--------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
-----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number _____________
---------------------
PRIME SUCCESSION, INC.
(Exact name of registrant as specified in its charter)
---------------------
DELAWARE 13-3904211
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3940 Olympic Blvd., Suite 300 41018
Erlanger, Kentucky, U.S.A. (Postal Code)
(Address of principal executive offices)
(606) 746-6800
(Registrant's telephone number, including area code)
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 __
The number of outstanding shares of Common Stock as of November 10,
1997, was 100.
--------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS
as of September 30, 1997 and December 31, 1996 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended September 30, 1997 and 1996
and the Nine Months Ended September 30, 1997 and 1996 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 1997 and 1996 4
NOTES to INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5
Item 2. MANAGEMENT'S DISCUSSION and ANALYSIS
of FINANCIAL CONDITION and RESULTS of OPERATIONS 6
Part II. OTHER INFORMATION
Item 5. OTHER INFORMATION 12
Item 6. EXHIBITS and REPORTS on FORM 8-K 12
SIGNATURES 12
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 1,892,461 $ 2,985,704
Restricted cash -- 4,388,837
Receivables:
Trade, less allowance of $2,525,954 and $2,834,438 11,420,987 11,286,384
Other 524,352 785,586
---------------- ----------------
Total receivables 11,945,339 12,071,970
-------------- --------------
Inventories:
Merchandise 4,158,917 2,951,913
Cemetery lots and mausoleum spaces 1,772,520 1,115,342
--------------- ---------------
Total inventories 5,931,437 4,067,255
--------------- ---------------
Prepaids and other current assets -- 354,576
Prepaid fees to shareholders -- 375,000
Deferred income taxes 446,249 371,249
---------------- ----------------
Total current assets 20,215,486 24,614,591
-------------- --------------
Property and equipment:
Land and land improvements 16,156,646 16,101,845
Buildings and improvements 47,599,727 45,664,076
Equipment, furniture and fixtures 8,447,768 7,363,265
Accumulated depreciation (2,513,198) (741,179)
---------------- -----------------
Net property and equipment 69,690,943 68,388,007
-------------- --------------
Developed cemetery properties 12,811,351 12,951,162
Undeveloped cemetery property 31,902,345 30,616,355
Goodwill, less accumulated amortization of $6,030,540 and
$1,789,876 225,437,469 228,215,892
Other intangible assets, less accumulated amortization of
$4,787,647 and $1,548,680 23,942,464 27,621,587
Long-term receivables, less allowance of $3,527,932 and
$2,731,216 8,502,342 5,584,119
Other assets 843,788 796,489
---------------- ----------------
$393,346,188 $398,788,202
============ ============
See accompanying notes to interim consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
Liabilities and Shareholders' Equity
<S> <C> <C>
Accounts payable $ 2,300,969 $ 2,695,283
Other accrued expenses 9,110,193 11,255,743
Bank indebtedness under revolving loan 9,500,000 --
Current installments of obligations under agreements with
former owners 2,339,015 3,326,127
Current installments of long-term debt 1,475,559 5,253,936
--------------- ---------------
Total current liabilities 24,725,736 22,531,089
-------------- --------------
Deferred merchandise liabilities and revenues, less trust fund
deposits 18,862,955 19,612,190
Obligations under agreements with former owners, less
current 15,410,388 17,568,971
installments 190,390,649 189,752,128
Long-term debt, less current installments 18,316,831 18,316,831
Deferred income taxes 3,160,388 4,402,013
Other long-term liabilities
Shareholders' equity:
Common stock, par value $.01 per share, 1,000 shares 1 1
authorized; 100 issued and outstanding shares 129,554,499 129,554,499
Additional paid-in capital (7,075,259) (2,949,520)
---------------- ----------------
Accumulated deficit
122,479,241 126,604,980
------------- -------------
Total shareholders' equity $393,346,188 $398,788,202
============ ============
See accompanying notes to interim consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Successor Predecessor Successor Predecessor
Company Company Company Company
--------- ---------- ---------- ----------
Three Months August 26, 1996 July 1, 1996 Nine Months August 26, 1996 January 1, 1996
Ended through through Ended through through
September 30, September 30, August 25, September 30, September 30, August 25,
1997 1996 1996 1997 1996 1996
---- ---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Funeral services $16,920,121 $ 6,955,889 $10,289,277 $54,788,505 $ 6,955,889 $ 47,281,120
Cemetery sales 5,888,749 1,370,313 2,039,419 16,579,559 1,370,313 8,834,774
------------- ----------- ------------ ------------ ----------- ------------
22,808,870 8,326,202 12,328,696 71,368,064 8,326,202 56,115,894
Costs and expenses:
Funeral homes 11,412,570 4,928,898 7,295,472 35,101,640 4,928,898 32,257,977
Cemetery 4,156,177 1,049,642 1,560,630 11,773,258 1,049,642 6,546,474
------------ ----------- ------------ ---------- ----------- -------------
15,568,747 5,978,540 8,856,102 46,874,898 5,978,540 38,756,396
Corporate general and
administrative expenses 744,784 641,463 1,216,253 2,455,763 641,463 4,637,919
Depreciation and
amortization 2,865,783 903,857 1,307,696 8,289,703 903,857 5,341,150
Legal settlement -- -- -- -- -- 6,344,313
------------ ----------- ------------ ---------- ----------- -------------
Operating income 3,629,556 802,342 948,645 13,747,700 802,342 988,061
------------ ----------- ------------ ---------- ----------- -------------
Other expenses
(income):
Interest expense,
including amortization
of deferred loan costs
(see Note 2)
6,082,747 2,512,064 2,453,786 17,846,431 2,512,064 10,059,415
Other (income)expense -- (9,158) 133,485 -- (9,158) 39,315
------------ ----------- ------------ ---------- ----------- -------------
6,082,747 2,502,906 2,587,271 17,846,431 2,502,906 10,098,730
------------ ----------- ------------ ---------- ----------- -------------
Loss before income
taxes (2,453,191) (1,700,564) (1,638,626) (4,098,731) (1,700,564) (9,110,669)
Income tax (expense) (1,323) (42,007) (111,337) (27,008) (42,007) (364,796)
------------ ----------- ------------ ---------- ----------- -------------
Net loss (2,454,514) (1,742,571) (1,749,963) (4,125,739) (1,742,571) (9,475,465)
Redeemable Preferred
Stock dividend
requirements -- -- (69,278) -- -- (277,111)
------------ ----------- ------------ ---------- ----------- -------------
Net loss attributable to
common shareholders $(2,454,514) $(1,742,571) $(1,819,241) $(4,125,739) $(1,742,571) $ (9,752,576)
============ ============ ============ ============ ============ ==============
Net loss per share
attributable to common
shareholders
$ 24,545.14 $ 17,425.71 $ -- $ 41,257.39 $ 17,425.71 $ --
============ =========== ============= =========== =========== =============
See accompanying notes to interim consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Successor Predecessor
Company Company
------- -------
August 26, January 1,
Nine Months 1996 1996
Ended through through
September 30, September 30, August 25,
1997 1996 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (4,125,739) $ (1,742,571) $ (9,475,465)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 9,632,970 1,072,322 5,701,419
Provision for doubtful accounts 544,505 120,828 113,143
Provision for deferred income taxes -- 41,264 155,227
Legal settlement -- -- 6,344,313
Payment on legal settlement -- (5,344,313) (1,100,000)
Changes in operating assets and liabilities
net of effects of acquisition of subsidiaries:
Receivables (3,589,915) (904,260) (211,649)
Inventories (1,777,840) 26,477 (68,444)
Accounts payable and accrued expenses (3,455,099) 1,941,449 887,452
Deferred merchandise liabilities and revenue (net) (742,612) 759,566 2,475,263
Other (2,076,436) 1,418,790 (1,515,129)
------------- ----------- -------------
Net cash provided by (used in) operating activities (5,590,166) (2,610,448) 3,306,130
------------- ----------- ------------
Cash flows from investing activities:
Proceeds from the disposal of assets 188,698 7,000 152,205
Purchases of property and equipment (2,757,977) (166,180) (1,087,432)
Net cash received for sale of business 2,041,033 -- --
Net cash paid for purchase of business (2,606,951) -- (675,000)
------------ ------------ -------------
Net cash used in investing activities (3,135,197) (159,180) (1,610,227)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from long-term debt 1,309,782 190,000,000 618,000
Proceeds from short-term debt 9,500,000 -- --
Payments on long-term debt (4,525,801) (109,707,365) (3,219,194)
Payments on obligations under agreements with former owners (3,040,698) (177,867) (1,444,015)
Decrease (Increase) in restricted cash 4,388,837 (9,109,084) --
Capital Contributions -- -- 3,000,000
Issuance of common stock -- 129,554,500 --
Acquisition of Predecessor Company -- (195,396,246) --
------------- ------------- ------------
Net cash provided by (used in) financing activities 7,632,120 5,163,938 (1,045,209)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents (1,093,243) 2,394,310 650,694
Cash and cash equivalents at beginning of period 2,985,704 1,417,043 766,349
------------ ------------ -----------
Cash and cash equivalents at end of period $ 1,892,461 $ 3,811,353 $ 1,417,043
============ =========== ===========
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(unaudited)
(1) On August 26, 1996, Prime Succession, Inc.'s (Predecessor Company)
capital stock was purchased (the Acquisition) by Blackstone Capital
Partners II Merchant Banking Fund L.P. and affiliates, Loewen Group
International, Inc. and PSI Management Direct L.P. A new entity, Prime
Succession, Inc. (Successor Company), was formed and became a
wholly-owned subsidiary of the Predecessor Company. In connection with
the Acquisition, all of the assets and liabilities of the Predecessor
Company were transferred to the Successor Company. Collectively, the
Predecessor Company and Successor Company are herein referred to as
"the Company". Since purchase accounting was reflected in the opening
balance sheet of the Successor Company on August 26, 1996, the
financial statements of the Successor Company are not comparable to the
financial statements of the Predecessor Company. Accordingly, a
vertical black line is shown to separate the Successor Company
financial statements from those of the Predecessor Company for the
periods ended prior to August 26, 1996.
(2) Interest expense includes amortization of deferred loan costs as follows:
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
--------- ------- ------- -------
August 26,
Three Months August 26, 1996 July 1, 1996 Nine Months 1996 January 1, 1996
Ended through through Ended through through
September 30, September 30, August 25, September 30, September August 25,
1997 1996 1996 1997 30, 1996
---- ---- ---- ---- 1996 ----
----
<S> <C> <C> <C> <C> <C> <C>
$452,396 $146,982 $137,678 $1,343,266 $146,982 $560,959
</TABLE>
(3) Footnote disclosure which would substantially duplicate the disclosure
contained in the Annual Report on Form 10-K for the year ended December
31, 1996 has not been included. The unaudited interim consolidated
financial statements reflect all adjustments which, in the opinion of
management, are necessary to reflect a fair statement of the results
for the periods presented and to present fairly the consolidated
financial position of Prime Succession, Inc. and subsidiaries as of
September 30, 1997. All such adjustments are of a normal recurring
nature.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The Company is an operator of funeral homes and cemeteries in the
United States. The Company owns 143 funeral homes and 19 cemeteries in 20 states
as of November 10, 1997. The Company commenced operations in 1992 and expanded
rapidly through the aggressive acquisition of funeral homes and cemeteries,
primarily in non-urban areas of the United States.
The Company had no funeral homes when it began operations in 1992 and
grew to 146 funeral homes in 1996. In order to achieve this rapid growth, former
management was primarily focused on identifying funeral homes to be acquired and
consummating acquisitions of such homes rather than on maximizing profitability
of the funeral homes and cemeteries which it had acquired. As a result, former
management did not take advantage of certain opportunities to improve the
efficiency and performance of the funeral homes acquired by the Company. New
management intends to substantially eliminate the Company's acquisition program.
In addition, in order to improve the Company's present and long-term operating
performance, new management intends to take advantage of (i) the quality and
size of the Company's portfolio of properties, (ii) the opportunity to operate
more efficiently those properties located in close proximity to one another,
(iii) the shift in focus from acquisitions to profit maximization at existing
locations and (iv) the benefits at both local sites and the corporate
headquarters from an Administrative Services Agreement with Loewen Group
International, Inc. The Company's future results of operations will depend
largely upon the ability of management to successfully implement its business
strategy.
6
<PAGE>
Results of Operations
The Company's operations are detailed below for the three months and
the nine months ended September 30, 1997 (Successor Company) and the
corresponding period in the prior year (Predecessor Company) expressed in dollar
amounts as well as relevant percentages. Revenue, gross margin, earnings (loss)
from operations and expenses other than income taxes are presented as a
percentage of revenue. Income taxes are presented as a percentage of losses
before income taxes. <TABLE> <CAPTION>
Three Months Ended September 30, 1997 Compared to Three Months Ended September 30, 1996
Successor Predecessor Successor Predecessor
Company Company Company Company
------- ------- ------- -------
Three Three
Months August 26, July 1, 1996 Months August 26, July 1, 1996
Ended 1996 through Ended 1996 through
September through August 25, September through August 25,
30, September 30, 1996 30, September 30, 1996
1997 1996 ---- 1997 1996 ----
---- ---- ---- ----
(millions of dollars) (millions of dollars) (percent) (percent)
Revenues
<S> <C> <C> <C> <C> <C> <C>
Funeral services $16.9 $ 6.9 $10.3 74.1% 83.1% 83.7%
Cemetery 5.9 1.4 2.0 25.9 16.9 16.3
------- ------ ------
Total $22.8 $ 8.3 $12.3 100.0% 100.0% 100.0%
===== ===== =====
Gross Margin
Funeral $ 5.5 $2.0 3.0 32.5% 29.0% 29.1%
Cemetery 1.7 .3 .4 28.8 21.4 20.0
------ ----- -----
Total 7.2 2.3 3.4 31.6 27.7 27.6
Expenses
General and
administrative .7 .6 1.2 3.1 7.2 9.8
Depreciation
and
amortization 2.9 .9 1.3 12.7 10.8 10.6
------ ----- ------
Earnings From
Operations 3.6 .8 .9 15.9 9.6 7.3
Interest on
long-term debt 6.1 2.5 2.5 26.8 30.1 20.3
Other expense -- -- .1 -- -- .8
------- ------- -------
Loss Before
Income Taxes (2.5) (1.7) (1.7) (11.0) (20.5) (13.8)
Income taxes -- -- (.1) -- -- (5.9)
Net Loss $ (2.5) $ (1.7) $ (1.8) (11.0)% (20.5)% (14.6)%
======= ======= =======
</TABLE>
7
<PAGE>
Consolidated revenues increased 10.7% to $22.8 million for the three months
ended September 30, 1997 compared to $20.6 million for the three months ended
September 30, 1996. Sales of funeral services and cemetery sales accounted for
74.1% and 25.9%, respectively, of total revenues for the three months ended
September 30, 1997 compared to 83.5% and 16.5%, respectively, for the three
months ended September 30, 1996. Funeral service revenues decreased 1.7% to
$16.9 million, and cemetery revenues increased 73.5% to $5.9 million.
Consolidated earnings from operations increased to $3.6 million for the three
months ended September 30, 1997 from $1.7 million for the three months ended
September 30, 1996. The increase in earnings from operations of $1.9 million is
due to enhanced pricing, merchandising and significant reduction in funeral
operating expenses for the period. Funeral contribution margin was 32.5% and
cemetery contribution margin was 28.8% for the three months ended September 30,
1997 compared to 29.1% and 20.6%, respectively, for the three months ended
September 30, 1996. Contribution margin is defined as funeral revenues or
cemetery revenues, as the case may be, less related cost of sales. On a
same-store business, excluding 1996 acquisitions and dispositions, total calls
decreased by 419 from 4,776 calls for the three months ended September 30, 1996
to 4,357 calls for the three months ended September 30, 1997. The average
revenue per call increased by $383 from $3,500 for the three months ended
September 30, 1996 to $3,883 for the three months ended September 30, 1997.
Cemetery revenues increased primarily due to increased pre-need sales efforts in
Alabama, Florida and Tennessee.
General and administrative expenses decreased to $0.7 million for the three
months ended September 30, 1997 from $1.8 million for the three months ended
September 30, 1996. As a percentage of consolidated revenue, general and
administrative expense decreased to 3.1% for the three months ended September
30, 1997 compared to 8.7% for the three months ended September 30, 1996. General
and administrative expenses decreased due to the elimination of Corporate
Development staff as well as the implementation of a more efficient area
management system. The majority of the Company's funeral service locations and
cemeteries are managed by area management in geographic clusters. The clusters
are established primarily in non-urban areas. The area manager has better day to
day management of the locations with reduced overhead and travel expenses.
The Company has also restructured its accounting and information systems to
be more effective and efficient. The Company has chosen Lawson Software to
support a major systems upgrade project that was completed in the third quarter.
The Company has connected all cluster operations with a central processor in the
corporate office enabling timely reporting of operating and financial
information in a cost effective manner. The Company began using this state of
the art financial package in the second quarter of 1997.
Depreciation and amortization increased $0.7 million to $2.9 million for the
three months ended September 30, 1997 compared to $2.2 million for the three
months ended September 30, 1996. The increase is due to the application of
purchase accounting related to the Acquisition of the Company.
Interest on long-term debt increased by $1.1 million to $6.1 million for the
three months ended September 30, 1997 compared to $5.0 million for the three
months ended September 30, 1996 as a result of additional borrowings by the
Company to finance the Acquisition.
8
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996
Successor Predecessor Successor Predecessor
Company Company Company Company
------- ------- ------- -------
Nine Months August 26, 1996 July 1, 1996 Nine Months August 26, 1996 January 1, 1996
Ended through through Ended through through
September 30, September 30, August 25, September 30, September 30, August 25,
1997 1996 1996 1997 1996 1996
---- ---- ---- ---- ---- ----
(millions of dollars) (millions of (percent) (percent)
dollars)
Revenues
<S> <C> <C> <C> <C> <C> <C>
Funeral services $54.8 $ 7.0 $47.3 76.8% 84.3% 84.3%
Cemetery 16.6 1.3 8.8 23.2 15.7 15.7
------- ------ -------
Total $71.4 $ 8.3 $56.1 100.0% 100.0% 100.0%
===== ===== =====
Gross Margin
Funeral $19.7 $2.0 $15.1 35.9% 28.6% 31.9%
Cemetery 4.8 .3 2.3 28.9 23.1 26.1
------ ----- ------
Total 24.5 2.3 17.4 34.3 27.7 31.0
Expenses
General and
administrative 2.5 .6 4.9 3.5 7.2 8.7
Cost of legal
proceedings -- -- 6.3 -- -- 11.2
Depreciation
and
amortization 8.3 .9 5.2 11.6 10.8 9.3
------ ----- ------
Earnings From
Operations 13.7 .8 1.0 19.2 9.6 1.8
Interest on
long-term debt 17.8 2.5 10.1 24.9 30.1 18.0
Loss Before
Income Taxes (4.1) (1.7) (9.1) (5.7) (20.5) (16.2)
Income taxes -- -- (.4) -- -- (4.4)
------ ------ ---------
Net Loss $ (4.1) $ (1.7) $ (9.5) (5.7)% (20.5)% (16.9)%
======= ======= =======
</TABLE>
9
<PAGE>
Consolidated revenues increased 10.9% to $71.4 million for the nine months
ended September 30, 1997 compared to $64.4 million for the nine months ended
September 30, 1996. Sales of funeral services and cemetery sales accounted for
76.8% and 23.2%, respectively, of total revenues for the nine months ended
September 30, 1997 compared to 84.3% and 15.7%, respectively, for the nine
months ended September 30, 1996. Funeral service revenues increased 0.9% to
$54.8 million, and cemetery revenues increased 64.4% to $16.6 million.
Consolidated earnings from operations increased to $13.7 million for the nine
months ended September 30, 1997 from $8.1 million for the nine months ended
September 30, 1996 before the $6.3 million legal settlement with Jeffrey Gamble.
The increase in earnings from operations of $5.6 million is due to enhanced
pricing, merchandising and significant reduction in funeral operating expenses
for the period. Funeral contribution margin was 35.9% and cemetery contribution
margin was 28.9% for the nine months ended September 30, 1997 compared to 31.5%
and 25.7%, respectively, for the nine months ended September 30, 1996.
Contribution margin is defined as funeral revenues or cemetery revenues, as the
case may be, less related cost of sales. On a same-store business, excluding
1997 acquisitions and dispositions, total calls decreased by 1,159 from 15,490
calls for the nine months ended September 30, 1996 to 14,331 calls for the nine
months ended September 30, 1997. The average revenue per call increased by $373
from $3,450 for the nine months ended September 30, 1996 to $3,823 for the nine
months ended September 30, 1997. Cemetery revenues increased primarily due to
increased pre-need sales efforts in Alabama, Florida and Tennessee.
General and administrative expenses decreased to $2.5 million for the nine
months ended September 30, 1997 from $5.5 million for the nine months ended
September 30, 1996. As a percentage of consolidated revenue, general and
administrative expense decreased to 3.5% for the nine months ended September 30,
1997 compared to 8.5% for the nine months ended September 30, 1996. General and
administrative expenses decreased due to the elimination of Corporate
Development staff as well as the implementation of a more efficient area
management system. The majority of the Company's funeral service locations and
cemeteries are managed by area management in geographic clusters. The clusters
are established primarily in non-urban areas. The area manager has better day to
day management of the locations with reduced overhead and travel expenses.
The Company has also restructured its accounting and information systems to
be more effective and efficient. The Company has chosen Lawson Software to
support a major systems upgrade project that was completed in the third quarter.
The Company has connected all cluster operations with a central processor in the
corporate office enabling timely reporting of operating and financial
information in a cost effective manner. The Company began using this state of
the art financial package in the second quarter of 1997.
Depreciation and amortization increased $2.2 million to $8.3 million for the
nine months ended September 30, 1997 compared to $6.1 million for the nine
months ended September 30, 1996. The increase is due to the application of
purchase accounting related to the Acquisition of the Company.
Interest on long-term debt increased by $5.2 million for the nine months
ended September 30, 1997 compared to the nine months ended September 30, 1996 as
a result of additional borrowings by the Company to finance the Acquisition.
Liquidity and Capital Resources
Historically, the Company's primary sources of cash have been funds provided
by operating activities, proceeds from additional long-term debt and, prior to
the Acquisition, capital contributions by the Company's then majority
shareholder.
As of September 30, 1997, the Company had a net working capital deficit of
$(4.5) million and a current ratio of 0.82:1, compared to a net working capital
of $2.1 million and a current ratio of 1.09:1 as of December 31, 1996.
Under the Bank Revolving Facility (as defined below), the Company may borrow
up to $25.0 million for general corporate purposes until August 26, 2001. The
loans thereunder bear interest at the Base Rate or the Adjusted Eurodollar Rate,
each as defined thereunder. There is a commitment fee of 0.5% on the unused
portion of the credit line. There were outstanding letters of credit of $4.2
million and borrowings of $9.5 million on the credit line as of September 30,
1997.
10
<PAGE>
Net cash used in operating activities was $5.6 million for the nine months
ended September 30, 1997, compared to net cash provided by operating activities
of $0.7 million for the same period in 1996, for a decrease of $6.3 million. The
net loss was reduced by $7.1 million from $11.2 million in 1996 to $4.1 million
in 1997 and non-cash adjustments increased by $3.0 million compared to 1996 for
depreciation and amortization of goodwill, deferred finance costs, provision for
doubtful accounts and provision for deferred income taxes. The decrease in legal
settlements of $6.3 million is the most significant change compared to 1996. The
net increase of $2.5 million in accounts receivable compared to 1996 is
attributable to increased pre-need sales. The increase of $1.7 million in
inventories compared to 1996 is attributable to the Company's remerchandising of
all of its selection rooms and cemetery inventory development. Accounts payable
and other operating liabilities required a total of $3.5 million for the nine
months ended September 30, 1997 compared to $2.8 million provided for the same
period in 1996.
The net increase of $1.4 million compared to 1996 in net cash used in
investing activities primarily relates to the purchase of funeral home buildings
for $1.4 million that were previously leased. The routine capital improvements
to the Company's facilities is comparable to the prior year. The Company
acquired three cemeteries and a funeral home during the nine months ended
September 30, 1997 for $2.6 million and sold two funeral homes for $2.0 million.
Net cash provided by financing activities represents the release of $4.4
million in restricted cash that had been restricted pursuant to the Bank Credit
Facilities (as defined below), $9.5 million in borrowings on the operating line
of credit, and proceeds from long-term borrowing of $1.3 million. This was
offset by the $3.0 million payment to satisfy certain obligations under
agreements with former owners of funeral homes and cemeteries and other payments
on long-term debt of $4.5 million.
Contemporaneously with the consummation of the acquisition (the
"Acquisition") of the Company's parent in August 1996, the Company entered into
senior secured amortization extended term loan facilities (the "Bank Term
Facility") in an aggregate principal amount of $90 million, the proceeds of
which were used to finance the Acquisition and related transaction costs, to
pre-fund certain capital expenditures and to refinance existing indebtedness of
the Company, and a senior secured revolving credit facility (the "Bank Revolving
Facility"; together with the Bank Term Facility, the "Bank Credit Facilities")
in an aggregate principal amount of up to $25 million, the proceeds of which
will be used for general corporate purposes and a portion of which may be
extended (as agreed upon) in the form of swing line loans or letters of credit
for the account of the Company. The Bank Term Facility will mature on August 26,
2003 and the Bank Revolving Facility will mature on August 26, 2001. The Bank
Term Facility is subject to amortization, subject to certain conditions, in
semi-annual installments in the amounts of $1 million in each of the first three
years after the anniversary of the closing date of the Bank Term Facility (the
"Bank Closing"); $4 million in the fourth year after the Bank Closing; $9
million in the fifth year after the Bank Closing; $12.5 million in the sixth
year after the Bank Closing and $61.5 million upon the maturity of the Bank Term
Facility. The Revolving Credit Facility is payable in full at maturity, with no
prior amortization.
All obligations under the Bank Credit Facilities and any interest rate
hedging agreements entered into with the lenders or their affiliates in
connection therewith are unconditionally guaranteed (the "Bank Guarantees")
jointly and severally, by Prime Succession Holdings, Inc., the Parent Company,
and each of the Company's existing and future domestic subsidiaries (the "Bank
Guarantors"). All obligations of the Company and the Bank Guarantors under the
Bank Credit Facilities and the Bank Guarantees are secured by first priority
security interests in all existing and future assets (other than real property
and vehicles covered by certificates of title) of the Company and the Bank
Guarantors. In addition, the Bank Credit Facilities are secured by a first
priority security interest in 100% of the capital stock of the Company and each
subsidiary thereof and all intercompany receivables.
In connection with the Acquisition, the Company also issued $100 million of
10 3/4% Senior Subordinated Notes due 2004, which were exchanged in January 1997
for $100 million of 10 3/4% Senior Subordinated Notes due 2004 (the "Notes")
that were registered under the Securities Act of 1933. The Notes mature on
August 15, 2004. Interest on the Notes is payable semi-annually on February 15
and August 15 at the annual rate of 10 3/4%. The Notes are redeemable in cash at
the option of the Company, in whole or in part, at any time on or after August
15, 2000, at prices ranging from 105.375% with annual reductions to 100% in 2003
plus accrued and unpaid interest, if any, to the redemption date. The proceeds
of the Notes were used, in part, to finance the Acquisition.
11
<PAGE>
The Company and its subsidiaries are subject to certain restrictive
covenants contained in the indenture relating to the Notes, including, but not
limited to, covenants imposing limitations on the incurrence of additional
indebtedness; certain payments, including dividends and investments; the
creation of liens; sales of assets and preferred stock; transactions with
interested persons; payment restrictions affecting subsidiaries; sale-leaseback
transactions; and mergers and consolidations. In addition, the Bank Credit
Facilities contain certain restrictive covenants that, among other things, limit
the ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness, pay dividends or make
certain restricted payments, create liens on assets, engage in mergers or
acquisitions or enter into leases or transactions with affiliates.
As of September 30, 1997, the Company had $201.4 million of indebtedness
outstanding and $11.3 million of borrowing availability under the Bank Revolving
Facility. The Company believes that, based upon current levels of operations and
anticipated growth and availability under the Bank Revolving Facility, it can
adequately service its indebtedness. If the Company cannot generate sufficient
cash flow from operations or borrow under the Bank Revolving Facility to meet
such obligations, then the Company may be required to take certain actions,
including reducing capital expenditures, restructuring its debt, selling assets
or seeking additional equity in order to avoid an event of default under the
Bank Credit Facilities or the Indenture relating to the Notes. There can be no
assurance that such actions could be effected or would be effective in
allowing the Company to meet such obligations.
12
<PAGE>
PART II
ITEM 5 - OTHER INFORMATION
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q include
"forward-looking statements" as defined in Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included herein, including, without limitation, the statements under Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financial position, plans to increase
revenues, reduce general and administrative expense and take advantage of
synergies, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed herein, including, without
limitation, in conjunction with the forward-looking statements included herein.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The Exhibits, as shown in the "Index of Exhibits", attached hereto as
pages 13 and 14, are filed as a part of this Report.
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.
PRIME SUCCESSION, INC.
/s/ MYLES S. CAIRNS
---------------------
Myles S. Cairns
Chief Financial Officer,
Secretary and Treasurer
November 10, 1997
13
<PAGE>
INDEX OF EXHIBITS
(a) Exhibit
Number Document Description
3.1* Certificate of Incorporation of Blackhawk Acquisition Corp.
3.2* Certificate of Amendment of Certificate of Incorporation of
Blackhawk Acquisition Corp. changing its name to Prime
Succession Acquisition Corp.
3.3* Certificate of Amendment of Certificate of Incorporation of
Prime Succession Acquisition Corp. changing its name to
Prime Succession, Inc.
3.4* By-Laws of Prime Succession, Inc.
4.1* Indenture dated as of August 15, 1996 between Prime Succession
Acquisition Corp. and United States Trust Company of New York,
as Trustee
4.2* Form of 10 3/4% Senior Subordinated Note due 2004 (included
in Exhibit 4.1)
10.1(a)* Casket Supply Agreement, dated January 1, 1993, between
Batesville Casket Company, Inc. and Prime Succession, Inc.
10.1(b)* Amendment Agreement, dated August 1994, between Batesville
Casket Company, Inc. and Prime Succession, Inc. (with respect
to Casket Supply Agreement)
10.1(c)* Amendment 2, dated May 22, 1995, between Batesville Casket
Company, Inc. and Prime Succession, Inc. (with respect to
Casket Supply Agreement)
10.2* Stockholders' Agreement dated as of August 26, 1996 among
Prime Succession, Inc. (to be renamed Prime Succession
Holdings, Inc.), Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners II
L.P., Blackstone Family Investment Partnership II L.P., PSI
Management Direct L.P. and Loewen Group International, Inc.
10.3* Administrative Services Agreement dated as of August 26, 1996
between Prime Succession Acquisition Corp. (to be renamed
Prime Succession, Inc.) and Loewen Group International, Inc.
10.4* Credit Agreement dated as of August 26, 1996 among Prime
Succession, Inc. (to be renamed Prime Succession Holdings,
Inc.), Prime Succession Acquisition Corp. (to be renamed Prime
Succession, Inc.), Goldman, Sachs & Co., as syndication agent
and arranging agent, the financial institutions from time to
time parties thereto as lenders and The Bank of Nova Scotia,
as administrative agent for such lenders.
10.5* Letter Agreement dated August 1, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession, Inc.) and
Gary Wright.
10.6* Letter Agreement dated August 1, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession, Inc.) and
Myles Cairns
10.7* Put/Call Agreement, dated as of August 26, 1996, among
Blackstone Capital Partners II Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners II L.P., Blackstone
Family Investment Partnership II L.P., PSI Management Direct
L.P., Loewen Group International Inc. and the Loewen Group
Inc.
10.8* Stock Purchase Agreement, dated as of June 14, 1996, by and
among Prime Succession, Inc., the individuals or entities
listed on the signature pages thereof, The Loewen Group Inc.
and Blackhawk Acquisition Corp.
14
<PAGE>
(a) Exhibit
Number Document Description
12 Computation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of Prime Succession, Inc. (formerly known as
Prime Succession Acquisition Corp.)
27 Financial Data Schedule
* Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-4 (Registration No.
333-14599).
(b) Reports on Form 8-K
None
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
Prime Succession, Inc. and subsidiaries
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
Successor Predecessor Successor Predecessor
Company Company Company Company
------- ------- ------- -------
Three Months August 26, 1996 July 1, 1996 Nine Months August 26, 1996 January 1, 1996
Ended through through Ended through through
September 30, September 30, August 25, September 30, September 30, August 25,
1997 1996 1996 1997 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of
Earnings to
Fixed Charges
Earnings:
Loss before
income taxes (2,455) (1,701) (1,639) (4,099) (1,701) (9,111)
Add: Fixed
charges, net 6,327 2,609 2,609 18,499 2,609 10,691
Income before
income taxes
and fixed
charges, net 3,872 908 970 14,400 908 1,580
Fixed Charges:
Total interest
expense (1) 6,083 2,512 2,454 17,846 2,512 10,059
Interest factor
in rents (2) 244 97 155 653 97 632
Total fixed
charges 6,327 2,609 2,609 18,499 2,609 10,691
Ratio of
earnings to
fixed charges 0.61 0.35 0.37 0.78 0.35 0.15
Coverage
deficiency (3) 2,455 1,701 1,639 4,099 1,701 9,111
</TABLE>
<PAGE>
(1) Total interest expense for each period includes amortization
of loan costs.
(2) Interest factor in rents represents one-third of rent expense,
which is considered representative of the interest factor.
(3) The Company's earnings are inadequate to cover fixed charges
for all periods indicated above. Coverage deficiency
represents the excess of fixed charges over income before
income taxes and fixed charges, net.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF PRIME SUCCESSION, INC.
AND SUBSIDIARIES, FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,892
<SECURITIES> 0
<RECEIVABLES> 14,471
<ALLOWANCES> 2,526
<INVENTORY> 5,931
<CURRENT-ASSETS> 20,215
<PP&E> 72,204
<DEPRECIATION> 2,513
<TOTAL-ASSETS> 393,346
<CURRENT-LIABILITIES> 24,726
<BONDS> 205,801
0
0
<COMMON> 0
<OTHER-SE> 129,554
<TOTAL-LIABILITY-AND-EQUITY> 393,346
<SALES> 71,368
<TOTAL-REVENUES> 71,368
<CGS> 46,875
<TOTAL-COSTS> 46,875
<OTHER-EXPENSES> 10,745
<LOSS-PROVISION> 544
<INTEREST-EXPENSE> 17,864
<INCOME-PRETAX> (4,099)
<INCOME-TAX> 27
<INCOME-CONTINUING> (4,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,125)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
