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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 June 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
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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) 634-1033
(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
August 13, 1996 was 12,789,507.
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<PAGE>
EQUITY CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited)-
June 30, 1996 and December 31, 1995......................3
Consolidated Statement of Operations (Unaudited)-
Three Months Ended June 30, 1996 and 1995
Six Months Ended June 30, 1996 and 1995..................4
Consolidated Statement of Cash Flows (Unaudited)-
Six Months Ended June 30, 1996 and 1995..................5
Consolidated Statement of Stockholders' Equity (Unaudited)-
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders........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>
June 30, Dec. 31,
(In thousands, except share data) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 14,607 $ 6,233
Receivables, net of allowances..................... 5,491 5,490
Inventories........................................ 5,542 5,060
Other.............................................. 1,120 1,177
--------- ---------
Total current assets............................ 26,760 17,960
Preneed funeral contracts............................. 123,664 102,889
Cemetery properties, at cost.......................... 76,526 75,103
Long-term receivables, net of allowances.............. 35,286 30,767
Property, plant and equipment, at cost (net).......... 44,893 36,417
Deferred charges and other assets..................... 7,218 7,352
Names and reputations (net)........................... 43,799 32,339
--------- ---------
Total assets.................................... $ 358,146 $ 302,827
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 5,464 $ 5,532
Income taxes payable............................... 47 1,108
Deferred income taxes.............................. 1,763 1,692
Current maturities of long-term debt............... 533 535
--------- ---------
Total current liabilities....................... 7,807 8,867
Deferred preneed funeral contract revenues............ 128,663 107,969
Long-term debt........................................ 10,845 54,518
Deferred cemetery costs............................... 17,756 17,580
Deferred income taxes................................. 22,319 21,340
Other liabilities..................................... 1,166 888
Commitments and contingencies.........................
Stockholders' equity:
Preferred stock.................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 12,789,507 and 9,898,174 shares issued
and outstanding in 1996 and 1995, respectively.. 128 99
Capital in excess of par value..................... 155,103 82,089
Retained earnings.................................. 14,359 9,477
--------- ---------
Total stockholders' equity...................... 169,590 91,665
--------- ---------
Total liabilities and stockholders' equity...... $ 358,146 $ 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 ended Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net revenues:
Funeral................. $ 12,240 $ 8,014 $ 27,071 $ 16,658
Cemetery................ 9,286 6,903 17,535 12,653
-------- -------- -------- --------
21,526 14,917 44,606 29,311
Cost and expenses:
Funeral................. 9,012 6,260 18,942 12,480
Cemetery................ 6,380 4,782 12,144 8,722
-------- -------- -------- --------
15,392 11,042 31,086 21,202
-------- -------- -------- --------
Total gross profit......... 6,134 3,875 13,520 8,109
General and adminis-
trative expenses........ 1,295 1,022 2,880 2,235
-------- -------- -------- --------
Operating income........... 4,839 2,853 10,640 5,874
Interest expense........... 395 414 1,487 724
-------- -------- -------- --------
Income before
income taxes............ 4,444 2,439 9,153 5,150
Provision for
income taxes............ 1,799 963 4,271 2,034
-------- -------- -------- --------
Net income................. $ 2,645 $ 1,476 $ 4,882 $ 3,116
======== ======== ======== ========
Earnings per share......... $ 0.22 $ 0.15 $ 0.44 $ 0.32
======== ======== ======== ========
Weighted average number
of common and equivalent
shares outstanding... 12,182 9,860 11,119 9,840
======== ======== ======== ========
</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>
Six months ended June 30,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 4,882 $ 3,116
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................... 2,252 1,558
Provision for bad debts and contract
cancellations.................................. 1,992 1,498
Gain on sale of assets.......................... (880) (11)
Deferred income taxes........................... 803 225
Changes in assets and liabilities, net of effects
from acquisitions:
Receivables..................................... (6,082) (2,792)
Inventories..................................... (22) (49)
Other current assets............................ 59 343
Other long-term assets.......................... (330) (2,932)
Accounts payable and accrued liabilities........ (672) (1,759)
Income taxes payable............................ (1,061) 588
Preneed funeral contracts and associated
deferred revenues.............................. (57) 110
-------- --------
Net cash provided by (used in)
operating activities........................ 884 (105)
-------- --------
Cash flows from investing activities:
Capital expenditures............................... (3,983) (2,029)
Proceeds from sale of assets....................... 3,006 15
Acquisitions, net of cash used..................... (9,522) (490)
Other.............................................. 83 52
-------- --------
Net cash used in investing activities......... (10,416) (2,452)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock......... 73,043 --
Borrowings on long-term debt....................... 331 5,523
Payments on debt................................... (55,468) (5,257)
-------- --------
Net cash provided by financing activities..... 17,906 266
-------- --------
Increase (decrease) in cash and cash equivalents...... 8,374 (2,291)
Cash and cash equivalents at beginning of period...... 6,233 5,832
-------- --------
Cash and cash equivalents at end of period............ $ 14,607 $ 3,541
======== ========
</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>
Common Stock Capital in
(In thousands, except ----------------- excess of Retained Stockholders'
number of shares) Shares Amount par value earnings equity
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995..... 9,898,174 $ 99 $ 82,089 $ 9,477 $ 91,665
Net income.......... -- -- -- 4,882 4,882
Common stock issued:
Option exercises.. 1,333 -- 22 -- 22
Equity offering... 2,890,000 29 72,992 -- 73,021
--------- ------ -------- -------- --------
Balance,
June 30, 1996.........12,789,507 $ 128 $155,103 $ 14,359 $169,590
========= ====== ======== ======== ========
</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 six months ended June 30, 1996
a one-time charge of $565,000 to revalue the deferred tax liability accounts
to appropriately reflect the higher statutory rate.
2. ACQUISITIONS
The following table is a summary of acquisitions made during the six month
periods ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------
<S> <C> <C>
Number acquired:
Funeral homes........ 22 12
Cemeteries........... 1 5
Purchase price..........$21,362,000 $18,332,000
</TABLE>
The purchase price for these acquisitions consisted of cash and issued debt.
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 $430,000 and $1,040,000 for
noncompetition agreements which were prepaid to individuals related to
businesses acquired in the six month periods ended June 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.
7
<PAGE>
The effect of acquisitions on the Consolidated Balance Sheet was as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets........................................ $ 1,300 $ 1,088
Preneed funeral contracts............................. 17,551 10,256
Cemetery properties................................... 1,650 3,377
Long-term receivables, net of allowances.............. 209 1,150
Property, plant and equipment......................... 6,813 3,234
Deferred charges and other assets..................... 462 1,040
Names and reputations................................. 12,390 11,529
Current liabilities................................... (204) (972)
Deferred preneed funeral contract revenues............ (17,643) (10,657)
Long-term debt........................................ (11,461) (17,888)
Deferred cemetery costs............................... (367) (870)
Deferred income taxes................................. (236) (650)
Other liabilities..................................... (350) (53)
--------- ---------
Total.............................................. 10,114 584
Less cash acquired................................. 592 94
--------- ---------
Cash used for acquisitions......................... $ 9,522 $ 490
========= =========
</TABLE>
The following represents the unaudited pro forma results of operations for the
six month periods ended June 30, 1996 and 1995, assuming the above noted
acquisitions had occurred as of January 1, 1995:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Net revenues.......................................... $ 47,274 $ 36,893
Income before income taxes............................ 9,557 5,944
Net income............................................ 5,122 3,596
Earnings per common and equivalent share.............. $ 0.46 $ 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
$52,688,000 and $38,063,000 will be funded by trusts and approximately
$70,976,000 and $64,826,000 will be funded by insurance policies as of June
30, 1996 and December 31, 1995, respectively. Accumulated earnings from trust
funds and increasing insurance benefits have been included to the extent that
they have accrued through June 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 June 30, 1996 and December 31, 1995, the amounts collected and
held in trusts, at cost, which approximates market, were approximately
$44,827,000 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 1998. 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 Service Corporation International
(SCI), a significant stockholder of the Company, 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 2,890,000 shares of
its Common Stock at $27.00 per share, including 390,000 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 payoff 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
six and three month periods ended June 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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1995:
Total net revenues for the six months ended June 30, 1996 increased 52.2% to
$44,606,000 from $29,311,000 for the six months ended June 30, 1995. The
increase in net revenues reflects an $11,358,000 increase in net revenues
attributable to acquired operations and a $1,852,000, or 6.7% 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 22 funeral homes and one cemetery acquired during the six
months ended June 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 six months ended June 30, 1996 increased 66.7% to
$13,520,000 from $8,109,000 for the six months ended June 30, 1995. The
increase in gross profit reflects a $3,619,000 increase attributable to
acquired operations and $842,000, or 10.3% increase from existing operations.
The increase in gross profit from existing operations was attributable 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 six months ended June 30, 1996 increased
62.5% to $27,071,000 from $16,658,000 for the six months ended June 30, 1995.
The increase in funeral net revenues reflects a $7,357,000 increase from
acquired operations, a $971,000, or 6.3% 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 six months ended June 30, 1996
increased 94.6% to $8,129,000 from $4,178,000 for the six months ended June
30, 1995. The increase in funeral gross profit reflects a $2,227,000 increase
from acquired operations, a $774,000, or 18.8% 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 28.7% from 25.1%. Funeral gross margin at existing operations improved to
29.6% from 26.5% primarily as a result of volume improvement, sales price
increases exceeding the cost increases in merchandising and salaries as well
as better merchandising mix in the funeral services. Funeral gross margin at
acquired operations improved to 27.0% from 5.9% primarily due to volume
improvement, profitability enhancements and cost efficiencies beginning to be
implemented at the funeral operations acquired in 1995.
Total cemetery net revenues for the six months ended June 30, 1996 increased
38.6% to $17,535,000 from $12,653,000 for the six months ended June 30, 1995.
The increase in cemetery net revenues reflects a $4,001,000 increase from
acquired operations and a $881,000, or 7.2% increase from existing operations.
Cemetery gross profit for the six months ended June 30, 1996 increased 37.1%
to $5,391,000 from $3,931,000 for the six months ended June 30, 1995. The
increase reflects a $1,392,000 increase from acquired operations and a
$68,000, or 1.7% increase from existing operations. Cemetery gross margin at
existing operations decreased to 31.6% from 33.4%, 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 revenue. Cemetery gross margin at acquired
operations were 28.1% 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 start
being incurred immediately after the acquisition.
General and administrative expenses for the six months ended June 30, 1996
increased $645,000, or 28.9% over the six months ended June 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.
General and administrative expenses as a percentage of net revenues, excluding
the effects of the gain on the aforementioned buyout, decreased to 6.8% in the
six months ended June 30, 1996 from 7.6% 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 six months ended June 30, 1996 increased $763,000, or
105.4% from the six months ended June 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 in May and June 1996. Interest
income of approximately $170,000 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 six months ended June 30, 1996 was
46.7% compared to 39.5% for the comparable six 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1995:
Total net revenues for the three months ended June 30, 1996 increased 44.3% to
$21,526,000 from $14,917,000 for the three months ended June 30, 1995. The
increase in net revenues reflects a $5,725,000 increase in net revenues
attributable to acquired operations and an $884,000, or 6.0% 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
31 funeral homes and 12 cemeteries acquired since March 31, 1995 and the
partial quarter results of the 12 funeral homes acquired during the three
months ended June 30, 1996.
Gross profit for the three months ended June 30, 1996 increased 58.3% to
$6,134,000 from $3,875,000 for the three months ended June 30, 1995. The
increase in gross profit reflects a $1,673,000 increase attributable to
acquired operations and $586,000, or 14.9% increase from existing operations.
The increase in gross profit from existing operations was attributable to
increased revenues and operational efficiencies at both funeral home and
cemetery operations.
Total funeral net revenues for the three months ended June 30, 1996 increased
52.7% to $12,240,000 from $8,014,000 for the three months ended June 30, 1995.
The increase in funeral net revenues reflects a $3,569,000 increase from
acquired operations and a $657,000, or 8.4% increase from existing operations.
Funeral gross profit for the three months ended June 30, 1996 increased 84.0%
to $3,228,000 from $1,754,000 for the three months ended June 30, 1995. The
increase in funeral gross profit reflects a $984,000 increase from acquired
operations and a $490,000, or 27.7% increase from existing operations.
Funeral gross margin improved to 26.4% from 21.9%. Funeral gross margin at
existing operations improved to 26.7% from 22.7% primarily as a result of
volume improvement, sales price increases exceeding the cost increases in
merchandising and salaries, as well as better merchandising mix in the funeral
services. Funeral gross margin at acquired operations was 25.6% primarily due
to profitability enhancements and cost efficiencies beginning to be
implemented at the funeral operations acquired in 1995.
13
<PAGE>
Total cemetery net revenues for the three months ended June 30, 1996 increased
34.5% to $9,286,000 from $6,903,000 for the three months ended June 30, 1995.
The increase in cemetery net revenues reflects a $2,156,000 increase from
acquired operations and a $227,000, or 3.3% increase from existing operations.
Cemetery gross profit for the three months ended June 30, 1996 increased 37.0%
to $2,906,000 from $2,121,000 for the three months ended June 30, 1995. The
increase reflects a $689,000 increase from acquired operations and a $96,000,
or 4.4% increase from existing operations. Cemetery gross margin at existing
operations improved to 31.9% from 31.6%, primarily as a result of lower fixed
operating and selling costs as a percentage of revenues partially offset by
higher interment rights/merchandising costs and maintenance expense as a
percentage of net revenues. Cemetery gross margin at acquired operations were
29.2% 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 start being incurred
immediately after the acquisition.
General and administrative expenses for the three months ended June 30, 1996
increased $273,000, or 26.7% over the three months ended June 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
expense as a result of consolidating the cemetery corporate operations from
Georgia to the corporate headquarters in Lufkin, Texas. General and
administrative expenses as a percentage of net revenues decreased to 6.0% in
the three months ended June 30, 1996 from 6.9% 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 June 30, 1996 decreased $19,000,
or 4.6% from the three months ended June 30, 1995. The decrease was primarily
attributable to the Company completely paying down in May 1996 amounts
borrowed under the Credit Facility as well as interest income of approximately
$170,000 related to temporary investment of the May 1996 Equity offering
proceeds, which has been netted against interest expense.
The Company's effective tax rate for the three months ended June 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 $14.6 million at June 30, 1996, representing
an increase of $8.4 million from December 31, 1995. For the six months ended
June 30, 1996, net cash flow from operating activities was approximately
$884,000. Cash used in investing activities totaled approximately $10.4
million. Cash provided by financing activities amounted to approximately $17.9
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 $6.1 million primarily attributable to a 38.8%
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 $725,000 of capital expenditures related to
additions and improvements at several funeral home and cemetery facilities,
$830,000 related to the acquisition of professional vehicles and cemetery
maintenance equipment, $315,000 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 $9.5 million of internal
funds to consummate funeral home and cemetery acquisitions during the six
months ended June 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, a
lump sum payment of $1,500,000 to extinguish a seller financed note and normal
scheduled payments on debt.
Long-term debt, including current maturities, at June 30, 1996 totaled $11.4
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 June 30, 1996 consisted of amounts 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. At June 30, 1996, there were no amounts borrowed under 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 1995 and is
due October 1998, 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 $47 million and $55 million in 1996 and 1997, respectively.
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 1,000,000 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 2,890,000 shares of its Common
Stock at $27.00 per share, including 390,000 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 will be used for general
corporate purposes, including current and future 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of Stockholders was held on May 22, 1996. Matters
presented to the stockholders for voting was the election of two directors,
the proposal to approve amendments to the 1994 Long-Term Incentive Plan and
the ratification of the appointment of the Company's independent auditors for
1996. Each nominee for director received approximately 7,721,000 votes for
his election and approximately 14,000 votes against his election. In
connection with the amendments to the 1994 Long-Term Incentive Plan,
approximately 7,091,000 voted for the amendments, approximately 457,000 voted
against and approximately 4,300 abstained. In connection with the appointment
of independent auditors, approximately 7,730,000 voted for the appointment,
approximately 4,000 voted against and approximately 1,400 abstained.
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 (dated April 24, 1996)
on May 2, 1996 relating to certain events, specifically the appointment
of William C. McNamara as the Company's Senior Vice President - Cemetery
Operations, the successful completion of the sale of 2,890,000 and
100,000 shares of the Company's Common Stock by the Company and a selling
stockholder, respectively, the completion of the purchase of 1,443,259
shares of the Company's Common Stock by Service Corporation International
from Robert W. (Jon) Loftis and certain persons affiliated with Mr.
Loftis, and the resignation of Mr. Loftis from his positions as Executive
Vice President - Cemetery Operations and a director of the Company.
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: August 13, 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 Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Computation of earnings per
common and equivalent share:
Net income attributable to
common stock................ $ 2,645 $ 1,476 $ 4,882 $ 3,116
========== ========== ========== ==========
Weighted average number of
common shares outstanding... 11,996 9,793 10,948 9,793
Additional shares assuming
conversion of stock options. 176 67 162 47
Effect of restricted stock
issued...................... 10 -- 9 --
---------- ---------- -------- ----------
Weighted average shares for
primary earnings per share.... 12,182 9,860 11,119 9,840
Incremental shares issuable
using quarter-end market
price:
Conversion of stock
options............... (11) 54 12 42
Effect of restricted
stock issued.......... -- -- 1 --
---------- ---------- ---------- ----------
Weighted average shares for
fully diluted earnings
per share................. 12,171 9,914 11,132 9,882
========== ========== ========== ==========
Primary earnings per common
and equivalent share........ $ 0.22 $ 0.15 $ 0.44 $ 0.32
========== ========== ========== ==========
Fully diluted earnings per
common and equivalent share. $ 0.22 $ 0.15 $ 0.44 $ 0.32
========== ========== ========== ==========
</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 SIX MONTHS ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,607
<SECURITIES> 0
<RECEIVABLES> 5,441
<ALLOWANCES> 1,026
<INVENTORY> 5,542
<CURRENT-ASSETS> 26,760
<PP&E> 53,757
<DEPRECIATION> 8,864
<TOTAL-ASSETS> 358,146
<CURRENT-LIABILITIES> 7,807
<BONDS> 10,845
0
0
<COMMON> 128
<OTHER-SE> 169,462
<TOTAL-LIABILITY-AND-EQUITY> 358,146
<SALES> 20,729
<TOTAL-REVENUES> 44,606
<CGS> 5,773
<TOTAL-COSTS> 31,086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 332
<INTEREST-EXPENSE> 1,487
<INCOME-PRETAX> 9,153
<INCOME-TAX> 4,271
<INCOME-CONTINUING> 4,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,882
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
