Keystone North America, Inc. Consolidated Financial Statements. For The Three Months Ended March 31, 2007

Transcription

1 Keystone North America, Inc. Consolidated Financial Statements For The Three Months Ended March 31, 2007

2 Unaudited Consolidated Financial Statements March 31, 2007 Contents Unaudited Consolidated Balance Sheets...1 Unaudited Consolidated Statements of Operations...3 Unaudited Consolidated Statements of Comprehensive Income...4 Unaudited Consolidated Statements of Shareholders Equity...5 Unaudited Consolidated Statements of Cash Flows...6 Notes to the Unaudited Consolidated Financial Statements...7

3 Unaudited Consolidated Balance Sheets (000 s of U.S. Dollars) As at As at March 31, December 31, Assets Current assets: Cash and cash equivalents $ 17,435 $ 2,824 Marketable securities Restricted short-term investments 3,307 3,474 Trade receivables, less allowances for doubtful accounts of $1,601 and $1,579 at March 31, 2007 and December 31, 2006, respectively 8,242 7,774 Inventories 6,003 5,852 Income tax receivable Prepaid and other current assets 3,121 2,612 Future income taxes 1,755 1,933 Total current assets 40,209 24,895 Preneed receivables and funds 56,559 52,316 Restricted cemetery care funds 3,622 3,372 Restricted long-term investments 4,176 4,650 Property and equipment, net 72,751 68,203 Goodwill 96,299 89,463 Tradenames 27,120 25,507 Covenants not to compete, less accumulated amortization of $5,269 and $4,937 at March 31, 2007 and December 31, 2006, respectively 11,473 9,893 Derivative contracts 2,483 2,420 Other assets 301 6,477 Total assets $ 314,993 $ 287,196 See accompanying notes. 1

4 Unaudited Consolidated Balance Sheets (000 s of U.S. Dollars) As at As at March 31, December 31, Liabilities and shareholders equity Current liabilities: Accounts payable and accrued expenses $ 8,432 $ 7,537 Dividends payable Current maturities of long-term debt (Note 4) 3,268 3,379 Total current liabilities 12,384 11,498 Deferred revenue 14,858 14,642 Long-term debt (Note 4) 143, ,472 Future income taxes 12,941 10,708 Other long-term liabilities Non-controlling interests in preneed funds 47,706 43,561 Non-controlling interests in cemetery care funds 3,622 3,372 Minority interest 3,525 7,112 Shareholders equity: Share capital (Note 5) 93,323 78,312 Accumulated deficit (11,658) (11,029) Accumulated other comprehensive loss (5,673) (4,807) Total shareholders equity 75,992 62,476 Total liabilities and shareholders equity $ 314,993 $ 287,196 See accompanying notes. 2

5 Unaudited Consolidated Statements of Operations (000 s of U.S. Dollars except per share amounts) Three months ended Three months ended March 31, March 31, Revenues: Funeral services $ 23,596 $ 20,541 Other 1, Total revenues 24,768 21,433 Costs and expenses 15,761 13,420 Gross profit 9,007 8,013 Other operating expenses: Corporate, general and administrative expenses 2,396 1,920 Depreciation Amortization Income from operations 5,124 4,551 Interest expense 4,255 4,166 Unrealized gain (loss) on derivative contracts 173 (356) Other income Income from continuing operations before income taxes and minority interest 1, Income tax expense Minority interest Income (loss) from continuing operations 696 (24) Loss from discontinued operations - (567) Net income (loss) $ 696 $ (591) Weighted average number of shares outstanding 19,811,961 18,768,017 Basic and diluted income (loss) from continuing operations $ 0.04 $ - Basic and diluted income (loss) from discontinued operations $ - $ (0.03) Basic and diluted net income (loss) per common share $ 0.04 $ (0.03) See accompanying notes. 3

6 Three months ended Three months ended March 31, March 31, Net income (loss) $ 696 $ (591) Other comprehensive loss, net of tax: Keystone North America Inc. Unaudited Consolidated Statements of Comprehensive Loss (000 s of U.S. Dollars) Net change in unrealized gains associated with available for sale assets Unrealized gains on available for sale assets, net of income taxes of $ Unrealized loss on foreign currency translation adjustments (1,079) 356 Minority interest allocation (2) - Other comprehensive loss $ (954) $ 356 Comprehensive loss $ (258) $ (235) See accompanying notes. 4

7 Unaudited Consolidated Statements of Shareholders' Equity (000 s of U.S. Dollars except per share amounts) Share Capital Accumulated Other Comprehensive Accumulated Shareholders' Shares Amount Loss Deficit Equity Balance at December 31, ,768,017 $ 78,312 $ (4,698) $ (2,114) $ 71,500 Net loss (2,656) (2,656) Dividends (6,259) (6,259) Currency translation adjustment - - (109) - (109) Balance at December 31, ,768,017 $ 78,312 $ (4,807) $ (11,029) $ 62,476 Transition adjustment Net income Dividends (1,675) (1,675) IPS offering 4,945,000 15, ,011 Other comprehensive loss - - (954) - (954) Balance at March 31, ,713,017 $ 93,323 $ (5,673) $ (11,658) $ 75,992 See accompanying notes. 5

8 Unaudited Consolidated Statements of Cash Flows (000 s of U.S. Dollars) Three months ended Three months ended March 31, March 31, Operating activities: Net income (loss) $ 696 $ (591) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest Provision (benefit) for future income taxes Unrealized loss (gain) on derivative contracts (173) 356 Amortization expense Depreciation expense Loss (gain) on disposal of businesses and assets 41 (24) Changes in operating assets and liabilities Net cash provided by operating activities 2,907 2,456 Investing activities: Business acquisitions, net of cash acquired (14,380) (1,519) Cash paid to repurchase Class B shares, net of cash received from management (3,387) - Purchases of property and equipment (281) (738) Cash paid for transition costs - (541) Proceeds from restricted investments Net cash used in investing activities (17,118) (1,804) Financing activities: Public offering and over-allotment proceeds of common shares, net of expenses 15,011 - Public offering and over-allotment proceeds of 14.5% Subordinated Notes 17,930 - Deferred financing costs (1,281) - Payments on credit agreement (300) - Borrowings on long-term debt Payments on long-term debt (1,008) (1,024) Cash paid for Class A dividends (1,448) (1,448) Cash paid for Class B dividends (180) (277) Net cash provided by (used in) financing activities 28,822 (2,451) Net increase (decrease) in cash 14,611 (1,799) Cash and cash equivalents, beginning of period 2,824 6,614 Cash and cash equivalents, end of the period $ 17,435 $ 4,815 Supplement disclosure of cash flow information: Cash paid for interest $ 3,984 $ 4,061 Cash paid (recovered) for income taxes $ (5) $ 38 See accompanying notes. 6

9 Notes to the Unaudited Consolidated Financial Statements (000 s of U.S. Dollars, except percentages and where the context requires) March 31, General Keystone North America Inc. (the Company ) was incorporated on August 27, 2004 under the laws of the Province of Ontario. The Company s authorized capital consists of an unlimited number of common shares ( Common Shares ) and an unlimited number of Class A preferred shares. No Class A preferred shares have been issued. Holders of Common Shares are entitled to receive dividends as and when declared by the board of directors and are entitled to one vote per Common Share on all matters to be voted on at all meetings of shareholders of the Company. From August 27, 2004 to February 8, 2005, the Company was inactive. The Company and its indirect subsidiary, Keystone Newport ULC (together, the Issuer ), completed an initial public offering (the initial IPS Offering ) on February 8, Each Income Participating Share ( IPS ) consists of one Common Share and C$4.286 principal amount of 14.5% subordinated notes of Keystone Newport ULC ( Subordinated Notes ). Concurrent with the initial IPS Offering, Keystone Newport ULC issued, on a private placement basis, $8.1 million (C$10 million) of separate 14.5% subordinated notes (the Separate Subordinated Notes and together with the Subordinated Notes, the Notes ) and the Issuer, through a subsidiary, entered into a bank credit facility (the Credit Agreement ) with a group of lenders consisting of a $43.1 million term loan and a $15 million revolving credit commitment (together with the initial IPS Offering, the initial IPS Transactions ). In connection with the initial IPS Offering, $43.1 million was drawn on the Credit Agreement. The credit agreement has since been amended which increased the revolving credit commitment to $30 million (see Note 5). On March 13, 2007, the Issuer sold 4,945,000 IPSs pursuant to a bought deal basis with a syndicate of underwriters (the Bought Deal ) for total gross cash proceeds of $34.1 million (C$40.3 million). The net proceeds (after commission and fees) were utilized to fund the acquisition of 100% of the shares of Fred H. Kaul Funeral Homes, Inc. for approximately $14.4 million; to fund the redemption of 518,745 Class B common shares of Keystone Group Holdings, Inc. for approximately $3.4 million; and for general corporate purposes. Each IPS unit consists of one Common Share and C$4.286 principal amount of 14.5% subordinated notes of Keystone Newport ULC ( Subordinated Notes ). The gross proceeds of the issuance of additional IPSs pursuant to the Bought Deal included the issuance of an additional $17.9 million (C$21.2 million) of Subordinated Notes as part of the IPSs issued. 7

10 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 1. General (continued) These interim consolidated financial statements present the results of operations of the Company for the three month period ended March 31, 2007 compared with the results of operations for the three month period ended March 31, Basis of Presentation The unaudited interim consolidated financial statements of the Company contain all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The financial statement results for the interim periods presented are not necessarily indicative of financial results for the full year. The Company s operations are subject to seasonality and industry experience indicates that slightly more deaths occur between December and March, which management attributes to seasonal variation due to adverse weather and certain illnesses that generally occur during the winter months. These unaudited interim consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principals generally accepted in Canada for interim financial statements and do not contain all of the disclosures required for annual financial statements. As a result, these financial statements should be read in conjunction with the Company s most recent financial statements dated December 31, These interim financial statements follow the same accounting policies and methods of application as the most recent annual financial statements, except for new accounting polices noted below. Reclassifications Certain 2006 revenues and expenses have been reclassified, primarily related to discontinued operations to conform with the 2007 presentation. New Accounting Policies In 2005, the Canadian Institute of Chartered Accountants ( CICA ) issued new accounting standards concerning financial instruments: Financial Instruments Recognition and Measurement ( Section 3855 ); Hedges ( Section 3865 ); and Comprehensive Income ( Section 1530 ). The standards require prospective application and were effective for the Company s first quarter of fiscal

11 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 2. Basis of Presentation (continued) Section 1530 introduces the concept of comprehensive income, which consists of net income and other comprehensive income (loss) ( OCI ), and represents changes in shareholders equity during a period arising from transactions with non-owners. OCI includes among its components, unrealized gains and losses on financial instruments classified as available for sale, changes in the fair value of the effective portion of cash flow hedging instruments and changes in translation adjustment with income tax expenses or benefits associated with each component. As a result of the implementation of this section, the consolidated financial statements include a consolidated statement of comprehensive income, while the cumulative amount of OCI, which is termed accumulated other comprehensive loss or AOCL, is presented as a new category of shareholders equity in the consolidated balance sheets. Section 3855, Financial Instruments Recognition and Measurement, sets out the standards for the recognition and measurements of financial assets and financial liabilities. Depending on their balance sheet classification, fair value or cost-based measures are used. This standard also prescribes the basis of presentation for gains and losses on financial instruments. Based on financial instrument classification, gains and losses on financial instruments are recognized in either net income or other comprehensive income. The Company has made the following classifications: The investments in marketable securities, restricted investments, preneed receivables and funds and restricted cemetery care funds are classified as assets available-for-sale and are measured at fair value based on information provided by the custodians of the accounts. Gains and losses resulting from the periodic revaluation are excluded from net earnings and recorded net of income taxes as a component of OCI in the Consolidated Statement of Comprehensive Income. Derivative financial instruments (that are not hedges) have been classified as Assets or liabilities held for trading and are measured at fair value based on third party valuations. Gains and losses resulting from the periodic revaluation are included in the consolidated statement of operations. Trade receivables are classified as loans and receivables and are recorded at amortized cost, using the effective interest method. Accounts payable and accrued liabilities, income taxes payable and long-term debt are classified as other financial liabilities and are initially measured at their fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method. 9

12 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 2. Basis of Presentation (continued) Certain preneed receivables and funds related to funeral trusts and restricted cemetery care funds were measured at fair value beginning January 1, 2007 and the resulting unrealized net gain was recorded to AOCL, net of income taxes, and subsequently reclassified to either non-controlling interests in preneed funds or non-controlling interests in cemetery care funds. At the close of each period, the change in market value of these investments creates a corresponding change in the non-controlling interest in the investments and, accordingly, has no net effect on OCI. In accordance with Section 3855, the prior period comparative figures at December 31, 2006 were not restated to fair value and are therefore presented at cost. Certain preneed receivables and funds related to merchandise and service trusts on cemetery and restricted investments were measured at fair value at January 1, 2007 and the resulting unrealized net gain of $0.1 million was recorded to AOCL, at that date, net of income taxes. At March 31, 2007, the change in market value of these investments of $0.1 million, net of income taxes, was recorded as a component of OCI. In accordance with Section 3855, the prior period comparative figures at December 31, 2006 were not restated to fair value and are therefore presented at cost. Deferred financing costs are included in the net amount of long-term debt and are amortized to interest expense over the term of the related debt. Prior to January 1, 2007, deferred financing costs are presented as a component of other assets, and an equal amount of deferred financing cost amortization was recognized each period. Section 3855 requires the use of the effective interest method to amortize deferred financing costs whereby the amount recognized varies over the life of the loan based on principal amounts outstanding. As at January 1, 2007, the unamortized amount of deferred financing costs was adjusted to what the balance would have been had the effective interest method been historically used. The impact was a decrease in long-term debt of $0.6 million, an increase in future income tax liabilities of $0.2 million and a decrease in accumulated deficit of $0.4 million. In accordance with Section 3855, the Company evaluated embedded derivative features in all contractual arrangements and identified the following: 10

13 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 2. Basis of Presentation (continued) Call option on subordinated notes Keystone Newport ULC has the option to call the subordinated notes after the fifth anniversary date at a redemption price that could result in a premium, therefore resulting in an embedded derivative requiring bifurcation. Put option on subordinated notes in the event of change of control as defined in the indenture, the holders of the notes carry a put option of 101% of the principal amount plus any unpaid interest. Negotiation rights on the Class B common shares Keystone Group Holdings, Inc. and the holder share a negotiation right whereby Keystone Group Holdings, Inc. and the holder enter into good faith negotiations to determine a fair value and repurchase the shares. Management has determined that the put option of the subordinated notes is closely related to the economic characteristics of the subordinated note host contract. Accordingly, the put option has not been separately accounted for in the accompanying consolidated financial statements. Management, with the assistance of a third party valuation, has deemed the value of the remaining embedded derivative features to be nominal in nature with the exception of the call option of the subordinated notes. An Option-Adjusted Spread ( OAS ) analysis was used to develop a value for the call option component of the subordinate notes. The valuation benchmarked a comparable set of high-yield bonds and their associated OAS and Nominal Spreads. The fair value of the embedded derivative related to the call option on the subordinated notes issued during the initial IPS Offering was determined to be C$2.1 million as of the date of issuance. The fair value of the embedded derivative related to the call option on the subordinated notes was C$1.9 million on January 1, The change in valuation was recorded to accumulated deficit as of January 1, The fair value of the embedded derivative related to the call option on the subordinated notes issued during the March 13, 2007 Bought Deal was valued at C$0.5 million at the time of issuance. On March 31, 2007 the fair value of the call option on all subordinated notes was C$2.4 million. The fair value of the call option on the subordinated notes is presented as a component of longterm debt on the accompanying balance sheet as at March 31,

14 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 2. Basis of Presentation (continued) Section 3865 establishes standards for when and how hedge accounting may be applied. The Company has decided not to elect hedge accounting on its derivative financial instruments, which consist of interest rate swap agreements and foreign currency exchange contracts. Accordingly these non-hedged derivatives are classified as assets held for trading and are marked-to-market at each period end and resulting gains/losses are recognized in the consolidated statement of operations. These changes resulted in no modifications to the Company s accounting for derivatives as presented in prior periods. The change in accounting policy related to the implementation of Sections 3855, 3865 and 1530 resulted in a decrease to net income of $0.05 million and no change in earnings per share from continuing operations and no change in earnings per share from discontinued operations. 3. Acquisitions in 2007 The Company acquired three funeral homes during the three months ended March 31, The operating results of this acquisition have been included since the date of acquisition. The following properties were acquired: Date Acquired Name Location Entity March 13, 2007 Fred H. Kaul Funeral Homes, Inc. Michigan Funeral Homes The net purchase price of the acquisition was approximately $14.4 million. The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is as follows: Current assets, less current liabilities $ (156) Property and equipment 5,125 Preneed receivables and funds 4,242 Identifiable intangible assets 3,908 Future income taxes (1,474) Non-controlling interest in preneed funds (4,242) Subtotal 7,403 Goodwill 6,977 Total $ 14,380 12

15 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 3. Acquisitions in 2007 (continued) The preliminary allocation of the purchase price is based on preliminary internal management and third-party valuations. The purchase price allocation may change upon final determination of the fair value of assets acquired and liabilities assumed. Intangible assets represent covenants not to compete of approximately $2.3 million that are amortized over the life of the agreements and tradenames of approximately $1.6 million with indefinite lives. None of the goodwill related to this acquisition will be deductible for tax purposes. 4. Debt Indebtedness of the Company at March 31, 2007 includes the following: Current Long-Term Subordinated notes, including an unamortized premium of $2,045 $ $ 98,731 Term loan facility 43,100 Revolving loan facility 5,000 Obligations under covenants not to compete 1,882 2,930 Notes payable to former owners 1,041 2,832 Obligations under consulting agreements Equipment financing Deferred loan costs, net of amortization of $1,679 (7,868) Call option on subordinated debt (2,047) $ 3,268 $ 143,670 Maturities of the principal of long-term debt are as follows: Term Loan Facility Revolving Loan Facility Equipment Financing Due to Former Owners & Employees Subordinated Notes Year ending December 31: 2007 (4/1/2007 to 12/31/2007) $ $ $ 185 $ 2,351 $ , , ,100 5, Thereafter 216 1,640 96,686 $ 43,100 $ 5,000 $ 961 $ 9,061 $ 96,686 13

16 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 4. Debt (continued) In April 2006, the Company formed a subsidiary, Keystone Canada Funeral Homes, Inc. ( KCFH ). KCFH acquired several funeral homes in KCFH has not guaranteed Keystone Newport ULC s obligations under the Subordinated Notes. The consolidated financial statements of the Company include the financial results of KCFH. Summary consolidating financial information of both the guarantor and non-guarantor subsidiaries of the Issuer for three months ended March 31, 2007 is as follows: Keystone North America and Guarantor Subsidiaries Non- Guarantor Subsidiaries Combined Total Consolidated Amounts Keystone ULC Revenue $ - $ 24,186 $ 582 $ 24,768 Income from operations - 4, ,124 Net income (loss) (3,075) 3, Current assets - 39,207 1,002 40,209 Non-current assets, excluding preneed receivables and restricted cemetery care funds 61, ,421 4, ,603 Current liabilities 1,168 11, ,384 Non-current liabilities, excluding minority interest and noncontrolling interests in preneed and cemetery care funds 90,126 77,878 3, , Common Shares On February 8, 2005, the Company issued 17,100,000 Common Shares for net proceeds of $71.4 million (C$89.3 million) as part of the IPS Offering. On February 17, 2005, the over-allotment option was exercised resulting in the issuance of 1,668,017 Common Shares for net proceeds of $6.9 million (C$8.4 million). On March 13, 2007, the Company issued 4,945,000 IPSs, generating gross proceeds of $34.1 million (C$40.3 million). 14

17 Notes to the Unaudited Consolidated Financial Statements (continued) (000 s of U.S. Dollars, except percentages, share amounts and where the context requires) 6. Minority Interest During the first quarter of 2007, the Keystone Group Holdings, Inc. repurchased approximately 518,745 outstanding Class B shares for the purchase price of approximately $3.4 million. The shares were cancelled and are no longer outstanding. After the cancellation of the shares, minority interest represents ownership of approximately 2.1%. This transaction was recorded as a step acquisition and reduced goodwill by approximately $0.2 million. As of March 31, 2007, 498,202 Class B shares were outstanding. 7. Retirement Plan Keystone has a defined contribution plan for the benefit of its employees. Total expense recognized by Keystone related to this defined contribution plan for the three months ended March 31, 2007 was $0.03 million. 8. Subsequent Events On April 9, 2007, the Company acquired eleven funeral homes and four cemeteries from Service Corporation International for approximately $18.0 million in cash. 15