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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of shares of Common Stock held by non-affiliates
of the registrant was approximately U.S. $0 as of March 24, 1997.
The number of outstanding shares of Common Stock as of March 24, 1997, was
100.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I
ITEM
NUMBER PAGE
----
<S> <C> <C>
1. BUSINESS..................................................................................... 1
2. PROPERTIES................................................................................... 4
3. LEGAL PROCEEDINGS............................................................................ 4
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.......................................... 5
PART II
5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................................... 6
6. SELECTED FINANCIAL DATA...................................................................... 6
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................... 7
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 11
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................................................... 49
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 50
11. EXECUTIVE COMPENSATION....................................................................... 52
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 53
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 54
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 57
</TABLE>
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Prime Succession, Inc. (the "Company") is the fourth-largest operator
of funeral homes and cemeteries, on the basis of revenues, in the United States.
In addition to providing services at the time of need, the Company also makes
funeral, cemetery and cremation arrangements on a pre-need basis. As of March
15, 1997, the Company operated 144 funeral homes and 18 cemeteries in 19 states,
primarily in non-urban areas of the United States.
The Company was incorporated in Delaware as Prime Succession
Acquisition Corp. in May 1996 as a precursor to the acquisition (the
"Acquisition") of Prime Succession Holdings, Inc. (formerly known as Prime
Succession, Inc.) ("Old Prime") by Blackstone Capital Partners II Merchant
Banking Fund L.P. and its affiliates (collectively, "Blackstone") and Loewen
Group International, Inc. ("Loewen"), a subsidiary of The Loewen Group Inc.
("Loewen Group"). In connection with the Acquisition, which was consummated on
August 26, 1996 (the "Acquisition Closing Date"), the Company (i) received all
of the assets and liabilities of, and became a wholly-owned subsidiary of, Old
Prime, (ii) entered into credit facilities (collectively, the "Bank Credit
Facilities") with a syndicate of financial institutions consisting of a senior
secured amortization extended term loan facility in an aggregate principal
amount of $90 million (the "Bank Term Facility") and a senior secured revolving
credit facility in an aggregate principal amount of up to $25 million and (iii)
privately placed $100 million aggregate principal amount of 10 3/4% Senior
Subordinated Notes due 2004 (the "Notes"), which subsequently were exchanged for
$100 million aggregate principal amount of publicly-registered notes with
identical material terms (the "Exchange Notes"). References herein to the
Company refer to the Company and its subsidiaries after the Acquisition Closing
Date and Old Prime and its subsidiaries prior to the Acquisition Closing Date.
The Company's management ("Management") has identified, and the Company
has begun to undertake, a number of initiatives that Management believes will
result in an improvement in both revenues and operating and general and
administrative expenses. Over time, the Company will continue to endeavor to
increase revenues and profitability by capitalizing on the location and
concentration of its properties, improved merchandising, enhanced pre-need
marketing, and a management structure that encourages an entrepreneurial
business culture.
The Company's principal executive offices are located at 3940 Olympic
Boulevard, Suite 300, Erlanger, Kentucky 41018 and its telephone number is (606)
746-6800.
FUNERAL HOME OPERATIONS
The Company's funeral homes offer a full range of services to respond
to individuals' funeral needs, including the collection of remains,
certification of death, professional embalming, use of funeral home facilities,
sale of caskets and related merchandise, transportation to a place of worship or
funeral chapel for a religious service and transportation to a cemetery or
crematorium. To provide the public with the opportunity to choose the service
that is most appropriate from both an emotional and financial perspective, the
Company offers complete funeral services and merchandise at prices ranging from
approximately $600 to $20,000 and averaging approximately $3,500. In addition,
most of the Company's funeral homes are able to offer families the opportunity
to conduct both visitation and religious services at a non-denominational chapel
on the premises, thereby reducing transportation costs to the Company and
inconvenience to the families.
Funeral services, merchandise and cemetery property can be purchased
at-need or pre-need. Payments made for pre-need funeral services are recorded as
revenues when such services are provided. Where allowed by state laws, if the
Company has both cemetery and funeral operations, it recognizes revenues from
pre-need funeral merchandise when the customer contracts are signed and a down
payment is received, with concurrent recognition of related costs. Where this is
prohibited by state laws, or the Company has only funeral operations, it
recognizes revenues from pre-need funeral merchandise when the merchandise is
provided. Allowances for cancellation and refunds are provided at the date of
sale based on historical experience. Payments made on pre-need contracts, in
accordance with applicable state law, typically are either deposited in a trust
fund by the Company and/or used by the purchasers of the pre-need contracts to
purchase life insurance policies under which the Company is designated the
beneficiary. On the date of performance of a pre-arranged service, the Company
records as funeral revenue all accumulated trust earnings and annual insurance
benefits.
Although cremation, as a percentage of total funeral services, has
been increasing by approximately 1% annually over the past five years in the
United States, the number of caskets sold (typically associated with a
traditional funeral service) has remained relatively constant due to the
increase in the number of deaths of approximately 1% per annum in the United
States from 1990 through 1995 (per a TD Securities Inc. article entitled "The
Death Care Industry" dated July 16, 1996). Over the next 10 years the cremation
rate is expected to continue to increase at the same rate, while the number of
caskets sold is expected to remain constant. Cremation rates vary dramatically
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across regions of the United States, at least in part because of demographic
differences in religious, ethnic and socioeconomic backgrounds. In 1996, the
Company's cremation rate was approximately 24%, up approximately 1% from 1995.
Historically, the Company's average revenue per cremation has been lower than
the average revenue per funeral service, although profit margins have been
approximately equivalent to those associated with traditional funeral services.
While the Company views cremation as an alternative to earth burial it
encourages the provision of a traditional funeral or other appropriate
commemorative service. Management believes a substantial increase in the ratio
of cremations to earth burials performed by the Company without a corresponding
increase in the prices of cremations could adversely affect the Company's
revenues and gross profits.
The Company is a party to a casket supply agreement with Batesville
Casket Company, Inc. ("BCC"), pursuant to which the Company must purchase
caskets exclusively from BCC, subject to certain exceptions, through March 31,
2000. Following such date, the agreement is terminable by either the Company or
BCC upon 30 days' written notice. Management believes that the terms of such
supply agreement are favorable to the Company. Pursuant to the terms of an
Administrative Services Agreement between the Company and Loewen, Loewen may
provide the Company with the ability to purchase supplies under certain of
Loewen's supply agreements with third parties, including Loewen's agreement with
BCC.
Funeral home operations accounted for approximately 83% of the
Company's total revenues during the fiscal year ended December 31, 1996.
CEMETERY OPERATIONS
The Company's cemetery operation, accounting for approximately 17% of
the Company's total revenues in fiscal 1996, assists families in making at-need
and pre-need arrangements and offers a complete line of cemetery products
(including a selection of burial spaces, burial vaults, lawn crypts, memorials,
niches, mausoleum crypts and caskets), the opening and closing of graves and
cremation services. The sale of cemetery pre-need arrangements is a significant
component of the cemetery operations, having represented approximately 77% of
the Company's cemetery revenues during the fiscal year ended December 31, 1996.
The pre-need sale of interment rights and other related products generally is
recorded as revenue when customer contracts are signed and a down payment is
received and, concurrently, related costs are recorded and an allowance is
established for customer cancellations and refunds.
COMPETITION
In the funeral industry, local community competition is oriented
toward gaining market share. At the local level, competition primarily is based
on building goodwill in the community by strengthening the name and reputation
of each individual funeral home or cemetery. Market share increases within a
community are usually gained over a long period of time because of the high
importance of reputation and superior service. Modest and tasteful promotional
programs can help enhance community profile but typically do not increase market
share significantly.
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The Company also faces competition from large "consolidators" in the
industry which seek to reap profits from an acquisition and consolidation
strategy. Such competitors include several large, publicly-traded funeral
services companies, including Service Corporation International, Loewen, Stewart
Enterprises, Inc. and Equity Corporation International, as well as various
smaller companies which provide competition with the Company on a regional basis
and, on a local level, from operators who have focused on acquiring funeral home
groupings in concentrated geographic regions of the United States.
REGULATION
The Company's funeral home operations are regulated by the Federal
Trade Commission ("FTC"), which administers the Trade Regulation Rule on Funeral
Industry Practices (the "Funeral Rule"), which became effective on April 30,
1984 and was revised as of July 19, 1994. The Funeral Rule defines certain acts
and practices in connection with the provision of funeral goods or services as
unfair or deceptive and sets forth various requirements intended to prevent such
unfair or deceptive acts and practices. The Company also must comply with other
federal legislation, including the Americans with Disabilities Act and
regulations administered by the Occupational Safety and Health Administration.
The Company's operations also are regulated at the state and local
level, with a vast majority of jurisdictions requiring licensing and supervision
of individuals who provide funeral-related services. A number of jurisdictions
also regulate the sale of pre-need services and the administration of any
resulting trust funds or insurance contracts. In addition, concerns regarding
lack of competition have led a few jurisdictions to enact legislation designed
to encourage competition by restricting the common ownership of funeral homes
and related operations within a specific geographic region. State legislatures
and regulatory agencies may propose new laws and regulations, some of which, if
enacted, could have a material effect on the death care industry in general and
on the Company's operations. The Company cannot predict the likelihood of
enactment of any such proposed laws or regulations or the effect that any such
enactment might have on the Company or its operations.
The Company believes that it is currently in substantial compliance
with the Funeral Rule and all other applicable federal, state and local laws and
regulations.
ENVIRONMENTAL MATTERS
Although Management is aware of some contamination related to the use
of underground storage tanks and embalming materials, Management does not
believe that any costs relating to these or other environmental issues will have
a material adverse effect on the Company's financial results.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 1,130
people. None of the employees of the Company or its subsidiaries is covered by a
collective bargaining agreement. Management believes that its relationship with
its employees is good.
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ITEM 2. PROPERTIES.
Set forth in the table below is the number, by state, of the Company's
funeral homes and cemeteries as of March 15, 1997.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
STATE FUNERAL HOMES CEMETERIES
----- ------------- ----------
<S> <C> <C>
Alabama 25 8
Arizona 2 0
Arkansas 3 0
California 15 0
Florida 21 4
Georgia 6 2
Illinois 18 0
Indiana 7 0
Iowa 1 0
Kentucky 3 1
Michigan 8 0
Minnesota 10 0
Missouri 5 0
Nebraska 4 0
New York 2 0
Ohio 1 0
Tennessee 6 3
Texas 5 0
West Virginia 2 0
--- --
Total 144 18
=== ==
</TABLE>
Of the 144 funeral homes listed above, 104 are owned by the Company or
one of its subsidiaries and 40 are leased. The leases have various terms ranging
from twenty months to twenty years. Some of the funeral homes listed above are
located at the same site as cemeteries and are operated as combination
operations. The Company's 18 cemeteries contain an aggregate of approximately
741 acres, of which approximately 62% are developed. The Company also owns six
crematories, two of which are located in Illinois and the remaining four of
which are located in California, Florida, Indiana and Tennessee.
The Company's headquarters occupy approximately 5,600 square feet of
office space in a building in Erlanger, Kentucky under a lease agreement which
expires in November 2004; provided that the lease may be terminated in or after
November 2000 by the Company if Loewen exercises its call option pursuant to the
Put/Call Agreement (as defined in Item 13 below) and certain other terms and
conditions are met.
ITEM 3. LEGAL PROCEEDINGS.
Gamble Settlement. On February 26, 1996, a lawsuit was filed (the
"Alabama Litigation") against the Company by World Service Life Insurance
Company of America ("World Service") and Jeffrey M. Gamble ("Gamble"), the
former owner of a business located in Alabama which was acquired by a subsidiary
of the Company, in connection with a pre-need funeral service funding agreement
between the Company and World Service (the "Alabama Pre-need Agreement"). On
February 29, 1996, a lawsuit (the "Texas Litigation") was filed against the
Company by South Texas Bankers Life Insurance Company ("South Texas") and Gamble
in connection with a pre-need funeral service funding agreement between the
Company and South Texas (the "Texas Pre-need Agreement" together with the
Alabama Pre-need Agreement, the "Pre-need Agreements").
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On April 11, 1996, the Company settled the Alabama Litigation and the
Texas Litigation by entering into a Termination of Pre-need Funding Agreements
and Release with World Service, Gamble and South Texas (the "Termination and
Release"). Pursuant to the Termination and Release, (a) the Pre-need Agreements
were immediately terminated, (b) each of the parties released the others from
all claims under or with respect to the Pre-need Agreements and (c) the Alabama
Litigation and the Texas Litigation were dismissed with prejudice. As
consideration for such termination, release and dismissal, the Company incurred
payment obligations to Gamble of approximately $6.3 million, which was recorded
as a charge against income in the Company's financial statements.
On the Acquisition Closing Date, the Company used a portion of the net
proceeds from the offering of the Notes and the Bank Term Facility to purchase
an annuity to fund the remaining monthly payments provided for in the
Termination and Release. Management believes that the Company will recover a
substantial portion of the cost of the settlement over time through higher
commission rates and increased policy benefits with the purchase of pre-need
insurance policies from an alternative insurance carrier.
Other. The Company is a party to other legal proceedings in the
ordinary course of its business but Management does not expect the outcome of
any such proceedings to have a material adverse effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None
5
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PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
In connection with the Acquisition, the Company issued 100 shares of
Common Stock to Old Prime, which shares represent all of the outstanding Common
Stock of the Company. There is no established public trading market for the
Common Stock of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial
and operating data for the Company for and at the end of each of the years in
the four-year period ended December 31, 1995, the period from January 1, 1996
through August 25, 1996 and the period from August 26, 1996 through December 31,
1996. The selected financial data under the captions "Income Statement Data",
"Other Financial Data" and "Balance Sheet Data" for the four fiscal years ended
December 31, 1995 were derived from the Company's financial statements which
have been audited by Ernst & Young LLP ("E&Y"), independent auditors of Existing
Prime (Predecessor Company) through December 31, 1995. KPMG Peat Marwick LLP
("KPMG") has been appointed auditors of New Prime (Successor Company). The
selected financial data under the captions "Income Statement Data", "Other
Financial Data" and "Balance Sheet Data" for the period from January 1, 1996
through August 25, 1996 and the period from August 26, 1996 through December 31,
1996 was derived from the financial statements of the Company which have been
audited by KPMG. The operating data is unaudited.
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------------------------------------------------------------------------------------
For the Period | For the Period
From August 26, | From January 1, Year Ended December 31,
1996 | 1996 --------------------------------------------
Through | Through
December 31, 1996 | August 25, 1996 1995 1994 1993 1992
----------------- | --------------- ---- ---- ---- ----
(dollars in | millions, except per share amounts and revenues per funeral service)
INCOME STATEMENT DATA: |
<S> <C> | <C> <C> <C> <C> <C>
Total revenue $32.7 | $ 56.1 $ 81.5 $ 72.2 $ 41.9 $ 5.2
Net loss (2.9) | (9.5) (0.7) (4.3) (2.3) (1.9)
Loss per share (29,495.20) | - - - - -
|
OTHER FINANCIAL DATA: |
EBITDA, as adjusted(1) 8.8 | 12.7 19.0 14.7 7.4 (0.6)
Cash flows from: |
Operating activities (2.0) | 3.3 6.0 2.7 2.0 --
Investing activities (1.4) | (1.6) (9.1) (25.7) (69.5) --
Financing activities 5.0 | (1.0) 0.2 22.8 68.6 --
|
<CAPTION> | As of December 31,
As of | --------------------------------------------
December 31, 1996 | 1995 1994 1993 1992
----------------- | ---- ---- ---- ----
<S> <C> | <C> <C> <C> <C> <C>
BALANCE SHEET DATA: |
Total debt and redeemable |
preferred stock (2) $195.0 | - $ 124.6 $123.5 $103.2 $ 43.5
Total assets 398.8 | - 196.1 195.3 163.9 67.6
|
OPERATING DATA: |
Number of funeral home |
locations 144 | 146 143 131 101 38
Number of funeral |
services 7,146 | 13,827 19,776 17,590 10,889 1,700
Total funeral service |
revenues per |
funeral service $3,751 | $3,419 $3,470 $3,460 $3,027 $2,943
Number of cemeteries 16 | 16 16 16 14 5
<FN>
(1) EBITDA, as adjusted, is defined as loss before income taxes plus interest expense, depreciation and amortization adjusted for
(i) the one-time approximate $3,500,000 net change in accounting estimate for the year ended December 31, 1995, and (ii) the
approximate $6,300,000 one-time charge for the settlement of the Gamble litigation for the period from January 1, 1996 through
August 25, 1996. These adjustments are described below:
--In December 1995, the Company constructed a cemetery vault manufacturing facility in Alabama that allows for the production
of vaults at a significantly lower cost than purchasing from independent manufacturers. The lower cost of sales from the new
manufacturing plant allowed the Company to recognize a one-time gain of $3,500,000 by reducing its estimated deferred
merchandise liability for pr e-need cemetery vault sales.
--The Company settled certain litigation in April 1996 and recorded a one-time charge of $6,300,000 in the first half of 1996
for the present value of future cash payments due under the litigation settlement agreements.
These two adjustments to EBITDA have been made because both are considered infrequent and non-recurring in nature by the
Company.
EBITDA, as adjusted, is presented because (i) Management believes that EBITDA provides relevant and useful information, (ii) it
is a widely accepted financial indicator of a company's ability to incur and service debt and (iii) it is the basis on which
compliance with the financial covenants under the Company's debt agreements is determined. However, EBITDA, as adjusted, should
not be considered in isolation, as a substitute for net income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or liquidity. Also, this measure of EBITDA, as adjusted may
not be comparable to similar measures reported by other companies.
(2) Total debt and redeemable preferred stock as of December 31, 1995 and 1994 includes $2.3 million and $2.0 million,
respectively, of redeemable preferred stock.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is the fourth-largest operator of funeral homes and
cemeteries, on the basis of revenues, in the United States. The Company owns 144
funeral homes and 18 cemeteries in 19 states. 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's
consolidated revenues and operating income were $ 88.8 million and $6.5 million,
respectively, for the year ended December 31, 1996. Sales of funeral services
and cemetery sales accounted for approximately 83% and 17%, respectively, of
total net sales for 1996.
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 it. 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 the Administrative Services Agreement with Loewen. The
Company's future results of operations will depend in large part on the ability
of Management to successfully implement its business strategy.
In September 1995, the Company's Corporate Controller visited the
operations of the Company's Alabama subsidiary. He found that Alabama management
did not have adequate record keeping and financial backup for their financial
statements. In October 1995, E&Y, the Company's independent auditors at such
time, went to the Alabama central office for 1995 audit preparation. E&Y first
reported to management regarding concerns about the financial reporting on their
return from Alabama. E&Y felt they would be delayed in the audit due to the
condition of financial records required to complete the audit process. E&Y and
management had discussions regarding the financial record keeping in Alabama
throughout the audit engagement. Although management started taking steps, as
described below, to correct the situation during the latter half of 1995, the
situation did not significantly improve during the 1995 audit period and E&Y
formally issued a reportable conditions letter with respect to the Company's
Alabama operations to the Company's Board of Directors on May 9, 1996, at the
completion of the audit and again at the completion of their review of the March
31, 1996 consolidated financial statements. (The Alabama operations accounted
for approximately 19.5% of the Company's consolidated revenues and approximately
22% of its consolidated assets during 1995. While the Company had a consolidated
net loss of $663,000 in 1995, the Alabama subsidiary had net income after tax of
$778,000.) Reportable conditions involve matters relating to significant
deficiencies in the design or operation of a company's internal control
structure that, in the judgment of the auditors, could adversely affect the
company's ability to record, process, summarize and report financial data
consistent with the assertions of management in the consolidated financial
statements. Such reportable conditions at the Alabama subsidiary included the
failure to perform key account reconciliations and the lack of qualified
financial personnel at such subsidiary's operations. Differences between the
subsidiary system and the general ledger which affected accounts receivable,
deferred revenue, commissions payable and accounts payable were not quantified
and corrected during the course of the year. In addition bank reconciliations
were not prepared which resulted in significant errors remaining undetected for
the entire year.
During the latter half of 1995 and in 1996, the former management of
the Company took steps designed to address the concerns raised by E&Y,
including, from January to September 1996, the dedication of corporate personnel
to work on site in Alabama to assist in the processing and summarizing of
financial data, the replacement of an outside service bureau that had previously
been responsible for funeral service accounting at most of the Company's
locations and the institution of new and automated accounting systems and
procedures overall. In June 1996, the accounts payable function, as well as all
general ledger responsibility, was moved to the corporate office. Management has
undertaken an extensive review of the Company's accounting controls and
procedures and believes that appropriate accounting controls and procedures are
now being utilized. However, Management will continue to monitor the functioning
of its accounting controls and procedures and intends to implement any
additional steps deemed necessary.
The report of independent auditors for the year end December 31, 1995
cited a condition, that according to the auditors, raised substantial doubt
about the Company's ability to continue as a going concern. One of the Company's
lenders advised the Company that it was deemed to be in violation of certain
covenants which would provide the lender with the ability to accelerate
repayment of its indebtedness. As discussed elsewhere in this document, in
connection with the Acquisition, the indebtedness outstanding under the debt
agreements was repaid in full and the facilities were terminated.
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On April 11, 1996, the Company settled a lawsuit with Jeffrey Gamble,
the former owner of a business acquired by a subsidiary of the Company, alleging
the breach of a pre-need funding agreement. The Company incurred payment
obligations to Mr. Gamble of approximately $6.3 million for the dismissal of the
lawsuit and the termination of the pre-need funding agreement.
RESULTS OF OPERATIONS
1996 (SUCCESSOR COMPANY/PREDECESSOR COMPANY COMBINED) COMPARED WITH 1995
(PREDECESSOR COMPANY)
Consolidated revenues increased 8.9% to $88.8 million in 1996 from
$81.5 million in 1995, with funeral service revenues increasing 8.0% to $74.1
million, and cemetery revenues increasing 13.9% to $14.7 million. Consolidated
operating income increased from $11.3 million in 1995 before the $3.5 million
change in accounting estimate for pre-need vaults to $12.8 million in 1996
before the $6.3 million legal settlement with Jeffery Gamble primarily due to a
full year of 1995 acquisitions. Funeral revenues increased primarily as a result
of a 1996 acquisition and a full year of 1995 acquisitions. On same-store
business, excluding 1995 and 1996 acquisitions, total calls increased by 101
from 18,482 calls in 1995 to 18,583 calls in 1996 and average revenue per call
increased by $66 from $3,393 in 1995 to $3,459 in 1996. Cemetery revenues
increased primarily due to increased pre-need sales efforts in Alabama and
Florida.
Consolidated contribution margin of $28.4 million increased 15.2% in
1996 from a $24.6 million contribution margin before the change in accounting
estimate of $3.5 million in 1995 for pre-need vaults, with funeral contribution
margin of 32.8% and cemetery contribution margin of 27.7%. Contribution margin
is defined as contribution as a percentage of funeral revenues or cemetery
revenues, as the case may be. Contribution is defined as funeral revenues or
cemetery revenues, as the case may be, less related cost of sales (including
related direct operating expenses).
Corporate and regional general and administrative expense increased to
$6.7 million in 1996 from $6.1 million in 1995. As a percentage of consolidated
revenue, general and administrative expense increased to 7.6% in 1996 from 7.5%
in 1995. Corporate and regional general and administrative expense increased due
to additional corporate and regional staff as well as expenses associated with
new information and accounting systems.
Depreciation and amortization expense increased $4.4 million to $8.8
million in 1996 from $4.4 million in 1995. This increase is primarily the
result of the purchase accounting treatment of the Acquisition.
Interest expense of $18.6 million in 1996 increased by $3.2 million
compared to $15.4 million in 1995, primarily as a result of additional
borrowings to finance the Acquisition and higher interest rates on borrowings,
principally as a result of the issuance of the Notes referred to below.
1995 COMPARED WITH 1994
Consolidated revenues increased 12.9% to $81.5 million in 1995 from
$72.2 million in 1994, with funeral service revenues increasing 12.8% to $68.6
million, and cemetery revenues increasing 13.9% to $12.9 million. Consolidated
operating income, before the change in accounting estimate of $3.5 million for
pre-need vaults (see below), increased 47.2% to $11.3 million in 1995 from
$7.7 million in 1994. Funeral revenues increased primarily as a result of 1995
acquisitions and a full year of 1994 acquisitions. On same-store business,
excluding 1994 and 1995 acquisitions, total calls decreased by 213 from 15,624
calls in 1994 to 15,411 calls in 1995 while average revenue per call increased
by $61 from $3,332 per call in 1994 to $3,393 per call in 1995. Cemetery
revenues increased primarily due to increased pre-need sales efforts in
Alabama and Florida.
8
<PAGE> 11
In 1995, the Company completed construction of a vault manufacturing
facility in Alabama that allows for production of vaults at a significantly
lower cost than the purchase of vaults from independent manufacturers. As a
result of the availability of this new facility, the Company was able to reduce
the deferred merchandise liability, resulting in a one-time reduction to cost of
sales of approximately $3.5 million. The Company recognized the adjustment as a
non-recurring gain in 1995.
As a percentage of revenues, consolidated contribution margin of $24.6
million, before the $3.5 million change in accounting estimate, increased to
30.2% in 1995 from 26.2% in 1994, with funeral contribution margin increasing
to 31.4% from 27.5% and cemetery contribution margin, before the $3.5 million
change in accounting estimate, increasing to 24.0% from 19.2%. Funeral
contribution margin increased in part because of a new merchandising program
implemented in 1995 which produced higher retail sales and lower casket costs.
Cemetery contribution margin increased as a result of improved efficiencies at
Alabama cemeteries and new pre-need merchandising programs.
Corporate and regional general and administrative expense increased to
$6.1 million in 1995 from $4.6 million in 1994. As a percentage of consolidated
revenue, general and administrative expense increased to 7.5% in 1995 from 6.4%
in 1994. Corporate and regional general and administrative expense increased due
to additional corporate and regional staff as well as expenses associated with
new information and accounting systems.
Depreciation and amortization increased $0.4 million to $4.4 million
in 1995 from $4.0 million in 1994 primarily due to acquisitions.
Interest expense increased by $3.0 million in 1995, primarily as a
result of additional borrowings by the Company to finance its acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash since 1994 have been funds
provided by operating activities, proceeds from additional long-term debt and
capital contributions by Old Prime's majority shareholder. In 1996, operating
activities generated $1.3 million of cash compared to $6.0 million of cash in
1995 and $2.7 million in 1994.
In 1996, long-term debt proceeds (principally from the new Bank Credit
Facilities and the issuance of the Notes discussed below) provided $190.6
million of cash compared to $10.0 million in 1995 and $27.2 million in 1994. In
1994, capital contributions contributed $6.3 million in cash. In 1996, the
disposal of assets provided cash of $0.8 million compared to $1.4 million in
1995 and $0.3 million in 1994.
The primary uses of cash since 1994 have been for the acquisition of
funeral homes and cemeteries, including the Acquisition, principal payments on
long-term debt and capital expenditures. In 1996, the Company purchased three
funeral homes for an aggregate purchase price of $0.7 million compared to 11
funeral homes for an aggregate purchase price of $8.9 million in 1995. In 1994,
the Company purchased 31 funeral homes and two cemeteries for an aggregate
purchase price of $23.4 million.
In 1996, the Company used $3.2 million for capital expenditures,
compared to $1.6 million in 1995 and $2.6 million in 1994. In 1996, the Company
paid $116.4 million in principal payments on long-term debt, principally
relating to the refinancing of the indebtedness of Old Prime, compared to $7.7
million in 1995 and $8.9 million in 1994.
The Company estimates that capital expenditures will be approximately
$1.5 million in 1997 to be used in part for the repair and improvement of
existing facilities. The Company also expects to invest approximately $1.0
million in 1997 for cemetery inventory development.
Contemporaneously with the consummation of the Acquisition, the Company
entered into senior secured credit facilities (the "Bank Credit Facilities")
with a syndicate of financial institutions and The Bank of Nova Scotia, as
administrative agent.
The Bank Credit Facilities provided the Company with 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") in an
aggregate principal amount of up to $25 million, the proceeds of which will be
used for general
9
<PAGE> 12
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 7 years after the Acquisition
Closing Date, and the Bank Revolving Facility will mature 5 years after the
Acquisition Closing Date. 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 Old Prime 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.
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 December 31, 1996, the Company had $195 million of indebtedness
outstanding and approximately $25 million of borrowing availability under the
Revolving Credit Facility. The Company believes that, based upon current levels
of operations and anticipated growth and availability under the Revolving Credit
Facility, it can adequately service its indebtedness. If the Company cannot
generate sufficient cash flow from operations or borrow under the Revolving
Credit 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. There can be no assurance that such actions could be effected or would
be effective in allowing the Company to meet such obligations.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K include
"forward-looking statements" as defined in Section 21D 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" and Item 1 "Business," and Item 11 "Executive Compensation," and
located elsewhere herein 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 (as defined herein) or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
10
<PAGE> 13
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PRIME SUCCESSION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PRIME SUCCESSION, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1996 AND FOR THE
PERIODS FROM JANUARY 1, 1996 THROUGH AUGUST 25, 1996 AND FROM AUGUST 26, 1996
THROUGH DECEMBER 31, 1996:
<S> <C>
Independent Auditors' Report.........................................................12
Financial Statements:
Consolidated Balance Sheet......................................................13
Consolidated Statements of Operations...........................................14
Consolidated Statements of Shareholders' Equity.................................15
Consolidated Statements of Cash Flows...........................................16
Notes to Consolidated Financial Statements......................................17
PRIME SUCCESSION, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1995 AND FOR THE TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 1995:
Report of Independent Auditors.......................................................32
Financial Statements:
Consolidated Balance Sheet......................................................33
Consolidated Statements of Operations.......................................... 34
Consolidated Statements of Shareholders' Equity.................................35
Consolidated Statements of Cash Flows...........................................36
Notes to Consolidated Financial Statements......................................37
Schedule II - Valuation and Qualifying Accounts......................................57
</TABLE>
All other schedules have been omitted as not applicable or not required.
11
<PAGE> 14
Independent Auditors' Report
----------------------------
Board of Directors
Prime Succession, Inc.:
We have audited the accompanying consolidated balance sheet of Prime Succession,
Inc. and subsidiaries (Successor Company) as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the period from August 26, 1996 through December 31, 1996 (Successor
Company period), and the consolidated statements of operations, shareholders'
equity, and cash flows of Prime Succession, Inc. and subsidiaries (Predecessor
Company) for the period from January 1, 1996 through August 25, 1996
(Predecessor Company period). In connection with our audit of the consolidated
financial statements, we also audited the financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Successor Company consolidated financial
statements present fairly, in all material respects, the financial position of
Prime Succession, Inc. and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the Successor Company period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor Company consolidated financial
statements present fairly, in all material respects, the results of their
operations and their cash flows for the Predecessor Company period, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein for the year ended December 31,
1996.
As discussed in Note 1 to the consolidated financial statements, effective
August 26, 1996, all of the outstanding capital stock of the Predecessor Company
was acquired in a business combination accounted for as a purchase. As a result
of this acquisition, the consolidated financial information for the period after
the acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.
KPMG Peat Marwick LLP
Cincinnati, Ohio
March 14, 1997
12
<PAGE> 15
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
Assets
------
<S> <C>
Cash and cash equivalents $ 2,985,704
Restricted cash 4,388,837
Receivables:
Trade, less allowance of $2,834,438 11,286,384
Other 785,586
-------------
Total receivables 12,071,970
Inventories:
Merchandise 2,951,913
Cemetery lots and mausoleum spaces 1,115,342
-------------
Total inventories 4,067,255
-------------
Prepaids and other current assets 354,576
Prepaid fees to shareholders (note 4) 375,000
Deferred income taxes (note 9) 371,249
-------------
Total current assets 24,614,591
-------------
Property and equipment:
Land and land improvements 16,101,845
Buildings and improvements 45,664,076
Equipment, furniture and fixtures 7,363,265
Accumulated depreciation (741,179)
-------------
Net property and equipment 68,388,007
-------------
Developed cemetery properties 12,951,162
Undeveloped cemetery properties 30,616,355
Goodwill, less accumulated amortization of $1,789,876 228,215,892
Other intangible assets, less accumulated amortization of $1,548,680 27,621,587
Long-term receivables, less allowance of $2,731,216 5,584,119
Other assets 796,489
=============
$ 398,788,202
=============
Liabilities and Shareholder's Equity
------------------------------------
Accounts payable $ 2,695,283
Other accrued expenses 11,255,743
Current installments of obligations under agreements with former owners (note 5) 3,326,127
Current installments of long-term debt (note 6) 5,253,936
-------------
Total current liabilities 22,531,089
-------------
Deferred merchandise liabilities and revenues, less trust fund deposits 19,612,190
Obligations under agreements with former owners, less current installments (note 5) 17,568,971
Long-term debt, less current installments (note 6) 189,752,128
Deferred income taxes (note 9) 18,316,831
Other long-term liabilities (note 12) 4,402,013
Shareholder's equity (note 7):
Common stock, par value $.01 per share, 1,000 shares authorized;
100 issued and outstanding shares 1
Additional paid-in capital 129,554,499
Accumulated deficit (2,949,520)
-------------
Total shareholder's equity 126,604,980
-------------
Commitments and contingencies (notes 10, 11 and 12)
$ 398,788,202
=============
See accompanying notes to consolidated financial statements
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods from January 1, 1996 through August 25, 1996
and from August 26, 1996 through December 31, 1996
Predecessor | Successor
Company | Company
-------------- | --------------
January 1, | August 26,
1996 through | 1996 through
August 25, | December 31,
1996 | 1996
-------------- | -------------
<S> <C> | <C>
Revenues: |
Funeral services $ 47,281,120 | 26,805,617
Cemetery sales 8,834,774 | 5,845,936
------------ | -----------
56,115,894 | 32,651,553
Costs and expenses: |
Funeral homes 32,257,977 | 17,514,919
Cemetery 6,546,474 | 4,070,525
------------ | -----------
38,804,451 | 21,585,444
Corporate and regional general and administrative |
expenses (note 4) 4,637,919 | 2,089,994
Depreciation and amortization 5,341,150 | 3,483,901
Legal settlement (note 3) 6,344,313 | --
------------ | -----------
Operating income 988,061 | 5,492,214
------------ | -----------
|
Other expenses: |
Interest expense, including amortization of deferred loan costs |
of $360,269 and $622,473 10,059,415 | 8,539,585
Other 39,315 | 98,015
------------ | -----------
10,098,730 | 8,637,600
------------ | -----------
Loss before income taxes (9,110,669) | (3,145,386)
Income tax benefit (expense) (note 9) (364,796) | 195,866
------------ | -----------
Net loss (9,475,465) | (2,949,520)
Redeemable Preferred Stock dividend requirements (277,111) | --
============ | ===========
Net loss attributable to common shareholders $ (9,752,576) | (2,949,520)
============ | ===========
Net loss per share attributable to common shareholders $ -- | (29,495.20)
============ | ===========
</TABLE>
See accompanying notes to consolidated financial statements
14
<PAGE> 17
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the periods from January 1, 1996 through
August 25, 1996 and from August 26, 1996
through December 31,1996
Common Common Common
Stock Stock Stock Additional Total
------- ------- -------- Paid-in Accumulated Shareholders'
Class A Class B (note 7) Capital Deficit Equity
------- ------- -------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Predecessor Company:
Balance as of December 31, 1995 $ 1 9 - 31,902,729 (9,211,524) 22,691,215
Net loss for the period January 1,
1996 through August 25, 1996 - - - - (9,475,465) (9,475,465)
Accrued dividends on redeemable
preferred stock - - - (277,111) - (277,111)
======= ======= ======= ----------- ------------ -------------
Balance as of August 25, 1996 $ 1 9 - 31,625,618 (18,686,989) 12,938,639
======= ======= ======= =========== ============ =============
Successor Company:
Acquisition of Predecessor Company $ - - 1 129,999,999 - 130,000,000
Receivable due from parent company - - - (445,500) - (445,500)
Net loss for the period August 26, 1996
through December 31, 1996 - - - - (2,949,520) (2,949,520)
======= ======= ======= =========== ============= ==============
Balance as of December 31, 1996 $ - - 1 129,554,499 (2,949,520) 126,604,980
======= ======= ======= =========== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the periods from January 1, 1996 through
August 25, 1996 and from August 26, 1996
through December 31, 1996
Predecessor | Successor
Company | Company
----------------- | ---------------
January 1, | August 26,
1996 through | 1996 through
August 25, | December 31,
1996 | 1996
----------------- | ---------------
<S> <C> | <C>
Cash flows from operating activities: |
Net loss $(9,475,465) | (2,949,520)
Adjustments to reconcile net loss to net cash |
provided by (used in) operating activities: |
Depreciation and amortization 5,701,419 | 4,106,374
Provision for doubtful accounts 991,798 | 970,172
Provision for deferred income taxes 155,227 | (141,369)
Legal settlement 6,344,313 | --
Payment on legal settlement (1,100,000) | (5,344,313)
Changes in operating assets and liabilities |
net effects of acquisition of subsidiaries: |
Receivables (211,649) | (3,359,542)
Inventories (68,444) | 493,059
Accounts payable and accrued expenses 887,452 | 3,037,740
Deferred merchandise and revenue (net) 2,475,263 | 505,549
Other (2,393,784) | 698,562
----------- | ------------
Net cash provided by (used in) operating activities 3,306,130 | (1,983,288)
----------- | ------------
Cash flows from investing activities: |
Proceeds from the disposal of assets 152,205 | 674,633
Purchases of property and equipment (1,087,432) | (2,100,108)
Net cash paid for purchase of business (675,000) | --
----------- | ------------
Net cash used in investing activities (1,610,227) | (1,425,475)
----------- | ------------
Cash flows from financing activities: |
Proceeds from long-term debt 618,000 | 190,000,000
Payments on long-term debt (3,219,194) | (111,506,428)
Payments on obligations under agreements with former owners (1,444,015) | (2,346,269)
Capital contributions 3,000,000 | --
Issuance of common stock -- | 129,554,500
Acquisition of Predecessor Company -- | (196,335,542)
Increase in restricted cash -- | (4,388,837)
----------- | ------------
Net cash provided by (used in) financing activities (1,045,209) | 4,977,424
----------- | ------------
Net increase in cash and cash equivalents 650,694 | 1,568,661
|
Cash and cash equivalents at beginning of period 766,349 | 1,417,043
=========== | ============
Cash and cash equivalents at end of period $ 1,417,043 | 2,985,704
=========== | ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(1) Acquisition and Description of the Business
-------------------------------------------
On August 26, 1996 (Closing Date), Prime Succession, Inc.'s (Predecessor
Company) capital stock was purchased (the Acquisition) by Blackstone
Capital Partners II Merchant Banking Fund L.P. and affiliates
(Blackstone), Loewen Group International, Inc. (Loewen) and PSI
Management Direct L.P. (PSIM). 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". The total
purchase price including transaction expenses was approximately $320
million of which approximately $130 million was contributed by
Blackstone, Loewen and PSIM, and $190 million was financed through
bank borrowings and the issuance of senior subordinated notes. The
purchase accounting method was used to record the transaction. The
estimated fair value of the acquired assets, excluding goodwill,
aggregated approximately $173 million and liabilities assumed
aggregated approximately $85 million. The excess of the purchase price
over the fair value of net assets of approximately $230 million was
established as goodwill and is being amortized over 40 years.
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 Successor Company financial statements from those of the
Predecessor Company for periods ended prior to August 26, 1996.
The following represents the unaudited pro forma results of operations as
if the acquisition occurred at the beginning of 1995.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revenue $ 85,400,000 88,900,000
============ ============
Net loss $(11,300,000) (18,300,000)
============ ============
</TABLE>
The unaudited pro forma results of operations include 14 funeral home
acquisitions made in 1995 and 1996, as if the acquisitions were made
at the beginning of 1995. The effect of these acquisitions increased
revenue by $3,900,000 and $100,000 in 1995 and 1996, respectively, and
decreased net loss by $300,000 in 1995. The pro forma results of
operations also include adjustments for increased depreciation,
amortization and interest expenses, and reduced expenses resulting
from the elimination of certain personnel. The effect of these
adjustments increased the net loss by $10,900,000 and $5,600,000 in
1995 and 1996, respectively.
(Continued)
17
<PAGE> 20
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Acquisition and Description of the Business, Continued
------------------------------------------------------
The unaudited pro forma information presented above does not purport to be
indicative of the results that actually would have been obtained if
the acquisition had been consummated at the beginning of 1995 and is
not intended to be a projection of future results or trends.
The Company is the fourth-largest operator of funeral homes and cemeteries,
on the basis of revenues, in the United States. The Company owns 144
funeral homes and 18 cemeteries, including 2 cemeteries acquired in
January of 1997, in 19 states. The Company was founded in 1991, began
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 has focused on non-urban areas
in order to take advantage of the opportunities offered by such areas,
including (i) the opportunity to establish and maintain a higher
market share as a result of the smaller number of death care providers
and (ii) the stronger preference for traditional full-service funeral
services and burials. Historically, the Company's primary growth
strategy has been to purchase properties that can serve as anchor
locations and subsequently to acquire additional funeral homes and
cemeteries located near those central assets.
(2) Significant Accounting Policies
-------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
-------------------------
All highly liquid investments, generally with original maturities of
three months or less, are considered to be cash equivalents.
Restricted cash of $4,388,837 is segregated from cash and cash
equivalents on the balance sheet as a separate caption. The use
of this cash, which has been deposited at several financial
institutions, is restricted for the future prepayment of certain
former owner debt and the collateralization of a letter of credit
of approximately $3,940,000 and $450,000, respectively. These
investments are valued at cost, which approximates fair value.
(Continued)
18
<PAGE> 21
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
------------------------------------------
(c) Receivables
-----------
The Company's receivables represent a combination of amounts due on
at-need and pre-need installment contracts. The Company
frequently extends credit to its customers for the purchase of
funeral services or cemetery space. The customers' credit
worthiness is evaluated on a case by case basis and collateral is
generally not required on credit sales. Installment contracts
receivable, arising primarily from the sales of cemetery property
and merchandise, are generally due in monthly installments over
periods of one to six years. The contracts require cash down
payments and generally include simple interest, computed at rates
ranging from approximately 8% to 14% per annum, which is
recognized on the interest method over the contract life.
Allowances include estimates for contract cancellations and
uncollectible accounts.
(d) Inventories
-----------
Inventories of mausoleum spaces, cemetery lots and merchandise are
recorded principally at average cost, which is not in excess of
market. However, as provided under the purchase method of
accounting, all inventories in existence on August 26, 1996 were
recorded at fair value, which was not in excess of market.
(e) Derivative Instruments
----------------------
The Company enters into interest rate swap agreements to manage
interest rate exposure on certain of its long-term debt. The
difference between the amounts paid and received is accrued and
accounted for as an adjustment to interest expense over the life
of the swap agreements.
(f) Property and Equipment
----------------------
Property and equipment are recorded at cost. However, as provided
under the purchase method of accounting, property and
equipment in existence on August 26, 1996 were recorded at
fair value, which was not in excess of market. Depreciation of
buildings, improvements and equipment is provided on a
straight-line basis over the expected useful lives of the
respective assets as follows:
Land improvements 15 years
Buildings and improvements 15 - 40 years
Equipment, furniture and fixtures 5 - 10 years
Expenditures for maintenance and repairs are expensed when
incurred.
(Continued)
19
<PAGE> 22
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
------------------------------------------
(g) Goodwill
--------
Goodwill, resulting from the cost of assets acquired exceeding the
underlying net asset value, is being amortized on a
straight-line basis over a forty-year period. The Company
periodically evaluates the carrying value of goodwill to
assess its continued recoverability as required by Statement
of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. The determination includes evaluation of
factors such as current market value, future asset
utilization, business climate and future cash flows expected
to result from the use of related assets. The Company's policy
is to record an impairment loss in the period when it is
determined that the carrying amount of the asset may not be
recoverable.
(h) Other Intangible Assets
-----------------------
Other intangible assets include deferred loan costs which are
being amortized using the straight-line method over 5 to 8
years, and names and reputations which represent the present
value of amounts due under consultative and noncompetition
agreements as well as prepaid amounts related to such
contracts. Amortization of these assets is provided on a
straight-line basis over the terms of the relevant
agreements, typically ten years.
(i) Revenue Recognition - Funeral Services and Merchandise
------------------------------------------------------
Funeral services and merchandise sold at the time of need are
recognized as funeral revenue when contracted. The Company
also sells pre-arranged funeral services and merchandise under
contracts that provide for delivery of funeral services and
merchandise at the time of death at a price determined at the
time the agreement is signed.
The Predecessor Company recognized revenues from pre-need funeral
services and merchandise when the services and merchandise
were provided, except for caskets and vaults included on
cemetery contracts in certain states (see Note 2(j)). Where
allowed by state laws, if the Successor Company has both
cemetery and funeral operations, it recognizes revenues from
pre-need funeral merchandise when the customer contracts are
signed and a down payment is received, with concurrent
recognition of related costs. Where this is prohibited by
state laws, or the Successor Company has only funeral
operations, it recognizes revenues from pre-need funeral
merchandise when the merchandise is provided. Allowances for
cancellations and refunds are provided at the
20
(Continued)
<PAGE> 23
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
------------------------------------------
(i) Revenue Recognition - Funeral Services and Merchandise, Continued
-----------------------------------------------------------------
date of sale based on historical experience. Payments are
typically used to purchase insurance contracts on the lives of
the patrons or deposited into trust funds as required by state
law, and are not shown on the consolidated balance sheet (see
Note 8).
For the Predecessor Company, trust earnings available for
withdrawal prior to the delivery of funeral services, and
insurance commissions paid in connection with the insurance
contracts described above, were recognized currently as part
of funeral service revenues. Direct obtaining costs related to
the sale of pre-need funeral services were included in other
assets and were being amortized over a period of approximately
20 years. For the Successor Company, trust fund investment
earnings retained in trust and annual insurance benefits, are
deferred until the service is performed. The Company estimates
that trust fund investment earnings and annual insurance
benefits exceed the increase in cost over time of providing
the related services. Upon performance of the specific funeral
service, the Company will recognize the accumulated trust
earnings and annual insurance benefits as funeral revenues.
Direct obtaining costs related to the sale of prearranged
funeral services are included in other assets and amortized
over a period of ten years, approximating the period the
benefits are expected to be realized. Direct obtaining costs,
net of accumulated amortization, were approximately $4,000,000
as of December 31, 1996, of which $600,000 was deferred, net
of amortization, by the Successor Company from August 26, 1996
through December 31, 1996. Indirect obtaining costs relating
to the sale of prearranged funeral services are expensed in
the period incurred.
(j) Revenue Recognition - Cemetery Sales
------------------------------------
The Company accounts for its cemetery sales in accordance with the
full accrual method. Pre-need sales of cemetery interment
rights and other related products (caskets, markers and
vaults) and services are recorded as revenues when customer
contracts are signed and a down payment is received.
Allowances for customer cancellations and refunds are provided
at the date of sale based on historical experience.
In compliance with local laws, a portion of the proceeds from the
sale of cemetery lots may be required to be paid into
perpetual or endowment care trust funds. A portion of the
proceeds from the related pre-need sale of other cemetery
merchandise may also be required to be paid into merchandise
trust funds. As of December 31, 1996, the amount held in
merchandise trust funds was approximately $4,500,000. The
Company recognizes currently the earnings on amounts withdrawn
from these trusts;
(Continued)
21
<PAGE> 24
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
------------------------------------------
(j) Revenue Recognition - Cemetery Sales, Continued
-----------------------------------------------
approximately $130,000 and $70,000 for the periods from
January 1, 1996 through August 25, 1996 and from August 26,
1996 through December 31, 1996, respectively. Earnings on the
perpetual or endowment care trust funds are used to defray
cemetery maintenance costs. The principal amount of deposits
placed in the merchandise trusts is available to the Company
when the merchandise is delivered.
(k) Income Taxes
------------
Income taxes are accounted for 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 net
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(l) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The carrying amounts as of December 31, 1996 of receivables,
accounts payable and other accrued expenses approximate fair
value due to the short maturity of these instruments. See
Notes 5 and 6 for disclosures regarding the fair value of
obligations under agreements with former owners and long-term
debt, respectively.
(m) Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(n) Net Loss Per Share
------------------
Net loss per share attributable to common shareholders for the
Successor Company is computed on the weighted average number
of shares outstanding during the period from August 26, 1996
through December 31, 1996, which was 100 shares.
(Continued)
22
<PAGE> 25
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Litigation Settlement
---------------------
On February 26, 1996, a lawsuit was filed against the Company and two
of its officers by World Service Life Insurance Company of America
(World Service) and Jeffrey M. Gamble, the former owner of an
acquired subsidiary, alleging, among other things, breach of a
pre-need funeral service funding agreement between the Company and
World Service. Immediately preceding the filing of the lawsuit,
the Company notified World Service that it had breached the
pre-need funding agreement by charging premiums to the Company in
excess of those charged to other World Service Customers.
On April 11, 1996, the parties settled the litigation with the
execution of a Termination of Pre-Need Funding Agreements and
Release. Subsequently, the Company paid Mr. Gamble approximately
$6,300,000 in August of 1996 for the dismissal of the lawsuit and
the termination of the Pre-need Funding Agreements.
(4) Related Party Transactions
--------------------------
In October 1996, the Company entered into agreements with certain
former owners and Loewen to substitute Loewen as the borrower and
to release the Company from any further obligation on its debt of
approximately $1,650,000 to the former owners. In connection with
these agreements, the Company paid Loewen cash equal to the debt
assumed.
On August 26, 1996, the Company entered into an Administrative
Services Agreement (Agreement) with Loewen. The Agreement requires
Loewen to provide various administrative services and support to
the Company including, but not limited to, licenses to use
software packages, legal services, certain employee training and
support services, travel services, etc. The Company paid Loewen
$250,000 on August 26, 1996 as a prepayment for services in the
first year of the agreement. The term of the Agreement is eight
years and requires annual increases of 2.5% on the $250,000 base
fee to be paid each August 26. The Agreement also requires the
Company to reimburse Loewen on a timely basis for all out of
pocket costs and expenses incurred from third parties in
connection with the provision of services described above.
On August 26, 1996, the Company also paid $250,000 in advance to
Blackstone on behalf of Prime Succession Holdings, Inc.
(Holdings), the parent company, as a monitoring fee. This $250,000
monitoring fee is payable annually in advance on August 26 until
such time that the Put/Call Agreement is exercised (see Note 7).
In connection with the Acquisition, on the Acquisition Closing
Date, affiliates of Blackstone received fees of approximately
$3,200,000 and the Company reimbursed Blackstone for all
out-of-pocket expenses incurred in connection with the Acquisition
and Loewen received a consulting fee of $1,500,000 and was
reimbursed for certain expenses incurred in connection with the
Acquisition equal to $1,000,000.
23
(Continued)
<PAGE> 26
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Obligations Under Agreements with Former Owners
-----------------------------------------------
The Company has entered in to consultative and noncompetition
agreements (generally for ten years) with certain officers of the
Company and former owners and key employees of businesses
acquired. Obligations under these agreements are as follows:
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Obligations under covenants not to compete, amounts payable monthly
with final installments in May 1997 through April 2010.
Obligations have been discounted at 13% $ 16,843,386
Obligations under consulting agreements, amounts payable monthly with
final installments in January 1997 through November 2013.
Obligations have been discounted at 13%
4,051,712
------------
20,895,098
Less current installments 3,326,127
============
$ 17,568,971
============
</TABLE>
As of December 31, 1996, the carrying amount of obligations under
agreements with former owners approximates fair value.
The approximate aggregate maturities on these agreements for the five
years ending December 31, 2001 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 3,326,127
1998 2,499,670
1999 2,472,682
2000 2,702,649
2001 and thereafter 9,893,970
============
$ 20,895,098
============
</TABLE>
Certain of the obligations are collateralized by letters of credit of
approximately $5,300,000.
Interest paid on obligations under agreements with former owners was
approximately $1,450,000 and $830,000 for the periods from January
1, 1996 through August 25, 1996 and from August 26, 1996 through
December 31, 1996, respectively.
(Continued)
24
<PAGE> 27
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
(6) Long-Term Debt
--------------
Long-term debt consists of:
December 31,
1996
-----------
<S> <C>
Senior subordinated notes, interest payable semi-annually
beginning February 1, 1997 with maturity date of August
15, 2004. Interest is fixed at 10 3/4%. $100,000,000
Term loans, interest payable quarterly and principal payable
semi-annually from February 1, 1997 through August 1, 2003
(8.67% interest rate at December 31, 1996). 90,000,000
Other 5,006,064
------------
195,006,064
Less current installments 5,253,936
============
Long-term debt, excluding installments $189,752,128
============
</TABLE>
As of December 31, 1996, the Company had $100,000,000 in Senior
Subordinated Notes outstanding with various institutional
investors from an August 20, 1996 private offering. The notes,
which mature on August 15, 2004, require semi-annual interest
payments on February 15 and August 15 of each year at a rate of
10-3/4%. The notes were used to partially finance the Acquisition
of the Company, as described in Note 1. In January 1997, the
Company exchanged $100,000,000 of new 10-3/4% Senior Subordinated
Notes due 2004 for the $100,000,000 outstanding Senior
Subordinated Notes due 2004.
As of December 31, 1996, the Company had $90,000,000 in term loans
outstanding under the Bank Credit Agreement dated August 26, 1996.
The term loans, which bear interest at the Base Rate or the
Adjusted Eurodollar Rate, as defined in the Bank Credit Agreement
dated August 26, 1996 require quarterly interest payments and
semi-annual principal payments from February 1, 1997 through
August 1, 2003. The term loans were used to partially finance the
Acquisition of the Company, as described in Note 1. The Company
has pledged substantially all of its assets, except real property
and vehicles, to secure the term loans.
In October 1996, the Company entered into interest rate swap
agreements to reduce the impact of changes in interest rates on
its term loans for the period from February 26, 1997 to August 26,
2000. These agreements effectively limit the Company's interest
rate exposure on $72,000,000 of its $90,000,000 term loans to a
fixed 7.0% during the term of the agreements. The Company is
exposed to credit loss in the event of nonperformance by the other
parties to the interest rate swap agreements. However, the Company
does not anticipate nonperformance by the counterparties.
(Continued)
25
<PAGE> 28
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
-------------------------
Under the Revolving Loan section of the Bank Credit Agreement dated
August 26, 1996, the Company may borrow up to $25,000,000 for
general corporate purposes until August 26, 2001. The Revolving
Loans bear interest at the Base Rate or the Adjusted Eurodollar
Rate, as defined in the Bank Credit Agreement. There is a
commitment fee of 0.5% on the unused portion of the credit line.
There were no borrowings on the credit line as of December 31,
1996.
The Company is subject to certain restrictive covenants in connection
with its Senior Subordinated 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 Agreement
contains 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.
The Company also has approximately $5,000,000 of other debt
outstanding as of December 31, 1996. Approximately $3,900,000 of
this other debt is due to former owners with rates ranging from 8%
to 11%.
In connection with the Acquisition (see Note 1), the Company defeased
certain of its debt due to former owners for $2,010,000 and
recorded a purchase accounting adjustment of $197,000. As of
December 31, 1996, $1,810,000 of the former owner notes have been
extinguished through defeasance.
As of December 31, 1996, the carrying amount of long-term debt
approximates fair value.
The approximate aggregate principal maturities of long-term debt for
the five years ending December 31, 2001 and thereafter are as
follows:
<TABLE>
<S> <C>
1997 $ 5,253,936
1998 1,251,006
1999 1,136,712
2000 4,173,609
2001 and thereafter 183,190,801
==============
$ 195,006,064
==============
</TABLE>
(Continued)
26
<PAGE> 29
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
-------------------------
Interest paid on long-term debt was approximately $6,860,000 and
$2,310,000 for the periods from January 1, 1996 through August 25,
1996 and from August 26, 1996 through December 31, 1996,
respectively.
(7) Shareholders' Equity
--------------------
As of December 31, 1996, all of the outstanding shares of common stock of
the Company are held by Prime Succession Holdings, Inc.
(Holdings), the parent company.
Pursuant to an agreement executed by Blackstone, Loewen and PSIM, in
connection with the Acquisition, (i) Loewen has a call option,
exercisable from and after the fourth anniversary of the
Acquisition Closing Date until but excluding the sixth anniversary
of the Acquisition Closing Date, to purchase the shares of common
stock of Holdings held by Blackstone and/or PSIM and (ii) each of
Blackstone and PSIM has a put option, exercisable from and after
the sixth anniversary of the Acquisition Closing Date until but
excluding the eighth anniversary of the Acquisition Closing Date,
to sell such shares of common stock of Holdings held by Blackstone
or PSIM, as the case may be, to Loewen. The option price in each
case is derived from a formula based on earnings before interest,
taxes, depreciation and amortization. In addition, pursuant to the
terms of a stockholders' agreement entered into by Holdings,
Blackstone, Loewen and PSIM on the Acquisition Closing Date,
neither Blackstone nor Loewen may transfer its shares of Holdings
common stock without the prior written consent of the other party,
subject to certain exceptions, and PSIM may not transfer its
shares of Holdings common stock without the consent of Blackstone
and Loewen.
(8) Pre-arranged Funeral Contracts
------------------------------
The Company enters into contracts with customers to pre-arrange
funeral services and merchandise at a fixed price. In certain
arrangements, the Company receives payment on the contract from
the customer. In turn, the Company invests in a variety of
instruments to fund pre-arranged funeral and cremation services
and the related merchandise sold but not delivered. Amounts
trusted are invested primarily in investment grade debt securities
and time deposits. Such investments are subject to the risk that
the current market value may fall below cost. The market value of
assets held in trust as of December 31, 1996 was approximately
$47,100,000. In the state of Alabama, which does not require
pre-arranged funeral trusts, the Company invests in insurance
contracts to cover the estimated future costs of fulfilling its
pre-arranged funeral contracts. As of December 31, 1996 the amount
invested in insurance contracts was approximately $8,100,000.
27
(Continued)
<PAGE> 30
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Pre-arranged Funeral Contracts, Continued
-----------------------------------------
The Company has other arrangements under which the customer purchases
an insurance policy which is assigned to the Company. The Company
does not have control of these policies and is obligated to
deliver the service at the fixed price only if the customer
delivers the policy proceeds.
(9) Income Taxes
------------
<TABLE>
<CAPTION>
Income tax expense (benefit) consists of:
Predecessor | Successor
Company | Company
------------- | --------------
Period from | Period from
January 1, | August 26,
1996 through | 1996 through
August 25, | December 31,
1996 | 1996
-------------- | --------------
|
<S> <C> | <C>
Federal: $ -- | --
Current 138,887 | (163,330)
Deferred |
State: 209,569 | (54,497)
Current 16,340 | 21,961
Deferred ========= | =========
$ 364,796 | (195,866)
========= | =========
</TABLE>
The differences between income taxes provided in the accompanying
consolidated statements of operations and the amounts which would
be computed by applying the U.S. Federal income tax rate of 34% to
loss before income taxes are as follows:
<TABLE>
<CAPTION>
Predecessor | Successor
Company | Company
---------------- | -------------
Period from | Period from
January 1, | August 26,
1996 through | 1996 through
August 25, | December 31,
1996 | 1996
-------------- | -------------
<S> <C> | <C>
Computed "expected" tax benefit $(3,097,627) | (1,069,431)
Increase (decrease) in taxes resulting from: |
Goodwill amortization 211,146 | 536,610
State taxes, net of federal income taxes 149,100 | (21,474)
Valuation allowance 3,197,841 | 338,094
Other (95,664) | 20,335
----------- | -------------
Actual income tax expense (benefit) $ 364,796 | (195,866)
=========== | =============
(Continued)
</TABLE>
28
<PAGE> 31
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
-----------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented
below:
<TABLE>
<CAPTION>
December 31,
1996
-----------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 6,820,198
Allowance for doubtful accounts 1,985,853
Covenants not to compete and
consulting agreements 2,004,679
Deferred funeral charges 3,432,676
Accrued other expenses 747,484
Environmental reserve 313,500
Other 411,310
-----------
Total gross deferred tax assets 15,715,700
Less valuation allowance 10,408,764
-----------
Total deferred tax assets 5,306,936
-----------
Deferred tax liabilities:
Cemetery property, principally due to
purchase accounting 12,016,531
Property and equipment, principally due
to purchase accounting and differences
in depreciation 8,376,737
Goodwill, principally due to differences
in amortization 1,929,769
Prepaid loan costs 735,484
Other 193,997
-----------
Total deferred tax liabilities 23,252,518
===========
Net deferred tax liability $17,945,582
===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996
and December 31, 1995 was $10,408,764 and $2,951,373, respectively.
The net change in total valuation allowance for the year ended
December 31, 1996 was an increase of $7,457,391. In assessing the
realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
29
(Continued)
<PAGE> 32
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
-----------------------
during the periods in which these temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon these
factors, management believes the valuation allowance as of
December 31, 1996 is appropriate.
Subsequently recognized tax benefits of $3,921,456 relating to the
valuation allowance for deferred tax assets as of December 31,
1996 will be allocated to goodwill.
As of December 31, 1996, the Company has a net operating loss
carryforward of approximately $17,950,000 for Federal income tax
purposes. If not used to offset future taxable income, the tax
loss carryforward will expire in varying amounts from 2006 through
2011.
(10) Leases
------
The Company leases primarily funeral home facilities and vehicles
under various noncancelable operating lease agreements.
Approximate future minimum lease payments required under such
operating leases with initial or remaining terms in excess of one
year as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $2,339,373
1998 1,984,271
1999 1,543,295
2000 1,185,268
2001 and thereafter 4,619,820
===========
$11,672,027
===========
</TABLE>
The majority of the operating leases for funeral home facilities
contain one of the following options: (a) purchase the property at
the fair value at date of expiration; (b) purchase the property
for a fair value determined at the inception of the lease or (c)
renewal of the lease at the fair rental value at the end of the
primary term of the lease. In addition, four of the leases contain
contingent rentals based upon revenues associated with the
location.
Rent expense paid under operating leases was approximately $1,930,000
and $1,030,000 for the periods from January 1, 1996 through August
25, 1996 and from August 26, 1996 through December 31, 1996,
respectively, of which approximately 15% and 14%, respectively,
was paid to former owners currently employed by the Company.
(Continued)
30
<PAGE> 33
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Employee Benefit Plan
---------------------
The Company has established a 401(k) plan for the benefit of its
employees. All employees who have reached the age of 21, have one
year of service with the Company and have worked a minimum of
1,000 hours in any given year are eligible. Employees may defer a
maximum of 15% of their compensation, subject to IRS limitations.
The Company will match 50% of the employees' contribution up to a
maximum of 2% of their salary. Total expense recognized by the
Company during the period from January 1, 1996 through August 25,
1996 and from August 26, 1996 through December 31, 1996 was
approximately $95,000 and $62,000, respectively.
(12) Commitments and Contingencies
-----------------------------
The Company and Batesville Casket Company, Inc. (BCC) entered into a
Casket Supply Agreement dated January 1, 1992. The agreement, as
amended, requires the Company to purchase caskets solely from BCC
at current market prices for the period from April 1, 1995 through
March 31, 2000, to the extent BCC stocks those caskets required by
the Company. Amounts purchased under this agreement were
approximately $5,100,000 and $2,300,000 for the periods from
January 1, 1996 through August 25, 1996 and from August 26, 1996
through December 31, 1996, respectively.
The Company has accrued $825,000 in other long-term liabilities as
their best estimate of potential future environmental liabilities.
The most significant components of this liability are storage
tanks and septic tanks into which embalming fluids and other
contaminants were discharged resulting in potential groundwater or
soil contamination. The Company's current estimated range of costs
for clean-up or removal is $476,000 to $1,150,000, with $825,000
representing the most probable costs which the Company expects to
incur within the next five years.
The Company is a party to legal proceedings in the ordinary course of
its business but does not expect the outcome of any such
proceedings to have a material adverse effect on the Company's
financial position.
31
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Prime Succession, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Prime
Succession, Inc. and subsidiaries (Existing Prime) as of December 31, 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Prime
Succession, Inc. and subsidiaries at December 31, 1995, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that
Prime Succession, Inc. and subsidiaries will continue as a going concern. As
discussed in Note 1, the Company has not complied with certain covenants of loan
agreements with two of its lenders. These violations constitute events of
default which provide the lenders with the right to demand immediate repayment
of the debt and related accrued interest. This condition raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Indianapolis, Indiana,
May 9, 1996, except for Note 15, as to
which the date is June 14, 1996
32
<PAGE> 35
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Assets December 31,
------ 1995
-------------
<S> <C>
Current assets:
Cash and cash equivalents .......................................................... $ 766,349
Receivables, less allowance of $2,926,331 .......................................... 9,409,130
Accounts receivable from shareholder ............................................... 3,000,000
Inventories:
Merchandise ........................................................................ 3,068,037
Cemetery lots and mausoleum spaces ................................................. 496,389
-------------
3,564,426
Prepaids and other currents assets ................................................. 1,298,372
-------------
Total current assets .................................................................... 18,038,277
Property and equipment:
Land and land improvements ......................................................... 13,335,855
Buildings and improvements ......................................................... 39,988,607
Equipment, furniture and fixtures .................................................. 10,910,479
Accumulated depreciation ........................................................... (6,160,304)
-------------
58,074,637
Developed cemetery properties, at cost ................................................. 5,322,650
Undeveloped cemetery properties, at cost ................................................ 7,634,747
Names and reputations, less accumulated amortization of $7,944,175 ...................... 22,591,211
Goodwill, less accumulated amortization of $4,416,174 ................................... 75,216,667
Other intangible assets, less accumulated amortization of $1,405,258 .................... 2,407,425
Long-term receivables, less allowance of $240,704 ....................................... 6,048,023
Other assets ............................................................................ 784,017
=============
$ 196,117,654
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable .................................................................... $ 2,230,200
Accrued salaries, commissions and withholdings ...................................... 2,249,557
Other accrued expenses .............................................................. 3,883,806
Current maturities of obligations under agreements with former owners ............... 2,280,929
Current maturities of long-term debt and long-term debt in default ................. 113,813,885
-------------
Total current liabilities ............................................................... 124,458,377
Deferred merchandise liabilities, less trust fund deposits .............................. 8,318,054
Deferred revenues, less trust fund deposits ............................................. 6,480,194
Obligations under agreements with former owners, less current maturities ................ 18,718,176
Long-term debt, less current maturities ................................................. 8,449,738
Deferred income taxes ................................................................... 866,146
Other long-term liabilities ............................................................. 3,826,494
Contingencies (Notes 1 and 13)
Redeemable Preferred Stock, par value $1,000 per share, 18% cumulative, at
liquidation value; 1,957 shares authorized, issued and outstanding,
including accrued and unpaid dividends of $352,260 at December 31, 1995 ......... 2,309,260
Shareholders' equity:
Common Stock, Class A, par value $.01 per share authorized 142 shares; 129.04 issued
and outstanding shares .......................................................... 1
Common Stock, Class B, par value $.01 per share; 900 shares authorized, issued and
outstanding ..................................................................... 9
Additional paid-in capital ......................................................... 31,902,729
Retained earnings deficit .......................................................... (9,211,524)
------------
22,691,215
============
$196,117,654
============
</TABLE>
See accompanying notes.
33
<PAGE> 36
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Revenues:
Funeral services ...................................... $ 60,857,509 $ 68,623,948
Cemetery sales ........................................ 11,317,321 12,890,745
------------ ------------
72,174,830 81,514,693
Cost of sales:
Funeral homes ........................................... 10,910,596 11,312,913
Cemetery ................................................ 2,678,796 2,479,450
Cumulative effect of change in accounting estimate (Note 5) -- (3,552,000)
------------ ------------
13,589,392 10,240,363
Operating expenses:
Funeral homes ........................................... 33,240,324 35,765,303
Cemetery ................................................ 6,469,911 7,314,657
------------ ------------
39,710,235 43,079,960
Corporate and regional general and administrative expenses 4,632,993 6,108,842
Depreciation and amortization ............................. 3,971,023 4,440,261
Covenants not to compete .................................. 2,578,342 2,770,817
------------ ------------
Operating income .......................................... 7,692,845 14,874,450
Other income and expense:
Interest expense ........................................ 12,421,811 15,401,048
Other income, net ....................................... (72,611) (172,082)
------------ ------------
12,349,200 15,228,966
Loss before income taxes .................................. (4,656,355) (354,516)
Income tax benefit (expense) .............................. 309,870 (308,624)
------------ ------------
Net loss .................................................. (4,346,485) (663,140)
Redeemable Preferred Stock dividend requirements .......... -- (352,260)
============ ============
Net loss attributable to common shareholders .............. $ (4,346,485) $ (1,015,400)
============ ============
</TABLE>
See accompanying notes.
34
<PAGE> 37
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<Caption.
Common Stock
---------------
Class A Class B Additional Retained
-------- -------- Paid-in Earnings
Amount Amount Capital (deficit)
------ ------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 .................... $ 1 $ 9 $ 24,899,990 $(4,201,899)
Common stock issued ........................... - - 4,354,999 --
Net loss ...................................... - - -- (4,346,485)
----- ----- ------------ -----------
Balance at December 31, 1994 .................. 1 9 29,254,989 (8,548,384)
Common stock issued ........................... - - 3,000,000 --
Net loss ...................................... - - -- (663,140)
Accrued dividends on Redeemable Preferred Stock - - (352,260) --
===== ===== ============ ===========
Balance at December 31, 1995 .................. $ 1 $ 9 $ 31,902,729 $(9,211,524)
===== ===== ============ ===========
</TABLE>
See accompanying notes.
35
<PAGE> 38
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss ...................................................................... $ (4,346,485) $ (663,140)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation ................................................................ 2,180,318 2,549,399
Amortization ................................................................ 5,059,588 5,456,104
Provision for doubtful accounts ............................................. 1,281,140 973,561
Provision for deferred income taxes ......................................... (560,598) 81,578
Gain on disposition of business ............................................. -- (207,092)
Cumulative effect of change in estimate of deferred merchandise liability .. -- (3,552,000)
Changes in operating assets and liabilities net of effects of acquisitions of
subsidiaries:
Receivables ............................................................... (3,918,418) (2,103,297)
Inventories ............................................................... (63,160) 548,877
Accounts payable and accrued expenses ..................................... 3,162,251 (1,052,504)
Deferred merchandise and revenue (net) .................................... 1,002,110 2,518,817
Other ..................................................................... (1,085,545) 1,409,655
------------ -----------
Net cash provided by operating activities ..................................... 2,711,201 5,959,958
INVESTING ACTIVITIES
Proceeds from the disposal of assets ......................................... 304,034 1,436,849
Purchases of property and equipment ........................................... (2,578,259) (1,561,564)
Net cash paid for purchases of businesses ..................................... (23,399,311) (8,931,865)
------------ -----------
Net cash used in investing activities ......................................... (25,673,536) (9,056,580)
FINANCING ACTIVITIES
Proceeds from long-term debt .................................................. 27,238,525 9,994,034
Payments on long-term debt .................................................... (8,936,642) (7,725,492)
Payments on obligations under agreements with former owners ................... (1,791,002) (2,031,248)
Capital contributions ......................................................... 4,355,000 --
Issuance of preferred stock ................................................... 1,957,000 --
------------ -----------
Net cash provided by financing activities ..................................... 22,822,881 237,294
------------ -----------
Decrease in cash and cash equivalents ......................................... (139,454) (2,859,328)
Cash and cash equivalents at beginning of period .............................. 3,765,131 3,625,677
============ ===========
Cash and cash equivalents at end of period .................................... $ 3,625,677 $ 766,349
============ ===========
</TABLE>
See accompanying notes.
36
<PAGE> 39
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994 and 1995
1. GOING CONCERN
The accompanying financial statements have been prepared assuming Prime
Succession, Inc. and subsidiaries (the Company) will continue as a going
concern. As discussed in Note 7, the Company must comply with certain
restrictive covenants in connection with its borrowings. At December 31, 1995,
the principal lender notified the Company that it is deemed to be in violation
of certain of these covenants. As a result, the debt with a second lender is
also in default. Under the agreements, the default situation results in the debt
being callable by the lenders, however, they have not indicated an intention to
do so. The debt from these lenders, amounting to $108,604,361 at December 31,
1995, has been classified as a current liability, resulting in the working
capital of the Company being in a substantial deficit position. The Company's
future existence is contingent upon its ability to cure the defaults or
otherwise refinance the debt. Management disagrees with the lender's
interpretation of certain events categorized as defaults and is confident the
defaults will be cured or they will be able to locate alternative financing.
Therefore, the financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
2. LITIGATION SETTLEMENT
On February 26, 1996, a lawsuit was filed against the Company and two
of its officers by World Service Life Insurance Company of America (World
Service) and Jeffrey M. Gamble, the former owner of an acquired subsidiary,
alleging, among other things, breach of a pre-need funeral service funding
agreement between the Company and World Service. Immediately preceding the
filing of the lawsuit, the Company notified World Service that it had breached
the pre-need funding agreement by charging premiums to the Company in excess of
those charged to other World Service customers.
On April 11, 1996, the parties settled the litigation with the
execution of a Termination of Pre-need Funding Agreements and Release. Under the
terms of the settlement, the Company agreed to pay a total of $9,000,000 over
twenty years to Mr. Gamble in consideration for the dismissal of the lawsuit and
the termination of the pre-need funding agreement. The present value of the
future settlement payments was recorded as a charge against income of $6,273,985
in the first quarter of 1996. Payments under the agreement are as follows:
$1,000,000 upon execution, $2,000,000 to be paid on or before April 1997, and
monthly payments of $25,000 over twenty years beginning May, 1996. Upon the
earlier date of the sale of the Company or April 1998, the Company will purchase
an annuity to fund the remaining monthly payments. However, in lieu of the
annuity, Mr. Gamble may demand payment from the Company of an amount equal to
the purchase price of the annuity. As a result of the pending sale of the
Company (see Note 15), the settlement has been classified as current in the
March 31, 1996 unaudited balance sheet.
The Company believes that it will recover a substantial portion of the
cost of the settlement over time through higher commission rates and increased
policy benefits through the purchase of pre-need insurance policies from an
alternative insurance carrier.
3. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company, which began operations in 1991, owns and operates funeral
homes and cemeteries throughout the United States.
37
<PAGE> 40
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and subsidiaries after elimination of intercompany accounts and
transactions.
Cash and Cash Equivalents
All highly liquid investments, generally with original maturities of
three months or less, are considered to be cash equivalents. These investments
are valued at cost, which approximates fair value.
Receivables
The Company's receivables represent a combination of amounts due on
at-need and pre-need (installment) contracts. The Company frequently extends
credit to its customers for the purchase of funeral services or cemetery space.
The customers' credit worthiness is evaluated on a case by case basis and
collateral is generally not required on credit sales. Installment contracts
receivable, arising primarily from the sales of cemetery property and
merchandise, are generally due in monthly installments over periods of one to
six years. The contracts require a cash down payment and generally include
simple interest, computed at rates ranging from 8.0% to 14.3% per annum, which
is recognized on the interest method over the contract life. Allowances include
estimates for contract cancellations and uncollectible accounts.
Inventories
Inventories of mausoleum spaces, cemetery lots and merchandise are
recorded principally at average cost which is not in excess of market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation of buildings,
improvements and equipment is provided on a straight-line basis over the
expected useful lives of the respective assets ranging from 3 to 40 years.
Expenditures for maintenance and repairs are expensed when incurred.
Names and Reputations
Amounts on the consolidated balance sheet under the caption Names and
Reputations represent the present value of amounts due under consultative and
noncompetition agreements as well as prepaid amounts related to such contracts.
Amortization of these assets is provided on a straight-line basis over the terms
of the relevant agreements, typically ten years.
Goodwill
Goodwill, resulting from the cost of assets acquired exceeding the
underlying net asset value, is being amortized on a straight-line basis over a
forty-year period. The Company periodically evaluates the carrying value of
goodwill to assess its continued recoverability. The determination includes
evaluation of factors such as current market value, future asset utilization,
business climate, and future cash flows expected to result from the use of the
related assets. The Company's policy is to record an impairment loss in the
period when it is determined that the carrying amount of the asset may not be
recoverable and the future undiscounted cash flows attributable to the asset are
less than its carrying value. The amount of the impairment loss is calculated as
the excess, if any, of the carrying
38
<PAGE> 41
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Goodwill, Continued
amount of the impaired asset over the future discounted cash flows attributable
to the asset. In March 1995, Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, was issued. SFAS No. 121 requires the recognition of
impairment losses on long-lived assets used in operations and intangible assets
whenever events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. As required, the
Company will adopt SFAS No. 121 in 1996. Based on current circumstances, SFAS
No. 121 would not have a material impact on the Company's consolidated results
of operations or financial position as of December 31, 1995.
Other Intangible Assets
Deferred organization and loan costs have arisen in connection with the
acquisition of various companies. These assets are being amortized using the
straight-line method over 5 to 7 years. See Note 7 for discussion of a potential
impairment of loan costs at December 31, 1995.
Funeral Services
The Company sells pre-arranged funeral services under contracts that
provide for delivery of funeral services at the time of death at a price
determined at the time the agreement is signed.
Revenues from the pre-need funeral services are not recognized in the
financial statements until services are provided. Payments are typically used to
purchase insurance contracts on the lives of the patrons or deposited into trust
funds as required by state law, and are not shown on the consolidated balance
sheet (see Note 10). The payment amounts trusted are available to the Company
only as funeral services are delivered or are refundable to the purchasers under
certain state laws that provide for return of such amounts to the purchasers
under their option to cancel the contract. Earnings on the trust funds are
recognized when withdrawn from trust, typically as the funeral services are
delivered.
Funeral services sold at the time of need are recognized as funeral
revenue when contracted.
Trust earnings available for withdrawal prior to the delivery of
funeral services, as well as insurance commissions paid in connection with the
insurance contracts described above, are recognized currently as part of funeral
service revenues. Trust earnings recognized in income were $1,478,246 and
$1,138,192 in 1995 and 1994, respectively.
Cemetery Sales
The Company accounts for its cemetery sales in accordance with the full
accrual method. Pre-need sales of cemetery interment rights and other related
products and services are recorded as revenues when customer contracts are
signed and a down payment is received, with concurrent accrual of related costs.
Allowances for customer cancellation and refunds are provided at the date of
sale based on historical experience.
39
<PAGE> 42
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cemetery Sales, Continued
In compliance with local laws, a portion of the proceeds from the sale
of cemetery lots may be required to be paid into perpetual or endowment care
trust funds. A portion of the proceeds from the related pre-need sale of other
cemetery merchandise may also be required to be paid into merchandise trust
funds. At December 31, 1995, the amount held in merchandise trust funds was
$4,051,973. The Company recognizes currently the earnings on amounts deposited
in these trusts; $187,834 and $189,953 in 1995 and 1994, respectively. Earnings
on the perpetual or endowment care trust funds are used to defray cemetery
maintenance costs. The principal amount of deposits placed in the merchandise
trusts is available to the Company when the merchandise is delivered.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
40
<PAGE> 43
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
4. ACQUISITIONS
During 1995, the Company purchased the following funeral homes:
Date Name Location Entity
- ---- ---- -------- ------
<S> <C> <C> <C>
April 17, 1995 Aaron Cremation and Burial California Funeral Home
April 28, 1995 Brewer-Korisko Mortuary, Inc. Nebraska Funeral Home
August 29, 1995 Grotewald Simi Valley Mortuary, Inc. California Funeral Home
October 26, 1995 Weigel Funeral Home, Inc. Indiana Funeral Home
October 27, 1995 Lambert Corporation, Inc. West Virginia Funeral Home
October 27, 1995 J&W, Inc. West Virginia Funeral Home
October 27, 1995 Spencer Funeral Home Ohio Funeral Home
November 15, 1995 Hertz-Thoma Chapel, Ltd. Illinois Funeral Home
November 27, 1995 Simpson-Meyer Corporation Indiana Funeral Home
November 27, 1995 Simpson Funeral Home, Inc. Indiana Funeral Home
November 27, 1995 Simpson-Volkman Corporation Indiana Funeral Home
During 1994, the Company purchased the following funeral homes and cemetery
businesses:
Date Name Location Entity
- ---- ---- -------- ------
January 20, 1994 Hot Springs Funeral Home Arkansas Funeral Home
February 15, 1994 Metcalf Funeral Home Nebraska Funeral Home
February 25, 1994 Vining Funeral Home Georgia Funeral Home
February 25, 1994 Lester B. Hayman Funeral Home Georgia Funeral Home
February 25, 1994 Copeland Funeral Home South Carolina Funeral Home
March 8, 1994 Craig Funeral Home Florida Funeral Home
March 8, 1994 Flagler Palms Memorial Gardens Florida Cemetery
March 17, 1994 Brown Funeral Home Florida Funeral Home
March 17, 1994 Wachob-Forest Lawn Florida Cemetery
April 27, 1994 Kurfiss Funeral Home Florida Funeral Home
May 20, 1994 Welsheimer Funeral Home Indiana Funeral Home
June 10, 1994 Norris Funeral Services, Inc. Alabama Funeral Home
June 20, 1994 Burns Funeral Home Arkansas Funeral Home
June 30, 1994 Beck Memorial Homes* Illinois Funeral Home
July 1, 1994 Kalis Funeral Home Florida Funeral Home
July 29, 1994 Hawthorn Funeral Home Texas Funeral Home
August 1, 1994 Clayton Frank & Sons Funeral Home Florida Funeral Home
August 31, 1994 Hughes Funeral Chapel California Funeral Home
September 2, 1994 Norwood Chapel, Inc. Alabama Funeral Home
September 15, 1994 Clary-Godwin Funeral Home Florida Funeral Home
September 15, 1994 Comander Funeral Home Florida Funeral Home
September 30, 1994 McWane Family Funeral Home Inc. California Funeral Home
<FN>
- ------------------
* On June 30, 1994, 83% ownership was obtained.
</TABLE>
The total consideration paid was approximately $23,399,000 and
$8,932,000 in 1994 and 1995, respectively, of which $20,603,000 and $7,692,000
was financed through borrowings. In 1994 and 1995, the Company acquired assets,
excluding goodwill, with fair values aggregating approximately $11,465,000 and
$4,413,000 and assumed liabilities of $1,722,000 and $194,000, respectively. All
acquisitions have been accounted for using the purchase method of accounting.
The excess of the purchase price over the fair value of net assets is
established as goodwill. The results of operations for all acquisitions since
the dates of acquisition have been included in the consolidated results of
operations.
41
<PAGE> 44
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
4. ACQUISITIONS--(CONTINUED)
The operating results of each acquisition are included in the Company's
operations from the date of the acquisition. The following represents the
unaudited pro forma results of operations as if all of the above noted business
combinations had occurred at the beginning of 1994.
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------------------
1994 1995
---- ----
(Unaudited)
<S> <C> <C>
Revenues......................... $82,881,107 $85,386,185
=========== ===========
Net loss......................... $(4,016,210) $ (82,887)
=========== ===========
</TABLE>
The pro forma information presented above does not purport to be
indicative of the results that actually would have been obtained if the
acquisitions had been consummated at the beginning of 1994 and is not intended
to be a projection of future results or trends.
In 1996, the Company acquired the assets of three funeral homes for a
purchase price of approximately $675,000 of which $618,000 was financed through
borrowings.
5. CHANGE IN ESTIMATE OF DEFERRED MERCHANDISE LIABILITY
Effective in the fourth quarter of 1995, the Company revised its
estimates of the obligation to provide vaults and to open and close gravesites
on pre-need sales of cemetery interment rights in the state of Alabama. The
Company's 1995 construction of a vault manufacturing facility allows production
of vaults at a significantly lower cost than the purchase of vaults from
independent manufacturers. Preparation of the gravesite will be performed by
employees, thereby eliminating the use of higher cost outside contractors. These
changes resulted in a reduction of the estimated deferred merchandise liability
and cost of goods sold in 1995 by approximately $3,552,000.
6. INCOME TAXES
Deferred income taxes relate primarily to temporary differences between
the tax basis of assets and liabilities and their reported amounts in the
financial statements.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------------
1994 1995
---- ----
<S> <C> <C>
Federal:
Deferred................................ $(560,598) $ 81,581
State:
Current................................. 250,728 227,043
-------------- --------------
$(309,870) $ 308,624
============== ==============
</TABLE>
42
<PAGE> 45
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
6. INCOME TAXES--(CONTINUED)
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1995
---- ----
<S> <C> <C>
Computed income tax at the applicable federal statutory income
tax rate ................................................. $(1,583,161) $(120,535)
Goodwill amortization ........................................ 179,585 242,755
Change in estimate of deferred merchandise liability ......... -- (1,207,680)
State taxes, net of federal benefit .......................... 165,480 149,848
Valuation allowance .......................................... 1,011,607 1,198,463
Other ........................................................ (83,381) 45,773
----------- -----------
Income tax expense (benefit) ................................. $(309,870) $308,624
=========== ===========
</TABLE>
Components of deferred tax assets and (liabilities) are as
follows:
<TABLE>
<CAPTION>
December 31,
1995
--------------
<S> <C>
Excess of the book value over tax basis of fixed assets acquired,
net of depreciation ......................................... $(4,397,043)
Goodwill ........................................................ (1,450,111)
-----------
Deferred tax liabilities ........................................ (5,847,154)
Net operating loss carryforwards ................................ 3,294,098
Allowance for doubtful accounts ................................. 1,203,474
Deferred marketing costs and trust fund income related to
pre-arranged funeral sales .................................. 2,458,843
Covenants and consulting agreements ............................. 872,103
Other ........................................................... 103,863
-----------
Deferred tax assets ............................................. 7,932,381
Valuation allowance ............................................. (2,951,373)
-----------
Net deferred tax liability ...................................... $(866,146)
===========
</TABLE>
The Company has net operating loss carryforwards for tax purposes of
approximately $7,311,000 at December 31, 1995 which expire in varying amounts
from 2006 through 2010.
43
<PAGE> 46
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
7. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
1995
---------------
<S> <C>
Debt in default:
Acquisition term loans:
Interest and principal payable quarterly with final installments in July
1998 through October 2002. Interest at prime rate plus 1.5% (10% at
December 31, 1995) .................................................. $100,355,242
Interest payable monthly with principal due at maturity, May 1996 through
October 2000. Interest at prime plus 1.75% (10.25% at
December 31, 1995) ..................................................... 8,249,119
Demand notes, interest at lender's prime rate (8.5% at December 31, 1995) 4,550,000
Other, principally seller financing of acquired operations ................. 9,109,262
------------
122,263,623
Less current maturities .................................................... 113,813,885
------------
$8,449,738
============
</TABLE>
The Company has a loan agreement with Provident Services, Inc.
(Provident) which provides for a revolving credit facility, acquisition term
loans and construction term loans. As of December 31, 1995, no additional
borrowings are permitted due to the defaults discussed below. Borrowings under
the revolving credit facility are for general working capital use and generally
have a final maturity date of two years after the borrowing date. The
acquisition term loans are used to fund acquisitions and require quarterly
payments. Borrowings under this portion of the agreement require the investment
of additional capital from the Class A shareholders of the Company if certain
debt to equity ratios are exceeded. The construction term loans enable the
borrower to construct facility improvements and require quarterly payments. All
borrowings bear interest at prime plus 1.5%. Borrowings under the Provident loan
agreement are secured by substantially all of the assets of the Company. The
loan agreement contains various restrictive covenants that limit additional
borrowing, capital expenditures, disposition of assets and payment of dividends.
Additionally, the Company is required to maintain specified financial ratios
related to cash flow, total liabilities and working capital. There were no
borrowings outstanding under the revolving credit facility at December 31, 1995.
At December 31, 1995, Provident notified the Company that it deemed the
Company to be in violation of covenants pertaining to (1) the incurrence of
additional indebtedness, (2) notifications, approvals and furnishing of
information regarding acquisitions not financed by the principal lender and (3)
delivery of audited financial statements within the period specified in the
agreement. Asserted violations of the indebtedness covenants also include the
assumption of additional indebtedness related to the Company's litigation
settlement (See Note 2) and extended payment terms negotiated with one of the
Company's principal suppliers. Management disagrees with the lender's assertion
that the extension of payment terms by its vendor constitutes prohibited
indebtedness. Under the terms of the loan agreement, the lender may call the
loans if the Company is in violation of any restrictive covenants. The lender
has not waived any of the claimed violations, and accordingly the entire balance
of the loans at December 31, 1995 of $100,355,242 has been included in current
liabilities. This results in an additional violation of a covenant under the
loan agreement regarding the maintenance of working capital ratios. Included in
the consolidated balance sheet caption other intangibles at December 31, 1995 is
approximately $2.3 million of deferred loan costs related to the aforementioned
loans. In the event that the loans are refinanced, the costs will be charged
against income as other expense at the time of refinancing.
44
<PAGE> 47
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
7. LONG-TERM DEBT--(CONTINUED)
The Company also has an agreement with Heller Financial, Inc. for a $35
million loan facility which provides for a revolving credit facility and an
acquisition loan facility as well as letter of credit financing to support
certain acquisition-related obligations. The facility carries a fee of one half
of one percent on the unused portion. The primary purpose of the facility is to
provide funds for future acquisitions. The loan agreement contains various
restrictive covenants that require the Company to maintain specified financial
ratios. Because the cited violations of the Provident loan agreement have not
been waived, cross default provisions in this loan agreement cause a default
under the Heller agreement. These defaults allow Heller to call its loans and
also preclude the Company from any additional borrowings. Therefore, the entire
balance of these loans at December 31, 1995 of $8,249,119 has also been included
in current liabilities.
A portion of the Company's other long-term debt is secured by letters
of credit in the amount of $829,000.
The carrying value of the debt approximates market as a result of its
variable interest rate.
Future maturities on long-term debt at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996......................................... $113,813,885
1997......................................... 659,485
1998......................................... 683,845
1999......................................... 608,348
2000......................................... 675,743
Thereafter................................... 5,822,317
---------------
$122,263,623
===============
</TABLE>
Interest paid was approximately $8.7 million and $14.9 million for the
years ended 1994 and 1995, respectively.
8. OBLIGATIONS UNDER AGREEMENTS WITH FORMER OWNERS
The Company has entered into consultative and noncompetition agreements
(generally for ten years) with certain officers of the Company and former owners
and key employees of businesses acquired. Obligations under these agreements are
as follows:
<TABLE>
<CAPTION>
December 31,
1995
----------------
<S> <C>
Obligations under covenants not to compete, amounts payable monthly with final
installments in May 1997 through April 2010. bligations have been
discounted at 10% ...................................................... $18,079,045
Obligations under consulting agreements, amounts payable monthly with final
installments in January 1997 through November 2013. Obligations have been
discounted at 10% ....................................................... 2,920,060
-----------
20,999,105
Less current maturities ......................................... 2,280,929
-----------
$18,718,176
===========
</TABLE>
45
<PAGE> 48
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
8. OBLIGATIONS UNDER AGREEMENTS WITH FORMER OWNERS, CONTINUED
Future maturities on these agreements at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996............................................ $2,280,929
1997............................................. 2,453,646
1998............................................. 2,484,167
1999............................................. 2,391,993
2000............................................. 2,646,345
Thereafter....................................... 8,742,025
---------------
$20,999,105
===============
</TABLE>
Certain of the covenants are collateralized by letters of credit of $5.3
million.
9. REDEEMABLE PREFERRED STOCK
On December 31, 1994 the Company issued 1,957 shares of Preferred Stock
with a liquidation value of $1,957,000. Dividends on each share of Preferred
Stock accrue on an annual basis at a rate of 18% based upon the sum of the
liquidation value plus all accumulated and unpaid dividends thereon.
The holders of a majority of the Preferred Stock may, at any time,
request redemption of all shares of the Preferred Stock. Upon such request, the
Company is required to redeem all shares at a price per share equal to the
liquidation value thereof plus all accrued and unpaid dividends thereon.
Upon liquidation or dissolution of the Company, each holder of
Preferred Stock will be entitled to be paid, before any distribution or payment
is made on any junior securities, an amount in cash equal to the aggregate
liquidation value, plus all accrued and unpaid dividends. The holders will not
be entitled to any further payment.
10. PRE-ARRANGED FUNERAL TRUSTS
The Company enters into contracts with customers to pre-arrange funeral
services at a fixed price. In certain arrangements, the Company receives payment
on the contract from the customer. In turn, the Company invests in a variety of
instruments to fund pre-arranged funeral and cremation services and the related
merchandise sold but not delivered. Amounts trusted are invested primarily in
life insurance contracts, investment grade equity and corporate debt securities,
and time deposits. Such investments are subject to the risk that the current
market value may fall below cost.
46
<PAGE> 49
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
10. PRE-ARRANGED FUNERAL TRUSTS, CONTINUED
The Company has other arrangements under which the customer purchases
an insurance policy which is assigned to the Company. The Company does not have
control of these policies and is obligated to deliver the service at the fixed
price only if the customer delivers the policy proceeds. Both types of these
arrangements are reflected in the table below. At December 31, 1995
approximately 39% and 14% of the insurance contracts held to satisfy pre-need
contracts represent insurance policies written by two insurance companies.
<TABLE>
<S> <C>
Cumulative pre-funded funeral services sold $155,642,543
============
Assets held to fund pre-need services:
Investments in trusted assets, at market $42,959,613
Insurance, at face value of policy ..... 71,036,319
Accounts receivable .................... 28,586,306
Other ...................................... 3,816,499
------------
$146,398,737
============
</TABLE>
11. SHAREHOLDERS' EQUITY
The rights of the Class A and Class B Common Stock are identical except
for the payment of distributions on the Common Stock. In the event a
distribution is made by the Company, it will be made first to holders of Class A
Common Stock in an amount equal to the sum of the shares' unreturned original
cost plus any unpaid yield (at a 5% rate of return). Any distribution in excess
of this amount will then be paid at a ratio of 9:1 to the holders of Class B and
Class A Common Stock, respectively.
12. LEASES
The annual payments for operating leases (which are primarily for
funeral home facilities and vehicles) at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................. $ 2,330,794
1997.............................................. 1,974,584
1998.............................................. 1,683,663
1999.............................................. 1,373,267
2000.............................................. 1,145,455
Thereafter........................................ 5,551,297
============
$14,059,060
============
</TABLE>
The majority of the operating leases for funeral home facilities
contain one of the following options: (a) purchase of the property at the fair
value at date of expiration; (b) purchase of the property for a value determined
at the inception of the lease or (c) renewal of the lease at the fair rental
value at the end of the primary term of the lease. In addition, four of the
leases contain contingent rentals based upon revenues associated with the
location.
Rent expense paid under operating leases was approximately $2,119,000
and $2,469,000 in 1994 and 1995, respectively, of which approximately 50% and
34%, respectively, was paid to former owners currently employed by the Company.
47
<PAGE> 50
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended December 31, 1994 and 1995
13. CONTINGENCIES
The Company is a party to legal proceedings in the ordinary course of
its business but does not expect the outcome of any such proceedings to have a
material adverse effect on the Company's financial position.
14. EMPLOYEE BENEFITS
The Company has established a 401(k) plan for the benefit of its
employees. All full-time employees who have reached the age of 21 and have one
year of service with the Company are eligible. Employees may defer 0-20% of
their compensation. The Company will match 25% of the employee's contribution up
to a maximum of 1% of their salary. Total expense recognized by the Company
during 1994 and 1995 was $100,000 and $145,000, respectively.
15. SUBSEQUENT EVENT
On June 14, 1996 the Company entered into a purchase agreement whereby
all shares of the common stock of the Company will be sold to a new company
formed by Blackstone Capital Partners II Merchant Banking Fund L.P. and The
Loewen Group Inc. for approximately $295 million. The sale of the Company is
expected to be completed in mid-September, 1996 and is subject to a number of
conditions, including regulatory approvals and financing.
48
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective August 26, 1996, in connection with the engagement by the
Company's new Management of KPMG Peat Marwick LLP ("KPMG") as its auditor
following the Acquisition, Ernst & Young LLP ("E&Y"), Old Prime's auditor prior
to the Acquisition, was dismissed. The decision to appoint KPMG in replacement
of E&Y as the Company's auditor was approved by the Board of Directors of the
Company.
E&Y's opinion was qualified as of and for the year ended December 31,
1995, in that the financial statements were prepared assuming the Company and
its subsidiaries would continue as a going concern. The Company had not complied
with certain of its covenants in loan agreements with two of its lenders. These
violations constituted events of default which provided the lenders with the
right to demand immediate repayment of the debt and related accrued interest.
The demand for repayment would raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements did not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may have resulted from the outcome of this uncertainty.
There were no disagreements between the Company and its auditors during
E&Y's appointment as auditor for the Company.
In planning and performing the audit of the consolidated financial
statements of the Company and its subsidiaries for the year ended December 31,
1995, and again during their review of the March 31, 1996 consolidated financial
statements, the auditors noted certain matters involving the internal control
structure and its operation at the Alabama subsidiary that they considered to be
reportable conditions under standards established by the American Institute of
Certified Public Accountants.
Specifically, the auditors found that a number of key reconciliations
were not performed during the year at the Alabama subsidiary. Differences
between a subsidiary system and the general ledger which affected accounts
receivable, deferred revenue, commission payable and accounts payable were not
quantified and corrected during the course of the year. In addition, bank
reconciliations were not prepared which enabled significant errors to remain
undetected for the entire year.
During the latter half of 1995 and in 1996, management of the Company
took steps designed to address the concerns raised by E&Y, including the
dedication of corporate personnel to work on site in Alabama to assist in the
processing and summarizing of financial data, the replacement of an outside
service bureau that had previously been responsible for funeral service
accounting at most of the Company's locations and the institution of new and
automated accounting systems and procedures overall. Management has undertaken
an extensive review of the Company's accounting controls and procedures and
believes that appropriate accounting controls and procedures are now being
utilized. However, Management will continue to monitor the functioning of its
accounting controls and procedures and intends to implement any additional steps
necessary.
49
<PAGE> 52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The current executive officers and directors of the Company, and their
ages as of March 15, 1997, are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Gary L. Wright......................51 President and Chief Executive Officer, Director
Myles S. Cairns.....................42 Chief Financial Officer, Secretary and Treasurer
Gregory M. Hilgendorf...............47 North Central Regional Vice President
Robert G. Salerno...................54 Western Regional Vice President
Bruce L. Woodard....................36 Central Regional Vice President
Joseph E. Franckewitz...............41 Vice President of Pre-Need Sales
Warren B. Rudman....................66 Director
Howard A. Lipson....................33 Director
John R. Woodard.....................32 Director
Chinh E. Chu........................30 Director
Peter K. Grunebaum..................63 Director
Clifford R. Hinkle..................48 Director
</TABLE>
Mr. Bruce Woodard and Mr. John Woodard are not related.
The business experience of each of such executive officers and
directors is set forth below. References to the "Company" in this Item 10 and in
Item 11 below refer, where applicable, to the Company from and after the
Acquisition Closing Date and to Old Prime prior to such date.
Gary L. Wright joined the Company as President and Chief Executive
Officer in August 1996. Prior thereto, Mr. Wright served as Loewen's Divisional
Vice President for the Southeast United States, overseeing operations in
Alabama, Georgia, Florida and Puerto Rico and managing the operations of over
100 funeral home locations, since June 1993. Previously, he served as Loewen's
Regional Manager for the Pacific Northwest, supervising operations in
Washington, Oregon and Alaska, from 1989 to 1993. Prior to joining Loewen, Mr.
Wright was a partner in the Price-Helton Funeral Chapel which was acquired by
Loewen in 1988. Mr. Wright is a past President of the Washington State Funeral
Directors Association and a past member of the Board of Governors of the
National Funeral Directors Association.
Myles S. Cairns joined the Company as Chief Financial Officer,
Secretary and Treasurer in August 1996. Prior thereto, Mr. Cairns served as Vice
President, Operations Controller of Loewen since October 1994. Previously, Mr.
Cairns held various positions at Loewen, including Director of Risk Management
from November 1993 to October 1994, Director of Operations Planning and Control
from 1990 to November 1993 and Corporate Controller from 1985 to 1989.
Gregory M. Hilgendorf has served as North Central Regional Vice
President of the Company since 1992, overseeing operations in Illinois, Indiana,
Kentucky, Michigan, Minnesota and Wisconsin. He also has served as a member of
the Company's Advisory Board and Senior Management Team. Prior to joining the
Company, Mr. Hilgendorf served as President of Olson Funeral Homes from 1982
until its acquisition by the Company in 1992 and was the owner of five Olson
funeral homes.
Robert G. Salerno has served as Western Regional Vice President of the
Company since 1993, overseeing operations in Arizona, California and Texas.
Prior thereto, Mr. Salerno served in various capacities at Pierce Brothers,
beginning in 1960, including Manager, Area Vice President and Senior Vice
President.
50
<PAGE> 53
Bruce L. Woodard has served as Central Regional Vice President of The
Company since 1992, overseeing operations in Arkansas, Iowa, Missouri and
Nebraska. Prior thereto, Mr. Woodard was an owner and General Manager of
Mason-Woodard Funeral Homes, which operates five funeral homes in southwest
Missouri.
Joseph E. Franckewitz joined the Company as Vice President of Pre-Need
Sales in August 1996. Mr. Franckewitz previously served in various capacities at
Gibraltar Mausoleum Corporation since 1989, including Regional Sales Manager in
Brandon, Florida and Regional Sales Manager in Baltimore, Maryland.
Warren B. Rudman became a partner of Paul, Weiss, Rifkind, Wharton and
Garrison in 1993 after serving two consecutive terms as a United States Senator
from New Hampshire, from 1980 through 1992. Senator Rudman was appointed
Attorney General of New Hampshire in 1970 and in 1975, he was elected president
of the National Association of Attorneys General. Senator Rudman currently
serves on the Board of Directors of the Chubb Corporation, Collins & Aikman, the
Raytheon Company and the Concord Coalition.
Howard A. Lipson is Senior Managing Director of The Blackstone Group
L.P., which he joined in 1988, and was a Vice President from January 1991 to
March 1994. Prior to joining Blackstone, Mr. Lipson was a member of the Mergers
and Acquisitions Group of Salomon Brothers Inc. He currently serves on the Board
of Directors of UCAR International Inc., Volume Services, Inc., AMF Group Inc.,
and Ritvik Holdings, Inc.
John R. Woodard joined The Blackstone Group L.P. as a Managing Director
in 1996. Prior thereto, he was a Vice President at Vestar Capital Partners from
1990 to 1996.
Chinh E. Chu is a Managing Director of The Blackstone Group L.P., which
he joined in 1990. Prior to joining Blackstone, Mr. Chu was a member of the
Mergers and Acquisitions Group of Salomon Brothers Inc. from 1988 to 1990.
Peter K. Grunebaum has been a Director of Fortrend International LLC
since February 1996. Prior thereto, he had been a Director of ICA International
since April 1989. He currently serves on the Board of Directors of Pre-Paid
Legal Services, Inc.
Clifford R. Hinkle has served as President and a Director of Flagler
Capital Corporation since its founding in 1992, as Chief Executive Officer and
Chairman of the Board of Directors of Flagler Holdings, Inc. since its formation
in January 1996 and as Chairman, President and Chief Executive Officer of Hinkle
& Co. since 1992. Prior thereto, he was Executive Director of the State Board of
Administration of Florida from 1987 to 1991. Mr. Hinkle also was a Director and
President and Chief Executive Officer of MHI Group, Inc. from 1993 until its
merger with Loewen Group in 1995. He currently serves on the Board of Directors
of Commercial Net Lease Realty.
Pursuant to the Stockholders' Agreement described in Item 13 below,
Blackstone and Loewen designated five and two nominees, respectively, to the
Board of Directors of Old Prime. Messrs. Wright, Rudman, Lipson, J. Woodard and
Chu were the nominees designated by Blackstone. Messrs. Grunebaum and Hinkle
(neither of whom is an officer or a director of Loewen Group) were the nominees
designated by Loewen. Pursuant to the Stockholders' Agreement, Loewen will
designate one additional nominee. Each of Blackstone's and Loewen's nominees to
the Board of Directors of Old Prime also was nominated to the Board of Directors
of the Company.
Directors of the Company (other than Directors who are employed by the
Company or Blackstone) will receive $25,000 annually for their service as
Directors plus the reimbursement of expenses. Such Directors will not receive a
separate fee for service on committees of the Board. Directors of the Company
who are employed by the Company or Blackstone will serve without compensation.
51
<PAGE> 54
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth for the fiscal year ended December 31,
1996 the compensation paid by the Company to its Chief Executive Officer and
each of the other most highly compensated executive officers (and former
executive officers who served during 1996) of the Company.
<TABLE>
<CAPTION>
Year All
Ended Other
Name and Principal Position December 31, Salary Bonus Compensation(1)
------------------------------- ------------ ------- ----- ------------
<S> <C> <C> <C> <C>
Gary L. Wright 1996 $82,471 -- $2,077
President and Chief Executive 1995 -- -- --
Officer, Director
Gregory M. Hilgendorf 1996 $93,462 $139,471 $16,048
Eastern Regional Vice President 1995 85,000 -- 1,557
Peter D. Cooper 1996 $130,000 $55,000 $600
Counsel 1995 130,000 -- 600
Robert G. Salerno 1996 $88,846 $40,000 $2,420
Western Regional Vice President 1995 76,930 -- --
Bruce L. Woodard 1996 $56,462 $30,000 $2,119
Central Regional Vice President 1995 45,489 -- --
Thomas H. Johnson 1996 $223,810 $70,000 $2,354
Former President and Chief Executive 1995 263,474 15,000 600
Officer
Bernhard L. Gaarsoe 1996 $100,691 $40,000 $14,908
Former Vice President, Chief 1995 145,998 6,000 600
Financial Officer,
Treasurer and Secretary
<FN>
(1) All Other Compensation includes amounts paid to the named executive
officers which may be applied to the payment of medical, dental and life
insurance benefits. In addition, All Other Compensation includes moving
expenses for Gregory M. Hilgendorf and consulting fees for Bernhard L.
Gaarsoe.
</TABLE>
Employment Agreements
The Company has entered into letter agreements with Messrs. Wright and
Cairns regarding certain terms of their employment with the Company. The
agreements provide that Messrs. Wright and Cairns will be paid a base salary of
$225,000 per year, with annual increases at the discretion of the Board of
Directors of the Company plus an annual cash bonus. In 1996, such bonus will be
at the discretion of the Board, and thereafter such bonus will be equal to a
percentage of such executive's salary, which percentage will in turn be based on
the extent to which the Company achieves a target EBITDA. For purposes of the
employment agreements, EBITDA is defined as Consolidated Cash Flow (as defined
in the Indenture between the Company and the trustee thereunder with respect to
the Notes). EBITDA is a non-GAAP measure of cash flow. The agreements will
provide that the target EBITDA is $35.0 million and $37.7 million for 1997 and
1998, respectively. The target for the following years will be set by the Board.
52
<PAGE> 55
The 1997 and 1998 targeted amounts were derived from the stockholders'
review of Management's estimates of projected cost savings and increase in
revenues following the Acquisition. The target EBITDA is a performance target
and is not a forecast of actual performance that will be realized by the
Company. Actual performance during the year may differ materially from the
targeted amount.
The agreements further provide that Messrs. Wright and Cairns will be
entitled to a long-term incentive bonus at any time that Loewen purchases all of
the shares of common stock of Old Prime owned by Blackstone, provided that
certain EBITDA targets are achieved. Such bonus will equal $500,000 if such
purchase occurs prior to 2002 and will be increased by $100,000 each year
thereafter up to a maximum of $900,000.
Other
The compensation of the executive officers other than Messrs. Wright
and Cairns will be determined by the Board of Directors of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Upon consummation of the Acquisition on August 26, 1996, the Company
became a direct, wholly owned subsidiary of Old Prime. The following table sets
forth certain information regarding the beneficial ownership of the Common Stock
of Old Prime ("Old Prime Common Stock") as of March 24, 1997:
<TABLE>
<CAPTION>
Name And Address Of Beneficial Owner Number Of Shares Percentage Of Common Stock
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Blackstone Management Associates II
L.L.C.(1) 758.08824 77.5%
Loewen Group International, Inc.(2) 213.23529 21.8%
Gary L. Wright(7) -- --
Warren B. Rudman(3) -- --
Howard A. Lipson(4) -- --
John R. Woodard(4) -- --
Chinh E. Chu(4) -- --
Peter K. Grunebaum(5) -- --
Clifford R. Hinkle(6) -- --
Directors and executive officers as a -- --
group(7) (12 persons)
</TABLE>
(1) 544.59536, 158.78262 and 54.71026 shares, respectively, are held by
Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore
Capital Partners II L.P. and Blackstone Family Investment Partnership II L.P.
Blackstone Management Associates II L.L.C. ("BMA II"), as the general partner of
each of Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone
Offshore Capital Partners II L.P. and Blackstone Family Investment Partnership
II L.P., exercises voting and dispositive power with respect to such shares.
Messrs. Peter G. Peterson and Stephen A. Schwarzman are the sole stockholders of
PSI P&S Corp. ("PSI P&S"), which is the general partner of PSI Management Direct
L.P., a Delaware limited partnership ("PSIM"), the holder of 6.61765 shares of
Old Prime Common Stock. Messrs. Peterson and Schwarzman are also founding
members of BMA II and may be deemed to share beneficial ownership of the shares
shown as beneficially owned by BMA II and PSI P&S Corp. Messrs. Peterson and
Schwarzman disclaim beneficial ownership of such shares of Old Prime Common
Stock. The address for the Blackstone entities, including Messrs. Peterson and
Schwarzman, is c/o Blackstone Group L.P., 345 Park Avenue, New York, N.Y. 10154.
(2) The address for Loewen is 50 River Center Boulevard, Covington, KY 41011.
(3) Mr. Rudman's business address is c/o Paul, Weiss, Rifkind, Wharton &
Garrison, 1615 L Street, N.W., Suite 1300, Washington, D.C. 20038.
53
<PAGE> 56
(4) Messrs. Lipson, Woodard and Chu are affiliated with Blackstone in the
capacities described in Item 10 above. Each such person's business
address is c/o The Blackstone Group L.P., 345 Park Avenue, New York, NY
10154. Messrs. Lipson, Woodard and Chu disclaim beneficial ownership of
any such shares of Common Stock beneficially owned by BMA II or PSI P&S.
(5) Mr. Grunebaum's business address is c/o Fortrend International LLC, 805
Third Avenue, Suite 2300, New York, New York 10022.
(6) Mr. Hinkle's business address is c/o Flagler Capital Corporation, 215 South
Monroe Street, Suite 500, Tallahassee, Florida 32301.
(7) None of the named executive officers owns any shares of Old Prime Common
Stock. Each of the executive officers of the Company holds a limited
partnership interest in PSIM, the holder of 6.61765 shares (approximately
0.7%) of Old Prime Common Stock; however, such executive officers do not
have voting or dispositive power with respect to such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The summaries of the Stock Purchase Agreement, the Stockholders'
Agreement, the Put/Call Agreement and the Administrative Services Agreement set
forth below do not purport to be complete and are qualified in their entirety by
reference to all the provisions of the Stock Purchase Agreement, the
Stockholders' Agreement, the Put/Call Agreement and the Administrative Services
Agreement, respectively. Copies of the Stock Purchase Agreement, the
Stockholders' Agreement, the Put/Call Agreement and the Administrative Services
Agreement are filed as exhibits to this Annual Report on Form 10-K.
Stock Purchase Agreement And Acquisition
On June 14, 1996, as a precursor to the Acquisition, a company
controlled by Blackstone (the "Purchaser") entered into a Stock Purchase
Agreement with Loewen Group and all of the holders of capital stock of Old Prime
(the "Selling Stockholders"), pursuant to which the Selling Stockholders agreed
to sell to the Purchaser, and the Purchaser agreed to purchase from the Selling
Stockholders, all of the shares of Old Prime held by the Selling Stockholders.
At the closing of the Acquisition, the Purchaser assigned back to Old Prime its
rights and obligations as Purchaser under the Stock Purchase Agreement, such
that at the closing Old Prime repurchased from the Selling Stockholders all of
their shares in Old Prime.
In connection with the Acquisition, (i) Blackstone, Loewen and PSIM
contributed $130 million and all of the common stock of the Company to Old Prime
(the "Blackstone/Loewen Contribution") in exchange for 100% of the capital stock
of Old Prime, resulting in the Company's becoming a wholly owned subsidiary of
Old Prime; (ii) Old Prime transferred the shares of all of its directly held
subsidiaries and all of its other assets and liabilities to the Company, (iii)
the Bank Credit Facilities were entered into, (iv) Old Prime (a) repurchased the
shares of its common stock owned by the Selling Stockholders and (b) repaid or
defeased existing indebtedness and discharged certain other existing obligations
in an aggregate amount of approximately $126.4 million using the proceeds of the
Blackstone/Loewen Contribution and a portion of the proceeds of the offering of
the Notes and the Bank Term Facility.
54
<PAGE> 57
Stockholders' Agreement
In connection with the Acquisition, Blackstone, Loewen and PSIM entered
into an agreement with Old Prime (the "Stockholders' Agreement") setting forth
certain of their rights and obligations as stockholders of Old Prime.
The Stockholders' Agreement provides that, subject to the Put/Call
Agreement referred to below, (i) neither Blackstone nor Loewen is permitted to
transfer any of its respective shares of common stock of Old Prime ("Old Prime
Common Stock") without the other's prior written consent, subject to certain
exceptions, and (ii) PSIM is not permitted to transfer any of its shares of Old
Prime Common Stock without the consent of Blackstone and Loewen.
Pursuant to the Stockholders' Agreement, Blackstone and Loewen
designated five and two nominees as directors, respectively, to the Board of
Directors of Old Prime (Loewen has the right thereunder to designate a third
nominee as well). The parties to the Stockholders' Agreement further agreed that
Old Prime shall cause the Board of Directors of the Company at all times to
consist of the same individuals who comprise the Board of Directors of Old
Prime. In addition, the Certificate of Incorporation and the By-Laws of Old
Prime provide that certain actions by or with respect to Old Prime require a
supermajority vote of the Board of Directors and/or the stockholders of Old
Prime. See "--Certain Matters Subject to Supermajority Vote."
The Stockholders' Agreement will terminate following the exercise by
either Blackstone or Loewen of its option pursuant to the Put/Call Agreement (as
defined below) or on such other date as Blackstone and Loewen may agree.
Put/Call Arrangement
Pursuant to a separate agreement among Blackstone, PSIM, Loewen Group
and Loewen (the "Put/Call Agreement"), (i) Loewen has a call option, exercisable
from and after the fourth anniversary of the Acquisition Closing Date until but
excluding the sixth anniversary of the Acquisition Closing Date, to purchase all
of Blackstone's or PSIM's shares of Old Prime Common Stock (the "Call Option")
and (ii) each of Blackstone and PSIM has a put option, exercisable from and
after the sixth anniversary of the Acquisition Closing Date until but excluding
the eighth anniversary of the Acquisition Closing Date, to require Loewen to
purchase Blackstone's or PSIM's, as the case may be, shares of Old Prime Common
Stock (the "Put Option"). The option price in each case is derived from a
formula based on EBITDA. The performance by Loewen of its obligations under the
Put/Call Agreement will be guaranteed by Loewen Group.
By virtue of the Put/Call Agreement, it is likely that the Company will
eventually become a wholly owned subsidiary of Loewen. There can be no
assurance, however, that either the Call Option or Put Option will be exercised.
Certain Matters Subject To Supermajority Vote
The Certificate of Incorporation and/or the By-Laws of Old Prime
provide that (1) amendments to the Certificate of Incorporation or By-Laws of
Old Prime require the approval of holders of 90% of the issued and outstanding
Old Prime Common Stock and (2) transactions involving the merger, consolidation
or sale of substantially all of the assets of Old Prime require the unanimous
approval of both the Board of Directors and the stockholders of Old Prime.
55
<PAGE> 58
Administrative Services Agreement
In connection with the Acquisition, the Company has engaged Loewen to
provide certain administrative services and share certain resources (Loewen, in
such capacity, being the "Administrative Services Provider") pursuant to the
Administrative Services Agreement. Such services will include the licensing of,
the maintenance of and the provision of training and other support services with
respect to, software, hardware and other information systems; the provision of
certain legal services, training and support services relating to certain types
of regulatory compliance, risk management services, travel arrangement services
and assistance and support with respect to environmental compliance and
remediation efforts, and the granting of access to certain telecommunications
equipment and services, as well as technical support therefor. In addition, the
Administrative Services Provider will provide the Company with the ability to
purchase supplies under certain of Loewen's supply agreements with third
parties. Also pursuant to the Administrative Services Agreement, Loewen and the
Company will contract for, to the extent feasible and cost-effective in
particular markets, access to embalming facilities and automobile fleets.
As compensation for services provided under the Administrative Services
Agreement, the Administrative Services Provider receives from the Company, in
cash, a fee (the "Administrative Services Fee") payable monthly in arrears and
in an aggregate annual amount equal to $250,000 for the first year following the
Acquisition Closing Date, to be increased by 2.5% for each year thereafter until
the termination of the Administrative Services Agreement. The Company is also
required to reimburse the Administrative Services Provider for all out-of-pocket
costs and expenses incurred by it from third parties in connection with
performing the administrative services described in the Administrative Services
Agreement.
The Administrative Services Agreement is subject to termination (i)
automatically on the eighth anniversary of the Acquisition Closing Date, (ii)
automatically upon closing following the exercise of the Call Option or the Put
Option, (iii) if required pursuant to a legally binding order of a court or any
other governmental agency with appropriate jurisdiction, (iv) subject to
applicable grace periods and an arbitration requirement in the event of a
dispute, upon notice by either the Company or Loewen in the event of a material
breach by the other party of any provision of the Administrative Services
Agreement and (v) at the option of the Company.
Payment of Certain Fees and Expenses
In connection with the Acquisition, on the Acquisition Closing Date,
affiliates of Blackstone received fees of approximately $3.2 million and the
Company reimbursed Blackstone for all out-of-pocket expenses incurred in
connection with the Acquisition and Loewen received a consulting fee of $1.5
million and was reimbursed for certain expenses incurred in connection with the
Acquisition equal to $1.0 million. In addition, from the Acquisition Closing
Date until the date on which Loewen or Blackstone exercises the Call Option or
the Put Option, respectively, pursuant to the Put/Call Agreement, an affiliate
of Blackstone will receive a monitoring fee equal to $250,000 per annum from the
Company.
Formation of PSIM; Loans to Management
In connection with the Acquisition, on the Acquisition Closing Date,
PSIM purchased approximately 0.7% of the Old Prime Common Stock (the "PSIM-Owned
Stock"). The limited partnership interests in PSIM were subsequently allocated
to Messrs. Wright and Cairns and other officers of the Company (the "PSIM
Limited Partners").
In order to effect such purchase, on the Acquisition Closing Date, the
Company made a loan to PSIM, which was evidenced by a note bearing interest at
an annual rate of 9% and secured by the PSIM-Owned Stock. PSIM is deemed to have
made loans to each of the PSIM Limited Partners in connection with their
subscription for limited partnership interests in PSIM. The loan to each of
Messrs. Wright and Cairns was in the principal amount of $97,750, evidenced by a
note bearing interest at an annual rate of 9% and secured by his limited
partnership interest in PSIM.
Agreements Relating to Former Owners
In October 1996, the Company entered into agreements with certain
former owners and Loewen to substitute Loewen as the borrower and to release the
Company from any further obligation on its debt of approximately $1,650,000 to
the former owners. In connection with these agreements, the Company paid Loewen
cash equal to the debt assumed.
56
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of the Report. Consolidated financial
statements and schedules of Prime Succession, Inc. and its subsidiaries filed as
part of this report are listed on page 11 of this report.
(b) Reports on Form 8-K. None.
(c) Exhibits.
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.
57
<PAGE> 60
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.
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).
58
<PAGE> 61
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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,
March 24, 1997 Secretary and Treasurer
- -------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ GARY L. WRIGHT
------------------------------------
Gary L. Wright
March 24, 1997 President, Chief Executive Officer
- -------------------
/s/ MYLES S. CAIRNS
------------------------------------
Myles S. Cairns
Chief Financial Officer, Secretary and Treasurer
(principal financial officer; principal accounting
March 24, 1997 officer)
- -------------------
/s/ WARREN B. RUDMAN
------------------------------------
Warren B. Rudman
March 24, 1997 Director
- -------------------
/s/ HOWARD A. LIPSON
------------------------------------
Howard A. Lipson
March 24, 1997 Director
- -------------------
/s/ JOHN R. WOODARD
------------------------------------
John R. Woodard
March 24, 1997 Director
- -------------------
/s/ CHINH E. CHU
------------------------------------
Chinh E. Chu
March 24, 1997 Director
- -------------------
/s/ PETER K. GRUNEBAUM
------------------------------------
Peter K. Grunebaum
March 24, 1997 Director
- -------------------
/s/ CLIFFORD R. HINKLE
------------------------------------
Clifford R. Hinkle
March 24, 1997 Director
- -------------------
59
<PAGE> 62
PRIME SUCCESSION, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs & Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
- -------------------------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Current - Allowance for contract
cancellations and doubtful accounts:
Year ended December 31,
1996 $2,926,331 371,846 414,900 (878,639) $2,834,438
1995 $1,929,748 973,561 1,134,613 (1,111,591) $2,926,331
1994 $2,768,124 1,281,140 103,472 (2,222,988) $1,929,748
Due after one year - Allowance for
contract cancellations and doubtful
accounts:
Year ended December 31,
1996 $240,704 1,590,125 1,977,607 (1,077,220) $2,731,216
1995 $213,575 - 27,129 - $240,704
1994 $493,835 - (280,260) - $213,575
<FN>
(1) Revision of allowance resulting from purchase accounting adjustments.
(2) Write-off of doubtful accounts.
</TABLE>
<PAGE> 1
PRIME SUCCESSION, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JAN. 1 THROUGH AUG. 26 THROUGH
1992 1993 1994 1995 AUG. 25, 1996 DEC. 31, 1996
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings To
Fixed Charges
Earnings:
Income (Loss) before
income taxes (1,923) (2,505) (4,656) (355) (9,111) (3,145)
Add: Fixed charges, net 847 6,650 13,128 16,224 10,691 8,884
Income (Loss) before
income taxes and
fixed charges, net (1,076) 4,145 8,472 15,869 1,580 5,739
Fixed Charges:
Total interest expense (1) 774 6,418 12,422 15,401 10,059 8,540
Interest factor in
rents (2) 73 232 706 823 632 344
Total fixed charges 847 6,650 13,128 16,224 10,691 8,884
Ratio of earnings to fixed
charges (1.3) 0.6 0.6 1.0 0.1 0.6
Coverage Deficiency (3) 1,923 2,505 4,656 355 9,111 3,145
<FN>
(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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR PRIME SUCCESSION, INC., FOR THE YEARS
ENDED DECEMBER 31, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 766 2,986
<SECURITIES> 0 0
<RECEIVABLES> 12,335 14,121
<ALLOWANCES> 2,926 2,834
<INVENTORY> 3,564 4,067
<CURRENT-ASSETS> 18,038 24,615
<PP&E> 64,235 69,129
<DEPRECIATION> 6,160 741
<TOTAL-ASSETS> 196,118 398,788
<CURRENT-LIABILITIES> 124,458 22,531
<BONDS> 27,168 207,321
<COMMON> 0 0
0 0
2,309 0
<OTHER-SE> 31,903 129,554
<TOTAL-LIABILITY-AND-EQUITY> 196,118 398,788
<SALES> 81,515 88,767
<TOTAL-REVENUES> 81,515 88,767
<CGS> 10,240 60,390
<TOTAL-COSTS> 53,320 60,390
<OTHER-EXPENSES> 28,549 22,035
<LOSS-PROVISION> 974 493
<INTEREST-EXPENSE> 15,401 18,599
<INCOME-PRETAX> (355) (12,256)
<INCOME-TAX> 309 169
<INCOME-CONTINUING> (663) (12,425)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (663) (12,425)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
Above amounts combine Successor Company and Predecessor Company financial
information for the year ended December 31, 1996 and were obtained from the
audited financial statements for the period from 1/1/96 to 8/25/96, and for the
period from 8/26/96 to 12/31/96.
</FN>
</TABLE>
