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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
COMMISSION FILE NUMBER 333-14599
_______________________
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 (ZIP 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 $0 as of March 17, 2000.
The number of outstanding shares of Common Stock as of March 17, 2000,
was 100.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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 18
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 41
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 42
11. EXECUTIVE COMPENSATION 44
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 45
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 49
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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. was incorporated in Delaware as Blackhawk
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 with a syndicate of financial
institutions providing a senior secured extended term loan facility in an
aggregate principal amount of $90 million 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, which subsequently were exchanged for $100 million
aggregate principal amount of publicly-registered notes with identical material
terms.
The Company's Consolidated Financial Statements have been prepared on a
"going concern" basis in accordance with Generally Accepted Accounting
Principles. The "going concern" basis of presentation assumes that the Company
will continue in operation for the foreseeable future and will realize its
assets and discharge its liabilities and commitments in the normal course of
business. There is substantial doubt about the appropriateness of the use of the
"going concern" assumption because of the Company's default with respect to its
Senior Subordinated Notes and Bank Credit Agreement and its current debt
structure. As such, realization of assets and discharge of liabilities are
subject to significant uncertainty.
The Consolidated Financial Statements do not reflect adjustments that
would be necessary if the "going concern" basis was not appropriate for the
Consolidated Financial Statements, then significant adjustments would be
necessary in the carrying value of assets and liabilities, the reported revenues
and expenses, and the balance sheet classifications used. The appropriateness of
the "going concern" basis is dependent upon, among other things, future
profitable operations, the ability to renegotiate its Senior Subordinated Notes
and Bank Credit Agreement.
The Company is the fifth largest provider of funeral home and cemetery
merchandise and services in the United States. In addition to providing
merchandise and services at the time of need, the Company also makes funeral,
cemetery and cremation arrangements on a pre-need basis. The Company through its
subsidiaries owns or operates 141 funeral homes and 19 cemeteries in 19 states,
primarily in non-urban areas.
The Company's management ("Management") has identified and the Company
has taken, a number of initiatives to expedite collection of receivables and
increase revenues including numerous initiatives to increase pre-need sales. The
Company will continue to focus on additional areas for reducing operating costs
and endeavor to increase
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revenues and profitability by capitalizing on the locations and concentration of
its properties, improved merchandising and a management structure that
encourages an entrepreneurial business culture.
The Company's principal executive offices are located at 3940 Olympic
Boulevard, Suite 500, Erlanger, Kentucky 41018 and its telephone number is (606)
746-6800.
THE DEATH CARE INDUSTRY
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 2.40 million in 1999 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 population,
particularly the "baby boomers" who have recently begun to turn 50, represents a
significant opportunity for firms such as the Company to expand their customer
base and secure future market share by actively marketing prearranged sales of
property, merchandise and services. According to the Bureau of the Census, the
United States population, age 50 and over, will increase from 74.4 million in
1999 to 97.1 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.
The death care industry is largely comprised of small family-owned,
locally operated entities that have been passed down through successive
generations within a single family and have established goodwill and tradition
over a period of time. For this reason, new competitors entering the market are
at a disadvantage to those well established businesses who have earned a
reputation for maintaining high professional standards, superior service,
attractive facilities and offer a competitive pricing structure. Other barriers
to market entry include zoning restrictions, regulatory complexities and the
existence of an adequate number of facilities serving mature markets. The
industry recently experienced a transition in which family-owned firms
consolidate with larger organizations such as the Company due to the desire of
owners to address management succession and estate planning issues as well as to
achieve liquidity and diversification of their investments. A more recent trend
has been the announcement by the larger publicly traded companies to either
curtail or suspend acquisition activity and concentrate on maximizing
profitability of properties already in their possession.
OPERATIONS
Clustering. The Company operates most of its funeral homes and
cemeteries in "clusters" which 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. This allows the Company to decrease
its overall operating costs.
Funeral Operations. Funeral operations accounted for approximately
82.4% of the Company's revenues for the fiscal year ended December 31, 1999. 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, 1999, the Company operated 141
funeral homes.
Cemetery Operations. Cemetery operations accounted for approximately
17.6% of the Company's revenues for the fiscal year ended December 31, 1999. The
Company's cemetery operations involve the sale of cemetery property and related
merchandise, including lots, lawn crypts, mausoleums, monuments, memorials,
burial vaults, along with the sale of burial site openings and closings.
Cemetery property and merchandise sales are made at the time of need or on a
prearranged basis. Prearranged sales represented approximately 71.5% of cemetery
revenue during the fiscal year ended December 31, 1999. As of December 31, 1999,
the Company owned and operated 19 cemeteries.
Combined Funeral Home and Cemetery Operations. A combined operation is
a funeral home located on a cemetery site where both are operated under the same
ownership. Combined operations help to increase market share
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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 margins, 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.
Of the Company's 19 cemeteries, 9 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 1999, 28% of the funeral services the Company
performed were cremations. While cremations often result in lower average
revenue than traditional funeral services, they generally produce higher gross
profit margins. The industry estimates that by the year 2010, cremations will
represent 38% of the United States burial market as compared to 24% in 1998. Key
factors contributing to the increase in the cremation rate include lower cost,
simplicity and environmental considerations. The Company has responded to 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. Prearranged funeral planning allows families to
specify in advance, and prepay, the services to be performed and the products to
be used. The Company markets death care products and services on a prearranged
basis through a staff of approximately 220 commissioned sales counselors. 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 the avoidance of the emotional strain of making
death care decisions at the time of need. The Company believes that an
aggressive marketing of prearranged products and services produces a backlog of
future business and enhances current and future market share.
Trust Funds. Prearranged funeral plans are funded through trust funds,
life insurance, or secured by surety bonds, 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 funeral service is performed to cover
the cost of the service. Generally, principal and earnings (including interest,
dividends and net realized capital gains) on the trust funds 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 life
insurance policies designed to cover the cost of providing the funeral service
in the future. Approximately 65% of all prearranged funeral plans sold by the
Company are funded through insurance with the balance being funded through trust
funds or secured by surety bonds. As of December 31, 1999, the Company's backlog
of prearranged funerals totaled approximately $162 million with approximately
$95 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, 1999, the Company's cemetery
merchandise trust funds totaled approximately $6.3 million.
The Company defrays 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, 1999, the Company's perpetual care trust funds totaled
approximately $8.9 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 the managers of local funeral homes
and cemeteries substantial flexibility in deciding how their firms will be
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operated 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.
In addition, the Company provides information systems support, 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. There are six Directors of Operations
in the funeral division and one Director of Operations in the cemetery division,
all of whom report directly to the Senior Vice President of Operations. The
pre-need sales division has one Vice President of Funeral Sales and one Vice
President of Cemetery Sales, both of whom report to the President.
GROWTH STRATEGY
GENERAL
Company has employed a number of management initiatives designed to:
- Expedite collection of receivables by implementing a specialty
on-site financing program with an independent agency during
the year ended December 31, 1999. This program provides
immediate need financing to families who qualify, with no
recourse to the Company
- Improve both revenues and profitability by capitalizing on the
location and concentration of its properties
- Improve merchandising
- Enhance pre-need marketing and to increase pre-need sales
- Maintain a 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 220
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
prearranged funeral services increased from $151 million at December 31, 1998 to
$162 million at December 31, 1999.
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 1999, the Company,
through Aaron Cremation Services ("Aaron"), operated seven low cost funeral
firms offering cremations and related products and services. Because these firms
operate from leased locations with a small staff, they generally 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 Aaron model is part 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 generally 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
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- Improving the utilization of its sales force
- Reducing reliance on telemarketing
The Company is a party to a supply agreement with Batesville Casket
Company, Inc. ("BCC") 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. Management
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.
Competition. The Company's funeral home and cemetery operations
generally face competition in local markets that typically are served by a
number of 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 continue to increase and that cremation will
represent approximately 38% of the United States burial market by the year 2010,
compared with 24% in 1998. 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 publicly-traded funeral
service companies, including Service Corporation International, Loewen and
Stewart Enterprises, Inc., as well as various smaller companies which compete
with the Company on a regional or local basis.
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.
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The Company's operations are also subject to extensive regulation,
supervision and licensing under numerous federal, state and local laws and
regulations. The Company believes that it is in 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, 1999, the Company employed approximately 1,160
people in funeral and cemetery operations, approximately 220 commissioned sales
people and 60 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:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
STATE FUNERAL HOMES CEMETERIES
- ----- ------------- ----------
<S> <C> <C>
Alabama 23 8
Arizona 3 0
Arkansas 3 0
California 15 0
Florida 21 4
Georgia 6 1
Illinois 15 0
Indiana 7 0
Iowa 1 0
Kentucky 3 3
Michigan 8 0
Minnesota 10 0
Missouri 5 0
Nebraska 4 0
Ohio 1 0
Tennessee 7 3
Texas 5 0
West Virginia 3 0
Wyoming 1 0
---- ----
Total 141 19
</TABLE>
As of December 31, 1999, all but 30 of the Company's 141 funeral home
locations were owned by subsidiaries of the Company. The leases with respect to
the 30 leased properties have terms ranging from 5 to 21 years.
As of December 31, 1999, the Company owned 19 cemeteries containing a
total of approximately 772 acres. Approximately 63% 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.
As of December 31, 1999, the Company occupies 20,000 square feet of
office space in a building in Erlanger, Kentucky under a lease agreement which
expires in December 2007. 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 funded 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
the 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 has produced the information required to respond to the
subpoena and those that have been issued subsequently. 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 will 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 (UNAUDITED).
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, 1999, 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 year ended December 31, 1995. KPMG LLP ("KPMG") has been appointed
auditors of the Company (Successor Company). The selected historical financial
data for the years ended December 31, 1999, 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
fiscal year ended December 31, 1995 were derived from the 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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<TABLE>
<CAPTION>
Successor Company Predecessor Company
------------------------------------------------- -------------------------
For the For the
Period Period
From From
August 26, January 1,
1996 1996 Year
Year Ended Through Through Ended
December 31, December 31, August 25, December 31,
-------------------------------- ------------ ---------- ------------
1999 1998 1997 1996 1996 1995
------ ------ ------ ------------ ---------- ------------
(dollars in millions, except per share amounts and revenues per funeral service)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 90.5 $ 98.0 $101.1 $ 32.7 $ 56.1 $ 81.5
Net income (loss) (18.3) (7.0) 0.1 (2.9) (9.5) (0.7)
OTHER FINANCIAL DATA:
EBITDA, as adjusted(1) 25.8 30.1 37.0 9.3 13.2 19.8
Cash flows from:
Operating activities 6.8 (0.5) (5.7) (2.0) 3.3 6.0
Investing activities (3.1) (3.2) (3.5) (1.4) (1.6) (9.1)
Financing activities (1.0) 3.4 7.8 5.0 (1.0) 0.2
</TABLE>
<TABLE>
<CAPTION>
As of As of
December December
31, 31,
--------------------------------------------- --------
1999 1998 1997 1996 1995
------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION:
Total debt and redeemable
preferred stock (2) $ 213.1 $ 210.3 $ 203.0 $195.0 -- $ 124.6
Total assets 414.1 427.2 439.0 437.5 -- 196.1
OPERATING DATA:
Number of funeral home
locations 141 143 143 144 146 143
Number of funeral
services 19,264 19,011 19,335 7,146 13,827 19,776
Total funeral service
revenues per
funeral service $ 3,871 $ 3,910 $ 3,896 $3,751 $ 3,419 $ 3,470
Number of cemeteries 19 20 19 16 16 16
</TABLE>
(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 as follows:
--In December 1995, the Predecessor 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 Predecessor 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 Predecessor 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.
--In 1999, the Company recognized impairment of goodwill with respect
to seven of its funeral homes. The loss on impairment amounted to
approximately $4,500,000. The Company also incurred legal costs
associated with the senior secured loan in the amount of approximately
$600,000 and recognized approximately $200,000 of expense associated
with a prior period transaction. The Company did not add back non-cash
loss on disposition of assets in its calculation of EBITDA.
These adjustments to EBITDA have been made because they 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) As of December 31, 1995 the Predecessor Company had outstanding $2.3
million of redeemable preferred stock.
11
<PAGE> 14
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 single family. In the latter part of the 1900's,
the industry experienced a transition in which family-owned firms were
consolidating with larger organizations, such as the Company. Recently, however,
several of the large publicly traded organizations announced plans to curtail or
suspend acquisition activity and concentrate on maximizing profitability of
properties already in their possession.
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 2.40 million in 1999 to
2.64 million in 2010. In addition, the average age of the population in the
United States is increasing. The aging population, particularly the "baby
boomers" who have recently begun to turn 50, represents a significant
opportunity for firms such as the Company to expand their customer base and
secure their future market share by actively marketing prearranged property,
merchandise and services. According to the Bureau of the Census, the United
States population, age 50 and over, will increase from 74.4 million in 1999 to
97.1 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
1999 COMPARED WITH 1998
Consolidated revenues decreased to $90.5 million in 1999 from $98.0 million
in 1998. Funeral service revenues increased 0.4% to $74.6 million from $74.3
million in 1998 and cemetery revenues decreased 32.9% to $15.9 million from
$23.7 million in 1998. Consolidated operating income decreased from $17.6
million in 1998 to $8.2 million in 1999. Funeral revenues increased primarily as
a result of an increase in services performed. Cemetery revenues decreased
primarily due to a substantial reduction in prearranged sales of property,
merchandise and services.
Consolidated contribution margin of $27.4 million decreased 15.2% in 1999
from $32.3 million in 1998 with funeral contribution margin of 30.7% in 1999
compared to 32.8% in 1998 and cemetery contribution margin of 28.4% in 1999
compared to 33.4% in 1998. Contribution margin is defined as a percentage of
funeral revenues or cemetery revenues, as the case may be, less related cost of
sales (including direct operating expenses).
Corporate general and administrative expense decreased to $3.2 million in
1999 compared to $3.3 million in 1998. As a percentage of consolidated revenue,
general and administrative expense increased to 3.5% in 1999 from 3.3% in 1998.
Corporate general and administrative expense decreased primarily due to
reduction in bank service charges.
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<PAGE> 15
During the year ended December 31, 1999, the Company recognized impairment
of goodwill with respect to seven of its funeral homes that had projected future
deficit cash flows on an undiscounted basis. The loss on impairment of
goodwill of $4,536,758 was determined using discounted cash flows.
Depreciation and amortization expense increased $0.1 million to $11.5
million in 1999 from $11.4 million in 1998. This increase is primarily the
result of increased depreciation on capital expenditures.
Interest expense of $24.6 million in 1999 increased by $0.4 million compared
to $24.2 million in 1998, primarily as a result of additional borrowings to
finance operating activities of the Company as well as pricing premiums on
senior debt.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash since 1996 have been funds provided by
proceeds from additional long-term debt, capital contributions and operations.
In 1999 and 1998, long-term debt proceeds provided no cash compared to $1.3
million in 1997. In 1999, net proceeds from the revolving loan facilities
provided $3.5 million compared to $7.3 million and $11.2 million in 1998 and
1997. In 1999, the disposal of assets provided cash of $0.3 million compared to
$0.4 million and $0.3 million in 1998 and 1997, respectively. Operating
activities provided $6.8 million in 1999. In 1998, operating activities used
$0.5 million of cash compared to using $5.7 million of cash in 1997.
Contemporaneously with the consummation of the Acquisition, on August 26,
1996, the Company entered a credit agreement (the "Bank Credit Agreement") with
a syndicate of financial institutions (the "Lender") and The Bank of
Nova Scotia, as administrative agent.
The Bank Credit Agreement provided the Company with senior secured 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 Bank Term Facility matures 7 years after the
Acquisition Closing
13
<PAGE> 16
Date, and the Bank Revolving Facility matures 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 Agreement 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 Agreement and the Bank Guarantees are secured by first priority
security interests in all existing and future assets (other than certain real
property and vehicles covered by certificates of title) of the Company and the
Bank Guarantors. In addition, the obligations 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 is 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 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 leased
transactions with affiliates.
As of September 30, 1999, the Company was in default with respect to certain
financial covenants set forth in the Bank Credit Agreement. On November 12,
1999, the Lenders granted the Company a conditional waiver of non-compliance
until January 31, 2000 pursuant to a Limited Waiver and Amendment to Credit
Agreement entered into among the Company, the Bank Guarantors, the Lenders and
The Bank of Nova Scotia.
On January 31, 2000, the Company and the Bank Guarantors entered into a
Limited Waiver and Forebearance Agreement to Credit Agreement with the Lenders
and The Bank of Nova Scotia pursuant to which the Lenders agreed to waive
certain conditions to additional borrowings under the Revolving Credit Facility
and to forbear from exercising certain rights and remedies under the Bank Credit
Agreement through March 15, 2000. The Lenders have not granted the Company a
further waiver beyond March 15, 2000 and have specifically reserved all of their
rights and remedies under the Bank Credit Agreement with respect to the existing
defaults. However, the Lenders have not accelerated the indebtedness outstanding
under the Bank Credit Agreement or pursued any available remedies.
Pursuant to the Limited Waiver and Forebearance Agreement to Credit
Agreement dated January 31, 2000, on February 8, 2000, The Bank of Nova Scotia,
as Administrative Agent under the Bank Credit Agreement, sent a Payment Blockage
Notice to the Trustee under the Indenture relating to the Notes. As a
consequence, the Company did not make the semi-annual interest payment due
February 15, 2000 on the Notes. The Company has not received an acceleration
notice from either the Trustee or the holders of the Notes, nor have the holders
of the Notes otherwise pursued any remedies available to them. Certain of the
Note holders have formed an informal committee which is currently in discussions
with the Company regarding the possible restructuring of the indebtedness owed
in respect of the Notes. The informal committee has retained legal counsel and
financial advisors to assist them in such discussions. No assurance can be given
that the Company will reach an agreement with the informal committee with
respect to the restructuring of such indebtedness. As of December 31, 1999, the
Company has $213.1 million of indebtedness outstanding and approximately $1.7
million of borrowing availability under the Revolving Credit Facility.
14
<PAGE> 17
On July 14, 1999, the Department of Bank and Finance of the State of Florida
approved the Company's application for use of a surety bond as security for the
fulfillment of the Company's pre-need merchandise liabilities. The Company
thereafter delivered to the Department of Banking and Finance a surety bond in
the amount of $8.5 million and withdrew trust funds in the amount of
approximately $6.8 million.
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 $0.8 million compared to one
funeral home and three cemeteries for an aggregate purchase price of $2.6
million in 1997. In 1999, the Company sold one cemetery for $0.3 million. In
1998, the Company sold a monument company for $0.3 million compared to three
funeral homes for $2.0 million in 1997.
The Company used $3.7 million, $3.1 million and $3.2 million for capital
expenditures in 1999, 1998 and 1997, respectively. The Company paid $1.5 million
in principal payments on long-term debt in 1999 and 1998, principally relating
to repayment of bank term debt and former owner obligations compared to $4.6
million in 1997, principally related to the repayment of former owners
obligations. In 1997, the Company used $1.4 million for the acquisition of Old
Prime.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $2.4 million for the fiscal year ending December 31, 2000,
which includes repair and improvement of existing 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 COMPLIANCE
Throughout the year ended December 31, 1999, the Company assessed, modified
and tested all its internal date-sensitive systems and equipment for Year 2000
compliance. The assessment phase of the Year 2000 project included both
information technology equipment and non-information technology equipment.
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.
The Company has also 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. Essentially all significant suppliers expect to be in compliance on
a timely basis.
The Company developed a contingency plan to address the possibility of the
Company's and third parties' non-compliance, however, the Company has not
encountered any significant Year 2000 related failures.
Although the Company believes that its Year 2000 compliance program
appropriately identified and addressed those Year 2000 issues that are subject
to the Company's reasonable control, there can be no assurance that the
company's efforts in this regard will be fully effective nor does the Company
have any guarantee that the systems of third parties will be brought into
compliance on a timely basis.
RECENT ACCOUNTING STANDARDS
Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," was 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," was 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 2001. The effect of these
pronouncements on the Company's consolidated financial condition and results of
operations is not expected to be material.
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<PAGE> 18
The SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements" in December 1999. SAB 101 presents the staff's views on
the application of existing generally accepted accounting principles to revenue
recognition in the financial statements. The industry is currently assessing the
impact of the application of SAB 101 on revenue recognition policies. If it is
determined that SAB 101 modifies or amends revenue recognition policies followed
by the industry and previously accepted by the SEC, the adjustment would be
required to be reflected in the Company's consolidated financial statements in
the quarter ending June 30, 2000.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K include "forward-looking
statements" as defined in Section 21D of the Securities Exchange Act of 1934.
All statements other than statements of historical facts included herein,
including, without limitation, the statements under Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
Item 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.
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.
Achieving the Company's revenue goals 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.
Another important component of revenue is earnings from the Company's trust
funds which are determined by the size of, and returns on the funds (which
include dividends, interest and realized capital gains). 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.
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.
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<PAGE> 19
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.
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.
17
<PAGE> 20
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, 1999, the carrying value of the Company's fixed-rate debt
was approximately $103.7 million, compared to fair value of $28.7 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, 1999, the Company had $109.4 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.
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<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PRIME SUCCESSION, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1999 AND 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997:
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 .............................. 26
Schedule II - Valuation and Qualifying Accounts ......................... 54
All other schedules have been omitted as not applicable or not required.
19
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
Board of Directors
Prime Succession, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Prime
Succession, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December
31, 1999. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed
in the accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit 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 consolidated financial statements present fairly, in
all material respects, the financial position of Prime Succession, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming Prime Succession, Inc. and
subsidiaries will continue as a going concern. As discussed in Note 6 to
the consolidated financial statements, Prime Succession, Inc. and
subsidiaries is in default of its Senior Subordinated Notes and Bank
Credit Agreement that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 6. The consolidated financial statements and
financial statement schedule do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Cincinnati, Ohio
March 17, 2000
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<PAGE> 23
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31,
1999 1998
------------- -------------
Assets (note 6)
<S> <C> <C>
Cash and cash equivalents $ 3,891,970 $ 1,146,670
Receivables:
Trade, less allowance of $2,216,347 and $2,086,520 13,902,326 14,718,380
Other 797,128 998,020
------------- -------------
Total receivables 14,699,454 15,716,400
Inventories:
Merchandise 3,276,136 3,582,912
Cemetery lots and mausoleum spaces 827,694 1,178,137
------------- -------------
Total inventories 4,103,830 4,761,049
------------- -------------
Prepaids and other current assets 424,576 607,407
Deferred income taxes (note 9) -- 588,088
------------- -------------
Total current assets 23,119,830 22,819,614
------------- -------------
Property and equipment:
Land and land improvements 16,929,888 16,447,209
Buildings and improvements 51,318,985 48,751,390
Equipment, furniture and fixtures 10,763,764 10,221,223
Accumulated depreciation (8,673,146) (5,906,519)
------------- -------------
Net property and equipment 70,339,491 69,513,303
------------- -------------
Developed cemetery properties 14,564,994 14,660,921
Undeveloped cemetery properties 30,830,259 30,992,379
Goodwill, less accumulated amortization of $18,996,653 and 207,755,119 218,065,917
$13,222,612
Other intangible assets, less accumulated amortization of 14,839,249 19,263,641
$13,614,443 and $9,953,607
Long-term receivables, less allowance of $3,965,996 and 14,397,421 15,221,081
$6,205,730
Merchandise trust assets and investments in insurance 21,814,901 22,586,059
contracts (note 2j and 8)
Deferred obtaining costs, less accumulated amortization of
$3,493,640 and $1,604,057 (note 2j) 15,270,796 13,507,989
Other assets 1,211,976 585,439
------------- -------------
$ 414,144,036 $ 427,216,343
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 24
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31
1999 1998
------------- -------------
Liabilities and Shareholders' Equity
<S> <C> <C>
Accounts payable $ 2,594,453 $ 2,031,580
Other accrued expenses 9,988,292 9,708,454
Current installments of obligations under agreements with 2,738,706 2,732,386
former owners (note 5)
Current installments of long-term debt (note 6) 682,284 1,396,074
Long-term debt in default (note 6) 209,000,000 --
Due to related party (note 3) 343,750 83,333
------------- -------------
Total current liabilities 225,347,485 15,951,827
------------- -------------
Deferred merchandise liabilities and revenues 54,965,220 50,478,119
Obligations under agreements with former owners, less
current installments (note 5) 9,510,666 12,537,499
Long-term debt, less current installments (note 6) 3,398,698 208,888,446
Deferred income taxes (note 9) 17,747,792 16,523,017
Other long-term liabilities (note 12) 2,761,744 3,719,511
Shareholders' equity (note 3 and 7):
Common stock, par value $.01 per share, 1,000 shares authorized;
100 issued and outstanding shares 1 1
Additional paid-in capital 128,501,398 128,888,394
Accumulated deficit (28,088,968) (9,770,471)
------------- -------------
Total shareholders' equity 100,412,431 119,117,924
------------- -------------
Commitments and contingencies (notes 10, 11 and 12)
$ 414,144,036 $ 427,216,343
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1999 and 1998 and 1997
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1999 1998 1997
------------ ------------- -------------
Revenues:
<S> <C> <C> <C>
Funeral (note 8) $ 74,567,243 $ 74,337,416 $ 78,698,491
Cemetery 15,947,287 23,667,815 22,440,769
------------ ------------- -------------
90,514,530 98,005,231 101,139,260
Costs and expenses:
Funeral 51,672,081 49,945,781 47,005,645
Cemetery 11,413,733 15,766,846 15,517,734
------------ ------------- -------------
63,085,814 65,712,627 62,523,379
Corporate general and administrative
expenses 3,188,246 3,327,047 3,250,451
Loss on impairment of goodwill (note 4) 4,536,758 -- --
Depreciation and amortization 11,475,196 11,371,044 11,241,934
------------ ------------- -------------
Operating income 8,228,516 17,594,513 24,123,496
------------ ------------- -------------
Other expenses:
Interest expense, including
amortization of deferred loan
costs of $1,726,808, $1,753,891
and $1,792,884 24,603,905 24,194,753 23,843,345
------------ ------------- -------------
Income (loss) before income taxes (16,375,389) (6,600,240) 280,151
Income tax expense (note 9) (1,943,108) (363,959) (136,903)
------------ ------------- -------------
Net income (loss) attributable to
common shareholders $(18,318,497) $ (6,964,199) $ 143,248
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1999 and 1998 and 1997
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Shareholders'
Stock Capital Deficit Equity
------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 $1 $ 129,554,499 $ (2,949,520) $ 126,604,980
Receivable due from parent company
(note 3) - (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 3) - (159,099) -- (159,099)
Net loss 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
Receivable due from parent company
(note 3) - (386,996) -- (386,996)
Net loss for the year ended
December 31, 1999 - -- (18,318,497) (18,318,497)
-- ------------- ------------ -------------
Balance as of December 31, 1999 $1 $ 128,501,398 $(28,088,968) $ 100,412,431
== ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1999 and 1998 and 1997
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(18,318,497) $ (6,964,199) $ 143,248
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,202,004 13,124,935 13,034,818
Depletion of cemetery property 755,938 1,126,378 1,664,589
Loss on property and equipment 5,610 4,316 --
Loss on impairment of goodwill 4,536,758 -- --
Deferred income tax expense (benefit) 1,812,863 (111,683) (1,898,968)
Changes in operating assets and liabilities
net of effects of acquisition of
subsidiaries:
Receivables (net) 1,729,951 (4,064,844) (7,226,690)
Inventories (86,513) (1,062,918) (3,226,300)
Deferred merchandise trust assets 784,817 12,056,628 6,440
Deferred obtaining costs (2,169,092) (4,652,071) (5,566,508)
Accounts payable and accrued expenses 860,404 474,116 (3,656,309)
Due to related party 260,417 -- --
Deferred merchandise liabilities 4,490,294 (11,010,127) 3,187,442
Other long-term liabilities (532,169) 1,029,001 (1,752,945)
Other (501,613) (465,753) (399,367)
------------ ------------ ------------
Net cash provided by (used in) operating activities 6,831,172 (516,221) (5,690,550)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from the disposal of property and equipment 289,601 426,023 265,731
Purchases of property and equipment (3,700,645) (3,113,744) (3,203,500)
Net cash received for sale of business 324,676 250,000 2,041,033
Net cash paid for purchase of business -- (805,000) (2,606,951)
------------ ------------ ------------
Net cash used in investing activities (3,086,368) (3,242,721) (3,503,687)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds of bank indebtedness under
revolving loan 3,500,000 7,300,000 11,200,000
Proceeds from long-term debt -- -- 1,309,782
Payments on long-term debt (1,478,991) (1,479,160) (4,621,844)
Payments on obligations under agreements
with former owners (3,020,513) (2,470,643) (3,160,498)
Acquisition of Old Prime -- -- (1,352,329)
Decrease in restricted cash -- -- 4,388,837
------------ ------------ ------------
Net cash provided by (used in) financing activities (999,504) 3,350,197 7,763,948
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,745,300 (408,745) (1,430,289)
Cash and cash equivalents at beginning of period 1,146,670 1,555,415 2,985,704
------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,891,970 $ 1,146,670 $ 1,555,415
============ ============ ============
Supplemental cash flow information:
Cash paid during the year for:
Income taxes $ 169,645 $ 284,327 $ 136,624
============ ============ ============
Interest $ 22,733,437 $ 22,404,690 $ 21,906,096
============ ============ ============
</TABLE>
See accompany notes to consolidated financial statements
25
<PAGE> 28
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(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.
Prime Succession, Inc. (the "Company") is the fifth largest provider of
products and services in the death care industry in the United States.
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, 1999, the funeral and cemetery
operations contributed approximately 82.4% and 17.6%, respectively, of total
revenues.
As of December 31, 1999, the Company owned and operated 141 funeral homes
and 19 cemeteries in 19 states. The Company was founded in 1991, and began
operations in 1992.
The Company sold one cemetery for $0.3 million during the year ended
December 31, 1999. The Company purchased two funeral homes and one cemetery,
in 1998, for an aggregate purchase price of $0.8 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, 1999, 1998 and 1997.
(Continued)
26
<PAGE> 29
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements have been prepared on a "going
concern" basis in accordance with General Accepted Accounting
Principles. The "going concern" basis of presentation assumes that the
Company will continue in operation for the foreseeable future and will
realize its assets and discharge its liabilities and commitments in the
normal course of business. There is substantial doubt about the
appropriateness of the use of the "going concern" assumption because of
the Company's default with respect to its Senior Subordinated Notes and
Bank Credit Agreement and its current debt structure (see Note 6). As
such, realization of assets and discharge of liabilities are subject to
significant uncertainty.
The Consolidated Financial Statements do not reflect adjustments that
would be necessary if the "going concern" basis was not appropriate for
the Consolidated Financial Statements, then significant adjustments
would be necessary in the carrying value of assets and liabilities, the
reported revenues and expenses, and the balance sheet classifications
used. The appropriateness of the "going concern" basis is dependent
upon, among other things, future profitable operations and the ability
to renegotiate its Senior Subordinated Notes and Bank Credit Agreement.
(b) 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.
(c) Cash and Cash Equivalents
All highly liquid investments, generally with original maturities of three
months or less, are considered to be cash equivalents.
(d) Receivables
The Company's receivables represent a combination of amounts due on
at-need and pre-need installment contracts. Prior to the implementation of
a specialty, on-site, financing program with an independent agency during
the year ended December 31, 1999, the Company frequently extended credit
to its at-need customers for the purchase of funeral services or cemetery
space. The customers' credit worthiness was evaluated on a case by case
basis and collateral was generally not required on credit sales. The
majority of at-need accounts receivable at December 31, 1999 are the
result of sales made prior to the implementation of the speciality,
on-site, financing program.
(Continued)
27
<PAGE> 30
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(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 2001.
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:
<TABLE>
<S> <C>
Land improvements 15 years
Buildings and improvements 15 - 40 years
Equipment, furniture and fixtures 5 - 10 years
</TABLE>
Expenditures for maintenance and repairs are expensed when incurred.
(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. The
determination includes evaluation of factors such as current market value,
future asset utilization, business climate and future undiscounted 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.
(Continued)
28
<PAGE> 31
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(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 Company recognizes revenues from pre-need funeral services and
merchandise when the services and merchandise are provided, except for
caskets and vaults included on cemetery contracts in certain states (see
Note 2(j)). Payments are typically used to purchase insurance contracts
on the lives of the patrons or deposited into trust funds as required by
state law.
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. Deferred obtaining costs related to the
sale of prearranged funeral services are amortized over a period of ten
years, approximating the period the benefits are expected to be
realized. Deferred obtaining costs, net of accumulated amortization,
were approximately $15,300,000, $13,500,000 and $9,300,000 as of
December 31, 1999, 1998 and 1997, of which $3,200,000, $3,900,000 and
$5,300,000 were deferred, net of amortization on the respective year's
addition, by the Company for the years ended December 31, 1999, 1998 and
1997.
(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
(Continued)
29
<PAGE> 32
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(j) Revenue Recognition - Cemetery Sales, Continued
paid into merchandise trust funds. As of December 31, 1999 and 1998, the
market value of assets held in merchandise trust funds was approximately
$6,300,000 and $5,400,000. The Company recognizes currently the earnings
on amounts withdrawn from the perpetual or endowment care trusts;
approximately $570,000, $340,000 and $400,000 for the years ended
December 31, 1999, 1998 and 1997. 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.
The SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements" in December 1999. SAB 101 presents
the staff's views on the application of existing generally accepted
accounting principles to revenue recognition in the financial
statements. The industry is currently assessing the impact of the
application of SAB 101 on revenue recognition policies. If it is
determined that SAB 101 modifies or amends revenue recognition policies
followed by the industry and previously accepted by the SEC, the
adjustment would be required to be reflected in the Company's
consolidated financial statements in the quarter ending June 30, 2000.
(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, 1999 and 1998 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. 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.
(Continued)
30
<PAGE> 33
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies, Continued
(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 1998 and 1997 amounts to
conform to the 1999 presentation.
(3) Related Party Transactions
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 agreement states the Company is to pay 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, 1999 the amount due from parent totaled approximately
$1,050,000 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.
(4) Impairment of Goodwill
During the year ended December 31, 1999, the Company recognized
impairment of goodwill with respect to seven of its funeral homes that
have projected future deficit cash flows on an undiscounted basis. The
loss on impairment of goodwill of $4,536,758, determined using
discounted cash flows, is reflected as a separate caption in the
Consolidated Statements of Operations for the year ended December 31,
1999.
(Continued)
31
<PAGE> 34
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Obligations Under Agreements with Former Owners
The Company has entered into consultative and noncompetition agreements
(generally for ten years) with certain officers of the Company and
former owners and key employees of businesses acquired. Obligations
under these agreements are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Obligations under covenants not to compete, amounts payable monthly with final
installments in December 2000 through December 2010. Obligations have been
discounted at 13% $ 9,298,546 $11,824,760
Obligations under consulting agreements, amounts
payable monthly with final installments in January
2002 through December 2014. Obligations have been
discounted at 13% 2,950,826 3,445,125
----------- -----------
12,249,372 15,269,885
Less current installments 2,738,706 2,732,386
----------- -----------
$ 9,510,666 $12,537,499
=========== ===========
</TABLE>
As of December 31, 1999 and 1998 the fair value of 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, 2004 and thereafter are as follows:
<TABLE>
<S> <C>
2000 $ 2,738,706
2001 2,713,432
2002 2,484,203
2003 1,553,193
2004 and thereafter 2,759,838
----------------
$ 12,249,372
================
</TABLE>
Certain of the obligations are collateralized by letters of credit of
approximately $600,000 (see Note 6).
Interest paid on obligations under agreements with former owners was
approximately $1,760,000, $2,150,000 and $2,410,000 for the years ended December
31, 1999, 1998 and 1997.
(Continued)
32
<PAGE> 35
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Revolving credit loan payable to bank $ 22,000,000 $ 18,500,000
Senior subordinated notes, interest payable semi-annually
beginning February 15, 1997 with maturity date of August
15, 2004. Interest is fixed at 10 3/4% 100,000,000 100,000,000
Term loans, interest payable quarterly and principal payable semi-
annually from February 1, 1997 through August 1, 2003
(8.59%, 7.50% and 8.93% interest rate at December 31,
1999, 1998 and 1997, respectively) 87,000,000 88,000,000
Other 4,080,982 3,784,520
------------ ------------
213,080,982 210,284,520
Less current installments on long-term debt 682,284 1,396,074
Less long-term debt in default 209,000,000 --
------------ ------------
Long-term debt, excluding current installments $ 3,398,698 $208,888,446
============ ============
</TABLE>
As of December 31, 1999, the Company had $100,000,000 in Senior Subordinated
Notes (the "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 outstanding Senior Subordinated Notes due
2004 for the $100,000,000 of publicly registered 10 3/4% Senior Subordinated
Notes due 2004. As of December 31, 1999 and 1998, the fair value of these
notes was approximately $25,000,000 and $97,900,000, respectively.
As of December 31, 1999, the Company had $87,000,000 in term loans
outstanding under a credit agreement (the "Bank Credit Agreement") with a
syndicate of financial institutions and the Bank of Nova Scotia, as
administrative agent, 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, 1999 the fair value of these term
loans was approximately $68,700,000. As of December 31, 1998, the carrying
amount of these term loans approximated fair value.
(Continued)
33
<PAGE> 36
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
In October 1996, the Company entered into interest rate swap agreements to
reduce the impact of changes in interest rates on its term loans for the
period from February 26, 1997 to August 26, 2000. These agreements
effectively limit the Company's interest rate exposure on $72,000,000 of its
then $90,000,000 term loans to a fixed 7.0% during the term of the
agreements. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the
counterparties.
Under the Revolving Loan section of the Bank Credit Agreement dated August
26, 1996, the Company may borrow up to $25,000,000 for general corporate
purposes until August 26, 2001. The Revolving Loans bear interest at the
Base Rate or the Adjusted Eurodollar Rate, as defined in the Bank Credit
Agreement. As of December 31, 1999 there is a commitment fee of 0.5% on the
unused portion of the credit line. There were outstanding letters of credit
of approximately $1,330,000 and borrowings of $22,000,000 on the line of
credit bearing interest at 3.0% and 9.09%, respectively. There were
outstanding letters of credit of approximately $825,000 and borrowings of
$18,000,000 on the line of credit as of December 31, 1998. 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 of December 31, 1999. As of December 31, 1999, the fair value
of these instruments was approximately $17,400,000. As of December 31, 1998,
the carrying amount of these instruments approximated 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.
As of December 31, 1999, the Company was in default of certain negative
covenants set forth in the Credit Agreement relating to the Bank Credit
Facilities. The syndicate of financial institutions and The Bank of Nova
Scotia granted a conditional waiver of non-compliance that expired on March
15, 2000. The lenders have not given the Company a further waiver and have
reserved all of their respective rights and remedies, however, the lenders
have not accelerated the indebtedness owed to them under the Bank Credit
Facilities and have not pursued any remedies available to them. The Company
has reclassified the related debt from long-term to current in its balance
sheet at December 31, 1999.
(Continued)
34
<PAGE> 37
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Long-Term Debt, Continued
As of December 31, 1999, the Company was in default under the Notes and as a
result of a payment blockage notice sent to the Company on February 8, 2000
by the lenders under the Bank Credit Facilities, the Company did not make
the February 15, 2000 interest payment due on the Notes. The Company has not
received an acceleration notice from either the Indenture Trustee in respect
of the Notes or the holders of the Notes, nor have the Note holders
otherwise pursued any remedies available to them. Certain of the Note
holders have formed an informal committee which is currently in discussions
with the Company regarding the possible restructuring of the indebtedness
owed in respect of the Notes. The informal committee has retained legal
counsel and financial advisors to assist them in such discussions. No
assurances can be given that the company will reach agreement with the
informal committee with respect to the restructuring of such indebtedness.
The Company has reclassified the related debt from long term to current in
its balance sheet at December 31, 1999.
The above mentioned defaults raise substantial doubt about the Company's
ability to continue as a going concern. Management has engaged financial and
legal advisors to address renegotiation of the Company's debt structure.
The Company also has approximately $4,100,000 and $3,800,000 of other debt
outstanding as of December 31, 1999 and 1998, respectively. Approximately
$1,740,000 and $1,820,000 of other debt, as of December 31, 1999 and 1998,
is due to former owners with rates ranging from 6% to 9%. As of December 31,
1999 and 1998, the fair value of other debt outstanding is not practicably
determined due to the varying terms associated with such debt.
The approximate aggregate principal maturities of long-term debt (excluding
long-term debt in default) for the five years ending December 31, 2004 and
thereafter are as follows:
<TABLE>
<S> <C>
2000 $ 682,284
2001 617,312
2002 304,782
2003 302,370
2004 and thereafter 2,174,234
-----------
$ 4,080,982
===========
</TABLE>
Interest paid on long-term debt was approximately $20,600,000, $19,800,000
and $19,300,000 for years ended December 31, 1999, 1998 and 1997,
respectively.
(7) Shareholders' Equity
As of December 31, 1999 and 1998, all of the outstanding shares of common
stock of the Company are held by Prime Succession Holdings, Inc. (Holdings),
the parent company.
(Continued)
35
<PAGE> 38
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Shareholders Equity, Continued
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, 1999 and 1998 was approximately $50,300,000 and
$51,200,000, respectively, of which $5,200,000 and $10,000,000,
respectively, is reflected in the Company's balance sheet. On July 14,
1999, the State of Florida approved the Company's application to change its
method of funding pre-need merchandise liabilities from trust funds to
surety bonds, thus allowing the Company to replace approximately $6.8
million of trust funds with a surety bond of $8.5 million. 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, 1999 and
1998 the amount invested in insurance contracts was approximately
$10,000,000 and $9,800,000.
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.
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.
(Continued)
36
<PAGE> 39
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
Income tax expense consists of:
<TABLE>
<CAPTION>
Year ended December 31 ,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Deferred $1,658,874 $ -- $ --
State:
Current 130,249 363,959 136,903
Deferred 153,985 -- --
---------- ---------- ----------
$1,943,108 $ 363,959 $ 136,903
========== ========== ==========
</TABLE>
The differences between income taxes provided in the accompanying consolidated
statements of operations and the amounts which would be computed by applying the
U.S. Federal income tax rate of 34% to loss before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(5,567,633) $(2,244,082) $ 95,251
Increase (decrease) in taxes resulting from:
Goodwill amortization 1,072,927 1,012,929 1,235,793
State taxes, net of federal income taxes 187,595 240,214 90,356
Valuation allowance 6,637,299 1,374,181 (789,571)
Effect of change in state valuation allowance (237,545) -- --
Purchase price adjustments -- -- (529,956)
Other (149,535) (19,283) 35,030
----------- ----------- -----------
Actual income tax expense $ 1,943,108 $ 363,959 $ 136,903
=========== =========== ===========
</TABLE>
(Continued)
37
<PAGE> 40
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $11,048,571 $ 9,907,419
Allowance for doubtful accounts 2,779,553 2,271,867
Covenants not to compete and consulting agreements 2,480,866 2,331,721
Other accrued expenses 739,773 1,067
Environmental reserve 119,474 143,732
Other 254,140 215,525
Goodwill, principally due to differences in amortization 208,296 --
----------- -----------
Total gross deferred tax assets 17,630,673 14,871,331
Less valuation allowance 17,630,673 10,993,374
----------- -----------
Total deferred tax assets -- 3,877,957
----------- -----------
Deferred tax liabilities:
Cemetery property, principally due to purchase
accounting 11,536,325 11,622,406
Property and equipment, principally due to purchase
accounting and differences in depreciation 6,089,987 6,364,291
Goodwill, principally due to differences in
amortization -- 1,578,278
Deferred funeral revenues net of funeral charges and
capitalized pre-need funeral expenditures 121,480 247,911
----------- -----------
Total deferred tax liabilities 17,747,792 19,812,886
----------- -----------
Net deferred tax liability $17,747,792 $15,934,929
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1999 and
1998 was $17,630,673 and $10,993,374, respectively. The net change in total
valuation allowance for the year ended December 31, 1999 and 1998 was an
increase of $6,637,299 and an increase of $1,374,181, 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, 1999 and 1998 is appropriate.
(Continued)
38
<PAGE> 41
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
Subsequently recognized tax benefits of $1,910,905 relating to the valuation
allowance for deferred tax assets as of December 31, 1999 and 1998 will be
allocated to goodwill.
As of December 31, 1999 and 1998, the Company has a net operating loss
carryforward of approximately $29,100,000 and $26,100,000 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 2020.
(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, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 3,072,196
2001 2,681,077
2002 2,089,979
2003 1,694,129
2004 and thereafter 3,181,205
----------------
$ 12,718,586
================
</TABLE>
The majority of the operating leases for funeral home facilities contain one
of the following options: (a) purchase the property at the fair value at
date of expiration; (b) purchase the property for a fair value determined at
the inception of the lease or (c) renewal of the lease at the fair rental
value at the end of the primary term of the lease. In addition, seven of the
leases contain contingent rentals based upon revenues associated with the
location.
Rent expense paid under operating leases was approximately $3,140,000,
$3,020,000 and $2,620,000 for the years ended December 31, 1999, 1998 and
1997, respectively, of which approximately 12%, 10% and 14%, respectively,
was paid to former owners currently employed by the Company.
(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 20% of their compensation,
subject to IRS limitations. The Company will match 50% of the employees'
contribution up to a maximum of 4% of their salary. Total expense recognized
by the Company during the years ended December 31, 1999, 1998 and 1997 was
approximately $210,000, $250,000 and $260,000, respectively.
(Continued)
39
<PAGE> 42
PRIME SUCCESSION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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
$6,700,000, $6,500,000 and $8,000,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company has accrued $318,000 and $378,000 as of December 31, 1999 and
1998 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, 1999, for clean-up or removal is $250,000 to $500,000, with
$318,000 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 operations, cash flows or disclosures.
40
<PAGE> 43
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.
41
<PAGE> 44
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 17, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gary L. Wright.......................................54 President and Chief Executive Officer, Director
Arthur J. Ansin......................................56 Chief Financial Officer, Executive Vice President,
Secretary and Treasurer
Gregory M. Hilgendorf................................50 Senior Vice President, Operations
Howard A. Lipson.....................................36 Director
Chinh E. Chu.........................................33 Director
Richard Lappin.......................................55 Director
Peter K. Grunebaum...................................66 Director
Clifford R. Hinkle...................................51 Director
Morley G. Handford...................................62 Director
</TABLE>
The business experience of each of such executive officers and
directors is set forth below.
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,
Executive Vice President, 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 their
acquisition by the Company in 1992.
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 AMF Group, Inc., Graham Packaging, Rose Hills, Allied Waste
Industries, Volume Services and Ritvik Holdings, Inc.
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.
Richard C. Lappin is a Senior Managing Director of The Blackstone
Principal Investing Group. Prior to joining Blackstone, Mr. Lappin was president
of Farley Industries.
42
<PAGE> 45
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 Century Capital Markets LLC,
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 may designate five and three nominees, respectively, to
the Board of Directors of Old Prime. Messrs. Wright, Lipson, Lappin and Chu are
the nominees designated by Blackstone. Messrs. Grunebaum, Hinkle and Handford
(none of whom is an officer or a director of Loewen Group) are the nominees
designated by Loewen. 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) receive $25,000 annually for their service as Directors
plus the reimbursement of expenses. Such Directors do not receive a separate fee
for service on any committees of the Board. Directors of the Company who are
employed by the Company or Blackstone serve without compensation.
43
<PAGE> 46
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth for the last three fiscal years ended
December 31, 1999, 1998 and 1997 the compensation earned by the Chief Executive
Officer and each of the other most highly compensated executive officers (and
former executive officers who served during 1999) of the Company.
<TABLE>
<CAPTION>
Year
Ended All Other
Name and Principal Position December 31, Salary Bonus Compensation(2)
------------ ------ ----- ---------------
<S> <C> <C> <C> <C>
Gary L. Wright(1) 1999 $225,000 $ 45,000 $ 11,953
President and Chief Executive Officer, 1998 225,000 50,000 11,503
Director 1997 225,000 199,708 9,055
Arthur J. Ansin(1) 1999 $261,346 $ 45,000 $ 3,510
Chief Financial Officer, Executive Vice
President, Secretary, Treasurer
Gregory M. Hilgendorf 1999 $160,000 $40,000 $123,451
Senior Vice President, Operations 1998 141,539 20,000 128,184
1997 120,000 37,340 115,020
Brian Clary 1999 $ 85,843 $25,000 $ 13,237
Corporate Controller
Peter D. Cooper 1999 $ 85,308 $ 7,000 $ 2,398
Counsel 1998 81,000 3,500 2,272
1997 84,000 6,644 1,855
Myles S. Cairns(3) 1999 $ 380,769 $ -- $ 39,006
Former Chief Financial Officer, Secretary, 1998 225,000 -- 13,215
Treasurer 1997 225,000 203,567 9,535
Joseph E. Franckewitz(4) 1999 $ 80,637 $ -- $ 3,471
Former Vice President, Sales 1998 181,000 21,058 11,036
1997 156,000 52,626 9,515
</TABLE>
(1) For additional information concerning the compensation of the current
executive officers of the Company, see "Employment Agreements" below.
(2) All Other Compensation includes amounts credited to the named executive
officers which may be applied to the payment of medical, dental and
life insurance benefits and in the case of Mr. Hilgendorf payments
under a consulting agreement and in the case of Mr. Cairns, the payment
of consulting and other fees.
(3) Mr. Cairns' employment terminated as of March 15, 1999. Pursuant to a
Termination Agreement entered into by Mr. Cairns and the Company, Mr.
Cairns received severance payments totaling $337,500 during 1999,
which have been included in salary.
(4) The employment of Mr. Franckewitz terminated as of April 20, 1999.
Employment Agreements
The Company has entered into a contract with Mr. Wright regarding
certain terms of his employment with the Company. The agreement provides that
Mr. Wright will be paid a base salary of $225,000 per year, with increases at
the discretion of the Board of Directors of the Company plus a cash bonus equal
to a percentage of his salary, but not to
44
<PAGE> 47
exceed a maximum of 100%. The percentage is based upon the extent to which the
Company achieves a target EBITDA (a non-GAAP measure of cash flow) as set by the
Board of Directors annually.
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 agreement further provides that Mr. Wright 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.
The Company has entered into a contract with Mr. Ansin regarding
certain terms of his employment with the Company. The agreement provides that
Mr. Ansin shall be paid a base salary of $225,000 per year, plus a cash bonus
equal to a percentage of his salary, but not to exceed a maximum of 150%. The
percentage is based upon the extent to which the Company achieves a target
EBITDA as set by the Board of Directors annually. The agreement also provides
that Mr. Ansin's cash bonus for the fiscal year ending December 31, 1999 shall
not be less than $150,000. Mr. Ansin became an employee of the Company in July
1999 and was paid salary in conjunction with a bonus. Thus, the salary presented
in the Summary Compensation Table reflects as salary, a combination of bonus and
salary.
Other
The compensation of the executive officers other than Mr. Wright will
be determined by the Board of Directors of the Company or the Chief Executive
Officer
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:
<TABLE>
<CAPTION>
Name And Address Of Beneficial Owner Number Of Percentage Of Common Stock
Shares
- ----------------------------------------------- ----------------------- -----------------------------------
<S> <C> <C>
Blackstone Management Associates II
L.L.C.(1) 764.70589 78.2%
Loewen Group International, Inc.(2) 213.23529 21.8%
Gary L. Wright(7) -- --
Howard A. Lipson(3) -- --
Richard C. Lappin(3) -- --
Chinh E. Chu(3) -- --
Peter K. Grunebaum(4) -- --
Clifford R. Hinkle(5) -- --
Morley G. Handford(6) -- --
Directors and executive officers as a -- --
group(7) (11 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
45
<PAGE> 48
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 The
Blackstone Group L.P., 345 Park Avenue, New York, N.Y. 10154.
(2) The address for Loewen is c/o The Loewen Group Inc., 4126 Norland
Avenue, Burnaby, British Columbia V5G 3S8
(3) Messrs. Lipson, Lappin 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.
(4) Mr. Grunebaum's business address is c/o Fortrend International LLC, 750
Lexington Avenue, New York, New York 10022.
(5) Mr. Hinkle's business address is c/o Flagler Holdings, Inc., 111 South
Monroe Street, Suite 2000-B, Tallahassee, Florida 32301.
(6) Mr. Handford business address is 12532 28A Avenue, N.W., Edmonton, AB
T6J 4C9.
(7) None of the named executive officers own any shares of Old Prime Common
Stock. Messrs. Wright, Hilgendorf and certain others have a limited
partnership interest in PSIM, the holder of 6.61765 shares
(approximately 0.7%) of Old Prime Common Stock; however, such
individuals do not have voting or dispositive power with respect to
such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following 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 which were filed as
exhibits to the Company's Registration Statement on Form S-4 with respect to the
Exchange Notes, and are incorporated by reference herein.
Stock Purchase Agreement And Acquisition
On June 14, 1996, as a precursor to the Acquisition, the Company and
Loewen entered into a Stock Purchase Agreement with all of the holders of
capital stock of Old Prime (the "Selling Stockholders"), pursuant to which the
Selling Stockholders agreed to sell to the Company, and the Company 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 Company
assigned back to Old Prime its rights and obligations 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 Notes and
the Bank Term Facility.
46
<PAGE> 49
Stockholders' Agreement
In connection with the Acquisition, Blackstone, Loewen and PSIM entered
into an agreement (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 four and three nominees as directors, respectively, to the Board of
Directors of Old Prime (Blackstone has the right thereunder to designate a fifth
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
described below) or on such other date as Blackstone and Loewen may agree.
Put/Call Agreement
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 was guaranteed by Loewen Group.
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 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 included 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 provided 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 may 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
47
<PAGE> 50
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 terminates (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 any court or any governmental
agency with appropriate jurisdiction, or (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.
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
In connection with the Acquisition, on the Acquisition Closing Date,
Mr. Wright and certain other officers and key employees 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").
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.
48
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(1) 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.
49
<PAGE> 52
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.
10.4(b)* Limited Waiver and Amendment dated November 12, 1999 entered
into by and among Prime Succession, Inc. (formerly known as
Prime Succession Acquisition Corp.), Prime Succession
Holdings, Inc. (formerly known as Prime Succession, Inc.), the
Financial Institutions listed therein, Goldman Sachs Credit
Partners L.P., as syndication agent and arranging agent, and
The Bank of Nova Scotia, as administrative agent.
10.4(c)* Limited Waiver and Forbearance Agreement to Credit Agreement
dated January 31, 2000 entered into by and among Prime
Succession, Inc. (formerly known as Prime Succession
Acquisition Corp.), Prime Succession Holdings, Inc. (formerly
known as Prime Succession, Inc.), the Financial Institutions
listed therein, Goldman Sachs Credit Partners L.P., as
syndication agent and arranging agent, and The Bank of Nova
Scotia, as administrative agent.
10.5* Letter Agreement dated August 1, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession, Inc.) and
Gary Wright.
10.6* Letter Agreement dated August 1, 1996 between Prime Succession
Acquisition Corp. (to be renamed Prime Succession, Inc.) and
Myles Cairns.
10.7* Put/Call Agreement, dated as of August 26, 1996, among
Blackstone Capital Partners II Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners II L.P., Blackstone
Family Investment Partnership II L.P., PSI Management Direct
L.P., Loewen Group International Inc. and the Loewen Group
Inc.
10.8* Stock Purchase Agreement, dated as of June 14, 1996, by and
among Prime Succession, Inc., the individuals or entities
listed on the signature pages thereof, The Loewen Group Inc.
and Blackhawk Acquisition Corp.
12 Computation of Ratio of Earnings to Fixed Charges
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
50
<PAGE> 53
* 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.
51
<PAGE> 54
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, Executive Vice President,
Secretary and Treasurer
March 17 , 2000
- ----------------------
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 17, 2000 President, Chief Executive Officer
- ------------------------
/s/ ARTHUR J. ANSIN
-------------------------------------
Arthur J. Ansin
Chief Financial Officer, Executive
Vice President, Secretary and Treasurer
(principal financial officer; principal
March 17, 2000 accounting officer)
- ----------------------
/s/ HOWARD A. LIPSON
-------------------------------------
Howard A. Lipson
March 17, 2000 Director
- ------------------------
/s/ RICHARD C. LAPPIN
-------------------------------------
Richard C. Lappin
March 17, 2000 Director
- ------------------------
/s/ CHINH E. CHU
-------------------------------------
Chinh E. Chu
March 17, 2000 Director
- ------------------------
/s/ PETER K. GRUNEBAUM
--------------------------------------
Peter K. Grunebaum
March 17, 2000 Director
- -------------------------
52
<PAGE> 55
/s/ CLIFFORD R. HINKLE
--------------------------------------
Clifford R. Hinkle
March 17, 2000 Director
- ------------------------
/s/ MORLEY G. HANDFORD
--------------------------------------
Morley G. Handford
March 17, 2000 Director
- ------------------------
53
<PAGE> 56
PRIME SUCCESSION, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at Charged to Charged to Balance at
Beginning Costs & Other End of
Description of Period Expenses Accounts(1) Deductions(2) Period
Current - Allowance for
contract cancellations and
doubtful accounts:
Year ended December 31,
1999 $2,086,520 660,656 1,132,271 (1,663,100) $2,216,347
1998 $2,647,693 578,764 -- (1,139,937) $2,086,520
1997 $2,834,438 729,762 -- (916,507) $2,647,693
Due after one year - Allowance
for contract cancellations
and doubtful accounts:
Year ended December 31,
1999 $6,205,730 1,432,876 (1,132,271) (2,540,339) $3,965,996
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
</TABLE>
(1) Reclassification of current portion.
(2) Write-off of doubtful accounts.
54
<PAGE> 1
Exhibit 12
Prime Succession, Inc. and subsidiaries
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
PERIOD PERIOD
FROM FROM
AUG. 26 JAN. 1
THROUGH THROUGH
DEC. 31, AUG. 25,
1999 1998 1997 1996 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of
Earnings
to Fixed
Charges
Earnings:
Income (Loss)
before income
taxes (16,375) (6,600) 280 (3,145) (9,111) (355)
Add: Fixed
charges, net 25,640 25,194 24,716 8,884 10,691 16,224
Income before
income taxes
and fixed
charges, net 9,265 18,594 24,996 5,739 1,580 15,869
Fixed Charges:
Total interest
expense (1) 24,604 24,195 23,843 8,540 10,059 15,401
Interest factor
in rents (2) 1,036 999 873 344 632 823
Total fixed
charges 25,640 25,194 24,716 8,884 10,691 16,224
Ratio of
earnings to
fixed charges 0.4 0.7 1.0 0.6 0.1 1.0
Coverage
deficiency
(surplus) (3) 16,375 6,600 (280) 3,145 9,111 355
</TABLE>
<PAGE> 2
(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> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF PRIME SUCCESSION, INC. AND SUBSIDIARIES, FOR THE YEAR
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,892
<SECURITIES> 0
<RECEIVABLES> 16,916
<ALLOWANCES> 2,216
<INVENTORY> 4,104
<CURRENT-ASSETS> 23,120
<PP&E> 79,013
<DEPRECIATION> 8,673
<TOTAL-ASSETS> 414,144
<CURRENT-LIABILITIES> 225,347
<BONDS> 12,909
0
0
<COMMON> 0
<OTHER-SE> 128,501
<TOTAL-LIABILITY-AND-EQUITY> 414,144
<SALES> 90,514
<TOTAL-REVENUES> 90,514
<CGS> 63,086
<TOTAL-COSTS> 63,086
<OTHER-EXPENSES> 19,200
<LOSS-PROVISION> 2,094
<INTEREST-EXPENSE> 24,604
<INCOME-PRETAX> (16,375)
<INCOME-TAX> 1,943
<INCOME-CONTINUING> (18,318)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,318)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
