10-Q 1 d240280d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2011

or

 

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

For the transition period from              to             .

Commission File Number: 000-50910

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

311 Veterans Highway, Suite B

Levittown, Pennsylvania

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

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    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 a 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 November 9, 2011 was 19,366,971.

 

 

 


Table of Contents

Index – Form 10-Q

 

         Page  

Part I

  Financial Information   

Item 1.

  Financial Statements (unaudited)      1   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      60   

Item 4.

  Controls and Procedures      62   

Part II

  Other Information   

Item 1.

  Legal Proceedings      62   

Item 1A.

  Risk Factors      62   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      63   

Item 3.

  Defaults Upon Senior Securities      63   

Item 4.

  (Removed and Reserved)      63   

Item 5.

  Other Information      63   

Item 6.

  Exhibits      64   
  Signatures      65   


Table of Contents

Part I – Financial Information

 

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

     September 30,
2011
     December 31,
2010
 

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 20,135       $ 7,535   

Accounts receivable, net of allowance

     47,741         45,149   

Prepaid expenses

     4,951         3,783   

Other current assets

     15,027         9,002   
  

 

 

    

 

 

 

Total current assets

     87,854         65,469   

Long-term accounts receivable, net of allowance

     63,516         60,061   

Cemetery property

     295,004         283,460   

Property and equipment, net of accumulated depreciation

     70,712         66,249   

Merchandise trusts, restricted, at fair value

     306,403         318,318   

Perpetual care trusts, restricted, at fair value

     235,359         249,690   

Deferred financing costs, net of accumulated amortization

     9,059         9,801   

Deferred selling and obtaining costs

     65,819         59,422   

Deferred tax assets

     566         605   

Goodwill

     22,671         18,153   

Other assets

     13,490         14,364   
  

 

 

    

 

 

 

Total assets

   $ 1,170,453       $ 1,145,592   
  

 

 

    

 

 

 

Liabilities and partners’ capital

     

Current liabilities:

     

Accounts payable and accrued liabilities

   $ 20,454       $ 23,444   

Accrued interest

     5,410         2,034   

Current portion, long-term debt

     1,743         1,386   
  

 

 

    

 

 

 

Total current liabilities

     27,607         26,864   

Other long-term liabilities

     2,955         3,687   

Long-term debt

     173,816         219,008   

Deferred cemetery revenues, net

     400,002         386,465   

Deferred tax liabilities

     17,667         18,331   

Merchandise liability

     118,194         113,356   

Perpetual care trust corpus

     235,359         249,690   
  

 

 

    

 

 

 

Total liabilities

     975,600         1,017,401   
  

 

 

    

 

 

 

Commitments and Contingencies

     

Partners’ capital

     

General partner

     2,688         1,809   

Common partners

     192,165         126,382   
  

 

 

    

 

 

 

Total partners’ capital

     194,853         128,191   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 1,170,453       $ 1,145,592   
  

 

 

    

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except unit data)

(unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  

Revenues:

        

Cemetery

        

Merchandise

   $ 28,738      $ 25,750      $ 81,277      $ 68,576   

Services

     13,295        11,537        35,697        29,562   

Investment and other

     10,793        8,335        30,495        25,240   

Funeral home

        

Merchandise

     3,041        2,516        9,137        7,378   

Services

     4,458        3,992        13,057        10,781   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     60,325        52,130        169,663        141,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses:

        

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

        

Perpetual care

     1,373        1,370        4,097        3,727   

Merchandise

     5,787        5,098        15,272        12,466   

Cemetery expense

     15,312        13,506        42,860        34,839   

Selling expense

     12,192        10,298        33,923        27,381   

General and administrative expense

     7,111        6,327        20,569        18,086   

Corporate overhead (including $195 and $190 in unit-based compensation for the three months ended September 30, 2011 and 2010, and $576 and $543 for the nine months ended September 30, 2011 and 2010, respectively)

     5,628        5,360        17,572        16,054   

Depreciation and amortization

     1,886        2,466        6,374        6,205   

Funeral home expense

        

Merchandise

     982        967        3,197        2,833   

Services

     3,107        2,549        8,456        6,884   

Other

     1,779        1,509        5,222        4,381   

Acquisition related costs

     1,189        1,963        3,147        4,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     56,346        51,413        160,689        137,475   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     3,979        717        8,974        4,062   

Expenses related to refinancing

     —          —          453        —     

Gain on acquisitions

     —          59        —          7,152   

Early extinguishment of debt

     —          —          4,010        —     

Increase in fair value of interest rate swaps

     —          1,398        —          4,637   

Interest expense

     4,824        5,902        14,266        15,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (845     (3,728     (9,755     (148

Income tax expense (benefit)

        

State

     69        (20     (829     34   

Federal

     (691     (1,807     (2,304     (2,716
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense (benefit)

     (622     (1,827     (3,133     (2,682
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (223   $ (1,901   $ (6,622   $ 2,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (4   $ (38   $ (132   $ 51   

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

   $ (219   $ (1,863   $ (6,490   $ 2,483   

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

   $ (.01   $ (.13   $ (.35   $ .18   

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

     19,353        13,995        18,807        13,649   

Distributions declared per unit

   $ .585      $ .565      $ 1.755      $ 1.675   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital

(in thousands)

(unaudited)

 

     Partners’ Capital  
     Common
Unit Holders
    General
Partner
    Total  

Balance, December 31, 2010

   $ 126,382      $ 1,809      $ 128,191   

Issuance of common units

     264        —          264   

Proceeds from public offering

     103,207        —          103,207   

General partner contribution

     —          2,246        2,246   

Compensation related to UARs

     394        —          394   

Net loss

     (6,490     (132     (6,622

Cash distribution

     (31,592     (1,235     (32,827
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 192,165      $ 2,688      $ 194,853   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

     For the nine months ended
September 30,
 
     2011     2010  

Operating activities:

    

Net income (loss)

   $ (6,622   $ 2,534   

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

    

Cost of lots sold

     5,004        4,414   

Depreciation and amortization

     6,374        6,205   

Unit-based compensation

     576        543   

Accretion of debt discounts

     950        252   

Change in fair value of interest rate swaps

     —          (4,637

Write-off of deferred financing fees

     453        —     

Gain on acquisitions

     —          (7,152

Fees paid related to early extinguishment of debt

     4,010        —     

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

    

Accounts receivable

     (5,509     (12,014

Allowance for doubtful accounts

     3,597        2,731   

Merchandise trust fund

     (11,681     (1,500

Prepaid expenses

     586        (468

Other current assets

     (6,024     (2,041

Other assets

     244        519   

Accounts payable and accrued and other liabilities

     (1,290     (224

Deferred selling and obtaining costs

     (6,398     (7,755

Deferred cemetery revenue

     31,560        31,728   

Deferred taxes (net)

     (2,476     (2,883

Merchandise liability

     (2,285     (495
  

 

 

   

 

 

 

Net cash provided by operating activities

     11,069        9,757   
  

 

 

   

 

 

 

Investing activities:

    

Cash paid for cemetery property

     (4,258     (1,841

Purchase of subsidiaries

     (10,300     (38,462

Cash paid for management agreements

     —          (346

Cash paid for property and equipment

     (4,601     (4,139
  

 

 

   

 

 

 

Net cash used in investing activities

     (19,159     (44,788
  

 

 

   

 

 

 

Financing activities:

    

Cash distribution

     (32,827     (23,341

Additional borrowings on long-term debt

     27,800        63,636   

Repayments of long-term debt

     (74,490     (40,928

Proceeds from public offering

     103,207        39,502   

Proceeds from general partner contribution

     2,246        1,031   

Fees paid related to early extinguishment of debt

     (4,010     —     

Cost of financing activities

     (1,236     (390
  

 

 

   

 

 

 

Net cash provided by financing activities

     20,690        39,510   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     12,600        4,479   

Cash and cash equivalents - Beginning of period

     7,535        13,479   
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 20,135      $ 17,958   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for interest

   $ 9,897      $ 12,060   

Cash paid during the period for income taxes

   $ 2,242      $ 961   

Non-cash investing and financing activities

    

Acquisition of assets by financing

   $ 237      $ —     

Issuance of limited partner units for cemetery acquisition

   $ 264      $ 5,785   

Acquisition of asset by assumption of directly related liability

   $ —        $ 2,532   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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

Nature of Operations

StoneMor Partners L.P. (“StoneMor”, the “Company” or the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of September 30, 2011, the Partnership operated 269 cemeteries, 248 of which are owned, in 25 states and Puerto Rico and owned and operated 66 funeral homes in 17 states and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated financial statements also include the effects of retroactive adjustments resulting from the Company’s 2010 acquisitions (see Note 13). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2010 Annual Report on Form 10-K (“2010 Form 10-K”) and has been adjusted to include the effects of retrospective adjustments resulting from the Company’s 2010 acquisitions, but does not include all disclosures required by GAAP, which are presented in the Company’s 2010 Form 10-K.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of each of the Company’s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 21 cemeteries under long-term operating or management contracts. The operations of 15 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810.

The 3 cemeteries that the Company began operating under a long-term operating agreement in the third quarter of 2010 and 3 other cemeteries the Company operates under long-term operating agreements do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of each of these cemeteries’ merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term operating agreements, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also recognized the existing merchandise liabilities that it assumed as part of these agreements. See Note 13 for further details on the 3 cemeteries the Company began operating under a long-term operating agreement in the third quarter of 2010.

Total revenues derived from the 21 cemeteries operated under long-term operating or management contracts totaled approximately $10.0 million and $27.9 million for the three and nine months ended September 30, 2011, as compared to $8.7 million and $24.3 million from these cemetery properties during the same periods last year.

New Accounting Pronouncements

In the third quarter of 2011, the Financial Accounting Standards Board issued Update No. 2011-08, Intangibles – Goodwill and Other (Topic 350) (“ASU 2011-08”). Prior to ASU 2011-08, the first step in the goodwill impairment test was to compare the fair value of a reporting unit to its carrying amount, including goodwill. ASU 2011-08 allows a Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after this assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, the goodwill test can be concluded and it is not necessary to calculate the fair value of the reporting unit. However, if the qualitative assessment does not lead to this conclusion, the full two step goodwill test, which has not been changed by ASU 2011-08, must be performed. The Company has chosen to early adopt the provisions of ASU 2011-08. This adoption is not expected to impact the Company’s financial position, results of operations, or cash flows.

 

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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.

 

2. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

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

 

     As of  
     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Customer receivables

   $ 146,842      $ 135,530   

Unearned finance income

     (16,269     (14,488

Allowance for contract cancellations

     (19,316     (15,832
  

 

 

   

 

 

 
     111,257        105,210   

Less: current portion, net of allowance

     47,741        45,149   
  

 

 

   

 

 

 

Long-term portion, net of allowance

   $ 63,516      $ 60,061   
  

 

 

   

 

 

 

Activity in the allowance for contract cancellations is as follows:

 

     For the nine months ended
September 30,
 
     2011     2010  
     (in thousands)  

Balance - Beginning of period

   $ 15,832      $ 13,865   

Provision for cancellations

     13,799        11,447   

Charge-offs - net

     (10,315     (7,854
  

 

 

   

 

 

 

Balance - End of period

   $ 19,316      $ 17,458   
  

 

 

   

 

 

 

 

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3. CEMETERY PROPERTY

Cemetery property consists of the following:

 

     As of  
     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Developed land

   $ 63,313       $ 61,849   

Undeveloped land

     163,949         159,386   

Mausoleum crypts and lawn crypts

     67,742         62,225   
  

 

 

    

 

 

 

Total

   $ 295,004       $ 283,460   
  

 

 

    

 

 

 

 

4. PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

     As of  
     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Building and improvements

   $ 71,617      $ 67,247   

Furniture and equipment

     36,279        31,947   
  

 

 

   

 

 

 
     107,896        99,194   

Less: accumulated depreciation

     (37,184     (32,945
  

 

 

   

 

 

 

Property and equipment - net

   $ 70,712      $ 66,249   
  

 

 

   

 

 

 

Depreciation expense was $1.4 million and $4.3 million for the three and nine months ended September 30, 2011, respectively, as compared to $1.7 million and $3.9 million during the same periods last year.

 

5. MERCHANDISE TRUSTS

At September 30, 2011, the Company’s merchandise trusts consisted of the following types of assets:

 

   

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

 

   

Publicly traded mutual funds that invest in underlying debt securities;

 

   

Publicly traded mutual funds that invest in underlying equity securities;

 

   

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

 

   

Fixed maturity debt securities issued by various corporate entities;

 

   

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

 

   

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

 

   

Assets acquired related to the June 22, 2011 acquisition of three cemeteries and four funeral homes from SCI Missouri (see Note 13). According to the terms of the agreement, SCI Missouri was required to liquidate the holdings of the related trusts upon closing and forward the proceeds to us as soon as practicable. As of September 30, 2011, the Company had not received these amounts. Accordingly, these assets are shown in a single line item in the disclosures below as “Assets acquired via acquisition” and the cost basis and fair value of such assets are based upon preliminary estimates that the Company is required to make in accordance with Accounting Topic 805.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. At September 30, 2011, approximately 94.3% of the total managed investments were Level 1 investments while approximately 5.7% were Level 2 assets. There were no Level 3 assets.

 

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

The Company has included $6.5 million and $6.4 million of investments held in trust by the West Virginia Funeral Directors Association at September 30, 2011 and December 31, 2010, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates fair value.

The cost and market value associated with the assets held in merchandise trusts at September 30, 2011 and December 31, 2010 were as follows:

 

As of September 30, 2011

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

Short-term investments

   $ 27,242       $ —         $ —        $ 27,242   

Fixed maturities:

          

U.S. Government and federal agency

     —           —           —          —     

U.S. State and local government agency

     23         —           —          23   

Corporate debt securities

     10,357         —           (1,020     9,337   

Other debt securities

     2,461         —           —          2,461   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     12,841         —           (1,020     11,821   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     66,684         1,948         (2,673     65,959   

Mutual funds - equity securities

     140,021         83         (15,581     124,523   

Equity securities

     66,631         1,572         (5,604     62,599   

Other invested assets

     6,039         —           (927     5,112   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

   $ 319,458       $ 3,603       $ (25,805   $ 297,256   
  

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

     2,622         —           —          2,622   

West Virginia Trust Receivable

     6,525         —           —          6,525   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 328,605       $ 3,603       $ (25,805   $ 306,403   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

As of December 31, 2010

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

Short-term investments

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

Fixed maturities:

          

U.S. Government and federal agency

     —           —           —          —     

U.S. State and local government agency

     23         —           —          23   

Corporate debt securities

     9,973         119         (152     9,940   

Other debt securities

     1,503         35         —          1,538   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     11,499         154         (152     11,501   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     49,717         3,087         (286     52,518   

Mutual funds - equity securities

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

Equity securities

     69,462         6,708         (909     75,261   

Other invested assets

     4,991         217         —          5,208   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

   $ 300,569       $ 16,610       $ (5,303   $ 311,876   
  

 

 

    

 

 

    

 

 

   

 

 

 

West Virginia Trust Receivable

     6,442         —           —          6,442   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The contractual maturities of debt securities as of September 30, 2011 are as follows:

 

As of September 30, 2011

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

U.S. Government and federal agency

   $ —         $ —         $ —         $ —     

U.S. State and local government agency

     23         —           —           —     

Corporate debt securities

     —           8,544         793         —     

Other debt securities

     2,461         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 2,484       $ 8,544       $ 793       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at September 30, 2011 and December 31, 2010 is presented below:

 

      Less than 12 months      12 Months or more      Total  

As of September 30, 2011

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

Fixed maturities:

                 

U.S. Government and federal agency

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

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     8,639         862         698         158         9,337         1,020   

Other debt securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     8,639         862         698         158         9,337         1,020   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securites

     47,518         2,422         2,350         251         49,868         2,673   

Mutual funds - equity securites

     64,956         6,823         54,156         8,758         119,112         15,581   

Equity securities

     35,768         4,125         4,921         1,479         40,689         5,604   

Other invested assets

     1,915         927         —           —           1,915         927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 158,796       $ 15,159       $ 62,125       $ 10,646       $ 220,921       $ 25,805   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

      Less than 12 months      12 Months or more      Total  

As of December 31, 2010

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

Fixed maturities:

                 

U.S. Government and federal agency

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

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     4,887         95         813         57         5,700         152   

Other debt securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     4,887         95         813         57         5,700         152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securites

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

Mutual funds - equity securites

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

Equity securities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

A reconciliation of the Company’s merchandise trust activities for the nine months ended September 30, 2011 is presented below:

 

Fair
Value @
12/31/2010

  Contributions     Distributions     Interest/
Dividends
    Capital
Gain
Distributions
    Realized
Gain/
Loss
    Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value @
9/30/2011
 
                (in thousands)                                
$ 318,318     36,451        (29,535     9,257        7,166        1,669        (1,571     (1,843     (33,509   $  306,403   

The Company made net deposits into the trusts of approximately $6.9 million during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, purchases and sales of securities available for sale included in trust investments were approximately $263.9 million and $254.8 million, respectively. Contributions included $4.1 million of assets that were acquired through acquisitions during the nine months ended September 30, 2011.

Other-than-temporary Impairments of Trust Assets

During the nine months ended September 30, 2011, the Company determined that there was a single security with an aggregate cost basis of approximately $0.2 million and an aggregate fair value of approximately $0.1 million, resulting in an impairment of $0.1 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of this asset to its current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed. During the three months ended September 30, 2011, the Company determined that there were no other than temporary impairments to the investment portfolio for merchandise trusts.

During the three and nine months ended September 30, 2010, the Company determined that there were 17 securities, with an aggregate cost basis of approximately $40.6 million and $40.9 million, respectively, an aggregate fair value of approximately $27.5 million and $27.6 million, respectively, and a resulting impairment of approximately $13.1 million and $13.3 million, respectively, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of this asset to its current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.

 

6. PERPETUAL CARE TRUSTS

At September 30, 2011, the Company’s perpetual care trusts consisted of the following types of assets:

 

   

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

 

   

Publicly traded mutual funds that invest in underlying debt securities;

 

   

Publicly traded mutual funds that invest in underlying equity securities;

 

   

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

 

   

Fixed maturity debt securities issued by various corporate entities;

 

   

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

 

   

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

 

   

Assets acquired related to the August 17, 2011 acquisition of five cemeteries and four funeral homes from SCI Puerto Rico (see Note 13). According to the terms of the agreement, SCI Puerto Rico was required to liquidate the holdings of the related trusts upon closing and forward the proceeds to us as soon as practicable. As of September 30, 2011, the Company had not received these amounts. Accordingly, these assets are shown in a single line item in the disclosures below as “Assets acquired via acquisition” and the cost basis and fair value of such assets are based upon preliminary estimates that the Company is required to make in accordance with Accounting Topic 805.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. At September 30, 2011, approximately 90.8% of the total managed investments were Level 1 investments while approximately 9.2% were Level 2 assets. There were no Level 3 assets.

 

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Table of Contents

The cost and market value associated with the assets held in perpetual care trusts at September 30, 2011 and December 31, 2010 were as follows:

 

As of September 30, 2011

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

Short-term investments

   $ 17,572       $ —         $ —        $ 17,572   

Fixed maturities:

          

U.S. Government and federal agency

     408         104         —          512   

U.S. State and local government agency

     67         81         —          148   

Corporate debt securities

     22,816         171         (1,882     21,105   

Other debt securities

     371         —           —          371   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     23,662         356         (1,882     22,136   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     60,451         72         (1,875     58,648   

Mutual funds - equity securities

     103,879         1,054         (12,044     92,889   

Equity Securities

     37,914         6,263         (657     43,520   

Other invested assets

     448         122         (570     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

   $ 243,926       $ 7,867       $ (17,028   $ 234,765   
  

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

     594         —           —          594   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 244,520       $ 7,867       $ (17,028   $ 235,359   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

As of December 31, 2010

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

Short-term investments

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

Fixed maturities:

          

U.S. Government and federal agency

     515         85         —          600   

U.S. State and local government agency

     67         81         —          148   

Corporate debt securities

     22,047         879         (234     22,692   

Other debt securities

     509         —           (1     508   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     23,138         1,045         (235     23,948   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     52,809         2,865         (525     55,149   

Mutual funds - equity securities

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

Equity Securities

     48,054         9,379         (181     57,252   

Other invested assets

     887         91         —          978   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

 

11


Table of Contents

The contractual maturities of debt securities as of September 30, 2011 are as follows:

 

As of September 30, 2011

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

U.S. Government and federal agency

   $ —         $ 388       $ 124       $ —     

U.S. State and local government agency

     148         —           —           —     

Corporate debt securities

     129         18,770         2,206         —     

Other debt securities

     371         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 648       $ 19,158       $ 2,330       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at September 30, 2011 and December 31, 2010 held in perpetual care trusts is presented below:

 

     Less than 12 months      12 Months or more      Total  

As of September 30, 2011

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

Fixed maturities:

                 

U.S. Government and federal agency

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

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

     18,482         1,718         952         164         19,434         1,882   

Other debt securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     18,482         1,718         952         164         19,434         1,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securites

     55,373         1,686         1,611         189         56,984         1,875   

Mutual funds - equity securites

     31,308         4,436         43,413         7,608         74,721         12,044   

Equity securities

     6,329         649         228         8         6,557         657   

Other invested assets

     —           570         —           —           —           570   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 111,492       $ 9,059       $ 46,204       $ 7,969       $ 157,696       $ 17,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 Months or more      Total  

As of December 31, 2010

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

Fixed maturities:

                 

U.S. Government and federal agency

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

U.S. State and local government agency

     —           —           —           —           —           —     

Corporate debt securities

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

Other debt securities

     137         1         —           —           137         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securites

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

Mutual funds - equity securites

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

Equity securities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

A reconciliation of the Company’s perpetual care trust activities for the nine months ended September 30, 2011 is presented below:

 

Fair
Value @
12/31/2010
    Contributions     Distributions     Interest/
Dividends
    Capital Gain
Distributions
    Realized
Gain/
Loss
    Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value @
9/30/2011
 
(in thousands)  
$ 249,690        7,452        (8,971     11,690        26        2,262        (865     (1,416     (24,509   $ 235,359   

The Company made net withdrawals out of the trusts of approximately $1.5 million during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, purchases and sales of securities available for sale included in trust investments were approximately $116.3 million and $111.1 million, respectively. Contributions included $3.0 million of assets that were acquired through acquisitions during the nine months ended September 30, 2011.

Other-than-temporary Impairments of Trust Assets

During the nine months ended September 30, 2011, the Company determined that there was a single security with an aggregate cost basis of less than $0.1 million which was substantially impaired, and such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of this asset to its current value and offset this change against the liability for perpetual care trust corpus. During the three months ended September 30, 2011, the Company determined that there were no other than temporary impairments to the investment portfolio for perpetual care trusts.

During the three and nine months ended September 30, 2010, the Company determined that there were 3 securities, with an aggregate cost basis of approximately $25.6 million, an aggregate fair value of approximately $10.8 million and a resulting impairment of approximately $14.8 million, wherein such impairment was 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 the liability for perpetual care trust corpus.

 

7. DERIVATIVE INSTRUMENTS

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

The Interest Rate Swaps did not qualify for hedge accounting. Accordingly, the fair value of the Interest Rate Swaps were reported on the Company’s balance sheet and periodic changes in the fair value of the Interest Rate Swaps were recorded in earnings. At September 30, 2010, the Company recorded an asset of approximately $2.0 million, which represents the fair value of the Interest Rate Swaps. The Company recorded a gain on the fair value of interest rate swaps of approximately $1.4 million and $4.6 million during the three and nine months ended September 30, 2010, respectively. The Interest Rate Swaps were terminated in October of 2010.

 

13


Table of Contents
8. LONG-TERM DEBT

The Company had the following outstanding debt:

 

     As of  
     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Insurance premium financing

   $ 452       $ 215   

Vehicle financing

     1,222         1,365   

Acquisition Credit Facility, due January 2016

     5,500         15,000   

Revolving Credit Facility, due January 2016

     18,000         18,500   

Note payable - Greenlawn acquisition

     1,355         1,400   

Note payable - Nelms acquisition (net of discount)

     706         866   

Note payable - Acquisition non-competes

     1,642         1,646   

10.25% Senior Notes, due 2017

     150,000         150,000   

Class B Senior Secured Notes, due 2012 (interest rate-12.50%)

     —           17,500   

Class C Senior Secured Notes, due 2012 (interest rate-12.50%)

     —           17,500   
  

 

 

    

 

 

 

Total

     178,877         223,992   

Less current portion

     1,743         1,386   

Less unamortized bond discount

     3,318         3,598   
  

 

 

    

 

 

 

Long-term portion

   $ 173,816       $ 219,008   
  

 

 

    

 

 

 

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

10.25% Senior Notes due 2017

Purchase Agreement

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

Indenture

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

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

The Indenture requires the Company, the Issuers and/or the Note Guarantors, as applicable, to comply with various covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its subsidiaries’ ability to (i) incur additional indebtedness; (ii) make certain dividends, distributions, redemptions or investments; (iii) enter into certain transactions with affiliates; (iv) create, incur, assume or permit to exist certain liens against their assets; (v) make certain sales of their assets; and (vi) engage in certain mergers, consolidations or sales of all or substantially all of their assets. The Indenture also contains various affirmative covenants regarding, among other things, delivery of certain reports filed with the SEC and materials required pursuant to Rule 144A under the Securities Act to holders of the Senior Notes and joinder of future subsidiaries as Note Guarantors under the Indenture. The Company was in compliance with all financial covenants at September 30, 2011.

 

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Note Purchase Agreement

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

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

Acquisition Credit Facility and Revolving Credit Facility

On April 29, 2011, the Company entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) among the Operating Company as the Borrower, each of the subsidiaries of the Operating Company as additional Borrowers, the General Partner and the Company as Guarantors, the Lenders identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The terms of the Credit Agreement are substantially the same as the terms of the prior agreement which was entered into on August 15, 2007 and amended eight times prior to entering into the Credit Agreement. The primary purpose of entering into the Credit Agreement was to consolidate the amendments to the prior agreement and to update outdated references. The current terms of the Credit Agreement are set forth below. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement.

The Credit Agreement provides for both an acquisition credit facility (the “Acquisition Credit Facility”) of $65.0 million and a revolving credit facility (the “Revolving Credit Facility” and, together with the Acquisition Credit Facility, the “Credit Facility”) of $55.0 million. At September 30, 2011, amounts outstanding under the Credit Facility bear interest at a rate of 5.75%. Amounts borrowed may be either Base Rate Loans or Eurodollar Rate Loans and once repaid or prepaid, amounts under the Acquisition Credit Facility may not be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.75% to 2.75% and 2.75% to 3.75%, respectively, depending on the Company’s Consolidated Leverage Ratio. The Base Rate is the highest of the Prime Rate, the Federal Funds Rate plus 0.50%, or the Eurodollar Rate plus 1.0%. The Eurodollar Rate is:

 

   

with respect to a Eurodollar Rate Loan, the higher of the British Bankers Association LIBOR Rate or 2.0%; and

 

   

with respect to a Base Rate Loan, the British Bankers Association LIBOR Rate.

The maturity date of the Credit Facility is January 29, 2016. The Company’s maximum Consolidated Leverage Ratio, which is the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA, is 3.65 to 1.0 for all Measurement Periods ending after December 31, 2010. In addition, the Company will not be permitted to have Maintenance Capital Expenditures, as defined in the Credit Agreement, for any Measurement Period ending in 2011, 2012 and 2013 exceeding $4.6 million, $5.2 million and $5.8 million, respectively, or $6.5 million for any Measurement Period ending in 2014 or thereafter. The Company will also not permit Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $52 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after February 9, 2011.

At the time of entering into the Credit Agreement, Consolidated Fixed Charge Coverage Ratio was required to be not less than 1.15x for any Measurement Period ending in 2011, or 1.20x for any Measurement Period thereafter.

On August 4, 2011, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”) to provide that the Company may not permit the Consolidated Fixed Charge Coverage Ratio to be less than 1.08x for any Measurement Period ending in the second and third fiscal quarters of 2011, 1.15x for any Measurement Period ending in the fourth quarter of 2011, or 1.20x thereafter. This amendment was effective on a retroactive basis to June 30, 2011.

On October 28, 2011, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”) to provide that the Company may not permit the Consolidated Fixed Charge Coverage Ratio to be less than 1.05x for any Measurement Period ending in the third and fourth fiscal quarters of 2011, or 1.20x thereafter. This amendment was effective on a retroactive basis to August 31, 2011.

 

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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 Commitment Fee Rate ranges from 0.5% to 0.75% depending on the Company’s Consolidated Leverage Ratio.

The Credit Agreement 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 revenues could cause the Company to breach certain of its financial covenants, such as the Consolidated Leverage Ratio, Consolidated Fixed Charge Coverage Ratio and the Consolidated EBITDA covenant, under the Credit Agreement. 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 September 30, 2011 the Company was in compliance with all applicable financial covenants.

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 and for other general corporate purposes. The Borrowers’ obligations under the Credit Agreement are guaranteed by both the Partnership and StoneMor GP LLC.

The Borrowers’ obligations under the Credit Facility are secured by a first priority lien and security interest in substantially all of the Borrowers’ assets, whether then owned or thereafter acquired, excluding: (i) trust accounts, certain proceeds required by law to be placed into such trust accounts and funds held in trust accounts; (ii) the General Partner’s interest in the Partnership, the incentive distribution rights under the Partnership’s partnership agreement and the deposit accounts of the General Partner into which distributions are received; (iii) Equipment subject to a purchase money security interest or equipment lease permitted under the Credit Agreement and certain other contract rights under which contractual, legal or other restrictions on assignment would prohibit the creation of a security interest or such creation of a security interest would result in a default thereunder.

Events of Default under the Credit Agreement include, but are not limited to, the following:

 

   

non-payment of any principal, interest or other amounts due under the Credit Agreement or any other Credit Document;

 

   

failure to observe or perform any covenants related to: (i) the delivery of financial statements, compliance certificates, reports and other information; (ii) providing prompt notice of Defaults and other events; (iii) the preservation of the legal existence and good standing of each Borrower and Guarantor; (iv) the ability of the Administrative Agent and each Lender to visit and inspect properties, examine books and records, and discuss financial and business affairs with directors, officers and independent public accountants of each Borrower and Guarantor; (v) restrictions on the use of proceeds; (vi) guarantees by new Subsidiaries; (vii) the maintenance of corporate formalities for each Borrower and Guarantor; (viii) the maintenance of Trust Accounts and Trust Funds; and (ix) any of the negative covenants contained in the Credit Agreement;

 

   

failure to observe or perform any other covenant, if uncured 30 days after notice thereof is provided by the Administrative Agent or Lenders;

 

   

any default under any other Indebtedness of the Borrowers or Guarantors;

 

   

any insolvency proceedings by a Borrower or Guarantor;

 

   

the insolvency of any Borrower or Guarantor, or a writ of attachment or execution or similar process issuing or being levied against any material part of the property of a Borrower or Guarantor; and

 

   

any Change in Control.

 

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9. INCOME TAXES

As of September 30, 2011, the Company’s taxable corporate subsidiaries had a federal net operating loss carryover of approximately $124.9 million, which will begin to expire in 2019 and $170.4 million in state net operating losses which begin to expire this year.

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

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

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

The provision for income taxes for the three and nine months ended September 30, 2011 and 2010 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2011 and 2010, respectively. The Company’s effective tax rate differs from its statutory tax rate primarily because the Company’s legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

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

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and any penalties in operating expenses. The Company has not recorded any material interest or penalties during the three and nine months ended September 30, 2011 or 2010. During the nine months ended September 30, 2011, the Company recorded an income tax benefit of approximately $0.9 million related to the reversal of uncertain tax positions for which the statute of limitations had expired.

 

10. DEFERRED CEMETERY REVENUES, NET

At September 30, 2011 and December 31, 2010, deferred cemetery revenues, net, consisted of the following:

 

     As of  
     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Deferred cemetery revenue

   $ 294,464      $ 266,754   

Deferred merchandise trust revenue

     46,089        28,999   

Deferred merchandise trust unrealized gains (losses)

     (22,202     11,307   

Deferred pre-acquisition margin

     122,914        117,309   

Deferred cost of goods sold

     (41,263     (37,904
  

 

 

   

 

 

 

Deferred cemetery revenues, net

   $ 400,002      $ 386,465   
  

 

 

   

 

 

 

Deferred selling and obtaining costs

   $ 65,819      $ 59,422   

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

 

11. COMMITMENTS AND CONTINGENCIES

Legal

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

 

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Leases

At September 30, 2011, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to five years and options to renew at varying terms. Expenses under operating leases were $0.6 million and $1.7 million for the three and nine months ended September 30, 2011, respectively, and $0.6 million and $1.6 million for the three and nine months ended 2010, respectively.

At September 30, 2011, operating leases will result in future payments in the following approximate amounts:

 

     (in thousands)  

2012

   $ 1,711   

2013

     1,505   

2014

     946   

2015

     681   

2016

     658   

Thereafter

     1,868   
  

 

 

 

Total

   $ 7,369   
  

 

 

 

 

12. PARTNERS’ CAPITAL

Unit-Based Compensation

The Company has issued to certain key employees and management unit-based compensation in the form of unit appreciation rights and phantom partnership units.

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three and nine months ended September 30, 2011 and 2010 are summarized in the table below:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Unit appreciation rights

   $ 119       $ 121       $ 358       $ 364   

Restricted phantom units

     76         69         218         179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unit-based compensation expense

   $ 195       $ 190       $ 576       $ 543   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2011, there was approximately $1.1 million in non-vested unit appreciation rights outstanding. These unit appreciation rights will be expensed through the first quarter of 2013.

On February 9, 2011, the Company completed a follow on public offering of 3,756,155 common units, including an option to purchase up to 731,155 common units to cover over-allotments which was exercised in full by the underwriters, at a price of $29.25 per unit, representing a 19.4% interest in the Company. Total gross proceeds from these transactions were approximately $109.9 million, before offering costs and underwriting discounts. Net proceeds of the offering, including the related capital contribution of the General Partner, after deducting underwriting discounts and offering expenses, were approximately $105.6 million. As part of this transaction, selling unitholders also sold 1,849,366 common units. The Company did not receive any of the proceeds generated by the sale of any units held by the selling unitholders.

On June 22, 2011, the Company issued 9,852 units in connection with an acquisition consummated in the second quarter of 2010. See Note 13.

 

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13. ACQUISITIONS

First Quarter 2011 Acquisition

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

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

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

 

     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 97   

Cemetery property

     1,710   

Merchandise trusts, restricted, at fair value

     880   

Perpetual care trusts, restricted, at fair value

     344   

Property and equipment

     332   

Other assets

     100   
  

 

 

 

Total assets

     3,463   
  

 

 

 

Liabilities:

  

Deferred margin

     795   

Merchandise liabilities

     734   

Perpetual care trust corpus

     344   
  

 

 

 

Total liabilities

     1,873   
  

 

 

 

Fair value of net assets acquired

     1,590   
  

 

 

 

Consideration paid

     1,700   
  

 

 

 

Goodwill from purchase

   $ 110   
  

 

 

 

Second Quarter 2011 Acquisition

On June 22, 2011, the Operating Company, StoneMor Missouri LLC, a Missouri limited liability company and StoneMor Missouri Subsidiary LLC, a Missouri limited liability company, each a wholly-owned subsidiary of the Company (collectively the “Buyer”), entered into an Asset Purchase and Sale Agreement (the “2nd Quarter Purchase Agreement”) with SCI International, LLC, a Delaware limited liability company and Keystone America, Inc., a Delaware corporation (collectively the “Seller” or “SCI Missouri”).

Pursuant to the 2nd Quarter Purchase Agreement, the Buyer acquired three cemeteries and four funeral homes in Missouri, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $2.15 million in cash.

 

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

 

     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 104   

Cemetery property

     880   

Merchandise trusts, restricted, at fair value

     2,622   

Perpetual care trusts, restricted, at fair value

     1,195   

Property and equipment

     1,783   
  

 

 

 

Total assets

     6,584   
  

 

 

 

Liabilities:

  

Deferred margin

     1,420   

Merchandise liabilities

     1,701   

Perpetual care trust corpus

     1,195   

Deferred tax liability

     400   
  

 

 

 

Total liabilities

     4,716   
  

 

 

 

Fair value of net assets acquired

     1,868   
  

 

 

 

Consideration paid

     2,150   
  

 

 

 

Goodwill from purchase

   $ 282   
  

 

 

 

Third Quarter 2011 Acquisitions

On August 1, 2011, the Operating Company and CFS West Virginia, an affiliate of the Operating Company, (collectively the “Buyer”) entered into a Stock Purchase Agreement with three individuals (collectively the “Seller”) to purchase all of the stock of Prince George Cemetery Corporation, a Virginia corporation. Through the purchase of Prince George Cemetery Corporation, the Buyer acquired one cemetery in Virginia. In consideration for the stock acquired, the Buyer paid the Seller approximately $1.9 million in cash. The Buyer will also pay $0.3 million in cash in even quarterly installments over a five year period in exchange for non-compete agreements with the Seller.

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

 

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     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 89   

Cemetery property

     2,277   

Merchandise trusts, restricted, at fair value

     577   

Perpetual care trusts, restricted, at fair value

     898   

Property and equipment

     125   

Other assets

     160   
  

 

 

 

Total assets

     4,126   
  

 

 

 

Liabilities:

  

Deferred margin

     360   

Merchandise liabilities

     332   

Deferred tax liability

     810   

Perpetual care trust corpus

     898   
  

 

 

 

Total liabilities

     2,400   
  

 

 

 

Fair value of net assets acquired

     1,726   
  

 

 

 

Consideration paid at closing

     1,850   
  

 

 

 

Consideration to be paid

     280   
  

 

 

 

Total consideration

   $ 2,130   
  

 

 

 

Goodwill from purchase

   $ 404   
  

 

 

 

Also, on August 17, 2011, the Operating Company, StoneMor Puerto Rico LLC, a Puerto Rico limited liability company and StoneMor Puerto Rico Subsidiary LLC, a Puerto Rico limited liability company, each a wholly-owned subsidiary of the Company (collectively the “Buyer”), entered into a Stock Purchase Agreement with Alderwoods Group, LLC, a Delaware limited liability company (the “Seller” or “SCI Puerto Rico”) to purchase all of the stock of SCI Puerto Rico Funeral and Cemetery Services, Inc., a Puerto Rico corporation. Through the purchase of SCI Puerto Rico Funeral and Cemetery Services, Inc., the Buyer acquired five cemeteries and four funeral homes in Puerto Rico. In consideration for the stock acquired, the Buyer paid the Seller $4.6 million in cash.

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

 

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     Preliminary  
     Assessment  
     (in thousands)  

Assets:

  

Accounts receivable

   $ 3,844   

Cemetery property

     4,730   

Perpetual care trusts, restricted, at fair value

     594   

Property and equipment

     3,570   
  

 

 

 

Total assets

     12,738   
  

 

 

 

Liabilities:

  

Deferred margin

     5,526   

Merchandise liabilities

     5,100   

Deferred tax liability

     640   

Perpetual care trust corpus

     594   
  

 

 

 

Total liabilities

     11,860   
  

 

 

 

Fair value of net assets acquired

     878   
  

 

 

 

Consideration paid

     4,600   
  

 

 

 

Goodwill from purchase

   $ 3,722   
  

 

 

 

The results of operations and pro forma results related to the acquisitions made in 2011 are not material to the unaudited condensed consolidated financial statements taken as a whole.

First Quarter 2010 Acquisition

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

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

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

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

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

 

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

 

     Final
Assessment
 
     (in thousands)  

Assets:

  

Cemetery property

   $ 33,761   

Accounts receivable

     2,651   

Merchandise trusts, restricted, at fair value

     48,027   

Perpetual care trusts, restricted, at fair value

     15,084   

Property and equipment

     5,768   
  

 

 

 

Total assets

     105,291   
  

 

 

 

Liabilities:

  

Deferred margin

     31,094   

Merchandise liabilities

     30,126   

Deferred income tax liability, net

     7,879   

Perpetual care trust corpus

     15,084   
  

 

 

 

Total liabilities

     84,183   
  

 

 

 

Fair value of net assets acquired

     21,108   
  

 

 

 

Consideration paid

     14,015   
  

 

 

 

Gain on bargain purchase

   $ 7,093   
  

 

 

 

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 nonprofit corporation (“Ohio Nonprofit,” 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.

 

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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 consideration, including the offset by the funds held in the Smith Barney Account, of approximately $32.5 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.

The Installment Notes were issued effective June 21, 2010 and mature April 1, 2014. The Installment Notes are to be paid over a 4 year period and do not have a stated rate of interest. The Company has recorded the Installment Notes at their fair market value of approximately $2.6 million. The face amounts of the Installment Notes were discounted approximately $0.7 million, and the discount will be amortized to interest expense over the life of the Installment Notes. 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.

 

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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 which were initially valued at a fair value of $0.5 million based on a unit price of $20.30 just prior to the date of acquisition. As a result, the Company issued 9,852 units in June of 2011, resulting in a charge to partners’ capital of approximately $0.3 million. The Company is also obligated to issue an additional 9,852 units and 4,926 units in June of 2012 and June of 2013, respectively.

The table below reflects the Company’s final assessment of the fair value of net assets received, the purchase price and the resulting goodwill from the purchase and displays the adjustment made from the adjusted values reported at December 31, 2010. The Company obtained additional information in the second quarter of 2011 and has retrospectively adjusted these preliminary values as noted below.

 

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     Preliminary
Assessment
     Adjustments     Final
Assessment
 
            (in thousands)        

Assets:

       

Cemetery land

   $ 21,686       $ —        $ 21,686   

Cemetery and funeral home property

     9,039         —          9,039   

Accounts receivable

     2,138         —          2,138   

Merchandise trusts, restricted, at fair value

     17,142         1,806        18,948   

Perpetual care trusts, restricted, at fair value

     3,349         733        4,082   

Other assets

     4,369         422        4,791   
  

 

 

    

 

 

   

 

 

 

Total assets

     57,723         2,961        60,684   
  

 

 

    

 

 

   

 

 

 

Liabilities:

       

Deferred margin

     15,939         —          15,939   

Merchandise liabilities

     15,543         —          15,543   

Deferred income tax liability, net

     9,426         302        9,728   

Perpetual care trust corpus

     3,349         733        4,082   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     44,257         1,035        45,292   
  

 

 

    

 

 

   

 

 

 

Fair value of net assets acquired

     13,466         1,926        15,392   
  

 

 

    

 

 

   

 

 

 

Paid at closing - purchase price

     10,417         —          10,417   
  

 

 

    

 

 

   

 

 

 

Paid at closing - units

     5,785         110        5,895   
  

 

 

    

 

 

   

 

 

 

Paid at closing - liabilities incurred

   $ 3,648       $ —        $ 3,648   
  

 

 

    

 

 

   

 

 

 

Goodwill from purchase

   $ 18,914       $ (1,816   $ 17,098   

Total purchase price

     19,850         110        19,960   

Paid at closing - trust underfunding

     12,530         —          12,530   

Total paid at closing

     32,380         110        32,490   

If the acquisitions from the first and second quarters of 2010 had been consummated on January 1, 2010, on a pro forma basis, for the three and nine months ended September 30, 2010, consolidated revenues would have been $55.1 million and $149.0 million, respectively, consolidated net income (loss) would have been $(2.1) million and $1.7 million, respectively and net income (loss) per limited partner unit (basic and diluted) would have been $(0.15) and $0.12, respectively.

Third Quarter 2010 Acquisition and Long-Term Operating Agreement

During the third quarter of 2010, certain subsidiaries of the Company entered into a long-term operating agreement (the “Operating Agreement”) with the Archdiocese of Detroit (the “Archdiocese”) wherein the Company became the exclusive operator of certain cemeteries owned by the Archdiocese.

Key terms and conditions of the operating agreement include, but are not limited to, the following:

 

1. There was no consideration paid by either party to effect the execution of the Operating Agreement.

 

2. The Archdiocese will pay the Company a management fee in the amounts of $0.5 million, $0.4 million and $0.3 million during the first three years of the agreement. This fee is in addition to any revenues the Company will earn from operating the property. No monies will be transferred during Year 4. The Company will pay the Archdiocese a fee in an amount equal to 5% of revenues beginning in Year 5. Total amounts paid are capped at $0.3 million, $0.4 million and $0.5 million during years five through seven consecutively.

 

3. The operating agreement is for a term of 40 years (subject to certain termination rights).

 

4. The Company shall acquire the exclusive rights to all of the property and assets of each cemetery, including but not limited to, the use of all land for interment purposes; the sum of accounts receivable and merchandise trust funds in force for existing pre-need contracts.

 

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The Company has concluded that this Operating Agreement does not qualify as a variable interest entity because the Company does not control the entity. However, the existing merchandise trust, which had a fair value of approximately $3.5 million as of the contract date, has been consolidated as a variable interest entity as the Company controls and directly benefits from the operations of the merchandise trust. Other liabilities assumed by the Company have also been recorded as of the contract date. As no consideration was paid in this transaction, the Company has recorded a deferred gain of approximately $3.1 million within deferred cemetery revenues, net, which represent the excess of the value of the merchandise trust over the liabilities assumed. This amount will be amortized as the Company recognizes the benefits of ownership associated with the merchandise trust.

The table below reflects the amounts recorded on the contract date either through consolidation as a VIE or the assumption of a liability, resulting in a deferred gain.

 

     Final
Assessment
 
     (in thousands)  

Assets:

  

Merchandise trusts, restricted, at fair value

   $ 3,493   

Liabilities:

  

Deferred margin

     208   

Merchandise liabilities

     192   
  

 

 

 

Net assets recorded

     3,093   

Consideration paid

     —     
  

 

 

 

Deferred gain

   $ 3,093   
  

 

 

 

Also during the third quarter of 2010, the Company purchased a single cemetery for $1.5 million, which included the payoff of an existing mortgage of $0.3 million. At September 30, 2010, the Company had made a provisional assessment of the fair value of net assets acquired for this transaction. The Company obtained additional information in the fourth quarter of 2010 and had retrospectively adjusted these preliminary values as of December 31, 2010.

The table below reflects the Company’s final assessment of the fair value of net assets received, the purchase price and the resulting gain on a bargain purchase and displays the adjustment made from the adjusted values reported at December 31, 2010. The Company obtained additional information in the second quarter of 2011 and has retrospectively adjusted these preliminary values as noted below.

 

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     Preliminary
Assessment
     Adjustments     Final
Assessment
 
            (in thousands)        

Assets:

       

Accounts receivable

   $ 1,003       $ (134   $ 869   

Cemetery property

     2,831           2,831   

Property and equipment

     607           607   

Merchandise trusts, restricted, at fair value

     3,080           3,080   

Perpetual care trusts, restricted, at fair value

     1,089           1,089   

Intangible assets

     340           340   
  

 

 

    

 

 

   

 

 

 

Total assets

     8,950         (134     8,816   
  

 

 

    

 

 

   

 

 

 

Liabilities:

       

Deferred margin

     2,537         (133     2,404   

Other liabilities

     318           318   

Merchandise liabilities

     2,342           2,342   

Deferred tax liabilities

     1,104           1,104   

Perpetual care trust corpus

     1,089         —          1,089   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     7,390         (133     7,257   
  

 

 

    

 

 

   

 

 

 

Fair value of net assets acquired

     1,560         (1     1,559   
  

 

 

    

 

 

   

 

 

 

Consideration paid

     1,500         —          1,500   
  

 

 

    

 

 

   

 

 

 

Gain on bargain purchase

   $ 60       $ (1   $ 59   
  

 

 

    

 

 

   

 

 

 

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

The accounting for an acquisition made in the fourth quarter of 2010 has still not been finalized and is subject to further adjustment during 2011. During the second quarter of 2011, the Company obtained additional information related to the acquisition made in the fourth quarter of 2010. These adjustments resulted in changes to amounts reported on the balance sheet at December 31, 2010 as follows; an increase to goodwill of $0.1 million and a decrease to long-term accounts receivable of $0.1 million.

 

14. SEGMENT INFORMATION

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

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

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

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

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

 

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Segment information as of and for the three and nine months ended September 30, 2011 and 2010 is as follows:

As of and for the three months ended September 30, 2011:

 

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

Revenues

                  

Sales

   $ 19,480       $ 7,744       $ 11,939       $ —         $ —        $ (5,000   $ 34,163   

Service and other

     7,354         6,007         7,136         —           —          (1,834     18,663   

Funeral home

     —           —           —           7,705         —          (206     7,499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     26,834         13,751         19,075         7,705         —          (7,040     60,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     4,056         1,965         2,127         —           —          (988     7,160   

Cemetery

     6,009         3,770         5,533         —           —          —          15,312   

Selling

     6,686         2,693         3,621         —           130        (938     12,192   

General and administrative

     3,279         1,535         2,297         —           —          —          7,111   

Corporate overhead

     —           —           —           —           5,628        —          5,628   

Depreciation and amortization

     425         219         444         391         407        —          1,886   

Funeral home

     —           —           —           5,868         —          —          5,868   

Acquisition related costs

     —           —           —           —           1,189        —          1,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     20,455         10,182         14,022         6,259         7,354        (1,926     56,346   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

   $ 6,379       $ 3,569       $ 5,053       $ 1,446       $ (7,354   $ (5,114   $ 3,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 438,653       $ 275,081       $ 365,737       $ 55,117       $ 35,865      $ —        $ 1,170,453   

Amortization of cemetery property

   $ 839       $ 442       $ 441       $ —         $ —        $ (268   $ 1,454   

Long lived asset additions

   $ 7,735       $ 472       $ 1,834       $ 3,869       $ 236      $ —        $ 14,146   

Goodwill

   $ 3,629       $ —         $ 11,586       $ 7,456       $ —        $ —        $ 22,671   

 

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As of and for the nine months ended September 30, 2011:

 

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

Revenues

                  

Sales

   $ 59,448       $ 24,277       $ 34,960       $ —         $ 5      $ (25,203   $ 93,487   

Service and other

     23,533         17,586         22,207         —           —          (9,344     53,982   

Funeral home

     —           —           —           22,749         —          (555     22,194   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     82,981         41,863         57,167         22,749         5        (35,102     169,663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     12,128         5,281         5,743         —           —          (3,783     19,369   

Cemetery

     17,036         10,739         15,085         —           —          —          42,860   

Selling

     20,292         8,464         10,336         —           807        (5,976     33,923   

General and administrative

     9,547         4,555         6,469         —           (2     —          20,569   

Corporate overhead

     —           —           —           —           17,572        —          17,572   

Depreciation and amortization

     1,183         663         1,686         1,118         1,724        —          6,374   

Funeral home

     —           —           —           16,875         —          —          16,875   

Acquisition related costs

     —           —           —           —           3,147        —          3,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     60,186         29,702         39,319         17,993         23,248        (9,759     160,689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

   $ 22,795       $ 12,161       $ 17,848       $ 4,756       $ (23,243   $ (25,343   $ 8,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 438,653       $ 275,081       $ 365,737       $ 55,117       $ 35,865      $ —        $ 1,170,453   

Amortization of cemetery property

   $ 2,592       $ 1,582       $ 835       $ —         $ —        $ (597   $ 4,412   

Long lived asset additions

   $ 11,607       $ 1,223       $ 5,111       $ 5,909       $ 540      $ —        $ 24,390   

Goodwill

   $ 3,629       $ —         $ 11,586       $ 7,456       $ —        $ —        $ 22,671   

As of and for the three months ended September 30, 2010:

 

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

Revenues

                  

Sales

   $ 18,807       $ 8,474       $ 10,232       $ —         $ —        $ (8,166   $ 29,347   

Service and other

     7,610         6,153         6,898         —           —          (4,386     16,275   

Funeral home

     —           —           —           6,688         —          (180     6,508   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     26,417         14,627         17,130         6,688         —          (12,732     52,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     3,975         1,988         1,783         —           —          (1,278     6,468   

Cemetery

     5,354         3,482         4,670         —           —          —          13,506   

Selling

     5,967         2,690         3,112         —           172        (1,643     10,298   

General and administrative

     3,004         1,502         1,812         —           9        —          6,327   

Corporate overhead

     —           —           —           —           5,360        —          5,360   

Depreciation and amortization

     417         192         454         253         1,150        —          2,466   

Funeral home

     —           —           —           5,025         —          —          5,025   

Acquisition related costs

     —           —           —           —           1,963        —          1,963   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     18,717         9,854         11,831         5,278         8,654        (2,921     51,413   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

   $ 7,700       $ 4,773       $ 5,299       $ 1,410       $ (8,654   $ (9,811   $ 717   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 369,567       $ 260,912       $ 348,006       $ 48,668       $ 92,475      $ —        $ 1,119,628   

Amortization of cemetery property

   $ 760       $ 544       $ 182       $ —         $ —        $ (92   $ 1,394   

Long lived asset additions

   $ 476       $ 3,611       $ 1,476       $ 202       $ 31      $ —        $ 5,796   

Goodwill

   $ 456       $ —         $ 11,304       $ 5,818       $ —        $ —        $ 17,578   

 

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As of and for the nine months ended September 30, 2010:

 

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

Revenues

                  

Sales

   $ 58,231       $ 25,250       $ 26,469       $ —         $ —        $ (33,613   $ 76,337   

Service and other

     19,039         16,424         13,223         —           —          (1,645     47,041   

Funeral home

     —           —           —           18,651         —          (492     18,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     77,270         41,674         39,692         18,651         —          (35,750     141,537   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     11,975         5,298         4,311         —           7        (5,398     16,193   

Cemetery

     15,057         9,822         9,963         —           —          (3     34,839   

Selling

     18,490         8,087         7,843         —           490        (7,529     27,381   

General and administrative

     8,910         4,473         4,690         —           13        —          18,086   

Corporate overhead

     —           —           —           —           16,054        —          16,054   

Depreciation and amortization

     1,155         571         759         820         2,900        —          6,205   

Funeral home

     —           —           —           14,120         —          (22     14,098   

Acquisition related costs

     —           —           —           —           4,619        —          4,619   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     55,587         28,251         27,566         14,940         24,083        (12,952     137,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

   $ 21,683       $ 13,423       $ 12,126       $ 3,711       $ (24,083   $ (22,798   $ 4,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 369,567       $ 260,912       $ 348,006       $ 48,668       $ 92,475      $ —        $ 1,119,628   

Amortization of cemetery property

   $ 2,345       $ 1,615       $ 475       $ —         $ —        $ (482   $ 3,953   

Long lived asset additions

   $ 2,440       $ 4,524       $ 64,402       $ 8,055       $ 78      $ —        $ 79,499   

Goodwill

   $ 456       $ —         $ 11,304       $ 5,818       $ —        $ —        $ 17,578   

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

 

15. FAIR VALUE MEASUREMENTS

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

 

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Level 1: Quoted market prices available in active markets for identical assets or liabilities. The Company includes short-term investments, consisting primarily of money market funds, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.

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

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

The following table allocates the Company’s assets and liabilities measured at fair value as of September 30, 2011 and December 31, 2010.

 

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As of September 30, 2011

Merchandise Trust

 

Description

   Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 27,242       $ —         $ 27,242   

Fixed maturities:

        

U.S. government and federal agency

     —           —           —     

U.S. state and local government agency

     —           23         23   

Corporate debt securities

     —           9,337         9,337   

Other debt securities

     —           2,461         2,461   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           11,821         11,821   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     65,959         —           65,959   

Mutual funds - equity securities - real estate sector

     19,998         —           19,998   

Mutual funds - equity securities - energy sector

     24,421         —           24,421   

Mutual funds - equity securities - MLP’s

     18,488         —           18,488   

Mutual funds - equity securities - other

     61,616         —           61,616   

Equity securities

        

Preferred REIT’s

     9,027         —