpetual care trust funds within “Other current assets” and presented intercompany payables to its merchandise and perpetual care trusts in “Accounts payable and accrued liabilities”. The Partnership has determined the intercompany payables and liabilities to its consolidated trust funds should be eliminated. The correction of the error resulted in a reclassification of $0.4 million in the condensed consolidated statements of cash flows between "Other assets" and "Payables and other liabilities" for the three months ended March 31, 2016.
D.
Specific to the Partnership’s disclosure in Note 11, Supplemental Condensed Consolidating Financial Information, (“Note 11”) the Partnership recorded incorrect amounts for its individual cemetery and funeral home location-level equity and intercompany balances at its formation and in subsequent acquisitions. Additionally, the Partnership presented certain managed locations as guarantor subsidiaries instead of non-guarantor subsidiaries in Note 11. Note that this error had no impact to amounts presented on the face of the condensed consolidated financial statements.
E.
The Partnership incorrectly presented the changes in “Accounts receivable, net of allowance” net of the income statement “Provision for cancellations” and omitted certain disclosures regarding the components of the changes in “Accounts receivable, net of allowance” and “Deferred revenues” in its condensed consolidated statement of cash flows. Additionally, specific to the Partnership’s related disclosure in Note 2, Accounts Receivable, Net of Allowance, the Partnership presented activity in the allowance for cancellations that related to deferred revenues on a gross basis instead of on a net basis. The correction of the error resulted in a reclassification of $2.7 million in the condensed consolidated statement of cash flows between "Provision for cancellations" and "Accounts receivable, net of allowance" for the three months ended March 31, 2016.

6



The effect of these adjustments on the Partnership’s condensed consolidated statements of operations and cash flows for the three months ended March 31, 2016 is summarized below for each affected caption (in thousands, except per unit data):
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
 
Three Months Ended March 31, 2016
 
Reference
 
As Filed
 
Restatement
Adjustments
 
As Restated
Cemetery revenues:
 
 
 
 
 
 
 
Merchandise
A, B
 
$
32,768

 
$
922

 
$
33,690

Services
A
 
13,463

 
256

 
13,719

Investment and other
B
 
14,375

 
39

 
14,414

Funeral home revenues:
 
 
 
 
 
 
 
Merchandise
A
 
7,456

 
26

 
7,482

Total revenues
 
 
76,929

 
1,243

 
78,172

Selling expense
B
 
14,576

 
157

 
14,733

Funeral home expenses:
 
 
 
 
 
 
 
Services
B
 
6,451

 
4

 
6,455

Total costs and expenses
 
 
77,472

 
161

 
77,633

Net loss
 
 
(7,475
)
 
1,082

 
(6,393
)
General partner's interest for the period
 
 
1,088

 
13

 
1,101

Limited partners' interest for the period
 
 
(8,563
)
 
1,069

 
(7,494
)
Net loss per limited partner unit (basic and diluted)
 
 
$
(0.26
)
 
$
0.03

 
$
(0.23
)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
Three Months Ended March 31, 2016
 
Reference
 
As Filed
 
Restatement
Adjustments
 
As Restated
Net loss
 
 
$
(7,475
)
 
$
1,082

 
$
(6,393
)
Provision for cancellations
E
 

 
2,718

 
2,718

Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net of allowance
E
 
(1,227
)
 
(2,718
)
 
(3,945
)
Other assets
B, C
 
(2,847
)
 
378

 
(2,469
)
Deferred selling and obtaining costs
B
 
(3,379
)
 
159

 
(3,220
)
Deferred revenues
A, B
 
16,952

 
(1,241
)
 
15,711

Payables and other liabilities
C
 
7,689

 
(378
)
 
7,311

Net cash provided by operating activities
 
 
$
5,234

 
$

 
$
5,234

As shown above, the adjustments affecting the condensed consolidated statement of cash flows for the period noted are included in the Partnership’s net loss from operations and offset by changes in operating assets and liabilities. There were no adjustments related to cash provided by (used in) investing and financing activities.
Uses and Sources of Liquidity
Our primary use of liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes, including debt repayment and distributions. As more fully discussed in Note 7, the terms of the Partnership's senior credit facility, as amended, place certain restrictions on the Partnership’s ability to increase and make distributions and obtain additional debt. Finally, the Partnership has incurred net losses for the reporting periods in this Form 10-Q, and the Consolidated Leverage Ratio under the credit facility has been nearing the maximum allowed ratio under existing covenants as disclosed in Note 7.

7



During 2016 and 2017, the Partnership completed various financing transactions to provide supplemental liquidity necessary to achieve management’s strategic objectives, including issuance of common units, utilization of the at-the-market equity program and establishment of a new credit facility which, as discussed more fully in Note 7 and Note 15, was further amended during 2017. The Partnership acknowledges that it continues to face a challenging competitive environment, and while the Partnership continues to focus on its overall profitability, including managing expenses, the Partnership reported a loss for the three months ended March 31, 2017. The Partnership expects that the actions taken in 2016 and 2017 will enhance its liquidity and financial flexibility. The Partnership will likely seek to continue to supplement cash generation with proceeds from financing activities, including borrowings under the credit facility and other borrowings, the issuance of additional limited partner units, capital contributions from the general partner and the sale of assets and other transactions. As of March 31, 2017, the Partnership had $12.8 million of total available borrowing capacity under its revolving credit facility.
If the Partnership continues to experience operating losses and is not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, the Partnership may be in breach of its covenants under the credit facility, and may not be able to access additional funds and the Partnership might need to secure additional sources of funds, which may or may not be available to the Partnership. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, our ability to declare or pay future distributions may be impacted.
Summary of Significant Accounting Policies
Refer to Note 1 to the Partnership's audited consolidated financial statements included in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2016 for the complete summary of significant accounting policies.
Use of Estimates
The preparation of the Partnership’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions 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, as well as the reported amounts of revenue and expense during the reporting periods. The Partnership’s unaudited condensed consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depreciation and amortization, merchandise trust and perpetual care trust asset valuation, allowance for cancellations, unit-based compensation, deferred revenues, deferred merchandise trust investment earnings, deferred selling and obtaining costs, assets and liabilities obtained through business combinations and income taxes. As a result, actual results could differ from those estimates.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the three months ended March 31, 2017. Goodwill totaled approximately $70.4 million as of both March 31, 2017 and December 31, 2016.
Income Taxes
The Partnership is not subject to U.S. federal and most state income taxes. The partners of the Partnership are liable for income tax in regard to their distributive share of the Partnership’s taxable income. Such taxable income may vary substantially from net income reported in the accompanying condensed consolidated financial statements. Certain corporate subsidiaries are subject to federal and state income tax. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards. 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 Partnership records a valuation allowance against its deferred tax assets if it deems that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.
The change in the deferred tax liability during the three months ended March 31, 2017 was caused by an increase in deferred tax liabilities associated with long-lived intangibles that will reverse after the expiration of the existing deferred tax assets.

8



Net Income (Loss) per Common Unit
Basic net income (loss) attributable to common limited partners per unit is computed by dividing net income (loss) attributable to common limited partners, which is determined after the deduction of the general partner’s interest, by the weighted average number of common limited partner units outstanding during the period. Net income (loss) attributable to common limited partners is determined by deducting net income attributable to participating securities, if applicable, and net income (loss) attributable to the general partner’s units. The general partner’s interest in net income (loss) is calculated on a quarterly basis based upon its units and incentive distributions to be distributed for the quarter, with a priority allocation of net income to the general partner’s incentive distributions, if any, in accordance with the partnership agreement, and the remaining net income (loss) allocated with respect to the general partner’s and limited partners’ ownership interests.
The Partnership presents net income (loss) per unit under the two-class method for master limited partnerships, which considers whether the incentive distributions of a master limited partnership represent a participating security when considered in the calculation of earnings per unit under the two-class method. The two-class method considers whether the partnership agreement contains any contractual limitations concerning distributions to the incentive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. If distributions are contractually limited to the incentive distribution rights’ share of currently designated available cash for distributions as defined under the partnership agreement, undistributed earnings in excess of available cash should not be allocated to the incentive distribution rights. Under the two-class method, management of the Partnership believes the partnership agreement contractually limits cash distributions to available cash; therefore, undistributed earnings in excess of available cash are not allocated to the incentive distribution rights.
The following is a reconciliation of net income (loss) allocated to the common limited partners for purposes of calculating net income (loss) attributable to common limited partners per unit (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
(As restated -
see above)
Net loss
$
(8,561
)
 
$
(6,393
)
Less: Incentive distribution right (“IDR”) payments to general partner

 
1,192

Net loss to allocate to general and common limited partners
(8,561
)
 
(7,585
)
Less: General partner’s interest excluding IDRs
(89
)
 
(91
)
Net loss attributable to common limited partners
$
(8,472
)
 
$
(7,494
)

Diluted net income (loss) attributable to common limited partners per unit is calculated by dividing net income (loss) attributable to common limited partners, less income allocable to participating securities, by the sum of the weighted average number of common limited partner units outstanding and the dilutive effect of unit option awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common units issuable upon payment of an exercise price by the participant under the terms of the Partnership’s long-term incentive plan.
The following table sets forth the reconciliation of the Partnership’s weighted average number of common limited partner units used to compute basic net income (loss) attributable to common limited partners per unit with those used to compute diluted net income (loss) attributable to common limited partners per unit (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Weighted average number of common limited partner units - basic
37,918

 
32,539

Add effect of dilutive incentive awards (1)

 

Weighted average number of common limited partner units - diluted
37,918

 
32,539

_____________________________
(1)
The diluted weighted average number of limited partners’ units outstanding presented on the condensed consolidated statement of operations does not include 328,914 units and 292,670 units for the three months ended March 31, 2017 and 2016, respectively, as their effects would be anti-dilutive.

9



Recently Issued Accounting Standard Updates - Not Yet Effective
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In connection with this new standard, the FASB has issued several amendments to ASU 2014-09, as follows:
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This standard improves the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This standard clarifies identifying performance obligations and the licensing implementation guidance.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This standard provides additional guidance on (a) the objective of the collectability criterion, (b) the presentation of sales tax collected from customers, (c) the measurement date of non-cash consideration received, (d) practical expedients in respect of contract modifications and completed contracts at transition and (e) disclosure of the effects of the accounting change in the period of adoption.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance, including the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.
In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which provides additional clarification and implementation guidance on ASU 2014-09 and is effective consistent with the adoption schedule for ASU 2014-09.
The new guidance in ASU 2014-09, as well as all amendments discussed above, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new guidance permits two methods of adoption, full retrospective or modified retrospective and we intend to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. Management has developed an implementation plan and is continuing to evaluate the impact that the adoption of this guidance will have on the financial statements of the Partnership. Management is in the midst of assessing the impact of the guidance on our contracts in all our revenue streams by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts. Management continues to monitor modifications, clarifications and interpretations issued by the FASB. Part of the implementation plan includes performing a detailed review of contracts and also evaluating the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance. Although the Partnership has not yet fully determined the scope of the impact of the new standard on our consolidated results of operations, financial position, cash flows and financial statement disclosures, management expects that there will be an impact to the financial reporting disclosures and internal control over financial reporting. The Partnership will adopt the requirements of the new standard upon its effective date of January 1, 2018.
In the first quarter of 2016, the FASB issued Update No. 2016-01, Financial Instruments (Subtopic 825-10) (“ASU 2016-01”). The core principle of ASU 2016-01 is that all equity investments should be measured at fair value with changes in the fair value recognized through net income. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted for the key aspects of the amendment. The Partnership will adopt the requirements of ASU 2016-01 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.

10



In the first quarter of 2016, the FASB issued Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The core principle of ASU 2016-02 is that all leases create an asset and a liability for lessees and recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The amendment is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-02 upon its effective date of January 1, 2019, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the second quarter of 2016, the FASB issued Update No. 2016-13, Credit Losses (Topic 326) (“ASU 2016-13”). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. The amendment is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-13 upon its effective date of January 1, 2020, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the third quarter of 2016, the FASB issued Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The core principle of ASU 2016-15 is to provide cash flow statement classification guidance. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-15 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the fourth quarter of 2016, the FASB issued Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The core principle of ASU 2016-18 is to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-18 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the first quarter of 2017, the FASB issued Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Partnership is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the first quarter of 2017, the FASB also issued Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350) (“ASU 2017-04”) to simplify the subsequent measurement of goodwill. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill. The Partnership plans to adopt the requirements of ASU 2017-04 upon its effective date of January 1, 2020, and is evaluating the impact, if any, on its financial position, results of operations and related disclosures.

11



2.
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
 
March 31, 2017
 
December 31, 2016
Customer receivables
$
223,113

 
$
223,326

Unearned finance income
(20,803
)
 
(21,034
)
Allowance for contract cancellations
(27,001
)
 
(26,153
)
Accounts receivable, net of allowance
175,309

 
176,139

Less: Current portion, net of allowance
76,430

 
77,253

Long-term portion, net of allowance
$
98,879

 
$
98,886

Activity in the allowance for contract cancellations was as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
(As restated -
see Note 1)
Balance, beginning of period
$
26,153

 
$
23,985

Provision for cancellations
1,828

 
2,718

Cancellations
(980
)
 
(1,682
)
Balance, end of period
$
27,001

 
$
25,021

As noted in Note 1, the Partnership has changed its presentation herein to focus only on the provision and cancellations of amounts recognized. The allowance for contract cancellations included $18.5 million and $17.4 million related to deferred revenues as of March 31, 2017 and December 31, 2016, respectively.
3.
CEMETERY PROPERTY
Cemetery property consisted of the following at the dates indicated (in thousands):
 
March 31, 2017
 
December 31, 2016
Cemetery land
$
256,482

 
$
257,914

Mausoleum crypts and lawn crypts
78,808

 
79,401

Cemetery property
$
335,290

 
$
337,315

4.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at the dates indicated (in thousands):
 
March 31, 2017
 
December 31, 2016
Buildings and improvements
$
126,025

 
$
125,442

Furniture and equipment
56,106

 
56,408

Funeral home land
11,505

 
11,527

Property and equipment, gross
193,636

 
193,377

Less: Accumulated depreciation
(76,730
)
 
(75,096
)
Property and equipment, net of accumulated depreciation
$
116,906

 
$
118,281

Depreciation expense was $2.9 million and $2.5 million for the three months ended March 31, 2017 and 2016, respectively.

12



5.
MERCHANDISE TRUSTS
At March 31, 2017 and December 31, 2016, the Partnership’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.
All of these investments are classified as available for sale and accordingly, all of the assets are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 10. There were no Level 3 assets.
The merchandise trusts are variable interest entities ("VIE") of which the Partnership is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Partnership may be required to fund this shortfall.
The Partnership included $8.7 million and $8.6 million of investments held in trust by the West Virginia Funeral Directors Association at March 31, 2017 and December 31, 2016, respectively, in its merchandise trust assets. As required by law, the Partnership deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recognized at their account value, which approximates fair value.
A reconciliation of the Partnership’s merchandise trust activities for the three months ended March 31, 2017 and 2016 is presented below (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Balance, beginning of period
$
507,079

 
$
464,676

Contributions
14,916

 
13,305

Distributions
(16,728
)
 
(7,797
)
Interest and dividends
6,284

 
5,773

Capital gain distributions
237

 
219

Realized gains and losses
1,810

 
1,270

Taxes
(1,675
)
 
(37
)
Fees
(708
)
 
(383
)
Unrealized change in fair value
12,643

 
2,982

Balance, end of period
$
523,858

 
$
480,008

During the three months ended March 31, 2017 and 2016, purchases of available for sale securities were $22.1 million and $6.4 million, respectively, while sales, maturities and paydowns of available for sale securities were $27.1 million and $12.6 million, respectively. Cash flows from pre-need customer contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

13



The cost and market value associated with the assets held in the merchandise trusts as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
March 31, 2017
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
26,925

 
$

 
$

 
$
26,925

Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. governmental securities
2
 
172

 
1

 
(52
)
 
121

Corporate debt securities
2
 
5,673

 
306

 
(303
)
 
5,676

Total fixed maturities
 
 
5,845

 
307

 
(355
)
 
5,797

Mutual funds - debt securities
1
 
229,609

 
4,845

 
(133
)
 
234,321

Mutual funds - equity securities
1
 
111,335

 
11,349

 
(160
)
 
122,524

Other investment funds (1)
 
 
75,498

 
597

 
(564
)
 
75,531

Equity securities
1
 
35,203

 
5,047

 
(289
)
 
39,961

Other invested assets
2
 
10,100

 

 

 
10,100

Total investments
 
 
$
494,515

 
$
22,145

 
$
(1,501
)
 
$
515,159

West Virginia Trust Receivable
 
 
8,699

 

 

 
8,699

Total
 
 
$
503,214

 
$
22,145

 
$
(1,501
)
 
$
523,858

______________________________ 
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 30 to 90 days, and private credit funds, which have lockup periods of five years with two potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2017, there were $3.7 million in unfunded commitments to the private credit funds, which are callable at any time.
December 31, 2016
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
17,317

 
$

 
$

 
$
17,317

Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. governmental securities
2
 
172

 
2

 
(44
)
 
130

Corporate debt securities
2
 
6,311

 
269

 
(202
)
 
6,378

Total fixed maturities
 
 
6,483

 
271

 
(246
)
 
6,508

Mutual funds - debt securities
1
 
236,159

 
1,580

 
(96
)
 
237,643

Mutual funds - equity securities
1
 
126,215

 
3,361

 
(533
)
 
129,043

Other investment funds (1)
 
 
60,017

 
603

 
(387
)
 
60,233

Equity securities
1
 
35,079

 
3,640

 
(192
)
 
38,527

Other invested assets
2
 
9,239

 

 

 
9,239

Total investments
 
 
$
490,509

 
$
9,455

 
(1,454
)
 
$
498,510

West Virginia Trust Receivable
 
 
8,569

 

 

 
8,569

Total
 
 
$
499,078

 
$
9,455

 
$
(1,454
)
 
$
507,079

______________________________ 
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 30 to 90 days.

14




The contractual maturities of debt securities as of March 31, 2017 were as follows (in thousands):
 
Less than
1 year
 
1 year through
5 years
 
6 years through
10 years
 
More than
10 years
U.S. governmental securities
$

 
$
56

 
$
65

 
$

Corporate debt securities
369

 
4,547

 
746

 
14

Total fixed maturities
$
369

 
$
4,603

 
$
811

 
$
14

Temporary Declines in Fair Value
The Partnership evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the merchandise trusts as of March 31, 2017 and December 31, 2016 is presented below (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
March 31, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
102

 
$
52

 
$
102

 
$
52

Corporate debt securities
1,040

 
116

 
370

 
187

 
1,410

 
303

Total fixed maturities
1,040

 
116

 
472

 
239

 
1,512

 
355

Mutual funds - debt securities
9,529

 
126

 
20

 
7

 
9,549

 
133

Mutual funds - equity securities
15,641

 
127

 
1,287

 
33

 
16,928

 
160

Other investment funds
33,259

 
564

 

 

 
33,259

 
564

Equity securities
3,278

 
216

 
429

 
73

 
3,707

 
289

Total
$
62,747

 
$
1,149

 
$
2,208

 
$
352

 
$
64,955

 
$
1,501

 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
87

 
$
44

 
$
87

 
$
44

Corporate debt securities
556

 
6

 
871

 
196

 
1,427

 
202

Total fixed maturities
556

 
6

 
958

 
240

 
1,514

 
246

Mutual funds - debt securities
6,040

 
61

 
754

 
35

 
6,794

 
96

Mutual funds - equity securities
7,475

 
357

 
2,578

 
176

 
10,053

 
533

Other investment funds
37,357

 
387

 

 

 
37,357

 
387

Equity securities
1,292

 
89

 
413

 
103

 
1,705

 
192

Total
$
52,720

 
$
900

 
$
4,703

 
$
554

 
$
57,423

 
$
1,454

For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.
Other-Than-Temporary Impairment of Trust Assets
The Partnership assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2017 and 2016, the Partnership determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts.

15



6.
PERPETUAL CARE TRUSTS
At March 31, 2017 and December 31, 2016, the Partnership’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.
All of these investments are classified as available for sale and accordingly, all of the assets are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 10. There were no Level 3 assets. The perpetual care trusts are VIEs of which the Partnership is the primary beneficiary.
A reconciliation of the Partnership’s perpetual care trust activities for the three months ended March 31, 2017 and 2016 is presented below (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Balance, beginning of period
$
333,780

 
$
307,804

Contributions
2,115

 
2,474

Distributions
(3,031
)
 
(3,723
)
Interest and dividends
3,871

 
4,149

Capital gain distributions
216

 
81

Realized gains and losses
2,065

 
74

Taxes
(165
)
 
(97
)
Fees
(608
)
 
(287
)
Unrealized change in fair value
3,236

 
(268
)
Balance, end of period
$
341,479

 
$
310,207

During the three months ended March 31, 2017 and 2016, purchases of available for sale securities were $69.5 million and $5.5 million, respectively, while sales, maturities and paydowns of available for sale securities were $64.1 million and $0.3 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

16



The cost and market value associated with the assets held in the perpetual care trusts as of March 31, 2017 and December 31, 2016 were as follows (in thousands):
March 31, 2017
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
9,671

 
$

 
$

 
$
9,671

Fixed maturities:
 
 
 
 
 
 
 
 

U.S. governmental securities
2
 
457

 
5

 
(27
)
 
435

Corporate debt securities
2
 
6,785

 
214

 
(190
)
 
6,809

Total fixed maturities
 
 
7,242

 
219

 
(217
)
 
7,244

Mutual funds - debt securities
1
 
145,648

 
1,962

 
(658
)
 
146,952

Mutual funds - equity securities
1
 
17,800

 
3,296

 
(21
)
 
21,075

Other investment funds (1)
 
 
127,371

 
3,463

 
(720
)
 
130,114

Equity securities
1
 
24,007

 
2,782

 
(451
)
 
26,338

Other invested assets
2
 
85

 

 

 
85

Total investments
 
 
$
331,824

 
$
11,722

 
$
(2,067
)
 
$
341,479

______________________________  
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 30 to 90 days, and private credit funds, which have lockup periods ranging from five to ten years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2017, there were $56.2 million in unfunded commitments to the private credit funds, which are callable at any time.
December 31, 2016
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
16,113

 
$

 
$

 
$
16,113

Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. governmental securities
2
 
483

 
14

 
(23
)
 
474

Corporate debt securities
2
 
12,598

 
380

 
(152
)
 
12,826

Total fixed maturities
 
 
13,081

 
394

 
(175
)
 
13,300

Mutual funds - debt securities
1
 
127,033

 
1,187

 
(669
)
 
127,551

Mutual funds - equity securities
1
 
30,708

 
1,940

 
(26
)
 
32,622

Other investment funds (1)

 
119,196

 
2,672

 
(622
)
 
121,246

Equity securities
1
 
20,978

 
2,150

 
(432
)
 
22,696

Other invested assets
2
 
252

 

 

 
252

Total investments
 
 
$
327,361

 
$
8,343

 
$
(1,924
)
 
$
333,780

______________________________  
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 30 to 90 days, and private credit funds, which have lockup periods ranging from six to ten years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2016, there were $45.1 million in unfunded commitments to the private credit funds, which are callable at any time.

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The contractual maturities of debt securities as of March 31, 2017 were as follows (in thousands):
 
Less than
1 year
 
1 year through
5 years
 
6 years through
10 years
 
More than
10 years
U.S. governmental securities
$

 
$
226

 
$
165

 
$
44

Corporate debt securities
633

 
5,319

 
783

 
74

Total fixed maturities
$
633

 
$
5,545

 
$
948

 
$
118

Temporary Declines in Fair Value
The Partnership evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.
An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the perpetual care trusts as of March 31, 2017 and December 31, 2016 is presented below (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
March 31, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
363

 
$
27

 
$
363

 
$
27

Corporate debt securities
960

 
67

 
2,388

 
123

 
3,348

 
190

Total fixed maturities
960

 
67

 
2,751

 
150

 
3,711

 
217

Mutual funds - debt securities
43,199

 
631

 
536

 
27

 
43,735

 
658

Mutual funds - equity securities
1,168

 
17

 
113

 
4

 
1,281

 
21

Other investment funds
39,059

 
720

 

 

 
39,059

 
720

Equity securities
6,880

 
438

 
156

 
13

 
7,036

 
451

Total
$
91,266

 
$
1,873

 
$
3,556

 
$
194

 
$
94,822

 
$
2,067

 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
283

 
$
23

 
$
283

 
$
23

Corporate debt securities
747

 
10

 
2,980

 
142

 
3,727

 
152

Total fixed maturities
747

 
10

 
3,263

 
165

 
4,010

 
175

Mutual funds - debt securities
24,026

 
620

 
1,908

 
49

 
25,934

 
669

Mutual funds - equity securities
3,836

 
16

 
452

 
10

 
4,288

 
26

Other investment funds
37,577

 
622

 

 

 
37,577

 
622

Equity securities
4,532

 
409

 
145

 
23

 
4,677

 
432

Total
$
70,718

 
$
1,677

 
$
5,768

 
$
247

 
$
76,486

 
$
1,924

For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.
Other-Than-Temporary Impairment of Trust Assets
The Partnership assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2017 and 2016, the Partnership determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.

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7.
LONG-TERM DEBT
Total debt consisted of the following at the dates indicated (in thousands):
 
March 31, 2017
 
December 31, 2016
Credit facility
$
140,625

 
$
137,125

7.875% Senior Notes, due June 2021
172,738

 
172,623

Notes payable - acquisition debt
453

 
502

Notes payable - acquisition non-competes
721

 
928

Insurance and vehicle financing
1,657

 
1,807

Less deferred financing costs, net of accumulated amortization
(10,959
)
 
(10,859
)
Total debt
305,235

 
302,126

Less current maturities
(1,617
)
 
(1,775
)
Total long-term debt
$
303,618

 
$
300,351

Credit Facility
On August 4, 2016, StoneMor Operating LLC (the “Operating Company”), a 100% owned subsidiary of the Partnership, entered into the Credit Agreement (the “Credit Agreement”) among each of the Subsidiaries of the Operating Company (together with the Operating Company, “Borrowers”), the Lenders identified therein, Capital One, National Association (“Capital One”), as Administrative Agent, Issuing Bank and Swingline Lender, Citizens Bank of Pennsylvania, as Syndication Agent, and TD Bank, N.A. and Raymond James Bank, N.A., as Co-Documentation Agents. In addition, on the same date, the Partnership, the Borrowers and Capital One, as Administrative Agent, entered into the Guaranty and Collateral Agreement (the “Guaranty Agreement,” and together with the Credit Agreement, “New Agreements”). Capitalized terms which are not defined in the following description of the New Agreements shall have the meaning assigned to such terms in the New Agreements, as amended.
On March 15, 2017, the Borrowers, Capital One, as Administrative Agent and acting in accordance with the written consent of the Required Lenders, entered into the First Amendment to Credit Agreement (as so amended, the "Original Credit Agreement"). The Original Credit Agreement provided for up to $210.0 million initial aggregate amount of Revolving Commitments, which may be increased, from time to time, in minimum increments of $5.0 million so long as the aggregate amount of such increases does not exceed $100.0 million. The Operating Company may also request the issuance of Letters of Credit for up to $15.0 million in the aggregate, of which there were $8.1 million outstanding at March 31, 2017 and $6.8 million outstanding at December 31, 2016. The Maturity Date under the Original Credit Agreement is the earlier of (i) August 4, 2021 and (ii) the date that is six months prior to the earliest scheduled maturity date of any outstanding Permitted Unsecured Indebtedness (at present, such date is December 1, 2020, which is six months prior to June 1, 2021 maturity date of outstanding 7.875% senior notes).
As of March 31, 2017, the outstanding amount of borrowings under the Original Credit Agreement was $140.6 million, which was used to pay down outstanding obligations under the Partnership's prior credit agreement, to pay fees, costs and expenses related to the New Agreements and to fund working capital needs. Generally, proceeds of the Loans under the Original Credit Agreement can be used to finance the working capital needs and for other general corporate purposes of the Borrowers and Guarantors, including acquisitions and distributions permitted under the Original Credit Agreement. As of March 31, 2017, the Partnership had $12.8 million of total available borrowing capacity under its revolving credit facility.
Each Borrowing under the Original Credit Agreement is comprised of Base Rate Loans or Eurodollar Loans. The Loans comprising each Base Rate Borrowing (including each Swingline Loan) bear interest at the Base Rate plus the Applicable Rate, and the Loans comprising each Eurodollar Borrowing bear interest at the Eurodollar Rate plus the Applicable Rate.
The Applicable Rate is determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries and ranges from 1.75% to 3.75% for Eurodollar Rate Loans and 0.75% to 2.75% for Base Rate Loans. Based on our Consolidated Leverage Ratio for the compliance period ended March 31, 2017, the Applicable Rate for Eurodollar Rate Loans was 3.75% and for Base Rate Loans was 2.75%. The Original Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which accrues at the Applicable Rate on the amount by which the commitments under the Original Credit Agreement exceed the usage of such commitments, and which is included within interest expense on the Partnership’s condensed consolidated statements of operations. On March 31, 2017, the weighted average interest rate on outstanding borrowings under the Original Credit Agreement was 4.9%.

19



The Original Credit Agreement contains financial covenants, pursuant to which the Partnership will not permit:
the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA, or the Consolidated Leverage Ratio, as of the last day of any fiscal quarter, commencing on September 30, 2016, determined for the period of four consecutive fiscal quarters ending on such date (the “Measurement Period”), to be greater than 4.25 to 1.0 for periods ended through September 30, 2017, and 4.00 to 1.0 for periods thereafter, which may be increased to 4.25 to 1.0 (in case of a Designated Acquisition made subsequent to the last day of the immediately preceding fiscal quarter) as of the last day of the fiscal quarter in which such Designated Acquisition occurs and as of the last day of the immediately succeeding fiscal quarter; and
the ratio of Consolidated EBITDA to Consolidated Debt Service, or the Consolidated Debt Service Coverage Ratio, as of the last day of any fiscal quarter, commencing on September 30, 2016 to be less than 2.50 to 1.0 for any Measurement Period.
On March 31, 2017, the Partnership’s Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio were 4.09 and 3.51, respectively.
The Original Credit Agreement prohibits the Partnership from increasing its regularly scheduled quarterly cash distributions otherwise permitted under the Original Credit Agreement until January 1, 2018 unless at the time such distribution is declared and on a pro forma basis after giving effect to the payment of any such distribution the Consolidated Leverage Ratio is no greater than 3.75:1.00. Additional covenants include customary limitations, subject to certain exceptions, on, among others: (i) the incurrence of Indebtedness; (ii) granting of Liens; (iii) fundamental changes and dispositions; (iv) investments, loans, advances, guarantees and acquisitions; (v) swap agreements; (vi) transactions with Affiliates; (vii) Restricted Payments; and (viii) Sale and Leaseback Transactions. The Partnership was in compliance with the Original Credit Agreement covenants as of March 31, 2017.
The Borrowers’ obligations under the Original Credit Agreement are guaranteed by the Partnership and the Borrowers. Pursuant to the Guaranty Agreement, the Borrowers’ obligations under the Original Credit Agreement are secured by a first priority lien and security interest (subject to permitted liens and security interests) in substantially all of the Partnership’s and Borrowers’ assets, whether then owned or thereafter acquired, excluding certain excluded assets, which include, among others: (i) Trust Accounts, certain proceeds required by law to be placed into such Trust Accounts and funds held in such Trust Accounts; and (ii) Excluded Real Property, including owned and leased real property that may not be pledged as a matter of law.
On July 26, 2017, StoneMor Operating LLC (the “Operating Company”), a 100% owned subsidiary of StoneMor Partners L.P. (the “Partnership”), the Subsidiaries (as defined in the Amended Credit Agreement) of the Operating Company (together with the Operating Company, “Borrowers”), the Lenders party thereto and Capital One, National Association (“Capital One”), as Administrative Agent (in such capacity, the “Administrative Agent”), entered into a Second Amendment and Limited Waiver (the "Second Amendment") and those parties subsequently entered into a Third Amendment and Limited Waiver effective as of August 15, 2017 (the "Third Amendment") and a Fourth Amendment to Credit Agreement dated September 29, 2017 (the “Fourth Amendment”). The cumulative effect of the Second Amendment, Third Amendment and Fourth Amendment was to modify the Original Credit Agreement to:
increase the facility’s Consolidated Leverage Ratio to 4.50:1.00 for the period ended September 30, 2017 and the period ending December 31, 2017, stepping down to 4.25:1.00 for periods ending in fiscal 2018, and then reverting back to 4.00:1.00;
provide that, in calculating Consolidated EBITDA for purposes of various financial covenants:
the Partnership is entitled to add back:
non-cash compensation or other expense attributable to equity compensation awards and certain other non-cash expenses;
unrealized losses (less unrealized gains) and non-cash expenses arising from or attributable to the early termination of any swap agreement;
other non-recurring cash expenses, losses, costs and charges subject to a limit of $14.3 million for the period ended June 30, 2017, $12.0 million for the period ended September 30, 2017 and periods ending December 31, 2017, March 31, 2018 and June 30, 2018, $4.0 million for the period ending September 30, 2018 and $2.0 million for periods thereafter;

20



non-recurring cash expenses, costs and charges relating to the previously announced Securities and Exchange Commission investigation and related actions, ongoing class action litigation and any other non-ordinary course of business legal matters in an aggregate amount for all periods not to exceed $5.0 million; and
certain cash expenses, costs and charges with respect to liability or casualty events to the extent insurance or indemnity recovery from a third party is actually received or is reasonably expected to be received within 90 days following the end of the applicable period; and
require the Partnership to subtract the following:
non-cash items increasing Consolidated Net Income for the applicable period;
federal, state, local and foreign income tax credits or refunds during such period;
certain cash payments made during the applicable period in respect of any noncash accrual, reserve or other non-cash charge that is accounted for in a prior period which was added to Consolidated Net Income to determine Consolidated EBITDA for such prior period and which does not otherwise reduce Consolidated Net Income for the current period; and
the amount of any insurance or indemnity recovery not so received within the 90 day period (or such longer period) set forth above and any recovery payments which are made by third parties within the 90 day period (or such longer period) set forth above, in each case to the extent added back to consolidated net income in the prior period;
amend the definition of “Consolidated Leverage Ratio” to permit the Partnership to deduct from Indebtedness the aggregate amount of all unrestricted cash and Cash Equivalents of the Partnership and its Subsidiaries in accounts subject to a first priority, perfected lien (subject to certain permitted liens) in favor of the Administrative Agent in an amount not to exceed $5,000,000;
reduce the revolver commitment to $200.0 million;
add provisions relating to a Fixed Charge Coverage Ratio that:
establish a minimum Consolidated Fixed Charge Coverage Ratio (as described below), as of the last day of any fiscal quarter, commencing on September 30, 2017, determined for the period of four (4) consecutive fiscal quarters ending on such date, of 1.20:1.00 for the four fiscal quarter period ending on such measurement date;
define “Consolidated Fixed Charge Ratio” as the ratio of (i) Consolidated EBITDA for the four fiscal quarter period ending on the applicable measurement date, minus (x) the aggregate of all expenditures by the Partnership and its Subsidiaries for a specified period which are included in “Maintenance Capital Expenditures” or “Growth Capital Expenditures” reflected in the consolidated statement of cash flows of the Partnership, but excluding any such expenditures to the extent financed from the proceeds of Indebtedness (other than Revolving Loans) or insurance proceeds or other similar recoveries paid on account of the loss of or damage to the assets being replaced or restored or other assets and that are made during such period, (y) any federal, state, local and foreign taxes paid by the Partnership and its Subsidiaries during such period (net of any tax credits or refunds during such period), and (z) all Restricted Payments (which includes distributions) paid in cash by the Partnership during such period, to (ii) Consolidated Fixed Charges for the four fiscal quarter period ending on such measurement date; and
define “Consolidated Fixed Charges” as the sum of (i) Consolidated Interest Expense paid or payable in cash plus (ii) the aggregate amount of all scheduled principal payments with respect to all Consolidated Funded Indebtedness, but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness permitted under the Amended Credit Agreement;

21



prior to the date on which the Partnership shall have achieved, as of the last day of any fiscal quarter after September 29, 2017, a Consolidated Leverage Ratio of less than 4.00:1.00 for the four consecutive fiscal quarters ending on such date: (a) limit Revolving Credit Availability to (i) the lesser of the Borrowing Base, which is equal to the sum of 80% of accounts receivable outstanding less than 120 days plus 40% of the book value, net of depreciation, of property, plant and equipment, and the aggregate Revolving Commitments of the Lenders at such time, minus (ii) the aggregate outstanding amount of Revolving Credit Exposures of the Lenders and (b) in the event the sum of the aggregate principal amount of all of the Revolving Credit Exposures of the Lenders exceeds the Borrowing Base then in effect, require the Borrowers to immediately prepay borrowings in an amount so that the Revolving Credit Availability is at least $0; and
extend the deadline for filing the Partnership’s Form 10-Q for the period ended September 30, 2017 to forty-five days following the filing of its Form 10-Q for the period ended June 30, 2017, but not later than January 31, 2018.
Senior Notes
On May 28, 2013, the Partnership issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Partnership pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Partnership incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are being amortized over the life of the Senior Notes. The Senior Notes mature on June 1, 2021.
At any time on or after June 1, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:
Year
Percentage
2017
103.938%
2018
101.969%
2019 and thereafter
100.000%
Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Partnership to purchase that holder’s Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest.
The Senior Notes are jointly and severally guaranteed by certain of the Partnership’s subsidiaries. The Indenture governing the Senior Notes contains covenants, including limitations of the Partnership’s ability to incur certain additional indebtedness and liens, make certain dividends, distributions, redemptions or investments, enter into certain transactions with affiliates, make certain asset sales, and engage in certain mergers, consolidations or sales of all or substantially all of the Partnership's assets, among other items. As of March 31, 2017, the Partnership was in compliance with these covenants.
8.
DEFERRED REVENUES
The Partnership defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Partnership recognizes deferred merchandise and service revenues as deferred revenues within long-term liabilities on its condensed consolidated balance sheet. The Partnership recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its condensed consolidated balance sheet. The Partnership also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts.

22



Deferred revenues and related costs consisted of the following at the dates indicated (in thousands):
 
March 31, 2017
 
December 31, 2016
Deferred contract revenues
$
788,477

 
$
782,120

Deferred merchandise trust revenue
82,235

 
76,512

Deferred merchandise trust unrealized gains
20,644

 
8,001

Deferred revenues
$
891,356

 
$
866,633

Deferred selling and obtaining costs
$
120,113

 
$
116,890

Deferred revenues presented in the table above are net of the allowance for contract cancellations disclosed in Note 2.
9.
COMMITMENTS AND CONTINGENCIES
Legal
The Partnership is currently subject to class or collective actions under the Securities Exchange Act of 1934 and for related state law claims that certain of our officers and directors breached their fiduciary duty to the Partnership and its unitholders. The Partnership could also become subject to additional claims and legal proceedings relating to the factual allegations made in these actions. While management cannot reasonably estimate the potential exposure in these matters at this time, if the Partnership does not prevail in any such proceedings, the Partnership could be required to pay substantial damages or settlement costs, subject to certain insurance coverages. Management has determined that, based on the status of the claims and legal proceedings against us, the amount of the potential losses cannot be reasonably estimated at this time. These actions are summarized below.
Anderson v. StoneMor Partners, LP, et al., No. 2:16-cv-06111 pending in the United States District Court for the Eastern District of Pennsylvania, and filed on November 21, 2016. The plaintiffs in this case (as well as Klein v. StoneMor Partners, LP, et al., No. 2:16-cv-06275, filed in the United States District Court for the Eastern District of Pennsylvania on December 2, 2016, which has been consolidated with this case) brought an action on behalf of a putative class of the holders of Partnership units and allege that the Partnership made misrepresentations to investors in violation of Section 10(b) of the Securities Exchange Act of 1934 by, among other things and in general, failing to clearly disclose the use of proceeds from debt and equity offerings by making allegedly false or misleading statements concerning (a) the Partnership’s strength or health in connection with a particular quarter’s distribution announcement, (b) the connection between operations and distributions and (c) the Partnership’s use of cash from equity offerings and its credit facility. Lead plaintiffs have been appointed in this case, and filed a Consolidated Amended Class Action Complaint on April 24, 2017. Defendants filed a motion to dismiss that Consolidated Amended Complaint on June 8, 2017; the motion is pending. Plaintiffs seek damages from the Partnership and certain of its officers and directors on behalf of the class of Partnership unitholders, as well as costs and attorneys’ fees.
Bunim v. Miller, et al., No. 2:17-cv-00519-ER, pending in the United States District Court for the Eastern District of Pennsylvania, and filed on February 6, 2017. The plaintiff in this case brought, derivatively on behalf of the Partnership, claims that StoneMor GP’s officers and directors aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in its public filings, by allegedly failing to clearly disclose the use of proceeds from debt and equity offerings, and by allegedly approving unsustainable distributions. The plaintiff also claims that these actions and misrepresentations give rise to causes of action for gross mismanagement, unjust enrichment, and (in connection with a purportedly misleading proxy statement filed in 2014) violations of Section 14(a) of the Securities Exchange Act of 1934. The derivative plaintiff seeks an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as general compliance and governance changes. This case has been stayed, by the agreement of the parties, pending the resolution of the motion to dismiss filed in the Anderson case.

23



Muth v. StoneMor G.P. LLC, et al., December Term, 2016, No. 01196 and Binder v. StoneMor G.P. LLC, et al., January Term, 2017, No. 04872, both pending in the Court of Common Pleas for Philadelphia County, Pennsylvania, and filed on December 20, 2016 and February 3, 2017, respectively. In these cases, the plaintiffs brought, derivatively on behalf of the Partnership, claims that StoneMor GP’s officers and directors aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in its public filings and by failing to clearly disclose the use of proceeds from debt and equity offerings, as well as approving unsustainable distributions. The plaintiffs also claim that these actions and misrepresentations give rise to a cause of action for unjust enrichment. The derivative plaintiffs seek an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as alterations to the procedures for electing members to the board of StoneMor GP, and other compliance and governance changes. These cases have been consolidated and stayed, by the agreement of the parties, pending the resolution of the motion to dismiss filed in the Anderson case.
The Partnership has received two subpoenas from the Philadelphia Regional Office of the Securities and Exchange Commission, Enforcement Division, in connection with a fact-finding as to whether violations of federal securities laws have occurred. The subpoenas themselves state that the fact-finding should not be construed as an indication that any violations of securities laws occurred. The first subpoena, received on April 25, 2017, sought information from us relating to, among other things, our prior restatements, financial statements, internal control over financial reporting, public disclosures, use of non-GAAP financial measures and matters pertaining to unitholder distributions and the sources of funds therefor. The second subpoena, received on July 13, 2017, sought information relating to protection of our confidential information and our policies regarding insider trading. We are cooperating with the SEC staff, have begun to deliver information requested in the first subpoena and have delivered all information requested in the second, more limited, subpoena.
The Partnership is party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any such proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows.  The Partnership carries insurance with coverage and coverage limits that it believes to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect the Partnership against all contingencies, management believes that the insurance protection is reasonable in view of the nature and scope of the operations.
Other
During the first quarter of 2016, the Partnership moved its corporate headquarters to Trevose, Pennsylvania. Due to the relocation, a cease-use expense of $2.4 million, of which $0.5 million was incurred in the first quarter of 2016, was recorded in “Other gains (losses), net” on the unaudited condensed consolidated statement of operations. This charge represents the net recognition of the discounted liability for future rent payments due under the lease on the previous headquarters, net of estimated sublease collections and deferred rent and lease incentives pertaining to the previous corporate office location.
In connection with the Partnership’s lease and management agreements with the Archdiocese of Philadelphia, it has committed to pay aggregate fixed rent of $36.0 million in the following amounts:
Lease Years 1-5 (May 28, 2014 - May 31, 2019)
None
Lease Years 6-20 (June 1, 2019 - May 31, 2034)
$1,000,000 per Lease Year
Lease Years 21-25 (June 1, 2034 - May 31, 2039)
$1,200,000 per Lease Year
Lease Years 26-35 (June 1, 2039 - May 31, 2049)
$1,500,000 per Lease Year
Lease Years 36-60 (June 1, 2049 - May 31, 2074)
None
The fixed rent for lease years 6 through 11, an aggregate of $6.0 million, is deferred. If, prior to May 31, 2024, the Archdiocese exercises its right in its sole discretion to terminate the agreements during lease year 11 or the Partnership terminates the agreements as a result of a default by the Archdiocese, the Partnership is entitled to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2024.

24



10.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has established a hierarchy to measure the Partnership’s financial instruments at fair value, which requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Partnership’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same contractual term of the asset or liability.
Level 3 – Unobservable inputs that the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.
The Partnership’s current assets and liabilities and customer receivables on its condensed consolidated balance sheets are similar to cash basis financial instruments, and their estimated fair values approximate their carrying values due to their short-term nature and thus are categorized as Level 1. The Partnership’s merchandise and perpetual care trusts consist of investments in debt and equity marketable securities and cash equivalents, are carried at fair value, and are considered either Level 1 or Level 2 (see Notes 5 and 6). Where quoted prices are available in active markets, securities are classified as Level 1 investments pursuant to the fair value measurement hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurement hierarchy. Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP. These funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy.
The Partnership’s other financial instruments as of March 31, 2017 and December 31, 2016 consist of its Senior Notes and outstanding borrowings under its revolving credit facility (see Note 7). The estimated fair values of the Partnership’s Senior Notes as of March 31, 2017 and December 31, 2016 were $174.3 million and $168.0 million, respectively, based on trades made on those dates, compared with the carrying amounts of $172.7 million and $172.6 million, respectively. As of March 31, 2017 and December 31, 2016, the carrying values of outstanding borrowings under the Partnership’s revolving credit facility (see Note 7), which bears interest at variable interest rates with maturities of 90 days or less, approximated their estimated fair values. The Senior Notes and the credit facility are valued using Level 2 inputs.
11.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Partnership’s Senior Notes are guaranteed by StoneMor Operating LLC and its 100% owned subsidiaries, other than the co-issuer, as described below. The guarantees are full, unconditional, joint and several. The Partnership, or the “Parent”, and its 100% owned subsidiary, Cornerstone Family Services of West Virginia Subsidiary Inc., are the co-issuers of the Senior Notes. The Partnership’s unaudited condensed consolidated financial statements as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 include the accounts of cemeteries owned by other entities but which we operate under long-term lease, operating or management agreements. For the purposes of this note, these entities are deemed non-guarantor subsidiaries, as they are not 100% owned by the Partnership. The Partnership’s unaudited condensed consolidated financial statements also contain merchandise and perpetual care trusts that are also non-guarantor subsidiaries for the purposes of this note.

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The following unaudited supplemental condensed consolidating financial information reflects the Partnership’s standalone accounts, the combined accounts of the subsidiary co-issuer, the combined accounts of the guarantor subsidiaries, the combined accounts of the non-guarantor subsidiaries, the consolidating adjustments and eliminations and the Partnership’s consolidated accounts as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016. For the purpose of the following financial information, the Partnership’s investments in its subsidiaries and the guarantor subsidiaries’ investments in their respective subsidiaries are presented in accordance with the equity method of accounting:
CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands)
March 31, 2017
Parent
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
10,531

 
$
3,192

 
$

 
$
13,723

Other current assets

 
3,325

 
83,711

 
17,205

 

 
104,241

Total current assets

 
3,325

 
94,242

 
20,397

 

 
117,964

Long-term accounts receivable

 
1,886

 
83,847

 
13,146

 

 
98,879

Cemetery property and equipment

 
925

 
417,124

 
34,147

 

 
452,196

Merchandise trusts

 

 

 
523,858

 

 
523,858

Perpetual care trusts

 

 

 
341,479

 

 
341,479

Deferred selling and obtaining costs

 
5,843

 
93,754

 
20,516

 

 
120,113

Goodwill and intangible assets

 

 
72,665

 
62,623

 

 
135,288

Other assets

 

 
18,665

 
2,828

 

 
21,493

Investments in and amounts due from affiliates eliminated upon consolidation
238,255

 
159,173

 
577,374

 

 
(974,802
)
 

Total assets
$
238,255

 
$
171,152

 
$
1,357,671

 
$
1,018,994

 
$
(974,802