_______________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
_______________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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)
(606) 746-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
The number of outstanding shares of Common Stock as of July 30, 1999, was
100.
_______________________________________________________
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TABLE OF CONTENTS
<S> <C> <C>
Page
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS
as of June 30, 1999 and December 31, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended June 30, 1999 and 1998 3
and the Six Months Ended June 30, 1999 and 1998
CONSOLIDATED STATEMENTS of CASH FLOWS
for the Six Months Ended June 30, 1999 and 1998 4
NOTES to INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5
Item 2. MANAGEMENT'S DISCUSSION and ANALYSIS
of FINANCIAL CONDITION and RESULTS of OPERATIONS 6
Part II. OTHER INFORMATION
Item 5. OTHER INFORMATION 12
Item 6. EXHIBITS and REPORTS on FORM 8-K 12
SIGNATURES 12
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PART I
ITEM 1. FINANCIAL STATEMENTS
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
Assets
------
<S> <C> <C>
Cash and cash equivalents $ 838,221 $ 1,146,670
Receivables:
Trade, less allowance of $1,461,500 and $2,086,520 13,773,884 14,718,380
Other 1,160,737 998,020
------------ ------------
Total current receivables 14,934,621 15,716,400
------------ ------------
Inventories:
Merchandise 3,977,819 3,582,912
Cemetery lots and mausoleum spaces 860,132 1,178,137
------------ ------------
Total current inventories 4,837,951 4,761,049
------------ ------------
Prepaids and other current assets 181,375 607,407
Deferred income taxes 588,088 588,088
------------ ------------
Total current assets 21,380,256 22,819,614
------------ ------------
Property and equipment:
Land and land improvements 16,520,594 16,447,209
Buildings and improvements 50,021,755 48,751,390
Equipment, furniture and fixtures 10,587,401 10,221,223
Accumulated depreciation (7,309,496) (5,906,519)
------------ ------------
Net property and equipment 69,820,254 69,513,303
------------ ------------
Developed cemetery properties 14,776,986 14,660,921
Undeveloped cemetery properties 30,992,379 30,992,379
Goodwill, less accumulated amortization of $16,165,056 and $13,222,612 215,123,473 218,065,917
Other intangible assets, less accumulated amortization of $12,007,473 and
$9,953,607 17,160,364 19,263,641
Long-term receivables, less allowance of $5,299,302 and $6,205,730 14,181,191 15,221,081
Other assets 808,254 585,439
------------ ------------
$384,243,157 $391,122,295
============ ============
See accompanying notes to interim consolidated financial statements.
</TABLE>
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<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Accounts payable $ 1,356,572 $ 2,031,580
Other accrued expenses 9,721,711 9,708,454
Current installments of obligations under agreements with former owners 2,788,511 2,732,386
Current installments of long-term debt 2,974,372 1,396,074
Due to related party 208,333 83,333
------------ ------------
Total current liabilities 17,049,499 15,951,827
------------ ------------
Deferred merchandise liabilities and revenues, less trust fund deposits 12,897,192 14,384,071
Obligations under agreements with former owners, less current installments 11,113,750 12,537,499
Long-term debt, less current installments 206,583,301 208,888,446
Deferred income taxes 16,523,017 16,523,017
Other long-term liabilities 3,351,011 3,719,511
Shareholders' equity:
Common stock, par value $.01 per share, 1,000 shares authorized;
100 issued and outstanding shares 1 1
Additional paid-in capital 128,767,633 128,888,394
Accumulated deficit (12,042,247) (9,770,471)
------------ ------------
Total shareholders' equity 116,725,387 119,117,924
------------ ------------
$384,243,157 $391,122,295
============ ============
See accompanying notes to interim consolidated financial statements.
</TABLE>
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<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Funeral services $ 18,052,753 $ 18,489,610 $ 38,927,876 $ 39,103,822
Cemetery sales 4,247,818 6,623,629 9,166,820 12,593,990
------------ ------------ ------------ ------------
22,300,571 25,113,239 48,094,696 51,697,812
Costs and expenses:
Funeral homes 12,385,593 12,371,809 25,067,869 25,103,965
Cemetery 2,629,352 4,411,310 5,906,255 8,389,769
------------ ------------ ------------ ------------
15,014,945 16,783,119 30,974,124 33,493,734
Corporate general and
administrative expenses 861,241 813,101 1,693,847 1,540,146
Depreciation and amortization 2,867,179 2,827,393 5,793,590 5,669,448
------------ ------------ ------------ ------------
Operating income 3,557,206 4,689,626 9,633,135 10,994,484
Other expenses:
Interest expense, including
amortization of deferred loan
costs (see Note 1) 6,003,090 6,076,670 11,855,167 12,182,744
------------ ------------ ------------ ------------
Loss before income taxes (2,445,884) (1,387,044) (2,222,032) (1,188,260)
Income tax expense (31,472) (20,000) (49,744) (37,500)
------------ ------------ ------------ ------------
Net loss $ (2,477,356) $ (1,407,044) $ (2,271,776) $ (1,225,760)
============ ============ ============ ============
See accompanying notes to interim consolidated financial statements.
</TABLE>
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<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,271,776) $ (1,225,760)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,681,115 6,546,394
Depletion of cemetery property 393,942 659,552
(Gain) loss on sale of assets (28,127) 21,364
Provision for deferred income taxes -- (7,653)
Changes in operating assets and liabilities
net of effects of acquisition of subsidiaries:
Receivables (net) 1,821,668 (1,215,629)
Inventories (586,908) (677,280)
Accounts payable and accrued expenses (661,751) (1,931,348)
Deferred merchandise liabilities and revenue (net) (1,690,022) (6,062)
Other long-term liabilities (368,500) 1,354,818
Other 252,791 29,138
------------ -----------
Net cash provided by operating activities 3,542,432 3,547,534
------------ -----------
Cash flows from investing activities:
Proceeds from the disposal of assets 150,768 449,144
Purchases of property and equipment (1,900,989) (1,735,844)
Net cash received for sale of business -- 250,000
Net cash paid for purchase of business -- (400,000)
----------- -----------
Net cash used in investing activities (1,750,221) (1,436,700)
Cash flows from financing activities:
Net payments of bank indebtedness under revolving loan -- (700,000)
Payments on long-term debt (733,036) (644,632)
Payments on obligations under agreements with former owners (1,367,624) (1,256,664)
----------- -----------
Net cash used in financing activities (2,100,660) (2,601,296)
----------- -----------
Net decrease in cash and cash equivalents (308,449) (490,462)
Cash and cash equivalents at beginning of period 1,146,670 1,555,415
----------- -----------
Cash and cash equivalents at end of period $ 838,221 $ 1,064,953
See accompanying notes to interim consolidated financial statements.
</TABLE>
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<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(unaudited)
(1) Interest expense includes amortization of deferred loan costs as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
$449,102 $438,473 $887,525 $876,946
(2) Footnote disclosure which would substantially duplicate the disclosure
contained in the Annual Report on Form 10-K for the year ended December 31,
1998 has not been included. The unaudited interim consolidated financial
statements reflect all adjustments which, in the opinion of management, are
necessary to reflect a fair statement of the results for the periods
presented and to present fairly the consolidated financial position of
Prime Succession, Inc. and subsidiaries as of June 30, 1999. All such
adjustments are of a normal recurring nature.
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
On August 26, 1996 (the "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, Loewen
Group International, Inc. and PSI Management Direct L.P. A new entity, Prime
Succession, Inc. (Successor Company), was formed and became a wholly-owned
subsidiary of the Predecessor Company. In connection with the Acquisition, all
of the assets and liabilities of the Predecessor Company were transferred to the
Successor Company. Collectively, the Predecessor Company and Successor Company
are herein referred to as "the Company".
The Company provides merchandise and services in both the funeral 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
June 30, 1999, the Company through its subsidiaries owns and operates 142
funeral homes and 20 cemeteries in 19 states, primarily in non-urban areas of
the United States. The Company commenced operations in 1992 and expanded rapidly
through the aggressive acquisition of funeral homes and cemeteries. The
Company's consolidated revenues were $48.1 million and $51.7 million for the six
months ended June 30, 1999 and 1998, respectively. Sales of funeral services of
$38.9 million and cemetery sales of $9.2 million accounted for approximately
80.9% and 19.1%, respectively, of total net sales for the six months ended June
30, 1999.
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. 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, and (iii) the shift in focus from
acquisitions to profit maximization at existing locations. 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 is a party to a supply agreement with Batesville Casket
Company, Inc. ("BCC"), The Forethought Group and Forethought Life Insurance
Company ("FLIC"), pursuant to which the Company must purchase caskets
exclusively from BCC and, in connection with its pre-need sales of funeral
services funded by insurance, the Company must offer to its customers in
specified markets exclusively FLIC insurance products. The agreement expires on
December 31, 2004, subject to earlier termination by any party thereto upon 30
days notice following a material, uncured breach of the agreement or the
occurrence of certain insolvency events. Management of the Company believes that
the terms of such supply agreement are favorable to the Company.
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Results of Operations
The Company's operations are detailed below for the three months and the
six months ended June 30, 1999 and 1998 expressed in dollar amounts as well as
relevant percentages. Revenue, gross margin, earnings from operations and
expenses other than income taxes are presented as a percentage of revenue.
Income taxes are presented as a percentage of losses before income taxes.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Three Months Ended Three Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(millions of dollars) (percent)
--------------------- ---------
<S> <C> <C> <C> <C>
Revenue
Funeral $18.1 $18.5 81.0% 73.7%
Cemetery 4.2 6.6 19.0 26.3
----- ----- ------ ------
Total $22.3 $25.1 100.0% 100.0%
===== ===== ====== ======
Gross Margin
Funeral $ 5.7 $ 6.1 31.5% 33.0%
Cemetery 1.6 2.2 38.1 33.3
----- -----
Total 7.3 8.3 32.7 33.1
Expenses
Corporate general and administrative 0.9 0.8 4.0 3.2
Depreciation and amortization 2.9 2.8 13.0 11.2
----- -----
Earnings From Operations 3.5 4.7 15.7 18.7
Interest on long-term debt 6.0 6.1 26.9 24.3
----- -----
Income Before Income Taxes (2.5) (1.4) (11.2) (5.6)
Income taxes -- -- -- --
----- -----
Net income $(2.5) $(1.4) (11.2)% (5.6)%
===== =====
</TABLE>
Consolidated revenues decreased 11.2% to $22.3 million for the three months
ended June 30, 1999 compared to $25.1 million in the corresponding period for
1998, with funeral service revenues decreasing 2.2% to $18.1 million compared to
$18.5 million in the corresponding period in 1998, and cemetery revenues
decreasing 36.4% to $4.2 million compared to $6.6 million in the corresponding
period for 1998. Funeral and cemetery revenues decreased primarily due to a
restructuring of pre-need commission rates and decline in sales force.
Consolidated operating income decreased from $4.7 million for the three months
ended June 30, 1998, to $3.5 million for the three months ended June 30, 1999.
Consolidated contribution margin of $7.3 million decreased 12.0% for the
three months ended June 30, 1999 from $8.3 million for the three months ended
June 30, 1998. Consolidated contribution margin decreased primarily as a result
of restructuring of pre-need commission rates and decline in sales force which
decreased both funeral and cemetery revenues. Funeral contribution margin was
31.5% for the three months ended June 30, 1999 compared to 33.0% for the three
months ended June 30, 1998 and cemetery contribution margin of 38.1% for the
three months ended June 30, 1999 compared to 33.3% for the corresponding period
in 1998. 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).
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<CAPTION>
Corporate general and administrative expense increased to $0.9 million for
the three months ended June 30, 1999 compared to $0.8 million at June 30, 1998.
As a percentage of consolidated revenue, general and administrative expense
increased to 4.0% in 1999 from 3.2% for the corresponding period in 1998.
Corporate general and administrative expense increased primarily due to
personnel changes.
Depreciation and amortization expense increased $0.1 million to $2.9
million for the three months ended June 30, 1999 compared to $2.8 million for
the corresponding period in 1998. The increase is primarily the result of
increased depreciation on capital expenditures.
Interest expense of $6.0 million for the three months ended June 30, 1999
decreased by $0.1 million compared to $6.1 million for the corresponding period
in 1998, primarily as a result of principal repayment on existing debt.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Six months ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(millions of dollars) (percent)
--------------------- ---------
<S> <C> <C> <C> <C>
Revenue
Funeral $38.9 $39.1 80.9% 75.6%
Cemetery 9.2 12.6 19.1 24.4
----- ----- ------ ------
Total $48.1 $51.7 100.0% 100.0%
===== ===== ====== ======
Gross Margin
Funeral $13.9 $14.0 35.7% 35.8%
Cemetery 3.2 4.2 34.8 33.3
----- -----
Total 17.1 18.2 35.6 35.2
Expenses
General and administrative 1.7 1.5 3.5 2.9
Depreciation and amortization 5.8 5.7 12.0 11.0
----- -----
Earnings From Operations 9.6 11.0 20.0 21.3
Interest on long-term debt 11.8 12.2 24.5 23.6
----- -----
Loss Before Income Taxes (2.2) (1.2) (4.6) (2.3)
Income taxes 0.1 -- (5.0) --
----- -----
Net Loss $(2.3) $(1.2) (4.8)% (2.3)%
</TABLE>
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<PAGE>
Consolidated revenues decreased 7.0% to $48.1 million for the six months
ended June 30, 1999 compared to $51.7 million in the corresponding period for
1998, with funeral service revenues decreasing 0.5% to $38.9 million compared to
$39.1 million in the corresponding period in 1998, and cemetery revenues
decreasing 26.9% to $9.2 million compared to $12.6 million in the corresponding
period for 1998. Funeral and cemetery revenues decreased primarily due to a
restructuring of pre-need commission rates and decline in sales force.
Consolidated operating income decreased from $11.0 million for the six months
ended June 30, 1998, to $9.6 million for the six months ended June 30, 1999.
Consolidated contribution margin of $17.1 million decreased 6.0% for the
six months ended June 30, 1999 from $18.2 million for the six months ended June
30, 1998. Consolidated contribution margin decreased primarily as a result of
restructuring of pre-need commission rates and decline in sales force which
decreased both funeral and cemetery revenues. Funeral contribution margin was
35.7% for the six months ended June 30, 1999 compared to 35.8% for the six
months ended June 30, 1998 and cemetery contribution margin of 34.8% for the six
months ended June 30, 1999 compared to 33.3% for the corresponding period in
1998. 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 general and administrative expense increased to $1.7 million for
the six months ended June 30, 1999 from $1.5 million for the corresponding
period in 1998. As a percentage of consolidated revenue, general and
administrative expense increased to 3.5% in 1999 from 2.9% for the corresponding
period in 1998. Corporate general and administrative expense increased primarily
due to personnel changes.
Depreciation and amortization expense increased $0.1 million to $5.8
million for the six months ended June 30, 1999 compared to $5.7 million for the
corresponding period in 1998. This increase is primarily the result of increased
depreciation on capital expenditures.
Interest expense of $11.8 million for the six months ended June 30, 1999
decreased by $0.4 million compared to $12.2 million for the corresponding period
in 1998, primarily as a result of principal repayments on existing debt.
Liquidity and Capital Resources
The Company's primary sources of cash since 1995 have been funds provided
by operations and proceeds from additional long-term debt and capital
contributions. As of June 30, 1999, the Company had a net working capital
surplus of $4.3 million and a current ratio of 1.25:1, compared to a net working
capital surplus of $6.9 million and a current ratio of 1.43:1 as of December 31,
1998.
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 the six months ended June 30, 1998,
the Company acquired one funeral home. The Company made no acquisitions in the
six months ended June 30, 1999.
In the six months ended June 30, 1999 and 1998, the Company used $1.9
million and $1.7 million for capital expenditures, respectively. In the six
months ended June 30, 1999, the Company paid $0.7 million in principal payments
on long-term debt compared to $0.6 million in the corresponding period in 1998.
In the six months ended June 30, 1998, the Company repaid a net of $0.7 million
on its revolving line of credit. The Company had a net repayment/borrowing on
its revolving line of credit of zero for the same period in 1999.
The Company estimates that capital expenditures net of estimated disposals
of $2.0 million in 1999 to be used in part for the repair and improvement of
existing facilities. The Company also expects to invest approximately $0.5
million in 1999 for cemetery inventory development.
Contemporaneously with the consummation of the Acquisition, the Company
entered into senior secured credit facilities (the "Bank Credit Facilities")
with a syndicate of financial institutions and The Bank of Nova Scotia, as
administrative agent.
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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 $90.0 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 $25.0 million, the proceeds of which may 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 $1.0 million in each of the first three years after the anniversary
of the closing date of the Bank Term Facility (the "Bank Closing"); $4.0 million
in the fourth year after the Bank Closing; $9.0 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 the Company and each of the Company's existing and
future domestic subsidiaries (the "Bank Guarantors"). All obligations of the
Company and the Bank Guarantors under the Bank Credit Facilities and the Bank
Guarantees are secured by first priority security interests in all existing and
future assets (other than real property and vehicles covered by certificates of
title) of the Company and the Bank Guarantors. In addition, the Bank Credit
Facilities are secured by a first priority security interest in 100% of the
capital stock of the Company and each subsidiary thereof and all intercompany
receivables.
In connection with the Acquisition, the Company also issued $100.0 million
of 10 3/4% Senior Subordinated Notes due 2004, which were exchanged in January
1997 for $100.0 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 June 30, 1999, the Company had approximately $209.6 million of
indebtedness outstanding and approximately $5.2 million of borrowing
availability under the Revolving Credit Facility. On July 14, 1999, the State of
Florida approved the Company's application to change its method of funding
pre-need merchandise liabilities from trust funds to surety bonds, thus allowing
the Company to replace approximately $6.0 million of trust funds with a surety
bond of $8.5 million. 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.
In September 1998, Statement of Financial Accounting Standards (FAS) No.
133, "Accounting for Derivative Instruments and Hedging" was issued. FAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualified under the standard hedge accounting. The
Company is currently assessing the effect of this standard, but does not
anticipate a material impact on the result of operations.
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Year 2000 Issues
Overview. As the Year 2000 approaches, all companies that use computers
must address "Year 2000" issues. Year 2000 issues result from the past practice
in the computer industry of using two digits rather than four to identify the
applicable year. This practice can create breakdowns or erroneous results when
computers perform operations involving years later than 1999.
The Company's State of Readiness. The Company has devised and commenced an
extensive compliance plan with the objective of bringing all of the Company's
information technology (IT) systems and non-IT systems into Year 2000 compliance
by the end of the second quarter of 1999. The Company has divided its systems
into (i) critical systems, consisting of IT systems, and (ii) non-critical
systems, consisting of a mixture of IT and non-IT systems. Each system will be
evaluated and brought into compliance in five phases:
o Phase I: Awareness - Prepare and present comprehensive report to management
o Phase II: Assessment - Identify and evaluate all systems for Year 2000
compliance
o Phase III: Compliance - Complete necessary Year 2000 modifications
o Phase IV: Testing - Test all modified systems for Year 2000 compliance
o Phase V: Implementation - Return Year 2000 compliance systems to daily
operation
The Company's systems used to maintain financial records were either found
to be compliant or have completed Phases I through V. As a result, 100% of these
critical systems are currently compliant. All of the Company's other critical
and non-critical systems have also completed Phase V.
In addition, the Company has communicated with all of its significant
vendors, financial institutions and insurers to determine the extent to which
these third parties' failure to resolve their Year 2000 issues could affect the
Company's operations. The Company has received indication that its significant
suppliers expect to be Year 2000 compliant prior to the end of the second
quarter of 1999. The Company has completed its evaluation of third parties'
compliance.
The Costs Involved. Because all of the Company's computer systems have been
replaced in the past two years as part of the Company's ongoing goal to maintain
state of the art technology, the Company's Year 2000 compliance costs have been
relatively low. To date, the company has incurred minor expenses in implementing
its compliance plan. Management estimates that the total cost to be incurred by
the Company to complete its compliance plan will be insignificant. This estimate
includes the use of both internal and external resources. All costs related to
the Year 2000 compliance plan are included in the Information Systems budget and
are based on management's best estimates. There can be no guarantee that actual
results will not differ from those estimated.
Risks. If the Company is not successful in its efforts to bring its systems
into Year 2000 compliance, the Company's ability to procure merchandise in a
timely and cost-effective manner may be impaired, daily business procedures may
be delayed due to the use of manual procedures, and some business procedures may
be interrupted if no alternative methodology is available, which could have a
material adverse effect on the Company's operations.
The Company has no guarantee that the systems of third parties will be
brought into compliance on a timely basis. The non-compliance of a third party's
system could have a material adverse effect on the Company's operations.
The Company's Contingency Plan. Although the Company believes that its Year
2000 compliance plan is adequate to achieve full system operation on a timely
basis, the Company has developed a contingency plan to address the possibility
of the Company's and third parties' non-compliance.
-11-
<PAGE>
PART II
ITEM 5 - OTHER INFORMATION
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q include
"forward-looking statements" as defined in Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included herein, including, without limitation, the statements under Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financial position, plans to increase
revenues, reduce general and administrative expense and take advantage of
synergies, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed herein, including, without
limitation, in conjunction with the forward-looking statements included herein.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The Exhibits, as shown in the "Index of Exhibits", attached hereto as pages
13 and 14, are filed as a part of this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRIME SUCCESSION, INC.
/s/ ARTHUR J. ANSIN
-----------------------
Arthur J. Ansin
Chief Financial Officer,
Secretary and Treasurer
July 30, 1999
-12-
<PAGE>
INDEX OF EXHIBITS
(a) Exhibit
Number Document Description
------ --------------------
3.1* Certificate of Incorporation of Blackhawk Acquisition Corp.
3.2* Certificate of Amendment of Certificate of Incorporation of
Blackhawk Acquisition Corp. changing its name to Prime Succession
Acquisition Corp.
3.3* Certificate of Amendment of Certificate of Incorporation of Prime
Succession Acquisition Corp. changing its name to Prime
Succession, Inc.
3.4* By-Laws of Prime Succession, Inc.
4.1* Indenture dated as of August 15, 1996 between Prime Succession
Acquisition Corp. and United States Trust Company of New York, as
Trustee
4.2* Form of 10 3/4% Senior Subordinated Note due 2004 (included in
Exhibit 4.1)
10.1(a)* Casket Supply Agreement, dated January 1, 1993, between
Batesville Casket Company, Inc. and Prime Succession, Inc.
10.1(b)* Amendment Agreement, dated August 1994, between Batesville Casket
Company, Inc. and Prime Succession, Inc. (with respect to Casket
Supply Agreement)
10.1(c)* Amendment 2, dated May 22, 1995, between Batesville Casket
Company, Inc. and Prime Succession, Inc. (with respect to Casket
Supply Agreement)
10.1(d)* Exclusive Supply Agreement, dated January 1, 1998 between
Batesville Casket Company, Inc., The Forethought Group,
Forethought Life Insurance Company and Prime Succession, Inc.
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.
10.4(a)* First Amendment to Credit Agreement dated September 30, 1998
among Prime Succession, Inc. (formerly known as Prime Succession
Acquisition Corp.), Prime Succession Holdings, Inc. (formerly
known as Prime Succession, Inc.), Goldman Sachs Credit Partners
L.P., as syndication agent and arranging agent, and The Bank of
Nova Scotia as administrative agent.
10.5* Letter Agreement dated August 1, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession, Inc.) and Gary
Wright.
-13-
<PAGE>
(a) Exhibit
Number Document Description
------- --------------------
10.6* Letter Agreement dated August 1, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession, Inc.) and
Myles Cairns.
10.7* Put/Call Agreement, dated as of August 26, 1996, among Blackstone
Capital Partners II Merchant Banking Fund L.P., Blackstone
Offshore Capital Partners II L.P., Blackstone Family Investment
Partnership II L.P., PSI Management Direct L.P., Loewen Group
International Inc. and the Loewen Group Inc.
10.8* Stock Purchase Agreement, dated as of June 14, 1996, by and among
Prime Succession, Inc., the individuals or entities listed on the
signature pages thereof, The Loewen Group Inc. and Blackhawk
Acquisition Corp.
12 Computation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of Prime Succession, Inc. (formerly known as Prime
Succession Acquisition Corp.)
27 Financial Data Schedule
* Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-4 (Registration No. 333-14599).
(b) Reports on Form 8-K
None
-14-
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
Prime Succession, Inc. and subsidiaries
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges
Earnings:
Loss before income taxes (2,446) (1,387) (2,222) (1,188)
Add: Fixed charges, net 6,258 6,303 12,350 12,678
Income before income taxes and fixed charges,
net 3,812 4,916 10,128 11,490
Fixed Charges:
Total interest expense (1) 6,003 6,077 11,855 12,183
Interest factor in rents (2) 255 226 495 495
Total fixed charges 6,258 6,303 12,350 12,678
Ratio of earnings to fixed charges 0.61 0.78 0.82 0.91
Coverage deficiency (3) 2,446 1,387 2,222 1,188
FN
(1) Total interest expense for each period includes amortization of loan costs.
(2) Interest factor in rents represents one-third of rent expense, which is
considered representative of the interest factor.
(3) The Company's earnings are inadequate to cover fixed charges for all
periods indicated above. Coverage deficiency represents the excess of fixed
charges over income before income taxes and fixed charges, net.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF PRIME SUCCESSION, INC.
AND SUBSIDIARIES, FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001023294
<NAME> Prime Succession, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 838
<SECURITIES> 0
<RECEIVABLES> 35,877
<ALLOWANCES> 6,761
<INVENTORY> 50,607
<CURRENT-ASSETS> 21,380
<PP&E> 77,130
<DEPRECIATION> 7,309
<TOTAL-ASSETS> 384,243
<CURRENT-LIABILITIES> 17,049
<BONDS> 209,558
<COMMON> 0
0
0
<OTHER-SE> 116,725
<TOTAL-LIABILITY-AND-EQUITY> 384,243
<SALES> 48,095
<TOTAL-REVENUES> 48,095
<CGS> 30,974
<TOTAL-COSTS> 30,974
<OTHER-EXPENSES> 7,487
<LOSS-PROVISION> 525
<INTEREST-EXPENSE> 11,855
<INCOME-PRETAX> (2,222)
<INCOME-TAX> 50
<INCOME-CONTINUING> (2,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,272)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
