Edgar Filing: STONEMOR PARTNERS LP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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

For the transition period from to .

Commission File Number: 000-50910

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)


Delaware		80-0103159
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

311 Veterans Highway, suite B Levittown, Pennsylvania		19056
(Address of principal executive offices)		(Zip Code)

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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


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

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

The number of the registrant’s outstanding common units at May 11, 2009 was 11,891,335

Index – Form 10-Q


		Page

Part I	Financial Information

Item 1.	Financial Statements – Unaudited	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

Part II	Other Information

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Submission of Matters to a Vote of Security Holders	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

	Signatures	47

Part I – Financial Information

Item 1.

Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)


	December 31, 2008		March 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	7,068	$	10,407
Accounts receivable, net of allowance		33,090		35,390
Prepaid expenses		3,422		2,411
Other current assets		14,477		13,071

Total current assets		58,057		61,279
Long-term accounts receivable - net of allowance		42,309		44,442
Cemetery property		228,499		228,051
Property and equipment, net of accumulated depreciation		49,615		48,855
Merchandise trusts, restricted, at fair value		161,605		157,210
Perpetual care trusts, restricted, at fair value		152,797		146,987
Deferred financing costs - net of accumulated amortization		2,425		2,586
Deferred selling and obtaining costs		41,795		44,355
Deferred tax assets		138		138
Other assets		1,000		683

Total assets	$	738,240	$	734,586

Liabilities and partners’ capital
Current liabilities
Accounts payable and accrued liabilities	$	25,702	$	23,276
Accrued interest		659		651
Current portion, long-term debt		80,478		80,405

Total current liabilities		106,839		104,332
Other long-term liabilities		1,837		1,874
Long-term debt		80,456		88,789
Deferred cemetery revenues, net		193,017		196,706
Deferred tax liabilities		7,928		7,928
Merchandise liability		75,977		76,259
Perpetual care trust corpus		152,797		146,987

Total liabilities		618,851		622,875

Partners’ capital
General partner		2,271		2,040
Limited partners:
Common		111,052		104,932
Subordinated		6,066		4,739

Total partners’ capital		119,389		111,711

Total liabilities and partners’ capital	$	738,240	$	734,586

See Accompanying Notes to the Condensed Consolidated Financial Statements.

StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except unit data)

(unaudited)


	Three months ended March 31,
	2008		2009
Revenues:
Cemetery
Merchandise	$	20,953	$	19,276
Services		9,234		9,238
Investment and other		7,065		7,816
Funeral home
Merchandise		2,389		2,609
Services		3,772		3,659

Total revenues		43,413		42,598

Costs and Expenses:
Cost of goods sold (exclusive of depreciation shown separately below):
Perpetual care		1,101		1,005
Merchandise		4,624		3,795
Cemetery expense		9,487		9,439
Selling expense		8,205		7,826
General and administrative expense		5,229		5,479
Corporate overhead (including $616 and $374 in unit-based compensation for the three months ended March 31, 2008 and 2009 respectively)		5,450		5,366
Depreciation and amortization		965		1,310
Funeral home expense
Merchandise		981		967
Services		2,221		2,406
Other		1,417		1,428
Acquisition related costs		—		1,586

Total cost and expenses		39,680		40,607

Operating profit		3,733		1,991
Other income and expenses
Gain on sale of funeral home		—		475
Interest expense		3,104		3,169

Income before income taxes		629		(703	)
Income taxes
State		166		162
Federal		5		—

Total income taxes		171		162

Net income (loss)	$	458	$	(865	)

General partner’s interest in net income (loss) for the period	$	9	$	(17	)
Limited partners’ interest in net income (loss) for the period
Common	$	328	$	(697	)
Subordinated	$	121	$	(151	)
Net income (loss) per limited partner unit (basic and diluted)	$	.04	$	(.07	)
Weighted average number of limited partners’ units outstanding (basic and diluted)		11,784		11,891

See Accompanying Notes to the Condensed Consolidated Financial Statements.

StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital

(in thousands)

(unaudited)


	Partners’ Capital												Total
	Limited Partners									General
	Common			Subordinated			Total			Partner
Balance, December 31, 2008	$	111,052		$	6,066		$	117,118		$	2,271		$	119,389

Net loss		(697	)		(151	)		(848	)		(17	)		(865	)
Cash distribution		(5,423	)		(1,176	)		(6,599	)		(214	)		(6,813	)

Balance, March 31, 2009	$	104,932		$	4,739		$	109,671		$	2,040		$	111,711

See Accompanying Notes to the Condensed Consolidated Financial Statements.

StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)


	For the three months ended March 31,
	2008			2009
Operating activities:
Net income (loss)	$	458		$	(865	)
Adjustments to reconcile net income to net cash provided by operating activity:
Cost of lots sold		1,960			1,184
Depreciation and amortization		965			1,310
Unit-based compensation		616			374
Previously capitalized acquisition costs		—			1,365
Gain on sale of funeral home		—			(475	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(5,199	)		(5,670	)
Allowance for doubtful accounts		1,179			1,237
Merchandise trust fund		(3,465	)		(1,462	)
Prepaid expenses		1,309			1,011
Other current assets		348			513
Other assets		(396	)		65
Accounts payable and accrued and other liabilities		(3,518	)		(2,771	)
Deferred selling and obtaining costs		(1,628	)		(2,560	)
Deferred cemetery revenue		6,601			8,947
Deferred taxes (net)		—			—
Merchandise liability		(99	)		1,228

Net cash provided by (used in) operating activities		(869	)		3,210

Investing activities:
Cost associated with potential acquisitions		(495	)		—
Additions to cemetery property		(530	)		(1,031	)
Purchase of subsidiaries, net of common units issued		(1,238	)		—
Divestiture of funeral home		—			475
Additions of property and equipment		(1,635	)		(376	)

Net cash used in investing activities		(3,898	)		(932	)

Financing activities:
Cash distribution		(6,206	)		(6,813	)
Additional borrowings on long-term debt		5,650			8,815
Repayments of long-term debt		(182	)		(556	)
Cost of financing activities		—			(385	)
General partner contribution		68			—

Net cash provided by (used in) financing activities		(670	)		1,061

Net increase (decrease) in cash and cash equivalents		(5,437	)		3,339
Cash and cash equivalents - Beginning of period		13,800			7,068

Cash and cash equivalents - End of period	$	8,363		$	10,407

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	2,681		$	3,177

Cash paid during the period for income taxes	$	1,154		$	280

Non-cash investing and financing activities
Issuance of limited partner units for cemetery acquisition	$	500		$	—

See Accompanying Notes to the Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Nature of Operations

StoneMor Partners L.P. (“StoneMor”, the “Company” or the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of March 31, 2009, the Partnership owned 218 and operated 232 cemeteries and 58 funeral homes in 26 states within the United States and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of March 31, 2009 and for the three months ended March 31, 2008 and 2009, respectively, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim period. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year.

During the Company’s review of Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51 (“SFAS No. 160”),” the Company determined that balances historically designated as “non-controlling interest in perpetual care trusts” in its condensed consolidated balance sheet do not meet the criteria for non-controlling interests as prescribed by SFAS No. 160. SFAS No. 160 indicates that only a financial instrument classified as equity in the trusts’ financial statements can be a non-controlling interest in the consolidated financial statements. Since the earnings from the Company’s cemetery perpetual care trusts are used to support the maintenance of its cemeteries and the Company cannot access the corpus, the Company believes the interest in these trusts retains the characteristics of a liability.

Reclassifications

Certain amounts in the condensed consolidated financial statement for the year ended December 31, 2008 has been reclassified to conform to the presentation in the financial statements for the three months ended March 31, 2009.

Principles of Consolidation

The consolidated financial statements include the accounts of each of the Company’s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The operations of the 14 managed cemeteries that the Company operates under long-term management contracts are also consolidated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 revised (“FIN 46R”), Consolidation of Variable Interest Entities: an Interpretation of Accounting Research Bulletin (“ARB”) No. 51. Total revenues derived from the cemeteries under long-term management contracts totaled approximately $6.1 million for the three months ended March 31, 2009 as compared to $6.5 million during the same period last year.

Summary of Significant Accounting Policies

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

Cash and Cash Equivalents

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

Cemetery Property

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

Property and Equipment

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


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

Depreciation expense was $1.1 million during the three months ended March 31, 2009 as compared to $0.7 million during the same period last year.

Inventories

Inventories, classified as other current assets on the Company’s condensed consolidated balance sheets, include cemetery and funeral home merchandise and are valued at the lower of cost or net realizable value. Cost is determined primarily on a specific identification basis on a first-in, first-out basis. Inventories were approximately $3.2 million and $3.4 million at March 31, 2009 and December 31, 2008, respectively.

Sales of Cemetery Merchandise and Services

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

Pre-need sales are usually made on an installment contract basis. Contracts are usually for a period not to exceed 60 months with payments of principal and interest required. For those contracts that do not bear a market rate of interest, the Company imputes such interest (at a rate of 4.75% during the three months ended March 31, 2009 and 9.0% during the year ended December 31, 2008) in order to segregate the principal and interest component of the total contract value.

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

The allowance for customer cancellations is established based on management’s estimates of expected cancellations and historical experiences and is currently approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. Management will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at March 31, 2009 and December 31, 2008 respectively.

Revenue recognition related to sales of pre-need cemetery merchandise and services is governed by Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (“SAB No. 104”), and the retail land sales provisions of Statement of Financial Accounting Standards No. 66, Accounting for the Sale of Real Estate (“SFAS No. 66”). Per this guidance, revenue from the sale of burial lots and constructed mausoleum crypts are deferred until such time that 10% of the sales price has been collected, at which time it is fully earned; revenues from the sale of unconstructed mausoleums are recognized using the percentage-of-completion method of accounting while revenues from merchandise and services are recognized once such merchandise is delivered (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to us) or services are performed.

In order to appropriately match revenue and expenses, the Company defers certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business. Such costs are accounted for under the provisions of SFAS No. 60, Accounting and Reporting by Insurance Enterprises (“SFAS No. 60”), and are expensed as revenues are recognized.

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

Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into trust (the “merchandise trust”) until such time that the Company meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. All investment earnings generated by the assets in the merchandise trusts (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The fair value of the funds held in merchandise trusts at March 31, 2009 and December 31, 2008 was approximately $157.2 million and $161.6 million, respectively (see Note 5).

Sales of Funeral Home Services

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

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

Perpetual Care Trusts

Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All principal must remain in this trust into perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. Earnings from the perpetual care trusts are recognized in current cemetery revenues. The fair value of funds held in perpetual care trusts at March 31, 2009 and December 31, 2008 was $147.0 million and $152.8 million, respectively (see Note 6).

Deferred Cemetery Revenues, Net

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

Impairment of Long-Lived Assets

The Company monitors the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets. The Company’s policy is to evaluate an asset for impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. An impairment charge is recorded to write-down the asset to its fair value if the sum of future undiscounted cash flows is less than the carrying value of the asset. No impairment charges were recorded during the three months ended March 31, 2009 and 2008.

Other-than-temporary Impairment of Trust Assets

The Company determines whether or not the assets in the merchandise and perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer and the Company’s ability and intent to hold the security until its value has been recovered. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value.

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

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

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

Net Income per Unit

Basic net income per unit is determined by dividing net income, after deducting the amount of net income allocated to the general partner interest from its issuance date of September 20, 2004, by the weighted average number of units outstanding during the period. Diluted net income per unit is calculated in the same manner as basic net income per unit, except that the weighted average number of outstanding units is increased to include the dilutive effect of outstanding unit options or phantom unit options.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141 R requires that acquirers in a business combination identify and record at fair value all of the assets and liabilities acquired as well as any non-controlling interest resulting from such business combination. Goodwill will be recognized when the fair value of consideration paid or transferred to the acquiree plus the fair value of any non-controlling interest exceeds the fair value of identified assets acquired less the fair value of liabilities assumed. A gain from a bargain purchase will be recognized when the fair value of consideration paid or transferred to the acquiree plus the fair value of any non-controlling interest is less than the fair value of identified assets acquired less the fair value of liabilities assumed. Gains from bargain purchases will be recognized in earnings in the period in which the acquisition occurs. SFAS 141 R also requires that costs incurred in a business transaction be recorded as an expense as opposed to part of the cost of the acquisition.

There are three options with regards to accumulated costs incurred and currently capitalized for acquisitions that had not as of yet been finalized prior to the adoption of SFAS 141R:

•

Immediately expense such costs.

•

Continue to carry such costs as an asset and immediately expense such costs upon the adoption of SFAS 141 R.

•

Account for the change as a change in accounting principle and restate prior year financial statements to reflect these costs as expenses in the period in which they occurred.

The Company adopted SFAS 141 R as of January 1, 2009. At December 31, 2008, there was approximately $1.4 million in accumulated acquisition costs that had been capitalized and were included in “Other current assets” on the Company’s balance sheet. These costs have been expensed in the first quarter of 2009 and are included on the Company’s income statement as part of “Acquisition related costs”.

In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements (“SFAS 157”). The Company adopted this guidance effective January 1, 2008 and did not elect the fair value option for any of its eligible assets or liabilities as of this date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51 (“SFAS 160”). SFAS 160 states that accounting and reporting for minority interests will be recharacterized as non-controlling interests and classified as a component of equity. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. The Company adopted this guidance effective January 1, 2009. This adoption caused the Company to reclassify amounts previously shown as “Non-controlling interests in perpetual care trusts” to “Perpetual care trust corpus” and to include this amount in total liabilities rather than as a “Commitment and contingency” The adoption of this standard had no effect on the Company’s financial position, results of operations or liquidity.

In February 2008, the FASB Emerging Issues Task Force issued EITF Issue No. 07-04, Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships (“EITF 07-04”). EITF 07-04 specifies when a master limited partnership that contains incentive distribution rights (“IDR’s”) should classify said IDR’s as a separate class of units for which a separate earnings per unit calculation should be made. The Company adopted EITF 07-04 in the first quarter of 2009. The adoption of EITF 07-04 has no impact on the calculation of earnings per share as allocated to common unit holders.

In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46 (R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4”). FSP FAS 140-4 requires public entities to provide additional disclosures about transfers of financial assets. It also requires public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. The Company adopted this guidance effective January 1, 2009. This adoption had no effect on its financial position, results of operations or liquidity.

In December 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP FAS 157-3”). The purpose of FSP FAS 157-3 was to clarify the application of SFAS 157 for a market that is not active. FSP FAS 157-3 did not change the objective of SFAS 157, which is the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The Company’s adoption of FSP FAS 157-3 for the year ended December 31, 2008 had no effect on its financial position, results of operations or liquidity.

Use of Estimates

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

2.	LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

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


	As of
	December 31, 2008			March 31, 2009
	(in thousands)
Customer receivables	$	102,145		$	108,723
Unearned finance income		(12,983	)		(13,891	)
Allowance for contract cancellations		(13,763	)		(15,000	)

		75,399			79,832
Less: current portion - net of allowance		33,090			35,390

Long-term portion - net of allowance	$	42,309		$	44,442

Activity in the allowance for contract cancellations is as follows:


	For the three months ended March 31,
	2008			2009
	(in thousands)
Balance - Beginning of period	$	11,540		$	13,763
Reserve on acquired contracts		21			—
Provision for cancellations		3,425			3,960
Charge-offs - net		(2,246	)		(2,723	)

Balance - End of period	$	12,740		$	15,000

3.	CEMETERY PROPERTY

Cemetery property consists of the following:


	December 31, 2008		March 31, 2009
	(in thousands)
Developed land	$	26,558	$	26,153
Undeveloped land		156,467		156,231
Mausoleum crypts and lawn crypts		45,474		45,667

Total	$	228,499	$	228,051

4.	PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:


	December 31, 2008			March 31, 2009
	(in thousands)
Building and improvements	$	44,801		$	45,685
Furniture and equipment		29,210			28,649

		74,011			74,334
Less: accumulated depreciation		(24,396	)		(25,479	)

Property and equipment - net	$	49,615		$	48,855

5.	MERCHANDISE TRUSTS

The cost and market value associated with the assets held in merchandise trusts at December 31, 2008 and March 31, 2009 were as follows:


	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market
	(in thousands)
As of December 31, 2008
Short-term investments	$	26,911	$	—	$	—		$	26,911
Fixed maturities:
U.S. Government and federal agency		5,554		90		(15	)		5,629
U.S. State and local government agency		4,477		40		(44	)		4,473
Corporate debt securities		3,593		50		(490	)		3,153
Other debt securities		10,655		—		—			10,655

Total fixed maturities		24,279		180		(549	)		23,910

Mutual funds - debt securities		38,260		—		(9,913	)		28,347
Mutual funds - equity securities		96,176		—		(42,959	)		53,217

Equity securities		43,881		—		(14,661	)		29,220

Total	$	229,507	$	180	$	(68,082	)	$	161,605


	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market
	(in thousands)
As of March 31, 2009
Short-term investments	$	14,620	$	—	$	—		$	14,620
Fixed maturities:
U.S. Government and federal agency		8,504		139		(42	)		8,601
U.S. State and local government agency		3,651		61		(12	)		3,700
Corporate debt securities		3,475		80		(180	)		3,375
Other debt securities		10,199		—		—			10,199

Total fixed maturities		25,829		280		(234	)		25,875

Mutual funds - debt securities		49,804		—		(9,961	)		39,843
Mutual funds - equity securities		96,515		—		(48,361	)		48,154

Equity securities		44,140		28		(15,450	)		28,718

Total	$	230,908	$	308	$	(74,006	)	$	157,210

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


	Less than 12 months				12 Months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities:
U.S. Government and federal agency	$	8,525	$	41	$	76	$	1	$	8,601	$	42
U.S. State and local government agency		3,184		1		517		11		3,701		12
Corporate debt securities		2,237		65		1,138		115		3,375		180
Other debt securities		—		—		—		—		—		—

Total fixed maturities		13,946		107		1,731		127		15,677		234

Mutual funds - debt securites		3,624		12		36,219		9,949		39,843		9,961
Mutual funds - equity securites		—		—		48,154		48,361		48,154		48,361

Equity securities		5,322		2,998		23,694		12,452		29,016		15,450

Total	$	22,892	$	3,117	$	109,798	$	70,889	$	132,690	$	74,006

The Company determines whether or not the assets in the merchandise trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.

At December 31, 2008, the Company had determined that there were 31 securities in the merchandise trust, with an aggregate cost of approximately $6.1 million, an aggregate market value of approximately $1.8 million, and a resulting aggregate impairment in value of approximately $4.3 million, wherein such impairment was considered to be other-than-temporary. The Company updated their analysis during the first quarter of 2009 and determined that there were no additional other than temporary impairments during the three months ended March 31, 2009.

The recognition of an other-than-temporary impairment is offset against deferred revenue. This reduction in deferred revenue is reflected in earnings as the underlying merchandise is delivered or the underlying service is performed.

A reconciliation of the Company’s merchandise trust activities for the three months ended March 31, 2009 is presented below:


Market Value @ 12/31/2008		Contributions		Distributions			Interest/ Dividends		Capital Gain Distributions		Realized Gain/ Loss			Taxes			Fees			Unrealized Change in Market Value			Change in Accrued Income			Market Value @ 3/31/2009
(in thousands)
$	161,605	$	9,589	$	(10,191	)	$	2,269	$	132	$	(259	)	$	(75	)	$	(212	)	$	(5,292	)	$	(356	)	$	157,210

$	161,605	$	9,589	$	(10,191	)	$	2,269	$	132	$	(259	)	$	(75	)	$	(212	)	$	(5,292	)	$	(356	)	$	157,210

The Company deposited $9,787 and $9,589 and withdrew $5,321 and $10,191 from the trusts during the three months ended March 31, 2008 and 2009, respectively. During the three months ended March 31, 2008, purchases and sales of securities available for sale included in trust investments were $157,890 and $91,167, respectively. During the three months ended March 31, 2009, purchases and sales of securities available for sale included in trust investments were $33,796 and $31,334, respectively.

6.	PERPETUAL CARE TRUSTS.

The cost and market value associated with the assets held in perpetual care trusts at December 31, 2008 and March 31, 2009 were as follows:


	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market
	(in thousands)
As of December 31, 2008
Short-term investments	$	21,236	$	—	$	—		$	21,236
Fixed maturities:
U.S. Government and federal agency		9,993		236		(10	)		10,219
U.S. State and local government agency		8,462		87		(72	)		8,477
Corporate debt securities		13,104		141		(2,024	)		11,221
Other debt securities		572		—		—			572

Total fixed maturities		32,131		464		(2,106	)		30,489

Mutual funds - debt securities		56,836		175		(19,113	)		37,898
Mutual funds - equity securities		74,084		—		(34,042	)		40,042

Equity Securities		31,926		—		(8,794	)		23,132

Total	$	216,213	$	639	$	(64,055	)	$	152,797


	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market
	(in thousands)
As of March 31, 2009
Short-term investments	$	10,973	$	—	$	—		$	10,973
Fixed maturities:
U.S. Government and federal agency		18,271		317		(18	)		18,570
U.S. State and local government agency		7,038		129		(60	)		7,107
Corporate debt securities		12,455		293		(753	)		11,995
Other debt securities		611		—		—			611

Total fixed maturities		38,375		739		(831	)		38,283

Mutual funds - debt securities		62,728		138		(18,762	)		44,104
Mutual funds - equity securities		74,214		—		(42,074	)		32,140

Equity Securities		31,987		50		(10,549	)		21,487

Total	$	218,277	$	927	$	(72,216	)	$	146,987

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


	Less than 12 months				12 Months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities:
U.S. Government and federal agency	$	18,416	$	16	$	155	$	2	$	18,571	$	18
U.S. State and local government agency		6,468		42		639		18		7,107		60
Corporate debt securities		7,681		252		4,314		501		11,995		753
Other debt securities		—		—		—		—		—		—

Total fixed maturities		32,565		310		5,108		521		37,673		831

Mutual funds - debt securites		3,895		38		40,209		18,724		44,104		18,762
Mutual funds - equity securites		1,740		1,015		30,400		41,059		32,140		42,074

Equity securities		1,987		675		19,161		9,874		21,148		10,549

Total	$	40,187	$	2,038	$	94,878	$	70,178	$	135,065	$	72,216

The Company determines whether or not the assets in the perpetual care trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value. Any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal an opposite reduction in the perpetual care trust corpus reflected on our balance sheet and has no impact in earnings.

At December 31, 2008, the Company had determined that there were 20 securities in the perpetual care trust, with an aggregate cost of approximately $7.0 million, an aggregate market value of approximately $2.2 million, and a resulting aggregate impairment in value of approximately $4.8 million, wherein such impairment is considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of each of these assets to their current value and offset this change against perpetual care trust corpus. There was no impact on net income or partners’ capital due to this adjustment. The Company updated their analysis during the first quarter of 2009 and determined that there were no additional other than temporary impairments recorded during the three months ended March 31, 2009.

A reconciliation of the Company’s perpetual care trust activities for the three months ended March 31, 2009 is presented below:


Market Value @ 12/31/2008		Contributions		Distributions			Interest/ Dividends		Capital Gain Distributions		Realized Gain/ Loss			Taxes		Fees			Unrealized Change in Market Value			Change in Accrued Income			Market Value @ 3/31/2009
(in thousands)
$	152,797	$	10,243	$	(10,352	)	$	3,575	$	—	$	(735	)	$	—	$	(203	)	$	(8,136	)	$	(202	)	$	146,987

$	152,797	$	10,243	$	(10,352	)	$	3,575	$	—	$	(735	)	$	—	$	(203	)	$	(8,136	)	$	(202	)	$	146,987

The Company deposited $1,790 and $10,243 and withdrew $3,341 and $10,352 from the trusts during the three months ended March 31, 2008 and 2009, respectively. During the three months ended March 31, 2008, purchases and sales of securities available for sale included in trust investments were $107,413 and $65,596, respectively. During the three months ended March 31, 2009, purchases and sales of securities available for sale included in trust investments were $42,173 and $39,210, respectively.

The Company recorded income from perpetual care trusts of $3.2 million and $3.4 million for the three months ended March 31, 2008 and 2009 respectively.

7.	LONG-TERM DEBT

The Company had the following outstanding debt at:


	December 31, 2008		March 31, 2009
	(in thousands)
Insurance premium financing	$	432	$	365
Vehicle Financing		80		64
Acquisition Credit Facility, due September 2012 (interest rate - Libor + 3.25%)		17,622		17,465
Revolving Credit Facility, due September 2012 (interest rate - Libor + 3.25%)		10,300		18,800
Series A senior secured notes, due 2009 (interest rate - 7.66%)		80,000		80,000
Series B senior secured notes, due 2012 (interest rate - 9.34%)		35,000		35,000
Series C senior secured notes, due 2012 (interest rate - 9.09%)		17,500		17,500

Total		160,934		169,194
Less current portion		80,478		80,405

Long-term portion	$	80,456	$	88,789

On April 30, 2009, the Company entered into the Second Amendment to Amended and Restated Credit Agreement by and among the Company, StoneMor GP LLC (“StoneMor GP”), StoneMor Operating LLC (the “Operating Company”), certain subsidiaries of the Operating Company, the lenders, and Bank of America, N.A., as Administrative Agent (the “Second Amendment”). In connection with the Second Amendment, on April 30, 2009, the Company also entered into the Second Amendment to Amended and Restated Note Purchase Agreement by and among the Company, StoneMor GP, the Operating Company, certain subsidiaries of the Company and the noteholders (the “Second Amendment to NPA”).

The following is a summary of the material provisions of the foregoing agreements. This summary is qualified in its entirety by reference to the Second Amendment and the Second Amendment to NPA, which are incorporated by reference in their entirety herein and copies of which are attached to this Current Report on Form 10-Q as Exhibits 10.1 and 10.2, respectively. Capitalized terms which are not defined in this Current Report on Form 10-Q shall have the meanings assigned to such terms in the Second Amendment and Second Amendment to NPA or the Credit Agreement and the Note Purchase Agreement, as applicable.

Credit Agreement

The Second Amendment amended certain terms of the Amended and Restated Credit Agreement, dated August 15, 2007 (the “A&R Credit Agreement”), as amended by the First Amendment to Amended and Restated Credit Agreement dated November 2, 2007 (together with the A&R Credit Agreement, the “Credit Agreement”). The Credit Agreement provided for a $65 million senior secured credit facility consisting of a $25 million Revolving Credit Facility and a $40 million Acquisition Facility.

The Second Amendment amended the Credit Agreement to, among other matters, increase (i) the Revolving Credit Facility to a maximum aggregate principal amount of $35 million with the ability to request further increases in a maximum aggregate principal amount of $10 million, and (ii) the Acquisition Facility to a maximum aggregate principal amount of $102.85 million, with the ability to request further increases in a maximum aggregate principal amount of $57 million, subject to a minimum increase amount of $5 million.

Loans outstanding under the Credit Agreement bore interest at a per annum rate based upon a base rate (the “Base Rate”) or a Eurodollar rate (the “Eurodollar Rate”) plus a margin ranging from 0% to .75% over the Base Rate and 2.25% to 3.25% over the Eurodollar rate, as selected by the Borrowers. The Base Rate was the higher of (a) the Federal Funds Rate plus 0.5% or (b) the “prime rate” as set by Bank of America. The Eurodollar Rate equaled the British Bankers Association LIBOR Rate. Margin was determined by the ratio of consolidated funded debt to consolidated EBITDA of the Company.

The Second Amendment amended the definitions of the Base Rate, Eurodollar Rate and Applicable Rate. The definition of the Base Rate was amended to mean the rate per annum equal to the highest of: (i) the Prime Rate, (ii) the sum of 0.5% plus the Federal Funds Rate and (iii) except during a period when the Eurodollar cannot be determined, the Eurodollar Rate plus 1.00%. Under the Second Amendment, with respect to a Eurodollar Rate Loan, the Eurodollar Rate means the rate per annum equal to the greater of: (i) the British Bankers Association LIBOR Rate (“BBA Libor”) or, if such rate is not available, the rate determined by Bank of America, N.A., as the administrative agent, subject to certain conditions, and (ii) 2.00%. With respect to a Base Rate Loan, the Eurodollar Rate means the BBA Libor or, if such rate is not available, the rate determined by Bank of America, N.A., subject to certain conditions.

The Applicable Rate on Eurodollar Rate Loans and Letter of Credit Fees was increased to a percentage per annum ranging from 3.25% to 4.25% and the Applicable Rate on Base Rate Loans was increased to a range from 2.25% to 3.25%, based on the Company’s Consolidated Leverage Ratio. The Commitment Fee Rate was increased to a range of 0.500% to 0.750%, based on the Company’s Consolidated Leverage Ratio.

The Second Amendment amended financial covenants under the Credit Agreement as follows: (i) for any most recently completed four fiscal quarters, Consolidated EBITDA shall not be less than the sum of $39 million plus 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after April 30, 2009; (ii) for any most recently completed four fiscal quarters ending during the following years, Consolidated Fixed Charge Coverage Ratio shall not be less than 1.15x in 2009 through 2011 and 1.20x in 2012 and thereafter; (iii) for any most recently completed four fiscal quarters through and including March 31, 2010, Consolidated Leverage Ratio shall not be greater than 3.75 to 1.0, and for any period of most recently completed four fiscal quarters ending thereafter, 3.50 to 1.0; and (iv) for any most recently completed four fiscal quarters ending during the following years, the Maintenance Capital Expenditures shall not exceed $4.2 million in 2009 through 2010, $4.6 million in 2011 and $5.2 million in 2012 and thereafter. The Second Amendment also included various representations and other provisions customary for the transaction of this nature as well as certain conforming changes to the Credit Agreement.

In connection with the Second Amendment, the Company borrowed $63 million under the new Acquisition Facility commitments, which, together with the $17 million of the existing availability under the Acquisition Facility, were used to repay $80 million under the 7.66% Senior Secured Series A Notes due September 20, 2009 (“Series A Notes”). In addition, the Company borrowed $5.4 million under the Revolving Credit Facility, which was used to pay the accrued interest on the Series A Notes, fees to Bank of America, N.A., amendment fees to noteholders under the Second Amendment to NPA as well as various other fees and costs incurred in connection with these transactions.

Note Purchase Agreement

The Second Amendment to NPA amended certain terms of the Amended and Restated Note Purchase Agreement, dated August 15, 2007 (the “A&R NPA”), as amended by the First Amendment to Amended and Restated Note Purchase Agreement, dated November 2, 2007 (together with the A&R NPA, the “Note Purchase Agreement”). The Note Purchase Agreement provided for the issuance of the Series A Notes in the aggregate principal amount of $80 million, 9.34% Series B Senior Secured Notes due August 15, 2012 in the aggregate principal amount of $35 million (the “Existing Series B Notes”), the 9.09% Senior Secured Series C Notes due December 21, 2012 in the aggregate principal amount of $17.5 million (the “Existing Series C Notes”) and authorized the issuance of up to $150 million aggregate principal amount of Shelf Notes.

The Second Amendment to NPA amended the Note Purchase Agreement to, among other matters, amend and restate the Existing Series B Notes and the Existing Series C Notes. The Existing Series B Notes were amended to increase the interest rate to 11.00% (the “Series B Notes”). The Existing Series C Notes were amended not only to increase the interest rate to 11.00%, but also to change the maturity date from December 21, 2012 to August 15, 2012 (the “Series C Notes”). Under the Second Amendment to NPA, the interest rate on the Series B Notes and Series C Notes will be increased by 1.5% per annum during any period in which any holder of Shelf Notes is required to maintain, in respect to the Shelf Notes, reserves in excess of 3.4% of the principal amount of the Shelf Notes held by such holder, as a result of a decision of an insurance regulatory authority having responsibility for valuation of insurance company assets.

Under the Second Amendment to NPA, the Company is permitted to incur indebtedness pursuant to the Credit Agreement Documents not greater than $137.85 million, consisting of an Acquisition Facility not to exceed $102.85 million and a Revolving Facility not to exceed $35.0 million, provided that the Aggregate Credit Facility Cap will be deemed increased up to $180 million and the Acquisition Facility Cap increased up to $145 million if the Company obtains commitments from additional lenders for up to $42.15 million within 120 days of April 30, 2009. The Aggregate Credit Facility Cap may be increased up to $205 million, with the Acquisition Facility Cap to be increased up to $160 million and the Revolving Credit Facility Cap to be increased up to $45 million with the approval of the holders of at least a majority principal amount of the Shelf Notes, which shall not be unreasonably withheld.

The Second Amendment to NPA included changes to the financial covenants that were similar to changes to the financial covenants under the Second Amendment as described above.

The Second Amendment to NPA also included various representations and other provisions customary for the transaction of this nature as well as certain conforming changes to the definitions, schedules and exhibits of the Note Purchase Agreement.

8.	INCOME TAXES

As of December 31, 2008, the Company’s taxable corporate subsidiaries had a federal net operating loss carryover of approximately $66.2 million, which will begin to expire in 2019 and $104.3 million in state net operating losses of which a portion expires annually through 2028.

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

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

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

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

The provision for income taxes for the three months ended March 31, 2009 and 2008 respectively is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2009 and 2008, respectively.

The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by FIN 48, which clarifies Statement 109, Accounting for Income Taxes , the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. The impact of adopting FIN 48 was not material as of the date of adoption or in subsequent periods. As a result of the implementation of FIN 48, the Company did not recognize any change in the liability for unrecognized tax benefits and there was no change to the January 1, 2007 balance of retained earnings. As of January 1, 2007, the Company had approximately $0.9 million of unrecognizable tax benefits. If recognized, the $0.9 million of the unrecognized tax benefits would reduce income tax expense and the Company’s effective tax rate. There have been no material changes in unrecognized tax benefits since January 1, 2007.

The Company and its subsidiaries are subject to US federal income tax as well as multiple state jurisdictions. The Company’s effective tax rate fluctuates over time based on income tax rates in the various tax jurisdictions in which the Company operates and based on the level of earnings in those jurisdictions. Several entities of the Company are currently under examination by the Internal Revenue Service for its separate company US income tax returns for year ending December 31, 2005. The audits are only in the preliminary stages and management does not expect any material impact to the financials to occur as a result of these audits. The Company is not currently under examination by any state jurisdictions. The federal statute of limitations and certain states are open from 2004 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. On the basis of present information, it is the opinion of the Company’s management that there are no pending assessments that will result in a material adverse effect on the Company’s condensed consolidated financial statements over the next twelve months.

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and any penalties in operating expenses. The Company has not recorded any material interest or penalties during the current period.

9.	DEFERRED CEMETERY REVENUES – NET

At December 31, 2008 and March 31, 2009, deferred cemetery revenues, net, consisted of the following:


	December 31, 2008			March 31, 2009
	(in thousands)
Deferred cemetery revenue	$	186,515		$	197,126
Deferred merchandise trust revenue		32,557			33,395
Deferred merchandise trust unrealized losses		(66,607	)		(71,864	)
Deferred pre-acquisition margin		67,615			66,922
Deferred cost of goods sold		(27,063	)		(28,873	)

Deferred cemetery revenues, net	$	193,017		$	196,706

Deferred selling and obtaining costs	$	41,795		$	44,355

Deferred selling and obtaining costs are carried as an asset on the condensed consolidated balance sheet in accordance with SFAS 60.

10.

COMMITMENTS AND CONTINGENCIES

Legal

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

Leases

At March 31, 2009, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to five years and options to renew at varying terms. Expenses under operating leases were $0.5 million for the three months ended March 31, 2009 as compared to $0.3 million during the same period last year.

At March 31, 2009, operating leases will result in future payments in the following approximate amounts:


	(in thousands)
2009	$	1,414
2010		1,605
2011		1,426
2012		1,238
2013		1,107
Thereafter		3,852

Total	$	10,642

Tax Indemnification

CFSI LLC (formerly Cornerstone Family Services, Inc., the Company’s predecessor) has agreed to indemnify the Company for all federal, state and local income tax liabilities attributable to the operation of the assets contributed by CFSI LLC to the Company prior to September 20, 2004. CFSI LLC has also agreed to indemnify the Company against additional income tax liabilities, if any, that arise from the consummation of the transactions related to the Company’s formation in excess of those believed to result at the time of the closing of the Company’s initial public offering. CFSI LLC has also agreed to indemnify the Company against the increase in income tax liabilities of its corporate subsidiaries resulting from any reduction or elimination of its net operating losses to the extent those net operating losses are used to offset any income tax gain or income resulting from the prior operation of the assets of CFSI LLC contributed to the Company, or from the Company’s formation transactions in excess of such gain or income believed to result at September 20, 2004.

11.

PARTNERS CAPITAL

Unit-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards 123 R, “Share Based Payment” (“SFAS 123 R”). SFAS 123 R requires that companies record as an expense the fair value of share based payment awards made to their employees. Depending upon their form, the offset to the expense is either to equity (normally additional paid in capital) or is recorded as a liability.

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

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards is summarized in the table below:


	Three months ended March 31,
	2008		2009
	(in thousands)
Unit appreciation rights	$	22	$	13
Restricted phantom units		594		361

Total unit-based compensation expense	$	616	$	374

As of March 31, 2009, there was less than $0.1 million of unrecognized pretax compensation cost related to non-vested unit appreciation rights and $0.7 million of unrecognized pretax compensation cost related to non-vested restricted phantom units which will be amortized into expense during the second and third quarter of this year.

12.

ACQUISITIONS AND DIVESTITURES

The Company made four separate acquisitions during 2008 consisting of nine cemeteries and two funeral homes. The Company’s balance sheets at December 31, 2008 reflect purchase price allocations related to these acquisitions that had not as of yet been finalized. These purchase price allocations were re-estimated in the first quarter of 2009. While there was no change in the estimate of the fair value of net assets acquired, there were changes in the purchase price allocations of certain individual assets acquired.

The following table reconciles amounts originally recorded and included in partners’ capital at December 31, 2008 to amounts included in partners’ capital at March 31, 2009:


	Original		Re-estimate		Change
	(In thousands)
Assets
Accounts receivable, net	$	650	$	650	$	—
Goodwill		480		480		—
Cemetery property		9,101		8,806		(295	)
Property and equipment		1,515		1,463		(52	)
Merchandise trust assets		1,426		1,773		347

Total assets		13,172		13,172		—

Liabilities
Deferred margin		4,530		4,530		—
Deferred interest		—		—		—
Perpetual care liabilities		—		—		—
Other liabilities		28		28		—
Merchandise liability		4,182		4,182		—

Total liabilities		8,740		8,740		—

Net assets	$	4,432	$	4,432	$	—

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

The Company made no acquisitions during the three months ended March 31, 2009.

The Company sold a single funeral home during the three months ended March 31, 2009. Proceeds received for the sale totaled approximately $0.5 million. The funeral home had a book value of less than $0.1 million at the time of the sale. The Company recognized a gain on this sale of approximately $0.5 million.

13.

SEGMENT INFORMATION

In conjunction with its September 2006 acquisition of 21 cemeteries and 14 funeral homes from Service Corporation International and as part of ongoing strategic planning and ongoing marketing studies of its potential customers, in the third quarter of 2007 the Company reorganized and disaggregated its single reportable segment into five distinct reportable segments which are classified as Cemetery Operations – Southeast, Cemetery Operations – Northeast, Cemetery Operations – West, Funeral Homes, and Corporate.

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

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

The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of the Company’s customers differs in each of our regionally based cemetery operating segments. Cremation rates in the West region are substantially higher (65% in Washington and Oregon) than they are in the Southeast region (12% in Alabama and Kentucky). Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

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

Segment information as of and for the three months ended March 31, 2008 and 2009 is as follows:

As of and for the three months ended March 31, 2008


	Cemeteries						Funeral
	Southeast		Northeast		West		Homes		Corporate			Adjustment			Total
	(in thousands)
Revenues
Sales	$	14,954	$	7,966	$	6,374	$	—	$	—		$	(6,096	)	$	23,198
Service and other		6,094		5,197		3,953		—		—			(1,190	)		14,054
Funeral home		—		—		—		6,161		—			—			6,161

Total revenues		21,048		13,163		10,327		6,161		—			(7,286	)		43,413

Costs and expenses
Cost of sales		3,261		2,253		989		—		—			(778	)		5,725
Selling		4,995		2,627		1,850		—		292			(1,559	)		8,205
Cemetery		4,072		3,216		2,185		—		14			—			9,487
General and administrative		2,496		1,537		1,170		—		26			—			5,229
Funeral home		—		—		—		4,619		—			—			4,619
Corporate		—		—		—		—		5,450			—			5,450

Total costs and expenses		14,824		9,633		6,194		4,619		5,782			(2,337	)		38,715

Operating earnings		6,224		3,530		4,133		1,542		(5,782	)		(4,949	)		4,698

Interest expense		1,333		760		546		465		—			—			3,104
Depreciation and amortization		316		222		31		90		306			—			965

Earnings (losses) before taxes	$	4,575	$	2,548	$	3,556	$	987	$	(6,088	)	$	(4,949	)	$	629

Supplemental information
Total assets	$	345,860	$	253,893	$	141,461	$	40,024	$	30,482		$	—		$	811,720

Amortization of cemetery property	$	713	$	1,026	$	127	$	—	$	—		$	424		$	2,290

Long lived asset additions	$	1,386	$	57	$	342	$	115	$	1,085		$	—		$	2,985

As of and for the three months ended March 31, 2009


	Cemeteries								Funeral
	Southeast			Northeast		West			Homes		Corporate			Adjustment			Total
	(in thousands)
Revenues
Sales	$	17,066		$	8,221	$	6,677		$	—	$	—		$	(9,984	)	$	21,980
Service and other		6,245			5,680		3,114			—		—			(689	)		14,350
Funeral home		—			—		—			6,268		—			—			6,268

Total revenues		23,311			13,901		9,791			6,268		—			(10,673	)		42,598

Costs and expenses
Cost of sales		3,785			1,657		1,195			—		3			(1,840	)		4,800
Selling		5,510			2,717		1,980			—		138			(2,519	)		7,826
Cemetery		4,082			3,027		2,319			—		11			—			9,439
General and administrative		2,689			1,652		1,134			—		4			—			5,479
Funeral home		—			—		—			4,801		—			—			4,801
Corporate		—			—		—			—		5,366			—			5,366
Acquisition related costs															1,586			1,586

Total costs and expenses		16,066			9,053		6,628			4,801		5,522			(2,773	)		39,297

Operating earnings		7,245			4,848		3,163			1,467		(5,522	)		(7,900	)		3,301

Gain on sale of funeral home		—			—		—			475		—			—			475
Interest expense		1,395			606		686			473		9			—			3,169
Depreciation and amortization		374			246		104			214		372			—			1,310

Earnings (losses) before taxes	$	5,476		$	3,996	$	2,373		$	1,255	$	(5,903	)	$	(7,900	)	$	(703	)

Supplemental information
Total assets	$	315,785		$	230,173	$	135,060		$	33,879	$	19,689		$	—		$	734,586

Amortization of cemetery property	$	721		$	472	$	237		$	—	$	—		$	(210	)	$	1,220

Long lived asset additions	$	(226	)	$	388	$	(57	)	$	313	$	120		$	—		$	538

Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104 therefore, the deferral

of these revenues and expenses is provided in the adjustment column to reconcile the Company’s managerial financial statements to those prepared in accordance with accounting principles generally accepted in the United States of America. Pre-need sales revenues included within the sales category consist primarily of the sale of burial lots, burial vaults, mausoleum crypts, grave markers and memorials, and caskets. Management accounting practices included in the Southeast, Northeast, and Western Regions reflect these pre-need sales when contracts are signed by the customer and accepted by the Company. Pre-need sales reflected in the consolidated financial statements, prepared in accordance with Generally Accepted Accounting Principals, recognize revenues for the sale of burial lots and mausoleum crypts when the product is constructed and at least 10% of the sales price is collected. With respect to the other products, the consolidated financial statements prepared under Generally Accepted Accounting Principles recognize sales revenues when the criteria for delivery under SAB No. 104 are met. These criteria include, among other things, purchase of the product, delivery and installation of the product in the ground, and transfer of title to the customer. In each case, costs are accrued in connection with the recognition of revenues; therefore, the consolidated financial statements reflect Deferred Cemetery Revenue, Net and Deferred Selling and Obtaining Costs on the balance sheet, whereas the Company’s management accounting practices exclude these items.

14.

FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company simultaneously adopted SFAS 157 and SFAS 159. As per the provisions of SFAS 159, the Company did not elect fair value measurement for any eligible assets or liabilities not previously recorded at fair value.

SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy defined by SFAS 157 are described below.


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

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

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

The following table allocates the Company’s investments measured at fair value as of March 31, 2009.

Merchandise Trust


Description	Level 1		Level 2		Level 3
	(in thousands)
Assets
Short-term investments	$	14,620	$	—	$	—

Fixed maturities:
U.S. government and federal agency		8,601		—		—
U.S. state and local government agency		—		3,700		—
Corporate debt securities		—		3,375		—
Other debt securities		—		10,199		—

Total fixed maturity investments		8,601		17,274		—

Mutual funds - debt securities		33,469		6,374		—
Mutual funds - equity securities		48,154		—		—

Equity securities		28,718		—		—

Total	$	133,562	$	23,648	$	—


Perpetual Care Trust

Description	Level 1		Level 2		Level 3
	(in thousands)
Assets
Short-term investments	$	10,973	$	—	$	—

Fixed maturities:
U.S. government and federal agency		18,570		—		—
U.S. state and local government agency		—		7,107		—
Corporate debt securities		—		11,995		—
Other debt securities		—		611		—

Total fixed maturity investments		18,570		19,713		—

Mutual funds - debt securities		30,192		13,912		—
Mutual funds - equity securities		32,140		—		—

Equity securities		21,487		—		—

Total	$	113,362	$	33,625	$	—

Item 2.

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

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

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

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future performance and plans, and any financial guidance provided, as well as certain information in other filings with the SEC and elsewhere, are forward-looking statements within the meaning of Section 27A(i) of the Securities Act of 1933 and Section 21E(i) of the Securities Exchange Act of 1934. The words

“believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “project,” “expect,” “predict,” and similar expressions identify these forward-looking statements. These forward-looking statements are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated, including, but not limited to, the following: uncertainties associated with future revenue and revenue growth; the effect of the current economic downturn; the impact of the company’s significant leverage on its operating plans; the ability of the company to service its debt and pay distributions; the decline in the fair value of certain equity and debt securities held in the company’s trusts; the company’s 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 political or regulatory environments, including potential changes in tax accounting and trusting policies; the company’s ability to successfully implement a strategic plan relating to producing operating improvement, strong cash flows and further deleveraging; uncertainties associated with the integration or the anticipated benefits of the company’s recent acquisitions; the company’s ability to complete and fund additional acquisitions; information disclosed within this Quarterly Report on Form 10-Q; and various other uncertainties associated with the deathcare industry and our operations in particular.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and this Quarterly Report on Form 10-Q. We assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Organization and Capitalization

We were organized on April 2, 2004 to own and operate the cemetery and funeral home business conducted by Cornerstone and its subsidiaries. On September 20, 2004, in connection with our initial public offering of common units representing limited partner interests, Cornerstone contributed to us substantially all of its assets, liabilities and businesses, and then converted into CFSI LLC, a limited liability company. This transfer represented a reorganization of entities under common control and was recorded at historical cost. In exchange for these assets, liabilities and businesses, CFSI LLC received 564,782 common units and 4,239,782 subordinated units representing limited partner interests in us.

Cornerstone was founded in 1999 by members of our management team and a private equity investment firm, which we refer to as McCown De Leeuw, in order to acquire a group of 123 cemetery properties and 4 funeral homes. Since that time, Cornerstone, succeeded by us, acquired 111 additional cemeteries and 55 funeral homes, built two funeral homes, exited from one management contract and sold one cemetery and one funeral home.

On September 20, 2004, we completed our initial public offering of 3,675,000 common units at a price of $20.50 per unit representing a 42.5% interest in us. On September 23, 2004, we sold an additional 551,250 common units to the underwriters in connection with the exercise of their over-allotment option and redeemed an equal number of common units from CFSI LLC at a cost of $5.3 million, making a total of 4,239,782 common units outstanding. Total gross proceeds from these sales were $86.6 million, before offering costs and underwriting discounts. Net proceeds, after deducting underwriting discounts but before paying offering costs, from these sales of common units was $80.8 million.

Concurrent with the initial public offering, our wholly owned subsidiary, StoneMor Operating LLC, and its subsidiaries, all as borrowers, issued and sold $80.0 million in aggregate principal amount of senior secured notes in a private placement and entered into a $12.5 million revolving credit facility and a $22.5 million acquisition facility with a group of banks. The net proceeds of the initial public offering and the sale of senior secured notes were used to repay the debt and associated accrued interest of approximately $135.1 million of CFSI LLC and $15.7 million of fees and expenses associated with the initial public offering and the sale of senior secured notes. The remaining funds have been used for general partnership purposes, including the construction of mausoleum crypts and lawn crypts, the purchases of equipment needed to install burial vaults and the acquisition of cemetery and funeral home locations.

On December 21, 2007, we completed a secondary public offering of 2,650,000 common units at a price of $20.26 per unit representing a 22.2% interest in us, making a total of 8,505,725 common units outstanding. In conjunction with this offering, our general partner contributed $1.1 million to maintain its 2% general partner interest. Total gross proceeds from these sales were $54.8 million, before offering costs and underwriting discounts. Net proceeds, after deducting underwriting discounts but before paying offering costs, from these sales of common units were $51.8 million.

Concurrent with the secondary public offering, our wholly owned subsidiary, StoneMor Operating LLC and its subsidiaries (collectively “StoneMor LLC”), all as borrowers, issued $17.5 million in aggregate principal amount of senior secured notes. The net proceeds of the public offering and the sale of senior secured notes and borrowings of $6.3 million under our acquisition line of credit were used to purchase 45 cemeteries and 30 funeral homes from Service Corporation International.

Overview

Cemetery Operations

We are the second largest owner and operator of cemeteries in the United States. As of March 31, 2009, we operated 232 cemeteries in 26 states and Puerto Rico. We own 218 of these cemeteries and operate the remaining 14 under long-term management agreements with non-profit cemetery corporations that own the cemeteries. As a result of the agreements and other control arrangements, we consolidate the results of the 14 managed cemeteries in our consolidated financial statements.

We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Cemetery operations accounted for approximately 85.3% of our revenues during the three months ended March 31, 2009 compared to 85.8% during the same period last year.

Our results of operations for our Cemetery Operations segments are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. We derive our cemetery revenues primarily from:

•

at-need sales of cemetery interment rights, merchandise and services;

•

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

•

pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise to the customer;

•

pre-need sales of cemetery services, other than perpetual care services, which we recognize as revenues when we perform the services for the customer;

•

investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as discussed above;

•

investment income from perpetual care trusts, which we recognize as revenues as the income is earned in the trust; and

•

other items, such as interest income on pre-need installment contracts and sales of land.

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

•

the merchandise is complete and ready for installation; or

•

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

•

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

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

Pre-need Sales

Deferred revenues from pre-need sales and related merchandise trust earnings are reflected on our balance sheet in deferred cemetery revenues, net. Total deferred cemetery revenues, net, also includes deferred revenues from pre-need sales that were entered into by entities we acquired prior to the time we acquired them. This includes both

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

Pre-need products and services are typically sold on an installment basis with terms ranging from 12 months to 84 months. Subject to state law, these contracts are normally subject to “cooling-off” periods, generally between three and thirty days, during which the customer may elect to cancel the contract and receive a full refund of amounts paid. Also subject to applicable state law, we are generally permitted to retain the amounts already paid on contracts, including any amounts that were required to be deposited into trust, on contracts cancelled after the “cooling-off” period. Historical post “cooling-off” period cancellations total approximately 10% of our pre-need sales (based on contract dollar amounts). If the products and services purchased under a pre-need contract are needed for interment before payment has been made in full, generally the balance due must be immediately paid in full.

Pre-need sales contracts normally contain provisions for both principal and interest. For pre-need sales wherein the contracts do not bear a market rate of interest, the Company imputes such interest (at a rate of 9.00% during the year ended December 31, 2008 and 4.75% during the three months ended March 31, 2009) in order to segregate the principal and interest component of the total contract value.

We normally offer prepayment incentives to customers whose pre-need contracts are longer than 36 months and bear interest. If those customers pay their contracts in full in less than 12 months, we rebate the interest that we collected from them. Even though this rebate policy reduces the amount of interest income we receive on our accounts receivable, the net effect is an increase in our immediate cash flow. Interest income from pre-need sales, including imputed interest, accounted for 3.5% during the three months ended March 31, 2009 as compared to 3.0% during the same period last year.

At-need Sales

At-need sales of products and services are generally required to be paid for in full with cash at the time of sale. At that time, we first deposit any amount required to be placed in perpetual care trusts. We are not required to deposit any amounts from our at-need sales into merchandise trusts.

Expenses

We analyze and categorize our operating expenses as follows:

1.	Cost of goods sold

Cost of goods sold reflects the actual cost of purchasing products and performing services. Sales of cemetery lots and interment rights, whether at-need or pre-need, typically have a lower cost of goods sold than other merchandise that we sell.

2.	Selling expenses

Selling expenses consist of salesperson and sales management payroll costs, including selling commissions, bonuses and employee benefits. We self-insure medical expenses of our employees up to certain individual and aggregate limits over which we have stop-loss insurance coverage. Our self-insurance policy may result in variability in our future operating expenses. Selling expenses also includes other costs of obtaining product and service sales, such as advertising, marketing, postage and telephone.

3.	Cemetery Expenses

Cemetery expenses represent the cost to maintain and repair our cemetery properties and consists primarily of labor and equipment, utilities, real estate taxes and other maintenance items. Repairs necessary to maintain our cemeteries are expensed as they are incurred. Other maintenance costs required over the long term to maintain the operating capacity of our cemeteries, such as to build roads and install sprinkler systems, are capitalized.

4.	General and administrative expenses

General and administrative expenses, which do not include corporate overhead, primarily includes insurance and other costs necessary to maintain our cemetery offices.

5.	Depreciation and amortization

We depreciate our property and equipment on a straight-line basis over their estimated useful lives.

Direct costs associated with pre-need sales of cemetery merchandise and services, such as sales commissions and cost of goods sold, are reflected in the balance sheet in deferred selling and obtaining costs and deferred cemetery revenues, net, respectively and are expensed as the merchandise is delivered or the services are performed. Indirect costs, such as marketing and advertising costs, are expensed in the period in which they are incurred.

6.	Acquisition Related Costs

As of January 1, 2009, we adopted Statement of Financial Accounting Standards 141 (R), “Business Combinations” (“SFAS 141 R”). Amongst other things, SFAS 141 R requires that costs incurred in acquisition related activities be expensed as incurred. Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities.

Funeral Home Operations

As of March 31, 2009, we owned and operated 58 funeral homes. These properties are located within the contiguous United States and in Puerto Rico. Twenty six of our 58 funeral homes are located on the grounds of cemeteries that we own.

We derive revenues at our funeral homes from the sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation services. We sell these services and merchandise almost exclusively at the time of need utilizing salaried licensed funeral directors. Funeral home revenues accounted for approximately 14.7% of our revenues during the three months ended March 31, 2009 compared to 14.2% during the same period last year.

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

Our funeral home operating expenses consist primarily of compensation to our funeral directors and the cost of caskets.

Corporate

We incur fixed costs for corporate overhead primarily for centralized functions, such as payroll, accounting, collections and professional fees. We also incur expenses relating to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.

Recent Developments

On April 30, 2009, we (along with certain of our subsidiaries) and StoneMor GP LLC entered into the Second Amendment to Amended and Restated Credit Agreement by and among us, StoneMor GP LLC and such certain subsidiaries, the lenders, and Bank of America, N.A., as Administrative Agent (the “Second Amendment”).

In connection with the Second Amendment, on April 30, 2009, we also entered into the Second Amendment to Amended and Restated Note Purchase Agreement by us and certain subsidiaries, StoneMor GP LLC and the noteholders (the “Second Amendment to NPA”).

The terms and conditions of the Second Amendment and the Second Amendment NPA are discussed more fully in Note 7 of the Unaudited Condensed Consolidated Financial Statements and under the heading “Liquidity and Capital Resources” included in this Management’s Discussion and Analysis of this Quarterly Report on Form 10-Q.

Current Market Conditions and Economic Developments

There has been significant instability in various financial markets and in economic conditions. Amongst other things, there has been a decline in the fair value of equity and (to a lesser degree) fixed-maturity debt securities and a contraction in the credit market as well as an overall downturn in economic activity.

Market Disruption

Current economic conditions make it difficult for companies to obtain funding in either the debt or equity markets. The current constraints in the capital markets may affect our ability to obtain funding through new

borrowings or the issuance of equity in the public market. In addition, we expect that, to the extent we are successful in arranging new debt financing, we will incur increased costs associated with these debt financings. In light of the current market conditions and our working capital needs, we have taken steps to preserve our liquidity position including, but not limited to, reducing discretionary capital expenditures (including acquisitions), maintaining our cash distribution rate at the same level as the prior quarter and continuing to actively manage operating and administrative costs. We have temporarily curtailed our acquisition strategy to conserve cash to avoid dilutive equity issuances as we attempt to manage our business under the current economic conditions.

We will continue to evaluate a variety of financing sources, including new debt financings and equity offerings, in order to fund acquisition opportunities and working capital needs and to refinance outstanding indebtedness. We believe that the size and scope of our operations, our stable revenue stream and our cash flow profile will be significant positive factors in our efforts to obtain new debt or equity funding; however, there is no assurance that we will be successful in obtaining financing if current capital market conditions continue for an extended period of time or if markets deteriorate further from current conditions. Furthermore, the terms, size and cost of any financing alternative could be less favorable and could be impacted by the timing and magnitude of our funding requirements, market conditions, and other uncertainties.

Effect on Revenues

Our overall business model is strong and is expected to remain so. This business model is constructed so that revenues are generated from at-need sales of cemetery merchandise and services and funeral home merchandise as well as pre-need sales of cemetery merchandise and services and income generated from our merchandise and perpetual care trusts.

During November and December of 2008 we noticed some softening in pre-need sales in certain areas of the country. This softening, which was probably a result of economic conditions, resulted in reduced grave marker and mausoleum sales in these areas. We have seen some rebound during the three months ended March 31, 2009. This is reflected by the value of pre-need contracts written during the three months ended March 31, 2009 exceeding the value of pre-need contracts written during the same period last year by approximately $2.1 million and at-need cemetery revenues for the three months ended March 31, 2009 exceeding at-need cemetery revenues for the same period last year by approximately $0.4 million.

It is possible that the current economic downturn could have an adverse effect on future pre-need sales of cemetery merchandise and services and to a much lesser extent at-need cemetery and funeral home revenues. We have taken a number of measures to counter a possible decrease in pre-need sales and possible increase in customer defaults or cancellations, including increased customer follow-up and employee training related thereto and extended collection department hours. We will continue to monitor the situation closely. Any downturn in these sales would have a less proportional impact on earnings than on revenues as such sales have higher cost of goods sold and lower profit margins than either at-need sales of cemetery merchandise and services and funeral home merchandise and services

A material decrease in our sales could cause us to breach certain of our financial covenants, such as the leverage ratio and the interest coverage ratio, under our credit facilities and senior secured notes. Any such breach could allow the lenders to accelerate (or create cross-default under) our debt which would have a material adverse effect on our business, financial condition or results of operations. We are currently in discussion with bank lenders regarding these ratios.

A material decrease in our sales could cause a decrease in our borrowing base under our credit facilities. Our borrowing base is recalculated each month and is based (in part) on our outstanding accounts receivables and the age thereof. See “Liquidity and Capital Resources—Long-Term Debt—Acquisition Credit Facility and Revolving Credit Facility” for a description of the calculation of our borrowing base. Accordingly, if our sales were to decrease and as a result our accounts receivables decrease (or if the age of our accounts receivables or cancellations increase), then our borrowing base may decrease.

We believe that the sale of both at-need cemetery merchandise and services and funeral home merchandise and services is relatively resistant to changes in economic conditions. We have not seen any material effect on these sales due to the current economic downturn. At-need cemetery merchandise and services sales and funeral home merchandise and services and sales accounted for 54.2% of our total revenues for the three months ended March 31, 2009 as compared to 52.1% during the same period last year.

Decline in Market Value of Trust Assets

A critical issue for us has been the decline in the fair value of equity and (to a lesser degree) fixed maturity debt securities held in our trusts as described below.

We have a substantial portfolio of invested assets in both our merchandise trust and the perpetual care trust. Both trusts have a mix of cash and cash equivalents, fixed maturity debt securities and equity securities. The fair value of trust assets declined substantially in the second half of 2008 and the first quarter of 2009 relative to prior years (see Notes 5 and 6 of the Unaudited Condensed Consolidated Financial Statements).

Funds in our trusts are managed by third-party investment managers who are in turn monitored by a third-party investment advisor selected by our Trust and Compliance Committee. The third-party investment advisor is providing the committee with consistent updates on the performance of the investments. We will continue to monitor performance closely. See “Item 3. Quantitative and Qualitative Disclosure About Market Risk” for more information.

The perpetual care trust and merchandise trust serve vastly different purposes and the risks and implications of changes in trust asset values are dissimilar.

Perpetual Care Trust

Pursuant to state law, a portion of the proceeds from the sale of cemetery property must be deposited into a perpetual care trust.

The perpetual care trust principal does not belong to us and must remain in the trust into perpetuity. We consolidate the trust into our financial statements in accordance with Financial Accounting Standards Board Interpretation No. 46 revised (“FIN 46R”), Consolidation of Variable Interest Entities: an Interpretation of Accounting Research Bulletin (“ARB”) No. 51 because the trust is considered a variable interest entity for which we are the primary beneficiary.

The fair value of trust assets is recorded as an asset on our balance sheet and is entirely offset by a liability. This liability is recorded as a “Perpetual care trust corpus”. Changes in fair value of trust assets are recognized by adjusting both the trust asset and the offsetting liability. Impairment of the value of trust assets, whether temporary or other-than-temporary, will not impact periodic earnings or comprehensive income nor will it impact our financial position or liquidity at any point in time.

Our primary risk related to the assets in the perpetual care trust relate to the interest and dividends paid and released to us and used to defray cemetery maintenance costs. Any reduction in this income stream could have a material effect on our financial condition, results of operations and liquidity. We have not seen any material degradation of this revenue stream due to the recent economic downturn. Interest income earned on perpetual care trust assets was approximately $3.4 million during the three months ended March 31, 2009 as compared to $3.2 million during the same period last year.

Merchandise Trust

Pursuant to state law, a portion of the proceeds from the sale of pre-need cemetery and funeral home merchandise and services must be deposited into a merchandise trust.

Unlike the perpetual care trust, the principal in the merchandise trust will ultimately revert to us. This will occur once we have met the various requirements for its release which is generally the delivery of merchandise or performance of underlying services. Accordingly, changes in the fair value of trust assets, both temporary and other-than-temporary, may ultimately impact our periodic earnings, comprehensive income and financial position or liquidity at any point in time.

Managing the cash flow associated with the release of trust assets and investment income is a critical component of our overall corporate strategy. Our investment strategy reflects the fact that the release of trust assets and the resultant cash flow is critical to our ability to meet our profitability goals and liquidity needs. Accordingly, we set such strategy to balance the potential for return with the need to maintain asset value.

The recent decline in the market value of the assets in the merchandise trust could ultimately impair our profitability and resulting financial position and liquidity should we be forced to liquidate such assets at an amount significantly below our original expectation, which is ultimately asset cost.

We mitigate this risk by ensuring that a sufficient portion of trust assets is invested in cash and cash equivalents that do not have significant risk to principal. We can then manage trust assets so that released amounts are liquidated from this pool as opposed to any pool of impaired assets.

At March 31, 2009, the merchandise trust had approximately $14.6 million in cash and cash equivalents. This amount functions as a cushion that mitigates the risk of liquidating impaired assets. In evaluating the sufficiency of

this amount as to its effectiveness in mitigating the risk of liquidating impaired assets, we have considered the net inflows and outflows of cash into the trust in recent prior periods. These net inflows and outflows are a function of both sales originations and the corresponding trust deposits and meeting the criteria for releasing funds. Total net cash outflows from the merchandise trust for the three months ended March 31, 2009 were approximately $1.5 million.

Absent a substantial downturn in pre-need sales, we believe that the cash and cash equivalent allocation of Merchandise Trust assets is sufficient to mitigate the risk of liquidating impaired assets in the near future.

2009 Expense Reduction Initiative

So that we may help protect our cash balances and related distributions, we have recently instituted our 2009 Expense Reduction Initiative. This initiative is a proactive measure designed to reduce our overall expense base in 2009 by approximately $5.0 million.

We have carefully designed this plan so that there is no negative impact on our ability to market and sell our merchandise and services or service the needs of our customer base.

Among the more material components of the 2009 Expense Reduction Initiative are the following:

•

reductions in personnel costs by implementing an employee furlough program;

•

reductions in various sales incentive programs;

•

reductions in various commission overrides;

•

reductions in advertising expenses; and

•

reductions in certain corporate overhead items.

Net Income, Operating Cash Flows and Partner Distributions

The table below details net income, operating cash flows and partner distributions made during the three months ended March 31, 2008 and 2009 respectively:


	Three months ended March 31,
	2008			2009
	(in thousands)
Net income (loss)	$	458		$	(865	)
Operating cash flows (deficits)		(869	)		3,210
Partner distributions		6,206			6,813

Cash flows from operations during the three months ended March 31, 2009 ($3.4 million) significantly outpaced our net loss ($0.9 million) during the same period. This is in large part attributable to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not as of yet recognized as revenues as we had not met the delivery criteria for revenue recognition. Although there is no assurance, we expect that the trend of operating cash flows outpacing net income will continue into the foreseeable future.

Segment Reporting and Related Information

In conjunction with our September 2006 acquisition of 21 cemeteries and 14 funeral homes from Service Corporation International and as part of ongoing strategic planning and ongoing marketing studies of our potential customers, in the third quarter of 2007 we reorganized and disaggregated our single reportable segment into five distinct reportable segments which are classified as Cemetery Operations – Southeast, Cemetery Operations – Northeast, Cemetery Operations – West, Funeral Homes, and Corporate.

We chose this level of reorganization and disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.

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

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

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our historical consolidated financial statements. We prepared these financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates, judgments and assumptions on historical experience and known facts and other assumptions that we believed to be reasonable under the circumstances. In future periods, we expect to make similar estimates, judgments and assumptions on the same basis as we have historically. Our actual results in future periods may differ from these estimates under different assumptions and conditions. We believe that the following accounting policies or estimates had or will have the greatest potential impact on our condensed consolidated financial statements for the periods discussed and for future periods.

Revenue Recognition

We sell our merchandise and services on both an at-need and pre-need basis. All at-need sales are recognized as revenues and recorded in earnings at the time that merchandise is delivered and services are performed.

Revenues from pre-need sales of cemetery interment rights in constructed burial property are deferred until at least 10% of the sales price has been collected, at which time they are fully earned.

Revenues from pre-need sales of cemetery interment rights in unconstructed burial property, such as mausoleum crypts and lawn crypts are recognized using the percentage-of-completion method of accounting, with no revenue being recognized until at least 10% of the sales price has been received. The percentage-of-completion method of accounting requires us to make certain estimates as of our reporting dates. These estimates are made based upon information available at the reporting date and are updated on a specific identification method at the end of each reporting period. Periodic earnings are calculated based upon the total sales price, estimated costs to complete and the percentage completed during a given reporting period.

Revenues from pre-need sales of cemetery merchandise and services are deferred until the merchandise is delivered or the services are performed, at which time they are fully earned.

Investment earnings, including realized gains and losses, generated by assets in our merchandise trusts are deferred until the associated merchandise is delivered or the services are performed.

In order to appropriately match revenue and expenses, we defer certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business until such time that the associated revenue is recognized.

Accounts Receivable Allowance for Cancellations

At the time of a pre-need sale, we record an account receivable in an amount equal to the total contract value less any cash deposit paid net of an estimated allowance for cancellations.

The allowance for cancellations is established based upon our estimate of expected cancellations and historical experiences and is currently approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. We will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at December 31, 2008 and March 31, 2009, respectively.

Merchandise Trust Assets

Assets held in our merchandise trusts are carried at fair value. Any change in unrealized gains and losses are reflected in the carrying value of the assets and is recognized as deferred revenue. Any and all investment income streams, including interest, dividends or gains and losses from the sale of trust assets are offset against deferred revenue until such time that we deliver the underlying merchandise. Investment income generated from our merchandise trust is included in Cemetery revenues – investment and other.

We evaluate whether or not the assets in the merchandise trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value.

Any reduction in the cost basis of assets held in our merchandise trust due to an other-than-temporary impairment is offset against deferred revenue.

Perpetual Care Trust Assets

Assets in our perpetual care trust are carried at fair value. Any change in unrealized gains and losses are reflected in the carrying value of the assets and is offset against perpetual care trust corpus.

We evaluate whether or not the assets in our perpetual care trust have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value.

Any reduction in the cost basis of assets held in our perpetual care trust due to an other-than-temporary impairment is offset against perpetual care trust corpus. There is no impact on earnings.

Impairment of Long-Lived Assets

We monitor the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets. Our policy is to evaluate an asset for impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. An impairment charge is recorded to write-down the asset to its fair value if the sum of future undiscounted cash flows is less than the carrying value of the asset.

Property and Equipment


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

These estimates could be impacted in the future by changes in market conditions or other factors.

Income Taxes

Our corporate subsidiaries are subject to both federal and state income taxes. We record deferred tax assets and liabilities to recognize temporary differences between the bases of assets and liabilities in our tax and GAAP balance sheets and for federal and state net operating loss carryforwards and alternative minimum tax credits.

We record a valuation allowance against our deferred tax assets if we deem 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.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

As of December 31, 2008, our taxable corporate subsidiaries had a federal net operating loss carryover of approximately $66.2 million, which will begin to expire in 2019 and a state net operating loss carry-forward of approximately $104.3 million, a portion of which expires annually through 2028. Our ability to use such federal net operating losses may be limited by changes in the ownership of our units deemed to result in an “ownership change” under the applicable provisions of the Internal Revenue Code of 1986, as amended.

For additional information about, among other things, our pre-need sales, at-need sales, trusting requirements, cash flow, expenses and operations, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and our other reports and statements filed with the SEC.

Recent Accounting Pronouncements

There are three options with regards to accumulated costs incurred and currently capitalized for acquisitions that had not as of yet been finalized prior to the adoption of SFAS 141R:

•

Immediately expense such costs.

•

Continue to carry such costs as an asset and immediately expense such costs upon the adoption of SFAS 141 R.

•

Account for the change as a change in accounting principle and restate prior year financial statements to reflect these costs as expenses in the period in which they occurred.

We adopted SFAS 141 R as of January 1, 2009. At December 31, 2008, there was approximately $1.4 million in accumulated acquisition costs that had been capitalized and were included in “Other current assets” on our balance sheet. These costs have been expensed in the first quarter of 2009 and are included in our income statement as part of “Acquisition related costs”.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements (“SFAS 157”). We adopted this guidance effective January 1, 2008 and did not elect the fair value option for any of our eligible assets or liabilities as of this date.

In February 2008, the FASB Emerging Issues Task Force issued EITF Issue No. 07-04, Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships (“EITF 07-04”). EITF 07-04 specifies when a master limited partnership that contains incentive distribution rights (“IDR’s”) should classify said IDR’s as a separate class of units for which a separate earnings per unit calculation should be made. We Company adopted EITF 07-04 in the first quarter of 2009. The adoption of EITF 07-04 has no impact on the calculation of earnings per share as allocated to common unit holders.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51 (“SFAS 160”). SFAS 160 states that accounting and reporting for minority interests will be recharacterized as non-controlling interests and classified as a component of equity. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. We adopted this guidance effective January 1, 2009. This adoption caused us to reclassify amounts previously shown as “Non-controlling interests in perpetual care trusts” to “Perpetual care trust corpus” and to include this amount in total liabilities rather than as a “Commitment and contingency” The adoption of this standard had no effect on our financial position, results of operations or liquidity.

In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46 (R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4”). FSP FAS 140-4 requires public entities to provide additional disclosures about transfers of financial assets. It also requires public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. We adopted this guidance effective January 1, 2009. This adoption had no effect on our financial position, results of operations or liquidity.

In December 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP FAS 157-3”). The purpose of FSP FAS 157-3 was to clarify the application of SFAS 157 for a market that is not active. FSP FAS 157-3 did not change the objective of SFAS 157, which is the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. Our adoption of FSP FAS 157-3 for the year ended December 31, 2008 had no effect on our financial position, results of operations or liquidity.

Results of Operations

The following table summarizes our results of operations for the periods presented:


	Three months ended March 31,
	2008		2009
	(in thousands)
Statement of Operations Data:
Revenues:
Cemetery
Pre-need merchandise	$	12,026	$	9,572
Pre-need services		2,244		2,703
Pre-need investment and other		6,185		6,750
At-need merchandise		8,927		9,704
At-need services		6,990		6,535
At-need investment and other		524		585
Other		356		481
Funeral home
Merchandise		2,389		2,609
Services		3,772		3,659

Total		43,413		42,598

Costs and Expenses:
Cost of goods sold:
Perpetual care		1,101		1,005
Merchandise		4,624		3,795
Cemetery expense		9,487		9,439
Selling expense		8,205		7,826
General and administrative expense		5,229		5,479
Corporate overhead		5,450		5,366
Depreciation and amortization		965		1,310
Funeral home expense
Merchandise		981		967
Services		2,221		2,406
Other		1,417		1,428
Acquisition related costs		—		1,586
Gain on sale of funeral home		—		475
Interest expense		3,104		3,169
Income taxes		171		162

Net income (loss)	$	458	$	(865	)

The following table presents supplemental operating data for the periods presented:


	Three months ended March 31,
	2008		2009
Operating Data:
Interments performed		10,540		9,712
Cemetery revenues per interment performed	$	3,534	$	3,741
Interment rights sold (1):
Lots		5,736		5,325
Mausoleum crypts (including pre-construction)		556		564
Niches		259		253

Total interment rights sold		6,551		6,142

Number of contracts written		19,698		20,829
Aggregate contract amount, in thousands (excluding interest)	$	44,741	$	48,444
Average amount per contract (excluding interest)	$	2,271	$	2,326
Number of pre-need contracts written		8,358		9,620
Aggregate pre-need contract amount, in thousands (excluding interest)	$	26,823	$	29,423
Average amount per pre-need contract (excluding interest)	$	3,209	$	3,059
Number of at-need contracts written		11,340		11,209
Aggregate at-need contract amount, in thousands	$	17,918	$	19,021
Average amount per at-need contract	$	1,580	$	1,697

(1)	Net of cancellations. Counts the sale of a double-depth burial lot as the sale of two interment rights.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Cemetery Revenues

Cemetery revenues were $36.3 million in the first quarter of 2009, a decrease of $1.0 million, or 2.7%, as compared to $37.3 million in the first quarter of 2008

Pre-need Revenues

Cemetery revenues from pre-need sales, including interest income from pre-need installment contracts and investment income from trusts, were $19.0 million in the first quarter of 2009, a decrease of $1.5 million, or 7.3%, as compared to $20.5 million in the first quarter of 2008.

Cemetery revenues from pre-need sales are recognized when the underlying merchandise is delivered or service is performed. Periodic changes in pre-need revenues is not necessarily indicative of changes in either the volume or pricing on pre-need contracts originated during the period but rather changes in the timing of when merchandise is delivered or services are performed.

The following table reconciles the value of actual sales made plus interest income from pre-need installment contracts and investment income from trusts to cemetery revenues for the three months ended September 30, 2007 and 2008:


	Three months ended March 31,
	2008			2009
	(in thousands)
Total value of contracts written	$	21,056		$	23,105
Interest income on pre-need sales		1,309			1,505
Investment income from merchandise trusts		2,295			1,877
Investment income from perpetual care trusts		3,163			3,372

Subtotal		27,823			29,859

Increase in deferred revenues on sales		(6,097	)		(9,996	)
Increase in deferred revenues on merchandise trust investment income		(1,271	)		(838	)

Pre-need revenues	$	20,455		$	19,025

The total value of contracts written increased by $2.0 million, or 9.5%, to $23.1 million in the first quarter of 2009 as compared to $21.1 million during the same period last year. Major increases included grave openings and closings ($1.0 million), vaults ($0.8 million) and markers ($0.6 million). The increases were primarily related to an increase in the value of contracts written at cemeteries acquired in 2007 and 2008.

Interest income on pre-need sales increased $0.2 million, or 15.3%, to $1.5 million in the first quarter of 2009 as compared to $1.3 million during the same period last year. The increase was primarily due to the increased volume of sales and accounts receivable outstanding.

Investment income from the merchandise trust decreased by $0.4 million, or 17.4%, to $1.9 million in the first quarter of 2009 as compared to $2.3 million during the same period last year. The decrease was primarily due to a decrease in the average cost basis of trust assets during the three months ended March 31, 2009 as opposed to the same period last year.

Investment income from the perpetual care trust increased by $0.2 million, or 6.3%, to $3.4 million in the first quarter of 2009 as compared to $3.2 million during the same period last year. The increase was primarily due to a slight increase on the yield in average invested assets during the three months ended March 31, 2009 as compared to the same period last year.

At-need Revenues

Cemetery revenues from at-need sales increased $0.4 million, or 2.4%, to $16.8 million in the first quarter of 2009 as compared to $16.4 million during the same period last year. Major increases included markers and bases ($0.7 million) and mausoleums ($0.2 million) offset by a reduction in grave openings and closings ($0.4 million). The increases were primarily related to an increase in sales at cemeteries acquired in 2007 and 2008.

Other Revenues

Other cemetery revenues increased by $0.1 million, or 25.0%, to $0.5 million during the first quarter of 2009 as compared to $0.4 million during the same period last year.

Operating Expenses

Costs of Goods Sold

Cost of goods sold was $4.8 million in the first quarter of 2009, a decrease of $0.9 million, or 15.8%, as compared to $5.7 million during the same period last year. As a percentage of cemetery revenues, cost of goods sold was 13.2% in the first quarter of 2009 a decrease of 2.1 points from 15.3% in the same period last year. The decrease in cost of goods sold as a percentage of cemetery revenue was attributable to a change in product mix delivered during the first quarter of 2009 as compared to the same period last year.

Selling Expense

Total selling expense was $7.8 million in the first quarter of 2009, a decrease of $0.4 million, or 4.9%, as compared to $8.2 million in the same period last year. The decrease was primarily due to a decrease in other personnel costs ($0.3 million) and advertising ($0.1 million). Sales commissions as a percentage of pre-need revenues was 14.1% for the three months ended March 31, 2009 as compared to 15.6% during the same period last year. This decrease was primarily caused by a decrease in commission rates paid in accordance with our 2009 Expense Reduction Initiative.

Cemetery Expense

Cemetery expense was $9.4 million in the first quarter of 2009, a decrease of $0.1 million, or 1.1%, as compared to $9.5 million in the same period last year. The slight decrease was primarily due to a corresponding slight decrease in fuel costs ($0.1 million). Most other costs were essentially flat.

General and Administrative Expense

General and administrative expense was $5.5 million in the first quarter of 2009, an increase of $0.3 million, or 5.8%, as compared to $5.2 million in the same period last year. The increase was primarily attributable to an increase in corporate insurance ($0.2 million) and professional fees ($0.1 million).

Funeral Home Revenues and Expenses

Funeral home revenues were $6.3 million in the first quarter of 2009, an increase of $0.1 million, or 1.6%, as compared to $6.2 million in the same period last year. This was primarily due to the implementation of new product offerings, along with a small price increase, offset by a decrease in the overall death rate.

Funeral home expenses were $4.8 million in the first quarter of 2009, an increase of $0.2 million, or 4.3%, as compared to $4.6 million in the same period last year which was related to the December 2007 acquisition of 30 funeral homes.

Overall operating profits from funeral homes were $1.5 million in the first quarter of 2009, a slight decrease of $0.1 million, or 6.7%, as compared to $1.6 million during the same period last year.

Corporate Overhead

Corporate overhead was $5.4 million in the first quarter of 2009, a decrease of $0.1 million, or 1.8%, as compared to $5.5 million during the same period last year. The decrease was primarily related to a decrease in unit-based compensation costs ($0.2 million).

Depreciation and Amortization

Depreciation and amortization was $1.3 million in the first quarter of 2009, an increase of $0.3 million, or 30.0%, as compared to $1.0 million during the same period last year. The increase was primarily due to increased depreciation on cemeteries acquired in 2008.

Acquisition related costs

Effective January 1, 2009, we adopted Statement of Financial Accounting Standards 141 (R), “Business Combinations” (“SFAS 141 R”). Amongst other things, SFAS 141 R changed the rules related to acquisition costs (i.e. legal fees) so that these costs are expensed as incurred rather than capitalized as part of the cost of the acquisition.

At December 31, 2008, we had $1.4 million in accumulated costs that related to acquisitions that had not as of yet been completed. These costs were included in “Other current assets” on our balance sheet. SFAS 141 R required us to expense these costs upon our adoption of the standard. SFAS 141 R further provided us with the option of either restating prior year financial statements by allocating these amounts to the year in which they were incurred or recording all of these expenses in the first quarter of 2009.

We chose the option of recording all of the expenses in the first quarter of 2009. Accordingly, “Acquisition related costs” of $1.6 million included in our operating profit during the first quarter of 2009 includes $1.4 million of costs incurred and paid in prior years and $0.2 million of costs incurred in the first quarter of 2009.

Operating profit

Operating profit was $2.0 million in the first quarter of 2009, a decrease of $1.7 million, or 45.9%, as compared to $3.7 million during the same period last year. The decrease was primarily caused by the $1.6 million in acquisition related costs recorded during the first quarter of 2009 along with a $0.8 million decrease in revenues offset by a $0.7 million decrease in other operating expenses.

The decrease in revenues was primarily driven by an increase in the change in deferred revenues on pre-need sales. We deferred $10.0 million of pre-need sales during the first quarter of 2009 compared to $6.1 million during the first quarter of 2008.

The decrease in operating expenses was primarily caused by a $1.0 million decrease in cost of goods sold, a $0.4 million decrease in selling expenses offset by a $0.3 increase in both depreciation and amortization and general and administrative expenses and a $0.2 million increase in funeral home expenses, all of which are discussed above.

Other income and expenses

We sold a single funeral home during the three months ended March 31, 2009. The gain on sale was approximately $0.5 million.

Interest Expense

Interest expense was $3.2 million in the first quarter of 2009, an increase of $0.1 million, or 3.2%, as compared to $3.1 million in the same period last year. The increase was primarily due to an increase in the average amount of outstanding debt outstanding during the period.

Provision (Benefit) for Income Taxes

The provision for income taxes was approximately $0.2 million in both the first quarter of 2009 and 2008, respectively.

Net Income(loss)

We had a net loss of $0.9 million during the first quarter of 2009 compared to net income of $0.5 million during the same period last year. The decrease was primarily caused by the $1.4 million non-cash charge for previously capitalized acquisition related costs, $0.2 million in acquisition expenses incurred during the first quarter of the year and a $0.1 decrease in operating profits offset by a $0.5 million gain on the sale of a funeral home, all of which are discussed above.

Segment Discussion

Revenues, operating earnings and earnings before taxes all increased for Cemetery Operations –Southeast and Cemetery Operations-Northeast in the first quarter of 2009 as compared to the same period last year primarily due to corresponding increases from cemeteries acquired in 2007 and 2008. Revenues from Funeral Homes increased in the three months ended March 31, 2009 as compared to the same period last year while operating earnings were relatively flat and earnings before taxes slightly decreased. The decrease in earnings before taxes was attributable to increased depreciation and amortization on Funeral Homes acquired in 2007 and 2008. Revenues, operating earnings and earnings before taxes for Cemetery Operations-West decreased in the first quarter of 2009 compared to the same period last year due to a slight decrease in sales and related expenses.

Liquidity and Capital Resources

Overview

Our primary short-term liquidity needs are to fund general working capital requirements, repay our Series A notes, service our debt and make routine maintenance capital improvements. We will need additional liquidity to construct mausoleum and lawn crypts on the grounds of our cemetery properties.

Our primary sources of liquidity are cash flow from operations and amounts available under our credit facilities as described below. In the past, we have been able to increase our liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities, including debt, subject to the restrictions in our credit facility and under our senior secured notes. Current economic conditions make it difficult for companies to obtain funding in either the debt or equity markets. The current constraints in the capital markets may affect our ability to obtain funding through new borrowings or the issuance of equity in the public market or may significantly increase the cost to obtain such funding.

We believe that cash generated from operations and our borrowing capacity under our Credit Agreement, which is discussed below, will be sufficient to meet our working capital requirements as well as our anticipated capital expenditures for the foreseeable future.

In addition to macroeconomic conditions, our ability to satisfy our debt service obligations, fund planned capital expenditures, make acquisitions and pay distributions to partners will depend upon our future operating performance. Our operating performance is primarily dependent on the sales volume of customer contracts, the cost of purchasing cemetery merchandise that we have sold, the amount of funds withdrawn from merchandise trusts and perpetual care trusts and the timing and amount of collections on our pre-need installment contracts.

Long-term Debt

On April 30, 2009, we entered into the Second Amendment to Amended and Restated Credit Agreement by and among us and certain of our subsidiaries, the lenders, and Bank of America, N.A., as Administrative Agent (the “Second Amendment”). In connection with the Second Amendment, on April 30, 2009, we also entered into the Second Amendment to Amended and Restated Note Purchase Agreement by and among us and certain of our subsidiaries and the noteholders (the “Second Amendment to NPA”).

Credit Agreement

The Applicable Rate on Eurodollar Rate Loans and Letter of Credit Fees was increased to a percentage per annum ranging from 3.25% to 4.25% and the Applicable Rate on Base Rate Loans was increased to a range from 2.25% to 3.25%, based on our Consolidated Leverage Ratio. The Commitment Fee Rate was increased to a range of 0.500% to 0.750%, based on our Consolidated Leverage Ratio.

In connection with the Second Amendment, we borrowed $63 million under the new Acquisition Facility commitments, which, together with the $17 million of the existing availability under the Acquisition Facility, were used to repay $80 million under the 7.66% Senior Secured Series A Notes due September 20, 2009 (“Series A Notes”). In addition, we borrowed $5.4 million under the Revolving Credit Facility, which was used to pay the accrued interest on the Series A Notes, fees to Bank of America, N.A., amendment fees to noteholders under the Second Amendment to NPA as well as various other fees and costs incurred in connection with these transactions.

Note Purchase Agreement

Under the Second Amendment to NPA, we are permitted to incur indebtedness pursuant to the Credit Agreement Documents not greater than $137.85 million, consisting of an Acquisition Facility not to exceed $102.85 million and a Revolving Facility not to exceed $35.0 million, provided that the Aggregate Credit Facility Cap will

be deemed increased up to $180 million and the Acquisition Facility Cap increased up to $145 million if we obtain commitments from additional lenders for up to $42.15 million within 120 days of April 30, 2009. The Aggregate Credit Facility Cap may be increased up to $205 million, with the Acquisition Facility Cap to be increased up to $160 million and the Revolving Credit Facility Cap to be increased up to $45 million with the approval of the holders of at least a majority principal amount of the Shelf Notes, which shall not be unreasonably withheld.

The Second Amendment to NPA included changes to the financial covenants that were similar to changes to the financial covenants under the Second Amendment as described above.

Cash Flow from Operating Activities.

Cash flows provided by operating activities were $3.2 million for the three months ended March 31, 2009, an increase of $4.1 million, as compared to a cash deficit of $0.9 million during the same period last year.

Cash flows from operations during the three months ended March 31, 2009 ($3.2 million) significantly outpaced our net loss ($0.9 million) during the same period. This is in large part attributable to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not as of yet recognized as revenues as we had not as of yet met the delivery criteria for revenue recognition. Although there is no assurance, we expect that the trend of operating cash flows outpacing net income will continue into the foreseeable future.

Cash Flow from Investing Activities

Net cash used in investing activities was $0.9 million during the three months ended March 31, 2009, a decrease of $3.0 million, or 76.9%, as compared to $3.9 million during the same period last year. Cash flows used for investing activities during the three months ended March 31, 2009 were primarily utilized for additions to cemetery property and equipment.

Cash Flow from Financing Activities

Cash flows from financing activities were $1.1 million during the three months ended March 31, 2009 as compared to cash used in financing activities of $0.7 million during the same period last year. Cash flows from financing for the three months ended March 31, 2008 was primarily generated by additional net borrowings of $8.3 million offset by the payment of partner distributions of $6.8 million.

Intercreditor and Collateral Agency Agreement

In connection with the closing of the credit facility and the private placement of the notes we entered into, along with our general partner, certain of our subsidiaries, the lenders under the new credit facility, the holders of the notes and Bank of America, N.A., as collateral agent, an intercreditor and collateral agency agreement setting forth the rights and obligations of the parties to the agreement as they relate to the collateral securing the new credit facility and the senior secured notes.

Capital Expenditures

The following table summarizes total maintenance capital expenditures and expansion capital expenditures, including for the construction of mausoleums and for acquisitions, for the periods presented:


	Three months ended March 31,
	2008		2009
	(In thousand’s)
Maintenance capital expenditures	$	1,635	$	376
Expansion capital expenditures		2,263		1,031

Total capital expenditures	$	3,898	$	1,407

Pursuant to our partnership agreement, in connection with determining operating cash flows available for distribution, costs to construct mausoleum crypts and lawn crypts may be considered to be a combination of maintenance capital expenditures and expansion capital expenditures depending on the purposes for construction. Our general partner, with the concurrence of its conflicts committee, has the discretion to determine how to allocate a capital expenditure for the construction of a mausoleum crypt or a lawn crypt between maintenance capital expenditures and expansion capital expenditures. In addition, maintenance capital expenditures for the construction of a mausoleum crypt or a lawn crypt are not subtracted from operating surplus in the quarter incurred but rather is subtracted from operating surplus ratably during the estimated number of years it will take to sell all of the available spaces in the mausoleum or lawn crypt. Estimated life is determined by our general partner, with the concurrence of its conflicts committee.

Seasonality

The death care business is relatively stable and predictable. Although we experience seasonal increases in deaths due to extreme weather conditions and winter flu, these increases have not historically had any significant impact on our results of operations. In addition, we perform fewer initial openings and closings in the winter when the ground is frozen.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

The information presented below should be read in conjunction with the notes to our unaudited condensed consolidated financial statements included under Part 1 “Item 1 – Financial Statements” in this Quarterly Report on Form 10-Q.

The market risk inherent in our market risk sensitive instruments and positions is the potential change arising from increases or decreases in interest rates and the prices of marketable equity securities, as discussed below. Our exposure to market risk includes forward-looking statements and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates or debt and equity markets. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based on actual fluctuations in interest rates, equity markets and the timing of transactions. We classify our market risk sensitive instruments and positions as “other than trading.”

Interest-bearing Investments

Our fixed-income securities subject to market risk consist primarily of investments in our merchandise trusts and perpetual care trusts. As of March 31, 2009, the fair value of fixed-income securities in our merchandise trusts represented 16.5% of the fair value of total trust assets while the fair value of fixed-income securities in our perpetual care trusts represented 26.0% of the fair value of total trust assets. The aggregate quoted fair value of these fixed-income securities was $25.9 million and $38.3 million in merchandise trusts and perpetual care trusts, respectively, as of March 31, 2009. Each 1% change in interest rates on these fixed-income securities would result in changes of approximately $259,000 and $383,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively, based on discounted expected future cash flows. If these securities are held to maturity, no change in fair market value will be realized.

Our money market and other short-term investments subject to market risk consist primarily of investments in our merchandise trusts and perpetual care trusts. As of March 31, 2009, the fair value of money market and short-term investments in our merchandise trusts represented 9.3% of the fair value of total trust assets while the fair value of fixed-income securities in our perpetual care trusts represented 7.5% of the fair value of total trust assets. The aggregate quoted fair value of these fixed-income securities was $14.6 million and $11.0 million in merchandise trusts and perpetual care trusts, respectively, as of March 31, 2009. Each 1% change in interest rates on these fixed-income securities would result in changes of approximately $146,000 and $110,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively.

Marketable Equity Securities

Our marketable equity securities subject to market risk consist primarily of investments held in our merchandise trusts and perpetual care trusts. These assets consist of both individual equity securities as well as closed and open ended mutual funds. As of March 31, 2009, the fair value of marketable equity securities in our merchandise trusts represented 74.2% of the fair value of total trust assets while the fair value of marketable equity securities in our perpetual care trusts represented 66.5% of total trust assets. The aggregate quoted fair market value of these marketable equity securities was $116.7 million and $97.7 million in merchandise trusts and perpetual care trusts, respectively, as of March 31, 2009, based on final quoted sales prices. Each 10% change in the average market prices of the equity securities would result in a change of approximately $11.7 million and $9.8 million in the fair market value of securities held in merchandise trusts and perpetual care trusts, respectively.

Investment Strategies and Objectives

Our internal investment strategies and objectives for funds held in merchandise trusts and perpetual care trusts are specified in an Investment Policy Statement which requires us to do the following:

•

State in a written document our expectations, objectives, tolerances for risk and guidelines in the investment of our assets;

•

Set forth a disciplined and consistent structure for managing all trust assets. This structure is based on a long-term asset allocation strategy, which is diversified across asset classes, investment styles and strategies. We believe this structure is likely to meet our stated objectives within our tolerances for risk and variability. This structure also includes ranges around the target allocations allowing for adjustments when appropriate to reduce risk or enhance returns. It further includes guidelines for the selection of investment managers and vehicles through which to implement the investment strategy;

•

Provide specific guidelines for each investment manager. These guidelines control the level of overall risk and liquidity assumed in each portfolio;

•

Appoint third-party investment advisors to oversee the specific investment managers and advise our Trust and Compliance Committee; and

•

Establish criteria to monitor, evaluate and compare the performance results achieved by the overall trust portfolios and by our investment managers. This allows us to compare the performance results of the trusts to our objectives and other benchmarks, including peer performance, on a regular basis.

Our investment guidelines are based on relatively long investment horizons, which vary with the type of trust. Because of this, interim fluctuations should be viewed with appropriate perspective. The strategic asset allocation of the trust portfolios is also based on this longer-term perspective. However, in developing our investment policy, we have taken into account the potential negative impact on our operations and financial performance of significant short-term declines in market value.

We recognize the challenges we face in achieving our investment objectives in light of the uncertainties and complexities of contemporary investment markets. Furthermore, we recognize that, in order to achieve the stated long-term objectives, we may have short-term declines in market value. Given the need to maintain consistent values in the portfolio, we have attempted to develop a strategy which is likely to maximize returns and earnings without experiencing overall declines in value in excess of 3% over any 12-month period. We were not able to achieve this objective during the first quarter of 2009 due to macro-economic conditions beyond our control.

In order to consistently achieve the stated return objectives within our tolerance for risk, we use a strategy of allocating appropriate portions of our portfolio to a variety of asset classes with attractive risk and return characteristics, and low to moderate correlations of returns. See the notes to our unaudited condensed consolidated financial statements for a breakdown of the assets held in our merchandise trusts and perpetual care trusts by asset class.

Debt Instruments

Our Acquisition Credit Facility and Revolving Credit Facility bear interest at a floating rate, based on LIBOR, which is adjusted quarterly. These credit facilities will subject us to increases in interest expense resulting from movements in interest rates. As of March 31, 2009, we had outstanding borrowings of $17.5 million under our Acquisition Credit Facility and $18.8 million under our Revolving Credit Facility.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submits under the Securities Exchange Act of 1934 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.

As of the end of the period covered by this report, 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 upon, and as of the date of this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in its reports under the Securities Exchange Act of 1934 as amended 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 as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

We and certain of our subsidiaries may from time to time be parties to legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We carry insurance that we believe to be adequate. Although there can be no assurance that such insurance is sufficient to protect us against all contingencies, management believes that our insurance protection is reasonable in view of the nature and scope of our operations.

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 have been changed to include the following additional risks:

Our debt obligations limit cash flow available for distributions to our partners, and we may reduce such distributions in the future.

During the three months ended March 31, 2009, we paid a quarterly distribution of $6.8 million, in the aggregate, based on a distribution of $0.5550 per unit. We have also announced a cash distribution of $0.5550 per unit payable on May 15, 2009 to unit holders of record as of the close of business on May 8, 2009. In connection with the second amendment to our credit agreement, on April 30, 2009, we used $63 million borrowed under the new acquisition facility commitments together with $17 million of existing availability under such facility to repay $80 million under our Series A Notes due September 20, 2009. The acquisition facility requires that we make only interest payments on our acquisition loans though April 30, 2010 and that, starting from May 1, 2010, we make regular payments of both principal and interest on such loans, whereas Series A Notes required only interest payments prior to maturity. As a result, we will have to dedicate a greater portion of our cash flow to service our debt obligations during the period from May 1, 2010 through the expiration of our credit agreement on August 15, 2012 than prior to the second amendment. Therefore, cash flow available for distributions to our partners will be reduced during this timeframe, and we may reduce such distributions in the future.

We have limited availability under our amended acquisition facility to fund additional acquisitions which could have a material adverse effect on our results of operations.

A primary component of our business strategy has been to grow through acquisitions of cemeteries and, to a lesser extent, funeral homes. In connection with the second amendment to our credit agreement, on April 30, 2009, we borrowed an aggregate of $80 million under our acquisition facility to repay our Series A Notes. As a result, approximately $5.5 million remained available under such facility on April 30, 2009, which requires us to raise money from other sources in order to make additional acquisitions. This may be difficult in the current economic climate and could result in a substantial decrease in future acquisitions or curtailment of our acquisition strategy, which, in turn, could have a material adverse effect on our results of operations.

The risks described in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits


Exhibit Number		Description

10.1		Second Amendment to Amended and Restated Credit Agreement, dated April 30, 2009, by and among StoneMor GP LLC, StoneMor Partners L.P., StoneMor Operating LLC, certain Subsidiaries of StoneMor Operating LLC, the Lenders and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on May 6, 2009).

10.2		Second Amendment to Amended and Restated Note Purchase Agreement, dated April 30, 2009, by and among StoneMor GP LLC, StoneMor Partners L.P., StoneMor Operating LLC, certain Subsidiaries of StoneMor Partners L.P. and the Noteholders (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on May 6, 2009).

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 William R. Shane, Executive Vice President and 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 William R. Shane, Executive Vice President and Chief Financial Officer (furnished herewith)

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

May 11, 2009				/s/ Lawrence Miller
				Lawrence Miller
				Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)

May 11, 2009				/s/ William R. Shane
				William R. Shane
				Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Exhibit Index


Exhibit Number		Description

10.1		Second Amendment to Amended and Restated Credit Agreement, dated April 30, 2009, by and among StoneMor GP LLC, StoneMor Partners L.P., StoneMor Operating LLC, certain Subsidiaries of StoneMor Operating LLC, the Lenders and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on May 6, 2009).

10.2		Second Amendment to Amended and Restated Note Purchase Agreement, dated April 30, 2009, by and among StoneMor GP LLC, StoneMor Partners L.P., StoneMor Operating LLC, certain Subsidiaries of StoneMor Partners L.P. and the Noteholders (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on May 6, 2009).

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 William R. Shane, Executive Vice President and 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 William R. Shane, Executive Vice President and Chief Financial Officer (furnished herewith)