- ------------------------------------------------------------------------------
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 March 31, 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
May 12, 1997 was 20,697,983.
- ------------------------------------------------------------------------------
<PAGE>
EQUITY CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet
March 31, 1997 and December 31, 1996.....................3
Consolidated Statement of Operations
Three Months Ended March 31, 1997 and 1996...............4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1997 and 1996...............5
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 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...........................16
Signature...................................................................17
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>
March 31, Dec. 31,
(In thousands, except share data) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 4,803 $ 12,654
Receivables, net of allowances..................... 9,288 9,050
Inventories........................................ 6,360 6,029
Other.............................................. 1,474 1,825
--------- ---------
Total current assets............................ 21,925 29,558
Preneed funeral contracts............................. 168,539 156,028
Cemetery properties, at cost.......................... 92,976 84,706
Long-term receivables, net of allowances.............. 45,427 37,226
Property, plant and equipment, at cost (net).......... 64,111 57,263
Deferred charges and other assets..................... 8,566 7,986
Names and reputations (net)........................... 85,498 71,124
--------- ---------
Total assets.................................... $ 487,042 $ 443,891
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 7,746 $ 6,943
Income taxes payable............................... 1,795 294
Deferred income taxes.............................. 2,994 2,605
Current maturities of long-term debt............... 536 537
--------- ---------
Total current liabilities....................... 13,071 10,379
Deferred preneed funeral contract revenues............ 173,452 161,153
Long-term debt........................................ 41,700 49,197
Deferred cemetery costs............................... 26,412 21,268
Deferred income taxes................................. 23,180 22,799
Other liabilities..................................... 1,775 1,631
Commitments and contingencies.........................
Stockholders' equity:
Preferred stock.................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 20,695,983 and 19,322,723 shares issued
and outstanding in 1997 and 1996, respectively.. 207 193
Capital in excess of par value..................... 182,952 157,468
Retained earnings.................................. 24,293 19,803
--------- ---------
Total stockholders' equity...................... 207,452 177,464
--------- ---------
Total liabilities and stockholders' equity...... $ 487,042 $ 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>
Three months ended March 31,
(In thousands, except per share data) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Net revenues:
Funeral.................................. $ 20,449 $ 12,746
Cemetery................................. 10,131 8,249
Other.................................... 1,674 2,085
---------- ----------
32,254 23,080
Cost and expenses:
Funeral.................................. 14,294 8,795
Cemetery................................. 7,036 5,764
Other.................................... 924 1,135
---------- ----------
22,254 15,694
---------- ----------
Total gross profit.......................... 10,000 7,386
General and administrative
expenses................................. 1,735 1,585
---------- ----------
Operating income............................ 8,265 5,801
Interest expense, net....................... 781 1,092
---------- ----------
Income before income taxes.................. 7,484 4,709
Provision for income taxes.................. 2,994 2,472
---------- ----------
Net income.................................. $ 4,490 $ 2,237
========== ==========
Earnings per share.......................... $ 0.22 $ 0.15
========== ==========
Weighted average number
of common and equivalent
shares outstanding.................... 20,412 15,085
========== ==========
</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>
Three months ended March 31,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 4,490 $ 2,237
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................... 1,557 1,084
Provision for bad debts and contract
cancellations.................................. 1,272 1,023
Gain on sale of assets.......................... (765) (892)
Deferred income taxes........................... 770 774
Changes in assets and liabilities, net of effects
from acquisitions:
Receivables...................................... (3,751) (2,903)
Inventories...................................... (32) 33
Other current assets............................. 369 272
Other long-term assets........................... (546) (377)
Accounts payable and accrued liabilities......... 284 780
Income taxes payable............................. 1,501 472
Preneed funeral contracts and associated
deferred revenues............................... (171) 1
-------- --------
Net cash provided by operating activities..... 4,978 2,504
-------- --------
Cash flows from investing activities:
Capital expenditures............................... (2,247) (1,978)
Proceeds from sale of assets....................... 50 810
Acquisitions, net of cash used..................... (14,610) (1,027)
Other.............................................. -- 36
-------- --------
Net cash used in investing activities......... (16,807) (2,159)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock......... 22,131 22
Borrowings on long-term debt....................... -- 331
Payments on debt................................... (18,153) (2,481)
-------- --------
Net cash provided by (used in) financing
activities................................... 3,978 (2,128)
-------- --------
Decrease in cash and cash equivalents................. (7,851) (1,783)
Cash and cash equivalents at beginning of period...... 12,654 6,233
-------- --------
Cash and cash equivalents at end of period............ $ 4,803 $ 4,450
======== ========
</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, 1996..... 19,322,723 $ 193 $157,468 $ 19,803 $177,464
Net income.......... -- -- -- 4,490 4,490
Common stock issued:
Equity offering... 1,199,178 12 22,089 22,101
Acquisitions...... 171,082 2 3,365 -- 3,367
Option exercises.. 3,000 -- 30 -- 30
---------- ------ -------- -------- --------
Balance,
March 31, 1997........ 20,695,983 $ 207 $182,952 $ 24,293 $207,452
========== ====== ======== ======== ========
</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 for the three months ended March 31, 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 three months
ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------
<S> <C> <C>
Number acquired:
Funeral homes........ 19 10
Cemeteries........... 3 1
Purchase price..........$29,752,000 $ 9,100,000
</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 $62,000 and
$170,000 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>
Three months ended March 31,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets........................................ $ 1,341 $ 335
Preneed funeral contracts............................. 12,424 8,201
Long-term receivables, net of allowances.............. 5,708 209
Cemetery properties................................... 7,804 1,315
Property, plant and equipment......................... 5,601 2,843
Deferred charges and other assets..................... (168) 194
Names and reputations................................. 14,885 4,689
Current liabilities................................... (790) (179)
Deferred preneed funeral contract revenues............ (12,383) (8,248)
Long-term debt........................................ (10,653) (8,004)
Deferred cemetery costs............................... (5,018) (33)
Deferred income taxes................................. -- (236)
Common stock issued................................... (3,367) --
--------- ---------
Total.............................................. 15,384 1,086
Less cash acquired................................. 774 59
--------- ---------
Cash used for acquisitions......................... $ 14,610 $ 1,027
========= =========
</TABLE>
The following represents the unaudited pro forma results of operations for the
three months ended March 31, 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.......................................... $ 33,883 $ 26,241
Income before income taxes............................ 7,708 4,890
Net income............................................ 4,625 2,345
Earnings per common and equivalent share.............. $ 0.23 $ 0.15
</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
$73,064,000 and $67,364,000 will be funded by trusts and approximately
$95,475,000 and $88,664,000 will be funded by insurance policies as of March
31, 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 March 31, 1997 and December 31, 1996, 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 March 31, 1997 and December 31, 1996, the amounts collected and
held in trusts, at cost, which approximates market, were approximately
$65,040,000 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 6.49% and 6.39% at March 31, 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 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 $27,207,000 and $35,000,000 at
March 31, 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.
During March 1996, the Company conveyed to SCI the 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 three
months ended March 31, 1996.
6. EQUITY OFFERING
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.
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.
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 death care 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 death care 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 death care
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 month periods ended March 31, 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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1996:
Total net revenues for the three months ended March 31, 1997 increased 39.7%
to $32,254,000 from $23,080,000 for the three months ended March 31, 1996.
The increase in net revenues reflects an $8,034,000 increase in net revenues
attributable to acquired operations and a $1,789,000, or 8.9% 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
59 funeral homes and three cemeteries acquired in 1996 and the partial quarter
results of the 19 funeral homes and three cemeteries acquired during the three
months ended March 31, 1997. Included in net revenues for the three months
ended March 31, 1997 are proceeds of $1,674,000 received in connection with
the 1997 acquisition of a cemetery in exchange for one of the Company's
funeral homes. Included in net revenues for the three months ended March 31,
1996 is $2,085,000 resulting 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 three months ended March 31, 1997 increased 35.4% to
$10,000,000 from $7,386,000 for the three months ended March 31, 1996. The
increase in gross profit is due primarily to a $2,265,000 increase
attributable to acquired operations and $648,000, or 10.4% increase from
existing operations. The increase in gross profit from existing operations
was attributable to increased revenues at both funeral home and cemetery
operations and operational efficiencies at funeral home operations.
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 March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three months
ended March 31, Change
(Dollars in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 12,734 $ 11,945 $ 789 6.6%
Acquired operations.................. 7,715 563 7,152 *
Disposed operations.................. -- 238 (238) *
------ ------ ------
Total funeral net revenues........ $ 20,449 $ 12,746 $ 7,703 60.4%
====== ====== ======
Gross profit:
Existing operations.................. $ 4,063 $ 3,700 $ 363 9.8%
Acquired operations.................. 2,092 152 1,940 *
Disposed operations.................. -- 99 (99) *
------ ------ ------
Total funeral gross profit........ $ 6,155 $ 3,951 $ 2,204 55.8%
====== ====== ======
- ------
*Not meaningful
Total funeral net revenues for the three months ended March 31, 1997 increased
60.4% to $20,449,000 from $12,746,000 for the prior year quarter, due
primarily to the full quarter results of the Company's 1996 acquisitions. The
increase in revenues from existing operations is primarily attributable to a
2.9% inflationary increase in the average revenue per regular funeral service
performed, along with a 2.2% increase in the number of regular funeral
services performed.
Total funeral gross profit for the three months ended March 31, 1997 increased
55.8% to $6,155,000 from $3,951,000 for the three months ended March 31, 1996.
Excluding the effects of the disposed funeral home operations, funeral gross
margin decreased to 30.1% from 30.8% 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 improved to 31.9%
from 31.0% for the prior year first quarter primarily as a result of revenue
and volume improvements 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 March 31, 1997 and 1996.
</TABLE>
<TABLE>
<CAPTION>
Three months
ended March 31, Change
(Dollars in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 9,194 $ 8,194 $ 1,000 12.2%
Acquired operations.................. 937 55 882 *
------ ------ ------
Total cemetery net revenues....... $ 10,131 $ 8,249 $ 1,882 22.8%
====== ====== ======
Gross profit:
Existing operations.................. $ 2,826 $ 2,541 $ 285 11.2%
Acquired operations.................. 269 (56) 325 *
------ ------ ------
Total cemetery gross profit....... $ 3,095 $ 2,485 $ 610 24.5%
====== ====== ======
- ------
*Not meaningful
Cemetery net revenues attributable to existing operations for the three months
ended March 31, 1997 increased 12.2% to $9,194,000 from $8,194,000 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 three cemeteries acquired in 1996 along with the partial quarter results
of the three cemeteries acquired in 1997. Cemetery gross margin at existing
operations decreased slightly to 30.7% from 31.0% in 1996 due primarily to
higher selling costs associated with the increase in preneed sales. Cemetery
gross margin for acquired operations were 28.7% for the three months ended
March 31, 1997. Gross margin for acquired operations have historically been
lower than gross margin for the Company's existing operations until they have
been operated by the Company long enough to fully implement the preneed
marketing programs to leverage off of the maintenance and fixed operating
costs which start being incurred immediately after acquisition.
General and administrative expenses for the three months ended March 31, 1997
increased $150,000, or 9.5% over the three months ended March 31, 1996. This
increase resulted primarily from increased personnel costs and professional
fees necessary to support a higher rate of growth. General and administrative
expenses as a percentage of net revenues, excluding the effects of the gains
on the aforementioned asset exchange and buyout, decreased to 5.7% in the
three months ended March 31, 1997 from 7.5% in the corresponding period in
1996, reflecting economies of scale realized by the Company as expenses are
spread over a larger revenue base.
Interest expense for the three months ended March 31, 1997 decreased $311,000,
or 28.5% from the three months ended March 31, 1996. The decrease was
primarily the result of lower debt levels as average indebtedness outstanding
for the 1997 quarter decreased to $46.0 million from $58.0 million for the
same period in 1996. Interest income of approximately $41,000 related to
temporary investment of the Company's February 1997 offering proceeds has been
netted against interest expense.
13
<PAGE>
The Company's effective tax rate for the three months ended March 31, 1997 was
40.0% compared to 52.5% for the comparable three months in 1996. The higher
rate in 1996 was due primarily to a one-time charge of $565,000 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. The Company expects the effective tax rate for income generated
in the remainder of 1997 will be approximately 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on cash flow from operations and third
party borrowings to finance its operations and on third party borrowings, the
issuance of notes payable and, in certain situations, the issuance of shares
of Common Stock to sellers of funeral homes and cemeteries to finance its
acquisition program. Recently acquired funeral homes typically generate
positive cash flow immediately following acquisition. In contrast, recently
acquired cemeteries typically generate negative cash flow during an
approximately three to nine month start-up period following the introduction
of an aggressive preneed cemetery sales effort, although in some cases this
period has exceeded nine months. This negative cash flow is typically offset
by positive cash flow from mature cemetery operations.
Cash and cash equivalents totaled $4.8 million at March 31, 1997, representing
a decrease of $7.9 million from December 31, 1996. For the three months ended
March 31, 1997, net cash flow from operating activities was approximately $5.0
million, cash used in investing activities totaled approximately $16.8 million
and cash provided by financing activities amounted to approximately $4.0
million. Significant components of cash flow generated from operating
activities include net income adjusted for non-cash items partially offset by
an increase in receivables of $3.8 million primarily attributable to a 31.5%
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 $0.4 million of capital expenditures related to
additions and improvements at several funeral home facilities, $0.8 million
related to the acquisition of professional vehicles and maintenance equipment
and $0.4 million for upgrades to computer systems and peripheral equipment.
Additionally, the Company utilized approximately $14.6 million of internal
funds, including funds drawn on the Credit Facility at December 31, 1996, to
consummate funeral home and cemetery acquisitions during the three months
ended March 31, 1997. Significant components of cash provided by financing
activities included $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,
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 March 31, 1997 totaled $42.2
million as compared to $49.7 million at December 31, 1996. The decrease was
principally attributable to 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 March 31, 1997
consisted of $27.2 million drawn under the Credit Facility and $15.0 million
owed under various notes payable to sellers of funeral homes and cemeteries.
As of March 31, 1997, the Credit Facility also supported letters of credit
totaling $3.2 million related to one of the Company's 1996 acquisitions. At
March 31, 1997, $69.6 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.
14
<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 6.49% and 6.39% at March 31,
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 all of the
Company's subsidiaries.
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 $80 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 1995, the Company filed a shelf registration
statement relating to 1,000,000 shares of Common Stock to be used to fund
acquisitions. As of March 31, 1997, approximately 712,000 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 12 to 18 months. 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 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.
SEASONALITY
Although the death care 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.
15
<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
March 31, 1997.
16
<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: May 15, 1997
EQUITY CORPORATION INTERNATIONAL
By: /s/ W. Cardon Gerner
------------------------
Senior Vice President
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
17
</TABLE>
<PAGE>
Exhibit 11.1
EQUITY CORPORATION INTERNATIONAL
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Computation of earnings per
common and equivalent share:
Net income attributable to common stock............... $4,490,509 $2,237,126
========== ==========
Weighted average number of
common shares outstanding........................... 20,089,372 14,849,260
Additional shares assuming
conversion of stock options......................... 303,171 222,897
Effect of restricted stock issued..................... 19,053 12,750
---------- ----------
Weighted average shares for primary earnings
per share........................................... 20,411,596 15,084,907
Incremental shares issuable using
quarter-end market price:
Conversion of stock options....................... 10,332 49,998
Effect of restricted stock issued................. 1,029 4,903
---------- ----------
Weighted average shares for fully diluted
earnings per share.................................. 20,422,957 15,139,808
========== ==========
Primary earnings per common and
equivalent share.................................... $ 0.22 $ 0.15
========== ==========
Fully diluted earnings per common and
equivalent share.................................... $ 0.22 $ 0.15
========== ==========
</TABLE>
1
<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 THREE MONTHS
ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,803
<SECURITIES> 0
<RECEIVABLES> 9,609
<ALLOWANCES> 1,730
<INVENTORY> 6,360
<CURRENT-ASSETS> 21,925
<PP&E> 74,918
<DEPRECIATION> 10,807
<TOTAL-ASSETS> 487,042
<CURRENT-LIABILITIES> 13,071
<BONDS> 41,700
0
0
<COMMON> 207
<OTHER-SE> 207,245
<TOTAL-LIABILITY-AND-EQUITY> 487,042
<SALES> 14,084
<TOTAL-REVENUES> 32,254
<CGS> 4,327
<TOTAL-COSTS> 22,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 280
<INTEREST-EXPENSE> 781
<INCOME-PRETAX> 7,484
<INCOME-TAX> 2,994
<INCOME-CONTINUING> 4,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,490
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
