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, 1998
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 __
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 10, 1999.
The number of outstanding shares of Common Stock as of March 10, 1999, was
100.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
Item
Number Page
1. BUSINESS 1
2. PROPERTIES 7
3. LEGAL PROCEEDINGS 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 8
PART II
5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 9
6. SELECTED FINANCIAL DATA 9
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 43
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 44
11. EXECUTIVE COMPENSATION 46
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 47
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 48
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 51
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CAUTIONARY NOTE
This Annual Report of Prime Succession, Inc. (the "Company") on Form 10-K
contains forward-looking statements in which the Company's management discusses
factors it believes may affect the Company's performance in the future. Such
statements typically are identified by terms expressing future expectations or
projections of revenues, earnings, capital expenditures, gross profit margin and
other financial items. All forward-looking statements, although made in good
faith, are based on assumptions about future events and are therefore inherently
uncertain, and actual results may differ materially from those expected or
projected. Important factors that may cause the Company's actual results in the
future to differ materially from expectations or projections in forward-looking
statements include those described under the heading "Cautionary Statements" in
Item 7. Forward-looking statements speak only as of the date of this report, and
the Company undertakes no obligation to update or revise such statements to
reflect new circumstances or unanticipated events as they occur.
PART I
ITEM 1. BUSINESS.
General
Prime Succession, Inc. is the fifth largest provider of funeral and
cemetery products and services in the death care industry, on the basis of
revenues, in the United States. Through its subsidiaries, the Company owns and
operates 143 funeral homes and 20 cemeteries in 20 states within the United
States.
The Company provides a complete range of death care products and services
both at and prior to the time of need. The Company's funeral homes and
cemeteries are located primarily in non-urban areas and generally are organized
in "clusters", which are integrated groups of funeral homes and cemeteries that
share certain assets, personnel and services. Many of these facilities are in
the Company's key markets, including among others, Fort Lauderdale, Birmingham
and Memphis.
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 principal executive offices are located at 3940 Olympic
Boulevard, Suite 500, Erlanger, Kentucky 41018 and its telephone number is (606)
746-6800.
The Death Care Industry
The Company's management believes that the death care industry has several
attractive fundamental characteristics. The industry is relatively stable,
business failures are uncommon and the market served by death care providers is
expanding. According to the United States Bureau of the Census, the number of
deaths in the United States is expected to increase by approximately 1% per year
from 2.38 million in 1998 to 2.64 million in 2010. In addition, industry studies
indicate that while the death rate is declining slightly, the average age of the
population in the United States is increasing. The aging of the population,
particularly the "baby boomers" who have only recently begun to turn 50,
represents a significant opportunity for firms such as the Company to expand
their customer base and secure a portion of their future market share by
actively marketing prearranged property, merchandise and services. According to
the Bureau of the Census, the United States population over 50 years of age will
increase from 72.7 million in 1998 to 96.4 million in 2010. The Company's
principal target market for sales of prearranged cemetery property, merchandise
and services is customers who are age 50 and above.
Traditionally, death care businesses in the United States have been
relatively small, family-owned enterprises that have passed through successive
generations within the family. Currently, however, the industry undergoing a
transition in which family-owned firms are consolidating with larger
organizations such as the Company. Management believes this trend primarily
results from the desire; of owners to address management succession and estate
planning issues as well as to achieve liquidity and diversification of their
investments.
Management believes it can be difficult for new competitors to be
successful opening new funeral homes and cemeteries in existing markets. Several
factors make it difficult for new facilities to compete successfully, including
the importance to families of reputation and goodwill developed over time,
regulatory complexities, zoning restrictions and the existence of an adequate
number of facilities serving mature markets.
Operations
Clustering. The Company operates most of its funeral homes and cemeteries
in "clusters". Clusters are groups of funeral homes and cemeteries located close
enough to each other that their operations can be integrated to achieve
economies of scale. Clustered facilities share vehicles, employees, computer
systems and some general and administrative functions, centralized embalming
services and inventory management allowing the Company to decrease its costs to
operate each location. Clustered facilities create opportunities for more
efficient and effective management of operations.
Funeral Operations. Funeral operations accounted for approximately 75.9% of
the Company's revenues for the fiscal year ended December 31, 1998. The
Company's funeral homes offer a complete range of funeral services and products
at the time of need or on a prearranged basis. The Company's services and
products include family consultation, removal and preparation of remains, the
use of funeral home facilities for visitation, worship and funeral services,
transportation services, flowers and caskets. In addition to traditional funeral
services, all of the Company's funeral homes offer cremation products and
services. Most of the Company's funeral homes have a non-denominational chapel
on the premises, which permits family visitation and religious services to take
place at the same location. As of December 31, 1998, the Company operated 143
funeral homes, 30 of which were leased.
Cemetery Operations. Cemetery operations accounted for approximately 24.1%
of the Company's revenues for the fiscal year ended December 31, 1998. The
Company's cemetery operations involve the sale of cemetery property and related
merchandise, including lots, lawn crypts, mausoleums, monuments, memorials,
burial vaults and caskets, 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. Prearranged sales represented approximately 85% of
cemetery revenue during the fiscal year ended December 31, 1998. The Company
also maintains cemetery grounds under perpetual care contracts and local laws.
The Company believes that it's cemetery properties help it to maintain
market share, as families often return to a cemetery location where their
ancestors are buried. In addition, the Company's clustering and combined
operations strategies help to improve the profitability of individual cemetery
locations. As of December 31, 1998, the Company owned and operated 20
cemeteries.
Combined Funeral Home and Cemetery Operations. A combined operation is a
funeral home located on a cemetery site where both are operated together.
Combined operations help 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 a competitive price at the time of need
or on a prearranged basis. In addition, combined operations enhance the
Company's purchasing power, enabling it to employ more sophisticated management
systems, and allowing it to share facilities, equipment, personnel and a
prearrangement sales force, resulting in lower average operating costs as well
as expanded marketing and sales opportunities. Approximately 40.0% of the
Company's cemeteries have a funeral home on site that is operated in conjunction
with the cemetery. Many of these facilities are in the Company's key markets,
including, Fort Lauderdale, Birmingham and Memphis.
Cremation. In fiscal year 1998, 27% of the funeral services the Company
performed were cremations. While cremations in the United States often result in
lower average revenue than traditional funeral services, they generally produce
higher gross profit margins.
The cremation rate in the United States has been increasing, and by the
year 2000, cremations are expected to represent 25% of the United States burial
market, according to industry estimates. The company has been addressing this
trend by providing cremation products and services at all of its funeral homes,
including traditional funeral services and memorialization options for families
choosing cremation.
Prearrangements. The Company markets death care products and services on a
prearranged basis through a staff of approximately 280 commissioned sales
counselors. Prearranged funeral planning allows families to establish in advance
and prepay for the type of services to be performed and the products to be used.
The cost of such products and services is set at prices prevailing at the time
the agreement is signed, rather than when the products and services are
delivered. Prearranged 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 products and services produces a backlog
of future business and builds current and future market share.
Trust Funds. Prearranged funeral plans are funded through trust funds or
insurance, depending on the regulatory requirements of the relevant
jurisdiction. When trust funding is used, the Company places into a trust fund a
percentage (which varies by jurisdiction) of the sale price, which is often paid
in installments. It retains the remainder of the sale price to defray costs
related to the sale. The Company withdraws the amount placed in the trust fund
when the service is performed to cover the cost of providing the funeral
service. Generally, principal and earnings (including interest, dividends and
net realized capital gains) on the trust funds, and insurance proceeds, are paid
to the Company only when the funeral service is performed. When insurance
funding is used, the Company applies the customers' payments to pay premiums on
insurance policies designed to cover the cost of providing the funeral service
in the future. Approximately 60% of all prearranged funeral plans sold by the
Company are funded through insurance with the balance being funded through trust
funds. As of December 31, 1998, the Company's backlog of prearranged funerals
totaled approximately $151 million with approximately $90 million funded by life
insurance contracts.
The Company also establishes trust funds to fund the cost of delivering
prearranged cemetery merchandise. Generally, the Company withdraws the principal
and earnings from these funds only when the merchandise is delivered or
contracts are canceled. As of December 31, 1998, the Company's cemetery
merchandise trust funds totaled approximately $5.4 million.
The Company funds its obligation to maintain cemetery grounds by placing a
portion, generally 10%, of the proceeds from cemetery property sales into
perpetual care trust funds. 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, 1998, the Company's perpetual care trust funds totaled approximately $9.1
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 believes that balances in the Company's trust funds, along with
insurance proceeds and installment payments due under contracts, will be
sufficient to cover its estimated cost of providing the related prearranged
services and products in the future.
Management. The Company has an experienced team of managers. The management
structure is designed to allow local funeral home directors and cemetery
managers substantial flexibility in deciding how their firms will be managed as
well as how their products and services will be priced and merchandised. At the
same time, financial goals are established by management at the corporate level
and the Company maintains centralized supervisory controls. Finally, the Company
provides centralized management, information systems support, and accounting and
payroll functions through its corporate office.
Currently, the Company is divided into a funeral division, a cemetery
division, and a pre-need sales division with six Directors of Operations in the
funeral division and one Director of Operations in the cemetery division. All of
the Directors of Operations report directly to the Senior Vice President of
Operations. The pre-need sales division has two Regional Vice Presidents of
Sales that report to the Vice President of Sales.
Growth Strategy
General
Management has identified, and the Company has taken, a number of
initiatives that resulted in improvements in both revenues and profitability by
capitalizing on the location and concentration of its properties, improved
merchandising, enhanced pre-need marketing, and management structure that
encourages an entrepreneurial business culture.
Internal Growth
Prearranged Services. The Company markets death care products and services
on a prearranged basis through a staff of approximately 280 commissioned sales
counselors. 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. The Company's backlog of
prearranged funeral services has grown from $147 million at December 31, 1997 to
$151 million at December 31, 1998.
Improved Merchandising. The Company frequently expands its product and
service offerings, adjusts the mix of products and services offered in
individual markets, takes advantage of enhanced pricing opportunities, and
implements selective marketing programs to increase revenue and improve profit
margins.
Alternative Service Firms. During fiscal year 1998, the Company expanded
its existing Aaron Cremation Services to Aaron Nationwide ("Aaron") which owned
and operated two low cost funeral stores offering cremations and related
products and services to seven outlets at March 10, 1999. Because Aaron's
offices generally operate from leased locations with a small staff, they have
lower overhead than traditional funeral homes. The cost to the family for death
care arrangements at an Aaron location generally is less than the cost at a
traditional funeral home.
The expansion of the Aaron model is an example of the Company's effort to
address the growing cremation market, and it offers a cost-saving alternative to
the construction of a traditional funeral home. The Company plans to open
additional funeral stores similar to the Aaron model, although management
expects this expansion to occur slowly while it further develops and tests the
concept in new markets. Results from the funeral stores opened have met the
Company's initial expectations.
Cost Control. In addition to its strategies for increasing revenues, the
Company plans to continue to improve its operating margins by achieving
economies of scale, improving efficiencies and controlling costs through a
variety of measures including the following:
- - Obtaining volume discounts from suppliers
- - Leveraging operating costs through clustering and the development
of combined operations
- - Improving the utilization of its sales force
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.
External Growth
Acquisitions. 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 has substantially eliminated the Company's acquisition
program. The Company's future results of operations will depend in large part on
the ability of Management to successfully maintain its business strategy.
Competition. The Company's funeral home and cemetery operations generally
face intense competition in local markets that typically are served by numerous
funeral home and cemetery firms. To a lesser degree, the Company also competes
with monument dealers, casket retailers and other non-traditional providers of
limited services or products. Because the market for death care services is
relatively stable, competition usually focuses on increasing market share and
selling prearranged products and services. Market share is largely a function of
goodwill and tradition, although competitive pricing, professional service and
attractive, well-maintained, conveniently located facilities are also important.
Because of the significant role played by goodwill and tradition, market share
increases are usually gained over a long period of time. Extensive marketing
through media advertising, direct mailings and personal sales calls has
increased in recent years, especially with respect to the sale of prearranged
funeral services.
The Company's traditional burial and funeral service operations face
competition from the increasing number of cremations. Industry studies indicate
that the percentage of cremations has increased throughout the 1980s and that
cremation will represent approximately 25% of the United States burial market by
the year 2000, compared with 14% in 1986. All of the Company's funeral homes
offer cremation, and the Company believes that it will be able to maintain its
competitive position by marketing full service cremations in combination with
traditional funeral services and memorialization. Additionally, development of
the Alternative Service Firms' concept by the Company represents another
opportunity for the Company to serve cremation customers. Additional information
on the development of the Alternative Service Firms' concept can be found under
the heading "Internal Growth" discussed earlier in Item 1.
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 and
Stewart Enterprises, Inc., 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 (the "FTC") under the FTC's Trade Regulation Rule on Funeral Industry
Practices, 16CFR Part 453 (the "Funeral Rule"), which went into effect on April
30, 1984, and was revised effective July 19, 1994.
The Funeral Rule defines certain acts or practices as unfair or deceptive,
and contains certain requirements to prevent these unfair or deceptive acts or
practices. The preventive measures require a funeral provider to give consumers
accurate, itemized price information and various other disclosures about funeral
goods and services, and prohibit a funeral provider from: (i) misrepresenting
legal, crematory and cemetery requirements; (ii) embalming for a fee without
permission; (iii) requiring the purchase of a casket for direct cremation; and
(iv) requiring consumers to buy certain funeral goods or services as a condition
for furnishing other funeral goods or services.
The Company's operations are also subject to extensive regulation,
supervision and licensing under numerous federal, state and locals laws and
regulations. The Company believes that it is in substantial compliance with the
Funeral Rule and all such laws and regulations. State legislatures and
regulatory agencies frequently propose new laws and regulations, some of which,
if enacted as proposed, could have a material effect on the Company's operations
and on the death care industry in general. The Company cannot predict the
outcome of any proposed legislation or regulation, or the effect that any such
legislation or regulation might have on the Company.
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, 1998, the Company employed approximately 1,160 people in
funeral and cemetery operations, approximately 280 commissioned sales people and
85 telemarketing staff. None of the employees of the Company or its subsidiaries
are covered by a collective bargaining agreement. Management believes that its
relationship with its employees is good.
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ITEM 2. PROPERTIES.
Set forth in the table below is the number, by state, of the Company's
funeral homes and cemeteries:
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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 16 0
Indiana 6 0
Iowa 1 0
Kentucky 3 3
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 20
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As of December 31, 1998, all but 30 of the Company's 143 funeral home
locations were owned by subsidiaries of the Company. The leases with respect to
the 30 leased properties have terms ranging from 2 to 21 years.
As of December 31, 1998, the Company owned 20 cemeteries covering a total
of approximately 790 acres. Approximately 62% of the total acreage is 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.
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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.
Florida Subpoena. On February 25, 1999, the Department of Legal Affairs of
the Office of the Attorney General of the State of Florida issued a subpoena
duces tecum requiring that certain subsidiaries of the Company doing business in
that state provide various described documents and materials regarding the
compliance of their pre-need and at-need policies and procedures with Florida
law. The Company is in the process of collecting the information required to
respond to the subpoena. Management does not believe that this investigation
will have a material adverse effect on the Company or its subsidiaries.
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
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PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
In connection with the Acquisition, the Company issued 100 shares of Common
Stock to Old Prime, which shares represent all of the outstanding Common Stock
of the Company. There is no established public trading market for the Common
Stock of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial data
for the Company for and at the end of each of the years in the five-year periods
ended December 31, 1998 and 1997, the period from January 1, 1996 through August
25, 1996 and the period from August 26, 1996 through December 31, 1996 and the
years ended December 31, 1995 and 1994. KPMG LLP ("KPMG") has been appointed
auditors of New Prime (Successor Company). The selected historical financial
data for the years ended December 31, 1998 and 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 two
fiscal years ended December 31, 1995 and 1994 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.
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Successor Predecessor
Company Company
--------------------------------------------- --------------------------------------
For the Period For the Period
From From
August 26, January 1,
1996 1996
Year Ended Through Through Year Ended
December 31, December 31, August 25, December 31,
----------------------------- --------------------
1998 1997 1996 1996 1995 1994
(dollars in millions, except per share amounts and revenues per funeral service)
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Income Statement Data:
Total revenue $98.0 $101.1 $32.7 $ 56.1 $81.5 $72.2
Net income (Loss) (7.0) 0.1 (2.9) (9.5) (0.7) (4.3)
Other Financial Data:
EBITDA, as adjusted(1) 30.1 37.0 9.3 13.2 19.8 15.6
Cash flows from:
Operating activities (0.5) (5.7) (2.0) 3.3 6.0 2.7
Investing activities (3.2) (3.5) (1.4) (1.6) (9.1) (25.7)
Financing activities 3.4 7.8 5.0 (1.0) 0.2 22.8
As of December As of December
31, 31,
--------------------------------------------- --------------------
1998 1997 1996 1995 1994
Balance Sheet Information:
Total debt and redeemable
preferred stock (2) $210.3 $203.0 $195.0 - $ 124.6 $123.5
Total assets 391.1 395.1 398.8 - 196.1 195.3
Operating Data:
Number of funeral home locations 143 143 144 146 143 131
Number of funeral services 19,011 19,335 7,146 13,827 19,776 17,590
Total funeral service
revenues per funeral service $3,910 $3,896 $3,751 $3,419 $3,470 $3,460
Number of cemeteries 20 19 16 16 16 16
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(Footnotes on following page)
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(1) EBITDA, as adjusted, is defined as income (loss) before income taxes
plus interest expense, depreciation, depletion 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
Introduction
Death care businesses in the United States traditionally have been
relatively small family-owned enterprises that have been passed down through
successive generations within a family. The industry in the United States is
undergoing a transition in which family-owned firms are consolidating with
larger organizations, such as the Company.
Two other trends affecting the death care industry are the expected
increase in the number of deaths and the average age of the population.
According to the United States Bureau of the Census, the number of deaths in the
United States is expected to increase by approximately 1% per year from 2.38
million in 1998 to 2.64 million in 2010. In addition, the average age of the
population in the United States is increasing. The aging of the population,
particularly the "baby boomers" who have only recently begun to turn 50,
represents a significant opportunity for firms such as the Company to expand
their customer base and secure a portion of their future market share by
actively marketing prearranged property, merchandise and services. According to
the Bureau of the Census, the United States population over 50 years of age will
increase from 72.7 million in 1998 to 96.4 million in 2010. The Company's
principal target market for sales of prearranged cemetery property, merchandise
and services is customers who are age 50 and above.
Certain statements made herein that are not historical facts are intended
to be forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on assumptions about future events and
therefore are inherently uncertain; actual results may differ materially from
those projected. See "Cautionary Statements." The discussion herein should be
read in conjunction with the Company's consolidated financial statements and the
notes thereto.
Trust Investments
The Company's funeral and cemetery business includes prearranged sales
funded through trust arrangements, as well as maintenance of cemetery grounds
funded through perpetual care funds. The Company's investment strategy for these
funds is, among other criteria, partially dependent on the ability to withdraw
net realized capital gains from these funds. However, withdrawal of capital
gains is not permitted for perpetual care funds in certain jurisdictions in
which the Company operates. Accordingly, funds for which net capital gains are
permitted to be withdrawn typically are invested in a diversified portfolio
consisting principally of U.S. government securities, other interest-bearing
securities and preferred stocks rated A or better, "blue chip" publicly-traded
common stock, money market funds and other short-term investments.
Results of Operations
1998 Compared with 1997
Consolidated revenues increased to $98.0 million in 1998 from $97.3 million
in 1997 before a one time gain of $3.8 million resulting from a pre-need funeral
trust conversion to insurance in December of 1997. Funeral service revenues
decreased 0.8% to $74.3 million, before a one-time gain of $3.8 million
resulting from a pre-need funeral trust conversion to insurance in December of
1997 and cemetery revenues increased 5.8% to $23.7 million from $22.4 million in
1997. Consolidated operating income decreased from $20.3 million in 1997 before
a one time gain of $3.8 million resulting from a pre-need funeral trust
conversion to insurance in December of 1997 to $17.6 million in 1998. Funeral
revenues decreased primarily as a result of a decline in funeral call volumes in
1998 of approximately 1.7% or 324 funerals from 1997. Cemetery revenues
increased primarily due to increased pre-need sales efforts in Alabama, Florida
and Tennessee.
Consolidated contribution margin of $32.3 million decreased 7.2% in 1998
from $34.8 million in 1997 before a one time gain of $3.8 million resulting from
a pre-need funeral trust conversion to insurance in December of 1997, with
funeral contribution margin of 32.8% in 1998 compared to 37.2% in 1997 before a
one-time gain of $3.8 million resulting from pre-need funeral trust conversion
to insurance in December of 1997, and cemetery contribution margin of 33.4% in
1998 compared to 30.9% in 1997. 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 remained constant at $3.3 million in 1998 and 1997. As a
percentage of consolidated revenue, general and administrative expense increased
to 3.3% in 1998 from 3.2% in 1997.
Depreciation and amortization expense increased $0.2 million to $11.4
million in 1998 from $11.2 million in 1997. This increase is primarily the
result of increased depreciation on capital expenditures.
Interest expense of $24.2 million in 1998 increased by $0.4 million
compared to $23.8 million in 1997, primarily as a result of additional
borrowings to finance operating activities of the Company.
<PAGE>
1997 (Successor Company) Compared with 1996 (Successor Company/Predecessor
Company Combined)
Consolidated revenues increased 9.6% to 97.3 million in 1997 before a one-
time gain of $3.8 million resulting from a pre-need funeral trust conversion to
insurance in December of 1997 from $88.8 million in 1996, with funeral service
revenues increasing 1.1% to $74.9 million, and cemetery revenues increasing
52.4% to $22.4 million from $14.7 million in 1996. Funeral revenues increased
primarily as a result of restructured pricing, merchandising of merchandise
display areas and from a one-time gain of approximately $3.8 million on
converting a funeral trust to insurance. Cemetery revenues increased 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 general and administrative expense decreased to $3.3 million in
1997 from $6.7 million in 1996. As a percentage of consolidated revenue,
corporate general and administrative expense decreased to 3.2% in 1997 from 7.6%
in 1996. Corporate 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.
Liquidity and Capital Resources
The Company's primary sources of cash since 1996 have been funds provided
by proceeds from additional long-term debt and capital contributions. In 1998, a
long-term debt proceeds provided no cash compared to $1.3 million in 1997 and
$190.6 million in 1996. In 1998, net proceeds from the revolving loan facilities
provided $7.3 million compared to $11.2 million in 1997. In 1998, the disposal
of assets provided cash of $0.4 million compared to $0.3 million in 1997 and
$0.8 million in 1996. In 1998, operating activities used $0.5 million of cash
compared to using $5.7 million of cash in 1997 and provided $1.3 million in
1996.
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. The
Company also has a $0.5 million bank credit line, renewable annually, for
general corporate purposes exclusive of the Bank Revolving Facility.
All obligations under the Bank Credit Facilities and any interest rate
hedging agreements entered into with the lenders or their affiliates in
connection therewith are unconditionally guaranteed (the "Bank Guarantees")
jointly and severally, by Old Prime and each of the Company's existing and
future domestic subsidiaries (the "Bank Guarantors"). All obligations of the
Company and the Bank Guarantors under the Bank Credit Facilities and the Bank
Guarantees are secured by first priority security interests in all existing and
future assets (other than real property and vehicles covered by certificates of
title) of the Company and the Bank Guarantors. In addition, the Bank Credit
Facilities are secured by a first priority security interest in 100% of the
capital stock of the Company and each subsidiary thereof and all intercompany
receivables.
In connection with the Acquisition, the Company also issued $100 million of
10 3/4% Senior Subordinated Notes due 2004, which were exchanged in January 1997
for $100 million of 10 3/4 % Senior Subordinated Notes due 2004 (the "Notes")
that were registered under the Securities Act of 1933. The Notes mature on
August 15, 2004. Interest on the Notes is payable semi-annually on February 15
and August 15 at the annual rate of 10 3/4%. The Notes are redeemable in cash at
the option of the Company, in whole or in part, at any time on or after August
15, 2000, at prices ranging from 105.375% with annual reductions to 100% in 2003
plus accrued and unpaid interest, if any, to the redemption date. The proceeds
of the Notes were used, in part, to finance the Acquisition.
The Company and its Subsidiaries are subject to certain restrictive
covenants contained in the Indenture relating to the Notes, including, but not
limited to, covenants imposing limitations on the incurrence of additional
indebtedness; certain payments, including dividends and investments; the
creation of liens; sales of assets and preferred stock; transactions with
interested persons; payment restrictions affecting subsidiaries; sale-leaseback
transactions; and mergers and consolidations. In addition, the Bank Credit
Facilities contain certain restrictive covenants that, among other things, limit
the ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness, pay dividends or make
certain restricted payments, create liens on assets, engage in mergers or
acquisitions or enter into leased transactions with affiliates.
As of December 31, 1998, the Company has $210.3 million of indebtedness
outstanding and approximately $6.2 million of borrowing availability under the
Revolving Credit Facility. The Company is currently negotiating to expand its
revolver, or bank term debt under its Bank Credit Agreement. The Company has
also applied to the state of Florida to change its method of funding pre-need
merchandise liabilities from trust funds to surety bonds. 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.
The primary uses of cash since 1996 have been for the acquisition of
funeral homes and cemeteries, including the Acquisition, principal payments on
long-term debt and capital expenditures. In 1998, the Company purchased two
funeral homes and one cemetery for an aggregate purchase price of $1.9 million
compared to one funeral home and three cemeteries for an aggregate purchase
price of $2.6 million in 1997. In 1996, the Company purchased three funeral
homes for an aggregate purchase price of $0.7 million. In 1998, the Company sold
a monument company for $0.3 compared to three funeral homes for $2.0 million in
1997.
In 1998, the Company used $3.1 million for capital expenditures and $3.2
million in 1997 and 1996. In 1998, the Company paid $1.5 million in principal
payments on long-term debt, principally relating to repayment of bank term debt
and former owner obligations, compared to $4.6 million in 1997 which principally
related to the repayment of former owner obligations compared to $114.7 million
in 1996 which principally related to the refinancing of the indebtedness of Old
Prime. In 1997, the Company used $1.4 million for the acquisition of the
Predecessor Company compared to $196.3 million in 1996.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $2.0 million for the fiscal year ending December 31, 1999, which
includes repair and improvement of existing facilities. The Company also expects
to invest approximately $0.5 million in 1999 for cemetery inventory development.
Management expects that future capital requirements will be satisfied
through internally generated cash flow and amounts available under its revolving
credit facilities.
Inflation
Inflation has not had a significant impact on the Company's operations over
the past three years, nor is it expected to have a significant impact in the
foreseeable future.
Other
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 fiscal year 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. One hundred percent of the Company's
other critical systems have completed Phase II, and ninety percent were found to
be compliant. The remaining non-compliant critical systems have completed Phases
III and IV and commenced Phase V, with a scheduled completion of the second
quarter of fiscal year 1999.
Ninety percent of the Company's non-critical systems have completed Phase
II and were either found to be compliant or made compliant by completing Phases
III through V. The Company anticipates that the remaining non-critical systems
will be evaluated and brought into compliance by the end of the second quarter
of fiscal year 1999.
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 indication that its significant suppliers
expect to be in compliance with Year 2000 issues ranging between fourth quarter
of 1998 and second quarter of 1999. The Company expects to complete its
evaluation of third parties' compliance by the end of the second quarter of
fiscal year 1999.
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 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 is in the process of developing a contingency plan to address
the possibility of the Company's and third parties' non-compliance. The Company
anticipates completing its contingency plan by the end of the second quarter of
fiscal year 1999.
Recent Accounting Standards
Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," is required to be implemented in the first quarter of the
Company's fiscal year 1998. SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," is required to be implemented during the
Company's fiscal year ending December 31, 1998 and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented in
the first quarter of the Company's fiscal year 2000. The effect of these
pronouncements on the Company's consolidated financial condition and results of
operations is not expected to be material.
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", Item 7a "Quantitative and Qualitative Disclosures about Market
Risk", 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 expenses and take advantage of
synergies, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed herein, including, without
limitation, in conjunction with the forward-looking statements included herein.
All subsequent written and oral forward-looking statements attributable to the
Company (as defined herein) or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
<PAGE>
Cautionary Statements
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed in the forward-looking statements above and in any other
forward-looking statements made by or on behalf of the Company.
I. Achieving the Company's revenue goals also is affected by the volume and
prices of the products and services sold. The annual sales targets set by the
Company are very aggressive, and the inability of the Company to achieve planned
increases in volume or prices could cause the Company not to meet anticipated
levels of revenue. The ability of the Company to achieve volume or price
increases at any location depends on numerous factors, including the local
economy, the local death rate and competition.
II. Another important component of revenue is earnings from the Company's
trust funds which are determined by the size of, and returns (which include
dividends, interest and realized capital gains) on, the funds. The performance
of the funds depends primarily on market conditions that are not within the
Company's control. The size of the funds depends on the level of sales and the
amount of returns that may be reinvested.
III. Future revenue also is affected by the level of prearranged sales in
prior periods. The level of prearranged sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individuals to have less discretionary income.
IV. In addition to the factors discussed above, earnings may be affected by
other important factors, including the following:
a. The ability of the Company to achieve projected economies of scale
in markets where it has "clusters" or combined facilities.
b. Changes in interest rates, which can increase or decrease the
amount the Company pays on borrowings with variable rates of interest.
c. The ability of the Company to manage its growth in terms of
implementing internal controls and information gathering systems, and
retaining or attracting key personnel, among other things.
d. The amount and rate of growth in the Company's general and
administrative expenses.
e. Changes in government regulation, including tax rates and their
effects on corporate structure.
f. Changes in inflation and other general economic conditions
affecting financial markets.
g. Unanticipated legal proceedings and unanticipated outcomes of legal
proceedings.
h. Changes in accounting policies and practices adopted voluntarily or
required to be adopted by generally accepted accounting principles.
i. The ability of the Company and its significant vendors, financial
institutions and insurers to achieve Year 2000 compliance on a timely
basis.
The Company also cautions readers that it assumes no obligation to update
or publicly release any revisions to forward-looking statements made herein or
any other forward-looking statements made by or on behalf of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential change arising from increases or decreases in the
prices of interest rates as discussed below. Generally, the Company's market
risk sensitive instruments and positions are characterized as "other than
trading". The Company's exposure to market risk as discussed below includes
"forward-looking statements" and represents an estimate of possible changes in
fair value or future earnings that would occur assuming hypothetical future
movements in interest rates. The Company's views on market risk are not
necessarily indicative of actual results that may occur and do not represent the
maximum possible gains and losses that may occur, since actual gains and losses
will differ from those estimated, based upon actual fluctuations in interest
rates and the timing of transactions.
Interest
The company has entered into various fixed and variable rate debt
obligations, which are detailed in Note 6 to the Company's consolidated
financial statements included in Item 8.
As of December 31, 1998, the carrying value of the Company's long-term
fixed-rate debt was approximately $103.8 million, compared to fair value of
$101.7 million. Fair value was determined using quoted market prices, where
applicable, or discounted future cash flows based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. If
these instruments are held to maturity, no change in fair value will be
realized.
As of December 31, 1998, the Company had $106.5 million in variable-rate
debt. Each 0.5% change in average interest rates applicable to such debt would
result in a change of approximately $0.5 million in the Company's pre-tax
earnings.
The Company monitors its mix of fixed and variable rate debt obligations in
light of changing market conditions and from time to time may alter that mix by,
for example, refinancing balances outstanding under its variable rate revolving
credit facilities with fixed-rate debt, or by entering into interest rate swaps
or other interest rate hedging transactions.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PRIME SUCCESSION, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1998 AND 1997 AND FOR
THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE PERIODS FROM JANUARY 1, 1996
THROUGH AUGUST 25, 1996 AND FROM AUGUST 26, 1996 THROUGH DECEMBER 31, 1996:
Independent Auditors' Report..................................................20
Financial Statements:
Consolidated Balance Sheets..............................................21
Consolidated Statements of Operations....................................23
Consolidated Statements of Shareholders' Equity..........................24
Consolidated Statements of Cash Flows....................................25
Notes to Consolidated Financial Statements...............................27
Schedule II - Valuation and Qualifying Accounts...............................55
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, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1998 and 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, 1998 and 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1998 and 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, 1998, 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 LLP
Cincinnati, Ohio
March 10, 1999
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
December 31,
------------
1998 1997
---- ----
Assets
------
<S> <C> <C>
Cash and cash equivalents $ 1,146,670 $ 1,555,415
Receivables:
Trade, less allowance of $2,086,520 and $2,647,693 14,718,380 13,073,005
Other 998,020 4,492,005
----------- -----------
Total receivables 15,716,400 17,565,010
Inventories:
Merchandise 3,582,912 3,836,994
Cemetery lots and mausoleum spaces 1,178,137 1,693,530
----------- -----------
Total inventories 4,761,049 5,530,524
----------- -----------
Prepaids and other current assets 607,407 319,000
Deferred income taxes (note 9) 588,088 723,566
----------- -----------
Total current assets 22,819,614 25,693,515
----------- -----------
Property and equipment:
Land and land improvements 16,447,209 16,190,801
Buildings and improvements 48,751,390 47,313,605
Equipment, furniture and fixtures 10,221,223 9,051,236
Accumulated depreciation (5,906,519) (3,165,322)
----------- -----------
Net property and equipment 69,513,303 69,390,320
----------- -----------
Developed cemetery properties 14,660,921 12,996,135
Undeveloped cemetery properties 30,992,379 31,902,345
Goodwill, less accumulated amortization of $13,222,612 and $7,482,615 218,065,917 222,086,427
Other intangible assets, less accumulated amortization of $9,953,607 and
$5,866,178 19,263,641 23,147,315
Long-term receivables, less allowance of $6,205,730 and $3,288,268 15,221,081 9,318,513
Other assets 585,439 571,615
------------ ------------
$391,122,295 $395,106,185
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
December 31,
------------
1998 1997
---- ----
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Accounts payable $ 2,031,580 $ 2,679,090
Other accrued expenses 9,708,454 8,441,985
Current installments of obligations under agreements with former owners (note 5) 2,732,386 2,369,684
Current installments of long-term debt (note 6) 1,396,074 1,389,530
Due to related party (note 4) 83,333 83,333
------------ ------------
Total current liabilities 15,951,827 14,963,622
------------ ------------
Deferred merchandise liabilities and revenues, less trust fund deposits 14,384,071 17,600,097
Obligations under agreements with former owners, less current installments
(note 5) 12,537,499 15,259,919
Long-term debt, less current installments (note 6) 208,888,446 201,580,635
Deferred income taxes (note 9) 16,523,017 16,770,180
Other long-term liabilities (note 12) 3,719,511 2,690,510
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 128,888,394 129,047,493
Accumulated deficit (9,770,471) (2,806,272)
------------ ------------
Total shareholders' equity 119,117,924 126,241,222
------------ ------------
Commitments and contingencies (notes 10, 11 and 12)
$391,122,295 $395,106,185
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 1998 and 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,
1998 1997 1996 1996
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Funeral services (note 8) $74,337,416 $78,698,491 $26,805,617 $47,281,120
Cemetery sales 23,667,815 22,440,769 5,845,936 8,834,774
--------------- --------------- --------------- -----------------
98,005,231 101,139,260 32,651,553 56,115,894
Costs and expenses:
Funeral homes 49,945,781 47,005,645 17,514,919 32,257,977
Cemetery 15,766,846 15,517,734 4,070,525 6,546,474
--------------- --------------- --------------- -----------------
65,712,627 62,523,379 21,585,444 38,804,451
Corporate general and administrative
expenses 3,327,047 3,250,451 2,089,994 4,637,919
Depreciation and amortization 11,371,044 11,241,934 3,483,901 5,341,150
Legal settlement (note 3) -- -- -- 6,344,313
--------------- --------------- --------------- -----------------
Operating income 17,594,513 24,123,496 5,492,214 988,061
--------------- --------------- --------------- -----------------
Other expenses:
Interest expense, including
amortization of deferred
loan costs of $1,753,891,
$1,792,884, $622,473 and $360,269 24,194,753 23,843,345 8,539,585 10,059,415
Other -- -- 98,015 39,315
--------------- --------------- --------------- -----------------
24,194,753 23,843,345 8,637,600 10,098,730
--------------- --------------- --------------- -----------------
Income (loss) before income taxes (6,600,240) 280,151 (3,145,386) (9,110,669)
Income tax benefit (expense) (note 9) (363,959) (136,903) 195,866 (364,796)
--------------- --------------- --------------- -----------------
Net income (loss) (6,964,199) 143,248 (2,949,520) (9,475,465)
Redeemable Preferred Stock dividend
requirements -- -- -- (277,111)
--------------- --------------- --------------- -----------------
Net income (loss) attributable to
common shareholders $(6,964,199) $ 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 years ended December 31, 1998 and 1997, and periods from January 1, 1996 through August 25, 1996
and from August 26, 1996 through December 31,1996
Predecessor
Company
Common
Stock Successor
-------------------- 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
Receivable due from parent
company (note 4) - - - (159,099) - (159,099)
Net income for the year ended
December 31, 1998 - - - - (6,964,199) (6,964,199)
-------- -------- ----------- ------------- -------------- --------------
Balance as of December 31, 1998 $ - $ - $ 1 $ 128,888,394 $ (9,770,471) $ 119,117,924
======== ======== =========== ============= ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 1998 and 1997, and the periods from January 1, 1996 through August 25, 1996
and from August 26, 1996 through December 31, 1996
Successor Predecessor
Company Company
------------------------------------------------ --------------
August 26, January 1,
Year ended 1996 through 1996 through
December 31, December 31, August 25,
1998 1997 1996 1996
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,964,199) $ 143,248 $ (2,949,520) $ (9,475,465)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,124,935 13,034,818 4,106,374 5,701,419
Depletion of cemetery property 1,126,378 1,664,589 527,515 509,856
Loss on sale of assets 4,316 -- -- --
Provision for deferred income taxes (111,683) (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 (net) (4,064,844) (7,226,690) (2,389,370) 780,149
Inventories (1,062,918) (3,226,300) (34,456) (578,300)
Accounts payable and accrued expenses 474,116 (3,656,309) 3,037,740 887,452
Deferred merchandise liabilities and
revenue (net) (3,605,570) (2,372,626) 505,549 2,475,263
Other long-term liabilities 1,029,001 (1,752,945) 1,021,741 (446,222)
Other (465,753) (399,367) (323,179) (1,947,562)
---------------- -------------- ---------------- --------------
Net cash provided by (used in) operating activities (516,221) (5,690,550) (1,983,288) 3,306,130
---------------- -------------- ---------------- --------------
Cash flows from investing activities:
Proceeds from the disposal of assets 426,023 265,731 674,633 152,205
Purchases of property and equipment (3,113,744) (3,203,500) (2,100,108) (1,087,432)
Net cash received for sale of business 250,000 2,041,033 -- --
Net cash paid for purchase of business (805,000) (2,606,951) -- (675,000)
---------------- -------------- ---------------- --------------
Net cash used in investing activities (3,242,721) (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 years ended December 31, 1998 and 1997, and the periods from January 1, 1996 through August 25, 1996
and from August 26, 1996 through December 31, 1996
Successor Predecessor
Company Company
----------------------------------------------- -----------------
August 26, January 1,
Year ended 1996 through 1996 through
December 31, December 31, August 25,
1998 1997 1996 1996
-------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net proceeds of bank indebtedness under
revolving loan 7,300,000 11,200,000 -- --
Proceeds from long-term debt -- 1,309,782 190,000,000 618,000
Payments on long-term debt (1,479,160) (4,621,844) (111,506,428) (3,219,194)
Payments on obligations under agreements
with former owners (2,470,643) (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 3,350,197 7,763,948 4,977,424 (1,045,209)
-------------- -------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (408,745) (1,430,289) 1,568,661 650,694
Cash and cash equivalents at beginning of period 1,555,415 2,985,704 1,417,043 766,349
-------------- -------------- ----------------- -----------------
Cash and cash equivalents at end of period $ 1,146,670 $ 1,555,415 $ 2,985,704 $ 1,417,043
============== ============== ================= =================
Supplemental cash flow information:
Cash paid during the year for:
Income taxes $ 284,327 $ 136,624 $ 210,846 $ 248,677
============== ============== ================= =================
Interest $22,404,690 $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, 1998
(1) The Company
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 unaudited pro forma results of operations as if the acquisition
occurred at the beginning of 1996 would result in revenues of
approximately $88.9 million and a net loss of $18.3 million for the
year ended December 31, 1996.
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 $100,000 in 1996. 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 $5,600,000 in 1996.
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 1996 and
is not intended to be a projection of future results or trends.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(1) The Company, Continued
Prime Succession, Inc. (the "Company") is the fifth largest provider
of products and services in the death care industry in North America.
Through its subsidiaries, the Company offers a complete line of
funeral merchandise and services, along with cemetery property,
merchandise and services. For the year ended December 31, 1998, the
funeral and cemetery operations contributed approximately 75.9% and
24.1%, respectively, of total revenues.
As of December 31, 1998, the Company owned and operated 143 funeral
homes and 20 cemeteries in 20 states within the United States. The
Company was founded in 1991, and began operations in 1992.
In 1998, the Company purchased two funeral homes and one cemetery for
an aggregate purchase price of $1.9 million and sold a monument
company for $0.3 million. 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 years ended December 31,
1998 and 1997.
(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.
(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.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(c) Receivables, Continued
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.
(e) Derivative Instruments
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 results of operations. This statement will become
effective in the first quarter of Year 2000.
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. 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 deferred
merchandise liability and were being amortized over a period of
approximately 10 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 deferred merchandise liability 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 $13,500,000,
$9,300,000 and $4,000,000 as of December 31, 1998, 1997 and 1996,
of which $3,900,000, $5,300,000 and $600,000 were deferred, net
of amortization, by the Successor Company for the years ended
December 31, 1998 and 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 internment
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, 1998 and 1997, the amount held in merchandise trust funds was
approximately $5,400,000 and $5,000,000. The Company recognizes
currently the earnings on amounts withdrawn from the perpetual or
endowment care trusts; approximately $340,000, $400,000, $130,000
and $70,000 for the years ended December 31, 1998 and 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, 1998 and 1997 of
receivables, accounts payable and other accrued expenses
approximate fair value due to the short maturity of these
instruments. See Notes 5 and 6 for disclosures regarding the fair
value of obligations under agreements with former owners and
long-term debt, respectively.
(m) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
(n) Reclassifications
Certain reclassifications have been made to the 1997 and 1996
amounts to conform to the 1998 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. 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).
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 fees and related expenses. At
December 31, 1998 the amount due from parent totaled approximately
$666,000 and consists of current and prior years monitoring fees,
income tax payable and directors fees and related expenses. This
amount is classified in the shareholders' equity section of the
consolidated balance sheet as a reduction to additional paid in
capital.
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
(5) Obligations Under Agreements with Former Owners
<S> <C> <C> <C>
The Company has entered into consultative and noncompetition
agreements (generally for ten years) with certain officers of the
Company and former owners and key employees of businesses acquired.
Obligations under these agreements are as follows:
December 31, December 31,
1998 1997
----------------- -----------------
Obligations under covenants not to compete, amounts payable
monthly with final installments in April 1999 through December
2010. Obligations have been discounted at 13% $11,824,760 $13,648,131
Obligations under consulting agreements, amounts payable monthly
with final installments in February 1999 through December 2014.
Obligations have been discounted at 13% 3,445,125 3,981,472
----------------- -----------------
15,269,885 17,629,603
Less current installments 2,732,386 2,369,684
----------------- -----------------
$12,537,499 $15,259,919
================= =================
As of December 31, 1998 and 1997, the fair value obligations under
agreements with former owners is not practicably determined due to the
quantity and varying terms of such agreements.
The approximate aggregate maturities on these agreements for the five
years ending December 31, 2003 and thereafter are as follows:
1999 $ 2,732,386
2000 2,717,780
2001 2,764,612
2002 2,625,138
2003 and thereafter 4,429,969
-----------------
$ 15,269,885
=================
Certain of the obligations are collateralized by letters of credit of
approximately $825,000 (see Note 6).
Interest paid on obligations under agreements with former owners was
approximately $2,150,000, $2,410,000, $830,000 and $1,450,000 for the
years ended December 31, 1998, 1997 and the periods from August 26,
1996 through December 31, 1996 and January 1, 1996 through August 25,
1996.
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt
Long-term debt consists of:
December 31, December 31,
1998 1997
--------------------- --------------------
<S> <C> <C>
Revolving credit loan payable to bank $ 18,500,000 $ 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 (7.50%,
8.93% and 8.67% interest rate at December 31, 1998, 1997 and 1996,
respectively). 88,000,000 89,000,000
Other 3,784,520 2,770,165
--------------------- --------------------
210,284,520 202,970,165
Less current installments 1,396,074 1,389,530
--------------------- --------------------
Long-term debt, excluding current installments $208,888,446 $201,580,635
===================== ====================
As of December 31, 1998, 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, 1998, the fair value of these notes was approximately
$97,900,000. As of December 31, 1997, the carrying amount of these
notes approximated fair value.
As of December 31, 1998, the Company had $88,000,000 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. As of December 31, 1998 and 1997, the carrying amount of
these term loans approximates fair value.
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.
(Continued)
</TABLE>
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Under the Revolving Loan section of the Bank Credit Agreement dated
August 26, 1996, the Company may borrow up to $25,000,000 for general
corporate purposes until August 26, 2001. The Revolving Loans bear
interest at the Base Rate or the Adjusted Eurodollar Rate, as defined
in the Bank Credit Agreement. As of December 31, 1998 there is a
commitment fee of 0.5% on the unused portion of the credit line. There
were outstanding letters of credit of approximately $825,000 and
borrowings of $18 million on the line of credit bearing interest at
2.0% and 7.33%, respectively. There were outstanding letters of credit
of approximately $4,100,000 and borrowings of $11,200,000 on the line
of credit as of December 31, 1997. The Company also has a $500,000
bank credit line, renewable annually, for general corporate purposes
which is exclusive of the revolving loan under the Bank Credit
agreement dated August 26, 1996. At December 31, 1998, there were
borrowings of $500,000 on the line of credit bearing interest at 7.75%
and no borrowings as December 31, 1997. As of December 31, 1998 and
1997, the carrying amount of these instruments approximates fair
value.
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 $3,800,000 and $2,800,000 of other
debt outstanding as of December 31, 1998 and 1997, respectively.
Approximately $1,820,000 of this other debt, as of December 31, 1998,
is due to former owners with rates ranging from 6% to 9%.
Approximately $740,000 of other debt as of December 31, 1997 was due
to former owners with a rate of 9%. As of December 31, 1998 and 1997,
the fair value of other debt outstanding is not practicably determined
due to the varying terms associated with such debt.
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, 1998 and 1997, approximately $1,140,000
and $1,700,000 of the former owner notes have been extinguished
through defeasance, respectively.
The approximate aggregate principal maturities of long-term debt for
the five years ending December 31, 2003 and thereafter are as follows:
1999 $ 1,396,074
2000 4,466,717
2001 20,465,750
2002 20,014,016
2003 and thereafter 163,941,963
------------
$210,284,520
============
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
Interest paid on long-term debt was approximately $19,800,000,
$19,300,000, $2,300,000 and $6,860,000 for year ended December 31,
1998 and 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, 1998 and 1997, all of the outstanding shares of
common stock of the Company are held by Prime Succession Holdings,
Inc. (Holdings), the parent company.
Pursuant to an agreement executed by Blackstone, Loewen and PSIM, in
connection with the Acquisition, (i) Loewen has a call option,
exercisable from and after the fourth anniversary of the Acquisition
Closing Date until but excluding the sixth anniversary of the
Acquisition Closing Date, to purchase the shares of common stock of
Holdings held by Blackstone and/or PSIM and (ii) each of Blackstone
and PSIM has a put option, exercisable from and after the sixth
anniversary of the Acquisition Closing Date until but excluding the
eighth anniversary of the Acquisition Closing Date, to sell such
shares of common stock of Holdings held by Blackstone or PSIM, as the
case may be, to Loewen. The option price in each case is derived from
a formula based on earnings before interest, taxes, depreciation and
amortization. In addition, pursuant to the terms of a stockholders'
agreement entered into by Holdings, Blackstone, Loewen and PSIM on the
Acquisition Closing Date, neither Blackstone nor Loewen may transfer
its shares of Holdings common stock without the prior written consent
of the other party, subject to certain exceptions, and PSIM may not
transfer its shares of Holdings common stock without the consent of
Blackstone and Loewen.
(8) Pre-arranged Funeral Contracts
The Company enters into contracts with customers to pre-arrange
funeral services and merchandise at a fixed price. In certain
arrangements, the Company receives payment on the contract from the
customer. In turn, the Company invests in a variety of instruments to
fund pre-arranged funeral and cremation services and the related
merchandise sold but not delivered. Amounts trusted are invested
primarily in investment grade debt securities and time deposits. Such
investments are subject to the risk that the current market value may
fall below cost. The market value of assets held in trust as of
December 31, 1998 and 1997 was approximately $51,200,000 and
$53,200,000. 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, 1998 and 1997 the
amount invested in insurance contracts was approximately $9,800,000
and $9,100,000.
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 one time commission and fees of approximately $3,833,000,
which was recorded as funeral revenue in 1997.
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
The Company has other arrangements under which the customer purchases
an insurance policy which is assigned to the Company. The Company does
not have control of these policies and is obligated to deliver the
service at the fixed price only if the customer delivers the policy
proceeds.
(9) Income Taxes
Income tax expense (benefit) consists of:
Successor Predecessor
Company Company
---------------------------------------------- -------------------
Period from Period from
Year ended August 26, January 1,
December 31 1996 through 1996 through
------------------------- December 31, August 25,
1998 1997 1996 1996
------------ ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Federal:
Current $ -- $ -- $ -- $ --
Deferred -- -- (163,330) 138,887
State:
Current 363,959 136,903 (54,497) 209,569
Deferred -- -- 21,961 16,340
------------ ------------ ---------------- -------------------
$363,959 $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 ended August 26, January 1,
December 31, 1996 through 1996 through
---------------------------- December 31, August 25,
1998 1997 1996 1996
--------------- -------------- --------------- ------------------
<S> <C> <C> <C> <C>
Computed "expected" tax benefit $(2,244,082) $ 95,251 $(1,069,431) $(3,097,627)
Increase (decrease) in taxes resulting
from:
Goodwill amortization 1,012,929 1,235,793 536,610 211,146
State taxes, net of federal income
taxes 240,214 90,356 (21,474) 149,100
Valuation allowance 1,374,181 (789,571) 338,094 3,197,841
Purchase price adjustments -- (529,956) -- --
Other (19,283) 35,030 20,335 (95,664)
--------------- -------------- --------------- ------------------
Actual income tax expense
(benefit) $ 363,959 $ 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,
1998 1997
----------------------- -----------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryfoward $ 9,907,419 $7,641,494
Allowance for doubtful accounts 2,271,867 2,257,810
Covenants not to compete and consulting agreements 2,331,721 1,813,013
Deferred funeral charges -- 977,814
Other accrued expenses 1,067 119,462
Environmental reserve 143,732 211,720
Other 215,525 394,444
----------------------- -----------------------
Total gross deferred tax assets 14,871,331 13,415,757
Less valuation allowance 10,993,374 9,619,193
----------------------- -----------------------
Total deferred tax assets 3,877,957 3,796,564
----------------------- -----------------------
Deferred tax liabilities:
Cemetery property, principally due to purchase accounting 11,622,406 11,734,089
Property and equipment, principally due to purchase
accounting and differences in depreciation 6,364,291 6,413,368
Goodwill, principally due to differences in amortization 1,578,278 1,695,721
Deferred funeral revenues net of funeral charges and
and capitalized preneed funeral expenditures 247,911 --
----------------------- -----------------------
Total deferred tax liabilities 19,812,886 19,843,178
----------------------- -----------------------
Net deferred tax liability $15,934,929 $16,046,614
======================= =======================
</TABLE>
The valuation allowance for deferred tax assets as of December 31,
1998 and 1997 was $10,993,374 and $9,619,193, respectively. The net
change in total valuation allowance for the year ended December 31,
1998 and 1997 was an increase of $1,374,181 and a decrease of
$789,571, 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, 1998 and 1997 is appropriate.
(Continued)
<PAGE>
Prime Succession, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
Subsequently recognized tax benefits of $1,910,905 and $2,022,489
relating to the valuation allowance for deferred tax assets as of
December 31, 1998 and 1997 will be allocated to goodwill.
As of December 31, 1998 and 1997, the Company has a net operating loss
carryforward of approximately $26,100,000 and $20,100,000 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
2019.
(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, 1998 are as follows:
1999 $ 2,835,508
2000 2,522,404
2001 2,038,940
2002 1,574,131
2003 and thereafter 5,191,404
--------------
$ 14,162,387
==============
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 $3,020,000,
$2,620,000, $1,030,000 and $1,930,000 for the years ended December 31,
1998 and 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 10%, 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 years
ended December 31, 1998 and 1997, and the period from August 26, 1996
through December 31, 1996 and from January 1, 1996 through August 25,
1996 was approximately $250,000, $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 through January 2004, to the extent BCC stocks
those caskets required by the Company. Amounts purchased under this
agreement were approximately $6,500,000, $8,000,000, $2,300,000 and
$5,100,000 for the years ended December 31, 1998 and 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 $378,000 and $537,000 as of December 31, 1998
and 1997 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, 1998,
for clean-up or removal is $250,000 to $500,000, with $378,000
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.
(13) Segment Data
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
The adoption of this statement did not impact the Company's
consolidated financial position, results of operation or cash flows.
<PAGE>
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 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.
<PAGE>
<TABLE>
<CAPTION>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The current executive officers and directors of the Company, and their ages as
of March 10, 1999, are as follows:
Name Age Position
---- --- --------
<S> <C> <C>
Gary L. Wright.......................................53 President and Chief Executive Officer, Director
Arthur J. Ansin......................................55 Chief Financial Officer, Secretary and Treasurer
Gregory M. Hilgendorf................................49 Senior Vice President, Operations
Joseph E. Franckewitz................................43 Vice President of Pre-Need Sales
Warren B. Rudman.....................................68 Director
Howard A. Lipson.....................................35 Director
David I. Foley.......................................31 Director
Chinh E. Chu.........................................32 Director
Peter K. Grunebaum...................................65 Director
Clifford R. Hinkle...................................50 Director
Morley G. Handford...................................61 Director
</TABLE>
Effective March 11, 1999, Mr. Myles S. Cairns' employment with the Company
terminated.
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.
Arthur J. Ansin joined the Company as Chief Financial Officer, Secretary
and Treasurer in March 1999. Mr. Ansin previously has served as Chief
Administrative Officer for Kitchens Etc., Vice President and Chief Financial
Officer for Lauriat's Inc. and Vice President, Chief Financial Officer and Chief
Information Officer for Wedlo, Inc.
Gregory M. Hilgendorf is Senior Vice President, Operations. He 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 of five Olson Funeral Homes from 1982 until its acquisition
by the Company in 1992.
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.
<PAGE>
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 a Vice President 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 Managing Director of The Blackstone Group L.P., which he
joined in 1990. Prior to joining Blackstone, Mr. Chu was a member of the Mergers
and Acquisitions Group of Salomon Brothers Inc. from 1988 to 1990.
Peter K. Grunebaum has been a Director of Fortrend International LLC since
February 1996. Prior thereto, he had been a Director of ICA International since
April 1989. He currently serves on the Board of Directors of Pre-Paid Legal
Services, Inc.
Clifford R. Hinkle served as President and a Director of Flagler Capital
Corporation from its founding in 1992 and currently serves 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 & Company 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, Inc. and Integrated
Orthopaedics, Inc.
Morley G. Handford formerly served as Senior Vice President of Support
Services for Viridian Inc. (previously Sherrit Inc.). He currently serves on the
Board of Directors of Thermic Edge Corporation and United Way of Canada -
Centraide Canada. He is also chairman of a scientific advisory committee for
Luscar Ltd.
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, Foley 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. In 1998, Loewen designated Morley G. Handford
as its nominee (whom is not an officer or director of Loewen Group). 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, 1998
the compensation earned by the Company to its Chief Executive Officer and each of
the other most highly compensated executive officers of the Company.
Year
Ended All Other
Name and Principal Position December 31, Salary Bonus Compensation(2)
--------------------------- ------------ ------ ----- ---------------
<S> <C> <C> <C> <C>
Gary L. Wright(1) 1998 $225,000 $ 50,000 $ 11,503
President and Chief Executive 1997 225,000 199,708 9,055
Officer, Director 1996 82,471 50,000 2,077
Myles S. Cairns(1) 1998 $225,000 $ -- $ 13,215
Chief Financial Officer, Secretary, 1997 225,000 203,567 9,535
Treasurer 1996 81,105 50,000 2,077
Gregory M. Hilgendorf 1998 $141,539 $ 20,000 $128,184
Senior Vice President, Operations 1997 120,000 37,340 115,020
1996 93,462 -- 96,388
Peter D. Cooper 1998 $ 81,000 $ 3,500 $ 2,272
Counsel 1997 84,000 6,644 1,855
1996 130,000 -- 600
Joseph E. Franckewitz 1998 $181,000 $ 21,058 $ 11,036
Vice President, Sales 1997 156,000 52,626 9,515
1996 66,000 20,000 1,962
</TABLE>
(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 as well as consulting agreements.
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.
<PAGE>
<TABLE>
<CAPTION>
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
----------------------------------------------- ---------------------- ----------------------------------
<S> <C> <C>
Blackstone Management Associates II L.L.C.(1) 764.70589 76.5%
Loewen Group International, Inc.(2) 235.29411 23.5%
Gary L. Wright(8) -- --
Warren B. Rudman(3) -- --
Howard A. Lipson(4) -- --
David I. Foley(4) -- --
Chinh E. Chu(4) -- --
Peter K. Grunebaum(5) -- --
Clifford R. Hinkle(6) -- --
Morley G. Handford(7) -- --
Directors and executive officers as a -- --
group(8) (13 persons)
</TABLE>
(1) 544.59536, 158.78262 and 54.71026 shares, respectively, are held by
Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone
Offshore Capital Partners II L.P. and Blackstone Family Investment
Partnership II L.P. Blackstone Management Associates II L.L.C., 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 Holdings, Inc., 215 South
Monroe Street, Suite 500, Tallahassee, Florida 32301.
<PAGE>
(7) Mr. Handford business address is 12532 28A Avenue, N.W., Edmonton, AB T6J
4C9.
(8) None of the named executive officers owns any shares of Old Prime Common
Stock. Each of the executive officers of the Company holds a limited
partnership interest in PSIM, the holder of 6.61765 shares (approximately
0.7%) of Old Prime Common Stock; however, such executive officers do not
have voting or dispositive power with respect to such shares.
Item 13. Certain Relationships and Related Transactions.
The summaries of the Stock Purchase Agreement, the Stockholders' Agreement,
the Put/Call Agreement and the Administrative Services Agreement set forth below
do not purport to be complete and are qualified in their entirety by reference
to all the provisions of the Stock Purchase Agreement, the Stockholders'
Agreement, the Put/Call Agreement and the Administrative Services Agreement,
respectively. Copies of the Stock Purchase Agreement, the Stockholders'
Agreement, the Put/Call Agreement and the Administrative Services Agreement are
filed as exhibits to 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.
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 therefore. 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, which may 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 19 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)
10.1(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 as of September
30, 1998 among Prime Succession, Inc., Prime Succession
Holdings, Inc., Goldman, Sachs Credit Partners, 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/ ARTHUR J. ANSIN
------------------------------------
Arthur J. Ansin
Chief Financial Officer, Secretary
March 10, 1999 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 10, 1999 President, Chief Executive Officer
- ------------------------
/s/ ARTHUR J. ANSIN
------------------------------------
Arthur J. Ansin
Chief Financial Officer, Secretary
and Treasurer (principal financial
March 10, 1999 officer; principal accounting officer)
- ------------------------
/s/ WARREN B. RUDMAN
------------------------------------
Warren B. Rudman
March 10, 1999 Director
- -------------------------
/s/ HOWARD A. LIPSON
------------------------------------
Howard A. Lipson
March 10, 1999 Director
- -------------------------
/s/ DAVID I. FOLEY
------------------------------------
David I. Foley
March 10, 1999 Director
- -------------------------
/s/ CHINH E. CHU
------------------------------------
Chinh E. Chu
March 10, 1999 Director
- -------------------------
/s/ PETER K. GRUNEBAUM
------------------------------------
Peter K. Grunebaum
March 10, 1999 Director
- --------------------------
/s/ CLIFFORD R. HINKLE
------------------------------------
Clifford R. Hinkle
March 10, 1999 Director
- -------------------------
/s/ MORLEY G. HANDFORD
------------------------------------
Morley G. Handford
March 10, 1999 Director
- -------------------------
<PAGE>
<TABLE>
<CAPTION>
PRIME SUCCESSION, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning Costs & Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
<S> <C> <C> <C> <C> <C>
Current - Allowance for
contract cancellations and
doubtful accounts:
Year ended December 31,
1998 $2,647,693 578,764 -- (1,139,937) $2,086,520
1997 $2,834,438 729,762 -- (916,507) $2,647,693
1996 $2,926,331 371,846 414,900 (878,639) $2,834,438
Due after one year - Allowance
for contract cancellations
and doubtful accounts:
Year ended December 31,
1998 $3,288,268 5,232,303 -- (2,314,841) $6,205,730
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
(1) Revision of allowance resulting from purchase accounting and other
adjustments.
(2) Write-off of doubtful accounts.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
Prime Succession, Inc. and subsidiaries
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
Successor Company Predecessor Company
Period from Period from
Aug. 26 Jan. 1
through through
Dec. 31, Aug. 25,
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings
to Fixed
Charges
Earnings:
Income (Loss)
before income
taxes (6,600) 280 (3,145) (9,111) (355) (4,656)
Add: Fixed
charges, net 25,194 24,716 8,884 10,691 16,224 13,128
Income before
income taxes
and fixed
charges, net 18,594 24,996 5,739 1,580 15,869 8,472
Fixed Charges:
Total interest
expense (1) 24,195 23,843 8,540 10,059 15,401 12,422
Interest factor
in rents (2) 999 873 344 632 823 706
Total fixed
charges 25,194 24,716 8,884 10,691 16,224 13,128
Ratio of
earnings to
fixed charges 0.7 1.0 0.6 0.1 1.0 0.6
Coverage
deficiency
(surplus) (3) 6,600 (280) 3,145 9,111 355 4,656
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,147
<SECURITIES> 0
<RECEIVABLES> 17,803
<ALLOWANCES> 2,087
<INVENTORY> 4,761
<CURRENT-ASSETS> 22,820
<PP&E> 75,420
<DEPRECIATION> 5,907
<TOTAL-ASSETS> 391,122
<CURRENT-LIABILITIES> 15,952
<BONDS> 221,426
0
0
<COMMON> 0
<OTHER-SE> 128,888
<TOTAL-LIABILITY-AND-EQUITY> 391,122
<SALES> 98,005
<TOTAL-REVENUES> 98,005
<CGS> 65,713
<TOTAL-COSTS> 65,713
<OTHER-EXPENSES> 14,698
<LOSS-PROVISION> 5,811
<INTEREST-EXPENSE> 24,195
<INCOME-PRETAX> (6,600)
<INCOME-TAX> 364
<INCOME-CONTINUING> (6,964)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,964)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
