Form 10-Q/A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

Amendment No. 1

 

 

(Mark One)

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

For the quarterly period ended June 30, 2016

or

 

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

For the transition period from                     to                    .

Commission File Number: 001-32270

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3600 Horizon Boulevard

Trevose, Pennsylvania

  19053
(Address of principal executive offices)   (Zip Code)

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

Large accelerated filer      Accelerated filer  
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   ☒

The number of the registrant’s outstanding common units at August 1, 2016 was 35,439,047.

 

 

 


Table of Contents

Explanatory Note

We are filing this Amendment No. 1 to our quarterly report on Form 10-Q (“Form 10-Q/A”) for the period ended June 30, 2016 which was originally filed on August 5, 2016 (“Original Filing”), to restate the Partnership’s consolidated financial statements as of June 30, 2016 and December 31, 2015 and for both the three and six months ended June 30, 2016 and 2015, as well as the related notes included in the Original Filing (“Restatement”).

This Form 10-Q/A contains only Item 1 (Financial Statements), Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), Item 4 (Controls and Procedures) of Part I and Item 6 (Exhibits) of Part II , and items including information not affected by the Restatement have not been repeated in this Form 10-Q/A.

The Restatement corrects accounting errors related to:

 

  1) The allocation of net loss to the General Partner and the limited partners for the purposes of determining the general partner’s and limited partners’ capital accounts presented within “Partners’ capital,” and the corresponding effect on “net loss per limited partner unit (basic and diluted)” for each of the three and six months ended June 30, 2016 and 2015;

 

  2) The presentation of certain components of “Cemetery property”, “Property and equipment, net of accumulated depreciation”, “Deferred cemetery revenues, net”, “Merchandise liability”, “Accounts payable and accrued liabilities” and “Common limited partners’ interest” as of June 30, 2016 and December 31, 2015;

 

  3) The presentation of “Cemetery merchandise revenues”, Cemetery service revenues”, and “Cost of goods sold” related to assumed performance obligations from acquisitions for each of the three and six months ended June 30, 2016 and 2015;

 

  4) The recording of incorrect amounts of investment revenues and expenses related to merchandise and perpetual care trusts on the consolidated statement of operations and the incorrect tracking of perpetual care-trusting obligations on the consolidated balance sheets;

 

  5) The recognition of incorrect amounts of revenue from deferred pre-acquisition contracts in the consolidated statements of operations based on inaccurate system inputs;

 

  6) Other adjustments principally relating to the recognition, accuracy and/or classification of certain amounts in “Deferred cemetery revenues, net”, “Merchandise liabilities”, and “Other current assets”; and

 

  7) The corresponding effect of the foregoing accounting errors on the Partnership’s income tax accounts, consolidated statement of partners’ capital, consolidated statement of cash flows, and the related notes thereto, disclosed in the Partnership’s consolidated financial statements as of June 30, 2016 and 2015 and for each of the three and six months ended June 30, 2016 and 2015 included in “Item 1 – Financial Statements (unaudited)” to this Form 10-Q/A.

Note 2, Restatement of Previously Issued Consolidated Financial Statements, in the Partnership’s consolidated financial statements included in Item 1 provides further information regarding the Restatement. “Item 4 – Controls and Procedures” to this Form 10-Q/A discloses the material weaknesses in the Partnership’s internal controls associated with the Restatement, as well as management’s conclusion that the Partnership’s internal controls over financial reporting were not effective as of December 31, 2015 and June 30, 2016. As disclosed therein, management is currently evaluating the changes needed in the Partnership’s internal controls over financial reporting to remediate these material weaknesses.

This Form 10-Q/A does not reflect events occurring after the filing of the Original Filing and does not substantively modify or update the disclosures therein other than as required to reflect the adjustments described above and to state our current address of principal executive offices on the cover page of Form 10-Q/A. See Note 2 to the accompanying consolidated financial statements, set forth in Item 1 of this Form 10-Q/A, for additional information.

We are also filing currently dated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1, and 32.2 to this Form 10-Q/A.

Unless the context otherwise requires, references to “we,” “us,” “our,” “StoneMor,” the “Company,” or the “Partnership” are to StoneMor Partners L.P. and its subsidiaries.


Table of Contents

Index – Form 10-Q/A

 

         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

     31   
Item 4.  

Controls and Procedures

     44   
Part II  

Other Information

  
Item 6.  

Exhibits

     45   
 

Signatures

     46   


Table of Contents

Part I – Financial Information

 

ITEM 1. FINANCIAL STATEMENTS

STONEMOR PARTNERS L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

     June 30, 2016     December 31, 2015  
     (As restated - see Note 2)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 9,436      $ 15,153   

Accounts receivable, net of allowance

     74,231        68,415   

Prepaid expenses

     7,037        5,367   

Other current assets

     21,823        22,241   
  

 

 

   

 

 

 

Total current assets

     112,527        111,176   

Long-term accounts receivable, net of allowance

     95,121        95,167   

Cemetery property

     333,859        334,457   

Property and equipment, net of accumulated depreciation

     114,790        116,127   

Merchandise trusts, restricted, at fair value

     494,596        464,676   

Perpetual care trusts, restricted, at fair value

     321,700        307,804   

Deferred selling and obtaining costs

     118,410        111,542   

Deferred tax assets

     181        181   

Goodwill

     70,572        69,851   

Intangible assets

     66,098        67,209   

Other assets

     18,341        16,167   
  

 

 

   

 

 

 

Total assets

   $ 1,746,195      $ 1,694,357   
  

 

 

   

 

 

 

Liabilities and Partners’ Capital

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 33,660      $ 29,989   

Accrued interest

     1,473        1,503   

Current portion, long-term debt

     5,373        2,440   
  

 

 

   

 

 

 

Total current liabilities

     40,506        33,932   

Long-term debt, net of deferred financing costs

     277,854        316,399   

Deferred revenues

     868,194        815,421   

Deferred tax liabilities

     17,828        17,747   

Perpetual care trust corpus

     321,700        307,804   

Other long-term liabilities

     24,209        21,508   
  

 

 

   

 

 

 

Total liabilities

     1,550,291        1,512,811   
  

 

 

   

 

 

 

Commitments and contingencies

    

Partners’ Capital

    

General partner interest

     (632     15   

Common limited partners’ interests

     196,536        181,531   
  

 

 

   

 

 

 

Total partners’ capital

     195,904        181,546   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 1,746,195      $ 1,694,357   
  

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

(unaudited)

 

     Three months ended June 30,     Six months ended June 30,  
     2016     2015     2016     2015  
     (As restated - see Note 2)  

Revenues:

        

Cemetery:

        

Merchandise

   $ 37,855      $ 38,999      $ 70,623      $ 68,402   

Services

     13,676        15,367        27,139        29,924   

Investment and other

     12,012        16,653        26,387        27,926   

Funeral home:

        

Merchandise

     6,569        6,250        14,025        13,325   

Services

     8,170        7,244        17,037        15,429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     78,282        84,513        155,211        155,006   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses:

        

Cost of goods sold

     12,042        13,333        22,762        23,162   

Cemetery expense

     17,485        19,279        33,341        35,544   

Selling expense

     16,391        15,769        30,967        29,679   

General and administrative expense

     8,993        9,192        18,197        18,521   

Corporate overhead

     9,737        10,429        20,048        19,512   

Depreciation and amortization

     3,155        2,944        6,220        5,896   

Funeral home expenses:

        

Merchandise

     1,835        2,066        3,984        4,442   

Services

     6,151        5,703        12,602        11,296   

Other

     4,746        4,380        9,886        8,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     80,535        83,095        158,007        156,613   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,253     1,418        (2,796     (1,607

Other gains (losses), net

     (191     —          (1,073     —     

Interest expense

     (5,707     (5,770     (11,497     (11,233
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (8,151     (4,352     (15,366     (12,840

Income tax benefit (expense)

     (500     (292     (760     (314
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,651   $ (4,644   $ (16,126   $ (13,154
  

 

 

   

 

 

   

 

 

   

 

 

 

General partner’s interest

   $ 1,085      $ 899      $ 2,173      $ 1,584   

Limited partners’ interest

   $ (9,736   $ (5,543   $ (18,299   $ (14,738

Net loss per limited partner unit (basic and diluted)

   $ (0.28   $ (0.19   $ (0.54   $ (0.50

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

     34,837        29,286        33,688        29,258   

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(dollars in thousands)

(unaudited)

 

     Partners’ Capital  
     Outstanding      Common     General        
     Common Units      Limited Partners     Partner     Total  
     (As restated - see Note 2)  

December 31, 2015

     32,108,782       $ 181,531      $ 15      $ 181,546   

Issuance of common units

     3,203,682         77,345        —          77,345   

Common unit awards under incentive plans

     9,293         820        —          820   

Net loss

     —           (18,299     2,173        (16,126

Cash distributions

     —           (41,883     (2,820     (44,703

Unit distributions paid in kind

     117,290         (2,978     —          (2,978
  

 

 

    

 

 

   

 

 

   

 

 

 

June 30, 2016

     35,439,047       $ 196,536      $ (632   $ 195,904   
  

 

 

    

 

 

   

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six months ended June 30,  
     2016     2015  
     (As restated - see Note 2)  

Cash Flows From Operating Activities:

    

Net loss

   $ (16,126   $ (13,154

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

    

Cost of lots sold

     4,443        4,917   

Depreciation and amortization

     6,220        5,896   

Non-cash compensation expense

     820        547   

Non-cash interest expense

     1,534        1,467   

Other gains (losses), net

     1,073        —     

Changes in assets and liabilities:

    

Accounts receivable, net of allowance

     (5,867     (9,469

Merchandise trust fund

     (10,517     (23,478

Other assets

     (3,740     (4,352

Deferred selling and obtaining costs

     (6,868     (7,483

Deferred revenue

     32,516        43,755   

Deferred taxes (net)

     81        (129

Payables and other liabilities

     4,890        5,458   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,459        3,975   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Cash paid for capital expenditures

     (7,504     (7,250

Cash paid for acquisitions

     (1,500     —     

Proceeds from asset sales

     1,848        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,156     (7,250
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Cash distributions

     (44,703     (36,297

Proceeds from borrowings

     38,744        56,823   

Repayments of debt

     (75,247     (14,215

Proceeds from issuance of common units

     74,537        —     

Cost of financing activities

     (351     (34
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (7,020     6,277   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (5,717     3,002   

Cash and cash equivalents - Beginning of period

     15,153        10,401   
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 9,436      $ 13,403   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 9,994      $ 9,551   

Cash paid during the period for income taxes

   $ 2,325      $ 3,516   

Non-cash investing and financing activities:

    

Acquisition of assets by financing

   $ 137      $ 242   

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

1. GENERAL

Nature of Operations

StoneMor Partners L.P. (the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. As of June 30, 2016, the Partnership operated 307 cemeteries in 27 states and Puerto Rico, of which 276 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 107 funeral homes in 19 states and Puerto Rico.

Basis of Presentation

The accompanying consolidated financial statements, which are unaudited except for the balance sheet at December 31, 2015, which is derived from audited financial statements, are presented in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Partnership’s financial position, results of operations and cash flows for the periods disclosed have been made. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto presented in Amendment No. 1 to the Partnership’s Annual Report on Form 10-K/A for the year ended December 31, 2015. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation. The results of operations for the three and six months ended June 30, 2016 may not necessarily be indicative of the results of operations for the full year ending December 31, 2016.

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of each of the Partnership’s wholly-owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Partnership has a variable interest and is the primary beneficiary. The Partnership operates 31 cemeteries under long-term lease, operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated.

The Partnership operates 15 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Partnership did not consolidate all of the existing assets and liabilities related to these cemeteries. The Partnership has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities since the Partnership controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Partnership is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services, and interment rights, and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Partnership will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Partnership has also recognized the existing performance obligations that it assumed as part of these agreements.

New Accounting Pronouncements

In the second quarter of 2014, the Financial Accounting Standards Board (“FASB”) issued Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in “Topic 605—Revenue Recognition” and most industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During the third quarter of 2015, Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606)” was released, deferring the effective date of the amendments to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted, only as of an annual reporting

 

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period beginning after December 15, 2016. During the first quarter of 2016, Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606)” was released, which clarifies the implementation guidance on principal versus agent considerations. During the second quarter of 2016, Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606)” was released, which clarifies the implementation guidance on identifying performance obligations. The FASB also issued Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). The core principle of ASU 2016-12 is to narrow scope improvements and practical expedients by clarifying the collectability criteria for customer collection exclusions representing an improvement over previous guidance. The Partnership will adopt the requirements of these updates upon the effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations or related disclosures.

In the first quarter of 2016, the FASB issued Update No. 2016-01, “Financial Instruments (Subtopic 825-10)” (“ASU 2016-01”). The core principle of ASU 2016-01 is that equity investments should be measured at fair value with changes in the fair value recognized through net income. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted for the key aspects of the amendment. The Partnership will adopt the requirements of ASU 2016-01 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.

In the first quarter of 2016, the FASB issued Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The core principle of ASU 2016-02 is that all leases create an asset and a liability for lessees and recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The amendment is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-02 upon its effective date of January 1, 2019, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.

In the second quarter of 2016, the FASB issued Update No. 2016-13, “Credit Losses (Topic 326)” (“ASU 2016-13”). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions, and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. The amendment is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-13 upon its effective date of January 1, 2020, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.

In 2015, the FASB issued Update No. 2015-07, “Fair Value Measurement (Topic 820).” The amendments in this update removed the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient. The entity adopted this guidance in the current period pertaining to its new investment funds (see Notes 6, 7 and 14).

Use of Estimates

The preparation of the Partnership’s unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited consolidated financial statements, as well as the reported amounts of revenue and expense during the reporting periods. The Partnership’s unaudited consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depreciation and amortization, merchandise trusts and perpetual care trusts asset valuation, allowance for cancellations, unit-based compensation, deferred contract revenues, deferred merchandise trust investment earnings, deferred selling and obtaining costs, assets and liabilities obtained via business combinations and income taxes. As a result, actual results could differ from those estimates.

Net Income (Loss) per Common Unit

Basic net income (loss) attributable to common limited partners per unit is computed by dividing net income (loss) attributable to common limited partners, which is determined after the deduction of the general partner’s interest, by the weighted average number of common limited partner units outstanding during the period. Net income (loss) attributable to common limited partners is determined by deducting net income attributable to participating securities, if applicable and net income (loss) attributable to the general partner’s units. The general partner’s interest in net income (loss) is

 

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calculated on a quarterly basis based upon its ownership interest and incentive distributions to be distributed for the quarter, with a priority allocation of net income to the general partner’s incentive distributions, if any, in accordance with the partnership agreement, and the remaining net income (loss) allocated with respect to the general partner’s and limited partners’ ownership interests.

The Partnership presents net income (loss) per unit under the two-class method for master limited partnerships, which considers whether the incentive distributions of a master limited partnership represent a participating security when considered in the calculation of earnings per unit under the two-class method. The two-class method considers whether the partnership agreement contains any contractual limitations concerning distributions to the incentive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. If distributions are contractually limited to the incentive distribution rights’ share of currently designated available cash for distributions as defined under the partnership agreement, undistributed earnings in excess of available cash should not be allocated to the incentive distribution rights. Under the two-class method, management of the Partnership believes the partnership agreement contractually limits cash distributions to available cash; therefore, undistributed earnings in excess of available cash are not allocated to the incentive distribution rights.

The following is a reconciliation of net income (loss) allocated to the common limited partners for purposes of calculating net income (loss) attributable to common limited partners per unit (in thousands, except unit data):

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Net loss

   $ (8,651    $ (4,644    $ (16,126    $ (13,154

Less: Incentive distribution right (“IDR”) payments to general partner

     1,195         975         2,387         1,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss to allocate to general and limited partners

     (9,846      (5,619      (18,513      (14,940

General partner’s interest excluding IDRs

     (110      (76      (214      (202
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to common limited partners

   $ (9,736    $ (5,543    $ (18,299    $ (14,738
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income (loss) attributable to common limited partners per unit is calculated by dividing net income (loss) attributable to common limited partners, less income allocable to participating securities, by the sum of the weighted average number of common limited partner units outstanding and the dilutive effect of unit appreciation rights and other awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common units issuable upon payment of an exercise price by the participant under the terms of the Partnership’s long-term incentive plan (see Note 13).

The following table sets forth the reconciliation of the Partnership’s weighted average number of common limited partner units used to compute basic net income (loss) attributable to common limited partners per unit with those used to compute diluted net income (loss) attributable to common limited partners per unit (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Weighted average number of common limited partner units - basic

     34,837         29,286         33,688         29,258   

Add effect of dilutive incentive awards (1)

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common limited partner units - diluted

     34,837         29,286         33,688         29,258   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The diluted weighted average number of limited partners’ units outstanding presented on the consolidated statement of operations does not include 299,226 units and 193,172 units for the three months ended June 30, 2016 and 2015, respectively and 296,594 units and 187,758 units for the six months ended June 30, 2016 and 2015, as their effects would be anti-dilutive.

2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that material adjustments were needed to correct certain accounting errors. Accordingly, the accompanying consolidated financial statements of the Partnership as of June 30, 2016 and December 31, 2015 and for each of the three and six months ended June 30, 2016 and 2015, and the related notes hereto, have been restated to correct these accounting errors (the “Restatement”). A summary of these accounting errors, and their effect on the Partnership’s consolidated financial statements is, as follows:

 

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  A. The Partnership allocates net loss to the General Partner and its limited partners for the purposes of determining the General Partner’s and limited partners’ capital accounts within “Partners’ capital”, and to calculate net loss per limited partner unit (basic and diluted). However, the historical allocation of the Partnership’s net losses did not appropriately consider available cash that had been (or will be) distributed to the separate class of nonvoting limited partner interest (the incentive distribution rights) held by the General Partner. While this misallocation had no impact on the Partnership’s consolidated net loss for both the three and six months ended June 30, 2016 and 2015, the revised calculation to correctly allocate net losses increased the limited partners’ historical share of allocated net loss and decreased the General Partner’s historical share of allocated net loss. As a result, the accompanying consolidated statement of operations and consolidated statement of partners’ capital have been restated to increase the limited partners’ share of allocated net loss and decrease the General Partner’s share of allocated net loss by approximately $1.2 million and $1.0 million for the three months ended June 30, 2016 and 2015, respectively, and $2.4 million and $1.8 million for the six months ended June 30, 2016 and 2015. Accordingly, the accompanying consolidated statement of partner’s capital has also been restated to decrease the limited partners’ share of partners’ capital, and increase the General Partner’s share of partners’ capital by approximately $12.5 million and $10.2 million as of June 30, 2016 and December 31, 2015, respectively.

 

  B. The Partnership had historically presented the cost component of its performance obligations as a liability referred to as “Merchandise liability” and the offset for these liabilities was recognized as a reduction in “Deferred cemetery revenues, net” in the Partnership’s consolidated balance sheet. However, subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that the correct presentation of these obligations is “Deferred revenues”, rather than a separate “Merchandise liability”. Accordingly, the accompanying consolidated balance sheet as of June 30, 2016 and December 31, 2015, has been restated to reclassify merchandise liabilities of approximately $170.0 million and $173.1 million as of June 30, 2016 and December 31, 2015, respectively, from “Merchandise liability” to “Deferred revenue”. The Partnership restated its financial statement line item presentation of “Deferred cemetery revenues, net” to “Deferred revenues”. Accordingly, the accompanying consolidated balance sheet as of June 30, 2016 and December 31, 2015 has been restated to reclassify approximately $695.1 million and $637.5 million as of June 30, 2016 and December 31, 2015, respectively, from “Deferred cemetery revenue, net” to “Deferred revenue”.

 

  C. The Partnership had historically presented revenue related to assumed obligations from acquisitions on a net basis in the Partnership’s consolidated statement of operations. However, subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that the correct presentation of this revenue was on a gross basis. Accordingly, the accompanying consolidated statement of operations has been restated to present such revenue on a gross basis. This classification resulted in an increase in “Cemetery merchandise revenues” of approximately $0.8 million and $1.3 million for the three months ended June 30, 2016 and 2015, respectively, and $1.6 million and $2.5 million for the six months ended June 30, 2016 and 2015, respectively, an increase in “Cemetery services revenue” of approximately $0.3 million and $0.2 million for the three months ended June 30, 2016 and 2015, respectively, and $0.5 million and $0.3 million for the six months ended June 30, 2016 and 2015, respectively, and an increase “Cost of goods sold” of approximately $1.0 million and $1.5 million for the three months ended June 30, 2016 and 2015, respectively, and $2.0 million and $2.8 million for the six months ended June 30, 2016 and 2015, respectively.

 

  D. The Partnership had historically recorded funeral home land from acquisitions within “Cemetery property”. However, subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that such Funeral home land should be recorded within “Property and equipment”. This adjustment resulted in a decrease of $11.7 million and $11.8 million in “Cemetery property” as of June 30, 2016 and December 31, 2015, respectively, and a corresponding increase in “Property and equipment”. Additionally, the Partnership had historically recorded deferred cemetery property within “Deferred cemetery revenues, net”. However, subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that such amounts should have been recorded within “Cemetery property”. This adjustment resulted in an increase in “Cemetery property” in the amount of $3.7 million and $3.6 million as of June 30, 2016 and December 31, 2015, respectively.

 

  E. The Partnership had historically recorded the obligation for certain of the Partnership’s outstanding phantom unit awards as liabilities. However, subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that these awards are equity awards and should be classified as equity. Accordingly, the accompanying consolidated balance sheet as of June 30, 2016 and December 31, 2015, has been restated to adjust the awards as equity award, resulting in a $1.9 million increase to “Common limited partners’ interest” and a decrease for the same amount to “Accounts payable and accrued liabilities” as of June 30, 2016 and December 31, 2015.

 

  F. The Partnership had historically recognized incorrect amounts of investment revenues and expenses related to its merchandise and perpetual care trusts on its consolidated statement of operations and was incorrectly tracking its perpetual care-trusting obligations on its consolidated balance sheets. Accordingly, the accompanying consolidated financial statements as of June 30, 2016 and 2015 and for both the three and six months ended June 30, 2016 and 2015 have been restated for these adjustments. The adjustments resulted in an increase in “Deferred revenues” of approximately $18.5 million and $17.9 million, a decrease in “Partners’ Capital” of approximately $26.5 million and $25.4 million, and an increase in “Other long-term liabilities” of approximately $8.0 million and $7.5 million as of June 30, 2016 and December 31, 2015, respectively. In addition, the correction of these accounting errors resulted in an increase in “Investment and other” revenues of $0.3 million in the three months ended June 30, 2016 and $0.2 million in the six months ended June 30, 2016, and an increase in “Cost of goods sold” of $0.7 million and $0.4 million for the three months ended June 30, 2016 and 2015, respectively, and $1.3 million and $0.7 million for the six months ended June 30, 2016 and 2015, respectively.

 

  G. The Partnership had historically recognized incorrect amounts of revenue from deferred pre-acquisition contracts in its consolidated statement of operations based on inaccurate system inputs. Subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016, the Partnership determined that revenue recognition on such pre-acquisition revenue was understated. Accordingly, the accompanying consolidated financial statements for the three and six months ended June 30, 2016 and 2015 have been restated to reflect the correction of the system inputs. The adjustments resulted in a decrease in “Deferred revenues” and an increase in “Partners’ Capital” of $16.5 million as of June 30, 2016 and December 31, 2015 and an increase in “Cemetery merchandise revenues” of $0.4 million and $0.8 million for the three and six months ended June 30, 2015 and an increase in “Cemetery services revenues” of $0.1 million in the three and six months ended June 30, 2015.

 

  H. Remaining adjustments principally relate to the recognition, accuracy and/or classification of certain amounts in “Deferred cemetery revenues, net”, “Merchandise liabilities”, and “Other current assets”, determined subsequent to the issuance of the Partnership’s Form 10-Q for the period ended June 30, 2016. Accordingly, the accompanying consolidated financial statements as of June 30, 2016 and December 31, 2015, and for the three and six months ended June 30, 2016 and 2015 have been restated for these adjustments. The adjustments resulted in a decrease of $3.6 million and a decrease of $1.9 million in “Deferred revenues” as of June 30, 2016 and December 31, 2015, respectively. The adjustments also resulted in an increase in “Cemetery merchandise revenues” of $1.0 million and $1.2 million, an increase in “Cemetery services revenues” of $0.4 million and $0.6 million, and an increase in “Cost of goods sold” of $0.6 million and $1.6 million in the three months ended June 30, 2016, and 2015, respectively. The adjustments resulted in an increase in “Cemetery merchandise revenues” of $2.0 million and $2.2 million, an increase in “Cemetery services revenues” of $0.9 million and $1.0 million, and an increase in “Cost of goods sold” of $1.1 million and $2.9 million in the six months ended June 30, 2016, and 2015, respectively.

 

  I. The Partnership calculated the effect on income taxes associated with the foregoing accounting errors and, as such, “Income tax benefit (expense)” within consolidated statement of operations was restated by $0.1 million for the three and six months ended June 30, 2015 and the “Deferred tax liability” within the consolidated balance sheets are restated by approximately $0.1 million as of June 30, 2016 and December 31, 2015.

 

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The effect of these adjustments on the Partnership’s consolidated balance sheets, statements of operations, partners’ capital and cash flows for each of the three and six months ended June 30, 2016 and 2015, and as of June 30, 2016 and December 31, 2015 is summarized below for each affected caption:

 

            As of June 30,     As of December 31,  
            2016     2015  
            As     Restatement     As     As     Restatement     As  
     Reference      Filed     Adjustments     Restated     Filed     Adjustments     Restated  
            (in thousands)  
               

Other current assets

     H       $ 19,126      $ 2,697      $ 21,823      $ 18,863      $ 3,378      $ 22,241   

Total current assets

        109,830        2,697        112,527        107,798        3,378        111,176   

Cemetery property

     D         341,825        (7,966     333,859        342,639        (8,182     334,457   

Property and equipment, net of accumulated depreciation

     D         103,083        11,707        114,790        104,330        11,797        116,127   

Deferred tax assets

     I         40        141        181        40        141        181   

Other assets

     H         17,243        1,098        18,341        15,069        1,098        16,167   

Total assets

        1,738,518        7,677        1,746,195        1,686,125        8,232        1,694,357   

Accounts payable and accrued liabilities

     E         35,546        (1,886     33,660        31,875        (1,886     29,989   

Total current liabilities

        42,392        (1,886     40,506        35,818        (1,886     33,932   

Deferred cemetery revenues, net

     B         695,092        (695,092     —          637,536        (637,536     —     

Merchandise liability

     B         169,974        (169,974     —          173,097        (173,097     —     

Deferred revenues

     B, D, F, G, H         —          868,194        868,194        —          815,421        815,421   

Deferred tax liabilities

     I         17,914        (86     17,828        17,833        (86     17,747   

Other long-term liabilities

     F         16,168        8,041        24,209        13,960        7,548        21,508   

Total liabilities

        1,541,094        9,197        1,550,291        1,502,447        10,364        1,512,811   

General partner interest

     A, F, G, H, I         (13,054     12,422        (632     (10,038     10,053        15   

Common limited partners’ interest

     A, E, F, G, H, I         210,478        (13,942     196,536        193,716        (12,185     181,531   

Total partners’ capital

        197,424        (1,520     195,904        183,678        (2,132     181,546   

Total liabilities and partners’ capital

      $ 1,738,518      $ 7,677      $ 1,746,195      $ 1,686,125      $ 8,232      $ 1,694,357   

 

          Three months ended June 30,  
          2016     2015  
          As     Restatement     As     As     Restatement     As  
     Reference    Filed     Adjustments     Restated     Filed     Adjustments     Restated  
          (in thousands, except per unit data)  

Cemetery revenues:

               

Merchandise

   C, G, H    $ 36,105      $ 1,750      $ 37,855      $ 36,042      $ 2,957      $ 38,999   

Services

   C, G, H      12,984        692        13,676        14,591        776        15,367   

Investment and other

   F      11,721        291        12,012        16,698        (45     16,653   

Total revenues

        75,549        2,733        78,282        80,825        3,688        84,513   

Cost of goods sold

   C, F, H      9,737        2,305        12,042        9,807        3,526        13,333   

Total cost and expenses

        78,230        2,305        80,535        79,569        3,526        83,095   

Operating income (loss)

        (2,681     428        (2,253     1,256        162        1,418   

Loss before income taxes

        (8,579     428        (8,151     (4,514     162        (4,352

Income tax benefit (expense)

   I      (500     —          (500     (334     42        (292

Net loss

        (9,079     428        (8,651     (4,848     204        (4,644

General partner’s interest for the period

   A, F, G, H, I      (103     1,188        1,085        (65     964        899   

Limited partners’ interest for the period

   A, F, G, H, I      (8,976     (760     (9,736     (4,783     (760     (5,543

Net loss per limited partner unit (basic and diluted)

   A, F, G, H, I    $ (0.26   $ (0.02   $ (0.28   $ (0.16   $ (0.03   $ (0.19

 

          Six months ended June 30,  
          2016     2015  
          As     Restatement     As     As     Restatement     As  
     Reference    Filed     Adjustments     Restated     Filed     Adjustments     Restated  
          (in thousands, except per unit data)  

Cemetery revenues:

               

Merchandise

   C, G, H    $ 67,080      $ 3,543      $ 70,623      $ 62,979      $ 5,423      $ 68,402   

Services

   C, G, H      25,816        1,323        27,139        28,501        1,423        29,924   

Investment and other

   F      26,173        214        26,387        28,008        (82     27,926   

Total revenues

        150,131        5,080        155,211        148,242        6,764        155,006   

Cost of goods sold

   C, F, H      18,294        4,468        22,762        16,890        6,272        23,162   

Total cost and expenses

        153,539        4,468        158,007        150,341        6,272        156,613   

Operating income (loss)

        (3,408     612        (2,796     (2,099     492        (1,607

Loss before income taxes

        (15,978     612        (15,366     (13,332     492        (12,840

Income tax benefit (expense)

   I      (760     —          (760     (399     85        (314

Net loss

        (16,738     612        (16,126     (13,731     577        (13,154

General partner’s interest for the period

   A, F, G, H, I      (196     2,369        2,173        (185     1,769        1,584   

Limited partners’ interest for the period

   A, F, G, H, I      (16,542     (1,757     (18,299     (13,546     (1,192     (14,738

Net loss per limited partner unit (basic and diluted)

   A, F, G, H, I    $ (0.49   $ (0.05   $ (0.54   $ (0.46   $ (0.04   $ (0.50

 

          Common
Limited
Partners
    General
Partner
    Total     Common
Limited
Partners
    General
Partner
     Total     Common
Limited
Partners
    General
Partner
    Total  
     Reference    As Filed     Restatement Adjustments     As Restated  
          (in thousands)  

Capital Balance at December 31, 2015

   A, E, F, G, H, I    $ 193,716      $ (10,038   $ 183,678      $ (12,185   $ 10,053       $ (2,132   $ 181,531      $ 15      $ 181,546   

Net loss

   A, F, G, H      (16,542     (196     (16,738     (1,757     2,369         612        (18,299     2,173        (16,126

Capital Balance at June 30, 2016

   A, E, F, G, H, I    $ 210,478      $ (13,054   $ 197,424      $ (13,942   $ 12,422       $ (1,520   $ 196,536      $ (632   $ 195,904   

 

          Six months ended June 30,  
          2016     2015  
          As     Restatement     As     As     Restatement     As  
     Reference    Filed     Adjustments     Restated     Filed     Adjustments     Restated  
          (in thousands)  

Net loss

   F, G, H, I    $ (16,738   $ 612      $ (16,126   $ (13,731   $ 577      $ (13,154

Changes in assets and liabilities:

               

Other assets

   D, H      (4,295     555        (3,740     (9,162     4,810        (4,352

Deferred revenues

   B, D, F, G, H      37,755        (5,239     32,516        45,307        (1,552     43,755   

Deferred taxes (net)

   I      —          —          —          (44     (85     (129

Payables and other liabilities

   F      818        4,072        4,890        9,208        (3,750     5,458   

Net cash provided by operating activities .

      $ 8,459      $ —        $ 8,459      $ 3,975      $ —        $ 3,975   

 

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The Restatement adjustments affecting the consolidated statement of cash flows for the periods noted are included in the Partnership’s net loss from operations and offset by changes in operating assets and liabilities. There were no adjustments related to cash provided by (used in) investing and financing activities.

3. ACQUISITIONS

2016 Acquisition

During the second quarter of 2016, the Partnership acquired related assets, net of certain assumed liabilities of three direct service cremation businesses for $1.5 million. The Partnership accounted for this transaction under the acquisition method of accounting. Accordingly, the Partnership evaluated the identifiable assets acquired and liabilities assumed at the acquisition date fair values. All other costs incurred associated with the acquisition of the assets noted were expensed as incurred. The following table presents the Partnership’s values assigned to the assets acquired and liabilities assumed in the acquisition, based on their estimated fair values at the date of the acquisition, which may be prospectively adjusted as additional information is received (in thousands):

 

Assets:

  

Accounts receivable

   $ 22   

Cemetery and funeral home property

     90   

Property and equipment

     220   

Merchandise trusts, restricted

     290   

Other assets

     13   
  

 

 

 

Total assets

     635   
  

 

 

 

Liabilities:

  

Deferred revenues

     193   
  

 

 

 

Total liabilities

     193   
  

 

 

 

Fair value of net assets acquired

     442   
  

 

 

 

Consideration paid - cash

     1,500   
  

 

 

 

Total consideration paid

     1,500   
  

 

 

 

Goodwill from purchase

   $ 1,058   
  

 

 

 

The Partnership recorded goodwill of $1.1 million in the Funeral Home reporting unit for the properties acquired in 2016.

2015 Acquisitions

During the year ended December 31, 2015, the Partnership acquired the following properties and related assets, net of certain assumed liabilities:

 

    One funeral home for cash consideration of $0.9 million on July 21, 2015;

 

    Three funeral homes and one cemetery for cash consideration of $5.7 million on August 6, 2015;

 

    Two cemeteries for cash consideration of $1.5 million on August 20, 2015;

 

    One funeral home for cash consideration of $5.0 million on August 31, 2015, and an additional $1.0 million paid in five annual installments beginning on the 1st anniversary of the closing date; and

 

    One cemetery and two funeral homes for cash consideration of $5.7 million on December 1, 2015.

The Partnership accounted for these transactions under the acquisition method of accounting. Accordingly, the Partnership evaluated the identifiable assets acquired and liabilities assumed at their respective acquisition date fair values. All other costs incurred associated with the acquisition of the assets noted were expensed as incurred. The following table presents the Partnership’s values assigned to the assets acquired and liabilities assumed in the acquisitions, based on their estimated and revised fair values, as applicable, which may be prospectively adjusted as additional information is received (in thousands):

 

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Assets:

  

Accounts receivable

   $ 2,641   

Cemetery property

     5,249   

Property and equipment

     7,710   

Inventory

     53   

Merchandise trusts, restricted

     15,075   

Perpetual care trusts, restricted

     4,134   

Intangible assets

     406   
  

 

 

 

Total assets

     35,268   
  

 

 

 

Liabilities:

  

Deferred revenues

     21,349   

Perpetual care trust corpus

     4,134   

Other liabilities

     21   
  

 

 

 

Total liabilities

     25,504   
  

 

 

 

Fair value of net assets acquired

     9,764   
  

 

 

 

Consideration paid – cash

     18,800   

Deferred cash consideration

     876   
  

 

 

 

Total consideration paid

     19,676   
  

 

 

 

Gain on bargain purchase

   $ 766   
  

 

 

 

Goodwill from purchase

   $ 10,678   
  

 

 

 

Certain provisional amounts pertaining to the 2015 acquisitions were adjusted in the second quarter of 2016 as the Company obtained additional information related to two of the acquisitions. The changes resulted in an adjustment to the gain on acquisition recognized during the year ended December 31, 2015, reducing the gain by $0.8 million via a loss recognized in the current period in accordance with GAAP. The amounts shown may be adjusted as additional information is received. The Partnership recorded goodwill of $1.1 million and $9.6 million in the Cemetery and Funeral Home reporting units, respectively, with regard to the properties acquired during the year ended December 31, 2015.

The following data presents pro forma revenues, net income (loss) and basic and diluted net income (loss) per unit for the Partnership as if the acquisitions consummated during the six months ended June 30, 2016 and the year ended December 31, 2015 had occurred as of January 1, 2015. The Partnership prepared these pro forma unaudited financial results for comparative purposes only. The results may not be indicative of the results that would have occurred if the acquisitions consummated during the six months ended June 30, 2016 and 2015 had occurred as of January 1, 2015 or the results that will be attained in future periods (in thousands, except per unit data):

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Revenue

   $ 78,282       $ 86,426       $ 155,324       $ 158,832   

Net loss

     (8,651      (4,516      (16,107      (12,898

Net loss per limited partner unit (basic and diluted)

   $ (0.28    $ (0.18    $ (0.54    $ (0.50

The properties acquired in 2016 have contributed $0.1 million of revenue and less than $0.1 million of operating profit for the three and six months ended June 30, 2016, respectively. The properties acquired in 2015 have contributed $4.8 million and $2.4 million of revenue and $0.8 million and $0.4 million of operating profit for the three and six months ended June 30, 2016 respectively.

 

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4. ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Accounts receivable, net of allowance, consists of the following at the dates indicated (in thousands):

 

     June 30, 2016      December 31, 2015  

Customer receivables

   $ 217,071       $ 207,645   

Unearned finance income

     (20,323      (20,078

Allowance for contract cancellations

     (27,396      (23,985
  

 

 

    

 

 

 

Accounts receivable, net of allowance

     169,352         163,582   

Less: current portion, net of allowance

     74,231         68,415   
  

 

 

    

 

 

 

Long-term portion, net of allowance

   $ 95,121       $ 95,167   
  

 

 

    

 

 

 

Activity in the allowance for contract cancellations is as follows (in thousands):

 

     Six months ended June 30,  
     2016      2015  

Balance, beginning of period

   $ 23,985       $ 22,138   

Provision for cancellations

     13,267         13,200   

Charge-offs, net

     (9,856      (10,264
  

 

 

    

 

 

 

Balance, end of period

   $ 27,396       $ 25,074   
  

 

 

    

 

 

 

5. CEMETERY PROPERTY

Cemetery property consists of the following at the dates indicated (in thousands):

 

     June 30, 2016      December 31, 2015  

Cemetery land

   $ 253,596       $ 253,955   

Mausoleum crypts and lawn crypts

     80,263         80,502   
  

 

 

    

 

 

 

Cemetery property

   $ 333,859       $ 334,457   
  

 

 

    

 

 

 

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at the dates indicated (in thousands):

 

     June 30, 2016      December 31, 2015  

Building and improvements

   $ 119,634       $ 117,034   

Furniture and equipment

     54,202         54,346   

Funeral home land

     11,707         11,797   
  

 

 

    

 

 

 

Property and equipment, gross

     185,543         183,177   

Less: accumulated depreciation

     (70,753      (67,050
  

 

 

    

 

 

 

Property and equipment, net of accumulated depreciation

   $ 114,790       $ 116,127   
  

 

 

    

 

 

 

Depreciation expense was $2.6 million and $2.4 million for three months ended June 30, 2016 and 2015, respectively, and $5.1 million and $4.8 million for six months ended June 30, 2016 and 2015, respectively.

7. MERCHANDISE TRUSTS

At June 30, 2016 and December 31, 2015, the Partnership’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds. Certain assets acquired in connection with the Partnership’s 2015 and 2016 acquisitions (see Note 3) are based upon preliminary estimated values assigned to the assets by the Partnership at the date of acquisition, and will be adjusted when additional information is received.

 

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All of these investments are classified as Available for Sale and accordingly, all of the assets are carried at fair value. All of the investments subject to the fair value hierarchy (see Note 1) are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 15. There were no Level 3 assets.

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

The Partnership included $8.3 million and $8.2 million of investments held in trust by the West Virginia Funeral Directors Association at June 30, 2016 and December 31, 2015, respectively, in its merchandise trust assets. As required by law, the Partnership deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recognized at their account value, which approximates fair value.

A reconciliation of the Partnership’s merchandise trust activities for the six months ended June 30, 2016 and 2015 is presented below (in thousands):

 

     Six months ended June 30,  
     2016      2015  

Balance, beginning of period

   $ 464,676       $ 484,820   

Contributions

     30,259         31,667   

Distributions

     (29,645      (21,231

Interest and dividends

     11,686         8,391   

Capital gain distributions

     263         (741

Realized gains and losses

     2,337         14,453   

Taxes

     (1,694      (3,026

Fees

     (1,048      (1,632

Unrealized change in fair value

     17,762         (33,774
  

 

 

    

 

 

 

Balance, end of period

   $ 494,596       $ 478,927   
  

 

 

    

 

 

 

During the six months ended June 30, 2016, purchases of available for sale securities were $47.1 million, while sales, maturities and paydowns of available for sale securities were $28.1 million.

 

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The cost and market value associated with the assets held in the merchandise trusts as of June 30, 2016 and December 31, 2015 were as follows (in thousands):

 

                   Gross      Gross        
     Fair Value             Unrealized      Unrealized     Fair  

June 30, 2016

   Hierarchy Level      Cost      Gains      Losses     Value  

Short-term investments

     1       $ 28,567       $ —         $ —        $ 28,567   

Fixed maturities:

             

U.S. governmental securities

     2         96         9         —          105   

Corporate debt securities

     2         8,854         169         (493     8,530   

Other debt securities

     2         160         —           —          160   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        9,110         178         (493     8,795   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         245,134         3,267         (6,829     241,572   

Mutual funds - equity securities

     1         137,408         5,502         (8,085     134,825   

Other investment funds (1)

        27,458         183         —          27,641   

Equity securities

     1         40,616         2,386         (3,346     39,656   

Other invested assets

     2         1,630         314         —          1,944   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 489,923       $ 11,830       $ (18,753   $ 483,000   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        3,264         —           —          3,264   

West Virginia Trust Receivable

        8,332         —           —          8,332   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 501,519       $ 11,830       $ (18,753   $ 494,596   
     

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

December 31, 2015

   Fair Value
Hierarchy Level
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Short-term investments

     1       $ 35,150       $ —         $ —        $ 35,150   

Fixed maturities:

             

U.S. governmental securities

     2         98         6         (3     101   

Corporate debt securities

     2         11,922         8         (546     11,384   

Other debt securities

     2         7,150         11         (7     7,154   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        19,170         25         (556     18,639   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         232,096         86         (10,713     221,469   

Mutual funds - equity securities

     1         139,341         69         (12,249     127,161   

Equity securities

     1         49,563         1,127         (2,474     48,216   

Other invested assets

     2         1,681         —           —          1,681   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 477,001       $ 1,307       $ (25,992   $ 452,316   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        4,185         —           —          4,185   

West Virginia Trust Receivable

        8,175         —           —          8,175   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 489,361       $ 1,307       $ (25,992   $ 464,676   
     

 

 

    

 

 

    

 

 

   

 

 

 

The contractual maturities of debt securities as of June 30, 2016 were as follows below:

 

     Less than      1 year through      6 years through      More than  
     1 year      5 years      10 years      10 years  

U.S. governmental securities

   $ 11       $ 12       $ 82       $ —     

Corporate debt securities

     —           7,202         1,328         —     

Other debt securities

     160         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 171       $ 7,214       $ 1,410       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary Declines in Fair Value

The Partnership evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.

 

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An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the merchandise trusts as of June 30, 2016 and December 31, 2015 is presented below (in thousands):

 

     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

June 30, 2016

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

Corporate debt securities

   $ 4,385       $ 314       $ 2,116       $ 179       $ 6,501       $ 493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     4,385         314         2,116         179         6,501         493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     16,342         463         138,981         6,366         155,323         6,829   

Mutual funds - equity securities

     11,037         899         55,539         7,186         66,576         8,085   

Equity securities

     14,913         1,846         7,104         1,500         22,017         3,346   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,677       $ 3,522       $ 203,740       $ 15,231       $ 250,417       $ 18,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

December 31, 2015

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

U.S. governmental securities

   $ —         $ —         $ 33       $ 3       $ 33       $ 3   

Corporate debt securities

     7,247         411         1,513         135         8,760         546   

Other debt securities

     2,883         7         —           —           2,883         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     10,130         418         1,546         138         11,676         556   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     121,777         6,938         36,682         3,775         158,459         10,713   

Mutual funds - equity securities

     58,467         10,994         5,465         1,255         63,932         12,249   

Equity securities

     21,480         2,275         649         199         22,129         2,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 211,854       $ 20,625       $ 44,342       $ 5,367       $ 256,196       $ 25,992   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

The Partnership assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three and six months ended June 30, 2016, the Partnership determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the three months ended June 30, 2015, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the six months ended June 30, 2015, the Company determined that there were two securities with an aggregate cost basis of approximately $0.6 million and an aggregate fair value of approximately $0.4 million, resulting in an impairment of $0.2 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Partnership adjusted the cost basis of these assets to their current value and offset this change against deferred revenues. This reduction in deferred revenues is reflected in earnings in periods after the impairment date as the underlying merchandise is delivered or the underlying services are performed.

8. PERPETUAL CARE TRUSTS

At June 30, 2016 and December 31, 2015, the Partnership’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds. Certain assets acquired in connection with the Partnership’s 2015 acquisitions (see Note 3) are based upon preliminary estimated values assigned to the assets by the Partnership at the date of acquisition, and will be adjusted when additional information is received.

All of these investments are classified as Available for Sale and accordingly, all of the assets are carried at fair value. All of the investments subject to the fair value hierarchy (see Note 1) are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 15. There were no Level 3 assets. The perpetual care trusts are VIEs for which the Partnership is the primary beneficiary.

 

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A reconciliation of the Partnership’s perpetual care trust activities for the six months ended June 30, 2016 and 2015 is presented below (in thousands):

 

     Six months ended June 30,  
     2016      2015  

Balance, beginning of period

   $ 307,804       $ 345,105   

Contributions

     5,146         5,766   

Distributions

     (7,818      (6,253

Interest and dividends

     8,127         8,144   

Capital gain distributions

     85         35   

Realized gains and losses

     (470      15,296   

Taxes

     (757      (605

Fees

     (622      (1,073

Unrealized change in fair value

     10,205         (34,305
  

 

 

    

 

 

 

Balance, end of period

   $ 321,700       $ 332,110   
  

 

 

    

 

 

 

During the six months ended June 30, 2016, purchases of available for sale securities were $161.3 million, while sales, maturities and paydowns of available for sale securities were $156.1 million.

The cost and market value associated with the assets held in the perpetual care trusts as of June 30, 2016 and December 31, 2015 were as follows (in thousands):

 

                   Gross      Gross        
     Fair Value             Unrealized      Unrealized     Fair  

June 30, 2016

   Hierarchy Level      Cost      Gains      Losses     Value  

Short-term investments

     1       $ 35,904       $ —         $ —        $ 35,904   

Fixed maturities:

             

U.S. governmental securities

     2         187         17         —          204   

Corporate debt securities

     2         14,116         262         (570     13,808   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        14,303         279         (570     14,012   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         161,372         1,322         (2,312     160,382   

Mutual funds - equity securities

     1         36,838         2,888         (552     39,174   

Other investment funds (1)

        69,073         431         —          69,504   

Equity securities

     1         1,476         614         (7     2,083   

Other invested assets

     2         79         3         (2     80   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 319,045       $ 5,537       $ (3,443   $ 321,139   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        561         —           —          561   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 319,606       $ 5,537       $ (3,443   $ 321,700   
     

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 30 to 90 days, and private credit funds, which have lockup periods ranging from six to ten years with three potential one year extensions at the discretion of the funds’ general partners. As of June 30, 2016 there are $50.1 million in unfunded commitments to the private credit funds, which are callable at any time.

 

                   Gross      Gross        
     Fair Value             Unrealized      Unrealized     Fair  

December 31, 2015

   Hierarchy Level      Cost      Gains      Losses     Value  

Short-term investments

     1       $ 36,618       $ —         $ —        $ 36,618   

Fixed maturities:

             

U.S. governmental securities

     2         126         14         —          140   

Corporate debt securities

     2         22,837         57         (845     22,049   

Other debt securities

     2         36         —           (1     35   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        22,999         71         (846     22,224   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         184,866         35         (7,180     177,721   

Mutual funds - equity securities

     1         68,079         1,054         (1,713     67,420   

Equity securities

     1         2,319         636         (7     2,948   

Other invested assets

     2         473         1         (162     312   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 315,354       $ 1,797       $ (9,908   $ 307,243   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        561         —           —          561   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 315,915       $ 1,797       $ (9,908   $ 307,804   
     

 

 

    

 

 

    

 

 

   

 

 

 

 

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The contractual maturities of debt securities as of June 30, 2016 were as follows below:

 

     Less than      1 year through      6 years through      More than  
     1 year      5 years      10 years      10 years  

U.S. governmental securities

   $ 111       $ —         $ 39       $ 54   

Corporate debt securities

     123         11,915         1,770         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 234       $ 11,915       $ 1,809       $ 54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary Declines in Fair Value

The Partnership evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.

An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the perpetual care trusts as of June 30, 2016 and December 31, 2015 is presented below (in thousands):

 

     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

June 30, 2016

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

Corporate debt securities

   $ 6,115       $ 371       $ 2,096       $ 199       $ 8,211       $ 570   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     6,115         371         2,096         199         8,211         570   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     21,362         665         39,903         1,647         61,265         2,312   

Mutual funds - equity securities

     1,496         115         4,181         437         5,677         552   

Equity securities

     290         7         —           —           290         7   

Other invested assets

     —           —           67         2         67         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,263       $ 1,158       $ 46,247       $ 2,285       $ 75,510       $ 3,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

December 31, 2015

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

U.S. governmental securities

   $ —         $ —         $ 112       $ —         $ 112       $ —     

Corporate debt securities

     12,482         535         4,505         310         16,987         845   

Other debt securities

     35         1         —           —           35         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     12,517         536         4,617         310         17,134         846   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     81,215         4,263         50,774         2,917         131,989         7,180   

Mutual funds - equity securities

     16,514         1,363         4,308         350         20,822         1,713   

Equity securities

     488         6         1,137         1         1,625         7   

Other invested assets

     —           —           315         162         315         162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 110,734       $ 6,168       $ 61,151       $ 3,740       $ 171,885       $ 9,908   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

The Partnership assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three and six months ended June 30, 2016 and 2015, the Partnership determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.

9. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Partnership has recorded goodwill of approximately $70.6 million as of June 30, 2016 and $69.9 million as of December 31, 2015. This amount represents the excess of the purchase price over the fair value of identifiable net assets acquired.

 

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Table of Contents

A rollforward of goodwill by reporting unit is as follows (in thousands):

 

     Cemeteries      Funeral Homes      Total  

Balance at December 31, 2015

   $ 25,320       $ 44,531       $ 69,851   

Goodwill from acquisitions during 2015

     —           (337      (337

Goodwill from acquisitions during 2016

     —           1,058         1,058   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ 25,320       $ 45,252       $ 70,572   
  

 

 

    

 

 

    

 

 

 

The Partnership adjusted preliminary amounts relating to 2015 acquisitions during the second quarter of 2016 as the Company obtained additional information. These updates resulted in a decrease in goodwill acquired from 2015 acquisitions.

The Partnership tests goodwill for impairment at each year end by comparing its reporting units’ estimated fair values to carrying values. There were no goodwill impairments recognized by the Partnership during the periods presented. Management will continue to evaluate goodwill at least annually or when impairment indicators arise.

Intangible Assets

The Partnership has intangible assets with finite lives recognized in connection with acquisitions and long-term lease, management and operating agreements. The Partnership amortizes these intangible assets over their estimated useful lives.

The following table reflects the components of intangible assets as of June 30, 2016 and December 31, 2015 (in thousands):

 

     June 30, 2016      December 31, 2015  
     Gross Carrying      Accumulated     Net Intangible      Gross Carrying      Accumulated     Net Intangible  
     Amount      Amortization     Asset      Amount      Amortization     Asset  

Lease and management agreements

   $ 59,758       $ (2,075   $ 57,683       $ 59,758       $ (1,577   $ 58,181   

Underlying contract value

     6,239         (1,092     5,147         6,239         (1,014     5,225   

Non-compete agreements

     5,486         (3,452     2,034         5,656         (3,112     2,544   

Other intangible assets

     1,439         (205     1,234         1,439         (180     1,259   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 72,922       $ (6,824   $ 66,098       $ 73,092       $ (5,883   $ 67,209   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for intangible assets was $0.6 million for both the three months ended June 30, 2016 and 2015 and $1.1 million for both the six months ended June 30, 2016 and 2015. The following is estimated amortization expense related to intangible assets with finite lives for the periods noted below (in thousands):

 

2016 (remainder)

   $ 1,069   

2017

   $ 1,956   

2018

   $ 1,708   

2019

   $ 1,440   

2020

   $ 1,266   

 

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10. LONG-TERM DEBT

Total debt consists of the following at the dates indicated (in thousands):

 

     June 30, 2016      December 31, 2015  

Credit Facility:

     

Working Capital Draws

   $ 68,000       $ 105,000   

Acquisition Draws

     44,500         44,500   

7.875% Senior Notes, due June 2021

     172,400         172,186   

Notes payable - acquisition debt

     596         687   

Notes payable - acquisition non-competes

     1,279         1,629   

Insurance and vehicle financing

     3,464         2,336   

Less deferred financing costs, net of accumulated amortization

     (7,012      (7,499
  

 

 

    

 

 

 

Total debt

     283,227         318,839   

Less current maturities

     (5,373      (2,440
  

 

 

    

 

 

 

Total long-term debt

   $ 277,854       $ 316,399   
  

 

 

    

 

 

 

Credit Facility

The Partnership is a party to the Fourth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) which provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. The Credit Agreement also provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The Partnership’s obligations under the Credit Facility are secured by substantially all of the assets of the Partnership, excluding those held in trust. Borrowings under the Credit Facility are classified as either acquisition draws or working capital draws. Acquisition draws may be utilized to finance permitted acquisitions, the purchase and construction of mausoleums and related costs or the net amount of merchandise trust deposits. Working capital draws may be utilized to finance working capital requirements, capital expenditures and for other general corporate purposes. The amount of the Credit Facility that is available for working capital draws is subject to a borrowing formula equal to 85% of eligible accounts receivable, as defined within the Credit Agreement. At June 30, 2016, the amount available under the Credit Facility for working capital advances under this limit was $143.9 million, of which $68.0 million was outstanding at June 30, 2016.

Each individual acquisition draw is subject to equal quarterly amortization of the principal amount, with annual principal payments comprised of ten percent of the related advance amount, commencing on the second anniversary of such advance, with the remaining principal due on December 19, 2019, subject to certain mandatory prepayment requirements. Up to $10.0 million of the Credit Facility may be in the form of standby letters of credit, of which there were $6.5 million outstanding at June 30, 2016 and none outstanding at December 31, 2015.

Borrowings under the Credit Facility bear interest, at the Partnership’s election, at either an adjusted LIBOR rate plus an applicable margin between 2.25% and 4.00% per annum or the base rate (which is the higher of the bank’s prime rate, the Federal funds rate plus 0.5% or one-month LIBOR plus 1.00%) plus an applicable margin between 1.25% and 3.00% per annum. The Partnership is also required to pay a fee on the unused portion of the Credit Facility at a rate between 0.375% and 0.8% per annum, which is included within interest expense on the Partnership’s consolidated statements of operations. On June 30, 2016, the weighted average interest rate on outstanding borrowings under the Credit Facility was 4.4%.

The Credit Agreement contains customary covenants that limit the Partnership’s ability to incur additional indebtedness, grant liens, make loans or investments, make cash distributions if a default exists or would result from the distribution, merger or consolidation with other persons, or engage in certain asset dispositions including the sale of all or substantially all of its assets. The Credit Agreement also requires the Partnership to maintain:

 

    Consolidated EBITDA (as defined in the Credit Agreement), calculated over a period of four consecutive fiscal quarters, to be no less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate Consolidated EBITDA for each permitted acquisition completed after June 30, 2014;

 

    the ratio of Consolidated EBITDA (as defined in the Credit Agreement) to Consolidated Debt Service (as defined in the Credit Agreement), calculated over a period of four fiscal quarters, or the Consolidated Debt Service Coverage Ratio, of not less than 2.50 to 1.00 for any period; and

 

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    the ratio of Consolidated Funded Indebtedness (as defined in the Credit Agreement) to Consolidated EBITDA (as defined in the Credit Agreement), calculated over a period of four fiscal quarters, or the Consolidated Leverage Ratio, of not greater than 4.00 to 1.00 for any period.

On June 30, 2016, the Partnership’s Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio were 3.11 and 4.37, respectively. The Partnership was in compliance with these covenants as of June 30, 2016.

Senior Notes

On May 28, 2013, the Partnership issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Partnership pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Partnership incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are being amortized over the life of the Senior Notes. The Senior Notes mature on June 1, 2021.

At any time on or after June 1, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:

 

Year

   Percentage  

2016

     105.906

2017

     103.938

2018

     101.969

2019 and thereafter

     100.000

Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Partnership to purchase that holder’s Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest.

The Senior Notes are jointly and severally guaranteed by certain of our subsidiaries. The Indenture governing the Senior Notes contains covenants, including limitations of the Partnership’s ability to incur additional indebtedness and liens, make certain dividends, distributions, redemptions or investments, enter into certain transactions with affiliates, make certain asset sales, and engage in certain mergers, consolidations or sales of all or substantially all of the Partnership’s assets. As of June 30, 2016, the Partnership was in compliance with these covenants.

11. INCOME TAXES

The Partnership is not subject to U.S. federal and most state income taxes. The partners of the Partnership are liable for income tax in regard to their distributive share of the Partnership’s taxable income. Such taxable income may vary substantially from net income reported in the accompanying unaudited consolidated financial statements. Certain corporate subsidiaries are subject to federal and state income tax. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Partnership records a valuation allowance against its deferred tax assets if it deems that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.

As of June 30, 2016, the Partnership had available approximately less than $0.1 million of alternative minimum tax credit carryforwards, which are available indefinitely, and $264.5 million of federal net operating loss carryforwards, which will begin to expire in 2017 and $321.8 million in state net operating loss carryforwards, a portion of which expires annually.

 

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In assessing the realizability of deferred tax assets, management considers whether it’s more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of June 30, 2016, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Partnership will realize a partial benefit of these deductible differences. The amount of deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.

In accordance with applicable accounting standards, the Partnership recognizes only the impact of income tax positions that, based upon their merits, are more likely than not to be sustained upon audit by a taxing authority. To evaluate its current tax positions in order to identify any material uncertain tax positions, the Partnership developed a policy of identifying and evaluating uncertain tax positions that considers support for each tax position, industry standards, tax return disclosures and schedules and the significance of each position. It is the Partnership’s policy to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. At June 30, 2016 and December 31, 2015, the Partnership had no material uncertain tax positions.

The Partnership is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2012 forward.

12. DEFERRED REVENUES

The Partnership defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Partnership recognizes deferred merchandise and service revenues as deferred revenues within long-term liabilities on its consolidated balance sheet. The Partnership recognizes deferred direct costs associated with pre-need merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its consolidated balance sheet. The Partnership also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts.

At June 30, 2016 and December 31, 2015, deferred revenues consisted of the following (in thousands):

 

     June 30, 2016      December 31, 2015  

Deferred contract revenues

   $ 785,072       $ 759,812   

Deferred merchandise trust revenue

     90,045         80,294   

Deferred merchandise trust unrealized gains (losses)

     (6,923      (24,685
  

 

 

    

 

 

 

Deferred revenues

   $ 868,194       $ 815,421   
  

 

 

    

 

 

 

Deferred selling and obtaining costs

   $ 118,410       $ 111,542   

13. LONG-TERM INCENTIVE PLANS

2014 Long-Term Incentive Plan

During the year ended December 31, 2014, the General Partner’s Board of Directors (the “Board”) and the Partnership’s unitholders approved a 2014 Long-Term Incentive Plan (“2014 LTIP”). The Compensation, Nominating and Governance, and Compliance Committee of the Board (the “Compensation Committee”) administers the 2014 LTIP. The 2014 LTIP permits the grant of awards, which may be in the form of phantom units, restricted units, unit appreciation rights (“UAR”), or unit options, including performance factors for each, covering an aggregate of 1,500,000 common units, a number that the Board may increase by up to 100,000 common units per year. At June 30, 2016, the estimated number of common units to be issued upon vesting and exercise of outstanding rights under this plan, assuming the satisfaction of the maximum conditions for performance factors, was 110,090. A cumulative number of 14,455 common units have been issued, leaving 1,375,455 common units available for future grants under the plan, assuming no increases by the Board.

 

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Phantom Unit Awards

Phantom units represent rights to receive a common unit or an amount of cash, or a combination of either, based upon the value of a common unit. Phantom units become payable, in cash or common units, at the Partnership’s election, upon the separation of directors and executives from service or upon the occurrence of certain other events specified in the underlying agreements. Phantom units are subject to terms and conditions determined by the Compensation Committee. In tandem with phantom unit grants, the compensation committee may grant distribution equivalent rights (“DERs”), which are the right to receive an amount in cash or common units equal to the cash distributions made by the Partnership with respect to common unit during the period that the underlying phantom unit is outstanding. All phantom units outstanding under the 2014 LTIP at June 30, 2016 contain tandem DERs.

The following table sets forth the 2014 LTIP phantom unit award activity for the three and six months ended June 30, 2016 and 2015, respectively:

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Outstanding, beginning of period

     105,167         4,241         102,661         2,189   

Granted (1)

     4,923         2,040         7,429         4,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period (2)

     110,090         6,281         110,090         6,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The weighted-average grant date fair value for the unit awards on the date of grant was $23.95 and $29.52 for three months ended June 30, 2016 and 2015, respectively, and $24.60 and $29.11 for six months ended June 30, 2016 and 2015, respectively. The intrinsic value of vested unit awards was $0.1 million for both the three months ended June 30, 2016 and 2015 and $0.2 million and $0.1 million for the six months ended June 30, 2016 and 2015, respectively.
(2) Based on the closing price of the common units on June 30, 2016, the estimated intrinsic value of the outstanding unit awards was $2.8 million at June 30, 2016.

2004 Long-Term Incentive Plan

The Compensation Committee administers the Partnership’s 2004 Long-Term Incentive Plan (“2004 LTIP”). The 2004 LTIP permitted the grant of awards, which may be in the form of phantom units, restricted units, or unit appreciation rights (“UAR”). At June 30, 2016, the estimated number of common units to be issued upon vesting and exercise of outstanding rights under this plan was 194,820, based upon the closing price of our common units at June 30, 2016. A cumulative number of 626,188 common units have been issued under the 2004 LTIP. There were no awards available for grant under the 2004 LTIP at June 30, 2016 because the plan expired in 2014.

Phantom Unit Awards

Phantom units were credited to participants’ mandatory deferred compensation accounts in connection with DERs accruing on phantom units received under the 2004 LTIP. These DERs continue to accrue until the underlying securities are issued. The following table sets forth the 2004 LTIP activity related to DERs credited as phantom units to the participant’s accounts for the three and six months ended June 30, 2016 and 2015, respectively:

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Outstanding, beginning of period

     188,948         172,793         184,457         169,122   

Granted (1)

     5,137         3,556         9,628         7,227   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period (2)

     194,085         176,349         194,085         176,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The weighted-average fair value for the phantom units credited was $23.52 and $30.04 for the three months ended June 30, 2016 and 2015, respectively, and $24.80 and $29.02 for the six months ended June 30, 2016 and 2015, respectively. The intrinsic value of vested phantom unit awards was $0.1 million for both the three months ended June 30, 2016 and 2015 and $0.2 million for both the six months ended June 30, 2016 and 2015.
(2) Based on the closing price of the common units on June 30, 2016, the estimated intrinsic value of the outstanding unit awards was $4.9 million at June 30, 2016.

 

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Total compensation expense for phantom units credited under both the 2004 and 2014 plans was approximately $0.2 million for the three months ended June 30, 2016 and 2015, and $0.4 million and $0.5 million for the six months ended June 30, 2016 and 2015, respectively.

Unit Appreciation Rights Awards

UAR awards represent a right to receive an amount equal to the closing price of the Partnership’s common units on the date preceding the exercise date less the exercise price of the UARs, to the extent the closing price of the Partnership’s common units on the date preceding the exercise date is in excess of the exercise price. This amount is then divided by the closing price of the Partnership’s common units on the date preceding the exercise date to determine the number of common units to be issued to the participant. UAR awards granted through June 30, 2016 have a five-year contractual term beginning on the grant date and vest ratably over a period of 48 months beginning on the grant date. Of the UARs outstanding at June 30, 2016, 16,302 UARs will vest within the following twelve months. The following table sets forth the UAR award activity for the three and six months ended June 30, 2016 and 2015, respectively:

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Outstanding, beginning of period

     66,793         112,346         66,793         123,000   

Exercised

     —           (19,595      —           (30,249

Forfeited

     —           (5,730      —           (5,730
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period (1)

     66,793         87,021         66,793         87,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable, end of period

     44,968         41,383         44,968         41,383   

 

(1) Based on the closing price of the common units on June 30, 2016, the estimated intrinsic value of the outstanding unit awards was $0.1 million at June 30, 2016. The weighted average remaining contractual life for outstanding UAR awards at June 30, 2016 was 2.1 years.

At June 30, 2016, the Partnership had approximately $0.1 million of unrecognized compensation expense related to unvested UAR awards that will be recognized through the year ended December 31, 2018. The Partnership recognized total compensation expense for UAR awards of less than $0.1 million for the three and six months ended June 30, 2016 and 2015. The Partnership issued 3,416 common units for the three months ended June 30, 2015 and 4,564 common units for the six months ended June 30, 2015 due to exercised UAR awards. There were no UAR exercises during the three and six months ended June 30, 2016.

14. COMMITMENTS AND CONTINGENCIES

Legal

The Partnership 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 its financial position or results of operations.

Other

During the first quarter of 2016, the Partnership moved its corporate headquarters to Trevose, Pennsylvania. Due to the relocation, a cease-use expense of $0.5 million was recorded during the period below “Operating income (loss)” on the unaudited consolidated statement of operations. This charge represents the net recognition of the discounted liability for future rent payments due under the lease on the previous headquarters, net of estimated sublease collections and deferred rent and lease incentives pertaining to the previous corporate office location.

In connection with the Partnership’s 2014 lease and management agreements with the Archdiocese of Philadelphia, it has committed to pay aggregate fixed rent of $36.0 million in the following amounts:

 

Lease Years 1-5

  

None

Lease Years 6-20

  

$1,000,000 per Lease Year

Lease Years 21-25

  

$1,200,000 per Lease Year

Lease Years 26-35

  

$1,500,000 per Lease Year

Lease Years 36-60

  

None

 

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The fixed rent for lease years 6 through 11 shall be deferred. If the Archdiocese terminates the agreements pursuant to a lease year 11 termination or the Partnership terminates the agreements as a result of a default by the Archdiocese, prior to the end of lease year 11, the deferred fixed rent shall be retained by the Partnership. If the agreements are not terminated, the deferred fixed rent shall become due and payable 30 days after the end of lease year 11.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

Management has established a hierarchy to measure the Partnership’s financial instruments at fair value, which requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Partnership’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same contractual term of the asset or liability.

Level 3 – Unobservable inputs that the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

The Partnership’s current assets and liabilities on its consolidated balance sheets are considered to be financial instruments, and their estimated fair values approximate their carrying values due to their short-term nature and thus are categorized as Level 1. The Partnership’s merchandise and perpetual care trusts consist of investments in debt and equity marketable securities and cash equivalents, are carried at fair value, and are considered either Level 1 or Level 2 (see Notes 7 and 8). Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP.

The Partnership’s other financial instruments as of June 30, 2016 and December 31, 2015 consist of its Senior Notes and outstanding borrowings under its revolving credit facility (see Note 10). The estimated fair values of the Partnership’s Senior Notes as of June 30, 2016 and December 31, 2015 were $175.1 million and $179.9 million, respectively, based on trades made on those dates, compared with the carrying amounts of $172.4 million and $172.2 million, respectively. As of June 30, 2016 and December 31, 2015, the carrying values of outstanding borrowings under the Partnership’s revolving credit facility (see Note 10), which bears interest at variable interest rates with maturities of 90 days or less, approximated their estimated fair values. The Senior Notes and the credit facility are valued using Level 2 inputs.

16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Partnership’s Senior Notes are guaranteed by StoneMor Operating LLC and its wholly-owned subsidiaries, other than the co-issuer, as described below. The guarantees are full, unconditional, joint and several. The Partnership, or the “Parent”, and its wholly-owned subsidiary Cornerstone Family Services of West Virginia Subsidiary Inc., are the co-issuers of the Senior Notes. The Partnership’s unaudited consolidated financial statements as of June 30, 2016 and December 31, 2015 and for the three and six months ended June 30, 2016 and 2015 include the accounts of cemeteries operated under long-term lease, operating or management agreements. For the purposes of this note, these entities are deemed non-guarantor subsidiaries, as they are not wholly-owned by the Partnership. The Partnership’s unaudited consolidated financial statements also contain merchandise and perpetual care trusts that are also deemed non-guarantor subsidiaries for the purposes of this note.

 

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The following unaudited supplemental condensed consolidating financial information reflects the Partnership’s standalone accounts, the combined accounts of the subsidiary co-issuer, the combined accounts of the guarantor subsidiaries, the combined accounts of the non-guarantor subsidiaries, the consolidating adjustments and eliminations and the Partnership’s consolidated accounts as of and for the three and six months ended June 30, 2016 and 2015. For the purpose of the following financial information, the Partnership’s investments in its subsidiaries and the guarantor subsidiaries’ investments in their respective subsidiaries are presented in accordance with the equity method of accounting (in thousands):

CONDENSED CONSOLIDATING BALANCE SHEETS

 

June 30, 2016    Parent      Subsidiary
Issuer
     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

                

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 6,382       $ 3,054       $ —        $ 9,436   

Other current assets

     —           5,276         82,814         15,001         —          103,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           5,276         89,196         18,055         —          112,527   

Long-term accounts receivable

     —           2,821         81,134         11,166         —          95,121   

Cemetery property and equipment

     —           1,020         416,052         31,577         —          448,649   

Merchandise trusts

     —           —           —           494,596         —          494,596   

Perpetual care trusts

     —           —           —           321,700         —          321,700   

Deferred selling and obtaining costs

     —           5,967         96,730         15,713         —          118,410   

Goodwill and intangible assets

     —           —           78,331         58,339         —          136,670   

Other assets

     —           —           16,151         2,371         —          18,522   

Investments in and amounts due from affiliates eliminated upon consolidation

     263,879         175,341         465,794         —           (905,014     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 263,879       $ 190,425       $ 1,243,388       $ 953,517       $ (905,014   $ 1,746,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Equity

                

Current liabilities

   $ —         $ 36       $ 39,636       $ 834       $ —        $ 40,506   

Long-term debt, net of deferred financing costs

     67,975         104,425         105,454         —           —          277,854   

Deferred revenues

     —           41,456         740,550         86,188         —          868,194   

Perpetual care trust corpus

     —           —           —           321,700         —          321,700   

Other long-term liabilities

     —           —           32,158         9,879         —          42,037   

Due to affiliates

     —           —           172,400         477,824         (650,224     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     67,975         145,917         1,090,198         896,425         (650,224     1,550,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Partners’ capital

     195,904         44,508         153,190         57,092         (254,790     195,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 263,879       $ 190,425       $ 1,243,388       $ 953,517       $ (905,014   $ 1,746,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
December 31, 2015    Parent      Subsidiary
Issuer
     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

                

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 11,869       $ 3,284       $ —        $ 15,153   

Other current assets

     —           4,858         78,464         12,701         —          96,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           4,858         90,333         15,985         —          111,176   

Long-term accounts receivable

     —           2,888         80,969         11,310         —          95,167   

Cemetery property and equipment

     —           1,084         418,400         31,100         —          450,584   

Merchandise trusts

     —           —           —           464,676         —          464,676   

Perpetual care trusts

     —           —           —           307,804         —          307,804   

Deferred selling and obtaining costs

     —           5,967         91,275         14,300         —          111,542   

Goodwill and intangible assets

     —           —           78,223         58,837         —          137,060   

Other assets

     —           —           14,153         2,195         —          16,348   

Investments in and amounts due from affiliates eliminated upon consolidation

     249,436         165,639         436,811         —           (851,886     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 249,436       $ 180,436       $ 1,210,164       $ 906,207       $ (851,886   $ 1,694,357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Equity

                

Current liabilities

   $ —         $ 12       $ 33,083       $ 837       $ —        $ 33,932   

Long-term debt, net of deferred financing costs

     67,890         104,295         144,214         —           —          316,399   

Deferred revenues

     —           40,467         697,516         77,438         —          815,421   

Perpetual care trust corpus

     —           —           —           307,804         —          307,804   

Other long-term liabilities

     —           —           29,761         9,494         —          39,255   

Due to affiliates

     —           —           172,185         454,605         (626,790     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     67,890         144,774         1,076,759         850,178         (626,790     1,512,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Partners’ capital

     181,546         35,662         133,405         56,029         (225,096     181,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 249,436       $ 180,436       $ 1,210,164       $ 906,207       $ (851,886   $ 1,694,357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended June 30, 2016    Parent     Subsidiary
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenues

   $ —        $ 1,653      $ 66,407      $ 12,590      $ (2,368   $ 78,282   

Total cost and expenses

     —          (2,575     (67,877     (12,451     2,368        (80,535

Other income (loss)

     —            (191     —          —          (191

Net loss from equity investment in subsidiaries

     (7,292     (8,816     —          —          16,108        —     

Interest expense

     (1,359     (2,087     (2,066     (195     —          (5,707
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     (8,651     (11,825     (3,727     (56     16,108        (8,151
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

     —          —          (500     —          —          (500
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (8,651   $ (11,825   $ (4,227   $ (56   $ 16,108      $ (8,651
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Three months ended June 30, 2015    Parent     Subsidiary
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenues

   $ —        $ 1,505      $ 73,659      $ 12,822      $ (3,473   $ 84,513   

Total cost and expenses

     —          (2,865     (70,398     (13,305     3,473        (83,095

Net loss from equity investment in subsidiaries

     (3,285     (4,637     —          —          7,922        —     

Interest expense

     (1,359     (2,087     (2,144     (180     —          (5,770
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     (4,644     (8,084     1,117        (663     7,922        (4,352
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

     —          —          (292     —          —          (292
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,644   $ (8,084   $ 825      $ (663   $ 7,922      $ (4,644
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Six months ended June 30, 2016    Parent     Subsidiary
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenues

   $ —        $ 2,886      $ 130,701      $ 26,356      $ (4,732   $ 155,211   

Total cost and expenses

     —          (5,092     (133,648     (23,999     4,732        (158,007

Other income (loss)

     —          —          (1,073     —          —          (1,073

Net loss from equity investment in subsidiaries

     (13,409     (16,455     —          —          29,864        —     

Interest expense

     (2,717     (4,174     (4,220     (386     —          (11,497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     (16,126     (22,835     (8,240     1,971        29,864        (15,366
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

     —          —          (760     —          —          (760
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (16,126   $ (22,835   $ (9,000   $ 1,971      $ 29,864      $ (16,126
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2015

   Parent     Subsidiary
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenues

   $ —        $ 2,785      $ 134,945      $ 23,670      $ (6,394   $ 155,006   

Total cost and expenses

     —          (5,276     (133,114     (24,617     6,394        (156,613

Net loss from equity investment in subsidiaries

     (10,437     (11,385     —          —          21,822        —     

Interest expense

     (2,717     (4,174     (3,985     (357     —          (11,233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     (13,154     (18,050     (2,154     (1,304     21,822        (12,840
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

     —          —          (314     —          —          (314
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (13,154   $ (18,050   $ (2,468   $ (1,304   $ 21,822      $ (13,154
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 

Six months ended June 30, 2016    Parent     Subsidiary
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
    Consolidated
 

Net cash provided by (used in) operating activities

   $ 2,624      $ 61      $ 13,804      $ 1,485      $ (9,515   $ 8,459   

Cash Flows From Investing Activities:

            

Cash paid for acquisitions and capital expenditures

     —          (61     (5,380     (1,715     —          (7,156

Payments to affiliates

     (32,458     —          —          —          32,458        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (32,458     (61     (5,380     (1,715     32,458        (7,156
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

            

Cash distributions

     (44,703     —          —          —          —          (44,703

Payments from affiliates

     —          —          22,943        —          (22,943     —     

Net borrowings and repayments of debt

     —          —          (36,503     —          —          (36,503

Proceeds from issuance of common units

     74,537        —          —          —          —          74,537   

Other financing activities

     —          —          (351     —          —          (351
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     29,834        —          (13,911     —          (22,943     (7,020
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          —          (5,487     (230     —          (5,717

Cash and cash equivalents - Beginning of period

     —          —          11,869        3,284        —          15,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ —        $ —        $ 6,382      $ 3,054      $ —        $ 9,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Six months ended June 30, 2015    Parent     Subsidiary
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net cash provided by (used in) operating activities

   $ 36,297      $ 151      $ 9,324      $ 1,391      $ (43,188   $ 3,975   

Cash Flows From Investing Activities:

            

Cash paid for acquisitions and capital expenditures

     —          (151     (5,472     (1,627     —          (7,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (151     (5,472     (1,627     —          (7,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

            

Cash distributions

     (36,297     —          —          —          —          (36,297

Payments to affiliates

     —          —          (43,188     —          43,188        —     

Net borrowings and repayments of debt

     —          —          42,608        —          —          42,608   

Other financing activities

     —          —          (34     —          —          (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (36,297     —          (614     —          43,188        6,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          —          3,238        (236     —          3,002   

Cash and cash equivalents - Beginning of period

     —          —          7,059        3,342        —          10,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ —        $ —        $ 10,297      $ 3,106      $ —        $ 13,403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

17. ISSUANCES OF LIMITED PARTNER UNITS

On November 19, 2015, the Partnership entered into an equity distribution agreement (“ATM Equity Program”) with a group of banks (the “Agents”) whereby it may sell, from time to time, common units representing limited partner interests having an aggregate offering price of up to $100,000,000. During the three months ended June 30, 2016, the Partnership issued 176,208 common units under the ATM Equity Program for net proceeds of $4.2 million. During the six months ended June 30, 2016, the Partnership issued 903,682 common units under the ATM Equity Program for net proceeds of $23.0 million.

Pursuant to a Common Unit Purchase Agreement, dated May 19, 2014, by and between the Partnership and American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), the Partnership issued 61,553 paid-in-kind units to ACII in lieu of cash distributions of $1.5 million during the three months ended June 30, 2016 and 117,290 paid-in-kind Units to ACII in lieu of cash distributions of $3.0 million for the six months ended June 30, 2016.

On April 20, 2016, the Partnership completed a follow-on public offering of 2,000,000 common units at a public offering price of $23.65 per unit. Additionally, the underwriters exercised their option to purchase an additional 300,000 common units. The offering resulted in net proceeds, after deducting underwriting discounts and offering expenses, of $51.5 million. The proceeds from the offering were used to pay down outstanding indebtedness under the Credit Facility.

18. SEGMENT INFORMATION

The Partnership’s operations include two reportable operating segments, Cemetery Operations and Funeral Homes. These operating segments reflect the way the Partnership manages its operations and makes business decisions as of June 30, 2016 and represent a change from the comparable period presented. Prior period information was revised to the current year presentation. Operating segment data for the periods indicated were as follows (in thousands):

 

28


Table of Contents
     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Cemetery Operations:

           

Revenues

   $ 63,543       $ 71,019       $ 124,149       $ 126,252   

Operating costs and expenses

     (54,911      (57,573      (105,267      (106,906

Depreciation and amortization

     (2,014      (1,904      (3,984      (3,810
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment income

   $ 6,618       $ 11,542       $ 14,898       $ 15,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Funeral Homes:

           

Revenues

   $ 14,739       $ 13,494       $ 31,062       $ 28,754   

Operating costs and expenses

     (12,732      (12,149      (26,472      (24,299

Depreciation and amortization

     (858      (802      (1,735      (1,601
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment income

   $ 1,149       $ 543       $ 2,855       $ 2,854   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation of segment income to net loss:

           

Cemeteries

   $ 6,618       $ 11,542       $ 14,898       $ 15,536   

Funeral homes

     1,149         543         2,855         2,854   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment income

     7,767         12,085         17,753         18,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate overhead

     (9,737      (10,429      (20,048      (19,512

Corporate depreciation and amortization

     (283      (238      (501      (485

Other gains (losses), net

     (191      —           (1,073      —     

Interest expense

     (5,707      (5,770      (11,497      (11,233

Income tax benefit (expense)

     (500      (292      (760      (314
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (8,651    $ (4,644    $ (16,126    $ (13,154
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures:

           

Cemeteries

   $ 2,691       $ 4,127       $ 4,632       $ 6,693   

Funeral homes

     44         207         495         382   

Corporate

     209         101         2,377         175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 2,944       $ 4,435       $ 7,504       $ 7,250   
  

 

 

    

 

 

    

 

 

    

 

 

 
Balance sheet information:    June 30, 2016      December 31, 2015                

Assets:

           

Cemetery Operations

   $ 1,528,569       $ 1,481,926         

Funeral Homes

     197,481         190,443         

Corporate

     20,145         21,988         
  

 

 

    

 

 

       

Total assets

   $ 1,746,195       $ 1,694,357         
  

 

 

    

 

 

       

Goodwill:

           

Cemetery Operations

   $ 25,320       $ 25,320         

Funeral Homes

     45,252         44,531         
  

 

 

    

 

 

       

Total goodwill

   $ 70,572       $ 69,851         
  

 

 

    

 

 

       

19. SUBSEQUENT EVENTS

On July 25, 2016, the Partnership announced a quarterly cash distribution of $0.66 per common unit pertaining to the results for the second quarter of 2016. The distribution is scheduled to be paid August 12, 2016 to common unit holders of record as of the close of business on August 5, 2016.

On August 4, 2016, StoneMor Operating LLC (the “Operating Company”), a wholly-owned subsidiary of the Partnership, entered into a new Credit Agreement (the “New Credit Agreement”) among each of the Subsidiaries of the Operating Company (together with the Operating Company, “Borrowers”), the Lenders identified therein, Capital One, National Association (“Capital One”), as Administrative Agent, Issuing Bank and Swingline Lender, Citizens Bank of Pennsylvania, as Syndication Agent, and TD Bank, N.A. and Raymond James Bank, N.A., as Co-Documentation Agents. In addition, on the same date, the Partnership, the Borrowers and Capital One, as Administrative Agent, entered into the Guaranty and Collateral Agreement (the “Guaranty Agreement,” and together with the New Credit Agreement, “New Agreements”). Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the New Agreements.

The New Agreements replaced the Partnership’s Credit Agreement, as amended with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and other lenders party thereto (the “Prior Credit Agreement”), Second Amended and Restated Security Agreement, and Second Amended and Restated Pledge Agreement, each dated as of December 19, 2014 (collectively, “Prior Agreements”).

 

29


Table of Contents

The New Credit Agreement provides for up to $210.0 million initial aggregate amount of Revolving Commitments, which may be increased, from time to time, in minimum increments of $5.0 million so long as the aggregate amount of such increases does not exceed $100.0 million. The Operating Company may also request the issuance of Letters of Credit for up to $15.0 million in the aggregate. The Maturity Date under the New Credit Agreement is the earlier of (i) August 4, 2021 and (ii) the date that is six months prior to the earliest scheduled maturity date of any outstanding Permitted Unsecured Indebtedness (at present, such date is December 1, 2020, which is six months prior to June 1, 2021 maturity date of outstanding 7.875% senior notes).

Generally, proceeds of the Loans under the New Credit Agreement can be used to finance the working capital needs and for other general corporate purposes of the Borrowers and Guarantors, including acquisitions and distributions permitted under the New Credit Agreement. The terms and covenants of the New Credit Agreement, taken as a whole, are substantially similar to those of the Prior Credit Agreement.

The Borrowers’ obligations under the New Credit Agreement are guaranteed by the Partnership and the Borrowers. Pursuant to the Guaranty Agreement, the Borrowers’ obligations under the Credit Agreement are secured by a first priority lien and security interest (subject to permitted liens and security interests) in substantially all of the Partnership’s and Borrowers’ assets, whether then owned or thereafter acquired, excluding certain assets.

In connection with entering into the New Credit Agreement, the Partnership incurred an extinguishment of debt charge of approximately $1.2 million pertaining to deferred financing costs on the Prior Credit Agreement.

 

30


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (REVISED)

As discussed in the Explanatory Note to this Form 10-Q/A and Note 2, Restatement of Previously Issued Consolidated Financial Statements, in the Partnership’s consolidated financial statements included in Item 1 to this Form 10-Q/A, the consolidated financial statements of the Partnership as of June 30, 2016 and December 31, 2015 and for both the three and six months ended June 30, 2016 and 2015 have been revised to give effect to the Restatement. Accordingly, the discussion and analysis below for both the three and six months ended June 30, 2016 and 2015 has been revised to give effect to the Restatement. The revised discussion and analysis presented below provides information to assist in understanding our financial condition and results of operations, and should be read in conjunction with the Partnership’s consolidated financial statements included in Item 1.

Certain statements contained in this Form 10-Q/A, including, but not limited to, information regarding our operating activities, the plans and objectives of our management, and assumptions regarding our future performance and plans are forward-looking statements. When used in this Form 10-Q/A, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on management’s expectations and estimates. These statements are neither promises nor guarantees and are made subject to certain risks and uncertainties that could cause actual results to differ materially from the results stated or implied in this Form 10-Q/A.

Our major risks are related to uncertainties associated with the cash flow from pre-need and at-need sales, trusts and financings, which may impact StoneMor’s ability to meet its financial projections, service its debt, pay distributions, and increase its distributions, as well as with its ability to maintain an effective system of internal control over financial reporting and disclosure controls and procedures.

Our additional risks and uncertainties include, but are not limited to, the following: uncertainties associated with future revenue and revenue growth; uncertainties associated with the integration or anticipated benefits of recent acquisitions or any future acquisitions; our ability to complete and fund additional acquisitions; the effect of economic downturns; the impact of our significant leverage on our operating plans; the decline in the fair value of certain equity and debt securities held in trusts; our ability to attract, train and retain an adequate number of sales people; uncertainties associated with the volume and timing of pre-need sales of cemetery services and products; increased use of cremation; changes in the death rate; changes in the political or regulatory environments, including potential changes in tax accounting and trusting policies; our ability to successfully implement a strategic plan relating to achieving operating improvements, strong cash flows and further deleveraging; our ability to successfully compete in the cemetery and funeral home industry; litigation or legal proceedings that could expose us to significant liabilities and damage our reputation; the effects of cyber security attacks due to our significant reliance on information technology; uncertainties relating to the financial condition of third-party insurance companies that fund our pre-need funeral contracts; and various other uncertainties associated with the death care industry and our operations in particular.

Our risks and uncertainties are more particularly described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K/A for the year ended December 31, 2015. Readers are cautioned not to place undue reliance on forward looking statements included in this

Form 10-Q/A, which speak only as of the date hereof. Except as required by applicable laws, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

BUSINESS OVERVIEW

We are a publicly-traded Delaware master-limited partnership (“MLP”) and provider of funeral and cemetery products and services in the death care industry in the United States. As of June 30, 2016, we operated 307 cemeteries in 27 states and Puerto Rico, of which 276 are owned and 31 are operated under lease, management or operating agreements. We also owned and operated 107 funeral homes in 19 states and Puerto Rico.

FINANCIAL PRESENTATION

Our consolidated balance sheets at June 30, 2016 and December 31, 2015, and the consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 include our accounts and our wholly-owned subsidiaries. Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the amounts reported in the consolidated balance sheets and related consolidated statements of operations. Actual balances and results could be different from those estimates. All intercompany transactions and balances have been eliminated in the consolidation of the financial statements.

SUBSEQUENT EVENTS

On July 25, 2016, we announced a quarterly cash distribution of $0.66 per common unit pertaining to the results for the second quarter of 2016. The distribution is scheduled to be paid August 12, 2016 to common unit holders of record as of the close of business on August 5, 2016.

 

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On August 4, 2016, our wholly-owned subsidiary, StoneMor Operating LLC entered into a credit agreement (the “New Credit Agreement”), which replaced the Partnership’s existing credit agreement. The New Credit Agreement provides for up to $210.0 million initial aggregate amount of Revolving Commitments, which may be increased, from time to time, in minimum increments of $5.0 million so long as the aggregate amount of such increases does not exceed $100.0 million. We may also request the issuance of Letters of Credit for up to $15.0 million in the aggregate. The Maturity Date under the New Credit Agreement is the earlier of (i) August 4, 2021 and (ii) the date that is six months prior to the earliest scheduled maturity date of any outstanding Permitted Unsecured Indebtedness (at present, such date is December 1, 2020, which is six months prior to June 1, 2021 maturity date of outstanding 7.875% senior notes).

Generally, proceeds of the Loans under the New Credit Agreement can be used to finance our working capital needs and for other general corporate purposes, including acquisitions and distributions permitted under the New Credit Agreement. The terms and covenants of the New Credit Agreement, taken as a whole, are substantially similar to those of the existing credit agreement.

In connection with entering into the New Credit Agreement, the Partnership incurred an extinguishment of debt charge of approximately $1.2 million pertaining to deferred financing costs on the existing credit agreement.

REVENUE RECOGNITION

Cemetery Operations

Our cemetery revenues are principally derived from sales of interment rights, merchandise and services. These sales occur both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Pre-need sales are typically sold on an installment plan. At-need cemetery sales and pre-need merchandise and services sales are recognized as revenue when the merchandise is delivered or the service is performed. For pre-need sales of interment rights, we recognize the associated revenue when we have collected 10% of the sales price from the customer. We consider our cemetery merchandise delivered to our customer when it is either installed or ready to be installed and delivered to a third-party storage facility until it is needed, with ownership transferred to the customer at that time. Pre-need sales that have not yet been recognized as revenue are recognized as deferred revenues, a liability on our consolidated balance sheet. Direct costs associated with pre-need sales that are recognized as deferred revenues, such as sales commissions, are recognized as deferred selling and obtaining costs, an asset on our consolidated balance sheet, until the merchandise is delivered or the services are performed.

Funeral Home Operations

Our funeral home revenues are principally derived from at-need and pre-need sales of merchandise and services. Pre-need sales are typically sold on an installment plan. Both at-need and pre-need funeral home sales are recognized as revenue when the merchandise is delivered or the service is performed. Pre-need sales that have not yet been recognized as revenue are recognized as deferred revenues, a liability on our consolidated balance sheet. Direct costs associated with pre-need sales that are recognized as deferred revenues, such as sales commissions, are recognized as deferred selling and obtaining costs, an asset on our consolidated balance sheet, until the merchandise is delivered or the services are performed. Our funeral home operations also include revenues related to the sale of term and final expense whole life insurance. As an agent for these insurance sales, we earn and recognize commission-related revenue streams from the sales of these policies.

Trust Investment Income

Sales of cemetery and funeral home merchandise and services are subject to state law. Under these laws, which vary by state, a portion of the cash proceeds received from the sale of interment rights and pre-need sales of cemetery and funeral home merchandise and services are required to be deposited into trusts. For sales of interment rights, a portion of the cash proceeds received are required to be deposited into a perpetual care trust. While the principal balance of the perpetual care trust must remain in the trust in perpetuity, we recognize investment income on such assets as revenue, excluding realized gains and losses from the sale of trust assets. For sales of cemetery and funeral home merchandise and services, a portion of the cash proceeds received are required to be deposited into a merchandise trust until the merchandise is delivered or the services are performed, at which time the funds deposited, along with the associated investment income, may be withdrawn. Investment income from assets held in the merchandise trust is recognized as revenues when withdrawn. Amounts deposited into trusts are invested as recommended by our wholly-owned registered investment adviser and approved by the Trust Committee of the board of directors of our general partner, including use of investment managers. These investment managers are required to invest our trust funds in accordance with applicable state law and internal investment guidelines adopted by the Trust Committee. Our investment managers are monitored by our wholly-owned registered investment advisor, who advises the Trust Committee of asset allocations, evaluates the investment managers and provides detailed monthly reports on the performance of each merchandise and perpetual care trust.

 

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GENERAL TRENDS AND OUTLOOK

We expect our business to be affected by key trends in the deathcare industry, based upon assumptions made by us and information currently available. Deathcare industry factors affecting our financial position and results of operations include, but are not limited to, demographic trends in terms of population growth and average age, which impacts death rates and number of deaths, increasing cremation trends, and increasing memorialization trends. In addition, we are subject to fluctuations in the fair value of equity and fixed-maturity debt securities held in our trusts. These values can be negatively impacted by contractions in the credit market and overall downturns in economic activity. Our ability to make payments on our debt and our ability to make cash distributions to our unitholders depends on our success at managing these industry trends. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Cemetery Operations

Overview

We are currently the second largest owner and operator of cemeteries in the United States. At June 30, 2016, we operated 307 cemeteries in 27 states and Puerto Rico. We own 276 of these cemeteries and we manage or operate the remaining 31 under lease, operating or management agreements. Revenues from cemetery operations accounted for approximately 81.2% of our total revenues during the three months ended June 30, 2016.

Operating Results

The following table presents operating results for our cemetery operations for the respective reporting periods (in thousands):

 

     Three months ended June 30,  
     2016      2015  

Merchandise

   $ 37,855       $ 38,999   

Services

     13,676         15,367   

Interest income

     2,252         2,184   

Investment and other

     9,760         14,469   
  

 

 

    

 

 

 

Total revenue

     63,543         71,019   
  

 

 

    

 

 

 

Cost of goods sold

     12,042         13,333   

Cemetery expense

     17,485         19,279   

Selling expense

     16,391         15,769   

General and administrative expense

     8,993         9,192   

Depreciation and amortization

     2,014         1,904   
  

 

 

    

 

 

 

Total cost and expenses

     56,925         59,477   
  

 

 

    

 

 

 

Operating income

   $ 6,618       $ 11,542   
  

 

 

    

 

 

 

 

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Cemetery merchandise revenues were $37.9 million for the three months ended June 30, 2016, a decrease of $1.1 million from $39.0 million for the three months ended June 30, 2015. The decrease was primarily due to a reduction in servicing of liabilities assumed in recent acquisitions. Cemetery services revenues were $13.7 million for the three months ended June 30, 2016, a decrease of $1.7 million from $15.4 million for the three months ended June 30, 2015. This decrease was primarily due to a reduction in opening and closing service revenues. Investment and other income was $9.8 million for the three months ended June 30, 2016, a decrease of $4.7 million from $14.5 million for the three months ended June 30, 2015. This was primarily attributed to a $3.3 million decrease in merchandise trust income due to a comparatively smaller deferred merchandise trust revenue balance in the current period. There was also a $1.0 million decrease in perpetual care trust income. Interest income remained consistent for the three months ended June 30, 2016 and 2015.

Cost of goods sold was $12.0 million for the three months ended June 30, 2016, a decrease of $1.3 million from $13.3 million for the three months ended June 30, 2015. This decrease was principally due to a decrease in related merchandise revenues.

Cemetery expenses were $17.5 million for the three months ended June 30, 2016, a decrease of $1.8 million from $19.3 million for the three months ended June 30, 2015. This decrease was principally due to a $1.1 million decrease in personnel costs and a $0.7 million decrease in repair and maintenance expenses.

Selling expenses were $16.4 million for the three months ended June 30, 2016, an increase of $0.6 million from $15.8 million for the three months ended June 30, 2015. This increase was primarily due to a $0.8 million increase in advertising and marketing costs, partially offset by a $0.2 million decrease in personnel costs.

General and administrative expenses were $9.0 million for the three months ended June 30, 2016, a decrease of $0.2 million from $9.2 million for the three months ended June 30, 2015. This decrease was primarily due to a $0.6 million decrease in personnel costs, partially offset by a $0.4 million increase in general overhead expenses.

Depreciation and amortization expense was consistent with the prior period, with $2.0 million for the three months ended June 30, 2016 compared to $1.9 million for the three months ended June 30, 2015.

Funeral Home Operations

Overview

At June 30, 2016, we owned and operated 107 funeral homes. These properties are located in 19 states and Puerto Rico. Revenues from funeral home operations accounted for approximately 18.8% of our total revenues during three months ended June 30, 2016.

 

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Operating Results

The following table presents operating results for our funeral home operations for the respective reporting periods (in thousands):

 

     Three months ended June 30,  
     2016      2015  

Merchandise

   $ 6,569       $ 6,250   

Services

     8,170         7,244   
  

 

 

    

 

 

 

Total revenue

     14,739         13,494   
  

 

 

    

 

 

 

Merchandise

     1,835         2,066   

Service

     6,151         5,703   

Depreciation and amortization

     858         802   

Other

     4,746         4,380   
  

 

 

    

 

 

 

Total expenses

     13,590         12,951   
  

 

 

    

 

 

 

Operating income

   $ 1,149       $ 543   
  

 

 

    

 

 

 

Funeral home merchandise revenues were $6.6 million for the three months ended June 30, 2016, an increase of $0.3 million from $6.3 million for the three months ended June 30, 2015. Funeral home service revenues were $8.2 million for the three months ended June 30, 2016, an increase of $1.0 million from $7.2 million for the three months ended June 30, 2015. The increases were mostly due to increases in casket and at-need service revenue, respectively, primarily due to the locations acquired in the last twelve months.

Funeral home expenses were $13.6 million for the three months ended June 30, 2016, an increase of $0.6 million from $13.0 million for the three months ended June 30, 2015. This increase principally consists of a $0.4 million increase in personnel costs primarily due to the locations acquired in the last twelve months and a $0.2 million increase in costs associated with insurance-related sales.

Corporate Overhead

Corporate overhead was $9.7 million for the three months ended June 30, 2016, a decrease of $0.7 million from $10.4 million for the three months ended June 30, 2015. This decrease was principally due to a $0.7 million decrease in personnel costs.

Corporate Depreciation and Amortization

Depreciation and amortization expense was consistent with the prior period, with $0.3 million for the three months ended June 30, 2016, an increase of $0.1 million from $0.2 million for the three months ended June 30, 2015.

Other Gains and Losses

In the second quarter of 2016, we obtained additional information related to two of the acquisitions that closed during 2015. The changes resulted in an adjustment to the gain on acquisition recognized during the year ended December 31, 2015, reducing the gain by $0.8 million via a loss recognized in the current period in accordance with GAAP. Also, we sold a warehouse during the period for a gain of $1.3 million, of which $0.7 million was deferred in accordance with sale-leaseback accounting.

Interest Expense

Interest expense was relatively consistent with the prior period, with $5.7 million for the three months ended June 30, 2016, a decrease of $0.1 million from $5.8 million for the three months ended June 30, 2015.

Income Tax Expense

Income tax expense was $0.5 million for the three months ended June 30, 2016, an increase of $0.2 million from $0.3 million for the three months ended June 30, 2015. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

 

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Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Cemetery Operations

Operating Results

Revenues from cemetery operations accounted for approximately 80.0% of our total revenues during the six months ended June 30, 2016. The following table presents operating results for our cemetery operations for the respective reporting periods (in thousands):

 

     Six months ended June 30,  
     2016      2015  

Merchandise

   $ 70,623       $ 68,402   

Services

     27,139         29,924   

Interest income

     4,481         4,384   

Investment and other

     21,906         23,542   
  

 

 

    

 

 

 

Total revenue

     124,149         126,252   
  

 

 

    

 

 

 

Cost of goods sold

     22,762         23,162   

Cemetery expense

     33,341         35,544   

Selling expense

     30,967         29,679   

General and administrative expense

     18,197         18,521   

Depreciation and amortization

     3,984         3,810   
  

 

 

    

 

 

 

Total cost and expenses

     109,251         110,716   
  

 

 

    

 

 

 

Operating income

   $ 14,898       $ 15,536   
  

 

 

    

 

 

 

Cemetery merchandise revenues were $70.6 million for the six months ended June 30, 2016, an increase of $2.2 million from $68.4 million for the six months ended June 30, 2015. The increase is principally due to increases in recognized sales of markers and mausoleums, partially offset by decreases in recognized sales of crypts and niches. Cemetery services revenues were $27.1 million for the six months ended June 30, 2016, a decrease of $2.8 million from $29.9 million for the six months ended June 30, 2015. This decrease was primarily due to a reduction in opening and closing service revenues. Investment and other income was $21.9 million for the six months ended June 30, 2016, a decrease of $1.6 million from $23.5 million for the six months ended June 30, 2015. This decrease was primarily due to a $3.0 million decrease in merchandise trust income attributable to a comparatively smaller deferred merchandise trust revenue balance in the current period, partially offset by $0.6 million increase in excess-land sale revenues with the remaining increase in miscellaneous income. Interest income remained consistent for both the six months ended June 30, 2016 and 2015.

Cost of goods sold was $22.8 million for the six months ended June 30, 2016, a decrease of $0.4 million from $23.2 million for the six months ended June 30, 2015. This decrease was primarily due to changes in the value and mix of products.    

Cemetery expenses were $33.3 million for the six months ended June 30, 2016, a decrease of $2.2 million from $35.5 million for the six months ended June 30, 2015. This decrease was principally due to a $1.7 million decrease in personnel costs and a $0.5 million decrease in repair and maintenance expenses.

Selling expenses were $31.0 million for the six months ended June 30, 2016, an increase of $1.3 million from $29.7 million for the six months ended June 30, 2015. This increase was primarily due to a $0.4 million increase in personnel costs and a $0.9 million increase in advertising and marketing costs.

 

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General and administrative expenses were $18.2 million for the six months ended June 30, 2016, a decrease of $0.3 million from $18.5 million for the six months ended June 30, 2015. This decrease was primarily due to a $1.1 million decrease in personnel costs, $0.1 million decrease in insurance costs, partially offset by a $0.9 million increase in general overhead expenses.

Depreciation and amortization expense was relatively consistent with the prior period, with $4.0 million for the six months ended June 30, 2016 compared to $3.8 million for the six months ended June 30, 2015.

Funeral Home Operations

Operating Results

Revenues from funeral home operations accounted for approximately 20.0% of our total revenues during six months ended June 30, 2016. The following table presents operating results for our funeral home operations for the respective reporting periods (in thousands):

 

     Six months ended June 30,  
     2016      2015  

Merchandise

   $ 14,025       $ 13,325   

Services

     17,037         15,429   
  

 

 

    

 

 

 

Total revenue

     31,062         28,754   
  

 

 

    

 

 

 

Merchandise

     3,984         4,442   

Service

     12,602         11,296   

Depreciation and amortization

     1,735         1,601   

Other

     9,886         8,561   
  

 

 

    

 

 

 

Total expenses

     28,207         25,900   
  

 

 

    

 

 

 

Operating income

   $ 2,855       $ 2,854   
  

 

 

    

 

 

 

Funeral home merchandise revenues were $14.0 million for the six months ended June 30, 2016, an increase of $0.7 million from $13.3 million for the six months ended June 30, 2015. Funeral home service revenues were $17.0 million for the six months ended June 30, 2016, an increase of $1.6 million from $15.4 million for the six months ended June 30, 2015. The overall increase was largely due to the locations acquired in the last twelve months, specifically with increases in casket and at-need service revenue, respectively.

Funeral home expenses were $28.2 million for the six months ended June 30, 2016, an increase of $2.3 million from $25.9 million for the six months ended June 30, 2015. This increase principally consists of a $1.4 million increase in personnel costs primarily due to the locations acquired in the last twelve months and a $0.5 million increase in costs associated with insurance-related sales.

Corporate Overhead

Corporate overhead was $20.0 million for the six months ended June 30, 2016, an increase of $0.5 million from $19.5 million for the six months ended June 30, 2015. This increase was principally due to a $2.6 million increase in acquisition-related costs, partially offset by a $1.3 million decrease in personnel costs, a $0.3 million decrease in professional fees and a $0.5 million decrease in advertising and marketing costs due to improved expense management. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

Corporate Depreciation and Amortization

Depreciation and amortization expense was consistent with the prior period, with $0.5 million for the six months ended June 30, 2016 and 2015.

 

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Other Gains and Losses

In the second quarter of 2016, we obtained additional information related to two of the acquisitions that closed during 2015. The changes resulted in an adjustment to the gain on acquisition recognized during the year ended December 31, 2015, reducing the gain by $0.8 million via a loss recognized in the current period in accordance with GAAP. Also, we sold a warehouse during the period for a total gain of $1.3 million, of which $0.7 million was deferred in accordance with sale-leaseback accounting. In addition, a cease-use expense of $0.5 million was recorded due to the relocation of corporate headquarters to Trevose, Pennsylvania. We also sold a funeral home building and related real property for a net loss of $0.4 million.

Interest Expense

Interest expense was $11.5 million for the six months ended June 30, 2016, an increase of $0.3 million from $11.2 million for the six months ended June 30, 2015. This increase was principally due to an increase in interest expense on amounts outstanding under the credit facility, which had higher average amounts outstanding during the current period than the comparable period.

Income Tax Expense

Income tax expense was $0.8 million for the six months ended June 30, 2016, an increase of $0.4 million from $0.4 million for the six months ended June 30, 2015. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

Supplemental Data

The following table presents supplemental operating data for the periods presented (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Interments performed

     13,401         14,024         27,034         28,636   

Interment rights sold (1)

           

Lots

     8,635         8,844         15,241         15,894   

Mausoleum crypts (including pre-construction)

     582         715         1,052         1,333   

Niches

     403         475         755         844   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interment rights sold (1)

     9,620         10,034         17,048         18,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

Number of cemetery contracts written

     28,365         30,227         54,396         57,626   

Number of pre-need cemetery contracts written

     12,784         13,965         24,160         26,048   

Number of at-need cemetery contracts written

     15,581         16,262         30,236         31,578   

 

(1) Net of cancellations. Sales of double-depth burial lots are counted as two sales.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity are cash generated from operations, borrowings under our revolving credit facility and capital raised through the issuance of additional limited partner units. As an MLP, our primary cash requirements, in addition to normal operating expenses, are for cash distributions, debt service and capital expenditures. In general, we expect to fund:

 

    cash distributions in accordance with our partnership agreement and maintenance capital expenditures through available cash and cash flows from operating activities;

 

    expansion capital expenditures and working capital deficits through cash generated from operations and additional borrowings; and

 

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    debt service obligations through additional borrowings or by the issuance of additional limited partner units or asset sales.

We rely on cash flow from operations, borrowings under our credit facility and the issuance of additional limited partner units to execute our growth strategy and meet our financial commitments and other short-term financial needs. We cannot be certain that additional capital will be available to us to the extent required and on acceptable terms.

We believe that we will have sufficient liquid assets, cash from operations and borrowing capacity to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures for at least the next twelve-month period. However, we are subject to business, operational and other risks that could adversely affect our cash flow. We may supplement our cash generation with proceeds from financing activities, including borrowings under our credit facility and other borrowings, the issuance of additional limited partner units, and the sale of assets and other transactions.

Cash Flows—Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Net cash flows provided by operating activities were $8.5 million during the six months ended June 30, 2016, an increase of $4.5 million from $4.0 million during the six months ended June 30, 2015. The $4.5 million favorable movement in net cash provided by operating activities resulted from a $6.2 million favorable movement in working capital and a $1.7 million unfavorable movement in net income excluding non-cash items. The favorable movement in working capital was principally due to larger withdrawals from and smaller realized gains in our merchandise trusts. The unfavorable movement in net income excluding non-cash items was due principally to our cemetery operations.

Net cash used in investing activities was $7.2 million during the six months ended June 30, 2016, a decrease of $0.1 million from $7.3 million during the six months ended June 30, 2015. Net cash used in investing activities during the six months ended June 30, 2016 consisted of $7.5 million for capital expenditures and $1.5 million for acquisitions, partially offset by proceeds from asset sales of $1.8 million. Net cash used in investing activities during the six months ended June 30, 2015 principally consisted of $7.3 million for capital expenditures.

Net cash flows used in financing activities were $7.0 million for the six months ended June 30, 2016 compared to net cash flows provided by financing activities of $6.3 million for the six months ended June 30, 2015. Cash flows used in financing activities during the six months ended June 30, 2016 consisted primarily of cash distributions of $44.7 million and $36.5 million of net repayments of debt, partially offset by $74.5 million of net proceeds from the issuance of common units. Cash flows provided by financing activities during the six months ended June 30, 2015 consisted primarily of $42.6 million of net borrowings, partially offset by cash distributions of $36.3 million.

Capital Expenditures

Our capital requirements consist primarily of:

 

    Expansion capital expenditures – we consider expansion capital expenditures to be capital expenditures that expand the capacity of our existing operations; and

 

    Maintenance capital expenditures – we consider maintenance capital expenditures to be any capital expenditures that are not expansion capital expenditures – generally, this will include expenditures to maintain our facilities.

The following table summarizes maintenance and expansion capital expenditures, excluding amounts paid for acquisitions, for the periods presented (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Maintenance capital expenditures

   $ 1,289       $ 2,065       $ 4,293       $ 3,379   

Expansion capital expenditures

     1,655         2,370         3,211         3,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 2,944       $ 4,435       $ 7,504       $ 7,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Issuance of Common Units

During the six months ended June 30, 2016, we issued 903,682 common units under the ATM program for net proceeds of $23.0 million.

On April 20, 2016, we completed a follow-on public offering of 2,000,000 common units at a public offering price of $23.65 per unit. Additionally, the underwriters exercised their option to purchase an additional 300,000 common units. The offering resulted in net proceeds, after deducting underwriting discounts and offering expenses, of $51.5 million. The proceeds from the offering were used to pay down outstanding indebtedness under the Credit Facility.

Long-Term Debt

Credit Facility

We are a party to the Fourth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), which provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. Additionally, the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. Our obligations under the Credit Facility are secured by substantially all of our assets, excluding those held in trust. Borrowings under the Credit Facility are classified as either acquisition draws or working capital draws. Acquisition draws may be utilized to finance permitted acquisitions, the purchase and construction of mausoleums and related costs or the net amount of merchandise trust deposits. Working capital draws may be utilized to finance working capital requirements, capital expenditures and for other general corporate purposes. The amount of the Credit Facility that is available for working capital draws is subject to a borrowing formula equal to 85% of eligible accounts receivable, as defined within the Credit Agreement. At June 30, 2016, the amount available under the Credit Facility for working capital advances under this limit was $143.9 million, of which $68.0 million was outstanding at June 30, 2016.

Each individual acquisition draw is subject to equal quarterly amortization of the principal amount, with annual principal payments comprised of ten percent of the related advance amount, commencing on the second anniversary of such advance, with the remaining principal due on December 19, 2019, subject to certain mandatory prepayment requirements. Up to $10.0 million of the Credit Facility may be in the form of standby letters of credit, of which there were $6.5 million outstanding at June 30, 2016 and none outstanding at December 31, 2015.

Borrowings under the Credit Facility bear interest, at our election, at either an adjusted LIBOR rate plus an applicable margin between 2.25% and 4.00% per annum or the base rate (which is the higher of the bank’s prime rate, the Federal funds rate plus 0.5% or one-month LIBOR plus 1.00%) plus an applicable margin between 1.25% and 3.00% per annum. We are also required to pay a fee on the unused portion of the Credit Facility at a rate between 0.375% and 0.8% per annum, which is included within interest expense on our consolidated statements of operations. At June 30, 2016, the weighted average interest rate on outstanding borrowings under the Credit Facility was 4.4%.

The Credit Agreement contains customary covenants that limit our ability to incur additional indebtedness, grant liens, make loans or investments, make cash distributions if a default exists or would result from the distribution, merger or consolidation with other persons, or engage in certain asset dispositions including the sale of all or substantially all of its assets. We were in compliance with these covenants as of June 30, 2016. The Credit Agreement also requires us to maintain:

 

    Consolidated EBITDA (as defined in the Credit Agreement), calculated over a period of four consecutive fiscal quarters, to be no less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate Consolidated EBITDA for each permitted acquisition completed after June 30, 2014;

 

    the ratio of Consolidated EBITDA (as defined in the Credit Agreement) to Consolidated Debt Service (as defined in the Credit Agreement), calculated over a period of four fiscal quarters, or the Consolidated Debt Service Coverage Ratio, of not less than 2.50 to 1.00 for any period; and

 

    the ratio of Consolidated Funded Indebtedness (as defined in the Credit Agreement) to Consolidated EBITDA (as defined in the Credit Agreement), calculated over a period of four fiscal quarters, or the Consolidated Leverage Ratio, of not greater than 4.00 to 1.00 for any period.

 

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Senior Notes

On May 28, 2013, we issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). We pay 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. We incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are being amortized over the life of these notes. The Senior Notes mature on June 1, 2021.

At any time on or after June 1, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:

 

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Year

   Percentage  

2016

     105.906

2017

     103.938

2018

     101.969

2019 and thereafter

     100.000

Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will have the right to require us to purchase that holder’s Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest.

The Senior Notes are jointly and severally guaranteed by certain of our material subsidiaries. The Indenture governing the Senior Notes contains covenants, including limitations of our ability to incur certain additional indebtedness and liens, make certain dividends, distributions, redemptions or investments, enter into certain transactions with affiliates, make certain asset sales, and engage in certain mergers, consolidations or sales of all or substantially all of our assets, among other items. As of June 30, 2016, we were in compliance with these covenants.

Cash Distribution Policy

Our partnership agreement requires that we distribute 100% of available cash to our common unitholders and general partner within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available cash consists generally of all of our cash receipts, less cash disbursements. Our general partner is granted discretion under the partnership agreement to establish, maintain and adjust reserves for future operating expenses, debt service, maintenance capital expenditures and distributions for the next four quarters. These reserves are not restricted by magnitude, but only by type of future cash requirements with which they can be associated.

Available cash is distributed to the common limited partners and the general partner in accordance with their ownership interests, subject to the general partner’s incentive distribution rights if quarterly cash distributions per limited partner unit exceed specified targets. Incentive distribution rights are generally defined as all cash distributions paid to our general partner that are in excess of its general partner ownership interest. The incentive distribution rights will entitle our general partner to receive the following increasing percentage of cash distributed by us as it reaches certain target distribution levels:

 

    13.0% of all cash distributed in any quarter after each common unit has received $0.5125 for that quarter;

 

    23.0% of all cash distributed in any quarter after each common unit has received $0.5875 for that quarter; and

 

    48.0% of all cash distributed in any quarter after each common unit has received $0.7125 for that quarter.

Agreements with the Archdiocese of Philadelphia

In accordance with the lease and management agreements with the Archdiocese of Philadelphia, we have agreed pay to the Archdiocese aggregate fixed rent of $36.0 million in the following amounts:

 

Lease Years 1-5

   None

Lease Years 6-20

   $1,000,000 per Lease Year

Lease Years 21-25

   $1,200,000 per Lease Year

Lease Years 26-35

   $1,500,000 per Lease Year

Lease Years 36-60

   None

The fixed rent for lease years 6 through 11 shall be deferred. If the Archdiocese terminates the agreements pursuant to a lease year 11 termination or we terminate the agreements as a result of a default by the Archdiocese, prior to the end of lease year 11, the deferred fixed rent shall be retained by us. If the agreements are not terminated, the deferred fixed rent shall become due and payable 30 days after the end of lease year 11.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires making estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of actual revenue and expenses during the reporting period. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from the estimates on which our financial statements are prepared at any given point of time. Changes in these estimates could materially affect our financial position, results of operations or cash flows. Significant items that are subject to such estimates and assumptions include revenue and expense accruals, fair value of merchandise and perpetual care trusts assets and the allocation of purchase price to the fair value of assets acquired. A discussion of our significant accounting policies we have adopted and followed in the preparation of our consolidated financial statements was included in our Annual Report on Form 10-K/A for the year ended December 31, 2015, and we summarize our significant accounting policies within our consolidated financial statements included in Note 1 under “Item 1” of this Form 10-Q/A.

 

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ITEM 4. CONTROLS AND PROCEDURES (As Revised)

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with our Original Filing, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, as of June 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the restatement of our consolidated financial statements (see Note 2, Restatement of Previously Issued Consolidated Financial Statements, under Item 1. Financial Statements unaudited), under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, we re-evaluated the effectiveness of our disclosure controls and procedures. In conducting our re-evaluation, we considered the material weaknesses in our internal control over financial reporting as discussed below. Based on this reevaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2016.

As discussed in the Explanatory Note and Note 2, Restatement of Previously Issued Consolidated Financial statements, included in this Form 10-Q/A, we determined to restate our previously issued financial statements to correct for errors associated with the recognition and presentation of certain revenues, expenses, assets, and liabilities, both recognized and deferred, the allocation of income and loss to our partners, and errors in the processing of transactions. As a result of this restatement, management identified deficiencies in our processes and procedures that constitute material weaknesses in our internal control over financial reporting as follows:

 

  A. The Partnership did not design and maintain effective controls over establishing accounting policies nor did they periodically review them for appropriate application in the financial statements.

 

  B. The Partnership did not design and maintain effective controls over the review of certain recorded balances within “Deferred cemetery revenues, net,” “Merchandise liability,” “Investment and other” revenues, ”Cemetery property,” and “Partners’ Capital”.

 

  C. The Partnership did not design and maintain effective controls over the reconciliation of amounts recorded in the general ledger to relevant supporting details.

In connection with the restatement of our consolidated financial statements, management re-evaluated the effectiveness of our internal control over financial reporting. Based on that re-assessment, management concluded that our internal control over financial reporting was not effective as of December 31, 2015, due to the material weaknesses described above.

Management is committed to the remediation of the material weaknesses, as well as the continued improvement of our internal control over financial reporting (“ICFR”). We are in the process of implementing measures to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses, which primarily include:

 

  1. Reevaluating and establishing, on a periodic basis, accounting policies and the appropriate application thereof;

 

  2. Enhancing control procedures related to the review of certain recorded balances affected by the material weaknesses to ensure the appropriateness of such balances; and

 

  3. Enhancing the control procedures related to the reconciliation of amounts recorded in the general ledger to relevant supporting details.

We believe these measures will remediate the material weaknesses noted. While we have completed some of these measures as of the date of this report, we have not completed and tested all of the planned corrective processes, enhancements, procedures and related evaluation that we believe are necessary to determine whether the material weaknesses have been fully remediated. We believe the corrective actions and controls need to be in operation for a sufficient period of time for management to conclude that the control environment is operating effectively and has been adequately tested through audit procedures. Therefore, the material weaknesses have not been fully remediated as of the date of this report. As we continue to evaluate and work to remediate the control deficiencies that gave rise to the material weaknesses, we may determine that additional measures or time are required to address the control deficiencies or that we need to modify or otherwise adjust the remediation measures described above. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our ICFR.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Except as set forth above, there have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II – Other Information

 

Item 6. Exhibits

Exhibits are listed in the Exhibit Index, which is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      STONEMOR PARTNERS L.P.
      By: StoneMor GP LLC
      its general partner
November 9, 2016      

/s/ Lawrence Miller

      Lawrence Miller
      Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)
November 9, 2016      

/s/ Sean P. McGrath

      Sean P. McGrath
      Chief Financial Officer (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description

  10.1**    Restricted Phantom Unit Agreement under the StoneMor Partners L.P. 2014 Long-Term Incentive Plan, entered into as of April 1, 2016, by and between StoneMor GP LLC and William Shane (incorporated by reference to Exhibit 10.1 of Registrant’s Original Filing filed on August 5, 2016).
  10.2**    Letter Agreement by and between Austin So and StoneMor GP LLC, dated May 26, 2016 (incorporated by reference to Exhibit 10.1 of Registrant’s Original Filing filed on August 5, 2016).
  10.3**    Confidentiality, Nondisclosure and Restrictive Covenant Agreement by and between Austin So and StoneMor GP LLC, dated May 26, 2016 (incorporated by reference to Exhibit 10.1 of Registrant’s Original Filing filed on August 5, 2016).
  31.1    Certification pursuant to Exchange Act Rule 13a-14(a) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors.
  31.2    Certification pursuant to Exchange Act Rule 13a-14(a) of Sean P. McGrath, Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors (furnished herewith).
  32.2    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Sean P. McGrath, Chief Financial Officer (furnished herewith).
  101    Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016, and December 31, 2015; (ii) Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015; (iii) Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit); (iv) Unaudited Condensed Consolidated Statement of Cash Flows for the three and six months ended June 30, 2016 and 2015; and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. Users of this data are advised that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of StoneMor Partners L.P.

 

** Previously filed with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 as originally filed with the Securities and Exchange Commission on August 5, 2016.

 

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