<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 1-12163
----------------
THE LOEWEN GROUP INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
BRITISH COLUMBIA 98-0121376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
</TABLE>
4126 NORLAND AVENUE
BURNABY, BRITISH COLUMBIA, CANADA V5G 3S8
(Address of principal executive offices) (Zip Code)
604-299-9321
Registrant's telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check /X/ 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 / /
----------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check /X/ whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / / No / /
----------------
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding Common shares as of October 31, 1998 was
74,053,838.
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- --------------------------------------------------------------------------------
<PAGE>
THE LOEWEN GROUP INC.
AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
PAGE
---------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS
as of September 30, 1998 and December 31, 1997................................................ 1
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
For the Three Months Ended September 30, 1998 and 1997 and
the Nine Months Ended September 30, 1998 and 1997........................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
for the Nine Months Ended September 30, 1998 and 1997......................................... 3
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS............................................ 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................ 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................... 30
ITEM 5. OTHER INFORMATION..................................................................... 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................... 34
SIGNATURES............................................................................................... 40
</TABLE>
This Form 10-Q/A was re-filed on December 31, 1998 to reflect
corrections to the "Consolidated Statements of Changes in Financial
Position" on page 3. The corrections did not affect the change in cash
and cash equivalents for the periods presented.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
THE LOEWEN GROUP INC.
CONSOLIDATED BALANCE SHEETS
EXPRESSED IN THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED) (RESTATED,
SEE NOTE 2)
<S> <C> <C>
ASSETS
Current assets
Cash and term deposits........................................................... $ 49,182 $ 36,767
Receivables, net of allowances................................................... 242,578 251,006
Inventories...................................................................... 35,390 34,885
Prepaid expenses................................................................. 12,181 11,141
------------- -------------
339,331 333,799
Prearranged funeral services....................................................... 437,987 410,379
Long-term receivables, net of allowances........................................... 628,329 553,663
Investments........................................................................ 193,542 224,008
Insurance invested assets.......................................................... 243,812 305,610
Cemetery property, at cost......................................................... 1,475,546 1,332,987
Property and equipment............................................................. 838,359 797,178
Names and reputations.............................................................. 745,443 666,578
Other assets....................................................................... 273,794 156,636
------------- -------------
$ 5,176,143 $ 4,780,838
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current indebtedness............................................................. $ 71,654 $ --
Accounts payable and accrued liabilities......................................... 166,730 160,208
Long-term debt, current portion.................................................. 47,680 43,507
------------- -------------
286,064 203,715
Long-term debt..................................................................... 2,066,127 1,750,427
Other liabilities.................................................................. 357,639 308,909
Insurance policy liabilities....................................................... 153,006 214,492
Deferred income taxes.............................................................. 287,121 300,145
Deferred prearranged funeral services revenue...................................... 437,987 410,379
Preferred securities of subsidiary................................................. 75,000 75,000
Shareholders' equity
Common shares.................................................................... 1,274,063 1,271,177
Preferred shares................................................................. 157,146 157,146
Retained earnings................................................................ 69,205 75,624
Foreign exchange adjustment...................................................... 12,785 13,824
------------- -------------
1,513,199 1,517,771
------------- -------------
$ 5,176,143 $ 4,780,838
------------- -------------
------------- -------------
</TABLE>
Commitments and contingencies (Notes 4, 7, 8 and 9)
See accompanying notes to interim consolidated financial statements
-1-
<PAGE>
THE LOEWEN GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- ----------- --------- -----------
(RESTATED, (RESTATED,
SEE NOTE 2) SEE NOTE 2)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
Funeral....................................... $ 152,068 $ 140,400 $ 476,169 $ 442,510
Cemetery...................................... 89,883 109,559 329,701 313,974
Insurance..................................... 23,257 24,177 72,335 67,997
--------- ----------- --------- -----------
265,208 274,136 878,205 824,481
Costs and expenses
Funeral....................................... 101,690 97,640 296,212 278,115
Cemetery...................................... 80,351 83,122 249,909 221,292
Insurance..................................... 19,574 20,885 61,506 55,975
--------- ----------- --------- -----------
201,615 201,647 607,627 555,382
--------- ----------- --------- -----------
63,593 72,489 270,578 269,099
Expenses
General and administrative.................... 44,464 46,187 93,480 85,358
Restructuring costs........................... -- 36,911 -- 36,911
Depreciation and amortization................. 29,774 17,912 70,554 51,695
--------- ----------- --------- -----------
74,238 101,010 164,034 173,964
--------- ----------- --------- -----------
Earnings (loss) from operations................. (10,645) (28,521) 106,544 95,135
Interest on long-term debt...................... 41,477 30,609 112,153 94,252
Loss on early extinguishment of debt............ -- 7,673 -- 7,673
--------- ----------- --------- -----------
Loss before undernoted items.................... (52,122) (66,803) (5,609) (6,790)
Dividends on preferred securities of
subsidiary.................................... 1,772 1,772 5,316 5,316
--------- ----------- --------- -----------
Loss before income taxes and undernoted items... (53,894) (68,575) (10,925) (12,106)
Income taxes.................................... (19,873) (25,647) (10,645) (13,636)
--------- ----------- --------- -----------
(34,021) (42,928) (280) 1,530
Equity and other earnings of associated
companies..................................... 1,583 2,599 8,123 9,474
--------- ----------- --------- -----------
Net earnings (loss) for the period.............. $ (32,438) $ (40,329) $ 7,843 $ 11,004
Retained earnings, beginning of period.......... 103,816 97,459 75,624 58,305
Common share dividends.......................... -- -- (7,496) (7,370)
Preferred share dividends....................... (2,173) (2,383) (6,766) (7,192)
--------- ----------- --------- -----------
Retained earnings, end of period................ $ 69,205 $ 54,747 $ 69,205 $ 54,747
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Basic earnings (loss) per Common share.......... $ (0.47) $ (0.58) $ 0.01 $ 0.06
Fully diluted earnings (loss) per Common
share......................................... $ (0.47) $ (0.58) $ 0.01 $ 0.06
Dividend per Common share....................... $ -- $ -- $ 0.10 $ 0.10
</TABLE>
See accompanying notes to interim consolidated financial statements
-2-
<PAGE>
THE LOEWEN GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
EXPRESSED IN THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
--------- ------------
(RESTATED,
SEE NOTE 2)
(UNAUDITED)
<S> <C> <C>
CASH PROVIDED BY (APPLIED TO)
Operations
Net earnings...................................................... $ 7,843 $ 11,004
Items not affecting cash
Depreciation and amortization................................... 70,554 51,695
Equity and other earnings of associated companies............... (8,123) (9,474)
Restructuring................................................... -- 14,631
Other, including net changes in other non-cash balances........... (111,080) (188,832)
--------- ------------
(40,806) (120,976)
--------- ------------
Investing
Business acquisitions............................................. (264,881) (425,947)
Construction of new facilities.................................... (13,538) (11,754)
Investments, net.................................................. (1,384) (12,501)
Purchase of insurance invested assets............................. (142,775) (197,952)
Proceeds on disposition and maturities of insurance invested
assets.......................................................... 118,139 190,788
Purchase of property and equipment................................ (36,028) (43,583)
Proceeds on disposition of assets................................. 7,978 20,738
Other............................................................. 9,688 (12,454)
--------- ------------
(322,801) (492,665)
--------- ------------
Financing
Issue of Common shares, before income tax recovery................ 2,886 452,888
Increase in long-term debt........................................ 967,139 1,182,904
Reduction in long-term debt....................................... (633,924) (1,003,808)
Common share dividends............................................ (7,496) (7,370)
Preferred share dividends......................................... (6,766) (7,192)
Current indebtedness.............................................. 71,654 --
Other............................................................. (15,965) (2,767)
--------- ------------
377,528 614,655
--------- ------------
Increase in cash and cash equivalents during the period............. 13,921 1,014
Effect of foreign exchange adjustment............................... (1,506) (485)
Cash and cash equivalents, beginning of period...................... 36,767 18,059
--------- ------------
Cash and cash equivalents, end of period............................ $ 49,182 $ 18,588
--------- ------------
--------- ------------
</TABLE>
Cash and cash equivalents include cash and term deposits.
See accompanying notes to interim consolidated financial statements
-3-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 1. BASIS OF PRESENTATION
The United States dollar is the principal currency of the Company's business
and accordingly the interim consolidated financial statements are expressed in
United States dollars. The interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts of all
subsidiary companies and all adjustments, including normal recurring
adjustments, which in management's opinion are necessary for a fair presentation
of the financial results for the interim periods. The financial statements have
been prepared consistent with the accounting policies described in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 1997 and should be read in conjunction therewith.
Certain of the comparative figures have been reclassified to conform to the
presentation adopted in the current period.
USE OF ESTIMATES
The preparation of interim consolidated financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the interim consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. As a result, actual results
could differ from those estimates.
NOTE 2. CHANGE IN ACCOUNTING POLICY
In the third quarter of 1998, the Company changed its policy for accounting
for income taxes by adopting the provisions of Section 3465, Income Taxes, of
the Handbook of the Canadian Institute of Chartered Accountants. Under this
standard, current income taxes are recognized for the estimated income taxes
payable for the current period. Future income tax assets and liabilities are
recognized for temporary differences between the tax and accounting bases of
assets and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are likely to be realized.
The provisions were applied retroactively with restatement of prior period
financial statements to January 1, 1993 which conforms to the effective date
that the Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, for its financial statement amounts presented under
United States generally accepted accounting principles. As a result of adopting
the new Canadian standard, the cumulative effect to opening retained earnings at
January 1, 1997 was a decrease of $21,812,000. The cumulative effect on the
consolidated balance sheet at September 30, 1998 is an increase in cemetery
property and names and reputations of approximately $426,000,000 (December 31,
1997--$409,000,000) primarily due to effects of acquisition accounting and a
corresponding increase in deferred income tax liability of approximately
$452,000,000 (December 31, 1997--$431,000,000). The effect on the consolidated
statement of operations for the nine months ended September 30, 1998 was a
decrease to net earnings of approximately $2,900,000 (1997--increase of
$1,900,000).
NOTE 3. ACQUISITIONS
During the nine months ended September 30, 1998, the Company acquired 61
funeral homes and 62 cemeteries in the United States, five funeral homes and
three cemeteries in Canada and 16 funeral
-4-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 3. ACQUISITIONS (CONTINUED)
homes in the United Kingdom. During the nine months ended September 30, 1997,
the Company acquired 80 funeral homes and 145 cemeteries in the United States
and 22 funeral homes in Canada.
All of the Company's acquisitions have been accounted for by the purchase
method. The preliminary purchase price allocation for certain of these
acquisitions has been estimated based on available information at the time and
is subject to revision. The effect of acquisitions at dates of purchase on the
Consolidated Balance Sheet is shown below.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
(RESTATED,
SEE
NOTE 2)
<S> <C> <C>
Current assets............................................. $ 6,068 $ 6,186
Prearranged funeral services............................... 14,574 22,766
Long-term receivables, net of allowances................... 7,699 74,811
Cemetery property, at cost................................. 123,824 369,220
Property and equipment..................................... 41,174 71,092
Names and reputations...................................... 101,143 77,330
Other assets............................................... 13,304 193
----------- -----------
307,786 621,598
Current liabilities........................................ (2,093) (4,029)
Long-term debt............................................. (2,928) (2,291)
Other liabilities.......................................... (717) (53,795)
Deferred income taxes...................................... (22,593) (112,770)
Deferred prearranged funeral services revenue.............. (14,574) (22,766)
----------- -----------
$ 264,881 $ 425,947
----------- -----------
----------- -----------
Consideration
Cash, including assumed debt repaid at closing........... $ 239,599 $ 399,677
Debt..................................................... 24,235 16,030
Common shares............................................ 1,047 10,240
----------- -----------
Purchase Price............................................. $ 264,881 $ 425,947
----------- -----------
----------- -----------
</TABLE>
The following table reflects, on an unaudited pro-forma basis, the combined
results of the Company's operations acquired during the period ended September
30, 1998 as if all such acquisitions had taken place at the beginning of the
respective years presented. Appropriate adjustments have been made to reflect
the accounting basis used in recording these acquisitions. This pro-forma
information does not purport to be
-5-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 3. ACQUISITIONS (CONTINUED)
indicative of the results of operations that would have resulted had the
acquisitions been in effect for the entire periods presented, and is not
intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- -------------
(RESTATED,
SEE
NOTE 2)
<S> <C> <C>
Revenues..................................................................... $ 893,249 $ 868,816
Net earnings................................................................. $ 6,971 $ 10,817
Basic earnings per share..................................................... $ -- $ 0.06
Fully diluted earnings per share............................................. $ -- $ 0.06
</TABLE>
NOTE 4. INVESTMENTS
(a) PRIME SUCCESSION HOLDINGS, INC. ("PRIME")
In 1996, the Company and Blackstone Capital Partners II Merchant Banking
Fund L.P. and certain affiliates (together, "Blackstone") acquired Prime, which
holds all of the outstanding common shares of Prime Succession, Inc., an
operator of funeral homes and cemeteries in the United States. The excess of the
purchase price over the fair value of net assets of approximately $230,000,000
was established as goodwill in Prime Succession, Inc. and is being amortized
over 40 years. The Company owns 21.8% of Prime common stock and 100% of Prime's
non-voting preferred stock.
The Company accounts for its investment in Prime preferred stock by the cost
method. For the nine months ended September 30, 1998, income of $5,239,000
(1997--$4,763,000) was recorded representing the 10% cumulative annual
payment-in-kind dividend.
The Company accounts for its investment in Prime common stock by the equity
method. Under this method, the Company records its share of the net earnings
(loss) of Prime after deducting the payment-in-kind dividend. For the nine
months ended September 30, 1998, a loss of $3,100,000 (1997--loss of $1,990,000)
was recorded representing the Company's share of the loss attributable to the
Prime common stock. Based on Prime's reported losses to date, the application of
the equity method will require the Company to record 100% of additional Prime
losses in future periods.
Under a Put/Call Agreement entered into with Blackstone, the Company has the
option to acquire ("Call") Blackstone's Prime common stock commencing on the
fourth anniversary of the acquisition, and for a period of two years thereafter,
at a price determined pursuant to the Put/Call Agreement. Blackstone has the
option to sell ("Put") its Prime common stock to the Company commencing on the
sixth anniversary of the acquisition, and for a period of two years thereafter,
at a price determined pursuant to the Put/Call Agreement.
Any payment to Blackstone is subject to Blackstone or the Company exercising
their respective rights under the Put or the Call. It is not currently possible
to determine whether Blackstone or the Company will exercise such rights.
Furthermore, any amount to be paid pursuant to the Put or Call is dependent on
calculated equity value which is based on EBITDA of future periods. Accordingly,
it is not possible at this date to estimate the future amount that may be
payable to Blackstone on the exercise of the Put or the Call.
-6-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 4. INVESTMENTS (CONTINUED)
Summarized financial data for Prime are presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income statement information:
Revenue................................................... $ 23,691 $ 22,809 $ 75,389 $ 71,368
Gross margin.............................................. 7,542 7,240 25,746 24,493
Earnings from operations.................................. 3,805 3,630 14,799 13,748
Payment-in-kind dividend.................................. 1,746 1,588 5,239 4,763
Net loss attributable to common shareholders.............. (3,980) (4,043) (8,961) (9,130)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Balance sheet information:
Current assets.......................................................... $ 20,677 $ 25,694
Non-current assets...................................................... 370,348 369,412
------------- ------------
Total assets............................................................ 391,025 395,106
Current liabilities..................................................... 11,723 14,964
Non-current liabilities................................................. 256,616 253,734
------------- ------------
Total liabilities....................................................... 268,339 268,698
Shareholders' equity.................................................... 122,686 126,408
</TABLE>
(b) ROSE HILLS HOLDINGS CORP. ("RH HOLDINGS")
In 1996, the Company and Blackstone acquired RH Holdings, which holds all of
the outstanding common stock of Rose Hills Company ("RHC") and the cemetery
related assets of Rose Hills Memorial Park Association, representing the largest
single location cemetery in the United States. The excess purchase price over
the fair value of net assets of approximately $130,000,000 was established as
goodwill in RH Holdings and is being amortized over 40 years. The Company owns
20.45% of RH Holdings' voting common stock and 100% of RH Holdings' non-voting
preferred stock.
The Company accounts for its investment in RH Holdings preferred stock by
the cost method. For the nine months ended September 30, 1998, income of
$7,095,000 (1997--$6,450,000) was recorded representing the 10% cumulative
annual payment-in-kind dividend.
The Company accounts for its investment in RH Holdings common stock by the
equity method. Under the equity method, the Company records its proportionate
share of the net earnings (loss) of RH Holdings after deducting the
payment-in-kind dividend. For the nine months ended September 30, 1998, a loss
of $1,123,000 (1997--loss of $1,425,000) was recorded representing the Company's
proportionate share of the loss attributable to the common stock of RH Holdings.
The properties contributed by the Company had a net carrying value of
$20,382,000. The Company has deferred a gain of $2,618,000 on the disposition of
these properties and will recognize the gain if and when the properties are
sold. The deferred gain is recorded in other liabilities on the consolidated
balance sheet.
-7-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 4. INVESTMENTS (CONTINUED)
Under a Put/Call Agreement entered into with Blackstone, the Company has the
option to acquire ("Call") Blackstone's RH Holdings common stock commencing on
the fourth anniversary of the acquisition, and for a period of two years
thereafter, at a price to be determined pursuant to the Put/Call Agreement.
Blackstone has the option to sell ("Put") its RH Holdings common stock to the
Company commencing on the sixth anniversary of the acquisition, and for a period
of two years thereafter, at a price determined pursuant to the Put/Call
Agreement.
Any payment to Blackstone will be subject to Blackstone or the Company
exercising their respective rights under the Put or the Call. It is not
currently possible to determine whether Blackstone or the Company will exercise
such rights. Furthermore, any amount to be paid pursuant to the Put or Call is
dependent on calculated equity value which is based on EBITDA of future periods.
Accordingly, it is not possible at this date to estimate the future amount that
may be payable to Blackstone on the exercise of the Put or the Call.
Summarized financial data for RH Holdings are presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income statement information:
Revenue............................................................. $ 19,205 $ 16,798 $ 61,453 $ 52,664
Gross margin........................................................ 16,046 12,801 51,650 41,266
Earnings from operations............................................ 5,103 2,789 18,268 11,727
Payment-in-kind dividend............................................ 2,365 2,150 7,095 6,450
Net loss attributable to common shareholders........................ (2,332) (3,277) (5,493) (6,970)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Balance sheet information:
Current assets.................................................................... $ 20,123 $ 17,117
Non-current assets................................................................ 299,156 294,934
------------- ------------
Total assets...................................................................... 319,279 312,051
Current liabilities............................................................... 19,308 15,780
Non-current liabilities........................................................... 171,111 169,013
------------- ------------
Total liabilities................................................................. 190,419 184,793
Shareholders' equity.............................................................. 128,860 127,258
</TABLE>
-8-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 5. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Bank revolving credit agreements.................................................... $ 162,847 $ 264,729
Management Equity Investment Plan ("MEIP") bank term credit agreement due in 2000... 105,140 105,140
9.62% Series D senior amortizing notes due in 2003.................................. 42,857 51,429
6.49% Series E senior amortizing notes due in 2004.................................. 42,857 50,000
7.50% Series 1 senior notes due in 2001............................................. 225,000 225,000
7.75% Series 3 senior notes due in 2001............................................. 125,000 125,000
8.25% Series 2 and 4 senior notes due in 2003....................................... 350,000 350,000
6.10% Series 5 senior notes due in 2002 (Cdn. $200,000,000)......................... 130,617 139,948
7.20% Series 6 senior notes due in 2003............................................. 200,000 --
7.60% Series 7 senior notes due in 2008............................................. 250,000 --
6.70% PATS senior notes............................................................. 300,000 300,000
Present value of notes issued for legal settlements discounted at an effective
interest rate of 7.75%............................................................ 38,147 39,115
Present value of contingent consideration payable on acquisitions discounted at an
effective interest rate of 8.0%................................................... 19,785 24,515
Other, principally arising from vendor financing of acquired operations or long-term
debt assumed on acquisitions, bearing interest at fixed and floating rates varying
from 4.8% to 14.0%, certain of which are secured by assets of certain
subsidiaries...................................................................... 121,557 119,058
------------- ------------
2,113,807 1,793,934
Less current portion................................................................ 47,680 43,507
------------- ------------
$ 2,066,127 $1,750,427
------------- ------------
------------- ------------
</TABLE>
(a) In 1996, the Company, LGII and their senior lenders entered into a
collateral trust agreement pursuant to which the senior lenders share certain
collateral and guarantees on a pari passu basis (the "Collateral Trust
Agreement"). The security for lenders under the Collateral Trust Agreement
consists of (i) all of LGII's right, title and interest in and to all rights to
receive payment under or in respect of accounts, contracts, contractual rights,
chattel paper, documents, instruments and general intangibles, (ii) a pledge of
the shares of capital stock of substantially all of the subsidiaries in which
Loewen directly or indirectly holds more than a 50% voting or economic interest
and (iii) a guarantee by each subsidiary that is pledging stock. The security is
held by a trustee for the equal and ratable benefit of the senior lending group.
The senior lending group consists principally of the lenders under the senior
amortizing notes, senior notes and bank revolving and term credit agreements as
well as the holders of certain letters of credit. At September 30, 1998, the
indebtedness owed to the senior lending group subject to the collateral trust
agreement, including holders of certain letters of credit, aggregated
$1,987,000,000.
(b) Certain of the above loan agreements contain various restrictive provisions,
including change of control provisions and provisions restricting payment of
dividends on Common and Preferred shares, restricting encumbrance of assets,
limiting redemption or repurchase of shares, limiting disposition of assets,
limiting the amount of additional debt and requiring the Company to maintain
specified financial ratios.
-9-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 5. LONG-TERM DEBT (CONTINUED)
(c) In May 1998, LGII completed a private placement in the United States of
$200,000,000 of 7.20% Series 6 Senior Guaranteed Notes due 2003 (the "Series 6
senior notes") and $250,000,000 of 7.60% Series 7 Senior Guaranteed Notes due
2008 (the "Series 7 senior notes"). The net proceeds from the Series 6 and 7
senior notes were used to repay indebtedness outstanding under the revolving
credit facility. The Series 6 and 7 senior notes are guaranteed by Loewen. In
September 1998, these notes were exchanged for notes registered under the
Securities Act of 1933.
(d) In March 1998, the Company amended its $1,000,000,000 revolving credit
agreement to provide greater flexibility for the timing of equity and other
financing alternatives. As part of the amendment, the 364-day tranche was
terminated and the $750,000,000 tranche was reduced to a $600,000,000 revolving
credit agreement with a three-year term.
(e) Repayment of the senior amortizing notes commenced September 1997 for Series
D and February 1998 for Series E, all in equal annual amounts to the respective
due dates.
(f) The PATS senior notes are due 2009, however are redeemable at the election
of the holder, in whole but not in part, at 100% of the principal amount on
October 1, 1999.
NOTE 6. PREFERRED SECURITIES OF SUBSIDIARY
On August 15, 1994, 3,000,000 9.45% Cumulative Monthly Income Preferred
Securities, Series A ("MIPS") were issued by Loewen Group Capital, L.P. ("LGC")
in a public offering for an aggregate amount of $75,000,000. LGC is a limited
partnership and LGII as its general partner manages its business and affairs.
LGII serves as the holding company for all United States assets and operations
of the Company. The consolidated financial statements of LGII are prepared in
accordance with Canadian generally accepted accounting principles and are
presented in United States dollars.
Summarized financial data for LGII are presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ------------- ---------- -------------
(RESTATED, (RESTATED,
SEE NOTE 2) SEE NOTE 2)
<S> <C> <C> <C> <C>
Income statement information:
Revenue................................................... $ 252,382 $ 255,359 $ 819,400 $ 766,406
Gross margin.............................................. 56,249 64,375 246,042 238,486
Earnings (loss) from operations........................... (8,367) (21,906) 102,313 86,729
Net loss.................................................. (46,366) (58,056) (59,657) (54,047)
</TABLE>
-10-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 6. PREFERRED SECURITIES OF SUBSIDIARY (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
(RESTATED,
SEE NOTE 2)
Balance sheet information:
Current assets................................................................... $ 237,705 $ 244,552
Non-current assets............................................................... 4,382,777 4,088,449
------------- -------------
Total assets..................................................................... 4,620,482 4,333,001
Current liabilities.............................................................. 187,878 172,371
Non-current liabilities.......................................................... 4,192,002 3,860,376
------------- -------------
Total liabilities................................................................ 4,379,880 4,032,747
Shareholders' equity............................................................. 240,602 300,254
</TABLE>
The MIPS are due August 31, 2024 and are subject to redemption at par at the
option of LGC, in whole or in part, from time to time, on or after August 31,
2004.
Holders of the MIPS are entitled to receive cumulative dividends at an
annual rate of 9.45% of the liquidation preference of $25 per MIPS. The
dividends accrue from the date of original issuance and are payable monthly in
arrears.
The Company has the right to defer payment of dividends on the MIPS for one
or more periods, each not to exceed 60 consecutive months. In this event the
Company may not declare or pay dividends on, or redeem, purchase or acquire or
make a liquidation payment with respect to any class of its capital stock.
The Company has guaranteed certain payment obligations of LGII to LGC and of
LGC to the MIPS holders. The guarantees are subordinated to all liabilities of
the Company and are unsecured.
NOTE 7. LEGAL PROCEEDINGS
ESNER ESTATE
On July 21, 1998, the Esner litigation (described in the Company's previous
periodic reports), was settled. The terms of the settlement provide that no
contribution to the settlement will be made by the Company. Upon execution of
the settlement agreement by all parties, the agreement will be presented to the
Court of Common Pleas of Bucks County, Pennsylvania, for final approval.
ROJAS ET AL.
On February 22, 1995, Juan Riveras Rojas, Leyda Rivera Vega, the Conjugal
Partnership constituted between them, and Carlos Rivera Bustamente instituted a
legal action against Loewen, LGII and a subsidiary in the United States District
Court for the District of Puerto Rico. The complaint alleges that the defendants
breached a contract and ancillary agreements with the plaintiffs relating to the
purchase of funeral homes and cemeteries, and committed related torts. The
plaintiffs seek compensatory damages of $12,500,000, and unspecified punitive
damages (although the Company is advised by counsel that there is no entitlement
to punitive damages under Puerto Rican law). The Company has filed a motion to
dismiss the complaint on the grounds of failure to join an indispensable party.
That motion was granted on March 30, 1998. Plaintiffs filed a notice of appeal
to the U.S. Circuit Court of Appeals for the First Circuit,
-11-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 7. LEGAL PROCEEDINGS (CONTINUED)
but later withdrew it. It is foreseeable that plaintiffs will reassert their
claims as counterclaims to the complaint filed by the Company, described below.
The Company claims it has suffered damages far in excess of the amount
claimed by the plaintiffs as a result of breach of contract and related torts on
the part of the plaintiffs. A subsidiary of the Company has filed a complaint
seeking damages in excess of $19,000,000 from the plaintiffs in the General
Court of Justice of the Commonwealth of Puerto Rico. The Company has determined
that it is not possible at this time to predict the final outcome of these legal
proceedings and that it is not possible to establish a reasonable estimate of
possible damages, if any, or reasonably to estimate the range of possible
damages that may be awarded to the plaintiffs. Accordingly, no provision with
respect to this lawsuit has been made in the Company's interim consolidated
financial statements.
FELDHEIM ET AL. V. SI-SIFH CORP. ET AL. AND DUFFY ET AL. V. SI-SIFH CORP ET AL.
Two complaints were filed in 1997 on behalf of individuals who claim damages
in connection with funeral insurance policies allegedly issued to them by
insurance companies owned, directly or indirectly, by S.I. Acquisition
Associates, L.P. ("S.I."). The Company acquired the assets but not the stock of
S.I. in March 1996. In January 1997, Elmer C. Feldheim and four other
individuals filed a lawsuit on behalf of themselves and a class of similarly
situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance
Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of
Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and
SI-SI Insurance Company, Inc. are affiliates of S.I.
In June 1997, Lloyd Duffy, Sr. and four other individuals filed a lawsuit on
behalf of themselves and a class of similarly situated individuals and/or
entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana
Holdings, Inc., and LGII in the Parish of Orleans, State of Louisiana.
Plaintiffs seek a class action. The DUFFY complaint was filed by the same
lawyers who filed the complaint in the FELDHEIM case, and is a virtually
identical copy of the FELDHEIM complaint. The DUFFY case is pending in the trial
court and, as of the date hereof, no discovery has taken place.
The FELDHEIM and DUFFY plaintiffs allegedly hold or held funeral insurance
policies issued by insurance companies owned, directly or indirectly, by the
defendants. The plaintiffs allege that (i) the defendants failed to provide the
funeral services purchased with the policies by, among other things, offering a
casket of inferior quality upon presentation of a policy, and (ii) in connection
with the sale of the insurance policy, the insurance companies negligently or
fraudulently represented and interpreted the scope and terms of the policies and
omitted to provide material information regarding the policy benefits and
limitations. Plaintiffs also alleged unfair trade practices in violation of
Louisiana's trade practices laws.
Plaintiffs' petitions seek damages, penalties and attorneys' fees. Louisiana
law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs
also seek a declaratory judgment compelling defendants to honor the policies.
On June 13, 1997, the district court in Jefferson Parish dismissed the
FELDHEIM plaintiffs' claim to a class action, and plaintiffs appealed. Briefing
of the appeal was completed December 1997, and oral argument was held on January
15, 1998. On June 30, 1998, the Louisiana Fifth Circuit Court of Appeal affirmed
the dismissal of the FELDHEIM plaintiffs' class-action claims except as to a
claim by "Sub Class B" plaintiffs (the proposed class of current policyholders
who are seeking a declaratory judgment). The appellate court found that the
trial court's opinion did not consider the validity of class treatment for the
"Sub Class B" plaintiffs' claim for a declaratory judgment when it dismissed
plaintiffs' class-action claims,
-12-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 7. LEGAL PROCEEDINGS (CONTINUED)
and it remanded the case to the trial court for a hearing on that issue. On
September 22, 1998, the trial court ruled that the claim could not go forward as
a class action. On October 20, 1998, plaintiffs noticed a suspensive appeal to
the Louisiana Fifth Circuit Court of Appeal from this ruling.
On August 26, 1998, defendants sought dismissal of all of plaintiffs'
remaining individual claims in FELDHEIM. The trial court has not yet ruled on
that request.
On September 21, 1998, plaintiffs in Feldheim filed an "Amended Petition for
Attorneys Fees," which contends that the plaintiffs' lawyers are entitled to an
unspecified sum of attorneys' fees. Defendants will respond shortly to that
amended petition.
As of the date hereof, no discovery has taken place.
On April 17, 1998 the trial court in the DUFFY lawsuit declined to grant the
defendants' exception seeking to dismiss the plaintiffs' class action
allegations on the face of the pleadings. Instead, the court deferred ruling on
those issues until the hearing on the class action issues, and the court
indicated it would permit some discovery. On April 23, 1998 the defendants filed
a Notice of Intent to Seek Supervisory Writs with the Court of Appeal from the
trial court's April 17, 1998 judgment, and the trial court granted the
defendants' motion for a stay of all proceedings pending a ruling by the Court
of Appeal on the supervisory writ application. The defendants filed their
Application for Supervisory Writs with the Louisiana Fourth Circuit Court of
Appeal on June 5, 1998, but a decision has not yet been rendered. On July 16,
1998, the trial court lifted its previously entered stay of all proceedings in
this case; defendants have filed a motion requesting that the trial court
reinstitute its stay.
The Company has determined that it is not possible at this time to predict
the final outcome of these legal proceedings, including whether a class will be
certified, and that it is not possible to establish a reasonable estimate of
possible damages, if any, or reasonably to estimate the range of possible
damages that may be awarded to plaintiffs. Accordingly, no provision with
respect to this lawsuit has been made in the Company's interim consolidated
financial statements.
LUENING, ET AL. V. SI-SIFH CORP., ET AL.
In June 1998, Warren S. Luening and four other individuals filed a lawsuit
on behalf of themselves and a class of similarly situated individuals and/or
entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana
Holdings, Inc., and LGII in the Parish of St. Bernard, State of Louisiana.
Plaintiffs seek a class action. Defendants in this case are the same entities
against whom complaints were filed in Jefferson Parish, Louisiana (the FELDHEIM
case) and in Orleans Parish, Louisiana (the DUFFY case), and, aside from the
addition of local counsel in St. Bernard Parish, the same lawyers who filed the
FELDHEIM and DUFFY complaints filed the Luening complaint.
Plaintiffs allegedly hold and held funeral insurance policies issued by
insurance companies owned, directly or indirectly, by the defendants. Plaintiffs
allege that (i) the defendants charged them for certain funeral services,
including the services of a funeral director and staff, a funeral ceremony, care
of the deceased, automotive services and a casket, even though these services
were allegedly covered by their policies, and (ii) the defendants have been
unjustly enriched through the payment of services allegedly covered under the
plaintiffs' policies, and the plaintiffs are therefore entitled to restitution
of those payments. Plaintiffs' complaint seeks compensatory and nonpecuniary
damages and attorneys' fees. Louisiana law prohibits plaintiffs from alleging
specific amounts of damages in their complaint.
-13-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 7. LEGAL PROCEEDINGS (CONTINUED)
On October 22, 1998, plaintiffs in LUENING filed a "First Amended Petition
for Damages." In response to the First Amended Petition, on October 19, 1998
defendants removed the LUENING case to federal court on diversity-of-citizenship
grounds. On October 20, 1998, defendants moved to dismiss the Luening petition.
As of the date hereof, no discovery has taken place.
It is not possible to predict the final outcome of this legal proceeding,
including whether a class will be certified, and it is not possible to establish
a reasonable estimate of possible damages, if any, or reasonably to estimate the
range of possible damages that may be awarded to plaintiffs. Accordingly, no
provision with respect to this lawsuit has been made in the Company's interim
consolidated financial statements.
OTHER
No material developments occurred in connection with any other previously
reported legal proceedings against the Company during the last fiscal quarter.
The Company is a party to other legal proceedings in the ordinary course of
its business but does not expect the outcome of any other proceedings,
individually or in the aggregate, to have a material adverse effect on the
Company's financial position, results of operation or liquidity.
ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company's operations are subject to numerous environmental laws,
regulations and guidelines adopted by various governmental authorities in the
jurisdictions in which the Company operates. Liabilities are recorded when
environmental liabilities are either known or considered probable and can be
reasonably estimated. The Company's policies are designed to control
environmental risk upon acquisition through extensive due diligence and
corrective measures taken prior to acquisition. The Company believes
environmental liabilities to be immaterial individually and in the aggregate.
NOTE 8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to efforts of customers, suppliers, or other
third parties, will be fully resolved.
NOTE 9. SUBSEQUENT EVENTS
During the period from October 1, 1998 to October 31, 1998, the Company
acquired four funeral homes. The aggregate cost of these transactions was
approximately $1,100,000.
As of October 31, 1998, the Company has committed to acquire certain funeral
homes, cemeteries and related operations, subject in most instances to certain
conditions including approval by the Company's Board of Directors. The aggregate
cost of these transactions, if completed, will be approximately $24,000,000.
-14-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 10. UNITED STATES ACCOUNTING PRINCIPLES
The interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in Canada.
These principles differ in the following material respects from those in the
United States as summarized below:
(a) EARNINGS AND EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- ----------- --------- -----------
(RESTATED, (RESTATED,
SEE SEE
NOTE 2) NOTE 2)
<S> <C> <C> <C> <C>
EARNINGS (LOSS)
Net earnings (loss) in accordance with Canadian
GAAP............................................. $ (32,438) $ (40,329) $ 7,843 $ 11,004
Less effects of differences in accounting for:
Insurance operations............................. (1,483) 1,482 99 1,727
Stock options.................................... -- -- (36) (174)
--------- ----------- --------- -----------
Net earnings (loss) in accordance with United
States GAAP...................................... $ (33,921) $ (38,847) $ 7,906 $ 12,557
Other comprehensive income:
Foreign currency translation adjustments......... (1,539) 578 (1,040) (1,036)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period............................ (4,827) 6,770 3,267 9,715
Less: reclassification adjustment for gains
included in net income....................... (160) (1,503) (7,083) (2,672)
--------- ----------- --------- -----------
Comprehensive income in accordance with United
States GAAP.................................... $ (40,447) $ (33,002) $ 3,050 $ 18,564
--------- ----------- --------- -----------
--------- ----------- --------- -----------
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per Common share in accordance with
United States GAAP, are as follows:
Basic earnings (loss) per Common share........... $ (0.49) $ (0.56) $ 0.02 $ 0.08
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Diluted earnings (loss) per Common share......... $ (0.49) $ (0.56) $ 0.02 $ 0.08
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("FAS 128") Earnings per Share for United States
GAAP purposes, on a retroactive basis. Under FAS 128, basic earnings (loss) per
Common share, similar to Canadian GAAP, is based on the weighted average number
of Common shares outstanding during the year. Diluted earnings (loss) per Common
share is based on the weighted average number of Common shares outstanding
during the year plus common stock equivalents. The computation of basic and
diluted earnings (loss) per Common share is as follows:
-15-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 10. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- ----------- --------- -----------
(RESTATED, (RESTATED,
SEE SEE
NOTE 2) NOTE 2)
<S> <C> <C> <C> <C>
Basic
Net earnings (loss)............................ $ (33,921) $ (38,847) $ 7,906 $ 12,557
Less: Preferred share dividends................ 2,173 2,383 6,766 7,192
--------- ----------- --------- -----------
Net earnings (loss) attributable to Common
shareholders................................. $ (36,094) $ (41,230) $ 1,140 $ 5,365
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Weighted average number of shares
outstanding.................................. 74,019 73,289 73,967 65,188
Basic earnings (loss) per Common share......... $ (0.49) $ (0.56) $ 0.02 $ 0.08
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Diluted
Net earnings (loss) attributable to Common
shareholders................................. $ (36,094) $ (41,230) $ 1,140 $ 5,365
Add: Effect of dilutive securities other than
options...................................... -- -- -- --
--------- ----------- --------- -----------
Diluted earnings (loss)........................ $ (36,094) $ (41,230) $ 1,140 $ 5,365
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Weighted average number of shares
outstanding.................................. 74,019 73,289 73,967 65,188
Add: Incremental shares from conversion of
dilutive options............................. -- -- 381 1,126
--------- ----------- --------- -----------
Diluted shares................................. 74,019 73,289 74,348 66,314
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Diluted earnings (loss) per Common share....... $ (0.49) $ (0.56) $ 0.02 $ 0.08
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
(b) BALANCE SHEET
The amounts in the interim consolidated balance sheet that differ from those
reported under Canadian GAAP are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
UNITED UNITED
CANADIAN STATES CANADIAN STATES
GAAP GAAP GAAP GAAP
------------ ------------ ------------ ------------
(RESTATED, SEE NOTE 2)
Assets
Long-term receivables, net of allowances.............. $ 628,329 $ 618,079 $ 553,663 $ 555,472
Investments........................................... 193,542 193,542 224,008 184,227
Insurance invested assets............................. 243,812 255,670 305,610 312,073
Names and reputations................................. 745,443 745,443 666,578 668,577
Other assets.......................................... 273,794 304,055 156,636 181,843
Liabilities and Shareholders' Equity
Insurance policy liabilities.......................... 153,006 186,320 214,492 240,750
Other liabilities..................................... 357,639 354,719 308,909 266,903
Deferred income taxes................................. 287,121 285,862 300,145 305,166
Common shares......................................... 1,274,063 1,300,395 1,271,177 1,297,443
Retained earnings..................................... 69,205 73,208 75,624 79,564
Unrealized gains (losses) on securities available for
sale, net of tax.................................... -- 1,396 -- 5,212
Foreign exchange adjustment........................... 12,785 (16,212 ) 13,824 (15,170 )
</TABLE>
-16-
<PAGE>
THE LOEWEN GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
NOTE 10. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED)
(c) STATEMENT OF CASH FLOWS
The statement of cash flows under United States GAAP would differ from the
statement of changes in financial position under Canadian GAAP as the following
non-cash transactions would not be reflected as cash flows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Debt and shares issued on acquisitions...................................................... $ 25,282 $ 26,270
Note receivable from sale of subsidiaries................................................... -- 15,725
Dividends payable on preferred shares....................................................... 2,153 2,383
</TABLE>
(d) RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 ("FAS 133") "Accounting
for Derivative Instruments and Hedging Activities" is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. FAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities" is effective for fiscal years beginning after December 15, 1998. SOP
98-5 states that costs of start-up activities, including organization costs,
should be expensed as incurred.
Management has not determined the impact of these recent accounting
standards on its consolidated financial statements.
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context otherwise requires (i) "Loewen" refers to The Loewen
Group Inc., a company organized under the laws of British Columbia, Canada, (ii)
"LGII" refers to Loewen Group International, Inc., a Delaware corporation and a
wholly-owned subsidiary of Loewen, and (iii) the "Company" refers to Loewen
together with its subsidiaries and associated companies.
OVERVIEW
The Company operates the second-largest number of funeral homes and
cemeteries in North America. In addition to providing services at the time of
need, the Company also makes funeral, cemetery and cremation arrangements on a
pre-need basis. As at October 31, 1998, the Company operated 1,119 funeral homes
and 549 cemeteries throughout North America. During 1997, the Company expanded
into the United Kingdom and now operates 30 funeral homes there. The Company
also operates several insurance subsidiaries that principally sell a variety of
life insurance products to fund funeral services purchased through a pre-need
arrangement.
The funeral service industry has a number of attractive business
characteristics. Historically the funeral service industry has had a low
business failure risk compared with most other businesses and has not been
significantly affected by economic or market cycles. According to the
preliminary 1996 Business Failure Record published by The Dun & Bradstreet
Corporation, the average business failure rate in the United States in 1996 was
80 per 10,000. The 1996 business failure rate of the funeral service and
crematoria industry was 12 per 10,000, among the lowest of all industries. In
addition, future demographic trends are expected to contribute to the continued
stability of the funeral service industry. The U.S. Department of Commerce,
Bureau of the Census, projects that the number of deaths in the United States
will grow at approximately 0.9% annually from 1997 through 2010.
The Company has capitalized on these favorable industry fundamentals through
a growth strategy that emphasizes three principal components: (i) improving the
revenue and profitability of newly-acquired and established operations; (ii)
acquiring "strategic" operations consisting predominantly of large, multi-
location urban properties; and (iii) acquiring smaller funeral homes and
cemeteries that offer significant synergies with existing properties.
Historically, the Company has grown rapidly, however, the Company's recent
results have been disappointing. The Company has recently undertaken a major
shift in its strategy by significantly reducing its acquisition program and is
concentrating its efforts on improving existing operations. This strategy will
focus upon emphasizing cash flow from its operations, in particular cash flow
from its cemetery operations. Also, efforts to reduce costs are being actively
pursued. Beginning in August 1997, the Company began implementing a number of
management improvements and cost control measures including the closure of the
Cincinnati office, field staff reductions aggregating approximately 550
employees and in June 1998, the consolidation of management functions then
resident in the Company's Philadelphia office to the Vancouver head office. The
results from these measures have not yet been fully realized in the Company's
operating results for each of the three months ended June 30, 1998 and September
30, 1998. Although the Company continues to implement its plans for
improvements, in July 1998 the Company secured the services of the investment
banking firm Salomon Smith Barney to identify and evaluate opportunities to
maximize shareholder value. Such opportunities may include strategic
partnerships, combinations, dispositions and capital investments in the Company.
In September 1998, the Company's Board of Directors appointed a Special
Committee of independent directors to oversee and direct the Company's efforts
in this process.
In addition, on October 8, 1998, Robert B. Lundgren was appointed President,
Chief Executive Officer and Co-Chairman of the Board replacing Raymond L. Loewen
who retired on the same date. Mr. Loewen serves as non-executive Co-Chairman of
the Board. On November 2, 1998, Canadian Imperial Bank of Commerce acquired
10,062,125 Loewen Common shares from Mr. Loewen in connection with the
restructuring of personal debt.
-18-
<PAGE>
RESULTS OF OPERATIONS
Detailed below are the Company's operating results for the three months and
nine months ended September 30, 1998 and 1997, expressed in dollar amounts as
well as relevant percentages. The operating results are presented as a
percentage of revenue except income taxes, which are presented as a percentage
of earnings before income taxes and equity and other earnings of associated
companies. The Company's operations are comprised of three businesses: funeral
homes, cemeteries and insurance.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- ----------- --------- -----------
RESTATED RESTATED
(IN MILLIONS) (PERCENTAGES)
<S> <C> <C> <C> <C>
Revenue
Funeral................................................... $ 152.0 $ 140.4 57.3 51.2
Cemetery.................................................. 89.9 109.6 33.9 40.0
Insurance................................................. 23.3 24.2 8.8 8.8
--------- -----------
Total................................................... $ 265.2 $ 274.2 100.0 100.0
--------- -----------
Gross margin
Funeral................................................... $ 50.4 $ 42.8 33.1 30.5
Cemetery.................................................. 9.5 26.4 10.6 24.1
Insurance................................................. 3.7 3.3 15.8 13.6
--------- -----------
Total................................................... 63.6 72.5 24.0 26.4
Expenses
General and administrative................................ 44.4 46.2 16.8 16.8
Restructuring costs....................................... -- 36.9 -- 13.5
Depreciation and amortization............................. 29.8 17.9 11.2 6.5
--------- -----------
Loss from operations...................................... (10.6) (28.5) (4.0) (10.4)
Interest on long-term debt................................ 41.5 30.6 15.6 11.2
Loss on early extinguishment of debt...................... -- 7.7 -- 2.8
Dividends on preferred securities of subsidiary........... 1.8 1.8 0.7 0.6
Income taxes.............................................. (19.9) (25.7) n/a n/a
--------- -----------
(34.0) (42.9) (12.8) (15.7)
Equity and other earnings of associated companies......... 1.6 2.6 0.6 1.0
--------- -----------
Net loss.................................................. $ (32.4) $ (40.3) (12.2) (14.7)
--------- -----------
--------- -----------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Consolidated revenue decreased 3.3% to $265.2 million for the three months
ended September 30, 1998 from $274.2 million during the same period in 1997,
primarily due to the decline in pre-need cemetery revenues, an increase in the
allowance for pre-need cemetery accounts receivable as a result of worsening
trends in collections experience during the current quarter and imputed interest
associated with pre-need cemetery sales contracts. This decrease was partially
offset by revenue from acquisitions and an $11.6 million increase in funeral
home revenues. Consolidated gross margin decreased 12.3% to $63.6 million for
the three months ended September 30, 1998 from $72.5 million during the same
period in 1997. As a percentage of revenue, consolidated gross margin decreased
to 24.0% for the three months ended September 30, 1998 from 26.4% during the
comparable period in 1997, reflecting the decline in cemetery gross margin,
partially offset by improvement in funeral home and insurance gross margins, as
discussed below.
Funeral revenue increased 8.3% to $152.0 million for the three months ended
September 30, 1998 compared to $140.4 million for the same period in 1997, due
to revenue from acquisitions. The number of
-19-
<PAGE>
funeral services performed at locations in operation for the three months ended
September 30, 1997 and 1998 ("Established Locations") declined by 4.3%, in part
due to the low death rate experienced for the quarter. This decline in services,
though offset by a slightly higher average revenue per funeral service, had an
unfavorable impact on revenue from Established Locations, which declined by
3.8%. Funeral costs of Established Locations declined 9.0% compared to the prior
year comparable period, due to reduced operating costs coupled with the decline
in volume. Funeral gross margin as a percentage of funeral revenue for
Established Locations increased to 33.5% in 1998 from 29.8% in 1997. Overall
funeral gross margin as a percentage of funeral revenue increased to 33.1% in
1998 from 30.5% in 1997, primarily due to improved operating costs and revenue
growth.
Gross cemetery sales increased to $113.7 million in the three months ended
September 30, 1998 compared to $101.1 million in the comparable 1997 period.
However, cemetery revenue decreased 18.0% to $89.9 million for the three months
ended September 30, 1998 compared to $109.6 million during the same period in
1997, primarily due to a decline in pre-need revenues, increases in the
allowance for pre-need accounts receivable and imputed interest on pre-need
sales contracts, combined with lower than expected realization of trust fund
investment income. The cemetery revenue decline was partially offset by revenue
from acquisitions. Cemetery gross margin as a percentage of cemetery revenue
decreased to 10.6% in 1998 from 24.1% in the same period in 1997, and for
Established Locations decreased to 6.3% in 1998 from 23.0% in 1997, primarily
due to a decline in pre-need sales. Cemetery gross margin was also reduced by
$13.7 million as a result of the increase to the allowance for pre-need accounts
receivable and $6.9 million for imputed interest on low interest contracts.
Insurance revenue decreased 3.8% to $23.3 million for the three months ended
September 30, 1998 from $24.2 million during the same period in 1997. The
decrease in revenue was primarily due to exclusion of revenue generated by First
Capital Life Insurance Company of Louisiana ("First Capital"), in accordance
with terms of the pending sale of First Capital described below, partially
offset by sales increases due to the continuing effort to expand the sale of
pre-need funeral insurance through Company-owned funeral homes. Insurance gross
margin as a percentage of insurance revenue increased to 15.8% compared to 13.6%
for the same period in 1997, primarily due to lower commission and other
operating costs. On July 27, 1998, the Company announced that it had entered
into an agreement to sell First Capital for cash proceeds of approximately $24
million and a pre-tax gain of approximately $5 million. The sale, which is
subject to certain conditions including insurance regulatory approvals, is
expected to close in the fourth quarter of 1998. First Capital specializes in
the sale of pre-need funeral insurance sold through non-Company funeral homes.
First Capital has tangible assets of approximately $88 million and annual
revenues of approximately $24 million.
United States based operations contributed over 90% of consolidated revenue
for the three-month periods ended September 30, 1998 and 1997.
General and administrative expenses, as a percentage of revenue, were 16.8%
for the three-month periods ended September 30, 1998 and 1997. The 1998 expenses
included the write off of approximately $14.9 million of previously capitalized
costs, primarily for acquisitions and planned construction projects that are no
longer being pursued. In the three months ended September 30, 1997 general and
administrative expenses included costs for litigation and various asset write
downs aggregating $24.0 million. Excluding these costs in each year, general and
administrative expenses increased by $7.4 million and, as a percentage of
revenue for the three months ended September 30, 1998 and 1997, were 11.1% and
8.1%, respectively, as 1998 was unfavorably impacted by the lower level of
revenues as described above.
In the third quarter of 1997, the Company recognized a restructuring charge
of $36.9 million following a review of the principal components of its
operational, administrative and capital structure. Accordingly, it was
determined that certain charges were necessary as a result of initiatives to
improve the long-term financial performance of the Company. The majority of the
initiatives effected were associated with the Company's efforts to more fully
integrate its field and administrative operations.
Depreciation and amortization expenses, as a percentage of revenue,
increased to 11.2% for the three months ended September 30, 1998, compared to
6.5% for the same period in 1997, primarily due to the
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<PAGE>
write off and accelerated amortization of various assets aggregating
approximately $8.1 million that were determined to have no continuing value, as
well as the fixed cost component effect of lower than expected revenues.
Interest expense on long-term debt increased by $10.9 million for the three
months ended September 30, 1998 compared to the same period in 1997, primarily
as a result of additional borrowings by the Company to finance its previous
expansion programs and support its working capital position, as well as higher
borrowing costs compared to the prior year.
In the third quarter of 1998, the Company adopted the Canadian Institute of
Chartered Accountants Handbook Section 3465, "Income Taxes." The provisions of
this standard were applied retroactively to January 1, 1993 which conforms to
the effective date that the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", for its financial statement
amounts presented under United States generally accepted accounting principles.
Implementation of the standard resulted in a $21.8 million cumulative effect
decrease of retained earnings as of January 1, 1997. The effect of the change on
the three months ended September 30, 1998 was not significant, as the effects of
increased operating costs, primarily due to the recording of tax effects
associated with land values of acquired cemeteries, were substantially offset by
lower taxes on the reduced operating income. The income tax recovery of $19.9
million for the three months ended September 30, 1998, due to the loss position
for the quarter, compares to an income tax recovery of $25.7 million during the
same period in 1997, similarly due to the loss position for such period. The
Company's effective tax rate is primarily determined through certain
international and intercompany financing arrangements, as well as other tax
strategies.
It is possible that changes in existing United States tax treaties over the
next year may have the effect of materially increasing the Company's tax rate.
If this occurs, the Company will attempt to maintain its existing tax rate
through alternative means, and currently believes that it will be able to do so,
but no assurances can be made it will be successful in this regard.
Equity and other earnings of associated companies were $1.6 million for the
three months ended September 30, 1998 due to the inclusion of payment-in-kind
dividends on preferred shares of Rose Hills and Prime, partially offset by the
Company's share of the losses attributable to the common shares of Rose Hills
and Prime, as described further in Note 4 to the Company's interim consolidated
financial statements, and was approximately $1.0 million below earnings for the
same period in 1997. Based on Prime's reported losses to date, the application
of the equity method will require the Company to record 100% of Prime's losses
for future periods. Based on Rose Hills reported losses to date and range of
estimates for the balance of 1998, the application of the equity method may
require the Company to similarly record 100% of Rose Hill's losses during the
fourth quarter of 1998.
Net loss decreased to $32.4 million for the three months ended September 30,
1998 from a net loss of $40.3 million during the same period in 1997. Fully
diluted loss per share decreased to $0.47 per share in 1998 from $0.58 per share
during the same period in 1997.
-21-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- ----------- --------- -----------
RESTATED RESTATED
(IN MILLIONS) (PERCENTAGES)
<S> <C> <C> <C> <C>
Revenue
Funeral................................................... $ 476.2 $ 442.5 54.2 53.7
Cemetery.................................................. 329.7 314.0 37.6 38.1
Insurance................................................. 72.3 68.0 8.2 8.2
--------- -----------
Total................................................... $ 878.2 $ 824.5 100.0 100.0
--------- -----------
Gross margin
Funeral................................................... $ 180.0 $ 164.4 37.8 37.2
Cemetery.................................................. 79.8 92.7 24.2 29.5
Insurance................................................. 10.8 12.0 15.0 17.7
--------- -----------
Total................................................... 270.6 269.1 30.8 32.6
Expenses
General and administrative................................ 93.5 85.4 10.6 10.3
Restructuring costs....................................... -- 36.9 -- 4.5
Depreciation and amortization............................. 70.6 51.7 8.0 6.3
--------- -----------
Earnings from operations.................................. 106.5 95.1 12.1 11.5
Interest on long-term debt................................ 112.2 94.3 12.8 11.4
Loss on early extinguishment of debt...................... -- 7.7 -- 0.9
Dividends on preferred securities of subsidiary........... 5.3 5.3 0.6 0.6
Income taxes.............................................. (10.7) (13.7) n/a n/a
--------- -----------
(0.3) 1.5 0.0 0.2
Equity and other earnings of associated companies......... 8.1 9.5 0.9 1.1
--------- -----------
Net earnings.............................................. $ 7.8 $ 11.0 0.9 1.3
--------- -----------
--------- -----------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Consolidated revenue increased 6.5% to $878.2 million for the nine months
ended September 30, 1998 from $824.5 million during the same period in 1997, due
to acquisitions. Consolidated gross margin increased 0.5% to $270.6 million for
the nine months ended September 30, 1998 from $269.1 million during the same
period in 1997, primarily due to acquisitions and effects of cost improvements,
substantially offset by volume declines and increases in the allowance for
pre-need cemetery accounts receivable in the third quarter as a result of
worsening trends in collections experience. As a percentage of revenue,
consolidated gross margin decreased to 30.8% for the nine months ended September
30, 1998 from 32.6% during the comparable period in 1997, primarily due to the
decline in cemetery gross margin, lower volume due in part to the lower death
rate experienced in the past two quarters, and the decline in insurance gross
margin, partially offset by improved funeral home gross margin, as discussed
below.
Funeral revenue increased 7.6% to $476.2 million for the nine months ended
September 30, 1998 compared to $442.5 million for the same period in 1997, due
to acquisitions. The number of funeral services performed at locations in
operation for the nine months ended September 30, 1997 and 1998 ("Established
Locations") declined by 4.7%, in part due to the low death rate experienced in
the second and third quarters. This decline, combined with slightly lower
average revenue per funeral service, had an unfavorable impact on revenue.
Funeral gross margin as a percentage of funeral revenue for Established
Locations increased to 38.1% in 1998 from 37.2% in 1997, as the $18.9 million
decrease in revenue was substantially offset by a $15.7 million decrease in
costs or 6.0%, resulting from the decline in the number of funeral services
performed and improved operating costs. As a result, overall funeral gross
margin as a percentage of funeral revenue increased slightly to 37.8% in 1998
from 37.2% in 1997.
-22-
<PAGE>
Cemetery revenue increased 5.0% to $329.7 million for the nine months ended
September 30, 1998 compared to $314.0 million during the same period in 1997,
primarily due to acquisitions, substantially offset by the decline in pre-need
sales. In addition, an increase in the allowance for pre-need accounts
receivable as a result of worsening trends in collections experience added to
the decline in revenue. Cemetery gross margin decreased to 24.2% in 1998 from
29.5% and for Established Locations decreased to 22.7% in 1998 from 29.0% in
1997, primarily due to declines in pre-need sales, higher operating costs, and
the increased allowance for pre-need accounts receivable.
Insurance revenue increased 6.4% to $72.3 million for the nine months ended
September 30, 1998 from $68.0 million during the same period in 1997. The
increase in revenues was primarily due to the continuing effort to expand the
sale of pre-need funeral insurance through Company-owned funeral homes.
Insurance gross margin decreased to 15.0% compared to 17.7% for the same period
in 1997, primarily due to higher commissions and increased benefit claims
experience in the first quarter and other operating costs associated with the
implementation of the Company's insurance products in several states. On July
27, 1998, the Company announced that it had entered into an agreement to sell
First Capital for cash proceeds of approximately $24 million and a pre-tax gain
of approximately $5 million. The sale, which is subject to certain conditions
including insurance regulatory approvals, is expected to close in the fourth
quarter of 1998. First Capital specializes in the sale of pre-need funeral
insurance sold through non-Company funeral homes. First Capital has tangible
assets of approximately $88 million and annual revenues of approximately $24
million.
General and administrative expenses, as a percentage of revenue, increased
to 10.6% for the nine months ended September 30, 1998 compared to 10.3% for the
same period in 1997. The slightly higher percentage in 1998 was impacted by the
write off of approximately $14.9 million of previously capitalized costs,
primarily for acquisitions and planned construction projects that are no longer
being pursued. In the nine months ended September 30, 1997 general and
administrative expenses were impacted by the inclusion of $21.0 million of costs
for litigation and various asset write downs. Excluding these items in each
year, general and administrative expenses increased by $14.2 million and, as a
percentage of revenue for the nine months ended September 30, 1998 and 1997,
were 8.9% and 7.8%, respectively, as 1998 was unfavorably impacted by lower than
expected revenues.
In the third quarter of 1997, the Company recognized a restructuring charge
of $36.9 million following a review of the principal components of its
operational, administrative and capital structure. Accordingly, it was
determined that certain charges were necessary as a result of initiatives to
improve the long-term financial performance of the Company. The majority of the
initiatives effected were associated with the Company's efforts to more fully
integrate its field and administrative operations.
Depreciation and amortization expenses, as a percentage of revenue,
increased to 8.0% for the nine months ended September 30, 1998, compared to 6.3%
for the same period in 1997, primarily due to the write off and accelerated
amortization of various assets aggregating approximately $8.1 million, as well
as the fixed cost component effect of lower than expected revenues and increased
deferred costs associated with financing activities.
Interest expense on long-term debt increased by $17.9 million for the nine
months ended September 30, 1998 compared to the same period in 1997, primarily
as a result of additional borrowings by the Company to finance its previous
expansion programs and ongoing working capital needs.
In the third quarter of 1998, the Company adopted the Canadian Institute of
Chartered Accountants Handbook Section 3465, "Income Taxes." The provisions of
this standard were applied retroactively to January 1, 1993 which conforms to
the effective date that the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", for its financial statement
amounts presented under United States generally accepted accounting principles.
Implementation of the standard resulted in a $21.8 million cumulative effect
decrease of retained earnings as of January 1, 1997. The income tax recovery for
the nine months ended September 30, 1998 of $10.7 million, due to the loss
position for the period, compared to a tax recovery of $13.7 million during the
same period in 1997. The
-23-
<PAGE>
Company's effective tax rate is primarily determined through certain
international and intercompany financing arrangements, as well as other tax
strategies.
It is possible that changes in existing United States tax treaties over the
next year may have the effect of materially increasing the Company's tax rate.
If this occurs, the Company will attempt to maintain its existing tax rate
through alternative means, and currently believes that it will be able to do so,
but no assurances can be made it will be successful in this regard.
Equity and other earnings of associated companies were $8.1 million for the
nine months ended September 30, 1998 due to the inclusion of payment-in-kind
dividends on preferred shares of Rose Hills and Prime, partially offset by the
Company's share of the losses attributable to the common shares of Rose Hills
and Prime, as described further in Note 4 to the Company's interim consolidated
financial statements, and was approximately $1.4 million below earnings for the
same period in 1997. Based on Prime's reported losses to date the application of
the equity method will require the Company to record 100% of Prime's losses for
future periods. Based on Rose Hills reported losses to date and range of
estimates for the balance of 1998, the application of the equity method may
require the Company to similarly record 100% of Rose Hill's losses during the
fourth quarter of 1998.
Net earnings decreased to $7.8 million for the nine months ended September
30, 1998 from $11.0 million during the same period in 1997. Fully diluted
earnings per share decreased to $0.01 per share in 1998 from $0.06 per share
during the same period in 1997, reflecting the decrease in earnings partially
offset by the increase in the number of Common shares outstanding.
ACQUISITIONS, INVESTMENTS AND CAPITAL EXPENDITURES
The Company acquired 147 funeral homes and cemeteries during the nine months
ended September 30, 1998 for consideration of approximately $265 million. Of
these acquisitions, 61 funeral homes and 62 cemeteries were located in the
United States, five funeral homes and three cemeteries were located in Canada,
and 16 funeral homes were located in the United Kingdom. During the same period
in 1997, the Company acquired 102 funeral homes and 145 cemeteries for
consideration of approximately $426 million. However, in light of the Company's
recent operating results and the announcement in July of the initiative to
evaluate opportunities to maximize shareholder value, the Company is reducing
substantially the level of acquisitions for the remainder of 1998 and 1999. This
reduced level of acquisition spending was evident in the Company's third
quarter.
During the period October 1, 1998 to October 31, 1998, the Company acquired
four funeral homes. The aggregate cost of these transactions was approximately
$1 million. As of October 31, 1998, the Company has committed to acquire certain
funeral homes, cemeteries and related operations, subject in most instances to
certain conditions including approval by the Company's Board of Directors. The
aggregate cost of these transactions, if completed, will be approximately $24
million.
In connection with certain acquisitions, the Company may issue Common shares
as full or partial payment of the purchase price ("share-for-share
acquisitions"). In August 1996, the Company registered with the Securities and
Exchange Commission 5,000,000 Common shares for issuance in connection with
prospective share-for-share acquisitions. As of October 31, 1998, 815,504 of
such Common shares had been issued.
From time to time in the ordinary course of business, the Company may
dispose of non-core assets or businesses acquired in conjunction with the
acquisition of funeral homes, cemeteries and insurance businesses. In addition,
the Company expects to continue to combine or sell a number of locations in
order to utilize its resources to produce a better return from its assets, when
appropriate. Further, as part of the process of implementing opportunities to
maximize shareholder value, the Company may dispose of a significant group of
its funeral homes, cemeteries (or some combinations) and insurance businesses.
-24-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to fund the remainder of its working capital
requirements for 1998 and reduced 1998 expansion program through borrowings
under its credit facilities (described below), internal cash flow and asset
dispositions and plans to ensure similar financing is available well in advance
of scheduled principal repayment dates. The Company currently has no plans for
an equity offering. The Company's balance sheet at September 30, 1998, as
compared to December 31, 1997, reflects changes principally from acquisitions
during 1998, as described in Note 3 to the Company's interim consolidated
financial statements. In addition, the Company continues to expand its cemetery
and funeral pre-need sales programs. The growth in cemetery pre-need sales and
the related long-term receivables have contributed to the greater uses of cash
than generated from operations. Cemetery pre-need sales are typically structured
with low initial cash payments by the customers that do not offset the cash
costs of establishing and supporting a growing pre-need sales program, including
the payment of certain sales commissions. For cemetery pre-need sales, the
balance due is recorded as an installment contract receivable and the future
liability for merchandise as an other liability and, accordingly, the increase
in the level of pre-need cemetery sales has resulted in an increase in both
current and long-term receivables and other liabilities.
The Company's objective is to maintain its long-term debt/equity ratio, on
average, in a range of 1.0:1 to 1.5:1. Due to the timing of its acquisition
program, the Company's long-term debt/equity ratio typically has risen to the
high end of the range, and then has been reduced substantially by an equity
issue. At September 30, 1998, the Company's long-term debt/equity ratio was
1.4:1.
In September 1998, a subsidiary of the Company obtained a $100 million
revolving receivables finance facility (the "Receivables Finance Facility")
through a subsidiary of one of its bank lenders. Under the terms of the
agreement, new receivables are added to the pool each month to offset
collections from existing receivables. Another subsidiary of the Company
services, administers and collects the receivables. The Receivables Finance
Facility contains certain covenants and provides for various events of
termination. This facility expires on January 15, 1999 and is secured by a
pledge of the cemetery receivables held by the subsidiary. At September 30, 1998
the balance outstanding on the Receivables Finance Facility was $71.6 million.
The Company plans to extend the Receivables Finance Facility expiration date
prior to January 15, 1999 or replace it with a similar facility with a longer
term.
INDEBTEDNESS
The Company has a $600 million revolving credit facility that matures in
March 2001 (the "Revolving Credit Facility"). The Revolving Credit Facility
bears interest at alternative market rates selected by LGII. As at October 31,
1998, the amount outstanding under the Revolving Credit Facility was $246
million, and such amount bore interest at 7.53% per annum. The Revolving Credit
Facility is secured in the manner described below under "Collateral Trust
Agreement."
LGII also has outstanding $300 million of pass-through asset trust senior
guaranteed notes due 2009 (the "PATS Senior Notes"). The PATS Senior Notes are
held by a trust for the benefit of the holders of pass-through asset trust
securities due October 1, 1999 (the "PATS Trust"). The PATS Senior Notes bear
interest at a rate of 6.70% until October 1, 1999 (the "Reset Date"), at which
time the interest rate will be reset (the "Reset Rate") for the balance of the
term of the PATS Senior Notes at a fixed annual rate of 6.05% plus an adjustment
equal to LGII's then-current credit spread to the ten-year principal amount on
the Reset Date. In connection with the issuance of the PATS Senior Notes, LGII
granted a put option to the PATS Trust that, in effect, entitles the PATS Trust
to redeem the PATS Senior Notes, in whole but not in part, on the Reset Date.
The PATS Trust will exercise the put option if the interest rate at the Reset
Date is greater than the Reset Rate. In such circumstances, LGII intends to
refinance the PATS Senior Notes. The PATS Senior Notes are guaranteed by Loewen
and secured in the manner described below under "Collateral Trust Agreement."
LGII has outstanding six series of senior guaranteed notes aggregating
$1,150 million (the "Senior Notes") issued in March and October of 1996 and May
of 1998. The Senior Notes are guaranteed by Loewen and bear interest rates
ranging from 7.20% to 8.25% and have initial terms of five to ten years.
-25-
<PAGE>
LGII also has outstanding one series of senior amortizing notes (the "Series E
Amortizing Notes") in the amount of $43 million. The Series E Amortizing Notes
are guaranteed by Loewen, bear an interest rate of 6.49% and have an initial
term of ten years.
Loewen has outstanding Cdn. $200 million of 6.10% Series 5 Guaranteed Notes,
due 2002 (the "Series 5 Senior Notes"). The Series 5 Senior Notes are guaranteed
by LGII and secured in the manner described below under "Collateral Trust
Agreement." In addition, Loewen also has outstanding one series of senior
amortizing notes (the "Series D Amortizing Notes") in the amount of $43 million.
The Series D Amortizing Notes are guaranteed by LGII and bear an interest rate
of 9.62% and an initial term of ten years. Loewen also has a Cdn. $5 million
revolving credit facility (the "Canadian Revolving Credit Facility"). A
subsidiary of Loewen has a $105 million secured term loan implemented in
connection with the 1994 Management Equity Investment Plan that will terminate
in July 2000 (the "MEIP Loan").
COLLATERAL TRUST AGREEMENT
In 1996, Loewen, LGII and their senior lenders entered into a collateral
trust agreement pursuant to which the senior lenders share certain collateral
and guarantees on a pari passu basis (the "Collateral Trust Agreement"). The
security for lenders under the Collateral Trust Agreement consists of (i) all of
LGII's right, title and interest in and to all rights to receive payment under
or in respect of accounts, contracts, contractual rights, chattel paper,
documents, instruments and general intangibles, (ii) a pledge of the shares of
capital stock of substantially all of the subsidiaries in which Loewen directly
or indirectly holds more than a 50% voting or economic interest and (iii) a
guarantee by each subsidiary that is pledging stock. The security is held by a
trustee for the equal and ratable benefit of the senior lending group. This
senior lending group consists principally of the lenders under the Series 1-7
Senior Notes, the Series D and E Senior Amortizing Notes, the Revolving Credit
Facility, the MEIP Loan and the PATS Senior Notes, as well as holders of certain
letters of credit. In addition, there are various covenants that prohibit liens
on the assets of the non-guaranteeing subsidiaries.
RESTRICTIONS
Certain of the Company's debt instruments and credit facilities contain
restrictions, including change of control provisions, provisions requiring the
Company to maintain specified financial ratios and provisions limiting the
payment of dividends on Common shares and preferred shares, the encumbrance of
assets, payments to subsidiaries, the redemption or repurchase of shares,
dispositions of assets, additional debt, transactions with interested persons,
sales of preferred stock, sale-leaseback transactions and merger and
acquisitions. At September 30, 1998, none of the Company's retained earnings
were restricted or unavailable for payment of dividends under the most
restrictive agreement.
In connection with the issuance of the Monthly Income Preferred Securities
("MIPS") by Loewen Group Capital, L.P. ("LGC") in August 1994, Loewen is
guarantor of a Series A Junior Subordinated Debenture due August 31, 2024 issued
by LGII (the "Series A Debenture"). Under the terms of the Series A Debenture,
Loewen may not pay dividends on its Common shares if (i) there shall have
occurred any event that, with the giving of notice or the lapse of time or both,
would constitute an Event of Default (as defined in the Series A Debenture),
(ii) Loewen is in default with respect to payment of any obligations under
certain related guarantees or (iii) LGII shall have given notice of its election
to select an Extension Period (as defined in the Series A Debenture), and such
period, or any extension thereof, shall be continuing. For further information
regarding the MIPS, see Note 6 to the Company's interim consolidated financial
statements.
Payments of dividends and loans and advances by subsidiaries to Loewen or
LGII are not restricted except that the Company's insurance subsidiaries are
subject to certain state regulations that restrict distributions, loans and
advances from such subsidiaries to the Company.
-26-
<PAGE>
SHARE REPURCHASE PROGRAM
In September 1997, the Company announced that it may, from time to time and
until September 1998, subject to market and other conditions, repurchase up to
approximately 3,600,000 of its Common shares and up to 440,000 of its Series C
Preferred shares, through the facilities of the Toronto Stock Exchange, the
Montreal Exchange and the New York Stock Exchange. No share repurchases were
made during this period and the Company has not extended its share repurchase
program.
INTEREST RATE RISK MANAGEMENT
The Company enters into derivative transactions with financial institutions
primarily as hedges of other financial transactions. The Company's policies do
not allow leveraged transactions and are designed to minimize credit and
concentration risk with counter-parties. The Company's practice is to use swaps
and options to manage its exposure to interest rate movements. The Company's
strategy is to maintain an average of between 60% and 80% of its debt subject to
fixed interest rates, although at any point in time during a period the
percentage of debt subject to fixed interest rates may be higher or lower. The
Company also uses futures and options to fix the interest rate of anticipated
financing transactions in advance. Derivative transactions are entered into as
hedges based on several criteria, including the timing, size and term of the
anticipated transaction. Any gain or loss from an effective hedging transaction
is deferred and amortized over the life of the financing transaction as an
adjustment to interest expense.
IMPACT OF THE YEAR 2000 ISSUE
OVERVIEW
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or other disruption of
operations and impede normal business activities.
THE COMPANY'S STATE OF READINESS
During the past two years, the Company has been evaluating and assessing its
existing informational computer systems, as well as non-informational systems,
and determined that it will be necessary to modify or replace certain portions
of its software so that its systems will function properly beyond December 31,
1999. In particular, certain of the Company's financial reporting and
information gathering systems, such as general ledger, fixed assets, payroll,
commissions, accounts receivable and payable, etc., required varying degrees of
modification or replacement. Continued accurate and timely information
processing and reporting is critical to the ongoing operations of the Company.
Similarly, non-informational systems, such as communications systems, security
systems, etc., are critical to the safe and uninterrupted performance of the
Company. The evaluation of the non-informational systems determined that all
significant areas are or will be Year 2000 compliant.
As systems were evaluated and assessed, a detailed work plan was developed
to ensure that each area requiring modification or replacement is adequately and
timely addressed. At this time, the Company's work plan continues to indicate
that most significant areas have been or are scheduled to be remedied by
mid-1999. Such work plan includes adequate time for remediation of the area, as
well as testing to ensure the remediation efforts were complete. Additionally,
the Company has established a task force and a review process to monitor
remaining implementation plans and to determine whether all remaining areas
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have been assessed and evaluated, resources identified and remediation completed
on a timely basis. A summary of the Company's work plan and status is as
follows:
<TABLE>
<CAPTION>
EVALUATION YEAR 2000 COMPLETION
FUNCTION COMPLETE COMPLIANT DATE
- --------------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
Corporate................................................ Yes Yes N/A
Funeral Home Operations.................................. Yes No 2Q 1999
Cemetery Operations...................................... Yes No 2Q 1999
Insurance Operations..................................... Yes Yes N/A
</TABLE>
In addition, systems improvements and benefits beyond solution of the Year
2000 Issues are expected to be realized as a result of the above initiatives.
The Company has also made formal communications with its significant vendors
to determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. The Company is
currently gathering information requested from third parties to complete its
evaluation and assessment of what, if any, material relationships exist and
whether or not such relationships present significant risks to the continued
operations of the Company beyond 1999. This evaluation and assessment is
expected to be completed by the fourth quarter of 1998. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted on a timely basis, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have material adverse effect on the Company.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
To date, management estimates that the total cost incurred by the Company to
evaluate, assess and remedy Year 2000 Issues has been less than $1 million, and
is not material to the operating results or financial position of the Company.
The expected future cost to complete evaluation, assessment and remediation of
Year 2000 Issues, including replacement if necessary, is expected to be less
than $7 million. Funding for addressing Year 2000 Issues will be achieved with
operating funds of the Company.
The cost and the date on which the Company plans to complete the Year 2000
Issue modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
Company's total Year 2000 Issue project cost and estimates to complete exclude
the estimated costs and time associated with the impact of a third party's Year
2000 Issue, which are not determinable.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
It is difficult to accurately project what the potential risks and
ramifications to the Company may be, in the event timely remediation efforts are
not completed by either the Company or significant third parties. In such an
event, it is likely that the ability to maintain accurate and complete financial
records of the Company's activities and transactions, and possibly the timely
and cost-effective procurement of merchandise, may be impaired. Such events,
should they occur, would be likely to significantly impair the Company's ability
to operate as it does today, creating business interruption, potential loss of
business, and earnings and liquidity difficulties. The Company presently
believes that with progress made to date and current and planned modifications
to existing software and conversions to new software, the risk of potential loss
associated with the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company.
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<PAGE>
THE COMPANY'S CONTINGENCY PLANS
Though the Company's Year 2000 Issue work plan is believed to be adequate to
achieve full system compliance on a timely basis, there may be circumstances
that could prevent timely implementation. Accordingly, the Company has designed
its work plan to address this potential occurrence. First, the work plan has
been designed to ensure that the most critical systems and areas are addressed
first, and in a manner that provides adequate time to remediate and test
thoroughly. Second, the Company has secured external expert resources to assist
in evaluation, assessment, prioritization and implementation of the work plan to
further ensure its success. Third, in the event the Company is unable to
completely remediate a system, the Company has sought to develop, where
necessary, an alternative solution as a back-up plan, such as developing a
"parallel" remediation effort (i.e., modifying an existing system to ensure it
is Year 2000 compliant at the same time such system is being completely
replaced). The Company will continue to monitor and adjust its contingency plan
needs in conjunction with the progress made on the primary work plan.
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<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
ESNER ESTATE
On July 21, 1998, the Esner litigation (described in the Company's previous
periodic reports), was settled. The terms of the settlement provide that no
contribution to the settlement will be made by the Company. Upon execution of
the settlement agreement by all parties, the agreement will be presented to the
Court of Common Pleas of Bucks County, Pennsylvania, for final approval.
FELDHEIM ET AL. V. SI-SIFH CORP. ET AL. AND DUFFY ET AL. V. SI-SIFH CORP ET AL.
Two complaints were filed in 1997 on behalf of individuals who claim damages
in connection with funeral insurance policies allegedly issued to them by
insurance companies owned, directly or indirectly, by S.I. Acquisition
Associates, L.P. ("S.I."). The Company acquired the assets but not the stock of
S.I. in March 1996. In January 1997, Elmer C. Feldheim and four other
individuals filed a lawsuit on behalf of themselves and a class of similarly
situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance
Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of
Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and
SI-SI Insurance Company, Inc. are affiliates of S.I.
In June 1997, Lloyd Duffy, Sr. and four other individuals filed a lawsuit on
behalf of themselves and a class of similarly situated individuals and/or
entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana
Holdings, Inc., and LGII in the Parish of Orleans, State of Louisiana.
Plaintiffs seek a class action. The DUFFY complaint was filed by the same
lawyers who filed the complaint in the FELDHEIM case, and is a virtually
identical copy of the FELDHEIM complaint. The DUFFY case is pending in the trial
court and, as of the date hereof, no discovery has taken place.
The FELDHEIM and DUFFY plaintiffs allegedly hold or held funeral insurance
policies issued by insurance companies owned, directly or indirectly, by the
defendants. The plaintiffs allege that (i) the defendants failed to provide the
funeral services purchased with the policies by, among other things, offering a
casket of inferior quality upon presentation of a policy, and (ii) in connection
with the sale of the insurance policy, the insurance companies negligently or
fraudulently represented and interpreted the scope and terms of the policies and
omitted to provide material information regarding the policy benefits and
limitations. Plaintiffs also alleged unfair trade practices in violation of
Louisiana's trade practices laws.
Plaintiffs' petitions seek damages, penalties and attorneys' fees. Louisiana
law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs
also seek a declaratory judgment compelling defendants to honor the policies.
On June 13, 1997, the district court in Jefferson Parish dismissed the
FELDHEIM plaintiffs' claim to a class action, and plaintiffs appealed. Briefing
of the appeal was completed in December 1997, and oral argument was held on
January 15, 1998. On June 30, 1998, the Louisiana Fifth Circuit Court of Appeal
affirmed the dismissal of the FELDHEIM plaintiffs' class-action claims except as
to a claim by "Sub Class B" plaintiffs (the proposed class of current
policyholders who are seeking a declaratory judgment). The appellate court found
that the trial court's opinion did not consider the validity of class treatment
for the "Sub Class B" plaintiffs' claim for a declaratory judgment when it
dismissed plaintiffs' class-action claims, and it remanded the case to the trial
court for a hearing on that issue. On September 22, 1998, the trial court ruled
that the claim could not go forward as a class action. On October 20, 1998,
plaintiffs noticed a suspensive appeal to the Louisiana Fifth Circuit Court of
Appeal from this ruling.
On August 26, 1998, defendants sought dismissal of all of plaintiffs'
remaining individual claims in FELDHEIM. The trial court has not yet ruled on
that request.
On September 21, 1998, plaintiffs in FELDHEIM filed an "Amended Petition for
Attorneys Fees," which contends that the plaintiffs' lawyers are entitled to an
unspecified sum of attorneys' fees. Defendants will respond shortly to that
amended petition.
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<PAGE>
As of the date hereof, no discovery has taken place.
On April 17, 1998 the trial court in the DUFFY lawsuit declined to grant the
defendants' exception seeking to dismiss the plaintiffs' class action
allegations on the face of the pleadings. Instead, the court deferred ruling on
those issues until the hearing on the class action issues, and the court
indicated it would permit some discovery. On April 23, 1998 the defendants filed
a Notice of Intent to Seek Supervisory Writs with the Court of Appeal from the
trial court's April 17, 1998 judgment, and the trial court granted the
defendants' motion for a stay of all proceedings pending a ruling by the Court
of Appeal on the supervisory writ application. The defendants filed their
Application for Supervisory Writs with the Louisiana Fourth Circuit Court of
Appeal on June 5, 1998, but a decision has not yet been rendered. On July 16,
1998, the trial court lifted its previously entered stay of all proceedings in
this case; defendants have filed a motion requesting that the trial court
reinstitute its stay.
The Company has determined that it is not possible at this time to predict
the final outcome of these legal proceedings, including whether a class will be
certified, and that it is not possible to establish a reasonable estimate of
possible damages, if any, or reasonably to estimate the range of possible
damages that may be awarded to plaintiffs. Accordingly, no provision with
respect to this lawsuit has been made in the Company's interim consolidated
financial statements.
LUENING, ET AL. V. SI-SIFH CORP., ET AL.
In June 1998, Warren S. Luening and four other individuals filed a lawsuit
on behalf of themselves and a class of similarly situated individuals and/or
entities against SI-SIFH Corp, SI-SI Insurance Company, Inc., Loewen Louisiana
Holdings, Inc., and LGII in the Parish of St. Bernard, State of Louisiana.
Plaintiffs seek a class action. Defendants in this case are the same entities
against whom complaints were filed in Jefferson Parish, Louisiana (the FELDHEIM
case) and in Orleans Parish, Louisiana (the DUFFY case), and, aside from the
addition of local counsel in St. Bernard Parish, the same lawyers who filed the
FELDHEIM and DUFFY complaints filed the Luening complaint.
Plaintiffs allegedly hold and held funeral insurance policies issued by
insurance companies owned, directly or indirectly, by the defendants. Plaintiffs
allege that (i) the defendants charged them for certain funeral services,
including the services of a funeral director and staff, a funeral ceremony, care
of the deceased, automotive services and a casket, even though these services
were allegedly covered by their policies, and (ii) the defendants have been
unjustly enriched through the payment of services allegedly covered under the
plaintiffs' policies, and the plaintiffs are therefore entitled to restitution
of those payments. Plaintiffs' complaint seeks compensatory and nonpecuniary
damages and attorneys' fees. Louisiana law prohibits plaintiffs from alleging
specific amounts of damages in their complaint.
On October 22, 1998, plaintiffs in LUENING filed a "First Amended Petition
for Damages." In response to the First Amended Petition, on October 19, 1998
defendants removed the LUENING case to federal court on diversity-of-citizenship
grounds. On October 20, 1998, defendants moved to dismiss the Luening petition.
As of the date hereof, no discovery has taken place.
It is not possible to predict the final outcome of this legal proceeding,
including whether a class will be certified, and it is not possible to establish
a reasonable estimate of possible damages, if any, or reasonably to estimate the
range of possible damages that may be awarded to plaintiffs.
THE LOEWEN GROUP INC. ET AL. V. THE UNITED STATES OF AMERICA
On October 30, 1998, Loewen and an affiliate filed a claim against the
United States government for damages under the arbitration provisions of the
North American Free Trade Agreement ("NAFTA"). The plaintiffs contend that they
were damaged as a result of breaches by the United States of its obligations
under NAFTA in connection with certain litigation in the State of Mississippi
entitled O'KEEFE V. THE LOEWEN GROUP INC. Specifically, the plaintiffs allege
that they were subjected to discrimination, denial of the minimum standard of
treatment guaranteed by NAFTA and uncompensated expropriation, all in violation
of NAFTA. The Company has determined that it is not possible at this time to
predict the final
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<PAGE>
outcome of this proceeding or to establish a reasonable estimate of the damages
that may be awarded to the Company.
OTHER
No material developments occurred in connection with any other previously
reported legal proceedings against the Company during the last fiscal quarter.
The Company is a party to other legal proceedings in the ordinary course of
its business but does not expect the outcome of any other proceedings,
individually or in the aggregate, to have a material adverse effect on the
Company's financial position, results of operation or liquidity.
ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company's operations are subject to numerous environmental laws,
regulations and guidelines adopted by various governmental authorities in the
jurisdictions in which the Company operates. Liabilities are recorded when
environmental liabilities are either known or considered probable and can be
reasonably estimated. The Company's policies are designed to control
environmental risk upon acquisition through extensive due diligence and
corrective measures taken prior to acquisition. The Company believes
environmental liabilities to be immaterial individually and in the aggregate.
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Management believes that the aggregate purchase price for acquisitions in
1998 will approximate $300 million. In 1998, funeral gross margin is expected to
be approximately 40% and cemetery gross margin is expected to be in the range of
20% to 25%. The foregoing statement and certain other statements made in this
Form 10-Q, in other filings made with the Securities and Exchange Commission,
and elsewhere (including oral statements made on behalf of the Company) are
forward-looking statements within the meaning of Section 27A(i) of the
Securities Act of 1933 and Section 21E(i) of the Securities Exchange Act of
1934. Shareholders and potential investors are hereby cautioned that certain
events or circumstances could cause actual results to differ materially from
those estimated, projected or predicted. The Company undertakes no obligation to
publicly release the result of any revisions to forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Other examples of forward-looking statements include: (i) projections of
revenue, earnings, capital structure and other financial items, (ii) statements
of the plans and objectives of the Company or its management, (iii) statements
of future economic performance and (iv) assumptions underlying statements
regarding the Company or its business. Important factors, risks and
uncertainties that could cause actual results to differ materially from any
forward-looking statements ("Cautionary Statements") are described below. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
CAUTIONARY STATEMENTS
In addition to other information in this Form 10-Q, the following important
factors, among others, could cause acquisition levels and other future results
to differ materially from estimates, predictions or projections.
1. REVENUE AND MARGINS. The most significant component of increases in
revenue is the level of acquisitions, discussed below. Revenue is also affected
by the volume of services rendered and the mix and pricing of services and
products sold and actual pre-need contract cancellation experience. Margins are
affected by the volume of services rendered, the mix and pricing of services and
products sold and related costs. Further, revenue and margins may be affected by
fluctuations in the number of deaths (which may be
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<PAGE>
significant from period to period), competitive pricing strategies, pre-need
sales and other sales programs implemented by the Company and the ability to
hire and retain the necessary level of sales staff.
2. ACQUISITION LEVELS. In light of the Company's 1998 operating results
through September 30, 1998 and its announced initiative to evaluate
opportunities to maximize shareholder value, the Company has reduced its
estimate of 1998 acquisitions from $500 million to $300 million and expects the
level of acquisitions in 1999 to be minimal. There can be no assurance that
funds will be available to complete all future acquisitions, and there can be no
assurance that the Company will complete any specific number or dollar amount of
acquisitions in a particular year.
3. OTHER. Consolidated financial results also may be affected by (i) the
ability of the Company to implement appropriate management and administrative
support structures to improve cash flow from operations and reduce costs, (ii)
the cost and availability of the Company's financing arrangements (including
interest rates on long-term debt), (iii) the number of Common shares
outstanding, (iv) competition, (v) the Company's effective tax rate, (vi) the
accounting treatment of acquisitions and the valuation of assets, (vii) the
amount and growth rate of the Company's general and administrative costs, (viii)
changes in applicable accounting principles and governmental regulations, (ix)
the outcome of legal proceedings, and (x) the ability of the Company and third
parties to achieve Year 2000 Issue compliance on a timely basis, and (xi) the
manner in which the Company ultimately implements its stated goal of considering
opportunities to maximize shareholder value.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
3 CHARTER DOCUMENTS
3.1 Certificate of Incorporation of The Loewen Group Inc. ("Loewen") issued by the British Columbia
Registrar of Companies (the "Registrar") on October 30, 1985 (1)
3.2 Altered Memorandum of Loewen, filed with the Registrar on June 21, 1996 (2)
3.3 Articles of Loewen, restated, filed with the Registrar on March 1, 1988, as amended on March 30,
1988, April 21, 1988, May 19, 1989, May 28, 1992, May 20, 1993, June 29, 1994, December 21, 1995
and February 7, 1996 (3)
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1.1 Note Agreement, dated for reference September 1, 1993, by and between Loewen and LGII re 9.62%
Senior Guaranteed Notes, Series D, due September 11, 2003, issued by Loewen ("Series D Notes"),
as amended on June 10, 1994 (1)
4.1.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference
September 1, 1993, among Loewen, LGII and institutions named therein, re Series D Notes (4)
4.2 Guaranty Agreement by LGII re Series D Notes, dated for reference April 1, 1993 (1)
4.3.1 Note Agreement by LGII and Loewen re 6.49% Senior Guaranteed Notes, Series E, due February 25,
2004, issued by LGII ("Series E Notes"), dated for reference February 1, 1994 (1)
4.3.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference
February 1, 1994, among Loewen, LGII and Teachers Insurance and Annuity Association of America,
re Series E Notes (4)
4.4 Guaranty Agreement by Loewen re Series E Notes, dated for reference February 1, 1994 (1)
4.5.1 Amended and Restated 1994 MEIP Credit Agreement, dated as of June 14, 1994, amended and restated
as of May 15, 1996 (the "MEIP Credit Agreement"), by and between Loewen Management Investment
Corporation, in its capacity as agent for LGII ("LMIC"), Loewen and the banks listed therein
(the "MEIP Banks") and Wachovia Bank of Georgia, N.A., as agent for the MEIP Banks ("MEIP
Agent") (5)
4.5.2 First Amendment to the MEIP Credit Agreement, dated as of December 2, 1996 (6)
4.5.3 Second Amendment to the MEIP Credit Agreement, dated as of April 30, 1997 (6)
4.5.4 Third Amendment to the MEIP Credit Agreement, dated as of May 21, 1997 (7)
4.5.5 Fourth Amendment to the MEIP Credit Agreement, dated as of September 29, 1997 (7)
4.6 Security Agreement, dated as of June 14, 1994, by and between LMIC and the MEIP Agent (1)
4.7 Guaranty dated as of June 14, 1994, by LGII in favor of the MEIP Agent for the ratable benefit of
the MEIP Banks (1)
4.8 Guaranty dated as of June 14, 1994, by Loewen in favor of the MEIP Agent for the ratable benefit
of the MEIP Banks (1)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
4.9 Exchange Acknowledgment by Loewen, with respect to the 1994 Exchangeable Floating Rate Debentures
due July 1, 2001 issued by LGII, dated June 15, 1994 (1)
4.10 Indenture, dated as of August 15, 1994, by and between LGII, as issuer, Loewen, as guarantor, and
State Street Bank and Trust Company, as trustee with respect to 9.45% Junior Subordinated
Debentures, Series A, due 2024, issued by LGII and guaranteed by Loewen (8)
4.11 MIPS Guarantee Agreement, dated August 15, 1994 (8)
4.12 Zero Coupon Loan Agreement, dated as of November 1, 1994, by and between WLSP Investment Partners
I Neweol Finance B.V., Electrolux Holdings B.V., Man Production Rotterdam B.V., Adinvest A.G.,
and Wachovia Bank of Georgia, N.A. (1)
4.13 Indenture, dated as of March 20, 1996, by and between LGII, as issuer, Loewen, as guarantor of the
obligations of LGII under the Indenture, and Fleet National Bank as Trustee, with respect to
Senior Guaranteed Notes of LGII (3)
4.14 Form of Senior Guarantee of LGII's Series 1 and 2 Notes (included in Exhibit 4.13)
4.15 Form of Global Series 1 and 2 Outstanding Notes of LGII (included in Exhibit 4.13)
4.16 Form of Physical Series 1 and 2 Outstanding Notes of LGII (included in Exhibit 4.13)
4.17 Form of Global Series 1 and 2 Exchange Notes of LGII (4)
4.18 Form of Physical Series 1 and 2 Exchange Notes of LGII (4)
4.19 Amended and Restated Credit Agreement, dated as of March 27, 1998 ("BMO Credit Agreement"), among
LGII, as borrower, Loewen, as a guarantor, the lenders named therein, as the lenders, Goldman,
Sachs & Co., as the documentation agent, and Bank of Montreal, as issuer, swingline lender and
administrative and syndication agent (7)
4.20 Collateral Trust Agreement, dated as of May 15, 1996, among Bankers Trust Company, as trustee,
Loewen, LGII and various other pledgers (4)
4.21.1 Amended and Restated Operating Credit Agreement, dated for reference July 15, 1996, between Loewen
and Royal Bank of Canada (5)
4.21.2 Third Amendment to Operating Credit Agreement, dated for reference July 15, 1996, among Loewen,
LGII and Royal Bank of Canada (5)
4.22 Indenture, dated as of October 1, 1996, by and between LGII, Loewen and Fleet National Bank, as
trustee, with respect to the Series 3 and 4 Notes (5)
4.23 Form of Senior Guarantee of LGII's Series 3 and 4 Notes (included in Exhibit 4.22)
4.24 Form of Global Series 3 and 4 Outstanding Notes of LGII (included in Exhibit 4.22)
4.25 Form of Physical Series 3 and 4 Outstanding Notes of LGII (included in Exhibit 4.22)
4.26 Form of Global Series 3 and 4 Exchange Notes of LGII (9)
4.27 Form of Physical Series 3 and 4 Exchange Notes of LGII (9)
4.28 Indenture, dated as of September 26, 1997, between Loewen, as issuer, LGII, as guarantor, and The
Trust Company of Bank of Montreal, as trustee, with respect to the Series 5 Notes (10)
4.29 Form of Series 5 Guaranteed Notes of LGII (10)
4.30 Form of Senior Guarantee of Loewen's Series 5 Notes (10)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
4.31 Indenture, dated as of September 30, 1997, between LGII, as issuer, Loewen, as guarantor, and
State Street Bank and Trust Company, as trustee, with respect to the Senior Guaranteed Notes due
2009 (10)
4.32 Form of Global "PATS" Senior Guaranteed Notes due 2009 of LGII (10)
4.33 Form of Physical "PATS" Senior Guaranteed Notes due 2009 of LGII (10)
4.34 Form of Senior Guarantee of LGII's "PATS" Senior Guaranteed Notes due 2009 (10)
4.35 Shareholder Protection Rights Plan, dated as of April 20, 1990, as amended on May 24, 1990 and
April 7, 1994 and reconfirmed on May 17, 1995 (1)
4.36 Form of Indenture by and between LGII, as issuer, Loewen, as guarantor, and Fleet National Bank,
as trustee, relating to the Debt Securities that may be issued pursuant to Registration
Statement No. 333-29443 (11)
4.37 Indenture dated as of May 28, 1998, between LGII, as issuer, Loewen, as guarantor, and State
Street Bank and Trust Company, as trustee, with respect to the Series 6 and 7 Notes (12)
4.38 Form of Senior Guarantee of Series 6 and 7 Notes of LGII (included in Exhibit 4.37)
4.39 Form of Global Series 6 and 7 Notes of LGII (included in Exhibit 4.37)
4.40 Form of Physical Series 6 and 7 Notes of LGII (included in Exhibit 4.37)
4.41 Form of Global Series 6 and 7 Exchange Notes of LGII (13)
4.42 Form of Physical Series 6 and 7 Exchange Notes of LGII (13)
4.43 Loewen and LGII hereby agree to furnish to the Commission, upon request, a copy of the instruments
which define the rights of holders of long-term debt of Loewen and LGII. None of such
instruments not included as exhibits herein collectively represents long-term debt in excess of
10% of the consolidated total assets of Loewen or LGII.
10 MATERIAL CONTRACTS
10.1 Stock Purchase Agreement, dated as of March 16, 1995, by and between Osiris Holding Corporation
and LGII (14)
10.2 Receipt Agreement, dated as of January 3, 1996, for the Cumulative Redeemable Convertible First
Preferred Shares, Series C, of Loewen ("Series C Shares") (3)
10.3 Undertaking by Raymond L. Loewen and Anne Loewen, dated as of January 3, 1996, to vote in favor of
the motion to subdivide the Series C Shares (3)
10.4 Registration Rights Agreement, dated as of March 20, 1996, by and between LGII, Loewen and the
Initial Purchasers named therein (3)
10.5 Letter Agreement, dated August 8, 1997, by and between Loewen and Service Corporation
International (7)
*10.6 Form of Indemnification Agreement with Outside Directors (15)
*10.7 Form of Indemnification Agreement with Officers (15)
*10.8 Form of Loewen Severance Agreement (15)
*10.9 Loewen Severance Pay Plan (15)
*10.10 1994 Management Equity Investment Plan (the "MEIP") (15)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
*10.11 Form of Executive Agreement executed by participants in the MEIP (8)
*10.12 1994 Outside Director Compensation Plan, as restated and amended as at January 9, 1997, and
further amended as at August 15, 1997 (7)
*10.13 Employee Stock Option Plan (International), as restated and amended as at March 11, 1998 (7)
*10.14 Employee Stock Option Plan (Canada), as restated and amended as at March 11, 1998 (7)
*10.15 Employment Agreement, dated August 19, 1988, by and between Loewen and Tim Hogenkamp (1)
*10.16 Employment Agreement, and Covenant Not to Compete, dated November 14, 1990, by and between LGII
and Albert S. Lineberry, Sr. (1)
*10.17 Employment Agreement, dated April 12, 1991, by and between Loewen and Dwight Hawes (1)
*10.18 Consulting Agreement, dated July 18, 1994, by and between Loewen and Charles B. Loewen, LGII, and
Corporate Services International Inc. (1)
*10.19 Employment Letter, dated March 10, 1995, by Raymond L. Loewen to Paul Wagler (5)
*10.20 Employment Agreement, dated March 17, 1995, by and between Loewen, LGII and Lawrence Miller (1)
*10.21.1 Employment Agreement, dated March 17, 1995, by and between Loewen and William R. Shane ("Shane
Employment Agreement") (1)
*10.21.2 Amendment No. 1 to Shane Employment Agreement, dated February 23, 1998, by and between Loewen and
William R. Shane (7)
*10.22 Employment Agreement, dated April 30, 1996, by and between Loewen and Grant Ballantyne (5)
*10.23 Resignation and Release Agreement, effective June 10, 1996, by and between Loewen, LGII and Robert
O. Wienke (5)
*10.24 Employment Agreement, dated October 3, 1997, by and between Loewen and F. Andrew Scott (7)
*10.25 Employment Agreement, dated October 31, 1997, by and between Loewen and Michael G. Weedon (7)
*10.26 Severance Agreement, dated November 4, 1997, by and between Loewen and Douglas J. McKinnon (7)
*10.27 Employment Agreement, dated January 30, 1998, by and between Loewen and Brad Stam (7)
11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
27 FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule -- Nine months ended September 30, 1998
27.2 Financial Data Schedule -- Restatement for three months ended March 31, 1998 and six months ended
June 30, 1998
27.3 Financial Data Schedule -- Restatement for 1997
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
27.4 Financial Data Schedule -- Restatement for 1996
99 ADDITIONAL EXHIBITS
99.1 Stock Purchase Agreement, dated as of June 14, 1996, by and among Prime Succession, Inc. the other
individuals or entities listed on the signature pages thereof, Loewen and Blackhawk Acquisition
Corp. (16)
99.2 Put/Call Agreement, dated as of August 26, 1996, by and among Blackstone, Blackstone Offshore
Capital Partners II L.P. ("Blackstone Offshore"), Blackstone Family Investment Partnership II
L.P. ("Blackstone Family"), PSI Management Direct L.P. ("PSI"), LGII and Loewen (17)
99.3 Stockholders' Agreement, dated as of August 26, 1996, by and among Prime Succession, inc. (to be
renamed Prime Succession Holdings, Inc.), Blackstone, Blackstone Offshore, Blackstone Family,
PSI and LGII (16)
99.4 Subscription Agreement, dated as of November 19, 1996, by and among Rose Hills Holdings Corp.
("Rose Hills"), Blackstone, Blackstone Rose Hills Offshore Capital Partners L.P. ("Blackstone
Rose Hills"), Blackstone Family, Roses Delaware, Inc. ("RDI"), Loewen, LGII and RHI Management
Direct, L.P. ("RHI") (18)
99.5 Put/Call Agreement, dated as of November 19, 1996, by and among Blackstone, Blackstone Offshore,
Blackstone Family, Blackstone Rose Hills, LGII, RDI, Loewen and RHI (18)
99.6 Stockholders' Agreement, dated as of November 19, 1996, by and among Rose Hills, Blackstone,
Blackstone Rose Hills, Blackstone Family, RDI, LGII and RHI (18)
99.7 Form of Letter of Transmittal (19)
99.8 Form of Notice of Guaranteed Delivery (19)
</TABLE>
- ------------------------
* Compensatory plan or management contract
(1) Incorporated by reference from Loewen's Annual Report on Form 10-K for the
year ended December 31, 1994, filed on March 31, 1995 (File No. 0-18429)
(2) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed on August 14, 1996 (File No. 0-18429)
(3) Incorporated by reference from Loewen's Annual Report on Form 10-K for the
year ended December 31, 1995, filed on March 28, 1996, as amended (File No.
0-18429)
(4) Incorporated by reference from the Registration Statement on Form S-4 filed
by Loewen on May 3, 1996, as amended (File No. 333-03135)
(5) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, filed on November 14, 1996 (File No.
1-12163)
(6) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, filed on May 13, 1997 (File No. 1-12163)
(7) Incorporated by reference from Loewen's Annual Report on Form 10-K for the
year ended December 31, 1997, filed on March 30, 1998 (File No. 1-12163)
(8) Incorporated by reference from the combined Registration Statement on Form
F-9/F-3 filed by LGII and Loewen on July 1, 1994, as amended (File Nos.
33-81032 and 33-81034)
-38-
<PAGE>
(9) Incorporated by reference from the Registration Statement on Form S-4 filed
by LGII and Loewen on November 18, 1996, as amended (File Nos. 333-16319 and
333-16319-01)
(10) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, filed on November 14, 1997 (File No.
1-12163)
(11) Incorporated by reference from the Registration Statement on Form S-3 filed
by Loewen and LGII on March 21, 1997, as amended (File Nos. 333-23747 and
333-23747-01)
(12) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q/A for
the quarter ended June 30, 1998, filed on August 13, 1998 (File No. 1-12163)
(13) Incorporated by reference from the Registration Statement on Form S-4 filed
by LGII and Loewen on August 26, 1998, as amended (File No. 333-62239-01)
(14) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No.
1, dated April 18, 1995, filed May 5, 1995 (File No. 0-18429)
(15) Incorporated by reference from Loewen's Solicitation/Recommendation
Statement on Schedule 14D-9, filed on October 10, 1996, as amended
(16) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated
August 26, 1996, filed October 11, 1996, as amended October 29, 1996 (File
No. 1-12163)
(17) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No.
1, dated August 26, 1996, filed October 29, 1996 (File No. 1-12163)
(18) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated
November 19, 1996, filed December 27, 1996 (File No. 1-12163)
(19) Incorporated by reference from Amendment No. 1 to the Registration
Statement on Form S-4 filed by LGII and Loewen on September 21, 1998 (File
No. 333-62239-01)
(b) REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed by Loewen during the
subject quarter:
<TABLE>
<CAPTION>
FILING DATE ITEM NUMBER DESCRIPTION
- ---------------------------- ------------------------ ----------------------------------------------------------
<S> <C> <C>
July 23, 1998 (dated July Item 5. Other Events Press release announcing the expectation of lower second
21, 1998) quarter earnings
July 28, 1998 (dated July Item 5. Other Events Press releases announcing agreement to sell First Capital
27, 1998) Life Insurance Company of Louisiana
July 28, 1998 (dated July Item 5. Other Events Press release announcing the engagement of an investment
27, 1998) banking firm to explore opportunities to maximize
shareholder value
August 3, 1998 (dated July Item 5. Other Events Press release announcing executive appointments
31, 1998)
August 7, 1998 (dated August Item 5. Other Events Press release announcing second quarter financial results
6, 1998)
September 14, 1998 (dated Item 5. Other Events Press release announcing cash dividend on Preferred Shares
September 11, 1998)
</TABLE>
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Loewen
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
<TABLE>
<S> <C>
THE LOEWEN GROUP INC.
Date: November 13, 1998 By: /s/ PAUL WAGLER
Name: Paul Wagler
Title: SENIOR VICE-PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
Date: November 13, 1998 By: /s/ DWIGHT K. HAWES
Name: Dwight K. Hawes
Title: SENIOR VICE-PRESIDENT, CORPORATE
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
-40-
<PAGE>
INDEX TO EXHIBITS
EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<S> <C>
3 CHARTER DOCUMENTS
3.1 Certificate of Incorporation of The Loewen Group Inc. ("Loewen") issued by the British Columbia
Registrar of Companies (the "Registrar") on October 30, 1985 (1)
3.2 Altered Memorandum of Loewen, filed with the Registrar on June 21, 1996 (2)
3.3 Articles of Loewen, restated, filed with the Registrar on March 1, 1988, as amended on March 30,
1988, April 21, 1988, May 19, 1989, May 28, 1992, May 20, 1993, June 29, 1994, December 21, 1995
and February 7, 1996 (3)
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1.1 Note Agreement, dated for reference September 1, 1993, by and between Loewen and LGII re 9.62%
Senior Guaranteed Notes, Series D, due September 11, 2003, issued by Loewen ("Series D Notes"),
as amended on June 10, 1994 (1)
4.1.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference
September 1, 1993, among Loewen, LGII and institutions named therein, re Series D Notes (4)
4.2 Guaranty Agreement by LGII re Series D Notes, dated for reference April 1, 1993 (1)
4.3.1 Note Agreement by LGII and Loewen re 6.49% Senior Guaranteed Notes, Series E, due February 25,
2004, issued by LGII ("Series E Notes"), dated for reference February 1, 1994 (1)
4.3.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference
February 1, 1994, among Loewen, LGII and Teachers Insurance and Annuity Association of America,
re Series E Notes (4)
4.4 Guaranty Agreement by Loewen re Series E Notes, dated for reference February 1, 1994 (1)
4.5.1 Amended and Restated 1994 MEIP Credit Agreement, dated as of June 14, 1994, amended and restated
as of May 15, 1996 (the "MEIP Credit Agreement"), by and between Loewen Management Investment
Corporation, in its capacity as agent for LGII ("LMIC"), Loewen and the banks listed therein
(the "MEIP Banks") and Wachovia Bank of Georgia, N.A., as agent for the MEIP Banks ("MEIP
Agent") (5)
4.5.2 First Amendment to the MEIP Credit Agreement, dated as of December 2, 1996 (6)
4.5.3 Second Amendment to the MEIP Credit Agreement, dated as of April 30, 1997 (6)
4.5.4 Third Amendment to the MEIP Credit Agreement, dated as of May 21, 1997 (7)
4.5.5 Fourth Amendment to the MEIP Credit Agreement, dated as of September 29, 1997 (7)
4.6 Security Agreement, dated as of June 14, 1994, by and between LMIC and the MEIP Agent (1)
4.7 Guaranty dated as of June 14, 1994, by LGII in favor of the MEIP Agent for the ratable benefit of
the MEIP Banks (1)
4.8 Guaranty dated as of June 14, 1994, by Loewen in favor of the MEIP Agent for the ratable benefit
of the MEIP Banks (1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<S> <C>
4.9 Exchange Acknowledgment by Loewen, with respect to the 1994 Exchangeable Floating Rate Debentures
due July 1, 2001 issued by LGII, dated June 15, 1994 (1)
4.10 Indenture, dated as of August 15, 1994, by and between LGII, as issuer, Loewen, as guarantor, and
State Street Bank and Trust Company, as trustee with respect to 9.45% Junior Subordinated
Debentures, Series A, due 2024, issued by LGII and guaranteed by Loewen (8)
4.11 MIPS Guarantee Agreement, dated August 15, 1994 (8)
4.12 Zero Coupon Loan Agreement, dated as of November 1, 1994, by and between WLSP Investment Partners
I Neweol Finance B.V., Electrolux Holdings B.V., Man Production Rotterdam B.V., Adinvest A.G.,
and Wachovia Bank of Georgia, N.A. (1)
4.13 Indenture, dated as of March 20, 1996, by and between LGII, as issuer, Loewen, as guarantor of the
obligations of LGII under the Indenture, and Fleet National Bank as Trustee, with respect to
Senior Guaranteed Notes of LGII (3)
4.14 Form of Senior Guarantee of LGII's Series 1 and 2 Notes (included in Exhibit 4.13)
4.15 Form of Global Series 1 and 2 Outstanding Notes of LGII (included in Exhibit 4.13)
4.16 Form of Physical Series 1 and 2 Outstanding Notes of LGII (included in Exhibit 4.13)
4.17 Form of Global Series 1 and 2 Exchange Notes of LGII (4)
4.18 Form of Physical Series 1 and 2 Exchange Notes of LGII (4)
4.19 Amended and Restated Credit Agreement, dated as of March 27, 1998 ("BMO Credit Agreement"), among
LGII, as borrower, Loewen, as a guarantor, the lenders named therein, as the lenders, Goldman,
Sachs & Co., as the documentation agent, and Bank of Montreal, as issuer, swingline lender and
administrative and syndication agent (7)
4.20 Collateral Trust Agreement, dated as of May 15, 1996, among Bankers Trust Company, as trustee,
Loewen, LGII and various other pledgers (4)
4.21.1 Amended and Restated Operating Credit Agreement, dated for reference July 15, 1996, between Loewen
and Royal Bank of Canada (5)
4.21.2 Third Amendment to Operating Credit Agreement, dated for reference July 15, 1996, among Loewen,
LGII and Royal Bank of Canada (5)
4.22 Indenture, dated as of October 1, 1996, by and between LGII, Loewen and Fleet National Bank, as
trustee, with respect to the Series 3 and 4 Notes (5)
4.23 Form of Senior Guarantee of LGII's Series 3 and 4 Notes (included in Exhibit 4.22)
4.24 Form of Global Series 3 and 4 Outstanding Notes of LGII (included in Exhibit 4.22)
4.25 Form of Physical Series 3 and 4 Outstanding Notes of LGII (included in Exhibit 4.22)
4.26 Form of Global Series 3 and 4 Exchange Notes of LGII (9)
4.27 Form of Physical Series 3 and 4 Exchange Notes of LGII (9)
4.28 Indenture, dated as of September 26, 1997, between Loewen, as issuer, LGII, as guarantor, and The
Trust Company of Bank of Montreal, as trustee, with respect to the Series 5 Notes (10)
4.29 Form of Series 5 Guaranteed Notes of LGII (10)
4.30 Form of Senior Guarantee of Loewen's Series 5 Notes (10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<S> <C>
4.31 Indenture, dated as of September 30, 1997, between LGII, as issuer, Loewen, as guarantor, and
State Street Bank and Trust Company, as trustee, with respect to the Senior Guaranteed Notes due
2009 (10)
4.32 Form of Global "PATS" Senior Guaranteed Notes due 2009 of LGII (10)
4.33 Form of Physical "PATS" Senior Guaranteed Notes due 2009 of LGII (10)
4.34 Form of Senior Guarantee of LGII's "PATS" Senior Guaranteed Notes due 2009 (10)
4.35 Shareholder Protection Rights Plan, dated as of April 20, 1990, as amended on May 24, 1990 and
April 7, 1994 and reconfirmed on May 17, 1995 (1)
4.36 Form of Indenture by and between LGII, as issuer, Loewen, as guarantor, and Fleet National Bank,
as trustee, relating to the Debt Securities that may be issued pursuant to Registration
Statement No. 333-29443 (11)
4.37 Indenture dated as of May 28, 1998, between LGII, as issuer, Loewen, as guarantor, and State
Street Bank and Trust Company, as trustee, with respect to the Series 6 and 7 Notes (12)
4.38 Form of Senior Guarantee of Series 6 and 7 Notes of LGII (included in Exhibit 4.37)
4.39 Form of Global Series 6 and 7 Notes of LGII (included in Exhibit 4.37)
4.40 Form of Physical Series 6 and 7 Notes of LGII (included in Exhibit 4.37)
4.41 Form of Global Series 6 and 7 Exchange Notes of LGII (13)
4.42 Form of Physical Series 6 and 7 Exchange Notes of LGII (13)
4.43 Loewen and LGII hereby agree to furnish to the Commission, upon request, a copy of the instruments
which define the rights of holders of long-term debt of Loewen and LGII. None of such
instruments not included as exhibits herein collectively represents long-term debt in excess of
10% of the consolidated total assets of Loewen or LGII.
10 MATERIAL CONTRACTS
10.1 Stock Purchase Agreement, dated as of March 16, 1995, by and between Osiris Holding Corporation
and LGII (14)
10.2 Receipt Agreement, dated as of January 3, 1996, for the Cumulative Redeemable Convertible First
Preferred Shares, Series C, of Loewen ("Series C Shares") (3)
10.3 Undertaking by Raymond L. Loewen and Anne Loewen, dated as of January 3, 1996, to vote in favor of
the motion to subdivide the Series C Shares (3)
10.4 Registration Rights Agreement, dated as of March 20, 1996, by and between LGII, Loewen and the
Initial Purchasers named therein (3)
10.5 Letter Agreement, dated August 8, 1997, by and between Loewen and Service Corporation
International (7)
*10.6 Form of Indemnification Agreement with Outside Directors (15)
*10.7 Form of Indemnification Agreement with Officers (15)
*10.8 Form of Loewen Severance Agreement (15)
*10.9 Loewen Severance Pay Plan (15)
*10.10 1994 Management Equity Investment Plan (the "MEIP") (15)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<S> <C>
*10.11 Form of Executive Agreement executed by participants in the MEIP (8)
*10.12 1994 Outside Director Compensation Plan, as restated and amended as at January 9, 1997, and
further amended as at August 15, 1997 (7)
*10.13 Employee Stock Option Plan (International), as restated and amended as at March 11, 1998 (7)
*10.14 Employee Stock Option Plan (Canada), as restated and amended as at March 11, 1998 (7)
*10.15 Employment Agreement, dated August 19, 1988, by and between Loewen and Tim Hogenkamp (1)
*10.16 Employment Agreement, and Covenant Not to Compete, dated November 14, 1990, by and between LGII
and Albert S. Lineberry, Sr. (1)
*10.17 Employment Agreement, dated April 12, 1991, by and between Loewen and Dwight Hawes (1)
*10.18 Consulting Agreement, dated July 18, 1994, by and between Loewen and Charles B. Loewen, LGII, and
Corporate Services International Inc. (1)
*10.19 Employment Letter, dated March 10, 1995, by Raymond L. Loewen to Paul Wagler (5)
*10.20 Employment Agreement, dated March 17, 1995, by and between Loewen, LGII and Lawrence Miller (1)
*10.21.1 Employment Agreement, dated March 17, 1995, by and between Loewen and William R. Shane ("Shane
Employment Agreement") (1)
*10.21.2 Amendment No. 1 to Shane Employment Agreement, dated February 23, 1998, by and between Loewen and
William R. Shane (7)
*10.22 Employment Agreement, dated April 30, 1996, by and between Loewen and Grant Ballantyne (5)
*10.23 Resignation and Release Agreement, effective June 10, 1996, by and between Loewen, LGII and Robert
O. Wienke (5)
*10.24 Employment Agreement, dated October 3, 1997, by and between Loewen and F. Andrew Scott (7)
*10.25 Employment Agreement, dated October 31, 1997, by and between Loewen and Michael G. Weedon (7)
*10.26 Severance Agreement, dated November 4, 1997, by and between Loewen and Douglas J. McKinnon (7)
*10.27 Employment Agreement, dated January 30, 1998, by and between Loewen and Brad Stam (7)
11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
27 FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule - Nine months ended September 30, 1998
27.2 Financial Data Schedule - Restatement for three months ended March 31, 1998 and six months
ended June 30, 1998
27.3 Financial Data Schedule - Restatement for 1997
27.4 Financial Data Schedule - Restatement for 1996
99 ADDITIONAL EXHIBITS
99.1 Stock Purchase Agreement, dated as of June 14, 1996, by and among Prime Succession, Inc. the other
individuals or entities listed on the signature pages thereof, Loewen and Blackhawk Acquisition
Corp. (16)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<S> <C>
99.2 Put/Call Agreement, dated as of August 26, 1996, by and among Blackstone, Blackstone Offshore
Capital Partners II L.P. ("Blackstone Offshore"), Blackstone Family Investment Partnership II
L.P. ("Blackstone Family"), PSI Management Direct L.P. ("PSI"), LGII and Loewen (17)
99.3 Stockholders' Agreement, dated as of August 26, 1996, by and among Prime Succession, inc. (to be
renamed Prime Succession Holdings, Inc.), Blackstone, Blackstone Offshore, Blackstone Family,
PSI and LGII (16)
99.4 Subscription Agreement, dated as of November 19, 1996, by and among Rose Hills Holdings Corp.
("Rose Hills"), Blackstone, Blackstone Rose Hills Offshore Capital Partners L.P. ("Blackstone
Rose Hills"), Blackstone Family, Roses Delaware, Inc. ("RDI"), Loewen, LGII and RHI Management
Direct, L.P. ("RHI") (18)
99.5 Put/Call Agreement, dated as of November 19, 1996, by and among Blackstone, Blackstone Offshore,
Blackstone Family, Blackstone Rose Hills, LGII, RDI, Loewen and RHI (18)
99.6 Stockholders' Agreement, dated as of November 19, 1996, by and among Rose Hills, Blackstone,
Blackstone Rose Hills, Blackstone Family, RDI, LGII and RHI (18)
99.7 Form of Letter of Transmittal (19)
99.8 Form of Notice of Guaranteed Delivery (19)
</TABLE>
- ------------------------
* Compensatory plan or management contract
(1) Incorporated by reference from Loewen's Annual Report on Form 10-K for the
year ended December 31, 1994, filed on March 31, 1995 (File No. 0-18429)
(2) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed on August 14, 1996 (File No. 0-18429)
(3) Incorporated by reference from Loewen's Annual Report on Form 10-K for the
year ended December 31, 1995, filed on March 28, 1996, as amended (File No.
0-18429)
(4) Incorporated by reference from the Registration Statement on Form S-4 filed
by Loewen on May 3, 1996, as amended (File No. 333-03135)
(5) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, filed on November 14, 1996 (File No.
1-12163)
(6) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, filed on May 13, 1997 (File No. 1-12163)
(7) Incorporated by reference from Loewen's Annual Report on Form 10-K for the
year ended December 31, 1997, filed on March 30, 1998 (File No. 1-12163)
(8) Incorporated by reference from the combined Registration Statement on Form
F-9/F-3 filed by LGII and Loewen on July 1, 1994, as amended (File Nos.
33-81032 and 33-81034)
(9) Incorporated by reference from the Registration Statement on Form S-4 filed
by LGII and Loewen on November 18, 1996, as amended (File Nos. 333-16319 and
333-16319-01)
(10) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, filed on November 14, 1997 (File No.
1-12163)
(11) Incorporated by reference from the Registration Statement on Form S-3 filed
by Loewen and LGII on March 21, 1997, as amended (File Nos. 333-23747 and
333-23747-01)
<PAGE>
(12) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q/A for
the quarter ended June 30, 1998, filed on August 13, 1998 (File No. 1-12163)
(13) Incorporated by reference from the Registration Statement on Form S-4 filed
by LGII and Loewen on August 26, 1998, as amended (File No. 333-62239-01)
(14) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No.
1, dated April 18, 1995, filed May 5, 1995 (File No. 0-18429)
(15) Incorporated by reference from Loewen's Solicitation/Recommendation
Statement on Schedule 14D-9, filed on October 10, 1996, as amended
(16) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated
August 26, 1996, filed October 11, 1996, as amended October 29, 1996 (File
No. 1-12163)
(17) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No.
1, dated August 26, 1996, filed October 29, 1996 (File No. 1-12163)
(18) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated
November 19, 1996, filed December 27, 1996 (File No. 1-12163)
(19) Incorporated by reference from Amendment No. 1 to the Registration
Statement on Form S-4 filed by LGII and Loewen on September 21, 1998 (File
No. 333-62239-01)
<PAGE>
THE LOEWEN GROUP INC.
Exhibit 11
For 10 Q
COMPUTATION OF PER SHARE EARNINGS
EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Basic
Net earnings (loss) $(32,438) $(40,329) $ 7,843 $11,004
Less: Preferred share dividends 2,173 2,383 6,766 7,192
-------- -------- ------- -------
Net earnings (loss) attributable to Common shareholders (34,611) (42,712) 1,077 3,812
Weighted average shares outstanding 74,019 73,289 73,967 65,188
Basic earnings (loss) per share $ (0.47) $ (0.58) $ 0.01 $ 0.06
-------- -------- ------- -------
-------- -------- ------- -------
Fully diluted
Net earnings (loss) attributable to Common shareholders $(34,611) $(42,712) $ 1,077 $ 3,812
Add: imputed earnings from dilutive options, net of tax effect 0 0 0 0
-------- -------- ------- -------
Fully diluted net earnings (loss) $(34,611) $(42,712) $ 1,077 $ 3,812
-------- -------- ------- -------
-------- -------- ------- -------
Weighted average shares outstanding 74,019 73,289 73,967 65,188
Shares issuable upon assumed conversion of dilutive options 0 0 0 0
-------- -------- ------- -------
Fully diluted shares 74,019 73,289 73,967 65,188
-------- -------- ------- -------
-------- -------- ------- -------
Fully diluted earnings (loss) per share $ (0.47) $ (0.58) $ 0.01 $ 0.06
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE UNAUDITED INTERIM
CONSLIDATED FINANCIAL STATEMENTS OF THE LOEWEN GROUP INC. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 49,182
<SECURITIES> 0
<RECEIVABLES> 291,243
<ALLOWANCES> 48,665
<INVENTORY> 35,390
<CURRENT-ASSETS> 339,331
<PP&E> 1,010,749
<DEPRECIATION> 172,390
<TOTAL-ASSETS> 5,176,143
<CURRENT-LIABILITIES> 286,064
<BONDS> 2,066,127
75,000
157,146
<COMMON> 1,274,063
<OTHER-SE> 81,990
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