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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1996
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: 0-24728
-------------------------
EQUITY CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
75-2521142
(I.R.S. employer identification number)
415 SOUTH FIRST STREET, SUITE 210
LUFKIN, TEXAS
(Address of principal executive offices)
75901
(Zip Code)
(409) 631-8700
(Registrant's telephone number, including area code)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No
The number of shares of the registrant's Common Stock outstanding as of
November 14, 1996 was 19,216,334.
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<PAGE>
EQUITY CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited)-
September 30, 1996 and December 31, 1995.................3
Consolidated Statement of Operations (Unaudited)-
Three Months Ended September 30, 1996 and 1995
Nine Months Ended September 30, 1996 and 1995............4
Consolidated Statement of Cash Flows (Unaudited)-
Nine Months Ended September 30, 1996 and 1995............5
Consolidated Statement of Stockholders' Equity (Unaudited)-
Nine Months Ended September 30, 1996.....................6
Notes to the Consolidated Financial Statements (Unaudited)..7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................11
Part II. Other Information
Item 1. Legal Proceedings..........................................17
Item 6. Exhibits and Reports on Form 8-K...........................17
Signature...................................................................18
FORWARD-LOOKING-STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q are forward-looking
statements. The expectations reflected in the forward-looking statements are
based on the Company's current views with respect to future events as well as
assumptions made by and information currently available to management.
Important factors that could cause actual results to differ materially from
expectations ("Cautionary Statements") are disclosed in this Form 10-Q,
including without limitation in conjunction with the forward-looking
statements included in this Form 10-Q. 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.
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
EQUITY CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
(In thousands, except share data) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 4,900 $ 6,233
Receivables, net of allowances..................... 7,337 5,490
Inventories........................................ 6,008 5,060
Other.............................................. 1,532 1,177
--------- ---------
Total current assets............................ 19,777 17,960
Preneed funeral contracts............................. 145,046 102,889
Cemetery properties, at cost.......................... 77,245 75,103
Long-term receivables, net of allowances.............. 34,338 30,767
Property, plant and equipment, at cost (net).......... 52,836 36,417
Deferred charges and other assets..................... 7,603 7,352
Names and reputations (net)........................... 63,532 32,339
--------- ---------
Total assets.................................... $ 400,377 $ 302,827
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 5,907 $ 5,532
Income taxes payable............................... 446 1,108
Deferred income taxes.............................. 1,753 1,692
Current maturities of long-term debt............... 750 535
--------- ---------
Total current liabilities....................... 8,856 8,867
Deferred preneed funeral contract revenues............ 150,082 107,969
Long-term debt........................................ 28,902 54,518
Deferred cemetery costs............................... 16,936 17,580
Deferred income taxes................................. 22,575 21,340
Other liabilities..................................... 1,146 888
Commitments and contingencies.........................
Stockholders' equity:
Preferred stock.................................... -- --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 19,216,334 and 14,847,251 shares
issued and outstanding in 1996 and 1995,
respectively.................................... 192 148
Capital in excess of par value..................... 155,217 82,040
Retained earnings.................................. 16,471 9,477
--------- ---------
Total stockholders' equity...................... 171,880 91,665
--------- ---------
Total liabilities and stockholders' equity...... $ 400,377 $ 302,827
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EQUITY CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- -------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Net revenues:
Funeral.................. $ 13,161 $ 8,663 $ 40,232 $ 25,321
Cemetery................. 7,891 7,009 25,426 19,662
-------- -------- -------- --------
21,052 15,672 65,658 44,983
Costs and expenses:
Funeral.................. 9,828 6,997 28,770 19,477
Cemetery................. 5,981 4,931 18,125 13,653
-------- -------- -------- --------
15,809 11,928 46,895 33,130
-------- -------- -------- --------
Total gross profit.......... 5,243 3,744 18,763 11,853
General and administrative
expenses................. 1,490 1,207 4,370 3,442
-------- -------- -------- --------
Operating income............ 3,753 2,537 14,393 8,411
Interest expense............ 203 573 1,690 1,297
-------- -------- -------- --------
Income before income taxes.. 3,550 1,964 12,703 7,114
Provision for income taxes.. 1,438 776 5,709 2,810
-------- -------- -------- --------
Net income.................. $ 2,112 $ 1,188 $ 6,994 $ 4,304
======== ======== ======== ========
Earnings per share.......... $ 0.11 $ 0.08 $ 0.40 $ 0.29
======== ======== ======== ========
Weighted average number
of common and equivalent
shares outstanding....... 19,447 14,902 17,583 14,807
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EQUITY CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 6,994 $ 4,304
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................... 3,543 2,449
Provision for bad debts and contract
cancellations.................................. 2,832 2,227
Gain on sale of assets.......................... (909) (32)
Deferred income taxes........................... 835 314
Changes in assets and liabilities, net of effects
from acquisitions:
Receivables..................................... (7,823) (4,991)
Inventories..................................... 17 (37)
Other current assets............................ (351) (190)
Other long-term assets.......................... (724) (3,428)
Accounts payable and accrued liabilities........ (460) (1,577)
Income taxes payable............................ (663) 1,127
Preneed funeral contracts and associated
deferred revenues.............................. (29) 168
-------- --------
Net cash provided by operating activities..... 3,262 334
-------- --------
Cash flows from investing activities:
Capital expenditures............................... (5,829) (3,076)
Proceeds from sale of assets....................... 3,037 44
Acquisitions, net of cash acquired................. (21,012) (787)
Other.............................................. 162 60
-------- --------
Net cash used in investing activities......... (23,642) (3,759)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of Common Stock......... 73,071 --
Borrowings on long-term debt....................... 2,278 5,573
Payments on debt................................... (56,302) (6,364)
-------- --------
Net cash provided by (used in) financing
activities................................... 19,047 (791)
-------- --------
Decrease in cash and cash equivalents................. (1,333) (4,216)
Cash and cash equivalents at beginning of period...... 6,233 5,832
-------- --------
Cash and cash equivalents at end of period............ $ 4,900 $ 1,616
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
EQUITY CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except number of shares)
Common Stock Capital in
----------------- excess of Retained Stockholders'
Shares Amount par value earnings equity
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995..... 14,847,251 $ 148 $ 82,040 $ 9,477 $ 91,665
Net income.......... -- -- -- 6,994 6,994
Common Stock issued:
Option exercises.. 1,999 -- 22 -- 22
Equity offering... 4,335,000 43 72,977 -- 73,020
Acquisitions...... 7,066 -- 150 -- 150
Other............. 25,018 1 28 -- 29
---------- ------ -------- -------- --------
Balance,
September 30, 1996.... 19,216,334 $ 192 $155,217 $ 16,471 $171,880
========== ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
EQUITY CORPORATION INTERNATIONAL
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Equity Corporation International and all majority owned
subsidiaries ("the Company") and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information in
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to these rules and regulations. In the opinion of
management, only adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
The Company's statutory Federal income tax rate has been increased from 34% to
35% as the Company expects to exceed the taxable income threshold requiring
the higher tax rate during 1996. As a result, the Company has recorded
through the provision for income taxes for the nine months ended September 30,
1996 a one-time charge of $565,000 to revalue the deferred tax liability
accounts to appropriately reflect the higher statutory rate.
On September 10, 1996, the Company's Board of Directors declared a three-for-
two split of the Company's Common Stock to be effected as a stock dividend.
The record date for purposes of the dividend was September 23, 1996, and was
distributed on October 2, 1996. All share and per share information in the
accompanying consolidated financial statements reflect the effects of the
stock split.
2. ACQUISITIONS
The following table is a summary of acquisitions made during the nine month
periods ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------
<S> <C> <C>
Number acquired:
Funeral homes........ 44 21
Cemeteries........... 1 11
Purchase price.......... $ 49,915,000 $35,592,000
</TABLE>
The purchase price for these acquisitions consisted of cash, Common Stock and
debt issued or assumed. The excess of purchase price over the fair value of
assets acquired and liabilities assumed is included in Names and reputations
(net) on the Consolidated Balance Sheet and will be amortized over a 40-year
period. In connection with these acquisitions, the Company enters into
customary employment, consulting and noncompetition agreements with certain
employees and former owners of the businesses acquired. In certain situations,
the Company will prepay a portion of the noncompetition agreements and
amortize such prepayments on a straight-line basis over the terms of the
agreements. The purchase prices indicated above do not include $832,000 and
$1,805,000 for noncompetition agreements which were prepaid to individuals
related to businesses acquired in the nine month periods ended September 30,
1996 and 1995, respectively. The acquisitions have been accounted for as
purchases and their operating results have been included since their
respective dates of acquisition.
Included in the summary of acquisitions for the 1996 period are 11 funeral
homes and related assets that were acquired from Service Corporation
International (SCI), a significant stockholder of the Company, in September
1996 for an aggregate purchase price of approximately $10,625,000 in cash.
7
<PAGE>
The effect of acquisitions on the Consolidated Balance Sheet was as follows:
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets........................................ $ 3,166 $ 1,445
Preneed funeral contracts............................. 35,358 18,610
Cemetery properties................................... 2,349 10,805
Long-term receivables, net of allowances.............. (1,075) 1,858
Property, plant and equipment......................... 13,684 7,006
Deferred charges and other assets..................... 773 1,805
Names and reputations................................. 32,422 16,890
Current liabilities................................... (3,207) (998)
Deferred preneed funeral contract revenues............ (35,458) (19,432)
Long-term debt........................................ (25,515) (31,857)
Deferred cemetery costs............................... 121 (1,188)
Deferred income taxes................................. (462) (874)
Other liabilities..................................... (336) (3,053)
Common Stock issued................................... (150) (119)
--------- ---------
Total.............................................. 21,670 898
Less cash acquired................................. 658 111
--------- ---------
Cash used for acquisitions......................... $ 21,012 $ 787
========= =========
</TABLE>
The following represents the unaudited pro forma results of operations for the
nine month periods ended September 30, 1996 and 1995, assuming the above noted
acquisitions had occurred as of January 1, 1995:
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
(In thousands, except per share data) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Net revenues.......................................... $ 75,789 $ 66,685
Income before income taxes............................ 13,883 9,032
Net income............................................ 7,696 5,464
Earnings per common and equivalent share.............. $ 0.44 $ 0.37
</TABLE>
8
<PAGE>
3. PRENEED FUNERAL CONTRACTS AND DEFERRED PRENEED FUNERAL CONTRACT REVENUES
The Company sells preneed funeral contracts through various programs providing
for future funeral services at prices prevailing when the agreement is signed.
These contracts are included in the Consolidated Balance Sheet as Preneed
funeral contracts. Payments on these contracts are generally placed in trust
(pursuant to state law) or are used to pay premiums on life insurance policies
issued by third party insurers. When the services are performed, approximately
$63,250,000 and $38,063,000 will be funded by trusts and approximately
$81,796,000 and $64,826,000 will be funded by insurance policies as of
September 30, 1996 and December 31, 1995, respectively. Accumulated earnings
from trust funds and increasing insurance benefits have been included to the
extent they have accrued through September 30, 1996 and December 31, 1995,
respectively. The cumulative total has been reduced by allowable cash
withdrawals for trust earning distributions and amounts retained by the
Company pursuant to various state laws. At September 30, 1996 and December 31,
1995, the amounts collected and held in trusts, at cost, which approximates
market, were approximately $55,129,000 and $32,176,000, respectively. The
amounts in trusts and all life insurance policies are generally transferred to
the customer upon contract cancellation.
Deferred preneed funeral contract revenues includes the contract amount of all
price guaranteed funeral services and accumulated trust earnings and
increasing insurance benefits earned. The Company defers recognition of trust
earnings and insurance benefits until performance of the funeral service.
Upon performance of the funeral service, the Company will recognize the fixed
contract price and related accumulated trust earnings or increasing insurance
benefits as funeral service revenues.
4. DEBT
In October 1994, the Company entered into an uncollateralized revolving credit
agreement with a group of banks to be used for acquisition financing and
general corporate purposes. The Credit Facility, as amended ("Credit
Facility"), provides for a line of credit up to $100,000,000 and expires in
October 1999. The Credit Facility bears interest, at the Company's option, at
either (i) the prime rate plus up to 0.25% or (ii) the London Interbank
Offered Rate plus 0.75% up to 1.50%, depending on the Company's leverage
ratio, as defined. The Credit Facility also contains customary restrictive
covenants requiring the Company to maintain certain financial ratios and is
guaranteed by all of the Company's subsidiaries. The Credit Facility will
permit the payment of dividends on the Company's Common Stock only to the
extent the Company maintains a specified net worth.
9
<PAGE>
5. DISPOSITIONS
During March 1996, the Company conveyed to SCI three funeral home operations
which had been previously operated by an unaffiliated third party for an
aggregate purchase price of $2,085,000. The three funeral homes had
originally been acquired by the Company from SCI in May 1990. In January
1993, the Company entered into long-term agreements with the third party,
under which the third party operated the three funeral homes. In February
1996, a subsidiary of SCI acquired the operations of the third party and
assumed the long-term agreements with the Company. Included in net funeral
service revenues and related funeral costs and expenses is the $2,085,000 and
$1,135,000, respectively, related to the transaction. Proceeds from the sale
were remitted to the Company in April 1996.
6. EQUITY OFFERING
On May 1, 1996 the Company completed a public offering of 4,335,000 shares of
its Common Stock at $18.00 per share, including 585,000 shares sold to the
underwriters pursuant to the overallotment option granted to them, for net
proceeds of approximately $73,000,000 (after selling commissions and estimated
related expenses of $5,000,000). The net proceeds were used to pay off
amounts outstanding under the Credit Facility and will be used for general
corporate purposes, including current and future acquisitions.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company provides services and products in both the funeral home and
cemetery segments of the deathcare industry. The Company has a growth
strategy which emphasizes an aggressive acquisition program and the
implementation of revenue enhancement and cost-containment programs. As part
of this growth strategy, the Company maintains a separate corporate
development department headed by a senior management executive with
substantial deathcare experience. The department is responsible for
identifying, evaluating, negotiating and closing acquisitions of funeral homes
and cemeteries. With the Company's knowledge of non-metropolitan markets and
experienced management team, the Company believes that it is well positioned
to take advantage of the continuing consolidation trend in the deathcare
industry. The Company's future results of operations will depend in large part
on the Company's ability to continue to make acquisitions on attractive terms
and to successfully integrate and manage the acquired properties.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the
nine and three month periods ended September 30, 1996 and 1995. For purposes
of this discussion, funeral homes and cemeteries owned and operated for the
entirety of each period being compared are referred to as existing operations.
Correspondingly, operations acquired or opened during either period being
compared are referred to as acquired operations.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995:
Total net revenues for the nine months ended September 30, 1996 increased
46.0% to $65,658,000 from $44,983,000 for the nine months ended September 30,
1995. The increase in net revenues reflects a $16,787,000 increase in net
revenues attributable to acquired operations and a $1,803,000, or 4.3%
increase in net revenues from existing operations. The substantial increase
in net revenues from acquired operations is due primarily to the full period
results of the 27 funeral homes and 13 cemeteries acquired in 1995 and the
partial period results of the 44 funeral homes and one cemetery acquired
during the nine months ended September 30, 1996. The remainder of the
increase in net revenues of $2,085,000 results from the buyout of several
long-term licensing and lease agreements related to three funeral homes which
had been previously operated by a third party since January 1993.
Gross profit for the nine months ended September 30, 1996 increased 58.3% to
$18,763,000 from $11,853,000 for the nine months ended September 30, 1995.
The increase in gross profit reflects a $4,649,000 increase attributable to
acquired operations and $1,311,000, or 11.4% increase from existing
operations. The increase in gross profit from existing operations was
attributable primarily to increased revenues at both funeral home and cemetery
operations as well as improved operational efficiencies at funeral home
operations. The remainder of the increase in gross profit of $950,000 relates
to the gain recognized on the buyout of the long-term licensing and lease
agreements.
11
<PAGE>
Total funeral net revenues for the nine months ended September 30, 1996
increased 58.9% to $40,232,000 from $25,321,000 for the nine months ended
September 30, 1995. The increase in funeral net revenues reflects a
$11,380,000 increase from acquired operations, a $1,446,000, or 6.4% increase
from existing operations and $2,085,000 related to the buyout of the long-term
licensing and lease agreements. Funeral gross profit for the nine months
ended September 30, 1996 increased 96.1% to $11,462,000 from $5,844,000 for
the nine months ended September 30, 1995. The increase in funeral gross
profit reflects a $3,125,000 increase from acquired operations, a $1,543,000,
or 28.1% increase from existing operations and $950,000 related to the gain on
the aforementioned buyout. Excluding the effects of the gain on the buyout,
funeral gross margin improved to 27.6% from 23.1%. Funeral gross margin at
existing operations improved to 29.2% from 24.3% primarily as a result of
volume improvement, sales price increases exceeding the cost increases in
merchandising and salaries as well as achieving a better merchandising mix and
maximizing the leverage off of allocable fixed operating costs. Funeral gross
margin at acquired operations improved to 24.7% from 12.9% primarily due to
volume improvement, profitability enhancements and cost efficiencies beginning
to be implemented.
Total cemetery net revenues for the nine months ended September 30, 1996
increased 29.3% to $25,426,000 from $19,662,000 for the nine months ended
September 30, 1995. The increase in cemetery net revenues reflects a
$5,407,000 increase from acquired operations and a $357,000, or 1.9% increase
from existing operations. Cemetery gross profit for the nine months ended
September 30, 1996 increased 21.5% to $7,301,000 from $6,009,000 for the nine
months ended September 30, 1995. The increase reflects a $1,524,000 increase
from acquired operations offset by a $232,000, or 3.8% decrease from existing
operations. Cemetery gross margin at existing operations decreased to 30.3%
from 32.1%, primarily as a result of higher interment rights/merchandise costs
and maintenance expense as a percentage of revenue offset partially by lower
selling and fixed operating costs as a percentage of net revenues. Cemetery
gross margin at acquired operations were 23.9% primarily because they had not
been operated by the Company long enough to fully implement its preneed
marketing programs to enable leveraging off of the maintenance and fixed
operating costs which generally start being incurred immediately after the
acquisition.
General and administrative expenses for the nine months ended September 30,
1996 increased $928,000, or 27.0% over the nine months ended September 30,
1995. This increase resulted primarily from increased personnel costs as well
as professional fees and insurance necessary to support a higher rate of
growth and, to a lesser extent, increased facility and travel expense as a
result of consolidating the cemetery corporate operations from Georgia to the
Company's corporate headquarters in Lufkin, Texas. General and administrative
expenses as a percentage of net revenues, excluding the effects of the gain on
the aforementioned buyout, decreased to 6.9% in the nine months ended
September 30, 1996 from 7.7% in the corresponding period in 1995, reflecting
economies of scale realized by the Company as expenses are spread over a
larger revenue base.
Interest expense for the nine months ended September 30, 1996 increased
$393,000, or 30.3% from the nine months ended September 30, 1995. The
increase was the result of higher debt levels as the Company increased its
borrowings to finance acquisitions through April 1996. Subsequent to April
1996, the Company completely paid off amounts borrowed under the Credit
Facility, substantially reducing the average level of indebtedness from May
through September 1996. Interest income of approximately $276,000 related to
temporary investment of the May 1996 equity offering proceeds has been netted
against interest expense.
12
<PAGE>
The Company's effective tax rate for the nine months ended September 30, 1996
was 44.9% compared to 39.5% for the comparable nine months in 1995. The
higher rate in 1996 was due primarily to an increase in the Company's
statutory Federal income tax rate from 34% to 35% as the Company expects to
exceed the taxable income threshold requiring the higher tax rate during 1996,
and a one-time charge of $565,000 to revalue the Company's deferred tax
liability accounts to appropriately reflect the higher statutory rate. The
Company expects the effective tax rate for income generated in the remainder
of 1996 will be 40.5%.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995:
Total net revenues for the three months ended September 30, 1996 increased
34.3% to $21,052,000 from $15,672,000 for the three months ended September 30,
1995. The increase in net revenues reflects a $5,147,000 increase in net
revenues attributable to acquired operations and a $233,000, or 1.5% increase
in net revenues from existing operations. The substantial increase in net
revenues from acquired operations is due primarily to the full quarter results
of the 37 funeral homes and 9 cemeteries acquired since June 30, 1995 and the
partial quarter results of the 22 funeral homes acquired during the three
months ended September 30, 1996.
Gross profit for the three months ended September 30, 1996 increased 40.0% to
$5,243,000 from $3,744,000 for the three months ended September 30, 1995. The
increase in gross profit reflects a $1,235,000 increase attributable to
acquired operations and $264,000, or 6.7% increase from existing operations.
The increase in gross profit from existing operations was attributable to
increased revenues and operational efficiencies at funeral home operations
offset to a lesser extent by decreased revenues and operational inefficiencies
at cemetery operations.
Total funeral net revenues for the three months ended September 30, 1996
increased 51.9% to $13,161,000 from $8,663,000 for the three months ended
September 30, 1995. The increase in funeral net revenues reflects a
$3,858,000 increase from acquired operations and a $640,000, or 7.5% increase
from existing operations. Funeral gross profit for the three months ended
September 30, 1996 increased 100.0% to $3,333,000 from $1,666,000 for the
three months ended September 30, 1995. The increase in funeral gross profit
reflects an $887,000 increase from acquired operations and a $780,000, or
47.7% increase from existing operations. Funeral gross margin improved to
25.3% from 19.2%. Funeral gross margin at existing operations improved to
26.3% from 19.1% primarily as a result of volume improvement, sales price
increases exceeding the cost increases in merchandising and salaries, as well
as achieving a better merchandising mix and maximizing the leverage off of
allocable fixed operating costs. Funeral gross margin at acquired operations
was 23.0%.
13
<PAGE>
Total cemetery net revenues for the three months ended September 30, 1996
increased 12.6% to $7,891,000 from $7,009,000 for the three months ended
September 30, 1995. The increase in cemetery net revenues reflects a
$1,289,000 increase from acquired operations offset by a $407,000, or 5.8%
decrease from existing operations. The decrease in cemetery net revenues from
existing operations was attributable to a decrease in preneed net revenues
partially offset by an increase in at need net revenues. Cemetery gross
profit for the three months ended September 30, 1996 decreased 8.1% to
$1,910,000 from $2,078,000 for the three months ended September 30, 1995. The
decrease reflects a $516,000, or 22.5% decrease from existing operations
partially offset by a $348,000 increase from acquired operations. Cemetery
gross margin at existing operations decreased to 27.0% from 32.8%, primarily
as a result of higher fixed operating, maintenance and selling costs as a
percentage of revenues partially offset by lower interment
rights/merchandising costs as a percentage of net revenues. Cemetery gross
margin at acquired operations were 10.0% primarily because they had not been
operated by the Company long enough to fully implement its preneed marketing
programs to enable leveraging off of the maintenance and fixed operating costs
which generally start being incurred immediately after the acquisition.
General and administrative expenses for the three months ended September 30,
1996 increased $283,000, or 23.4% over the three months ended September 30,
1995. This increase resulted primarily from increased personnel costs and
insurance necessary to support a higher rate of growth as well as increased
facility and travel expense as a result of consolidating the cemetery
corporate operations from Georgia to the Company's corporate headquarters in
Lufkin, Texas. General and administrative expenses as a percentage of net
revenues decreased to 7.1% in the three months ended September 30, 1996 from
7.7% in the corresponding period in 1995, reflecting economies of scale
realized by the Company as expenses are spread over a larger revenue base.
Interest expense for the three months ended September 30, 1996 decreased
$370,000, or 64.6% from the three months ended September 30, 1995. The
decrease was primarily attributable to the Company completely paying down
amounts borrowed under the Credit Facility from the proceeds of the equity
offering in May 1996. Interest income of approximately $106,000 related to
temporary investment of the equity offering proceeds has been netted against
interest expense.
The Company's effective tax rate for the three months ended September 30, 1996
was 40.5% compared to 39.5% for the comparable three months in 1995. The
higher rate in 1996 was due primarily to an increase in the Company's
statutory Federal income tax rate from 34% to 35% as the Company expects to
exceed the taxable income threshold requiring the higher tax rate during 1996.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on cash flow from operations and third
party borrowings to finance its operations, and on third party borrowings, the
issuance of notes payable and, in certain situations, the issuance of shares
of Common Stock to sellers of funeral homes and cemeteries to finance its
acquisition program. Recently acquired funeral homes typically generate
positive cash flow immediately following acquisition. In contrast, recently
acquired cemeteries typically generate negative cash flow during an
approximately three to nine month start-up period following the introduction
of an aggressive preneed cemetery sales effort, although in some cases this
period has exceeded nine months. This negative cash flow is typically offset
by positive cash flow from mature cemetery operations.
Cash and cash equivalents totaled $4.9 million at September 30, 1996,
representing a decrease of $1.3 million from December 31, 1995. For the nine
months ended September 30, 1996, net cash flow from operating activities was
approximately $3.3 million. Cash used in investing activities totaled
approximately $23.6 million. Cash provided by financing activities amounted to
approximately $19.0 million. Significant components of cash flow generated
from operating activities include net income adjusted for non-cash items
partially offset by an increase in receivables of $7.8 million primarily
attributable to a 23.1% increase in preneed cemetery sales which are usually
financed on an installment basis over 36 months. Significant components of
cash used in investing activities included $961,000 of capital expenditures
related to additions and improvements at several funeral home and cemetery
facilities, $1,501,000 related to the acquisition of professional vehicles and
cemetery maintenance equipment, $552,000 related to a new telephone system and
furnishings to accommodate the consolidation of cemetery corporate operations
at the Company's corporate headquarters in Lufkin, Texas, and the purchase for
$333,000 of a funeral home operation that was previously leased.
Additionally, the Company utilized approximately $21.0 million of internal
funds to consummate funeral home and cemetery acquisitions during the nine
months ended September 30, 1996. Partially offsetting these investing
activities' uses of cash was approximately $2.1 million of proceeds received
in April 1996 related to the buyout of several long-term licensing and lease
agreements. Significant components of cash provided by financing activities
included the proceeds of approximately $73.0 million from the issuance of
Common Stock in connection with the Company's equity offering consummated in
May 1996 offset by payoffs of $52.7 million borrowed under the Company's
Credit Facility, lump sum payments of $2.2 million to extinguish seller
financed notes and normal scheduled payments on debt.
Long-term debt, including current maturities, at September 30, 1996 totaled
$29.7 million as compared to $55.1 million at December 31, 1995. The decrease
was principally attributable to the payoff of $50.0 million outstanding under
the Credit Facility with proceeds from the Company's equity offering in May
1996. Long-term debt at September 30, 1996 consisted of $16.0 million drawn
under the Credit Facility and $13.7 million owed under various notes payable
to sellers of funeral homes and cemeteries. The total amount available to be
borrowed under the Credit Facility was increased from $60 million to $100
million in February 1996. Any amounts repaid under the Credit Facility are
available for future borrowings under the terms of the Credit Facility.
15
<PAGE>
The Company's capital resources consist of cash flow from operations and
available borrowing capacity under the Credit Facility. Borrowings under the
Credit Facility bear interest, at the Company's option, at either (i) the
prime rate plus up to 0.25% per annum or (ii) the London Interbank Offered
Rate plus 0.75% up to 1.50% per annum, depending on the Company's leverage
ratio, as defined. The Credit Facility was extended in September 1996 and is
due October 1999, contains customary restrictive covenants, permits the
payment of dividends only to the extent the Company maintains a specified net
worth and requires the Company to maintain certain financial ratios. The
Credit Facility is guaranteed by all of the Company's subsidiaries.
The Company expects to acquire funeral homes and cemeteries for purchase
prices aggregating $55 million in each of 1996 and 1997. The Company
anticipates that the consideration for future acquisitions will consist of a
combination of cash, long-term notes, the assumption of existing indebtedness
of the acquired businesses, and, in some cases, the issuance of additional
shares of the Company's Common Stock. In June 1995, the Company filed a shelf
registration statement relating to shares of Common Stock to be used to fund
acquisitions. The Company anticipates making ongoing capital expenditures of
approximately $6 million in each of 1996 and 1997. Additionally, the Company
approved the authorization to expend approximately $4.2 million to construct
two new funeral home operations. On May 1, 1996, the Company completed a
public offering of 4,335,000 shares of its Common Stock at $18.00 per share,
including 585,000 shares sold to the underwriters pursuant to the
overallotment option granted to them, for net proceeds of $73.0 million (after
selling commissions and estimated related expenses of $5.0 million). A
portion of the net proceeds was used to payoff amounts borrowed under the
Credit Facility and the remainder was used for general corporate purposes,
including acquisitions. As a result, management believes that cash flow from
operations and the borrowing capacity available under the Credit Facility
should be sufficient to meet its anticipated capital expenditures and other
operating requirements and to substantially fund acquisitions through the
first quarter of 1998. However, because future cash flows and the availability
of financing are subject to a number of variables, such as the number and size
of acquisitions made by the Company, there can be no assurance that the
Company's capital resources will be sufficient to maintain currently planned
levels of capital expenditures, or to fund future acquisitions. Additional
debt and equity financings may be required in connection with future
acquisitions. The availability of these capital sources will depend on
prevailing market conditions and interest rates and the then-existing
financial condition of the Company.
SEASONALITY
Although the deathcare business is relatively stable and fairly predictable,
the Company's results of operations may periodically fluctuate due to limited
seasonality and the timing of acquisitions. Revenues from the Company's
funeral home operations tend to be somewhat greater in the first and fourth
quarters of each calendar year while revenues from its cemetery operations
tend to be somewhat greater in the second and fourth quarters of each calendar
year.
INFLATION
Inflation has not had a significant impact on the results of operations of the
Company.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 10, 1996, The Loewen Group, Inc., Loewen Group International, Inc.
and Ridge Chapels, Inc. (collectively, the "Plaintiffs") brought an action
against Equity Corporation International, Inc. ("ECI"), Service Corporation
International, New Service Corporation International, Inc., and SCI Holdings
Canada, Inc. (collectively, "SCI") in the United States District, Eastern
District of New York. The Plaintiffs have alleged that the actions of SCI and
in combination with ECI are designed to eliminate Plaintiffs as a competitive
factor in numerous markets across the United States. The Plaintiffs have
asked the court to adjudge that ECI and SCI have participated in a conspiracy
to restrain trade in violation of Section 1 of the Sherman Act and that the
Plaintiffs be granted such other and further relief as the court may deem just
and proper, including recovery from ECI and SCI for the cost of this suit and
reasonable attorney's fees incurred by the Plaintiffs. While the outcome of
this lawsuit cannot be predicted with certainty, ECI believes that it will not
have a material adverse effect on its financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 - Statement regarding computation of per share earnings
27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on September 11, 1996 with
respect to the approval by the Company's Board of Directors of a three-for-two
split of the Common Stock to be effected as a stock dividend, payable on
October 2, 1996 to stockholders of record September 23, 1996.
The Company filed a Current Report on Form 8-K (dated September 18, 1996) on
September 24, 1996 with respect to certain acquisitions completed in 1996,
including (i) the acquisition of substantially all the operating assets of
Carmony-Ewing Funeral Homes, Inc., the Common Stock of Carmony Funeral Homes,
Inc. and certain real property of R.L. Ewing, (ii) the acquisition of
substantially all the operating assets of Jones & Rich, Inc., (iii) the
acquisition of substantially all the operating assets of the Whitehurst
Funeral Home, (iv) the acquisition of substantially all the funeral home
operating assets of Robert E. and Marjorie B. Lee as well as substantially all
the operating assets of Ferguson-Lee, Inc., and (v) the acquisition of
substantially all the operating assets of Weathersbee Funeral Home and certain
real property of S.M. Weathersbee and J.D. Weathersbee.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1996
EQUITY CORPORATION INTERNATIONAL
By: /s/ W. Cardon Gerner
------------------------
Senior Vice President
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
18
<PAGE>
Exhibit 11.1
EQUITY CORPORATION INTERNATIONAL
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(In thousands, except per share data)
- -----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Computation of earnings per
common and equivalent share:
Net income attributable to
common stock................ $ 2,112 $ 1,188 $ 6,994 $ 4,304
========== ========== ========== ==========
Weighted average number of
common shares outstanding... 19,148 14,691 17,312 14,690
Additional shares assuming
conversion of stock options. 278 211 255 117
Effect of restricted stock
issued...................... 21 -- 16 --
---------- ---------- -------- ----------
Weighted average shares for
primary earnings per share.... 19,447 14,902 17,583 14,807
Incremental shares issuable
using quarter-end market
price:
Conversion of stock
options............... 20 36 18 54
Effect of restricted
stock issued.......... 2 -- 2 --
---------- ---------- ---------- ----------
Weighted average shares for
fully diluted earnings
per share................. 19,469 14,938 17,603 14,861
========== ========== ========== ==========
Primary earnings per common
and equivalent share........ $ 0.11 $ 0.08 $ 0.40 $ 0.29
========== ========== ========== ==========
Fully diluted earnings per
common and equivalent share. $ 0.11 $ 0.08 $ 0.40 $ 0.29
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,900
<SECURITIES> 0
<RECEIVABLES> 6,785
<ALLOWANCES> 1,219
<INVENTORY> 6,008
<CURRENT-ASSETS> 19,777
<PP&E> 62,368
<DEPRECIATION> 9,532
<TOTAL-ASSETS> 400,377
<CURRENT-LIABILITIES> 8,856
<BONDS> 28,902
0
0
<COMMON> 192
<OTHER-SE> 171,688
<TOTAL-LIABILITY-AND-EQUITY> 400,377
<SALES> 30,206
<TOTAL-REVENUES> 65,658
<CGS> 8,959
<TOTAL-COSTS> 46,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 508
<INTEREST-EXPENSE> 1,690
<INCOME-PRETAX> 12,703
<INCOME-TAX> 5,709
<INCOME-CONTINUING> 6,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,994
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
