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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
---------------------
Commission file number _____________
---------------------
PRIME SUCCESSION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3904211
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3940 Olympic Blvd., Suite 500 41018
Erlanger, Kentucky, U.S.A. (Postal Code)
(Address of principal executive offices)
(Registrant's telephone number, including area code) (606) 746-6800
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 19, 1998.
The number of outstanding shares of Common Stock as of March 19, 1998,
was 100.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Business.
Overview
Prime Succession, Inc. (the "Company") provides merchandise and
services in both the funeral home and cemetery segments of the death care
industry in the United States. In addition to providing merchandise and services
at the time of need, the Company also makes funeral, cemetery and cremation
arrangements on a pre-need basis. As of March 19, 1998, the Company through its
subsidiaries owns and operates 143 funeral homes and 19 cemeteries in 20 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").
The Company's management ("Management") has identified, and the Company
has taken, a number of initiatives that resulted in improvements 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 500, Erlanger, Kentucky 41018 and its telephone number is (606)
746-6800.
Funeral Home Operations
Funeral operations revenue of $78.7 million accounted for approximately
78% of the Company's revenues for the year ended December 31, 1997. 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, flowers, and related merchandise, transportation to a place of worship
or funeral chapel for a ceremony celebrating the life and memory of the deceased
and transportation to a cemetery or crematorium. The funeral home provides the
public with the opportunity to choose the ceremony that is most appropriate from
both an emotional and financial perspective. The Company offers complete funeral
arrangements and merchandise at prices ranging from approximately $600 to
$20,000 and averaging approximately $3,900. 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. In addition to traditional funeral services, all of the
Company's funeral homes offer a complete range of memorialization and cremation
products and services.
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. 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 across regions of the United States, at least in part because of
demographic differences in religious, ethnic and socioeconomic backgrounds.
While the Company views cremation as an alternative to earth burial and
encourages the provision of a traditional funeral or other appropriate
commemorative service, Management believes a substantial increase in the rate of
cremations performed by the Company could adversely affect the Company's
revenues and gross profits. In the years ended December 31, 1997 and 1996, 25%
of the services provided ended with cremation. While cremations often result in
lower average revenue than traditional funeral services, they generally produce
higher gross profit margins per service.
The Company operates most of its funeral homes and cemeteries in
"clusters". Clusters are groups of funeral homes and cemeteries located in close
enough proximity that their operations can be integrated to achieve economics of
scale. Clustered facilities share vehicles, employees, computer systems and some
general and administrative functions, centralized embalming services and
inventory management allow the Company to decrease its cost to operate each
location. Also clustered facilities create opportunities for more efficient and
effective management of operations.
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
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 accumulated
insurance benefits. As of March 19, 1998, the Company operated 143 locations of
which 35 were leased.
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 December
31, 2004. 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.
Cemetery Operations
Cemetery operations revenue of $22.4 million accounted for
approximately 22% of the Company's revenues for the year ended December 31,
1997. The Company's cemetery operations involve the sale of cemetery property
and related merchandise, including lots, lawn crypts, family and community
mausoleums, monuments, memorials and burial vaults, along with the sale of
burial site openings and closings. Cemetery property and merchandise sales are
made at the time of need or on a prearranged basis. The sale of cemetery
pre-need arrangements is a significant component of the cemetery operations,
having represented approximately 77% of the cemetery revenues in the year ended
December 31, 1997. The pre-need sale of interment rights and other related
products generally are recorded as revenue when the 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.
The Company also maintains cemetery grounds pursuant to perpetual care contracts
or laws. Although profit margins of cemetery operations typically are lower than
those of funeral operations, the Company believes that its cemetery properties
help it to maintain market share, as families often return to a cemetery
location where their relatives are buried. In addition, the Company's clustering
and combined facilities strategies help to improve the profitability of
individual cemetery locations. As of March 19, 1998, the Company owned and
operated 19 cemeteries.
Combined Funeral Home and Cemetery Operations. Approximately 42% of the
Company's cemeteries have a Company funeral home on site that is operated in
conjunction with the cemetery. Many of these facilities are in the Company's key
markets, including, among others, Fort Lauderdale, Birmingham and Memphis. The
clustering effect of combinations allows for sharing of facilities, personnel
and equipment which results in lower average operating costs to the Company and
helps to increase market share by allowing the Company to offer families the
convenience of complete funeral home and cemetery planning and services from a
single location at competitive prices.
Prearrangements. The Company markets death care products and services
on a prearranged basis through a staff of approximately 440 commissioned sales
counselors. Prearranged funeral planning allows families to determine in advance
and prepay for their funeral service. The merchandise to be used and the cost of
such merchandise and services are priced at the time the agreement is signed,
rather than when the products and services are delivered. Prearranged funeral
plans also permit families to eliminate the emotional strain of making death
care decisions at the time of need. The Company believes that extensive
marketing of prearranged merchandise and services will produce a backlog of
future business and will enhance current as well as future market share.
Approximately 50% of all prearranged funeral plans sold by the Company
are funded through insurance with the balance being funded through trust funds,
depending on the regulatory requirements in the relevant jurisdiction. When
trust funding is used, a percentage of the sale price (the amount varies among
jurisdictions), which is often paid in installments, is placed in a trust fund
and the remainder is retained by the Company to defray costs related to the
sale. When contracts are funded by insurance, all payments received by the
Company are used to pay premiums on insurance policies designed to cover the
future cost of the funeral service.
Principal and all earnings or capital growth on the trust funds, and
amounts funded through insurance are withdrawn and recognized as revenue to the
Company when the funeral service is performed. As of December 31, 1997, the
Company's backlog of prearranged funerals totaled approximately $147 million
with approximately $86 million funded by life insurance contracts.
Prearranged cemetery merchandise is generally funded through trust
funds established by the Company, and the related principal and earnings
generally are available to the Company only when the merchandise is delivered or
when contracts cancel. As of December 31, 1997, the Company's merchandise trust
funds totaled approximately $4.7 million.
The Company funds its obligation to provide maintenance of cemetery
grounds by placing a portion, generally 10%, of the proceeds from cemetery
property sales into perpetual care trust funds or escrow accounts. Income from
these funds is withdrawn and used for maintenance of the cemeteries, but
principal, including in some jurisdictions net realized capital gains, generally
must be held in perpetuity. As of December 31, 1997, the Company's perpetual
care trust funds totaled approximately $8.3 million.
The accounting methods used to reflect the Company's prearranged
funeral, merchandise and perpetual care trust funds are complex and are
described in the notes to the Company's consolidated financial statements.
Management. The Company has an experienced team of managers. The
Company's management structure is designed to allow local funeral home directors
and cemetery managers substantial flexibility in deciding how their firms will
be managed and their products and services will be priced and merchandised. At
the same time, the Company establishes financial goals at the corporate level
and maintains centralized controls through an area manager network. The Company
provides centralized management and information systems support, accounting and
payroll through its corporate office.
Currently, the Company is divided into three operating divisions in the
United States, each of which is managed by a division vice president. These
divisions are further divided into regions, each of which is managed by an area
manager.
Competition
In the funeral industry, local community competition is oriented
towards 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.
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, 1997, the Company employed approximately 1,100
people in funeral and cemetery operations, approximately 440 commissioned sales
people and 300 telemarketing staff. 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.
<PAGE>
<TABLE>
<CAPTION>
ITEM 2. PROPERTIES.
Set forth in the table below is the number, by state, of the Company's
funeral homes and cemeteries:
<S> <C> <C>
NUMBER OF NUMBER OF
STATE FUNERAL HOMES CEMETERIES
Alabama 23 8
Arizona 3 0
Arkansas 3 0
California 15 0
Florida 21 4
Georgia 6 2
Illinois 15 0
Indiana 7 0
Iowa 1 0
Kentucky 3 2
Michigan 8 0
Minnesota 10 0
Missouri 5 0
Nebraska 4 0
New York 2 0
Ohio 1 0
Tennessee 7 3
Texas 5 0
West Virginia 3 0
Wyoming 1 0
Total 143 19
</TABLE>
Of the 143 funeral homes listed above, 108 are owned by the Company or
one of its subsidiaries and 35 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 and are operated as combination operations. The
Company's 19 cemeteries contain an aggregate of approximately 769 acres, of
which approximately 61% 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 share space with their pre-need
telemarketing call center and together occupy approximately 20,000 square feet
of office space in a building in Erlanger, Kentucky under a lease agreement
which expires in December 2007; provided that the lease may be terminated in
December 2004 by the Company, under certain terms and conditions.
<PAGE>
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").
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 paid
Gamble approximately $6,300,000, 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 fund the
remaining obligation 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
<PAGE>
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
data for the Company for and at the end of each of the years in the three-year
period ended December 31, 1997, the period from January 1, 1996 through August
25, 1996 and the period from August 26, 1996 through December 31, 1996 and the
year ended December 31, 1995. KPMG Peat Marwick LLP ("KPMG") have been appointed
auditors of New Prime (Successor Company). The selected historical financial
data for the year ended December 31, 1997 and for the period from January 1,
1996 through August 25, 1996 and the period from August 26, 1996 through
December 31, 1996 were derived from the financial statements of the Company
which have been audited by KPMG. The selected financial data for the three
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 Old Prime (Predecessor Company) through December 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------------------------- ---------------------------------------------
For the Period For the
Period
From From
August 26, January 1, Year Ended December 31,
Year 1996 1996
-----------------------------
Ended Through Through
December 31, December August
31, 25,
1997 1996 1996 1995 1994 1993
(dollars in millions, except per share amounts and revenues per funeral
service)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenue $101.1 $32.7 $ 56.1 $ 81.5 $72.2 $ 41.9
Net income (Loss) 0.1 (9.5) (0.7) (4.3) (2.3)
(2.9)
Other Financial Data:
EBITDA, as adjusted(1) 35.4 8.8 12.7 19.0 14.7 7.4
Cash flows from:
Operating activities (7.0) (2.0) 3.3 6.0 2.7 2.0
Investing activities (3.5) (1.4) (1.6) (9.1) (25.7) (69.5)
Financing activities 9.1 5.0 (1.0) 0.2 22.8 68.6
As of December 31, As of December 31,
-----------------------------
1997 1996 1995 1994 1993
Balance Sheet Information:
Total debt and redeemable
preferred stock (2) $203.0 $195.0 - $ 124.6 $123.5 $103.2
Total assets 395.1 398.8 - 196.1 195.3 163.9
Operating Data:
Number of funeral home
locations 143 144 146 143 131 101
Number of funeral
services 19,335 7,146 13,827 19,776 17,590 10,889
Total funeral service
revenues per
funeral service $3,896 $3,751 $3,419 $3,470 $3,460 $3,027
Number of cemeteries 19 16 16 16 16 14
</TABLE>
(Footnotes on following page)
<PAGE>
(1) EBITDA, as adjusted, is defined as income (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 pre-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.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Prime Succession, Inc. (the "Company") provides merchandise and
services in both the funeral home and cemetery segments of the death care
industry in the United States. In addition to providing merchandise and services
at the time of need, the Company also makes funeral, cemetery and cremation
arrangements on a pre-need basis. As of March 19, 1998, the Company through its
subsidiaries owns and operates 143 funeral homes and 19 cemeteries in 20 states,
primarily in non-urban areas of the United States. Old Prime commenced
operations in 1992 and expanded rapidly through the aggressive acquisition of
funeral homes and cemeteries. The Company's consolidated revenues and operating
income were $101.1 million and $24.1 million, respectively, for the year ended
December 31, 1997. Sales of funeral services of $78.7 million and cemetery sales
of $22.4 million accounted for approximately 77.8% and 22.2%, respectively, of
total net sales for 1997.
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
substantially eliminated the Company's acquisition program. In addition, in
order to improve the Company's present and long-term operating performance, new
Management took 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 maintain its
business strategy.
The Company restructured its accounting and information systems to be
more effective and efficient during 1997. The Company implemented Lawson Insight
Financial Systems during 1997 as the foundation for a major systems upgrade. The
Company is able to communicate and transmit financial data with all cluster
operations via data lines and the internet, thus allowing for timely reporting
of operating and financial information in a cost effective manner.
Results of Operations
1997 (Successor Company) Compared with 1996 (Successor
Company/Predecessor Company Combined)
Consolidated revenues increased 13.9% to $101.1 million in 1997 from
$88.8 million in 1996, with funeral service revenues increasing 6.2% to $78.7
million, and cemetery revenues increasing 52.4% to $22.4 million from $14.7
million in 1996. Consolidated operating income increased from $12.8 million in
1996, before the $6.3 million legal settlement with Jeffrey Gamble, to $24.1
million in 1997. Funeral revenues increased primarily as a result of
restructured pricing, merchandising of merchandise display areas and from a
commission of approximately $3.1 million on converting a funeral trust to
insurance. On same-store business, excluding 1997 acquisitions, total calls
decreased by 516 from 18,583 calls in 1996 to 18,067 calls in 1997 and average
revenue per call increased by $437 from $3,459 in 1996 to $3,896 in 1997.
Cemetery revenues increased primarily due to increased pre-need sales efforts in
Alabama, Florida and Tennessee.
Consolidated contribution margin of $38.6 million increased 35.9% in
1997 from $28.4 million in 1996, with funeral contribution margin of 40.3% in
1997 compared to 32.8% in 1996 and cemetery contribution margin of 30.9% in 1997
compared to 27.7% in 1996. Contribution margin is defined as a percentage of
funeral revenues or cemetery revenues, as the case may be, less related cost of
sales (including direct operating expenses).
Corporate and regional general and administrative expense decreased to
$3.3 million in 1997 from $6.7 million in 1996. As a percentage of consolidated
revenue, general and administrative expense decreased to 3.2% in 1997 from 7.6%
in 1996. Corporate and regional general and administrative expense decreased
primarily due to elimination of corporate development staff as well as
restructured and upgraded more efficient information and accounting systems.
Depreciation and amortization expense increased $2.4 million to $11.2
million in 1997 from $8.8 million in 1996. This increase is primarily the result
of the purchase accounting treatment of the Acquisition.
Interest expense of $23.8 million in 1997 increased by $5.2 million
compared to $18.6 million in 1996, 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.
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 decreased from $14.9 million in 1995 to $6.5 million in 1996,
primarily due to the $6.3 million legal settlement with Jeffrey Gamble. 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 $76 from $3,383 in 1995
to $3,459 in 1996. Cemetery revenues increased due to increased pre-need sales
efforts in Alabama and Florida.
Consolidated operating income of $12.8 million before legal settlement
of $6.3 million increased 13.3% in 1996 from $11.3 million operating income
before change in accounting estimate of $3.5 million in 1995, 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.
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.
Liquidity and Capital Resources
The Company's primary sources of cash since 1995 have been funds
provided by operating activities, proceeds from additional long-term debt and
capital contributions. In 1997, operating activities used $5.7 million of cash
compared to providing $1.3 million of cash in 1996 and $6.0 million in 1995.
In 1997, long-term debt proceeds provided $1.3 million of cash
compared to $190.6 million in 1996 and $10.0 million in 1995. In 1997, the
disposal of assets provided cash of $0.3 million compared to $0.8 million in
1996 and $1.4 million in 1995. In 1997 proceeds from revolving loan provided
$11.2 million.
The primary uses of cash since 1995 have been for the acquisition of
funeral homes and cemeteries, including the Acquisition, principal payments on
long-term debt and capital expenditures. In 1997, the Company purchased 1
funeral home and three cemeteries for an aggregate purchase price of $2.6
million compared to three funeral homes for an aggregate purchase price of $0.7
million in 1996. In 1995, the Company purchased 11 funeral homes for an
aggregate purchase price of $8.9 million. In 1997, the Company sold three
funeral homes for $2.0 million.
In 1997 and 1996, the Company used $3.2 million for capital
expenditures and $1.6 million in 1995. In 1997, the Company paid $4.6 million in
principal payments on long-term debt, principally relating to repayment of
former owner obligations, compared to $114.7 million in 1996 which principally
related to the refinancing of the indebtedness of Old Prime and $7.7 million in
1995. In 1997 the company used $1.4 million for the acquistion of the
Predecessor Company compared to $196.3 million in 1996.
The Company estimates that capital expenditures will be approximately
$1.5 million in 1998 to be used in part for the repair and improvement of
existing facilities. The Company also expects to invest approximately $1.8
million in 1998 for cemetery inventory development.
Contemporaneously with the consummation of the Acquisition in 1996,
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 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 will be 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 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 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, 1997, the Company had $203 million of indebtedness
outstanding and approximately $9.7 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 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PRIME SUCCESSION, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996 AND FOR
THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIODS FROM JANUARY 1, 1996 THROUGH
AUGUST 25, 1996 AND FROM AUGUST 26, 1996 THROUGH DECEMBER 31, 1996:
Independent Auditors' Report.................................................15
Financial Statements:
Consolidated Balance Sheets.............................................16
Consolidated Statements of Operations.................................. 18
Consolidated Statements of Shareholders' Equity.........................19
Consolidated Statements of Cash Flows...................................20
Notes to Consolidated Financial Statements..............................22
PRIME SUCCESSION, INC. AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1995:
Report of Independent Auditors...............................................38
Financial Statements:
Consolidated Statements of Operations.................................. 39
Consolidated Statements of Shareholders' Equity.........................40
Consolidated Statements of Cash Flows...................................41
Notes to Consolidated Financial Statements..............................42
Schedule II - Valuation and Qualifying Accounts..............................65
All other schedules have been omitted as not applicable or not required.
<PAGE>
Independent Auditors' Report
Board of Directors
Prime Succession, Inc.:
We have audited the accompanying consolidated balance sheets of Prime
Succession, Inc. and subsidiaries (Successor Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1997 and 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). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 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, 1997 and 1996, and
the results of their operations and their cash flows for the year ended December
31, 1997 and 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 consolidated financial schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein for the years ended December 31, 1997 and 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 6, 1998
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
December 31
1997 1996
Assets
<S> <C> <C>
Cash and cash equivalents $1,555,415 $2,985,704
Restricted cash -- 4,388,837
Receivables:
Trade, less allowance of $2,647,693 and $2,834,438 13,073,005 11,286,384
Other 4,492,005 785,586
---------------- ----------------
Total receivables 17,565,010 12,071,970
Inventories:
Merchandise 3,836,994 2,951,913
Cemetery lots and mausoleum spaces 1,693,530 1,115,342
---------------- ----------------
Total inventories 5,530,524 4,067,255
---------------- ----------------
Prepaids and other current assets 319,000 354,576
Prepaid fees to shareholders (note 4) -- 375,000
Deferred income taxes (note 9) 723,566 371,249
---------------- ----------------
Total current assets 25,693,515 24,614,591
---------------- ----------------
Property and equipment:
Land and land improvements 16,190,801 16,101,845
Buildings and improvements 47,313,605 45,664,076
Equipment, furniture and fixtures 9,051,236 7,363,265
Accumulated depreciation (3,165,322) (741,179)
---------------- ----------------
Net property and equipment 69,390,320 68,388,007
---------------- ----------------
Developed cemetery properties 12,996,135 12,951,162
Undeveloped cemetery properties 31,902,345 30,616,355
Goodwill, less accumulated amortization of $7,482,615 and $1,789,876 222,086,427 228,215,892
Other intangible assets, less accumulated amortization of $5,866,178 and
$1,548,680 23,147,315 27,621,587
Long-term receivables, less allowance of $3,288,268 and $2,731,216 9,318,513 5,584,119
Other assets 571,615 796,489
---------------- ----------------
$395,106,185 $398,788,202
================ ================
See accompanying notes to consolidated financial statements.
<PAGE>
Prime Succession, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
December 31
1997 1996
Liabilities and Shareholders' Equity
Accounts payable $2,679,090 $2,695,283
Other accrued expenses 8,441,985 11,255,743
Current installments of obligations under agreements with former owners 2,369,684 3,326,127
(note 5)
Current installments of long-term debt (note 6) 1,389,530 5,253,936
Due to related party (note 4) 83,333 --
---------------- ----------------
Total current liabilities 14,963,622 22,531,089
---------------- ----------------
Deferred merchandise liabilities and revenues, less trust fund deposits 17,600,097 19,612,190
Obligations under agreements with former owners, less current installments 15,259,919 17,568,971
(note 5)
Long-term debt, less current installments (note 6) 201,580,635 189,752,128
Deferred income taxes (note 9) 16,770,180 18,316,831
Other long-term liabilities (note 12) 2,690,510 4,402,013
Shareholders' equity (note 7):
Common stock, par value $.01 per share, 1,000 shares authorized;
100 issued and outstanding shares 1 1
Additional paid-in capital 129,047,493 129,554,499
Accumulated deficit (2,806,272) (2,949,520)
---------------- ----------------
Total shareholders' equity 126,241,222 126,604,980
---------------- ----------------
Commitments and contingencies (notes 10, 11 and 12)
$395,106,185 $398,788,202
================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Statements of Operations
For the year ended December 31, 1997 and periods from January 1,1996
through August 25, 1996 and from August 26, 1996 through December 31,1996
Successor Predecessor
Company
Company
----------------------------------- --------------
Year August 26, January 1,
Ended 1996 through 1996 through
December 31, December 31, August 25,
1997 1996 1996
---------------- ------------------ --------------
<S> <C> <C> <C>
Revenues:
Funeral services (note 8) $78,698,491 $26,805,617 $47,281,120
Cemetery sales 22,440,769 5,845,936 8,834,774
---------------- ------------------ --------------
101,139,260 32,651,553 56,115,894
Costs and expenses:
Funeral homes 47,005,645 17,514,919 32,257,977
Cemetery 15,517,734 4,070,525 6,546,474
---------------- ------------------ --------------
62,523,379 21,585,444 38,804,451
Corporate and regional general and administrative
expenses 3,250,451 2,089,994 4,637,919
Depreciation and amortization 11,241,934 3,483,901 5,341,150
Legal settlement (note 3) -- -- 6,344,313
---------------- ------------------ --------------
Operating income 24,123,496 5,492,214 988,061
---------------- ------------------ --------------
Other expenses:
Interest expense, including amortization of deferred
loan costs of $1,792,884, $622,473 and $360,269 23,843,345 8,539,585 10,059,415
Other -- 98,015 39,315
---------------- ------------------ --------------
23,843,345 8,637,600 10,098,730
---------------- ------------------ --------------
Income (loss) before income taxes 280,151 (3,145,386) (9,110,669)
Income tax benefit (expense) (note 9) (136,903) 195,866 (364,796)
---------------- ------------------ --------------
Net income (loss) 143,248 (2,949,520) (9,475,465)
Redeemable Preferred Stock dividend requirements -- -- (277,111)
---------------- ------------------ --------------
Net income (loss) attributable to common shareholders $143,248 $(2,949,520) $(9,752,576)
================ ================== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the year ended December 31, 1997 and periods from January 1, 1996 through
August 25, 1996 and from August 26, 1996 through December 31,1996
Predecessor
Company
Common Successor
Stock Company Additional Total
--------------------
Class A Class B Common Paid-in Accumulated Shareholders'
Stock 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 (note 7) $ - $ - $ 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
Receivable due from parent
company (note 4) - - - (507,006) - (507,006)
Net income for the year ended
December 31, 1997 - - - - 143,248 143,248
======== ======== =========== ============= ============== ============
Balance as of December 31, 1997 $ - $ - $ 1 $ 129,047,493 $ (2,806,272) $ 126,241,222
======== ======== =========== ============= ============== ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the year ended December 31, 1997 and the periods from January 1,
1996 through August 25, 1996 and from August 26, 1996 through December 31, 1996
<S> <C> <C> <C>
Successor Predecessor
Company Company
------------------------------------ ---------------------
Year August 26, January 1,
ended 1996 through 1996 through
December 31, December 31, August 25,
1997 1996 1996
------------------ ----------------- ---------------------
Cash flows from operating activities:
Net income (loss) $ 143,248 $ (2,949,520) $ (9,475,465)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 13,034,818 4,106,374 5,701,419
Provision for doubtful accounts 3,217,492 970,172 991,798
Provision for deferred income taxes (1,898,968) (141,369) 155,227
Legal settlement -- -- 6,344,313
Payment on legal settlement -- (5,344,313) (1,100,000)
Changes in operating assets and liabilities
net of effects of acquisition of subsidiaries:
Receivables (10,444,182) (3,359,542) (211,649)
Inventories (1,561,711) 493,059 (68,444)
Accounts payable and accrued expenses (3,656,309) 3,037,740 887,452
Deferred merchandise liabilities and (2,005,471) 505,549 2,475,263
revenue (net)
Other long-term liabilities (1,752,945) 1,021,741 (446,222)
Other (766,522) (323,179) (1,947,562)
------------- -------------- --------------
Net cash provided by (used in) operating activities (5,690,550) (1,983,288) 3,306,130
------------------ ----------------- ---------------------
Cash flows from investing activities:
Proceeds from the disposal of assets 265,731 674,633 152,205
Purchases of property and equipment (3,203,500) (2,100,108) (1,087,432)
Net cash received for sale of business 2,041,033 -- --
Net cash paid for purchase of business (2,606,951) -- (675,000)
----------------- -------------- --------------
Net cash used in investing activities (3,503,687) (1,425,475) (1,610,227)
------------------ ----------------- ---------------------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the year ended December 31, 1997 and the periods from January 1,
1996 through August 25, 1996 and from August 26, 1996 through December 31, 1996
<S> <C> <C> <C>
Successor Predecessor
Company Company
------------------------------------ ---------------------
Year August 26, January 1,
ended 1996 through 1996 through
December 31, December 31, August 25,
1997 1996 1996
------------------ ----------------- ---------------------
Cash flows from financing activities:
Proceeds from long-term debt 1,309,782 190,000,000 618,000
Proceeds from bank indebtedness under revolving loan 11,200,000 -- --
Payments on long-term debt (4,621,844) (111,506,428) (3,219,194)
Payments on obligations under agreements with former
owners (3,160,498) (2,346,269) (1,444,015)
Capital contributions -- -- 3,000,000
Issuance of common stock -- 129,554,500 --
Acquisition of Predecessor Company (1,352,329) (196,335,542) --
Decrease (increase) in restricted cash 4,388,837 (4,388,837) --
------------- -------------- --------------
Net cash provided by (used in) financing activities 7,763,948 4,977,424 (1,045,209)
------------- -------------- --------------
Net increase(decrease) in cash and cash equivalents (1,430,289) 1,568,661 650,694
Cash and cash equivalents at beginning of period 2,985,704 1,417,043 766,349
------------- -------------- --------------
Cash and cash equivalents at end of period $ 1,555,415 $ 2,985,704 $ 1,417,043
================== ================= =====================
Supplemental cash flow information: Cash paid during the year for:
Income taxes $ 136,624 $ 210,846 $ 248,677
================== ================= =====================
Interest $ 21,906,096 $ 4,644,749 $ 8,483,810
================== ================= =====================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(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 was approximately $320 million of which
approximately $130 million was contributed by Blackstone and
Loewen, 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 will be 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.
Year ended December 31,
------------------------------------
1995 1996
----------------- ----------------
Revenue $ 85,400,000 $ 88,900,000
================= ================
Net loss $ (11,300,000) $ (18,300,000)
================= ================
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)
<PAGE>
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.
In 1997, the Company purchased one funeral home and three
cemeteries for an aggregate purchase price of $2.6 million and
sold three funeral homes for $2.0 million. The acquisitions and
dispositions had an immaterial effect on the consolidated
financial statements for the year ended December 31, 1997.
The Company is fifth-largest operator of funeral homes and
cemeteries, on the basis of revenues, in the United States and is
the largest privately-held company in the funeral and cemetery
industry. The Company owns 143 funeral homes and 19 cemeteries in
20 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 at December 31,
1996 was segregated from cash and cash equivalents on the
balance sheet as a separate caption. The use of this cash,
which was deposited at several financial institutions, was
restricted for the prepayment of certain former owner debt and
the collateralization of a letter of credit of approximately
$3,940,000 and $450,000, respectively.
(Continued)
<PAGE>
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 6% to 18% 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)
<PAGE>
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 it
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. 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).
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(i) Revenue Recognition - Funeral Services and Merchandise, Continued
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 $9,300,000 and $4,000,000 as of December
31, 1997 and 1996, of which $5,300,000 and $600,000 was deferred, net of
amortization, by the Successor Company for the year ended December 31, 1997
and from August 26, 1996 through December 31, 1996, respectively. 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, 1997 and 1996, the amount held in
merchandise trust funds was approximately $9,600,000 and $4,500,000. The
Company recognizes currently the earnings on amounts withdrawn from these
trusts; approximately $400,000, $130,000 and $70,000 for the year ended
December 31, 1997 and for the periods from January 1, 1996 through August
25, 1996 and from August 26, 1996 through December 31, 1996. 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.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(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, 1997 and 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-termdebt, 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) Reclassifications
Certain reclassifications have been made to the 1996 amounts to conform to
the 1997 presentation.
(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.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(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
pays Loewen $250,000 annually as a prepayment for services. The term of the
Agreement is eight years and allows for annual increases up to 2.5% on the
$250,000 base fee 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.
The Company advances funds to Prime Succession Holdings, Inc. ("Holdings"),
the parent company, in order to pay an annual monitoring fee to Blackstone,
board of directors fee and related expenses. At December 31, 1997 the
amount due from parent consists of the 1998 monitoring fee of $250,000, the
1997 monitoring fee of $167,000 ($83,000 was paid by the Company on behalf
of Holdings in 1996) and directors fees and related expenses of
approximately $90,000. This amount is classified in the shareholders'
equity section of the consolidated balance sheet as a reduction to
additional paid in capital.
At December 31, 1996, the Company recorded a prepaid asset of $167,000
related to the monitoring fee, as the fee is payable in advance.
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 in connection with the
Acquisition equal to $1,000,000.
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
<S> <C> <C>
(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:
December 31, December 31,
1997 1996
----------------- -----------------
Obligations under covenants not to compete, amounts payable monthly
with final installments in January 1998 through
December 2010. Obligations have been discounted at 13% $ 13,648,131 $ 16,843,386
Obligations under consulting agreements, amounts payable
monthly with final installments in February 1999 through
December 2014. Obligations have been discounted at 13% 3,981,472 4,051,712
----------------- -----------------
17,629,603 20,895,098
Less current installments 2,369,684 3,326,127
----------------- -----------------
$ 15,259,919 $ 17,568,971
================= =================
As of December 31, 1997 and 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, 2002
and thereafter are as follows:
1998 $ 2,369,684
1999 2,434,452
2000 2,688,354
2001 2,731,124
2002 and thereafter 7,405,989
=================
$ 17,629,603
=================
Certain of the obligations are collateralized by letters of credit of approximately $4,100,000
(see note 6).
Interest paid on obligations under agreements with former owners was approximately $2,410,000,
$830,000 and $1,450,000 for the year ended December 31, 1997 and the periods from August 26, 1996
through December 31, 1996 and January 1, 1996 through August 25, 1996.
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
<S> <C> <C>
(6) Long-Term Debt
Long-term debt consists of:
December 31, December 31,
1997 1996
-------------------- --------------------
Revolving credit loan payable to bank $ 11,200,000 $ --
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%. 100,000,000 100,000,000
Term loans, interest payable quarterly and principal payable semi-annually
from February 1, 1997 through August 1, 2003 (8.93% and 8.67% interest
rate at December 31, 1997 and 1996, respectively).
89,000,000 90,000,000
Other 2,770,165 5,006,064
-------------------- --------------------
202,970,165 195,006,064
Less current installments 1,389,530 5,253,936
-------------------- --------------------
Long-term debt, excluding current installments $201,580,635 $189,752,128
==================== ====================
</TABLE>
As of December 31, 1997, 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 publicly registered 10 3/4% Senior
Subordinated Notes due 2004 for the $100,000,000 outstanding Senior
Subordinated Notes due 2004.
As of December 31, 1997, the Company had $89,000,000 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.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
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 then $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.
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. As of December 31, 1997, there is a commitment fee of 0.5% on
the unused portion of the credit line. There were outstanding letters of
credit of approximately $4,100,000 and borrowings of $11,200,000 on the
line of credit bearing interest at 2.75% and 8.71%, respectively. There
were outstanding letters of credit of approximately $5,400,000 and no
borrowings on the line of credit 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 $2,800,000 and $5,000,000 of other debt
outstanding as of December 31, 1997 and 1996, respectively. Approximately
$740,000 of this other debt, as of December 31, 1997, is due to a former
owner with a rate of 9%. Approximately $3,900,000 of other debt as of
December 31, 1996 was 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 approximately $2,000,000 and
recorded a purchase accounting adjustment of approximately $200,000. As of
December 31, 1997 and 1996, approximately $1,700,000 and $1,800,000 of the
former owner notes have been extinguished through defeasance, respectively.
As of December 31, 1997 and 1996, the carrying amount of long-term debt
approximates fair value.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
The approximate aggregate principal maturities of long-term debt for the
five years ending December 31, 2002 and thereafter are as follows:
1998 $ 1,389,530
1999 1,275,578
2000 4,327,440
2001 20,353,701
2002 and thereafter 175,623,916
$202,970,165
Interest paid on long-term debt was approximately $19,300,000, $2,300,000
and 6,860,000 for year ended December 31, 1997 and the periods from August
26, 1996 through December 31, 1996 and from January 1, 1996 through August
25, 1996, respectively.
(7) Shareholders' Equity
As of December 31, 1997 and 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.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(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, 1997 and 1996 was approximately $53,200,000 and
$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, 1997 and 1996 the amount invested in insurance contracts
was approximately $9,100,000 and $8,100,000.
In December 1997, the Company entered into an agreement to transfer
approximately $17,000,000 of assets held in trust to another trustee, that
will invest the funds in life insurance. As a result, the Company earned a
commission of approximately $3,100,000, which was recorded as funeral
revenue in 1997.
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:
Successor PredecessorCompany
Company
-------------------------------------- -------------------
Period from Period from
Year August 26, January 1,
ended 1996 through 1996 through
December 31, December 31, August 25,
1997 1996 1996
----------------- ----------------- -------------------
Federal:
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred -- (163,330) 138,887
State:
Current 136,903 (54,497) 209,569
Deferred -- 21,961 16,340
----------------- ----------------- -----------------
$136,903 $(195,866) $364,796
================= ================= ===================
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
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:
Successor Predecessor
Company Company
------------------------------------ ------------------
Period from Period from
Year August 26, January 1,
ended 1996 through 1996 through
December 31, December 31, August 25,
1997 1996 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ 95,251 $(1,069,431) $(3,097,627)
Increase (decrease) in taxes resulting from:
Goodwill amortization 1,235,793 536,610 211,146
State taxes, net of federal income taxes 90,356 (21,474) 149,100
Valuation allowance (789,571) 338,094 3,197,841
Purchase price adjustments (529,956) -- --
Other 35,030 20,335 (95,664)
----------------- ----------------- ------------------
Actual income tax expense (benefit) $ 136,903 $ (195,866) $ 364,796
================= ================= ==================
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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:
December 31, December 31,
1997 1996
----------------------- -----------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryfoward $7,641,494 $6,820,198
Allowance for doubtful accounts 2,257,810 1,985,853
Covenants not to compete and consulting
agreements 1,813,013 2,004,679
Deferred funeral charges 977,814 3,432,676
Accrued other expenses 119,462 747,484
Environmental reserve 211,720 313,500
Other 394,444 411,310
----------------------- -----------------------
Total gross deferred tax assets 13,415,757 15,715,700
Less valuation allowance 9,619,193 10,408,764
----------------------- -----------------------
Total deferred tax assets 3,796,564 5,306,936
----------------------- -----------------------
Deferred tax liabilities:
Cemetery property, principally due to purchase
accounting 11,734,089 12,016,531
Property and equipment, principally due to
purchase accounting and differences in depreciation 6,413,368 8,376,737
Goodwill, principally due to differences in amortization 1,695,721 1,929,769
Prepaid loan costs -- 735,484
Other -- 193,997
----------------------- -----------------------
Total deferred tax liabilities 19,843,178 23,252,518
----------------------- -----------------------
Net deferred tax liability $16,046,614 $17,945,582
======================= =======================
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and
1996 was $9,619,193 and $10,408,764, respectively. The net change in total
valuation allowance for the year ended December 31, 1997 and 1996 was a
decrease of $789,571 and an increase of $7,457,391, respectively. 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 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, 1997 and 1996 is appropriate.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
Subsequently recognized tax benefits of $2,022,489 relating to the
valuation allowance for deferred tax assets as of December 31, 1997 and
1996 will be allocated to goodwill.
As of December 31, 1997 and 1996, the Company has a net operating loss
carryforward of approximately $20,110,000 and $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 2012.
(10) Leases
The Company leases primarily funeral home facilities and vehicles under
various noncancellable 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, 1997 are as
follows:
1998 $ 2,785,687
1999 2,349,665
2000 2,051,347
2001 1,626,677
2002 and thereafter 6,135,638
==================
$ 14,949,014
==================
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 $2,620,000,
$1,030,000 and $1,930,000 for the year ended December 31, 1997 and the
periods from August 26, 1996 through December 31, 1996 and from January 1,
1996 through August 25, 1996, respectively, of which approximately 14%, 14%
and 15%, respectively, was paid to former owners currently employed by the
Company.
(Continued)
<PAGE>
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 year ended December 31, 1997, the
period from August 26, 1996 through December 31, 1996 and from January 1,
1996 through August 25, 1996 was approximately $260,000, $62,000 and
$95,000, 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 $8,000,000, $2,300,000 and $5,100,000 for the
year ended December 31, 1997 and the periods from August 26, 1996 through
December 31, 1996 and from January 1, 1996 through August 25, 1996,
respectively.
The Company has accrued $537,000 and $825,000 as of December 31, 1997 and
1996 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 as of
December 31, 1997, for clean-up or removal is $476,000 to $850,000, with
$537,000 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.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Prime Succession, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Prime Succession, Inc. and subsidiaries
for the year ended December 31, 1995. Our audit also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and this schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of Prime Succession, Inc. and
subsidiaries operations and their cash flows for the year 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 adjustment 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 11, as
to which the date is
June 14, 1996
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended
December 31,
-------------
1995
-------------
Revenues:
Funeral services $68,623,948
Cemetery sales 12,890,745
-------------
81,514,693
Cost of sales:
Funeral homes 11,312,913
Cemetery 2,479,450
Cumulative effect of change
in accounting estimate (Note 5) (3,552,000)
------------
10,240,363
Operating expenses:
Funeral homes 35,765,303
Cemetery 7,314,657
------------
43,079,960
Corporate and regional general and administrative expenses 6,108,842
Depreciation and amortization 4,440,261
Covenants not to compete 2,770,817
------------
Operating income 14,874,450
Other income and expense:
Interest expense 15,401,048
Other income, net (172,082)
------------
15,228,966
Loss before income taxes (354,516)
Income tax benefit (expense) (308,624)
------------
Net loss (663,140)
Redeemable Preferred Stock dividend requirements (352,260)
============
Net loss attributable to common shareholders $(1,015,400)
============
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Retained
-----------------------
Class A Class B Additional Earnings
--------- ---------
Amount Amount Paid-In (deficit)
Capital
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1,1995 $ 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)
========= ========= =============== ==============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<S> <C>
Year ended December 31,
-----------------------------
1995
Operating activities
Net loss $ (663,140)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 2,549,399
Amortization 5,456,104
Provision for doubtful accounts 973,561
Provision for deferred income taxes 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 (2,103,297)
Inventories 548,877
Accounts payable and accrued expenses (1,052,504)
Deferred merchandise and revenue (net) 2,518,817
Other 1,409,655
--------------
Net cash provided by operating activities 5,959,958
Investing activities
Proceeds from the disposal of assets 1,436,849
Purchases of property and equipment (1,561,564)
Net cash paid for purchases of businesses (8,931,865)
--------------
Net cash used in investing activities (9,056,580)
Financing activities
Proceeds from long-term debt 9,994,034
Payments on long-term debt (7,725,492)
Payments on obligations under agreements with former owners (2,031,248)
--------------
Net cash provided by financing activities 237,294
--------------
Decrease in cash and cash equivalents (2,859,328)
Cash and cash equivalents at beginning of period 3,625,677
==============
Cash and cash equivalents at end of period
$ 766,349
==============
See accompanying notes.
</TABLE>
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 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 11), 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.
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 1995
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and subsidiaries after elimination of intercompany accounts and
transactions.
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
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.
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 1995
3. Significant Accounting Policies--(Continued)
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 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. 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.
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 1995
3. Significant Accounting Policies--(Continued)
Funeral Services, Continued
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 in 1995.
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.
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. The Company recognizes currently the earnings on amounts deposited in
these trusts; $187,834 in 1995. 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.
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 1995
4. Acquisitions
During 1995, the Company purchased the following funeral homes:
<S> <C> <C> <C>
Date Name Location Entity
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
</TABLE>
The total consideration paid was approximately $8,932,000 in 1995 of
which $7,692,000 was financed through borrowings. In 1995, the Company acquired
assets, excluding goodwill, with fair values aggregating approximately
$4,413,000 and assumed liabilities of $194,000. 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. 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 1995.
; Year ended
December 31,
----------------------
1995
(Unaudited)
Revenues $85,386,185
----------------------
Net Loss $ (82,887)
======================
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 1995 and is not intended
to be a projection of future results or trends.
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 1995
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:
Year ended
December 31,
------------------
1995
Federal:
Deferred $ 81,581
State:
Current 227,043
------------------
$308,624
==================
<TABLE>
<CAPTION>
The differences between the U.S. federal statutory tax rate and the Company's effective rate are as follows:
Year Ended December 31,
-------------------------------
1995
<S> <C>
Computed income tax at the applicable federal statutory income tax rate $ (120,535)
Goodwill amortization 242,755
Change in estimate of deferred merchandise liability (1,207,680)
State taxes, net of federal benefit 149,848
Valuation allowance 1,198,463
Other 45,773
===============
Income tax expense $ 308,624
===============
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 1995
<S> <C>
7. Long-Term Debt
Long-term debt is as follows:
December 31, 1995
-----------------------
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 litigation settled by the
Company in 1996 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 at December 31, 1995 there 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.
<PAGE>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended December 31, 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.
Interest paid was approximately $14.9 million for the year ended
December 31, 1995.
8. Leases
At December 31, 1995 the Company had entered into several operating
leases, which are primarily for funeral home facilities and vehicles. 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 $2,469,000
in 1995 of which approximately 34% was paid to former owners currently employed
by the Company.
9. 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.
10. 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 1995 was $145,000, respectively.
11. 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.
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.
<PAGE>
<TABLE>
<CAPTION>
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 19, 1998, are as follows:
<S> <C> <C>
Name Age Position
Gary L. Wright.......................................52 President and Chief Executive Officer, Director
Myles S. Cairns......................................43 Chief Financial Officer, Secretary and Treasurer
Gregory M. Hilgendorf................................48 North Central Regional Vice President
Robert G. Salerno....................................55 Western Regional Vice President
Bruce L. Woodard.....................................37 Central Regional Vice President
Joseph E. Franckewitz................................42 Vice President of Pre-Need Sales
Warren B. Rudman.....................................67 Director
Howard A. Lipson.....................................34 Director
David I. Foley.......................................30 Director
Chinh E. Chu.........................................31 Director
Peter K. Grunebaum...................................64 Director
Clifford R. Hinkle...................................49 Director
Mr. John Woodard resigned from the board effective February 12, 1998 for personal reaons.
Mr. Bruce Woodard and Mr. John Woodard are not related.
</TABLE>
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, managing the operations of over 100 funeral
home locations, since June 1993. Previously, he served as Loewen's Regional
Manager for the Pacific Northwest, managing 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 Eastern 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 and owner five Olson Funeral Homes
from 1982 until its acquisition by the Company in 1992.
Robert G. Salerno has served as Western Regional Vice President of the Company
since 1993, overseeing operations in Arizona, California, Texas and Wyoming.
Prior thereto, Mr. Salerno served in various capacities at Pierce Brothers,
beginning in 1960, including Manager, Area Vice President and Senior Vice
President.
Bruce L. Woodard has served as Central Regional Vice President of The Company
since 1992, overseeing operations in Arkansas, Iowa, Michigan, Minnesota,
Missouri, Nebraska and New York. 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
July 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.
David I. Foley is an Associate of The Blackstone Group L.P. and currently works
in Blackstone's Principal Investment Group. Prior to joining Blackstone in 1995,
Mr. Foley was with AEA Investors, Inc. and The Monitor Company.
Chinh E. Chu is a Vice President 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 can 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.
<PAGE>
<TABLE>
<CAPTION>
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth for the fiscal year ended December 31,
1997 the compensation paid by the Company to its Chief Executive Officer and
each of the other most highly compensated executive officers of the Company.
<S> <C> <C> <C> <C>
Year
Ended All Other
Name and Principal Position December 31, Salary Bonus Compensation(2)
Gary L. Wright(1) 1997 $225,000 $50,000 $9,055
President and Chief Executive 1996 82,471 -- 2,077
Officer, Director 1995 -- -- --
Myles S. Cairns(1) 1997 $225,000 $50,000 $9,535
Chief Financial Officer, 1996 81,105 -- 2,077
Secretary, Treasurer 1995 -- -- --
Gregory M. Hilgendorf 1997 $120,000 $-- $ --
Eastern Regional Vice President 1996 93,462 -- 16,048
1995 85,000 139,471 1,557
--
Peter D. Cooper 1997 $ 84,000 $-- $1,855
Counsel 1996 130,000 55,000 600
1995 130,000 -- 600
Robert G. Salerno 1997 $90,000 $-- $1,855
Western Regional Vice President 1996 88,846 40,000 2,420
1995 76,930 -- --
Bruce L. Woodard 1997 $90,769 $ -- $1,855
Central Regional Vice President 1996 56,462 30,000 2,119
1995 45,489 -- --
Joseph E. Franckewitz 1997 $156,000 $20,000 $9,515
Vice President, Sales 1996 66,000 20,000 1,962
(1) For information concerning the compensation of the current executive
officers of the Company, see "Employment Agreements" below.
(2) 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.
</TABLE>
Employment Agreements
The Company has entered into contracts 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 $34.4 million and $37.1 million for 1997 and 1998,
respectively. The target for the following years will be set by the Board.
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:
Name And Address Of Beneficial Owner Number Of Shares Percentage
Of Common Stock
--------------- ---------------
Blackstone Management Associates II
L.L.C.(1) 764.70589 76.5%
Loewen Group International, Inc.(2) 235.29411 23.5%
Gary L. Wright(7) -- --
Warren B. Rudman(3) -- --
Howard A. Lipson(4) -- --
David I. Foley(4) -- --
Chinh E. Chu(4) -- --
Peter K. Grunebaum(5) -- --
Clifford R. Hinkle(6) -- --
Directors and executive officers as a -- --
group(7) (12 persons)
(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., 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. Blackstone Management
Associates II L.L.C. is also the sole stockholder 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. Blackstone Management Associates II L.L.C.
disclaims beneficial ownership of such shares of Old Prime Common Stock.
The address for the Blackstone entities is c/o Blackstone Group L.P., 345
Park Avenue, New York, N.Y. 10154.
(2) The address for Loewen is 3190 Tremont Avenue, Trevose, Pennsylvania
19053-6693
(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.
(4) Messrs. Lipson, Foley 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. Mr. Lipson disclaims beneficial ownership of any such shares of
Common Stock beneficially owned by Blackstone Management Associates II
L.L.C.
(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.
<PAGE>
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 the Company's Registration Statement on Form
S-4 with respect to the Exchange Notes, which is incorporated by reference
herein.
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.
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.
<PAGE>
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 extend 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,
Messrs. Wright and Cairns and certain other officers of the Company (the "PSIM
Limited Partners") subscribed for limited partnership interest in PSIM and PSI
P&S subscribed for a general partnership interest in PSIM, the proceeds of which
subscriptions PSIM used to purchase approximately 0.7% of the Old Prime common
stock (the "PSIM-Owned Stock").
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, the proceeds of which
loan PSIM used to make a loan to each of the PSIM Limited Partners. 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.
<PAGE>
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 14 of this report.
(b) Reports on Form 8-K. None.
(c) Exhibits.
Exhibit
Number Document Description
2* 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.
3.1* Certificate of Incorporation of Blackhawk Acquisition
Corp.
3.2* Certificate of Amendment of Certificate of
Incorporation of Blackhawk Acquisition Corp.
changing its name to Prime Succession
Acquisition Corp.
3.3* Certificate of Amendment of Certificate of
Incorporation of Prime Succession
Acquisition Corp. changing its name to Prime
Succession, Inc.
3.4* By-Laws of Prime Succession, Inc.
4.1* Indenture dated as of August 15, 1996 between
Prime Succession Acquisition Corp. and
United States Trust Company of New York, as
Trustee
4.2* Form of 10 3/4% Senior Subordinated Note due 2004
(included in Exhibit 4.1)
10.1(a)* Casket Supply Agreement, dated January 1, 1993,
between Batesville Casket Company, Inc. and Prime
Succession, Inc.
10.1(b)* Amendment Agreement, dated August 1994, between
Batesville Casket Company, Inc. and Prime Succession,
Inc. (with respect to Casket Supply Agreement)
10.1(c)* Amendment 2, dated May 22, 1995, between Batesville
Casket Company, Inc. and Prime Succession, Inc.(with
respect to Casket Supply Agreement)
10.2* Stockholders' Agreement dated as of August 26,
1996 among Prime Succession, Inc. (to be
renamed Prime Succession Holdings, Inc.),
Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital
Partners II L.P., Blackstone Family Investment
Partnership II L.P., PSI Management Direct
L.P. and Loewen Group International, Inc.
10.3* Administrative Services Agreement dated as of
August 26, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession,
Inc.) and Loewen Group International, Inc.
10.4* Credit Agreement dated as of August 26, 1996
among Prime Succession, Inc. (to be renamed
Prime Succession Holdings, Inc.), Prime
Succession Acquisition Corp. (to be renamed
Prime Succession, Inc.), Goldman, Sachs & Co.,
as syndication agent and arranging agent, the
financial institutions from time to time
parties thereto as lenders and The Bank of
Nova Scotia, as administrative agent for such
lenders
10.5* Letter Agreement dated August 1, 1996 between Prime
Succession Acquisition Corp. (to be renamed Prime
Succession, Inc.) and Gary Wright.
10.6* Letter Agreement dated August 1, 1996 between Prime
Succession Acquisition Corp. (to be renamed Prime
Succession, Inc.) and Myles Cairns
10.7* Put/Call Agreement, dated as of August 26, 1996,
among Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital
Partners II L.P., Blackstone Family Investment
Partnership II L.P., PSI Management Direct L.P.,
Loewen Group International Inc. and the Loewen Group
Inc.
12 Computation of Ratio of Earnings to Fixed Charges
16* Letter from Ernst & Young LLP (independent auditors
prior to the Acquisition) concerning change in
Company's accountants delivered pursuant to Item
304(a) of Regulation S-K.
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) with respect to the
Exchange Notes.
<PAGE>
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
March 19, 1998 Chief Financial Officer, 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 19, 1998 President, Chief Executive Officer
- -------------------------
/s/ MYLES S. CAIRNS
------------------------------------
Myles S. Cairns
Chief Financial Officer, Secretary and Treasurer
March 19, 1998 (principal financial officer; principal
----------------------- accounting officer)
/s/ WARREN B. RUDMAN
------------------------------------
Warren B. Rudman
March 19, 1998 Director
- -------------------------
/s/ HOWARD A. LIPSON
------------------------------------
Howard A. Lipson
March 19, 1998 Director
- -------------------------
/s/ DAVID I. FOLEY
------------------------------------
David I. Foley
March 19, 1998 Director
- -------------------------
/s/ CHINH E. CHU
------------------------------------
Chinh E. Chu
March 19, 1998 Director
- -------------------------
/s/ PETER K. GRUNEBAUM
------------------------------------
Peter K. Grunebaum
March 19, 1998 Director
- --------------------------
/s/ CLIFFORD R. HINKLE
------------------------------------
Clifford R. Hinkle
March 19, 1998 Director
- -------------------------
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<S> <C> <C> <C> <C> <C>
Balance at Charged to Charged to Balance at
Beginning Costs & Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
Current - Allowance for
contract cancellations and
doubtful accounts:
Year ended December 31,
1997 $2,834,438 729,762 -- (916,507) $2,647,693
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
Due after one year - Allowance for contract cancellations and doubtful accounts:
Year ended December 31,
1997 $2,731,216 2,487,730 -- (1,930,678) $3,288,268
1996 $240,704 1,590,125 1,977,607 (1,077,220) $2,731,216
1995 $213,575 -- 27,129 -- $240,704
(1) Revision of allowance resulting from purchase accounting adjustments.
(2) Write-off of doubtful accounts.
</TABLE>
<PAGE>
Exhibit 12
Prime Succession, Inc. and subsidiaries
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor Company
Period from Period from
Jan. 1 Aug. 26
through through
Aug. 25, Dec. 31,
1996 1996
1993 1994 1995 1997
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings
to Fixed
Charges
Earnings:
Income (Loss)
before income
taxes (2,505) (4,656) (355) (9,111) (3,145) 280
Add: Fixed
charges, net 6,650 13,128 16,224 10,691 8,884 24,716
Income before
income taxes
and fixed
charges, net 4,145 8,472 15,869 1,580 5,739 24,996
Fixed Charges:
Total interest
expense (1) 6,418 12,422 15,401 10,059 8,540 23,843
Interest factor
in rents (2) 232 706 823 632 344 873
Total fixed
charges 6,650 13,128 16,224 10,691 8,884 24,716
Ratio of
earnings to
fixed charges 0.6 0.6 1.0 0.1 0.6 1.0
Coverage
deficiency
(surplus) (3) 2,505 4,656 355 9,111 3,145 (280)
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 except 1997 indicated above. Coverage deficiency represents the
excess of fixed charges over income before income taxes and fixed
charges, net. Coverage surplus represents excess income before income
taxes and fixed charges, net over fixed charges.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PRIME SUCCESSION, INC.
AND SUBSIDIARIES, FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
0
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</TABLE>
