- ------------------------------------------------------------------------------
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 quarterly period ended June 30, 1997
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
June 30, 1997 was 20,753,166.
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<PAGE>
EQUITY CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet
June 30, 1997 and December 31, 1996......................3
Consolidated Statement of Operations
Three and Six Months Ended June 30, 1997 and 1996........4
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1997 and 1996..................5
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1997...........................6
Notes to the Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.........................11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...........................20
Signature...................................................................21
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 and the
Company's annual report on Form 10-K, 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) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 6,845 $ 12,654
Receivables, net of allowances..................... 9,213 9,050
Inventories........................................ 7,152 6,029
Other.............................................. 3,005 1,825
--------- ---------
Total current assets............................ 26,215 29,558
Preneed funeral contracts............................. 193,871 156,028
Cemetery properties, at cost.......................... 95,001 84,706
Long-term receivables, net of allowances.............. 48,819 37,226
Property, plant and equipment, at cost (net).......... 75,245 57,263
Deferred charges and other assets..................... 16,351 7,986
Names and reputations (net)........................... 115,471 71,124
--------- ---------
Total assets.................................... $ 570,973 $ 443,891
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 7,359 $ 6,943
Income taxes payable............................... -- 294
Deferred income taxes.............................. 3,146 2,605
Current maturities of long-term debt............... 829 537
--------- ---------
Total current liabilities....................... 11,334 10,379
Deferred preneed funeral contract revenues............ 199,261 161,153
Long-term debt........................................ 98,226 49,197
Deferred cemetery costs............................... 25,481 21,268
Deferred income taxes................................. 22,852 22,799
Other liabilities..................................... 1,934 1,631
Commitments and contingencies.........................
Stockholders' equity:
Preferred stock.................................... -- --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 20,753,166 and 19,322,723 shares issued
and outstanding in 1997 and 1996, respectively.. 208 193
Capital in excess of par value..................... 184,320 157,468
Retained earnings.................................. 27,349 19,803
Foreign translation adjustment..................... 8 --
--------- ---------
Total stockholders' equity...................... 211,885 177,464
--------- ---------
Total liabilities and stockholders' equity...... $ 570,973 $ 443,891
========= =========
</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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net revenues:
Funeral................. $ 19,211 $ 12,240 $ 39,661 $ 24,986
Cemetery................ 11,701 9,286 21,831 17,535
Other................... -- -- 1,674 2,085
-------- -------- -------- --------
30,912 21,526 63,166 44,606
-------- -------- -------- --------
Costs and expenses:
Funeral................. 14,504 9,012 28,798 17,807
Cemetery................ 8,073 6,380 15,109 12,144
Other................... -- -- 924 1,135
-------- -------- -------- --------
22,577 15,392 44,831 31,086
-------- -------- -------- --------
Total gross profit......... 8,335 6,134 18,335 13,520
General and adminis-
trative expenses........ 2,099 1,295 3,834 2,880
-------- -------- -------- --------
Operating income........... 6,236 4,839 14,501 10,640
Interest expense, net...... 1,143 395 1,924 1,487
-------- -------- -------- --------
Income before
income taxes............ 5,093 4,444 12,577 9,153
Provision for
income taxes............ 2,037 1,799 5,031 4,271
-------- -------- -------- --------
Net income................. $ 3,056 $ 2,645 $ 7,546 $ 4,882
======== ======== ======== ========
Earnings per share......... $ 0.15 $ 0.14 $ 0.36 $ 0.29
======== ======== ======== ========
Weighted average number
of common and equivalent
shares outstanding... 21,028 18,273 20,721 16,679
======== ======== ======== ========
</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) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 7,546 $ 4,882
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................... 3,523 2,252
Provision for bad debts and contract
cancellations.................................. 2,558 1,992
Gain on sale of assets.......................... (787) (880)
Deferred income taxes........................... 594 803
Changes in assets and liabilities, net of effects
from acquisitions:
Receivables...................................... (7,550) (6,082)
Inventories...................................... (157) (22)
Other current assets............................. (19) 59
Other long-term assets........................... (898) (330)
Accounts payable and accrued liabilities......... (882) (672)
Income taxes payable............................. (1,411) (1,061)
Preneed funeral contracts and associated
deferred revenues............................... (163) (57)
-------- --------
Net cash provided by operating activities..... 2,354 884
-------- --------
Cash flows from investing activities:
Capital expenditures............................... (5,883) (3,983)
Proceeds from sale of assets....................... 74 3,006
Acquisitions, net of cash acquired................. (16,284) (9,522)
Other.............................................. 52 83
-------- --------
Net cash used in investing activities......... (22,041) (10,416)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of Common Stock......... 22,206 73,043
Borrowings on long-term debt....................... 11,996 331
Payments on debt................................... (20,324) (55,468)
-------- --------
Net cash provided by financing activities..... 13,878 17,906
-------- --------
Increase (decrease) in cash and cash equivalents...... (5,809) 8,374
Cash and cash equivalents at beginning of period...... 12,654 6,233
-------- --------
Cash and cash equivalents at end of period............ $ 6,845 $ 14,607
======== ========
</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 Shares Amount
number of shares) ---------- ----------
<C> <C>
Common Stock
Balance at December 31, 1996................. 19,322,723 $ 193
Issued:
Equity offering............................ 1,199,178 12
Acquisitions............................... 224,525 3
Option exercises........................... 6,000 --
Other...................................... 740 --
---------- ----------
Balance at June 30, 1997..................... 20,753,166 $ 208
========== ==========
Capital in excess of par value
Balance at December 31, 1996................. $ 157,468
Equity offering............................ 22,089
Acquisitions............................... 4,658
Option exercises........................... 55
Other...................................... 50
----------
Balance at June 30, 1997..................... $ 184,320
==========
Retained earnings
Balance at December 31, 1996................. $ 19,803
Net income................................. 7,546
----------
Balance at June 30, 1997..................... $ 27,349
==========
Foreign translation adjustment
Balance at December 31, 1996................. $ --
Translation adjustment..................... 8
----------
Balance at June 30, 1997..................... $ 8
==========
Total stockholders equity.................... $ 211,885
==========
</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
the notes to the consolidated financial statements normally included in
financial statements prepared in accordance with generally accepted accounting
principles has 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. Capitalized terms
not defined herein have the meanings as defined in the notes to the
consolidated financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1996. 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, 1996.
The Company's statutory Federal income tax rate increased from 34% to 35% as
the Company exceeded the taxable income threshold requiring the higher tax
rate during 1996. As a result, the Company recorded through the provision for
income taxes a one-time charge of $565,000 in the first quarter of 1996 to
revalue the deferred tax liability accounts to appropriately reflect the
higher statutory rate.
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect as of the end of the reporting period.
Income and expense items are translated at average exchange rates for the
reporting period. The resulting translation adjustments are recorded as a
component of stockholders' equity.
2. ACQUISITIONS
The following table is a summary of acquisitions made during the six months
ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------
<S> <C> <C>
Number acquired:
Funeral homes........ 45 22
Cemeteries........... 5 1
Purchase price..........$79,889,000 $21,362,000
</TABLE>
The purchase price for these acquisitions consisted of cash, Common Stock and
debt issued or assumed. Also included in the 1997 purchase price is $924,000
which represents the net book value of funeral home assets exchanged for one
of the acquired cemeteries (Note 5). 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 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 $837,000 and
$430,000 for noncompetition agreements which were prepaid to individuals
related to businesses acquired in 1997 and 1996, 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 net effect of acquisitions (including the exchange discussed above) on the
Consolidated Balance Sheet was as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets........................................ $ 2,935 $ 1,300
Preneed funeral contracts............................. 34,598 17,551
Cemetery properties................................... 9,307 1,650
Long-term receivables, net of allowances.............. 5,908 209
Property, plant and equipment......................... 14,349 6,813
Deferred charges and other assets..................... 7,990 462
Names and reputations................................. 45,435 12,390
Current liabilities................................... (827) (204)
Deferred preneed funeral contract revenues............ (35,026) (17,643)
Long-term debt........................................ (57,595) (11,461)
Deferred cemetery costs............................... (5,018) (367)
Deferred income taxes................................. -- (236)
Other liabilities..................................... (38) (350)
Common Stock issued................................... (4,661) --
--------- ---------
Total.............................................. 17,357 10,114
Less cash acquired................................. 1,073 592
--------- ---------
Cash used for acquisitions......................... $ 16,284 $ 9,522
========= =========
</TABLE>
The following represents the unaudited pro forma results of operations for the
six months ended June 30, 1997 and 1996, assuming the above noted acquisitions
and exchange had occurred as of January 1, 1996:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Net revenues.......................................... $ 73,103 $ 60,934
Income before income taxes............................ 13,287 10,303
Net income............................................ 7,972 5,566
Earnings per common and equivalent share.............. $ 0.38 $ 0.33
</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
$90,843,000 and $67,364,000 will be funded by trusts and approximately
$103,028,000 and $88,664,000 will be funded by insurance policies as of June
30, 1997 and December 31, 1996, respectively. Accumulated earnings from trust
funds and increasing insurance benefits have been included to the extent that
they have accrued through June 30, 1997 and December 31, 1996. 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, 1997 and December 31, 1996, the amounts collected and held
in trusts, at cost, which approximates market, were approximately $80,200,000
and $59,246,000, 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
The Company maintains an uncollateralized revolving credit agreement with a
group of banks that provides for a $100,000,000 line of credit to be used for
acquisition financing and general corporate purposes. The Company's Credit
Facility, as amended, provides for a revolving credit period expiring in
October 1999 and 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
weighted average interest rates on amounts borrowed under the Credit Facility
were 6.84% and 6.39% at June 30, 1997 and December 31, 1996, respectively. In
addition, the Company pays a commitment fee on unused funds ranging from 0.20%
to 0.32%, depending on the Company's leverage ratio, as defined. The Credit
Facility also supports letters of credit totaling $3,152,000 related to one of
the Company's acquisitions in 1996. The Credit Facility contains customary
restrictive covenants requiring the Company to maintain certain financial
ratios and is guaranteed by substantially 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.
Balances outstanding under the Credit Facility totaled $83,453,000 and
$35,000,000 at June 30, 1997 and December 31, 1996, respectively.
9
<PAGE>
5. DISPOSITIONS
During January 1997, the Company acquired one cemetery from Service
Corporation International ("SCI"), a former significant stockholder of the
Company (Note 6), in exchange for one of the Company's funeral home
facilities. This was a strategic business decision as the acquired cemetery is
in close proximity to one of the Company's existing funeral home facilities.
In connection with the transaction, the Company received consideration of
$1,674,000, including $250,000 in cash, and recognized a gain of approximately
$750,000 in the first quarter of 1997.
During March 1996, the Company conveyed to SCI licensing and lease agreements
related to three funeral home operations which had been previously operated by
an unaffiliated third party for an aggregate purchase price of $2,085,000.
This amount and $1,135,000 of related costs and expenses are included in net
revenues and costs and expenses, respectively, for the six months ended June
30, 1996.
6. EQUITY OFFERINGS
In February 1997, the Company completed the registration and sale of 7,994,522
shares of Common Stock owned by SCI which represented SCI's total investment
in the Company. SCI received all proceeds and paid all expenses related to the
sale of these shares. In addition, the Company received net proceeds of
approximately $22,101,000 (after selling commissions and related expenses) in
connection with the issuance and sale by the Company of 1,199,178 shares of
Common Stock at $19.25 per share pursuant to the underwriters' exercise of an
overallotment option granted by the Company. Approximately $13,000,000 of
these proceeds was used to pay down a portion of the Company's Credit Facility
and the remainder was used for general corporate purposes, including
acquisitions.
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 $73,007,000 (after selling commissions and related
expenses). The net proceeds were used to payoff amounts outstanding under the
Credit Facility and the remainder was used for general corporate purposes,
including acquisitions.
7. RECENT FASB PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share" which simplifies the standards for
computing and presenting earnings per share ("EPS") and makes them comparable
to international EPS standards. This statement is effective for the year
ending December 31, 1997. Earlier application is not permitted and restatement
of prior period EPS data is required. The Company does not believe
implementation of SFAS No. 128 will have a material impact on its EPS.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 131 establishes standards for the way that
public enterprises report segment information in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports to shareholders. These
statements are both effective for fiscal years beginning after December 15,
1997. The Company does not believe implementation of SFAS Nos. 130 and 131
will have a material effect on its financial position, results of operation or
cash flows.
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
three and six month periods ended June 30, 1997 and 1996. 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.
Total net revenues for the three months ended June 30, 1997 increased 43.6% to
$30,912,000 from $21,526,000 for the three months ended June 30, 1996. The
increase in net revenues reflects an $8,607,000 increase in net revenues
attributable to acquired operations and a $1,063,000 or 5.1% increase in net
revenues from existing operations. The substantial increase in revenues from
acquired operations is due primarily to the full quarter results of the 68
funeral homes and five cemeteries acquired between April 1, 1996 and March 31,
1997 and the partial quarter results of the 26 funeral homes and two
cemeteries acquired during the three months ended June 30, 1997. The increase
in revenues from existing operations was attributable primarily to increases
in preneed sales at cemetery operations.
Gross profit for the three months ended June 30, 1997 increased 35.9% to
$8,335,000 from $6,134,000 for the comparable prior year quarter. The
increase in gross profit is due primarily to a $2,087,000 increase
attributable to acquired operations and a $244,000 or 4.1% increase from
existing operations. The increase in gross profit from existing operations was
attributable primarily to the increase in preneed sales discussed above.
11
<PAGE>
FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral
home operations during the three months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three months
ended June 30, Change
(Dollars in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 11,592 $ 11,556 $ 36 0.3%
Acquired operations.................. 7,619 400 7,219 *
Disposed operations.................. -- 284 (284) *
------ ------ ------
Total funeral net revenues........ $ 19,211 $ 12,240 $ 6,971 57.0%
====== ====== ======
Gross profit:
Existing operations.................. $ 2,951 $ 2,989 $ (38) (1.3)%
Acquired operations.................. 1,756 109 1,647 *
Disposed operations.................. -- 130 (130) *
------ ------ ------
Total funeral gross profit........ $ 4,707 $ 3,228 $ 1,479 45.8%
====== ====== ======
- ------
*Not meaningful
Total funeral net revenues for the three months ended June 30, 1997 increased
57.0% to $19,211,000 from $12,240,000 for the prior year quarter, due
primarily to a $7,219,000 increase attributable to acquired operations.
Revenues from existing operations increased by 0.3% over the prior year
quarter as a 2.2% inflationary increase in the average revenue per regular
service performed along with increased sales of ancillary funeral products was
offset by a 3.0% decrease in the number of regular funeral services performed.
Total funeral gross profit for the three months ended June 30, 1997 increased
45.8% to $4,707,000 from $3,228,000 for the three months ended June 30, 1996.
Excluding the effects of the disposed funeral home operations, funeral gross
margin decreased to 24.5% from 25.9% due primarily to acquired operations,
which generally have lower gross margins as compared to the Company's existing
operations. Depending on numerous factors including the size of an acquired
operation, the proximity to other Company operations and market sensitivity,
it may take 12 to 36 months before margin improvement is realized at an
acquired operation as a result of new policies and procedures implemented by
the Company. Funeral gross margin at existing operations decreased to 25.5%
from 25.9% for the prior year second quarter primarily as a result of the
volume declines discussed above coupled with the relatively fixed cost nature
of funeral home operating costs.
12
<PAGE>
CEMETERY SEGMENT. The following table sets forth certain information regarding
the net revenues and gross profit of the Company from its cemetery operations
during the three months ended June 30, 1997 and 1996.
</TABLE>
<TABLE>
<CAPTION>
Three months
ended June 30, Change
(Dollars in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 10,313 $ 9,286 $ 1,027 11.1%
Acquired operations.................. 1,388 -- 1,388 *
------ ------ ------
Total cemetery net revenues....... $ 11,701 $ 9,286 $ 2,415 26.0%
====== ====== ======
Gross profit:
Existing operations.................. $ 3,188 $ 2,906 $ 282 9.7%
Acquired operations.................. 440 -- 440 *
------ ------ ------
Total cemetery gross profit....... $ 3,628 $ 2,906 $ 722 24.8%
====== ====== ======
- ------
*Not meaningful
Total cemetery net revenues for the three months ended June 30, 1997 increased
26.0% to $11,701,000 from $9,286,000 for the prior year quarter. Cemetery net
revenues attributable to existing operations increased 11.1% to $10,313,000
from $9,286,000 for the prior year quarter, due primarily to increases in
preneed sales. The increase in net revenues for acquired operations reflects
the full quarter results of the five cemeteries acquired between April 1, 1996
and March 31, 1997 along with the partial quarter results of the two
cemeteries acquired in the three months ended June 30, 1997.
Total cemetery gross profit for the three months ended June 30, 1997 increased
24.8% to $3,628,000 from $2,906,000 for the three months ended June 30, 1996.
Cemetery gross margin at existing operations decreased to 30.9% from 31.3% in
the second quarter of 1996 due primarily to higher selling expenses associated
with the increase in preneed sales, partially offset by operating leverage
achieved on the relatively fixed portion of cemetery cost structure which is
being spread over a larger revenue base.
General and administrative expenses for the three months ended June 30, 1997
increased $804,000 or 62.1% over the three months ended June 30, 1996. This
increase resulted primarily from nonrecurring expenses in June 1997 totaling
approximately $200,000 in connection with the Company's listing of its Common
Stock on the New York Stock Exchange, as well as increased personnel costs and
professional fees necessary to support a higher rate of growth.
Interest expense for the three months ended June 30, 1997 increased $748,000
from the comparable prior year quarter, due primarily to higher debt levels as
average indebtedness outstanding increased to $70.6 million for the current
year quarter from $36.1 million for the same period in 1996. The increase in
average indebtedness outstanding is the result of increased acquisition
activity during 1997 along with the payoff in 1996 of $52.7 million borrowed
under the Company's Credit Facility with a portion of the proceeds of the
Company's equity offering in May 1996. Interest income of approximately
$170,000 related to the temporary investment of the Company's equity offering
proceeds has been netted against interest expense for the three months ended
June 30, 1996.
13
<PAGE>
The Company's effective tax rate for the three months ended June 30, 1997 was
40.0% compared to 40.5% for the comparable three months in 1996. The Company
expects the effective tax rate for income generated in the remainder of 1997
will be approximately 40.0%.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996:
Total net revenues for the six months ended June 30, 1997 increased 41.6% to
$63,166,000 from $44,606,000 for the six months ended June 30, 1996. The
increase in net revenues reflects a $16,496,000 increase in net revenues
attributable to acquired operations and a $2,997,000 or 7.6% increase in net
revenues from existing operations. The substantial increase in revenues from
acquired operations is due primarily to the full period results of the 59
funeral homes and three cemeteries acquired in 1996 and the partial period
results of the 45 funeral homes and five cemeteries acquired during the six
months ended June 30, 1997. Included in net revenues for the six months ended
June 30, 1997 is $1,674,000 related to the sale of one of the Company's
funeral homes in exchange for a cemetery and $250,000 in cash. Included in
net revenues for the six months ended June 30, 1996 is $2,085,000 resulting
from the Company's sale of several long-term licensing and lease agreements
related to three funeral homes which had previously been operated by a third
party.
Gross profit for the six months ended June 30, 1997 increased 35.6% to
$18,335,000 from $13,520,000 for the comparable prior year period. The
increase in gross profit is due primarily to a $4,123,000 increase
attributable to acquired operations and a $1,121,000 or 9.6% increase from
existing operations. The increase in gross profit from existing operations
was attributable to increased preneed sales at the Company's cemetery
operations along with improved operational efficiencies at both funeral and
cemetery operations.
14
<PAGE>
FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral
home operations during the six months ended June 30, 1997 and 1996.
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30, Change
(Dollars in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 23,567 $ 22,719 $ 848 3.7%
Acquired operations.................. 16,094 1,745 14,349 *
Disposed operations.................. -- 522 (522) *
------ ------ ------
Total funeral net revenues........ $ 39,661 $ 24,986 $ 14,675 58.7%
====== ====== ======
Gross profit:
Existing operations.................. $ 6,938 $ 6,515 $ 423 6.5%
Acquired operations.................. 3,925 435 3,490 *
Disposed operations.................. -- 229 (229) *
------ ------ ------
Total funeral gross profit........ $ 10,863 $ 7,179 $ 3,684 51.3%
====== ====== ======
- ------
*Not meaningful
Total funeral net revenues for the six months ended June 30, 1997 increased
58.7% to $39,661,000 from $24,986,000 for the prior year period, due primarily
to a $14,349,000 increase attributable to acquired operations. The increase
in revenues from existing operations is primarily attributable to a 2.7%
inflationary increase in the average revenue per regular service performed,
offset in part by a 0.5% decrease in the number of regular funeral services
performed.
Total funeral gross profit for the six months ended June 30, 1997 increased
51.3% to $10,863,000 from $7,179,000 for the six months ended June 30, 1996.
Excluding the effects of the disposed funeral home operations, funeral gross
margin decreased to 27.4% from 28.4% due primarily to acquired operations,
which generally have lower gross margins as compared to the Company's existing
operations. Funeral gross margin at existing operations increased to 29.4%
from 28.7% for the prior year period primarily as a result of sales price
increases exceeding the cost increases in merchandising and salaries, offset
in part by the slight volume decline discussed above.
15
<PAGE>
CEMETERY SEGMENT. The following table sets forth certain information regarding
the net revenues and gross profit of the Company from its cemetery operations
during the six months ended June 30, 1997 and 1996.
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30, Change
(Dollars in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 19,099 $ 16,950 $ 2,149 12.7%
Acquired operations.................. 2,732 585 2,147 *
------ ------ ------
Total cemetery net revenues....... $ 21,831 $ 17,535 $ 4,296 24.5%
====== ====== ======
Gross profit:
Existing operations.................. $ 5,909 $ 5,211 $ 698 13.4%
Acquired operations.................. 813 180 633 *
------ ------ ------
Total cemetery gross profit....... $ 6,722 $ 5,391 $ 1,331 24.7%
====== ====== ======
- ------
*Not meaningful
Total cemetery net revenues for the six months ended June 30, 1997 increased
24.5% to $21,831,000 from $17,535,000 for the six months ended June 30, 1996.
Cemetery net revenues attributable to existing operations for the six months
ended June 30, 1997 increased 12.7% to $19,099,000 from $16,950,000 for the
prior year period, due primarily to increases in preneed sales.
Total cemetery gross profit increased 24.7% to $6,722,000 for the six months
ended June 30, 1997 from $5,391,000 for the comparable prior year period.
Cemetery gross margin at existing operations increased slightly to 30.9% from
30.7% in 1996 due primarily to operating leverage achieved on the relatively
fixed portion of cemetery cost structure which is being spread over a larger
revenue base, partially offset by higher selling costs associated with the
increase in preneed sales.
General and administrative expenses for the six months ended June 30, 1997
increased $954,000 or 33.1% over the same period in 1996. This increase
resulted primarily from nonrecurring New York Stock Exchange listing expenses
during the second quarter of 1997 as discussed above, as well as increased
personnel costs and professional fees necessary to support a higher rate of
growth. Excluding the effects of the New York Stock Exchange listing expenses
along with the gains recorded on the asset exchange and sale of licensing and
lease agreements discussed above, general and administrative expenses as a
percentage of net revenues decreased to 5.9% from 6.8% in the prior year
period due to general and administrative expenses being spread over a larger
revenue base.
Interest expense for the six months ended June 30, 1997 increased $437,000 or
29.4% from the comparable prior year period, due primarily to higher debt
levels as average indebtedness outstanding over the 1997 period increased to
$74.4 million from $33.2 million for the same period in 1996 as a result of
increased acquisition activity during 1997 along with the payoff of $52.7
million in 1996 borrowed under the Company's Credit Facility with a portion of
the proceeds of an equity offering in May 1996. Partially offsetting this
increase was the paydown of approximately $13.0 million borrowed under the
Company's Credit Facility with a portion of the proceeds of an equity offering
in February 1997. Interest income of approximately $41,000 and $170,000
related to the temporary investment of equity offering proceeds has been
netted against interest expense for the six months ended June 30, 1997 and
1996, respectively.
16
<PAGE>
The Company's effective tax rate for the six months ended June 30, 1997 was
40.0% compared to 46.7% for the comparable six months in 1996. The higher rate
in 1996 was due primarily to a one-time charge of $565,000 in the first
quarter of 1996 to revalue the Company's deferred tax liability accounts to
appropriately reflect an increase in the Company's statutory Federal income
tax rate from 34% to 35% as the Company exceeded the taxable income threshold
requiring the higher tax rate during 1996.
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 $6.8 million at June 30, 1997, representing
a decrease of $5.8 million from December 31, 1996. For the six months ended
June 30, 1997, net cash flow from operating activities was approximately $2.3
million, cash used in investing activities totaled approximately $22.0 million
and cash provided by financing activities amounted to approximately $13.9
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 $7.5 million primarily attributable to a 30.2%
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 capital expenditures of $1.3 million related to
additions and improvements at several funeral home facilities, $1.5 million
related to the acquisition of professional vehicles and maintenance equipment
and $0.8 million for upgrades to computer systems and peripheral equipment.
Additionally, the Company utilized approximately $16.3 million of internal
funds, including funds drawn on the Credit Facility at December 31, 1996, to
consummate funeral home and cemetery acquisitions during the six months ended
June 30, 1997. Significant components of cash provided by financing activities
included (i) borrowings of approximately $12.0 million which were used, among
other things, to prepay a portion of the Company's estimated 1997 income
taxes, finance an agreement with one of the Company's suppliers for the
storage and delivery of preneed cemetery merchandise and refinance a note
payable issued in connection with the Company's Canadian acquisitions; (ii)
$22.1 million of net proceeds received in connection with the sale of the
Company's Common Stock and the use of a portion of these proceeds to pay $13.0
million outstanding under the Company's Credit Facility; and (iii) lump sum
payments totaling approximately $4.9 million to extinguish certain seller
financed notes and normal scheduled debt payments.
Long-term debt, including current maturities, at June 30, 1997 totaled $99.1
million as compared to $49.7 million at December 31, 1996. The increase was
principally attributable to increased acquisition activity during the six
months ended June 30, 1997, partially offset by the payoff of $13.0 million
outstanding under the Credit Facility with a portion of the proceeds from the
issuance of Common Stock in February 1997, as described below. Long-term debt
at June 30, 1997 consisted of $83.5 million drawn under the Credit Facility
and $15.6 million owed under various notes payable to sellers of funeral homes
and cemeteries. As of June 30, 1997, the Credit Facility also supported
letters of credit totaling $3.2 million related to one of the Company's 1996
acquisitions. At June 30, 1997, $13.3 million was available for borrowings
under the Credit Facility. Any amounts repaid under the Credit Facility are
available for future borrowings under the terms of the Credit Facility.
17
<PAGE>
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 weighted average interest rates on
amounts borrowed under the Credit Facility were 6.84% and 6.39% at June 30,
1997 and December 31, 1996, respectively. The Credit Facility, which 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 substantially
all of the Company's subsidiaries.
Due to recent and projected future increases in acquisition activity, the
Company is currently negotiating to increase the line of credit under the
Credit Facility to $225 million and to obtain more favorable borrowing terms.
The Company expects to have this new facility in place by the end of the third
quarter of 1997.
In February 1997, the Company received net proceeds of approximately $22.1
million (after selling commissions and related expenses) in connection with
the issuance and sale by the Company of 1,199,178 shares of Common Stock at
$19.25 per share pursuant to the underwriters' exercise of an overallotment
option granted by the Company in the registration and sale of shares of Common
Stock owned by SCI.
The Company currently expects to acquire funeral homes and cemeteries for
purchase prices aggregating $110 to $115 million in 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 1997, the Company amended its
shelf registration statement by increasing to approximately 1,350,000 the
number of shares of Common Stock to be used to fund acquisitions under such
registration statement. As of June 30, 1997, approximately 1,009,000 shares
of Common Stock remained available for issuance pursuant to this registration
statement. The Company anticipates making ongoing capital expenditures of
approximately $7.9 million in 1997. Additionally, the Company approved the
authorization to expend approximately $6.1 million to construct two new
funeral home facilities and perform significant renovations and improvements
on certain of its existing funeral home facilities. These expenditures are
expected to be incurred over the next 9 to 15 months. Management believes
that cash flow from operations and the borrowing capacity available under the
renegotiated Credit Facility should be sufficient to meet its anticipated
capital expenditures and other operating requirements and to substantially
fund acquisitions through the third 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 and
the successful increase in the Credit Facility, there can be no assurance that
the Company's capital resources will be sufficient to maintain currently
planned levels of capital expenditures and 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.
18
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.
RECENT FASB PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share" which simplifies the standards for
computing and presenting earnings per share ("EPS") and makes them comparable
to international EPS standards. This statement is effective for the year
ending December 31, 1997. Earlier application is not permitted and restatement
of prior period EPS data is required. The Company does not believe
implementation of SFAS No. 128 will have a material impact on its EPS.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information. " SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 131 establishes standards for the way that
public enterprises report segment information in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports to shareholders. These
statements are both effective for fiscal years beginning after December 15,
1997. The Company does not believe implementation of SFAS Nos. 130 and 131
will have a material effect on its financial position, results of operation or
cash flows.
19
<PAGE>
PART II. OTHER INFORMATION
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 did not file any reports on Form 8-K during the quarter ended
June 30, 1997.
20
<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 14, 1997
EQUITY CORPORATION INTERNATIONAL
By: /s/ W. Cardon Gerner
------------------------
Senior Vice President
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
21
</TABLE>
<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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Computation of earnings per
common and equivalent share:
Net income attributable to
common stock................ $ 3,056 $ 2,645 $ 7,546 $ 4,882
========== ========== ========== ==========
Weighted average number of
common shares outstanding... 20,654 17,994 20,373 16,422
Additional shares assuming
conversion of stock options. 352 264 328 243
Effect of restricted stock
issued...................... 22 15 20 14
---------- ---------- -------- --------
Weighted average shares for
primary earnings per share.... 21,028 18,273 20,721 16,679
Incremental shares issuable
using quarter-end market
price:
Conversion of stock
options............... 26 -- 18 18
Effect of restricted
stock issued.......... 1 -- 1 1
---------- ---------- ---------- ----------
Weighted average shares for
fully diluted earnings
per share................. 21,055 18,273 20,740 16,698
========== ========== ========== ==========
Primary earnings per common
and equivalent share........ $ 0.15 $ 0.14 $ 0.36 $ 0.29
========== ========== ========== ==========
Fully diluted earnings per
common and equivalent share. $ 0.15 $ 0.14 $ 0.36 $ 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 SIX MONTHS ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,845
<SECURITIES> 0
<RECEIVABLES> 10,296
<ALLOWANCES> 2,023
<INVENTORY> 7,152
<CURRENT-ASSETS> 26,215
<PP&E> 87,159
<DEPRECIATION> 11,914
<TOTAL-ASSETS> 570,973
<CURRENT-LIABILITIES> 11,334
<BONDS> 98,226
0
0
<COMMON> 208
<OTHER-SE> 211,677
<TOTAL-LIABILITY-AND-EQUITY> 570,973
<SALES> 29,710
<TOTAL-REVENUES> 63,166
<CGS> 9,170
<TOTAL-COSTS> 44,831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 512
<INTEREST-EXPENSE> 1,924
<INCOME-PRETAX> 12,577
<INCOME-TAX> 5,031
<INCOME-CONTINUING> 7,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,546
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
