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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

(Amendment No. 1)

 

 

(Mark One)

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

For the quarterly period ended June 30, 2010

or

 

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

For the transition period from              to             .

Commission File Number: 000-50910

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

311 Veterans Highway, Suite B

Levittown, Pennsylvania

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

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

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

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

The number of the registrant’s outstanding common units at August 9, 2010 was 13,841,135.

 

 

 


Table of Contents

EXPLANATORY NOTE

StoneMor Partners L.P. (the “Company”) previously reported that, on September 8, 2010, management and the Audit Committee of the Board of Directors of StoneMor GP LLC, the Company’s general partner, concluded that the unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2010 originally filed with the Securities and Exchange Commissions on August 9, 2010 on its Quarterly Report on Form 10 Q for the quarter ended June 30, 2010 (the “Original Filing”) would be restated for an error that occurred due to a misinterpretation of business combination accounting rules. This Amendment on Form 10-Q/A (the “Amended Filing”) amends the Original Filing to reflect such restatement.

In the second quarter of 2010, the Company completed its assessment of the fair value of net assets acquired related to two long-term operating agreements entered into by the Company during the second quarter of 2009 (the “Final Assessment”) which were treated by the Company as acquisitions in accordance with Accounting Standards Codification 805 (“ASC 805”). The resulting change of the Final Assessment was an increase in the fair value of net assets acquired in excess of the purchase price of approximately $4.6 million. Because the initial provisional value of the net assets acquired already exceeded the consideration transferred (a bargain purchase), this increase in the fair value of net assets acquired resulted in a gain of approximately $4.6 million, of which $0.4 million related to a purchase price adjustment in the prior year.

In the Original Filing, the Company recognized a $4.2 million gain on acquisition in the second quarter of 2010 related to the Final Assessment. Per ASC 805, the Company should have retrospectively adjusted the provisional amounts originally recorded in the second quarter of 2009. Accordingly, the Original Filing reflected income in the form of a gain on acquisition in the second quarter of 2010 that should have been reflected in the Original Filing in the second quarter of 2009.

Details of the restatement of the financial statements are discussed in Note 1 of Part I, Item 1 of this Amended Filing.

As a result of the restatement in Part I, Item 1 of this Amended Filing, Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operation, is revised to incorporate all the revisions made to Part I, Item 1 as stated in the previous paragraph.

In accordance with Rule 12b-15 under the Exchange Act, each item of the Original Filing that is amended by this Amended Filing is also restated in its entirety, and this Amended Filing is accompanied by currently dated certifications on Exhibits 31.1, 31.2, 32.1 and 32.2 by the Company’s Chief Executive Officer and Chief Financial Officer. Except as described above, this Amended Filing does not amend, update, or change any items, financial statements, or other disclosures in the Original Filing, and does not reflect events occurring after the filing of the Original Filing, including as to any exhibits to the Original Filing affected by subsequent events. Information not affected by the changes described above is unchanged and reflects the disclosures made at the time of the Original Filing. Accordingly, this Amended Filing should be read in conjunction with the Original Filing and our other SEC filings subsequent to the filing of the Original Filing, including any amendments to those filings. Capitalized terms not defined in the Amended Filing are as defined by the Original Filing.

 

1


Table of Contents

Index – Form 10-Q/A

 

          Page
Part I    Financial Information    3
Item 1.    Financial Statements    3
   Condensed Consolidated Balance Sheets – June 30, 2010 (unaudited) and December 31, 2009 as restated    3
   Condensed Consolidated Statements of Operations - three and six months ended June 30, 2010 and 2009 as restated    4
   Condensed Consolidated Statement of Partners’ Capital – June 30, 2010 as restated    5
   Condensed Consolidated Statements of Cash Flows – six months ended June 30, 2010 and 2009 as restated    6
   Notes to Condensed Consolidated Financial Statements as of June 30, 2010    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    43
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    74
Item 4.    Controls and Procedures    76
Part II    Other Information    76
Item 1.    Legal Proceedings    76
Item 1A.    Risk Factors    76
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    77
Item 3.    Defaults Upon Senior Securities    77
Item 4.    (Removed and reserved)    77
Item 5.    Other Information    77
Item 6.    Exhibits    78
   Signatures    79

 

2


Table of Contents

Part I – Financial Information

 

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheets

(in thousands)

 

     June 30,
2010
   December 31,
2009
     (unaudited)    (As restated,
see Note 1)

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 13,450    $ 13,479

Accounts receivable, net of allowance

     43,102      37,113

Prepaid expenses

     3,477      3,531

Other current assets

     9,815      4,502
             

Total current assets

     69,844      58,625

Long-term accounts receivable—net of allowance

     59,685      48,015

Cemetery property

     294,120      240,277

Property and equipment, net of accumulated depreciation

     85,448      51,520

Merchandise trusts, restricted, at fair value

     266,909      203,829

Perpetual care trusts, restricted, at fair value

     215,429      196,275

Deferred financing costs—net of accumulated amortization

     10,697      12,020

Deferred selling and obtaining costs

     55,759      49,782

Deferred tax assets

     519      451

Fair value of interest rate swap

     559      —  

Other assets

     5,847      1,864
             

Total assets

   $ 1,064,816    $ 862,659
             

Liabilities and partners’ capital

     

Current liabilities

     

Accounts payable and accrued liabilities

   $ 24,190    $ 26,574

Accrued interest

     1,546      1,829

Current portion, long-term debt

     523      378
             

Total current liabilities

     26,259      28,781

Other long-term liabilities

     5,731      2,912

Fair value of interest rate swap

     —        2,681

Long-term debt

     237,186      182,821

Deferred cemetery revenues, net

     313,301      258,978

Deferred tax liabilities

     28,348      4,907

Merchandise liability

     104,076      65,883

Perpetual care trust corpus

     215,429      196,275
             

Total liabilities

     930,330      743,238
             

Partners’ capital

     

General partner

     2,155      1,986

General partner incentive distribution rights

     6,199      —  

Common partner

     126,132      117,434
             

Total partners’ capital

     134,486      119,420
             

Total liabilities and partners’ capital

   $ 1,064,816    $ 862,659
             

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

3


Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands)

(unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2009     2010     2009  
     As restated,
see note 1
    As restated,
see note 1
    As restated,
see note 1
    As restated,
see note 1
 

Revenues:

        

Cemetery

        

Merchandise

   $ 24,031      $ 23,456      $ 42,826      $ 42,732   

Services

     10,034        9,534        18,025        18,772   

Investment and other

     8,898        9,049        16,905        16,865   

Funeral home

        

Merchandise

     2,363        2,320        4,862        4,929   

Services

     3,411        3,443        6,789        7,102   
                                

Total revenues

     48,737        47,802        89,407        90,400   
                                

Costs and Expenses:

        

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

        

Perpetual care

     1,270        1,423        2,357        2,428   

Merchandise

     4,077        4,736        7,422        8,531   

Cemetery expense

     12,086        10,412        21,333        19,851   

Selling expense

     9,467        8,618        17,083        16,444   

General and administrative expense

     6,161        5,411        11,759        10,890   

Corporate overhead (including $177 and $383 in unit-based compensation for the three months ended June 30, 2010 and 2009 and $353 and $757 for the six months ended June 30, 2010 and June 30, 2009)

     5,605        5,497        10,694        10,863   

Depreciation and amortization

     1,799        1,708        3,657        3,018   

Funeral home expense

        

Merchandise

     953        944        1,866        1,911   

Services

     2,247        2,296        4,335        4,702   

Other

     1,442        1,471        2,872        2,899   

Acquisition related costs

     1,666        542        2,656        2,128   
                                

Total cost and expenses

     46,773        43,058        86,034        83,665   
                                

Operating profit (loss)

     1,964        4,744        3,373        6,735   

Other income and expense

        

Gain on sale of funeral homes

     —          —          —          475   

Gain on acquisition

    
—  
  
    4,583        23,312        4,583   

Increase in fair value of interest rate swap

     1,568        —          3,239        —     

Interest expense

     5,238        3,202        10,097        6,371   
                                

Income (loss) before income taxes

     (1,706     6,125        19,827        5,422   

Income taxes:

        

State

     27        39        55        201   

Federal

     (381     (136     (909     (136
                                

Total income taxes

     (354     (97     (854     65   
                                

Net income (loss)

   $ (1,352   $ 6,222      $ 20,681      $ 5,357   
                                

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

   $ (27   $ 124      $ 286      $ 107   

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

   $ —        $ —        $ 6,382      $ —     

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

        

Common

   $ (1,325   $ 5,011      $
14,013
  
  $ 4,314   

Subordinated

   $ —        $ 1,087      $ —        $ 936   

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

   $ (.10   $ .51      $ 1.04      $ .44   

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

     13,537        11,891        13,448        11,891   

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

4


Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of

StoneMor Partners L.P.

Partners’ Capital

(in thousands)

(as restated and unaudited, see note 1)

 

     Partners’ Capital  
     Common
Unit Holders
    General
Partner
    Incentive
Distribution
Rights
    Total  

Balance, December 31, 2009 as previously reported

   $ 113,344      $ 1,904      $      $ 115,248   
                                

Adjustment, see Note 1

     4,090        82        —          4,173   
                                

Balance, December 31, 2009, as restated

   $ 117,434      $ 1,986      $      $ 119,420   
                                

Issuance of executive management units

     3,825        —            3,825   

General partner contribution

     —          69        —          69   

Net income

     15,340        313        6,382        22,033   

Cash distribution

     (7,413     (151     (89     (7,653
                                

Balance, March 31, 2010, as restated

     129,186        2,217        6,293        137,696   
                                

Issuance of common units

     5,785        —          —          5,785   

General partner contribution

     —          117        —          117   

Net loss, as restated

     (1,325     (27     —          (1,352

Cash distribution

     (7,513     (153     (90     (7,757
                                

Balance, June 30, 2010, as restated

   $ 126,132      $ 2,155      $ 6,199      $ 134,486   
                                

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

5


Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

     For the six months ended June 30,  
     2010     2009  
     As restated,
see note 1
    As restated,
see note 1
 

Operating activities:

    

Net income

   $ 20,681      $ 5,357   

Adjustments to reconcile net income to net cash provided by operating activity:

    

Cost of lots sold

     3,030        2,616   

Depreciation and amortization

     3,657        3,018   

Unit-based compensation

     353        757   

Previously capitalized acquisition costs

     —          1,365   

Accretion of debt discount

     166        —     

Previously capitalized financing fees

     —          141   

Gain on acquisitions

     (23,312     (4,583

Increase in value of interest rate swap

     (3,239     —     

Gain on sale of funeral home

     —          (475

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

    

Accounts receivable

     (14,656     (11,361

Allowance for doubtful accounts

     1,481        1,649   

Merchandise trust fund

     (3,981     (2,119

Prepaid expenses

     54        (431

Other current assets

     (2,767     320   

Other assets

     234        (414

Accounts payable and accrued and other liabilities

     640        460   

Deferred selling and obtaining costs

     (5,977     (4,745

Deferred cemetery revenue

     26,101        17,626   

Deferred taxes (net)

     (996     (207

Merchandise liability

     1,118        (870
                

Net cash provided by operating activities

     2,587        8,104   
                

Investing activities:

    

Additions to cemetery property

     (903     (2,240

Purchase of subsidiaries, net of common units issued

     (36,962     (2,727

Divestiture of funeral home

     —          475   

Additions of property and equipment

     (2,657     (1,061
                

Net cash used in investing activities

     (40,522     (5,553
                

Financing activities:

    

Cash distribution

     (15,410     (13,626

Additional borrowings on long-term debt

     53,889        101,667   

Repayments of long-term debt

     (684     (81,053

Cost of financing activities

     (75     (5,332

Sale of partner units

     186        —     
                

Net cash provided by (used in) financing activities

     37,906        1,656   
                

Net increase (decrease) in cash and cash equivalents

     (29     4,207   

Cash and cash equivalents—Beginning of period

     13,479        7,068   
                

Cash and cash equivalents—End of period

   $ 13,450      $ 11,275   
                

Supplemental disclosure of cash flow information

    

Cash paid during the period for interest

   $ 10,380      $ 5,587   
                

Cash paid during the period for income taxes

   $ 1,530      $ 1,520   
                

Non-cash investing and financing activities

    

Issuance of note payable for acquisition

   $ 1,305      $ —     

Issuance of limited partner units for cemetery acquisition

   $ 5,785      $ —     
                

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

6


Table of Contents
1.     RESTATEMENT OF PREVIOUSLY REPORTED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On September 8, 2010, management and the Audit Committee of the Board of Directors of StoneMor GP LLC (the “Audit Committee”), the general partner of StoneMor Partners LP (the “Company”), concluded that the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2010 previously filed by the Company with the Securities and Exchange Commission (the “Commission”) on August 9, 2010 on its Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (the “Form 10-Q”) should no longer be relied upon because of an error in such financial statements as discussed below. This error relates solely to the period in which income should have been recognized and had no impact on the Company’s financial position at June 30, 2010 nor on its cash flows for either the three or six months ended June 30, 2010 or 2009 or any other period. This error occurred due to a misinterpretation of business combination accounting rules regarding the period in which to record a gain resulting from a change in the initially estimated fair value of assets acquired. The Company concluded that such a gain of approximately $4.2 million, which was recorded in the second quarter of 2010, should have been recognized by retrospective adjustment of the second quarter of 2009.

At June 30, 2009, the Company recorded initial provisional values for the acquisition of two cemetery properties but was still seeking information about the fair value of the assets and liabilities acquired (the measurement period). Accounting Standards Codification 805 requires that any subsequent changes to those provisional values occurring during the measurement period that result from obtaining new information about the facts that existed at the acquisition date be recognized by retrospectively adjusting the provisional values in the period when the acquisition was initially presented. In the second quarter of 2010, the Company received final appraisals on the fair value of certain cemetery property and property, plant and equipment acquired in those acquisitions made in the second quarter of 2009. These final appraisals indicated a fair value of those assets that was greater than the original estimate made in the second quarter of 2009. Because the initial provisional value of the net assets acquired already exceeded the consideration transferred (a bargain purchase), this increase in the fair value of net assets acquired resulted in a gain of approximately $4.6 million of which $0.4 million related to a purchase price adjustment in the prior year. The Company improperly recorded the gain and increase to the fair value of the net assets acquired in the second quarter of 2010 rather than retrospectively recording the changes in the second quarter of 2009.

As a result, the accompanying unaudited condensed consolidated financial statements as of June 30, 2010 and for the three and six months then ended have been restated from the amounts previously reported. The information in the data table below represents only those balance sheet, income statement and cash flow line items affected by the restatement.

Balance sheet information

     As of December 31, 2009
     As originally
reported
   Adjustments     As
Restated
     (in thousands)

Assets

       

Cemetery property

   $ 235,357    $ 4,920      $ 240,277

Property and equipment, net of accumulated depreciation

     52,265      (745     51,520

Merchandise trusts, restricted, at fair value

     203,885      (56     203,829

Perpetual care trusts, restricted, at fair value

     196,295      (20     196,275

Other assets

     2,194      (330     1,864

Total assets

     858,889      3,770        862,659

Liabilities

       

Deferred tax liabilities

     5,290      (383     4,907

Perpetual care trust corpus

     196,295      (20     196,275

Total liabilities

     743,641      (403     743,238

Partners’ capital

       

General partner

     1,904      83        1,986

Common partner

     113,344      4,090        117,434

Total partners’ capital

     115,248      4,173        119,420

Total liabilities and partners’ capital

   $ 858,889    $ 3,770      $ 862,659

Income statement information

 

     Three months ended June 30, 2010     Six months ended June 30, 2010
For the three and six months ended June 30, 2010    Original    Adjustments     As Restated     Original    Adjustments     As Restated
    

(in thousands, except unit information)

    (in thousands, except unit information)

Gain on acquisition

   $ 4,173    $ (4,173   $      $ 27,485    $ (4,173   $ 23,312

Income (loss) before income taxes

   $ 2,467    $ (4,173   $ (1,706   $ 24,000    $ (4,173   $ 19,827

Net income (loss)

   $ 2,821    $ (4,173   $ (1,352   $ 24,854    $ (4,173   $ 20,681

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

   $ 56    $ (83   $ (27   $ 369    $ (83   $ 286

General partner's IDR interest in net income for the period

   $    $      $      $ 6,382    $      $ 6,382

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

              

Common

   $ 2,765    $ (4,090   $ (1,325   $ 18,103    $ (4,090   $ 14,013

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

   $ 0.23    $ (0.31   $ (0.10   $ 1.35    $ (0.31   $ 1.04
     Three months ended June 30, 2009     Six months ended June 30, 2009
     Original    Adjustments     As Restated     Original    Adjustments     As Restated
For the three and six months ended June 30, 2009    (in thousands, except unit information)     (in thousands, except unit information)

Gain on acquisition

   $    $ 4,583      $ 4,583      $    $ 4,583      $ 4,583

Income (loss) before income taxes

   $ 1,542    $ 4,583      $ 6,125      $ 839    $ 4,583      $ 5,422

Net income (loss)

   $ 1,639    $ 4,583      $ 6,222      $ 774    $ 4,583      $ 5,357

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

   $ 33    $ 91      $ 124      $ 15    $ 91      $ 107

General partner's IDR interest in net income for the period

   $    $      $      $    $      $

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

              

Common

   $ 1,320    $ 3,691      $ 5,011      $ 623    $ 3,691      $ 4,314

Subordinated

   $ 286    $ 801      $ 1,087      $ 136    $ 801      $ 936

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

   $ 0.14    $ 0.37      $ 0.51      $ 0.06    $ 0.37      $ 0.44

Cash flow information

 

     June 30, 2010     June 30, 2009  
     Original     Adjustments     As restated     Original    Adjustments     As restated  
For the six months ended    (in thousands)     (in thousands)  

Net income

   $ 24,854      $ (4,173   $ 20,681      $ 774    $ 4,583      $ 5,357   

Adjustments to reconcile net income to net cash provided by operating activities:

             

Gain on acquisitions

   $ (27,485   $ 4,173      $ (23,312   $ –      $ (4,583   $ (4,583

 

2. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

StoneMor Partners L.P. is a provider of funeral and cemetery products and services in the death care industry in the United States. The words “we,” “us,” “our,” “StoneMor,” the “Partnership,” and the “Company” refer to StoneMor Partners L.P. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of June 30, 2010, StoneMor operates 252 cemeteries. The Company owns 236 of these cemeteries and operates the remaining 16 under long-term agreements. As a result of the agreements and other control arrangements, we consolidate the results of the 16 managed cemeteries in our consolidated financial statements.

As of June 30, 2010, StoneMor owned and operated 63 funeral homes. Twenty six of these funeral homes are located on the grounds of the cemeteries we own.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009, respectively, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim period. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year.

Principles of Consolidation

The consolidated financial statements include the accounts of each of the Company’s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The operations of the 16 managed cemeteries that the Company operates under long-term agreements are also consolidated as a result of the agreement and other control provisions. Total revenues derived from the cemeteries under long-term agreements totaled approximately $8.2 million and $15.2 million for the three and six months ended June 30, 2010, as compared to $7.9 million and $14.0 million during the same periods last year.

Summary of Significant Accounting Policies

The significant accounting policies followed by the Company are summarized below:

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less from the time they are acquired to be cash equivalents.

Cemetery Property

Cemetery property consists of developed and undeveloped cemetery property and constructed mausoleum crypts and lawn crypts and is valued at cost, which is not in excess of market value.

Property and Equipment

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

 

Buildings and improvements    10 to 40 years
Furniture and equipment    5 to 10 years
Leasehold improvements    over the term of the lease

Depreciation expense was $1.1 million and $2.3 million during the three and six months ended June 30, 2010 as compared to $1.0 million and $2.1 million during the same periods last year.

 

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Inventories

Inventories, classified as other current assets on the Company’s condensed consolidated balance sheets, include cemetery and funeral home merchandise and are valued at the lower of cost or net realizable value. Cost is determined primarily on a specific identification basis on a first-in, first-out basis. Inventories were approximately $5.2 million and $3.5 million at June 30, 2010 and December 31, 2009, respectively.

Sales of Cemetery Merchandise and Services

The Company sells its merchandise and services on both a pre-need and at-need basis. Sales of at-need cemetery services and merchandise are recognized as revenue when the service is performed or merchandise is delivered.

Pre-need sales are usually made on an installment contract basis. Contracts are usually for a period not to exceed 60 months with payments of principal and interest required. For those contracts that do not bear a market rate of interest, the Company imputes such interest in order to segregate the principal and interest component of the total contract value.

At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less any cash deposit paid net of an estimated allowance for customer cancellations. The revenue from both the sales and interest component of the account receivable is deferred. Interest revenue is recognized utilizing the effective interest method. Sales revenue is recognized in accordance with the rules discussed below.

The allowance for customer cancellations is established based on management’s estimates of expected cancellations and historical experiences and is currently approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. Management will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at June 30, 2010 and December 31, 2009, respectively.

Revenue recognition related to sales of cemetery merchandise and services is governed by Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (“SAB No. 104”), and the retail land sales provisions of Accounting Standards Codification (“ASC”) 976-605-25-6. Per this guidance, revenue from the sale of burial lots and constructed mausoleum crypts are deferred until such time that 10% of the sales price has been collected, at which time it is fully earned; revenues from the sale of unconstructed mausoleums are recognized using the percentage-of-completion method of accounting while revenues from merchandise and services are recognized once such merchandise is delivered (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to us) or services are performed.

In order to appropriately match revenue and expenses, the Company defers certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business. Such costs are accounted for under the provisions of ASC 944-720-25-1, and are expensed as revenues are recognized.

The Company records a merchandise liability equal to the estimated cost to provide services and purchase merchandise for all outstanding and unfulfilled pre-need contracts. The merchandise liability is established and recorded at the time of the sale but is not recognized as an expense until such time that the associated revenue for the underlying contract is also recognized. The merchandise liability is established based on actual costs incurred or an estimate of future costs, which may include a provision for inflation. The merchandise liability is reduced when services are performed or when payment for merchandise is made by the Company and title is transferred to the customer.

Merchandise Trusts

Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into trust (the “merchandise trust”) until such time that the Company meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. All investment earnings generated by the assets in the merchandise trusts (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The fair value of the funds held in merchandise trusts at June 30, 2010 and December 31, 2009 was approximately $267.0 million and $203.9 million, respectively (see Note 6).

Perpetual Care Trusts

Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All principal must remain in this trust into perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. Earnings from the perpetual care trusts are recognized in current cemetery revenues. The fair value of funds held in perpetual care trusts at June 30, 2010 and December 31, 2009 was approximately $215.4 million and $196.3 million, respectively (see Note 7).

Sales of Funeral Home Services

Revenue from funeral home services is recognized as services are performed and merchandise is delivered.

 

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

Deferred Cemetery Revenues, Net

Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trust is deferred until such time that the services are performed or the merchandise is delivered.

In addition to amounts deferred on new contracts and investment income and unrealized gains on our merchandise trust, deferred cemetery revenues, net, includes deferred revenues from pre-need sales that were entered into by entities prior to the acquisition of those entities by the Company, including entities that were acquired by Cornerstone Family Services, Inc. upon its formation in 1999. The Company provides for a reasonable profit margin for these deferred revenues (deferred margin) to account for the future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. Deferred margin amounts are deferred until the merchandise is delivered or services are performed.

Impairment of Long-Lived Assets

The Company monitors the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets. The Company’s policy is to evaluate an asset for impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. An impairment charge is recorded to write-down the asset to its fair value if the sum of future undiscounted cash flows is less than the carrying value of the asset. No impairment charges were recorded during the three or six months ended June 30, 2010 and 2009.

Other-Than-Temporary Impairment of Trust Assets

The Company determines whether or not the impairment of a fixed maturity debt security is an other-than-temporary impairment by evaluating each of the following:

 

   

Whether it is the Company’s intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.

 

   

If there is no intent to sell, the Company evaluates if it is not more likely than not that the Company will be required to sell the debt security before its anticipated recovery. If the Company determines that it is more likely than not that it will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary.

The Company has further evaluated whether or not all assets in the merchandise trust have other-than-temporary impairments based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.

If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.

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

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

The trust footnotes (Notes 5 and 6) disclose the adjusted cost basis of the assets in the both the merchandise and perpetual care trust. This adjusted cost basis includes any adjustments to the original cost basis due to other-than-temporary impairments.

Two Class Method of Accounting for Earnings per Share

The Company utilizes the two class method of accounting for earnings per share as required by Accounting Topic 260.

 

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Under this method:

 

1. Periodic net income is reduced by the amount of dividends declared for each class of participating security in order to determine undistributed earnings.

 

2. Undistributed earnings are allocated to each participating security as if all earnings had been distributed in accordance with the distribution schedule per the partnership agreement.

 

3. Total periodic earnings (“TPE”) for each class is the sum of their share of dividends plus undistributed earnings.

If the Company’s general partner’s agreement contains incentive distribution rights (“IDR’s”’) and such IDR’s are detachable from the general partner units (i.e. can be sold on a stand alone basis), companies must consider IDR’s to be a separate class of ownership interest and allocate and disclose TPE to such class by itself.

Prior to 2010, the Company distributed dividends in excess of earnings. Total earnings were in an amount such that there was no allocation of TPE to the IDR’s. In the three and six months ended June 30, 2010, TPE exceeds dividends distributed and undistributed earnings are available for allocation to the IDR’s. Additionally, such IDR’s are detachable from the Company’s general partner units. Accordingly, the Statement of Changes in Partner’s Capital reflects three classes of units with amounts allocated to such units in accordance with this standard.

The table below reflects the allocation of earnings for the three and six months ended June 30, 2010:

For the three months ended June 30, 2010:

 

     Common
Units Holders
    General
Partner
    Incentive
Distribution
Rights
    Total  
     (In thousands)  

Dividends declared—tier 1

   $ 6,261      $ 128      $ —        $ 6,389   

Dividends declared—tier 2

     677        14        —          691   

Dividends declared—tier 3

     575        12        90        677   
                                

Total

     7,513        153        90        7,756   
                                

Total loss

           (1,352
              

Undistributed loss

           (9,108
              

Undistributed loss—tier 1

     (8,838     (180     (90     (9,108
                                

Total periodic loss

   $ (1,325   $ (27   $ —        $ (1,352
                                

 

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For the six months ended June 30, 2010:

 

     Common
Units Holders
    General
Partner
    Incentive
Distribution
Rights
    Total  
     (In thousands)  

Dividends declared—tier 1

   $ 12,439      $ 254      $ —        $ 12,693   

Dividends declared—tier 2

     1,345        27        —          1,372   

Dividends declared—tier 3

     1,143        23        178        1,345   
                                

Total

     14,927        305        178        15,410   
                                

Total earnings

           20,681   
              

Undistributed earnings

           5,271   
              

Undistributed loss—tiers 1and 2

     (8,838     (180     (90     (9,108

Undistributed earnings—tier 3

     434        9        68        511   

Undistributed earnings—tier 4

     1,670        34        522        2,226   

Undistributed earnings—tier 5

     5,822        119        5,704        11,645   
                                

Total periodic earnings

   $ 14,015      $ 286      $ 6,382      $ 20,681   
                                

Recent Accounting Pronouncements

Beginning July 1, 2009, the Financial Accounting Standards Board (“FASB”) began communicating changes to the source of authoritative U.S. GAAP, the FASB Accounting Standards Codification (FASB Codification), through Accounting Standards Update (“Updates”). Updates are published for all authoritative U.S. GAAP promulgated by the FASB, regardless of the form in which such guidance may have been issued prior to release of the FASB Codification (e.g., FASB Statements, EITF Abstracts, FASB Staff Positions, etc.). Updates are also issued for amendments to the SEC content in the FASB Codification as well as for editorial changes.

Updates issued in 2010 that are applicable to the Company include:

In January 2010, the FASB issued Update No. 2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“Update 2010-06”). Update 2010-06 requires each of the following new disclosures:

 

  1. Entities must disclose separately significant transfers into and out of Level 1 and Level 2.

 

  2. Reconciliations of Level 3 assets must provide gross information related to purchases, sales, issuances and settlements as opposed to netting such number.

Update 2010-06 provided each of the following amendments to existing disclosures:

 

  3. Entities must provide fair value measurement for each class of asset and liability. A class is often a subset of a line item asset or liability.

 

  4. Entities should provide disclosures about the valuation techniques used to measure fair value on Level 2 and Level 3 assets and liabilities.

Disclosure requirements 1, 3 and 4 are applicable for all periods beginning after December 15, 2009. Disclosure requirement 2 is applicable for all periods beginning after December 15, 2010. The Company has adopted disclosure requirements 1, 3 and 4 as of January 1, 2010. As this is a disclosure only requirement, there is no impact on the financial position of the Company related to this adoption. See Note 16 to this Quarterly Report on Form 10-Q/A.

 

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Additional accounting pronouncements issued during the reporting period include:

In June 2009, the FASB adopted ASC Topic 810, Subtopic 10, Sections 30 and 65 (“ASC 810-10-30/65”), the purpose of which is to amend certain requirements of ASC Topic 810, Subtopic 10, Section 5, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. Amongst other things, ASC 810-10-30/65 requires a change in the determination of which entity’s qualify as variable interest entities (“VIE’s”), changes in an entity that is involved in VIE’s method of determining whether they are the primary beneficiary of such VIE, and changes to disclosures required by all entities involved with VIE. ASC 810-10-30/65 is effective for each reporting period beginning after November 15, 2009. Early adoption was prohibited. The Company adopted the provisions of ASC 810-10-30/65 effective on January 1, 2010. The Company has reviewed the requirements of ASC 810-10-30/65 and determined that there are no changes to its current determination of those entities with which it is involved as to their status of being VIE’s nor to its determination of the Company’s status with regards to its position as the primary beneficiary of such VIE’s. The Company has modified certain disclosures with regards to those VIE’s with which it is involved. Such modifications are included in Note 6 of this Quarterly Report on Form 10-Q/A.

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

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

In April of 2009, the FASB issued ASC 825-10-65-1, which relates to financial instruments. ASC 825-10-65-1amends ASC 825-10-50-10 to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825-10-65-1 is effective for interim periods ending after June 15, 2009 and the Company adopted it for second quarter of 2009. ASC 825-10-65-1 did not have a significant impact on the Company’s financial statements.

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

Use of Estimates

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

 

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3. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

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

 

     As of  
     June 30,
2010
    December 31,
2009
 
     (in thousands)  

Customer receivables

   $ 134,188      $ 112,995   

Unearned finance income

     (14,810     (14,002

Allowance for contract cancellations

     (16,591     (13,865
                
     102,787        85,128   

Less: current portion—net of allowance

     43,102        37,113   
                

Long-term portion—net of allowance

   $ 59,685      $ 48,015   
                

Activity in the allowance for contract cancellations is as follows:

 

     For the six months
ended June 30,
 
     2010     2009  
     (in thousands)  

Balance—Beginning of period

   $ 13,865      $ 13,763   

Provision for cancellations

     7,455        6,719   

Charge-offs—net

     (4,729     (5,070
                

Balance—End of period

   $ 16,591      $ 15,412   
                

 

4. CEMETERY PROPERTY

Cemetery property consists of the following:

 

     As of
     June 30,
2010
   December 31,
2009
     (in thousands)

Developed land

   $ 35,490    $ 27,940

Undeveloped land

     211,997      164,881

Mausoleum crypts and lawn crypts

     46,633      47,456
             

Total

   $ 294,120    $ 240,277
             

The significant increases during the six months ended June 30, 2010 was primarily related to the acquisitions made by the Company discussed in Note 14 of this Quarterly Report filed on Form 10-Q/A.

 

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5. PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

     As of  
     June 30,
2010
    December 31,
2009
 
     (in thousands)  

Building and improvements

   $ 83,239      $ 45,361   

Furniture and equipment

     32,712        34,151   
                
     115,951        79,512   

Less: accumulated depreciation

     (30,503     (28,262
                

Property and equipment—net

   $ 85,448      $ 51,250   
                

 

6. MERCHANDISE TRUST

At June 30, 2010, the Company’s merchandise trust consisted of the following types of assets:

 

 

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

 

 

Publicly traded mutual funds that invest in underlying debt securities;

 

 

Publicly traded mutual funds that invest in underlying equity securities;

 

 

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

 

 

Fixed maturity debt securities issued by various corporate entities; and

 

 

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

All of these investments are classified as Available for Sale as defined by ASC 320-10-25-1. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by ASC 820-10-35-(39 through 51H). At June 30, 2010, approximately 89.3% of these assets were Level 1 investments while approximately 10.7% were Level 2 assets. There were no Level 3 assets.

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

 

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The cost and market value associated with the assets held in the merchandise trust at June 30, 2010 and December 31, 2009 is as follows:

 

     Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Market
As of June 30, 2010    (in thousands)

Short-term investments

   $ 41,201    $ —      $ —        $ 41,201

Fixed maturities:

          

U.S. State and local government agency

     33      —        —          33

Corporate debt securities

     9,649      46      (283     9,412

Other debt securities

     18,183      —        —          18,183
                            

Total fixed maturities

     27,865      46      (283     27,628
                            

Mutual funds—debt securities

     49,047      1,094      (2,043     48,098

Mutual funds—equity securities

     113,813      —        (23,307     90,506

Equity securities

     61,925      2,143      (5,545     58,523

Other invested assets

     954      —        —          954
                            

Total

   $ 294,805    $ 3,282    $ (31,178   $ 266,909
                            
     Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Market
As of December 31, 2009    (in thousands)

Short-term investments

   $ 47,451    $ —      $ —        $ 47,451

Fixed maturities:

          

U.S. State and local government agency

     33      —        (10     23

Corporate debt securities

     3,204      90      (48     3,246

Other debt securities

     10,337      448      —          10,785
                            

Total fixed maturities

     13,574      538      (58     14,054
                            

Mutual funds—debt securities

     39,545      8      (840     38,713

Mutual funds—equity securities

     93,472      —        (23,034     70,438

Equity securities

     34,818      1,249      (4,304     31,763

Other invested assets

     1,385      26      —          1,411
                            

Total

   $ 230,245    $ 1,821    $ (28,236   $ 203,829
                            

The contractual maturities of debt securities as of June 30, 2010 and December 31, 2009 are as follows:

 

     Less than
1 year
   1 year through
5 years
   5 years through
10 years
   More than
10 years
As of June 30, 2010    (in thousands)

U.S. State and local government agency

     33      —        —        —  

Corporate debt securities

     —        3,675      5,621      116

Other debt securities

     16,822      1,361      —        —  
                           

Total fixed maturities

   $ 16,855    $ 5,036    $ 5,621    $ 116
                           
     Less than
1 year
   1 year through
5 years
   5 years through
10 years
   More than
10 years
As of December 31, 2009    (in thousands)

U.S. State and local government agency

     23      —        —        —  

Corporate debt securities

     —        1,408      1,683      155

Other debt securities

     10,785      —        —        —  
                           

Total fixed maturities

   $ 10,808    $ 1,408    $ 1,683    $ 155
                           

 

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An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at June 30, 2010 and December 31, 2009 is presented below:

At June 30, 2010

 

     Less than 12 months    12 Months or more    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in thousands)

Fixed maturities:

                 

U.S. State and local government agency

     —        —        —        —        —        —  

Corporate debt securities

     7,703      216      405      67      8,108      283

Other debt securities

     —        —        —        —        —        —  
                                         

Total fixed maturities

     7,703      216      405      67      8,108      283
                                         

Mutual funds—debt securities

     14,588      1,661      2,283      382      16,871      2,043

Mutual funds—equity securities

     —        —        90,506      23,307      90,506      23,307
                                         

Equity securities

     8,850      1,467      29,646      4,078      38,496      5,545
                                         

Total

   $ 31,141    $ 3,344    $ 122,840    $ 27,834    $ 153,981    $ 31,178
                                         

At December 31, 2009

 

     Less than 12 months    12 Months or more    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in thousands)

Fixed maturities:

                 

U.S. Government and federal agency

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

U.S. State and local government agency

     23      10      —        —        23      10

Corporate debt securities

     1,554      18      263      30      1,817      48

Other debt securities

     —        —        —        —        —        —  
                                         

Total fixed maturities

     1,577      28      263      30      1,840      58
                                         

Mutual funds—debt securities

     9,456      118      15,086      722      24,542      840

Mutual funds—equity securities

     —        —        70,439      23,034      70,439      23,034
                                         

Equity securities

     2,307      191      25,686      4,113      27,993      4,304
                                         

Total

   $ 13,340    $ 337    $ 111,474    $ 27,899    $ 124,814    $ 28,236
                                         

A reconciliation of the Company’s merchandise trust activities for the six months ended June 30, 2010 is presented below:

Six months ended June 30, 2010

 

Fair

Value @
12/31/2009

   Net
Contributions
(Distributions)
    Interest/
Dividends
   Capital
Gain
Distributions
   Realized
Gain/

Loss
   Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value @
6/30/2010
(in thousands)
$ 203,829    $ 61,466 (a)    $ 2,543    $ 239    $ 1,631    $ (857   $ (461   $ (1,481   $ 266,909
                                                             
  (a) Includes $46.2 million and $18.4 million of merchandise trust assets related to the first quarter 2010 and second quarter 2010 acquisitions, respectively.

The Company made net deposits into the trusts of approximately $61.4 million during the six months ended June 30, 2010. Purchases and sales of securities available for sale included in trust investments were approximately $287.8 million and $226.3 million, respectively during the six months ended June 30, 2010.

Other-than-temporary Impairments

In the second quarter of 2009, the Company adopted Section 10-65-1 of ASC 320.

ASC 320-10-65-1 amended the other-than-temporary impairment guidance for debt securities. ASC 320-10-65-1 also changed the disclosure requirements for other-than-temporary impairments on both debt and equity securities.

 

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The fundamental accounting changes resulting from the issuance of ASC 320-10-65-1 are as follows:

Prior to the issuance of ASC 320-10-65-1, entities were required to assert that they had the intent and ability to hold debt securities for a period of time sufficient to allow for any anticipated recovery in fair value in order to conclude that an impairment was not other than temporary. ASC 320-10-65-1 amended this requirement so that an entity now must:

 

 

Assess whether it has the intent to sell the debt security or;

 

 

Assess whether it is more likely than not it will be required to sell the debt security before its anticipated recovery

If either of these conditions exists, the impairment is considered to be other than temporary. An other-than-temporary impairment in an amount equal to the difference between the fair value and amortized cost shall be recognized in earnings.

In situations wherein an entity:

 

 

Does not have an intent to sell an impaired debt security and;

 

 

Determines that it is more likely than not that it will not be required to sell an impaired debt security before its anticipated recovery;

ASC 320-10-65-1 requires that an entity determine whether or not there is a “credit loss” on the security.

A credit loss is the excess of the amortized cost of the security over the present value of future expected cash flows. If there is a credit loss, an entity must recognize an other-than-temporary impairment in earnings in an amount equal to the credit loss. This amount becomes the new cost basis of the asset and will not be adjusted for subsequent changes in the fair value of the asset.

There is likely to be a difference between this new cost basis and the current fair value of the security. If such fair value is less than the adjusted cost basis, an entity shall determine whether this loss is other-than-temporary or a normal unrealized loss. Normal unrealized losses shall be accounted for as they currently are. Pursuant to FASB guidance, any additional other-than-temporary impairment shall be recognized through other comprehensive income. Instead, the Company defers this amount and includes it in deferred cemetery revenue, net.

After the recognition of a credit loss, an entity shall continue to evaluate the difference between the new cost basis and expected future cash flows. For debt securities for which other-than-temporary impairments were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted in accordance with existing guidance as interest income. If upon subsequent evaluation, there is a significant increase in the cash flows expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, such changes shall be accounted for as a prospective adjustment to the accretable yield

In addition to the aforementioned accounting changes, ASC 320-10-65-1 requires the following changes to disclosures relating to an entity’s entire investment portfolio:

 

 

Certain disclosures that were only required on an annual basis are now required for interim periods as well.

 

 

For periods in which an other-than-temporary impairment of a debt security is recognized and only the amount related to a credit loss was recognized in earnings, an entity shall disclose, by major security type, the methodology and significant inputs used to measure the amount related to the credit loss.

 

 

For each interim and annual reporting period presented, an entity shall disclose a tabular rollforward of the amount related to credit losses recognized in earnings. This will include at a minimum:

 

  1. The beginning balance of the amount related to credit losses on debt securities held by the entity at the beginning of the period for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

 

  2. Additions for the amount related to the credit loss for which an other-than-temporary impairment was not previously recognized.

 

  3. Reductions for securities sold during the period (realized).

 

  4. Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.

 

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  5. Additional increases to the amount related to the credit loss for which an other-than temporary impairment was previously recognized when the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis.

 

  6. Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security.

 

  7. The ending balance of the amount related to credit losses on debt securities held by the entity at the end of the period for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

The Company has applied the applicable guidance related to other-than-temporary impairments throughout the reporting period. In addition to the relative guidance stated above, the Company performs each of the following procedures:

Fixed Maturity Debt Securities

 

 

The Company assesses the overall credit quality of each issue by evaluating its credit rating as reported by any credit rating agency. The Company also determines if there has been any downgrade in its creditworthiness as reported by such credit rating agency.

 

 

The Company determines if there has been any suspension of interest payments or any announcements of any intention to do so.

 

 

The Company evaluates the length of time until the principal becomes due and whether the ability to satisfy this payment has been impaired.

Equity Securities

 

 

The Company compares the proportional decline in value to the overall sector decline as measured via certain specific indices.

 

 

The Company determines whether there has been further periodic decline from prior periods or whether there has been a recovery in value.

For all securities

 

 

The Company evaluates the length of time that a security has been in a loss position.

 

 

The Company determines if there is any publicly available information that would cause us to believe that impairment is other than temporary in nature.

During the three and six months ended June 30, 2010, the Company determined that there were no other than temporary impairments to the fixed maturity investment portfolio in the Merchandise Trust due to credit losses.

During the three and six months ended June 30, 2010, the Company determined that there was a single security, with an aggregate cost basis of approximately $0.3 million, an aggregate fair value of less than $0.1 million and a resulting impairment of value of approximately $0.2 million, wherein such impairment is considered to be other-than-temporary. Accordingly, the Company has adjusted the cost basis of this asset to its current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.

 

7. PERPETUAL CARE TRUSTS

At June 30, 2010, the Company’s perpetual care trust consisted of the following types of assets:

 

 

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

 

 

Publicly traded mutual funds that invest in underlying debt securities;

 

 

Publicly traded mutual funds that invest in underlying equity securities;

 

 

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

 

 

Fixed maturity debt securities issued by various corporate entities; and

 

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

All of these investments are classified as Available for Sale as defined by ASC 320-10-25-1. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by ASC 820-10-35-(39 through 51H). At June 30, 2010, approximately 86.4% of these assets were Level 1 investments while approximately 13.6% were Level 2 assets. There were no Level 3 assets.

The cost and market value associated with the assets held in perpetual care trusts at June 30, 2010 and December 31, 2009 were as follows:

 

     Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Market
As of June 30, 2010    (in thousands)

Short-term investments

   $ 12,866    $ —      $ —        $ 12,866

Fixed maturities:

          

U.S. Government and federal agency

     —        —        —          —  

U.S. State and local government agency

     87      126      —          213

Corporate debt securities

     20,947      474      (680     20,741

Other debt securities

     5,816      —        —          5,816
                            

Total fixed maturities

     26,850      600      (680     26,770
                            

Mutual funds—debt securities

     48,165      225      (511     47,879

Mutual funds—equity securities

     99,807      2,369      (26,052     76,124
                            

Equity Securities

     47,399      5,016      (1,057     51,358

Other invested assets

     431      —        —          431
                            

Total

   $ 235,518    $ 8,210    $ (28,300   $ 215,429
                            
     Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Market
As of December 31, 2009    (in thousands)

Short-term investments

   $ 46,615    $ —      $ —        $ 46,615

Fixed maturities:

          

U.S. Government and federal agency

     4,747      66      (48     4,765

U.S. State and local government agency

     1,497      14      (74     1,437

Corporate debt securities

     13,722      369      (199     13,892

Other debt securities

     4,821      8      —          4,829
                            

Total fixed maturities

     24,787      457      (321     24,923
                            

Mutual funds—debt securities

     36,774      24      (465     36,333

Mutual funds—equity securities

     74,831      1      (22,275     52,557
                            

Equity Securities

     33,514      3,385      (1,486     35,413

Other invested assets

     434      2      —          436
                            

Total

   $ 216,954    $ 3,868    $ (24,547   $ 196,275
                            

 

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The market value of contractual maturities of debt securities as of June 30, 2010 and December 31, 2009 are as follows:

 

     Less than
1 year
   1 year through
5 years
   5 years through
10 years
   More than
10 years
As of June 30, 2010    (in thousands)

U.S. Government and federal agency

   $ —      $ —      $ —      $ —  

U.S. State and local government agency

     213      —        —        —  

Corporate debt securities

     —        8,269      12,002      472

Other debt securities

     5,445      371      —        —  
                           

Total fixed maturities

   $ 5,658    $ 8,640    $ 12,002    $ 472
                           
     Less than
1 year
   1 year through
5 years
   5 years through
10 years
   More than
10 years
As of December 31, 2009    (in thousands)

U.S. Government and federal agency

   $ 806    $ 3,230    $ 438    $ 291

U.S. State and local government agency

     560      296      520      61

Corporate debt securities

     —        6,166      7,104      622

Other debt securities

     4,829      —        —        —  
                           

Total fixed maturities

   $ 6,195    $ 9,692    $ 8,062    $ 974
                           

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at June 30, 2010 and December 31, 2009 held in perpetual care trusts is presented below:

At June 30, 2010

 

     Less than 12 months    12 Months or more    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in thousands)

Fixed maturities:

                 

U.S. Government and federal agency

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

U.S. State and local government agency

     —        —        —        —        —        —  

Corporate debt securities

     14,610      453      938      227      15,548      680

Other debt securities

     —        —        —        —        —        —  
                                         

Total fixed maturities

     14,610      453      938      227      15,548      680
                                         

Mutual funds—debt securities

     2,983      314      17,179      197      20,162      511

Mutual funds—equity securities

     7,102      2,337      48,260      23,715      55,362      26,052
                                         

Equity securities

     3,878      197      14,481      860      18,359      1,057
                                         

Total

   $ 28,573    $ 3,301    $ 80,858    $ 24,999    $ 109,431    $ 28,300
                                         

 

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At December 31, 2009

 

     Less than 12 months    12 Months or more    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in thousands)

Fixed maturities:

                 

U.S. Government and federal agency

   $ 1,708    $ 42    $ 188    $ 6    $ 1,896    $ 48

U.S. State and local government agency

     655      74      —        —        655      74

Corporate debt securities

     6,796      76      1,246      123      8,042      199

Other debt securities

     —        —        —        —        —        —  
                                         

Total fixed maturities

     9,159      192      1,434      129      10,593      321
                                         

Mutual funds—debt securities

     1,969      347      900      118      2,869      465

Mutual funds—equity securities

     —        —        47,299      22,275      47,299      22,275
                                         

Equity securities

     1,317      107      18,397      1,379      19,714      1,486
                                         

Total

   $ 12,445    $ 646    $ 68,030    $ 23,901    $ 80,475    $ 24,547
                                         

A reconciliation of the Company’s perpetual care trust activities for the six months ended June 30, 2010 is presented below:

Six months ended June 30, 2010

 

Fair
Value @
12/31/2009

   Net
Contributions
(Distributions)
   Interest/
Dividends
   Capital
Gain
Distributions
   Realized
Gain/
Loss
    Taxes     Fees     Unrealized
Change in
Fair Value
   Fair
Value @
6/30/2010
(in thousands)
$196,275    $ 15,574    $ 4,168    $ —      $ (617   $ (157   $ (403   $ 589    $ 215,429
                                                            

The Company made net deposits into the trusts of approximately $15.6 million during the six months ended June 30, 2010. Purchases and sales of securities available for sale included in trust investments were approximately $212.7 million and $197.1 million, respectively during the six months ended June 30, 2010.

The Company recorded income from perpetual care trusts of $3.8 million and $6.8 million for the three and six months ended June 30, 2010 as compared to $3.3 million and $6.6 million during the same periods last year. This income is classified as cemetery revenues in the condensed consolidated statements of operations.

Other-than-temporary Impairments

Refer to Note 6 for a detailed discussion of the Company’s methodology of determining, accounting for and disclosing other than temporary impairments. The Company determined that there were no other than temporary impairments to the assets in the perpetual care trust during the three and six months ended June 30, 2010.

 

8. DERIVATIVE INSTRUMENTS

On November 24, 2009, the Company entered into an interest rate swap (the “First Interest Rate Swap”) wherein the Company agreed to pay the counterparty interest in the amount of three month LIBOR plus 888 basis points in consideration for the counterparties agreement to pay the Company a fixed rate of interest of 10.25% on a principal amount of $108 million. Settlements are to be made net on a quarterly basis in February, May, August and November of each year. The First Interest Rate Swap expires on December 1, 2012.

On December 4, 2009, the Company entered into an interest rate swap (the “Second Interest Rate Swap”, together with the First Interest Rate Swap, the “Interest Rate Swaps”) wherein the Company agreed to pay the counterparty interest in the amount of three month LIBOR plus 869 basis points in consideration for the counterparties agreement to pay the Company a fixed rate of interest of 10.25% on a principal amount of $27 million. Settlements are to be made net on a quarterly basis in February, May, August and November of each year. The Second Interest Rate Swap expires on December 1, 2012.

 

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The Interest Rate Swaps do not qualify for hedge accounting. Accordingly, the fair value of the Interest Rate Swaps is reported on the Company’s balance sheet and periodic changes in the fair value of the Interest Rate Swaps are recorded in earnings. At June 30, 2010, the Company recorded an asset (the “Fair value of interest rate swaps”) of approximately $0.5 million, which represents the fair value of the Interest Rate Swaps at June 30, 2010. The Company recorded a gain on the fair value of interest rate swaps of approximately $1.6 million and $3.2 million during the three and six months ended June 30, 2010.

The Company entered into the Interest Rate Swaps in an effort to manage their total interest expense. The Interest Rate Swaps reduced interest expense by approximately $0.4 million and $0.8 million during the three and six months ended June 30, 2010.

The Interest Rate Swaps do not contain any credit risk contingent features. No collateral is required to be posted by either counterparty.

 

9. LONG-TERM DEBT

The Company had the following outstanding debt at:

 

     June 30,
2010
   December 31,
2009
     (in thousands)

Insurance premium financing

   $ 217    $ 190

Vehicle Financing

     939      547

Acquisition Credit Facility, due September 2012

     37,500      —  

Revolving Credit Facility, due September 2012

     15,500      —  

Note payable—Greenlawn Acquisition

     1,400      1,400

Note payable—Nelms acquisition (net of discount)

     926      —  

10.25% senior notes, due 2017

     150,000      150,000

Series B senior secured notes, due 2012

     17,500      17,500

Series C senior secured notes, due 2012

     17,500      17,500
             

Total

     241,482      187,137

Less current portion

     523      378

Less unamortized bond discount

     3,773      3,938
             

Long-term portion

   $ 237,186    $ 182,821
             

10.25% Senior Notes due 2017

Purchase Agreement

On November 18, 2009, the Company entered into a Purchase Agreement (the “Purchase Agreement”) by and among StoneMor Operating LLC (the “Operating Company”), Cornerstone Family Services of West Virginia Subsidiary, Inc. (“CFS West Virginia”), Osiris Holding of Maryland Subsidiary, Inc. (“Osiris”), the Partnership, the subsidiary guarantors named in the Purchase Agreement (together with the Company, the “Note Guarantors”) and Banc of America Securities LLC (“BAS”), acting on behalf of itself and as the representative for the other initial purchasers named in the Purchase Agreement (collectively, the “Initial Purchasers”). Pursuant to the Purchase Agreement, the Operating Company, CFS West Virginia and Osiris (collectively, the “Issuers”), each the Company’s wholly-owned subsidiary, as joint and several obligors, agreed to sell to the Initial Purchasers $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the “Senior Notes”), with an original issue discount of approximately $4.0 million, in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”), for resale by the Initial Purchasers (i) to qualified institutional buyers pursuant to Rule 144A under the Securities Act or (ii) outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act (the “Notes Offering”). The Notes Offering closed on November 24, 2009.

The Purchase Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which the Company, the Issuers, and other Note Guarantors, on one hand, and the Initial Purchasers, on the other, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Issuers, the Company and the other Note Guarantors also agreed to enter into a Registration Rights Agreement (described below) for the benefit of holders of the Senior Notes.

 

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The net proceeds from the Notes Offering and Units Offering were used, in part, to:

 

   

repay approximately $30.7 million of borrowings under the Revolving Facility (as defined below);

 

   

repay approximately $104.7 million of borrowings under the Acquisition Credit Facility (as defined below); and

 

   

redeem $17.5 million of outstanding 11.00% Series B Senior Secured Notes due 2012 (the “Series B Notes”).

Indenture

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

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

The Senior Notes are senior unsecured obligations of the Issuers and:

 

   

rank equally in right of payment with all existing and future senior unsecured debt of the Issuers;

 

   

rank senior in right of payment to all existing and future senior subordinated and subordinated debt of the Issuers;

 

   

are effectively subordinated in right of payment to existing and future secured debt of the Issuers, to the extent of the value of the assets securing such debt; and

 

   

are structurally subordinated to all of the existing and future liabilities of each subsidiary of the Issuers that does not guarantee the Senior Notes.

The Issuers’ obligations under the Senior Notes and the Indenture are jointly and severally guaranteed (the “Note Guarantees”) by the Company and each subsidiary, other than the Issuers, that is a guarantor of any indebtedness under the Credit Agreement (as defined below), or is a borrower under the Credit Agreement and each other subsidiary that the Issuers shall otherwise cause to become a Note Guarantor pursuant to the terms of the Indenture (each, a “Restricted Subsidiary”).

At any time on or after December 1, 2013, the Issuers, at their option, 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 December 1 of the years indicated:

 

Year

   Optional
Redemption Price
 

2013

   105.125 %

2014

   102.563 %

2015 and thereafter

   100 %

At any time prior to December 1, 2013, the Issuers may, on one or more occasions, redeem all or any portion of the Senior Notes, upon not less than 30 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus the Applicable Premium (as defined in the Indenture) as of the date of redemption, including accrued and unpaid interest to the redemption date.

In addition, at any time prior to December 1, 2012, the Issuers, at their option, may redeem up to 35% of the aggregate principal amount of the Senior Notes issued under the Indenture with the net cash proceeds of certain of the equity offerings of the Company described in the Indenture at a redemption price equal to 110.250% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date provided, however, that (i) at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remain outstanding immediately after the occurrence of such redemption and (ii) the redemption occurs within 90 days of the closing date of such offering.

Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of Senior Notes will have the right to require the Issuers 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 to the date of purchase.

 

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The Indenture requires the Company, the Issuers and/or the Note Guarantors, as applicable, to comply with various covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its subsidiaries’ ability to (i) incur additional indebtedness; (ii) make certain dividends, distributions, redemptions or investments; (iii) enter into certain transactions with affiliates; (iv) create, incur, assume or permit to exist certain liens against their assets; (v) make certain sales of their assets; and (vi) engage in certain mergers, consolidations or sales of all or substantially all of their assets. The Indenture also contains various affirmative covenants regarding, among other things, delivery of certain reports filed with the SEC and materials required pursuant to Rule 144A under the Securities Act to holders of the Senior Notes and joinder of future subsidiaries as Note Guarantors under the Indenture. The Company was in compliance with all covenants at June 30, 2010.

Events of default under the Indenture that could, subject to certain conditions, cause all amounts owing under the Senior Notes to become immediately due and payable include, but are not limited to, the following:

 

  1. failure by the Issuers to pay interest on any of the Senior Notes when it becomes due and the continuance of any such failure for 30 days;

 

  2. failure by the Issuers to pay the principal on any of the Senior Notes when it becomes due and payable, whether at stated maturity, upon redemption, upon purchase, upon acceleration or otherwise;

 

  3. the Issuers’ failure to comply with the agreements and covenants relating to limitations on entering into certain mergers, consolidations or sales of all or substantially all of their assets or in respect of their obligations to purchase the Senior Notes in connection with a Change of Control;

 

  4. failure by the Company or the Issuers to comply with any other agreement or covenant in the Indenture and the continuance of this failure for 60 days after notice of the failure has been given the Company by the Trustee or holders of at least 25% of the aggregate principal amount of the Senior Notes then outstanding;

 

  5. failure by the Company to comply with its covenant to deliver certain reports and the continuance of such failure to comply for a period of 120 days after written notice thereof has been given to the Company by the Trustee or by the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding;

 

  6. certain defaults under mortgages, indentures or other instruments or agreements under which there may be issued or by which there may be secured or evidenced indebtedness of the Company or any Restricted Subsidiary, whether such indebtedness currently exists or is incurred after the date of the Indenture;

 

  7. certain judgments or orders that exceed $7.5 million for the payment of money entered by a court of competent jurisdiction against the Company or any Restricted Subsidiary if such judgments have not been satisfied, stayed, annulled or rescinded within 60 days of being entered;

 

  8. certain events of bankruptcy of the Company, StoneMor GP LLC, the general partner of the Company (the “General Partner”), or any Significant Subsidiary; or

 

  9. other than in accordance with the terms of the Note Guarantee and the Indenture, any Note Guarantee ceasing to be in full force and effect, being declared null and void and unenforceable, found to be invalid or any Guarantor denying its liability under its Note Guarantee.

Registration Rights Agreement

In connection with the sale of the Senior Notes, on November 24, 2009, the Issuers, the Company, the other Note Guarantors and BAS, as representative of the Initial Purchasers, entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Issuers, the Company and the other Note Guarantors agreed, for the benefit of the holders of the Senior Notes, to use their commercially reasonable efforts to file a registration statement with the SEC with respect to a registered offer to exchange the Senior Notes for new “exchange” notes having terms substantially identical in all material respects to the Senior Notes, with certain exceptions (the “Exchange Offer”). The Issuers, the Company and the other Note Guarantors agreed to use their commercially reasonable efforts to consummate such Exchange Offer on or before the 366th day after the issuance of the Senior Notes.

In addition, upon the occurrence of certain events described in the Registration Rights Agreement which result in the inability to consummate the Exchange Offer, the Issuers, the Company and the other Note Guarantors agreed to file a shelf registration statement with the SEC covering resales of the Senior Notes and to use their commercially reasonable efforts to cause such shelf registration statement to be declared effective.

 

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The Issuers are required to pay additional interest to the holders of the Senior Notes under certain circumstances if they fail to comply with their obligations under the Registration Rights Agreement.

Note Purchase Agreement

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

Pursuant to the NPA, the Note Issuers and the Note Purchasers agreed to (a) exchange certain senior secured notes previously issued by the Note Issuers to the Note Purchasers on September 20, 2004, for new Series A Notes due September 20, 2009, in the amount of $80 million; and (b) issue Series B Notes, due August 15, 2012 in the aggregate amount of $35 million, subject to the option, on an uncommitted basis, to issue/purchase additional secured Shelf Notes in the aggregate amount of up to $35 million, and to issue/purchase additional secured Shelf Notes to refinance the Series A Notes.

On November 2, 2007, the Company entered into the First Amendment to Amended and Restated Note Purchase Agreement (the “First Amendment to NPA”) by and among the Company, the General Partner, certain of the Company’s subsidiaries and the noteholders, to among other things, amend the negative covenants of the NPA.

On December 21, 2007, the Company entered into the Joinder to Amended and Restated Note Purchase Agreement and Finance Documents pursuant to which the Company added certain issuers to the NPA. Pursuant to the NPA, as amended, certain of the Company’s subsidiaries issued Senior Secured Series C Notes (the “Series C Notes” and together with Series A Notes, Series B Notes and the Shelf Notes are referred to as the “Notes”) in the aggregate principal amount of $17.5 million, due December 21, 2012.

The Series A Notes bore an interest rate of 7.66% per annum, the Series B Notes bore an interest rate of 9.34% per annum and the Series C Notes bore an interest rate of 9.09% per annum.

The Notes are guaranteed by both the Company and the General Partner. The Notes rank pari passu with all other senior secured debt, including the Revolving Credit Facility and the Acquisition Credit Facility. Obligations under the Notes are secured by a first priority lien and security interest covering substantially all of the assets of the Note Issuers, whether then owned or thereafter acquired, other than specified receivable rights and a second priority lien and security interest covering those specified receivable rights of the Note Issuers, whether then owned or thereafter acquired. These assets secure the Notes and the Acquisition Credit Facility described below. The priority of the liens and security interests securing the Notes is pari passu with the liens and security interests securing the Acquisition Credit Facility described below.

On April 30, 2009, the Company entered into the Second Amendment to Amended and Restated Credit Agreement by and among the Company and certain of the Company’s subsidiaries, the lenders, and Bank of America, N.A., as Administrative Agent (the “Second Amendment to Credit Agreement”), pursuant to which the Company borrowed $63,000,000 under the new Acquisition Credit Facility commitments, which, together with the $17,000,000 of the existing availability under the Acquisition Credit Facility, were used to repay the Series A Notes. In addition, the Company borrowed $5,400,000 under the Revolving Credit Facility, which was used to pay the accrued interest on the Series A Notes, fees to Bank of America, N.A., amendment fees to noteholders under the Second Amendment to NPA described below as well as various other fees and costs incurred in connection with these transactions. In connection with the Second Amendment to Credit Agreement, on April 30, 2009, the Company also entered into the Second Amendment to Amended and Restated Note Purchase Agreement by and among the Company, the General Partner and certain of the Company’s subsidiaries and the noteholders (the “Second Amendment to NPA”).

The Second Amendment to NPA amended the NPA to, among other matters, amend and restate the Series B Notes and the Series C Notes. The Series B Notes were amended to increase the interest rate to 11.00% (the “Amended Series B Notes”). The Series C Notes were amended not only to increase the interest rate to 11.00%, but also to change the maturity date from December 21, 2012 to August 15, 2012 (the “Amended Series C Notes,” and together with the Amended Series B Notes, the “Amended NPA Notes”).

 

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On July 1, 2009, the Company entered into the Third Amendment to Amended and Restated Note Purchase Agreement by and among the Company, the General Partner, certain of the Company’s subsidiaries and the noteholders, to among other things, amend certain negative covenants of the NPA.

In connection with the Fourth Amendment to Credit Agreement, as described below, on November 24, 2009, the Company entered into the Fourth Amendment to Amended and Restated Note Purchase Agreement by and among the Company, the General Partner, the Operating Company, certain of the Company’s subsidiaries and the noteholders (the “Fourth Amendment to NPA”). The Fourth Amendment to NPA amended the NPA to, among other matters, amend certain restrictive covenants and other terms set forth in the NPA to permit the Company to incur the indebtedness evidenced by the Amended NPA Notes, enter into the restrictive covenants set forth in the Indenture, use the net proceeds of the Notes Offering as discussed above and amend the Consolidated Leverage Ratio in accordance with the Fourth Amendment to Credit Agreement.

Under the Fourth Amendment to NPA, the Company is permitted to incur indebtedness under the Credit Agreement not greater than $80.0 million (the “Aggregate Credit Facility Cap”), consisting of the Acquisition Credit Facility, as defined below, not to exceed $45.0 million and the Revolving Credit Facility, as defined below, not to exceed $35.0 million. The Aggregate Credit Facility Cap may be increased up to $100.0 million, with the Acquisition Credit Facility cap to be increased up to $55.0 million and the Revolving Credit Facility cap to be increased up to $45.0 million with the approval of the holders of at least a majority principal amount of the Shelf Notes, which shall not be unreasonably withheld.

The Note Issuers under the NPA paid fees to the holders of the Amended NPA Notes in connection with the Fourth Amendment to NPA.

The Amended NPA Notes bore an interest rate of 11.00% per annum, payable quarterly. Under the Fourth Amendment to NPA, the interest rate on the Amended NPA Notes was to be increased by 1.5% per annum during any period in which (i) any holder of the Amended NPA Notes is required to maintain reserves in excess of 3.4% of the principal amount of such Amended NPA Notes, as a result of a decision of an insurance regulatory authority having responsibility for valuation of insurance company assets (an “IR Authority”) or (ii) the Senior Notes issued pursuant to the Notes Offering are designated any rating below BB- (or its equivalent) by an IR Authority, provided that any Amended NPA Notes are not designated a separate rating of BB- or higher (or its equivalent) by such authority (each, a “Reserve Event”).

On January 15, 2010, the Company entered into the Fifth Amendment to the NPA, to provide for further changes to the Consolidated Leverage Ratio similar to the changes under the Fifth Amendment to Credit Agreement, as defined below, and to clarify that the interest rate applicable to the Amended NPA Notes increased from 11% per annum to 12.5% per annum effective November 24, 2009, which increase will continue until the termination of the Reserve Event period in accordance with the NPA.

On May 4, 2010, the Company entered into the Sixth Amendment to Amended and Restated Note Purchase Agreement (the “Sixth Amendment to Credit Agreement”)., to, among other matters, provide for (i) changes to the Consolidated Leverage Ratio similar to the changes under the Sixth Amendment to Credit Agreement as described below, and (ii) the payment by the Partnership to each holder of Amended Series B Notes and Amended Series C Notes of additional interest at a rate of 0.25% per annum (the “Additional Interest”) from May 4, 2010 until such time as each holder of Notes shall have received a Compliance Certificate for the most recently completed four fiscal quarters of the Partnership ending on or after December 31, 2010 evidencing that the Consolidated Leverage Ratio was less than 3.75 to 1.00 for such period. The Amended Series B Notes and Amended Series C Notes were amended and restated to provide for the payment of the Additional Interest as described in the Sixth Amendment to NPA.

The Sixth Amendment to NPA also included a consent by the Noteholders to an increase in the Aggregate Credit Facility Cap from $80 million to $100 million, an increase in the Acquisition Facility Cap from $45 million to $55 million and an increase in the Revolving Facility Cap from $35 million to $45 million.

The NPA (as amended) contains restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require the Company to maintain certain financial covenants, including specified financial ratios. A material decrease in sales could cause the Company to breach certain of its financial covenants, such as the leverage ratio and the interest coverage ratio, under the Company’s NPA, as amended. Any such breach could allow the lenders to accelerate (or create cross-default under) the Company’s debt which would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company was in compliance with all covenants at June 30, 2010.

 

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Acquisition Credit Facility and Revolving Credit Facility

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

The Credit Agreement initially provided that: (1) the Acquisition Credit Facility would have a maximum principal amount of $40,000,000 (with an option to increase such facility by an additional $15,000,000 on an uncommitted basis) and the term of 5 years, and (2) the Revolving Credit Facility would have a maximum principal amount of $25,000,000 (with an option to increase such facility by up to $10,000,000 on an uncommitted basis) and a term of 5 years. Amounts borrowed under the Acquisition Credit Facility and repaid or prepaid may not be reborrowed and amounts borrowed under the Revolving Credit Facility and repaid or prepaid during the term may be reborrowed. In addition, Bank of America agreed to provide to the borrowers swing line loans (“Swing Line Loans”) with a maximum limit of $5,000,000, which is a part of the Revolving Credit Facility. Loans outstanding under the Acquisition Credit Facility and the Revolving Credit Facility bear interest at rates set forth in the Credit Agreement, which have since been amended as described below.

On November 2, 2007, the Company, the General Partner and the Borrowers entered into the First Amendment to Amended and Restated Credit Agreement with certain lenders thereto and Bank of America, to among other things, amend certain negative covenants of the Credit Agreement.

On April 30, 2009, the Company, the General Partner and the Borrowers entered into the Second Amendment to Credit Agreement with the lenders and Bank of America. The Second Amendment to Credit Agreement amended the Credit Agreement to, among other matters, increase (i) the Revolving Credit Facility to a maximum aggregate principal amount of $35,000,000, with the ability to request further increases in a maximum aggregate principal amount of $10,000,000, and (ii) the Acquisition Credit Facility to a maximum aggregate principal amount of $102,850,000, with the ability to request further increases in a maximum aggregate principal amount of $57,000,000, subject to a minimum increase amount of $5,000,000. The maximum aggregate principal amount of the Acquisition Credit Facility was increased to $107,850,000, with the ability to request further increases in a maximum aggregate principal amount of $52,000,000, after giving effect to a $5,000,000 increase in the Acquisition Credit Facility implemented through the Lender Joinder to Amended and Restated Credit Agreement, dated June 24, 2009, among the Company, the General Partner, the Borrowers and other parties thereto.

On July 6, 2009, the Company, the General Partner, the Borrowers and Bank of America entered into the Third Amendment to Amended and Restated Credit Agreement to among other things, amend certain covenants of the Credit Agreement.

Concurrently with the closing of the Notes Offering and a common unit offering, on November 24, 2009, the Company entered into the Fourth Amendment to Amended and Restated Credit Agreement (the “Fourth Amendment to Credit Agreement”) by and among the Company, the General Partner, the Borrowers, the lenders, and Bank of America, as Administrative Agent for the benefit of the lenders. The Fourth Amendment to Credit Agreement amended the Credit Agreement to, among other matters, (i) amend certain restrictive covenants and other terms set forth in the Credit Agreement to permit the Company to incur the indebtedness evidenced by the Senior Notes, enter into the Indenture and use the net proceeds of the Notes Offering and Units Offering as discussed above; (ii) decrease the Acquisition Credit Facility to a maximum aggregate principal amount of $45.0 million, with the ability to request further increases in a maximum aggregate principal amount of $10.0 million; and (iii) amend the Consolidated Leverage Ratio (as defined in the Credit Agreement). On January 15, 2010, the Company entered into the Fifth Amendment to the Amended and Restated Credit Agreement which further amended the Consolidated Leverage Ratio. Loans outstanding under the Acquisition Credit Facility and the Revolving Credit Facility bear interest at a per annum rate based upon a base rate (the “Base Rate”) or a Eurodollar rate (the “Eurodollar Rate”) plus a margin ranging from 2.25% to 3.25% over the Base Rate and 3.25% to 4.25% over the Eurodollar Rate, as selected by the Borrowers. The Base Rate is the highest of (a) the Federal Funds Rate plus 0.5% or (b) the Prime Rate, as defined in the Credit Agreement. The Eurodollar Rate equals the greater of: (i) the British Bankers Association LIBOR Rate or (ii) if such rate is not available, the rate determined by Bank of America, N.A., as the Administrative Agent, subject to certain conditions. Margin is determined by the ratio of consolidated funded debt to consolidated EBITDA.

The borrowers under the Credit Agreement paid fees to Bank of America, as Administrative Agent, and BAS, as Arranger. In addition, the Credit Agreement requires the Borrowers to pay an unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments.

The proceeds of the Acquisition Credit Facility may be used by the Borrowers to finance (i) Permitted Acquisitions and (ii) the purchase and construction of mausoleums. The proceeds of the Revolving Credit Facility and Swing Line Loans may be utilized to finance working capital requirements, Capital Expenditures, as defined in the Credit Agreement, and for other general corporate purposes.

 

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Borrowings under the Credit Agreement rank pari passu with all other senior secured debt of the Borrowers including the senior secured notes discussed above. The Borrowers’ obligations under the Credit Agreement are guaranteed by both the Company and the General Partner (collectively, the “Guarantors”).

The Borrowers’ obligations under the Revolving Credit Facility are secured by a first priority lien and security interest in specified receivable rights, whether then owned or thereafter acquired, of the Borrowers and the Guarantors, and by a second priority lien and security interest in substantially all assets other than those receivable rights of the Borrowers and Guarantors, excluding trust accounts and certain proceeds required by law to be placed into such trust accounts and funds held in trust accounts, the General Partner’s interest in the Company and the General Partner’s incentive distribution rights under the Company’s partnership agreement. The specified receivable rights include all accounts and other rights to payment arising under customer contracts or agreements or management agreements, and all inventory, general intangibles and other rights reasonably related to the collection and performance of these accounts and rights to payment.

The Borrowers’ obligations under the Acquisition Credit Facility are secured by a first priority lien and security interest in substantially all assets, whether then owned or thereafter acquired, other than specified receivable rights of the Borrowers and the Guarantors, excluding trust accounts and certain proceeds required by law to be placed into such trust accounts and funds held in trust accounts, the General Partner’s interest in the Company and the General Partner’s incentive distribution rights under the Company’s partnership agreement, and a secondary priority lien and security interest in those specified receivable rights. These assets secure the Acquisition Credit Facility and the senior secured notes described above. The priority of the liens and security interests securing the Acquisition Credit Facility is pari passu with the liens and security interests securing the senior secured notes described above.

The agreements governing the Revolving Credit Facility, the Acquisition Credit Facility contain restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require the Company to maintain certain financial covenants, including specified financial ratios. A material decrease in sales could cause the Company to breach certain of its financial covenants, such as the leverage ratio and the interest coverage ratio, under the Company’s Credit Agreement and NPA, as amended. Any such breach could allow the lenders to accelerate (or create cross-default under) the Company’s debt which would have a material adverse effect on the Company’s business, financial condition or results of operations. As of June 30, 2010, the Company had $53.0 million outstanding under the Credit Agreement and the Company was in compliance with all applicable covenants.

On May 4, 2010, the Company entered into the Sixth Amendment to Amended and Restated Credit Agreement to, among other things, provide that the Partnership and the General Partner shall not permit the Consolidated Leverage Ratio to be greater than:

 

   

4.15 to 1.0, for the most recently completed four fiscal quarters of the Partnership ending prior to July 1, 2010;

 

   

4.00 to 1.0, for the most recently completed four fiscal quarters of the Partnership ending between July 1, 2010 and September 30, 2010;

 

   

3.75 to 1.0, for the most recently completed four fiscal quarters of the Partnership ending between October 1, 2010 and December 31, 2010; or

 

   

3.65 to 1.0, for the most recently completed four fiscal quarters of the Partnership ending after December 31, 2010.

The Consolidated Leverage Ratio was 3.76 to 1.0, for the most recently completed four fiscal quarters of the Partnership ending after June 30, 2010.

Under the Credit Agreement, the interest rate on Base Rate Loans and Eurodollar Rate Loans is calculated based on the Base Rate or Eurodollar Rate, as applicable, plus the Applicable Rate. The Sixth Amendment to Credit Agreement amended the definition of Applicable Rate to provide that, commencing on May 4, 2010 until such time as the Agent shall have received a Compliance Certificate evidencing compliance with all financial covenants for the most recently completed four fiscal quarters of the Partnership ending on or after December 31, 2010, Pricing Level 3 of the Applicable Rate (the currently applicable pricing level) for (i) Eurodollar Rate Loans and Letter of Credit Fees shall be increased by 25 basis points to 4.50%, and (ii) Base Rate Loans shall be increased by 25 basis points to 3.50%.

 

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The Sixth Amendment to Credit Agreement also amended the definition of Consolidated EBITDA to provide that Consolidated EBITDA shall not be adjusted for any changes resulting from the sale by the credit parties of all of their investments held, as of May 4, 2010, in one of more Merchandise Trusts in the Highland Floating Rate Advantage Fund.

Effective May 21, 2010, the Lenders increased each of the Revolving Credit Facility and the Acquisition Credit Facility by $9.125 million. After giving effect to such increases, the maximum aggregate principal amount available under the Revolving Credit Facility is $44.125 million and the maximum aggregate principal amount available under the Acquisition Credit Facility is $54.125 million.

Green Lawn Note

In July of 2009, certain of the Company’s subsidiaries, entered into a $1.4 million note purchase agreement in connection with an operating agreement in which the Company became the exclusive operator of Green Lawn Cemetery (the “Green Lawn Note”). The Green Lawn Note bears interest at a rate of 6.5% per year on unpaid principal and is payable monthly, beginning on August 1, 2009. Principal on the note is due in 96 equal installments beginning on July 1, 2011.

Nelms Note

In June of 2010, certain of the Company’s subsidiaries issued two installment notes in the aggregate, notional amount of approximately $1.3 million in connection with the second quarter acquisition discussed in Note 14 of this Quarterly Report filed on Form 10-Q/A. The notes are payable over four years. As the notes do not currently bear interest, the Company recorded the note net of a discount of approximately $0.2 million. The Company paid approximately $0.2 million in principal on the note during the three months ended June 30, 2010. At June 30, 2010, the liability related to the note was stated on the Company’s balance sheet at approximately $0.9 million.

In June of 2010, certain of the Company’s subsidiaries also issued four notes in the aggregate principal amount of approximately $5.8 million in connection with the acquisition referenced above. These notes were paid at the closing of the acquisition referenced above by: (i) the issuance by the Company of 293,947 unregistered common units representing limited partnership interests of the Company valued at $5,585,000 and (ii) a cash payment of $202,347.

 

10. INCOME TAXES

As of December 31, 2009, the Company’s taxable corporate subsidiaries had a federal net operating loss carryover of approximately $90.7 million, which will begin to expire in 2019 and $140.7 million in state net operating losses which begin to expire this year.

Effective with the closing of the Partnership’s initial public offering on September 20, 2004, the Company was no longer a taxable entity for federal and state income tax purposes; rather, the Partnership’s tax attributes (except those of its corporate subsidiaries) are to be included in the individual tax returns of its partners. Neither the Partnership’s financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as “passive income” for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources.

The tax returns of the Partnership are subject to examination by state and federal tax authorities. If such examinations result in changes to taxable income, the tax liability of the partners could be changed accordingly.

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

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

The provision for income taxes for the three and six months ended June 30, 2010 and 2009 respectively is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2010 and 2009, respectively.

Certain of the Company’s subsidiaries are subject to US federal income tax as well as multiple state jurisdictions. The effective tax rate fluctuates over time based on income tax rates in the various tax jurisdictions in which these subsidiaries operates and based on the level of earnings in those jurisdictions. Several entities of the Company were recently under examination by the Internal Revenue Service for its separate company US income tax returns for the year ended December 31, 2005. These audits were completed in the third quarter of 2009 with no impact to the financial statements. The Company is not

 

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currently under examination by any state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2005 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. On the basis of present information, it is the opinion of the Company’s management that there are no pending assessments that will result in a material adverse effect on the Company’s condensed consolidated financial statements over the next twelve months.

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and any penalties in operating expenses. The Company has not recorded any material interest or penalties during the three and six months ended June 30, 2010 or 2009.

 

11. DEFERRED CEMETERY REVENUES – NET

At June 30, 2010 and December 31, 2009, deferred cemetery revenues, net, consisted of the following:

 

     June 30,
2010
    December 31,
2009
 
     (in thousands)  

Deferred cemetery revenue

   $ 248,842      $ 222,749   

Deferred merchandise trust revenue

     33,029        29,142   

Deferred merchandise trust unrealized losses

     (27,896     (27,278

Deferred pre-acquisition margin

     95,355        66,297   

Deferred cost of goods sold

     (36,028     (31,931
                

Deferred cemetery revenues, net

   $ 313,301      $ 258,978   
                

Deferred selling and obtaining costs

   $ 55,759      $ 49,782   
                

Deferred selling and obtaining costs are carried as an asset on the condensed consolidated balance sheet in accordance with ASC 944-30-55-1.

 

12. COMMITMENTS AND CONTINGENCIES

Legal

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

Leases

At June 30, 2010, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to five years and options to renew at varying terms. Expenses under operating leases were $0.5 million and $1.0 million for both the three and six months ended June 30, 2010 and 2009.

 

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At June 30, 2010, operating leases will result in future payments in the following approximate amounts:

 

     (in thousands)

2011

     1,715

2012

     1,517

2013

     1,380

2014

     864

2015

     653

Thereafter

     2,516
      

Total

   $ 8,645
      

Tax Indemnification

CFSI LLC (formerly Cornerstone Family Services, Inc., the Company’s predecessor) has agreed to indemnify the Company for all federal, state and local income tax liabilities attributable to the operation of the assets contributed by CFSI LLC to the Company prior to the closing of the Company’s public offering in 2004. CFSI LLC has also agreed to indemnify the Company against additional income tax liabilities, if any, that arise from the consummation of the transactions related to the Company’s formation in excess of those believed to result at the time of the closing of the Company’s initial public offering. The Company estimates that $600,000 of state income taxes and no federal income taxes will be due as a result of these formation transactions. CFSI LLC has also agreed to indemnify the Company against the increase in income tax liabilities of the Company’s corporate subsidiaries resulting from any reduction or elimination of the Company’s net operating losses to the extent those net operating losses are used to offset any income tax gain or income resulting from the prior operation of the assets of CFSI LLC contributed to the Company, or from the Company’s formation transactions in excess of such gain or income believed to result at the time of the closing of the initial public offering. Until all of its indemnification obligations under the omnibus agreement have been satisfied in full, CFSI LLC is subject to limitations on its ability to dispose of or encumber its interest in the Company’s general partner or the common units held by it (except upon a redemption of common units by the partnership upon any exercise of the underwriters’ over-allotment option) and will also be prohibited from incurring any indebtedness or other liability. CFSI LLC is also subject to certain limitations on its ability to transfer its interest in the Company’s general partner or the common units held by it if the effect of the proposed transfer would trigger an “ownership change” under the Internal Revenue Code that would limit the Company’s ability to use the Company’s federal net operating loss carryovers.

13. PARTNERS’ CAPITAL

Unit-Based Compensation

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

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three and six months ended June 30, 2010 and 2009 are summarized in the table below:

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009
     (in thousands)    (in thousands)

Unit appreciation rights

   $ 121    $ —      $ 242    $ —  

Restricted phantom units

     56      383      111      757
                           

Total unit-based compensation expense

   $ 177    $ 383    $ 353    $ 757
                           

As of June 30, 2010, there was approximately $1.7 million in non-vested unit appreciation rights outstanding.

During the 2nd quarter of 2010, the Company issued 180,000 units to executives and key employees as part of its long-term incentive plan.

 

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14. ACQUISITIONS AND DIVESTITURES

First Quarter 2010 Acquisition

On March 30, 2010, StoneMor Operating LLC, a Delaware limited liability company (“StoneMor LLC”), StoneMor Michigan LLC, a Michigan limited liability company (“Buyer LLC”) and StoneMor Michigan Subsidiary LLC, a Michigan limited liability company (“Buyer NQ Sub” and individually and collectively with StoneMor LLC and Buyer LLC, “Buyer”), each a wholly-owned subsidiary of StoneMor Partners L.P. (the “Company”), entered into an Asset Purchase and Sale Agreement (the “1st Quarter Purchase Agreement”) with SCI Funeral Services, LLC, an Iowa limited liability company (“Parent”), SCI Michigan Funeral Services, Inc., a Michigan corporation (“SCI Michigan”, and together with Parent, “SCI”), Hillcrest Memorial Company, a Delaware corporation (“Hillcrest”), Christian Memorial Cultural Center, Inc., a Michigan corporation (“Christian”), Sunrise Memorial Gardens Cemetery, Inc., a Michigan corporation (“Sunrise”), and Flint Memorial Park Association, a Michigan corporation (“Flint” and individually and collectively with Sunrise, Hillcrest and Christian, “Seller”).

In connection with the 1st Quarter Purchase Agreement, on March 30, 2010, StoneMor LLC and Plymouth Warehouse Facilities LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“Plymouth” and individually and collectively with StoneMor LLC, “Warehouse Buyer”), entered into an Asset Purchase and Sale Agreement (the “Warehouse Purchase Agreement”) with SCI, Hillcrest, Sunrise, Flint, Buyer NQ Sub and Buyer LLC.

Pursuant to the 1st Quarter Purchase Agreement, Buyer acquired nine cemeteries in Michigan, including certain related assets (the “Acquired Assets”), and assumed certain related liabilities (the “Assumed Liabilities”). In consideration for the transfer of the Acquired Assets and in addition to the assumption of the Assumed Liabilities, Buyer paid Seller approximately $14 million (the “Closing Purchase Price”) in cash. The Closing Purchase Price can be increased or decreased post-closing for accounts receivable, merchandise trust amounts and endowment care trust amounts above or below agreed levels, as provided in the Purchase Agreement.

Pursuant to the Warehouse Purchase Agreement, Warehouse Buyer acquired one warehouse in Michigan from SCI, including certain related assets, and assumed certain related liabilities for $0.5 million in cash, which was deemed part of the $14 million consideration paid in connection with the Purchase Agreement.

The 1st Quarter Purchase Agreement and Warehouse Purchase Agreement also include various representations, warranties, covenants, indemnification and other provisions which are customary for transactions of this nature.

The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired, the purchase price and the resulting gain on a bargain purchase price that was made in the first quarter of the year. No subsequent adjustments were made during the second quarter. The Company expects to adjust these amounts as additional information is received.

 

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     As of
June 30, 2010
     (in thousands)

Assets:

  

Cemetery land

   $ 32,338

Cemetery property

     5,360

Accounts receivable (net)

     2,293

Merchandise trusts, restricted, at fair value

     46,155

Perpetual care trusts, restricted, at fair value

     14,572

Property and equipment

     325
      

Total assets

     101,043
      

Liabilities

  

Deferred margin

     18,287

Merchandise liabilities

     22,619

Deferred income tax liability

     8,238

Perpetual care trust corpus

     14,572
      

Total liabilities

     63,716
      

Fair value of net assets acquired

     37,327
      

Consideration paid

     14,015
      

Gain on bargain purchase

   $ 23,312
      

The results of operations of the acquired properties have been included in the condensed consolidated financial statements since the date of acquisition and are not material to the condensed consolidated results of operations.

The following unaudited pro forma information presents a summary of results of operations of the Company and the acquired cemeteries if the acquisition had occurred on January 1, 2009:

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010     2009    2010    2009
     (unaudited)    (unaudited)
     (In thousands)    (In thousands)

Revenues

   $ 50,267      $ 49,332    $ 92,467    $ 93,460

Net income (loss)

     (1,431     6,143      20,523      5,278

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

     (0.10     0.51      1.03      0.43

The unaudited pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on January 1, 2009 or of future results of operations of the locations.

 

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Second Quarter 2010 Acquisition

On April 29, 2010, the Johnson County Circuit Court of Indiana entered the Order Approving Form of Amended and Restated Purchase Agreement and Authorizing Sale of Equity Interests and Assets (the “Indiana Order”). The Indiana Order, subject to certain conditions, permitted Lynette Gray, as receiver (the “Receiver”) of the business and assets of Ansure Mortuaries of Indiana, LLC (“Ansure”), Memory Gardens Management Corporation (“MGMC”), Forest Lawn Funeral Home Properties, LLC (“Forest Lawn”), Gardens of Memory Cemetery LLC (“Gardens of Memory”), Gill Funeral Home, LLC (“Gill”), Garden View Funeral Home, LLC (“Garden View”), Royal Oak Memorial Gardens of Ohio Ltd. (“Royal Oak”), Heritage Hills Memory Gardens of Ohio Ltd. (“Heritage”) and Robert E. Nelms (“Nelms” and collectively with Ansure, MGMC, Forest Lawn, Gardens of Memory, Gill, Garden View, Royal Oak and Heritage, the “Original Sellers”), to enter into and consummate an Amended and Restated Purchase Agreement (the “2nd Quarter Purchase Agreement”) with StoneMor Operating LLC, a Delaware limited liability company (“StoneMor LLC”), StoneMor Indiana LLC, an Indiana limited liability company (“StoneMor Indiana”), StoneMor Indiana Subsidiary LLC, an Indiana limited liability company (“StoneMor Subsidiary”) and Ohio Cemetery Holdings, Inc., an Ohio non-profit corporation (“Ohio Non-profit,” and collectively with StoneMor LLC, StoneMor Indiana and StoneMor Subsidiary, the “Buyer”), each a wholly-owned subsidiary of the Company. Subject to the receipt of the Indiana Order, the Purchase Agreement was executed by the Buyer and the Receiver on April 2, 2010.

Effective June 21, 2010, certain subsidiaries of the Company entered into Amendment No. 1 to the 2nd Quarter Purchase Agreement (“Amendment No. 1”) by and among the Buyer, the Original Sellers, Robert Nelms, LLC (“Nelms LLC,” and collectively with the Original Sellers, the “Sellers”) and the Receiver, which amended the Purchase Agreement executed by the Buyer and the Receiver. Amendment No. 1 amended the 2nd Quarter Purchase Agreement by: adding certain parties to the Purchase Agreement; modifying certain representations and warranties made by the Original Sellers in the 2nd Quarter Purchase Agreement; and providing that the Buyer will assume certain additional liabilities such as the obligation to pay for all claims incurred under the health benefit plans of the Original Sellers on or before the closing of the transactions contemplated by the Purchase Agreement and Amendment No. 1, but which had not been reported on or prior to the closing.

Effective June 21, 2010, pursuant to the 2nd Quarter Purchase Agreement and Amendment No. 1, the Buyer acquired the stock (the “Stock”) of certain companies owned by Ansure (the “Acquired Companies”) and certain assets (the “Assets”) owned by Nelms, Nelms LLC, Gill, Gardens of Memory, Garden View, Forest Lawn, Heritage, Royal Oak and MGMC, resulting in the acquisition of 8 cemeteries and 5 funeral homes in Indiana, Michigan and Ohio (the “Acquisition”). The Buyer acquired the Stock and Assets, advanced moneys to pay for trust shortfalls of the cemeteries, paid certain liabilities of the Sellers, which were offset by funds held in a Smith Barney Account acquired by the Buyer in the transaction, and paid certain legal fees of the parties to the transaction and other acquisition costs, for a total paid at closing, including the offset by the funds held in the Smith Barney Account, of approximately $33.0 million. The Acquisition was financed, in part, by borrowing $22.5 million from the Company’s acquisition facility under the Amended and Restated Credit Agreement dated August 15, 2007 among StoneMor LLC, certain of its subsidiaries, the Company, StoneMor GP LLC, Bank of America, N.A., the other lenders party thereto, and Banc of America Securities LLC, as amended.

Settlement Agreement

In connection with the Acquisition, effective June 21, 2010, StoneMor LLC and StoneMor Indiana (collectively, “StoneMor”) and the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Chapel Hill Associates, Inc., d/b/a Chapel Hill Memorial Gardens of Grand Rapids, Chapel Hill Funeral Home, Inc., Covington Memorial Funeral Home, Inc., Covington Memorial Gardens, Inc., Forest Lawn Memorial Chapel Inc., Forest Lawn Memory Gardens Inc., Fred W. Meyer, Jr. by James R. Meyer as Special Administrator to the Estate of Fred W. Meyer, Jr. (the “F. Meyer Estate”), James R. Meyer (“J. Meyer”), Thomas E. Meyer (“T. Meyer”), Nancy J. Cade (“Cade,” and collectively with the F. Meyer Estate, J. Meyer, and T. Meyer, the “Meyer Family”) and F.T.J. Meyer Associates, LLC (“FTJ”).

Pursuant to the Settlement Agreement, StoneMor agreed to assume, pay and discharge a portion of Ansure’s and Forest Lawn’s obligations under: (i) certain notes issued by Ansure in favor of Fred W. Meyer, Jr., J. Meyer, T. Meyer, and Cade (collectively, the “Original Meyer Family”); and (ii) a note issued by Forest Lawn to FTJ, which was later assigned to the Original Meyer Family.

StoneMor agreed to assume approximately $7.1 million of Ansure’s and Forest Lawn’s obligations under the notes they issued, with the remaining principal, interest and fees due under such notes forgiven by the Meyer Family. In connection with the assumption of these obligations, at Closing, StoneMor issued promissory notes to each member of the Meyer Family (the “Closing Notes”) and additional promissory notes payable in installments to certain members of the Meyer Family (the “Installment Notes”). The Closing Notes were issued effective June 21, 2010 in the aggregate principal amount of approximately $5.8 million, were unsecured subordinated obligations of StoneMor, bore no interest and were payable on demand at the Closing. The Closing Notes were paid at closing by: (i) the issuance by the Company of 293,947 unregistered common units representing limited partnership interests of the Company (the “Units”) valued at approximately $5.6 million pursuant to the terms of the Settlement Agreement; and (ii) a cash payment of approximately $0.2 million.

 

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The Installment Notes were issued effective June 21, 2010 in the aggregate principal amount of approximately $1.3 million to be paid in installments over 4 years. The Installment Notes were issued effective June 21, 2010 and mature April 1, 2014. The Installment Notes bear 10.25% interest per annum on the portion of the outstanding balance after the maturity date or while there exists any uncured event of default or the exercise by the Company of any remedies following the occurrence and during the continuance of any event of default. In addition, if StoneMor voluntarily files for bankruptcy or is involved in an involuntary bankruptcy proceeding, the entire principal balance of the Installment Notes will automatically become due and payable.

J. Meyer, T. Meyer and Cade each entered into an Amended and Restated Agreement-Not-To-Compete with StoneMor, which amended the non-compete agreements each previously entered into with Ansure. In consideration for entering into an Amended and Restated Agreement-Not-To-Compete, StoneMor agreed to pay an aggregate of approximately $2.3 million to J. Meyer, T. Meyer, and Cade, with approximately $0.3 million paid at Closing, and the remainder to be paid in installments over 4 years.

The Settlement Agreement also provides that, if the annual distributions paid by the Company to its unitholders are less than $2.20, StoneMor will pay additional cash consideration to the Meyer Family annually for four years pursuant to a formula contained in the Settlement Agreement. StoneMor may also pay up to approximately $2.4 million to the Meyer Family from the proceeds of the Misappropriation Claims, subject to certain minimum thresholds before payments are required.

In addition, StoneMor provided an assignment from the Receiver to the Meyer Family of the Eminent Domain Claim, as defined in the Settlement Agreement, and the proceeds thereto, at closing. The Meyer Family agreed to assign its rights under the Fraud Claims, as defined in the Settlement Agreement, to StoneMor.

All obligations of StoneMor, the Company and the Acquired Companies under the Settlement Agreement and other transaction documents are subordinate and junior to the obligations of StoneMor, the Company and the Acquired Companies under any Senior Debt, as defined in the Settlement Agreement.

The Settlement Agreement also includes various representations, warranties, covenants, mutual releases, indemnification and other provisions, which are customary for a transaction of this nature.

Unregistered Sale of Securities

In connection with the Acquisition, StoneMor GP, LLC, the general partner of the Company (“StoneMor GP”), entered into a Non-Competition Agreement (“Non-Competition Agreement”) dated as of June 21, 2010 with Ronald P. Robertson, pursuant to which Mr. Robertson agreed not to compete with StoneMor GP and the companies under its management and control. In consideration for Mr. Robertson’s covenant not to compete and as a partial payment of the Closing Notes to the Meyer Family pursuant to the Settlement Agreement, effective June 21, 2010, the Company issued 303,800 Units.

Pursuant to the Non-Competition Agreement, the Company is obligated to issue additional Units valued at $0.5 million over the next three years as follows: Units valued at $0.2 million on each of the first anniversary and second anniversary of the Closing with the number of Units determined by dividing $0.2 million by the per-Unit price of Units on The Nasdaq Stock Market LLC (“Nasdaq”) on the close of the third business day prior to the closing, subject to adjustments as a result of a Unit split, Unit combination or similar events occurring after the closing but prior to each of the first and second anniversaries; and Units valued at $0.1 million on the third anniversary of the closing, with the number of Units determined by dividing $0.1 million by the per-Unit price on the Nasdaq on the close of the third business day prior to the closing, subject to adjustments as a result of a Unit split, Unit combination or similar events occurring after the closing but prior to the third anniversary of the closing.

The table below reflects the Company’s preliminary assessment of the fair value of net assets received and the purchase price. These amounts will be retrospectively adjusted as additional information is received.

 

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Table of Contents
     As of
June 30, 2010
     (in thousands)
     (As restated)

Assets:

  

Cemetery land

   $ 23,188

Cemetery and funeral home property

     27,842

Accounts receivable (net)

     2,191

Merchandise trusts, restricted, at fair value

     5,866

Perpetual care trusts, restricted, at fair value

     1,663

Other assets

     4,225
      

Total assets

     64,975
      

Liabilities

  

Deferred margin

     12,070

Merchandise liabilities

     14,929

Other liabilities

     16,130

Perpetual care trust corpus

     1,663
      

Total liabilities

     44,792
      

Fair value of net assets acquired

     20,183
      

Paid at closing—purchase price

     10,417

Paid at closing—units

     5,785

Paid at closing—liabilities incurred

     3,981
      

Total purchase price

     20,183
      

Paid at closing—merchandise trust underfunding

     12,530
      

Total paid at closing

   $ 32,713
      

The results of the operations of the properties acquired have been included in the condensed consolidated financial statements since the date of the acquisition and are not material to the results of operations.

Second Quarter 2009 Acquisitions

In the second quarter of 2009, the Company, through certain of its subsidiaries, entered into two long-term operating agreements wherein the Company became exclusive operator of the underlying cemetery land. These two cemeteries qualify as variable interest entities (“VIE”) for which the Company is the primary beneficiary. As such, the Company has consolidated these two cemeteries into the financial statements.

In the second quarter of this year, the Company made final changes to the fair value of the net assets acquired due to this transaction. These changes resulted in the Company recognizing a gain on the acquisition of approximately $4.6 million. In accordance with ASC 805, we have revised the comparative prior period information included in this report filed on Form 10-Q/A to retrospectively reflect these final changes.

 

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The table below denotes the changes made to the recognition of the fair value of the net assets acquired due to this transaction in the second quarter of 2010 as compared to what was recorded at June 30, 2009.

 

     Amount
Originally
Recorded
   Revised
Amount
    Change  
     (in thousands)  

Assets

       

Cemetery land

   $ 5,072    $ 8,720      $ 3,648   

Cemetery building

     —        450        450   

Accounts receivable

     591      270        (321

Merchandise trust assets

     1,380      1,385        5   

PC Trust assets

     3,367      3,428        61   

Equipment

     —        179        179   

Goodwill

     —        —          —     

Other assets

     —        —          —     

Cemetery inventory

     252      247        (5
                       

Total assets

     10,662      14,678        4,016   
                       

Liabilities

       

Merchandise liabilities

     1,332      1,635        303   

Other liabilities

     —        46        46   

Deferred margin

     1,563      1,322        (241

Deferred tax liabilities

     —        198        198   

Perpetual care trust corpus

     3,367      3,428        61   
                       

Total liabilities

     6,262      6,628        366   
                       

Net assets acquired

   $ 4,400    $ 8,050      $ 3,650   
                       

Summary of purchase price

       

Cash paid

   $ 2,700    $ 2,700      $ —     

Notes payable (par)

     1,700      1,858        158   

Notes payable (discount)

     —        (943     (943

Note receivable (par)

     —        (170     (170

Note receivable (discount)

     —        22        22   
                       

Total purchase price

     4,400      3,467        (933
                       

Excess of net assets over purchase price

   $ —      $ 4,583      $ 4,583   
                       

Third Quarter 2009 Acquisitions

As of June 30, 2010, there were still purchase allocations open on the acquisition made in the third quarter of 2009. The table below details the provisional assessment of net assets acquired, purchase price and the resultant gain on a bargain purchase.

The table below details the provisional assessment of net assets acquired, purchase price and the resultant gain on a bargain purchase.

 

     Provisional
Amounts

Recorded
 

Assets

  

Cemetery land

   $ 3,600   

Cemetery building

     3,089   

Accounts receivable

     109   

Merchandise trust assets

     321   

PC Trust assets

     2,911   

Equipment

     166   

Other assets

     750   

Cemetery inventory

     —     
        

Total assets

     10,946   
        

Liabilities

  

Merchandise liabilities

     231   

Other liabilities

     —     

Deferred margin

     187   

Deferred tax liabilities

     129   

Perpetual care trust corpus

     2,911   
        

Total liabilities

     3,458   
        

Net assets acquired

   $ 7,488   
        

Summary of purchase price

  

Cash paid

   $ 1,400   

Notes payable (par)

     2,150   
        

Total purchase price

     3,550   
        

Gain from a bargain purchase

   $ (3,938
        

The primary assets subject to additional changes are cemetery property and property and equipment. The Company will finalize this allocation in the third quarter of 2010.

 

15. SEGMENT INFORMATION

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

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

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

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

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

 

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Segment information as of and for the three and six months ended June 30, 2010 and 2009 is as follows:

As of and for the three months ended June 30, 2010

 

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

Revenues

                  

Sales

   $ 20,769    $ 8,812    $ 9,344    $ —      $ —        $ (11,415   $ 27,510   

Service and other

     7,830      6,439      4,363      —        (57     (3,122     15,453   

Funeral home

     —        —        —        5,923      —          (149     5,774   
                                                    

Total revenues

     28,599      15,251      13,707      5,923      (57     (14,686     48,737   
                                                    

Costs and expenses

                  

Cost of sales

     4,253      1,731      1,517      —        —          (2,151     5,347   

Cemetery

     5,411      3,495      3,181      —        —          (2     12,086   

Selling

     6,360      2,792      2,663      —        258        (2,606     9,467   

General and administrative

     3,079      1,478      1,616      —        (13     —          6,161   

Funeral home

     —        —        —        4,648      —          (6     4,642   

Depreciation and amortization

     329      190      150      282      848        —          1,799   

Corporate

     —        —        —        —        5,605        —          5,605   

Acquisition related costs

     —        —        —        —        1,666        —          1,666   
                                                    

Total costs and expenses

     19,433      9,686      9,127      4,930      8,364        (4,765     46,773   
                                                    

Operating earnings

     9,166      5,565      4,580      993      (8,421     (9,921     1,964   
                                                    

Increase in value of interest rate swap

     —        —        —        —        1,568          1,568   

Interest expense

     2,299      947      1,333      675      (16     —          5,238   
                                                    

Earnings (losses) before taxes

   $ 6,867    $ 4,618    $ 3,247    $ 318    $ (6,837   $ (9,921   $ (1,706
                                                    

Supplemental information

                  

Total assets

   $ 405,742    $ 260,205    $ 316,719    $ 53,528    $ 28,623      $ —        $ 1,064,816   
                                                    

Amortization of cemetery property

   $ 826    $ 560    $ 174    $ —      $ —        $ (214   $ 1,346   
                                                    

Long lived asset additions

   $ 5,007    $ 233    $ 28,755    $ 18,648    $ 122      $ —        $ 52,765   
                                                    

 

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As of and for the six months ended June 30, 2010

 

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

Revenues

                  

Sales

   $ 39,425    $ 16,765    $ 16,237    $ —      $ (79   $ (24,452   $ 47,896

Service and other

     15,249      12,055      7,864      —        —          (5,308     29,860

Funeral home

     —        —        —        11,962      —          (311     11,651
                                                  

Total revenues

     54,674      28,820      24,101      11,962      (79     (30,071     89,407
                                                  

Costs and expenses

                  

Cost of sales

     8,068      3,314      2,528      —        6        (4,137     9,779

Cemetery

     9,703      6,339      5,292      —        —          (1     21,333

Selling

     12,521      5,397      4,731      —        320        (5,887     17,083

General and administrative

     5,906      2,984      2,878      —        (9     —          11,759

Funeral home

     —        —        —        9,081      —          (8     9,073

Depreciation and amortization

     766      380      273      561      1,677        —          3,657

Corporate

     —        —        —        —        10,694        —          10,694

Acquisition related costs

     —        —        —        —        2,656        —          2,656
                                                  

Total costs and expenses

     36,965      18,414      15,702      9,642      15,344        (10,033     86,034
                                                  

Operating earnings

     17,709      10,406      8,399      2,320      (15,423     (20,038     3,373
                                                  

Gain on acquisitions

     —        —        —        —        23,312          23,312

Increase in value of interest rate swap

     —        —        —        —        3,239          3,239

Interest expense

     4,611      1,890      2,318      1,293      (15     —          10,097
                                                  

Earnings (losses) before taxes

   $ 13,098    $ 8,516    $ 6,081    $ 1,027    $ 11,143      $ (20,038   $ 19,827
                                                  

Supplemental information

                  

Total assets

   $ 405,742    $ 260,205    $ 316,719    $ 53,528    $ 28,623      $ —        $ 1,064,816
                                                  

Amortization of cemetery property

   $ 1,666    $ 1,071    $ 293    $ —      $ —        $ (403   $ 2,627
                                                  

Long lived asset additions

   $ 5,099    $ 264    $ 66,994    $ 18,697    $ 184      $ —        $ 91,238
                                                  

As of and for the three months ended June 30, 2009

 

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

Revenues

                  

Sales

   $ 19,023    $ 8,949    $ 7,817    $ —      $ —        $ (9,161   $ 26,628

Service and other

     6,848      5,685      3,321      —        —          (444     15,410

Funeral home

     —        —        —        5,914      —          (151     5,763
                                                  

Total revenues

     25,871      14,634      11,138      5,914      —          (9,756     47,801
                                                  

Cos