- ------------------------------------------------------------------------------
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, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 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
August 7, 1998 was 21,783,197.
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<PAGE>
EQUITY CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet
June 30, 1998 and December 31, 1997......................3
Consolidated Statement of Operations
Three and Six Months Ended June 30, 1998 and 1997........4
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1998 and 1997..................5
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1998...........................6
Notes to the Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.........................12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders........21
Item 5. Other Information..........................................21
Item 6. Exhibits and Reports on Form 8-K...........................21
Signature...................................................................22
FORWARD-LOOKING-STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements contained herein other
than statements of historical fact are forward-looking statements. When
used in this Form 10-Q, the words "anticipate", "believe", "estimate"
and "expect" and similar expressions are intended to identify forward-
looking statements. Such statements reflect the Company's current views
with respect to future events and are subject to certain risks,
uncertainties and assumptions, including competition for and
availability of funeral home and cemetery acquisitions, the ability of
the Company to successfully implement its revenue enhancement and cost
containment programs at acquired funeral homes and cemeteries, the
Company's ability to retain key management personnel and to continue to
attract and retain skilled funeral home and cemetery management
personnel, state and federal regulations, changes in the death rate or
acceleration of the trend towards cremation, availability and cost of
capital and general industry and economic conditions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. The Company does
not intend to update these forward-looking 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) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 8,657 $ 8,039
Receivables, net of allowances..................... 21,030 15,412
Inventories........................................ 10,390 9,134
Other.............................................. 2,162 2,181
--------- --------
Total current assets............................ 42,239 34,766
Preneed funeral contracts............................. 270,410 235,891
Cemetery properties, at cost.......................... 120,614 117,087
Long-term receivables, net of allowances.............. 62,317 55,393
Property, plant and equipment, at cost (net).......... 120,698 94,684
Deferred charges and other assets..................... 39,287 24,284
Names and reputations (net)........................... 203,500 155,595
--------- --------
Total assets.................................... $ 859,065 $717,700
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 16,155 $ 14,077
Income taxes payable............................... 211 51
Current maturities of long-term debt............... 755 858
Deferred income taxes.............................. 2,427 2,114
--------- --------
Total current liabilities....................... 19,548 17,100
Deferred preneed funeral contract revenues............ 276,621 242,185
Convertible subordinated debentures................... 143,750 --
Long-term debt........................................ 107,502 171,303
Deferred cemetery costs............................... 28,012 27,224
Deferred income taxes................................. 38,256 31,106
Other liabilities..................................... 2,163 2,250
Commitments and contingencies.........................
Stockholders' equity:
Preferred stock.................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 21,420,717 and 21,119,362 shares issued
and outstanding in 1998 and 1997, respectively... 214 211
Capital in excess of par value..................... 198,641 191,902
Retained earnings.................................. 44,446 34,502
Accumulated other comprehensive income............. (88) (83)
--------- --------
Total stockholders' equity...................... 243,213 226,532
--------- --------
Total liabilities and stockholders' equity...... $ 859,065 $717,700
========= ========
</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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues:
Funeral................. $ 32,863 $ 19,211 $ 65,655 $ 39,661
Cemetery................ 13,787 11,701 28,196 21,831
Other................... 752 -- 752 1,674
-------- -------- -------- --------
47,402 30,912 94,603 63,166
-------- -------- -------- --------
Costs and expenses:
Funeral................. 24,480 14,504 47,269 28,798
Cemetery................ 9,532 8,073 19,426 15,109
Other................... 387 -- 387 924
-------- -------- -------- --------
34,399 22,577 67,082 44,831
-------- -------- -------- --------
Total gross profit......... 13,003 8,335 27,521 18,335
General and administrative
expenses................ 2,158 2,099 4,631 3,834
-------- -------- -------- --------
Operating income........... 10,845 6,236 22,890 14,501
Interest expense, net...... 3,465 1,143 6,588 1,924
-------- -------- -------- --------
Income before
income taxes............ 7,380 5,093 16,302 12,577
Provision for
income taxes............ 2,878 2,037 6,358 5,031
-------- -------- -------- --------
Net income................. $ 4,502 $ 3,056 $ 9,944 $ 7,546
======== ======== ======== ========
Earnings per share:
Basic................ $ 0.21 $ 0.15 $ 0.47 $ 0.37
======== ======== ======== ========
Diluted.............. $ 0.21 $ 0.15 $ 0.46 $ 0.36
======== ======== ======== ========
Weighted average number
of common and equivalent
shares outstanding:
Basic................ 21,372 20,654 21,279 20,373
======== ======== ======== ========
Diluted.............. 21,785 21,028 25,303 20,721
======== ======== ======== ========
</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) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 9,944 $ 7,546
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................... 6,448 3,523
Provision for bad debts and contract
cancellations.................................. 4,189 2,558
Gain on asset dispositions...................... (410) (787)
Deferred income taxes........................... 913 594
Changes in assets and liabilities, net of effects
from acquisitions:
Receivables...................................... (13,148) (7,550)
Inventories...................................... (214) (157)
Other current assets............................. 57 (19)
Other long-term assets........................... (1,080) (898)
Accounts payable and accrued liabilities......... 599 (882)
Income taxes payable............................. 159 (1,411)
Preneed funeral contracts and associated
deferred revenues............................... (492) (163)
-------- --------
Net cash provided by operating activities..... 6,965 2,354
-------- --------
Cash flows from investing activities:
Capital expenditures............................... (9,775) (5,883)
Proceeds from asset dispositions................... 910 74
Acquisitions, net of cash acquired................. (802) (16,284)
Other.............................................. -- 52
-------- --------
Net cash used in investing activities......... (9,667) (22,041)
-------- --------
Cash flows from financing activities:
Issuance of convertible debentures, net............ 139,134 --
Net proceeds from issuance of Common Stock......... 615 22,206
Borrowings on long-term debt....................... 9,352 11,996
Payments on long-term debt......................... (145,781) (20,324)
-------- --------
Net cash provided by financing activities..... 3,320 13,878
-------- --------
Increase (decrease) in cash and cash equivalents...... 618 (5,809)
Cash and cash equivalents at beginning of period...... 8,039 12,654
-------- --------
Cash and cash equivalents at end of period............ $ 8,657 $ 6,845
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
EQUITY CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER
----------------- EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDERS'
(In thousands,except share data) SHARES AMOUNT PAR VALUE EARNINGS INCOME EQUITY
---------- ------ --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997..... 21,119,362 $ 211 $ 191,902 $ 34,502 $ (83) $ 226,532
Comprehensive income:
Net income................ -- -- -- 9,944 -- 9,944
Foreign currency
translation adjustment,
net of taxes............. -- -- -- -- (5) (5)
-------- --------- ----------
Total.................. -- -- -- 9,944 (5) 9,939
-------- --------- ----------
Common stock issued:
Acquisitions.............. 266,211 3 6,124 -- -- 6,127
Option exercises.......... 21,129 -- 294 -- -- 294
Other..................... 14,015 -- 321 321
---------- ------ --------- -------- --------- ----------
Balance, June 30, 1998........ 21,420,717 $ 214 $ 198,641 $ 44,446 $ (88) $ 243,213
========== ====== ========= ======== ========= ==========
The Company's comprehensive income for the six months ended June 30, 1997 of $7,554 consisted of
net income of $7,546 and a foreign currency translation adjustment of $8.
</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, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
periods presented have been included. All dollar amounts are reported in
thousands unless otherwise indicated. Operating results for 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, 1997. 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, 1997.
2. ACQUISITIONS
The following table is a summary of acquisitions made during the six months
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------
<S> <C> <C>
Number acquired:
Funeral homes........ 46 45
Cemeteries........... 5 5
Purchase price.......... $83,358 $79,889
</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 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 $531 and $837
for noncompetition agreements that were prepaid to individuals related to
businesses acquired in 1998 and 1997, respectively. The acquisitions have been
accounted for as purchases and their operating results have been included in
the Consolidated Statement of Operations 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) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets........................................ $ 3,486 $ 2,935
Preneed funeral contracts............................. 24,773 34,598
Long-term receivables, net of allowances.............. 2,127 9,307
Cemetery properties................................... 3,958 5,908
Property, plant and equipment......................... 20,174 14,349
Deferred charges and other assets..................... 9,629 7,990
Names and reputations................................. 50,660 45,435
Current liabilities................................... (453) (827)
Deferred preneed funeral contract revenues............ (25,332) (35,026)
Long-term debt........................................ (72,520) (57,595)
Deferred cemetery costs............................... (2,081) (5,018)
Deferred income taxes................................. (6,511) --
Other liabilities..................................... -- (38)
Common stock issued................................... (6,127) (4,661)
--------- ---------
Total.............................................. 1,783 17,357
Less cash acquired................................. 981 1,073
--------- ---------
Cash used for acquisitions......................... $ 802 $ 16,284
========= =========
</TABLE>
The following represents the unaudited pro forma results of operations for the
six months ended June 30, 1998 and 1997, assuming the above noted acquisitions
and exchange had occurred as of January 1, 1997:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net revenues.......................................... $ 100,686 $ 85,367
Net income............................................ 10,077 8,226
Earnings per common and equivalent share:
Basic............................................... $ 0.47 $ 0.40
========= =========
Diluted............................................. $ 0.46 $ 0.39
========= =========
</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
$119,444 and $104,523 will be funded by trusts and approximately $150,966 and
$131,368 will be funded by insurance policies as of June 30, 1998 and December
31, 1997, respectively. Accumulated earnings from trust funds and increasing
insurance benefits have been included to the extent that they have accrued
through June 30, 1998 and December 31, 1997, respectively. The cumulative
total has been reduced by allowable cash withdrawals for trust earning
distributions and amounts retained by the Company pursuant to various state
laws. At June 30, 1998 and December 31, 1997, the amounts collected and held
in trusts, at cost, which approximates market, were approximately $107,141 and
$93,900, 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 a revolving credit agreement with a group of banks that
provides for a $225,000 line of credit to be used for acquisition financing
and general corporate purposes. The Tranche A commitments under the Credit
Facility provide for $150,000 of borrowings outstanding at any one time
expiring September 2, 2002. The Tranche B commitments under the Credit
Facility provide for $75,000 of borrowings outstanding at any one time
expiring September 1, 1999, subject to annual renewal options. Borrowings
under the Credit Facility bear interest, at the Company's option, at either
(i) the prime rate or (ii) the London Interbank Offered Rate plus an
applicable margin, depending on the Company's Leverage Ratio, as defined. In
addition, the Company pays a commitment fee on unused funds. The weighted
average interest rates on amounts borrowed under the Credit Facility were
6.70% and 6.83% at June 30, 1998 and December 31, 1997, respectively. The
Credit Facility contains customary restrictive covenants requiring the Company
to maintain certain financial ratios, is guaranteed by substantially all of
the Company's subsidiaries and is collateralized by a pledge of stock of
certain 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 $95,500 and $156,700 at June 30, 1998 and December 31, 1997,
respectively.
In February 1998, the Company completed the private placement of $143,750
aggregate principal amount of 4.5% convertible subordinated debentures due
2004 (the "Debentures"). The Debentures mature on December 31, 2004, are
convertible into shares of the Company's Common Stock at a conversion price of
$27.09 per share and may not be redeemed by the Company prior to February 26,
2001. The net proceeds to the Company from this private placement were used to
pay down the Credit Facility. The selling commissions and related expenses
have been deferred and are being amortized ratably over the term of the
Debentures.
9
<PAGE>
5. DISPOSITIONS
In April 1998, one of the Company's funeral home facilities located in Alabama
was destroyed by a tornado. The Company received approximately $752 in
insurance proceeds from this loss and recorded a gain due to the involuntary
conversion of $365 which represents the difference between the proceeds
received and the net book value of the destroyed funeral home facility.
During January 1997, the Company acquired one cemetery from Service
Corporation International ("SCI"), a former significant stockholder of the
Company, 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,
including $250 in cash, and recognized a gain of approximately $750.
6. EARNINGS PER SHARE
The Company reports earnings per share in accordance with the provisions of
SFAS No. 128, "Earnings per Share". The prior year period has been restated to
conform to the new requirements. A reconciliation of the numerators and
denominators of the basic and diluted per-share computations for net income
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(In thousands, except per share data) 1998 1997 1998 1997
------------------ ----------------
<S> <C> <C> <C> <C>
Income (numerator)
Net income (Basic)....................... $ 4,502 $ 3,056 $ 9,944 $ 7,546
Effect of assumed conversion of
convertible debt....................... -- -- 1,574 --
------- ------- ------- ------
Net income assuming conversion (Diluted). $ 4,502 $ 3,056 $11,518 $ 7,546
======= ======= ======= =======
Shares (denominator)
Shares - basic........................... 21,372 20,654 21,279 20,373
Options.................................. 390 352 361 328
Convertible debt......................... -- -- 3,640 --
Other.................................... 23 22 23 20
------- ------- ------- -------
Shares - diluted......................... 21,785 21,028 25,303 20,721
======= ======= ======= =======
Earnings per share:
Basic.................................... $ 0.21 $ 0.15 $ 0.47 $ 0.37
======= ======= ======= =======
Diluted.................................. $ 0.21 $ 0.15 $ 0.46 $ 0.36
======= ======= ======= =======
</TABLE>
The Debentures issued in February 1998, convertible into 5,306,386 shares of
Common Stock (Note 4), were excluded from the calculation of diluted earnings
per share for the three months ended June 30, 1998, because their effect on
earnings per share would have been antidilutive. In addition, a $2,200
principal amount 5.25% convertible subordinated note due January 29, 2008,
convertible into 74,074 shares of Common Stock beginning January 29, 2000, was
excluded from the calculation of diluted earnings per share for the three and
six months ended June 30, 1998 because its effect on earnings per share would
have been antidilutive for both periods.
10
<PAGE>
7. RECENT FASB PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income", effective January
1, 1998. Currently, the Company's components of comprehensive income consist
of net income and the foreign currency translation adjustment related to the
operations of the Company's Canadian subsidiaries. The Company has elected to
report comprehensive income within the statement of stockholders' equity as
permitted by SFAS No. 130.
8. SUBSEQUENT EVENT
On August 6, 1998, the Company announced that it has entered into an Agreement
and Plan of Merger (the "Merger Agreement") with SCI to combine the two
companies. Pursuant to and subject to the terms of the Merger Agreement, each
of the issued and outstanding shares of the Company's Common Stock will be
converted in the merger into the right to receive the number of shares of SCI
common stock, par value $1.00 per share, ("SCI Common Stock") determined by
dividing $27.00 by the Average SCI Stock Price (as defined below); provided,
however, that (i) in the event the Average SCI Stock Price is greater than
$41.50, the Company's Common Stock shall be converted into the right to
receive the number of shares of SCI Common Stock determined by dividing $27.00
by $41.50 and (ii) in the event the Average SCI Stock Price is less than
$34.00, the Company's Common Stock shall be converted into the right to
receive the number of shares of SCI Common Stock determined by dividing $27.00
by $34.00.
The "Average SCI Stock Price" means the average of the Daily Per Share Prices
(as defined below) for the ten consecutive trading days ending on the third
trading day prior to the closing of the merger. The "Daily Per Share Price"
for any trading day means the weighted average of the per share selling prices
on the New York Stock Exchange, Inc. (the "NYSE") of SCI Common Stock (as
reported in the NYSE Composite Transactions) for that day.
The consummation of the merger, anticipated in the fourth quarter of 1998, is
subject to the approval of holders of a majority of the shares of the
Company's Common Stock outstanding and regulatory approvals pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
11
<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 that 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 and six month periods ended June 30, 1998 and 1997. 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. All dollar amounts are
reported in thousands unless otherwise indicated.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997:
Total net revenues for the three months ended June 30, 1998 increased 53.3% to
$47,402 from $30,912 for the three months ended June 30, 1997. The increase
in net revenues reflects a $15,195 increase in net revenues attributable to
acquired operations and a $543, or 1.8% increase in net revenues from existing
operations. The increase in net revenues from existing operations is due to
increases in average funeral revenues and improvements in merchandising mix,
offset in part by a decrease in preneed sales at the Company's cemetery
operations and lower funeral volumes. Included in net revenues for the three
months ended June 30, 1998 are insurance proceeds of $752 received on a
funeral home facility which was destroyed by a tornado in the second quarter
of 1998.
Gross profit for the three months ended June 30, 1998 increased 56.0% to
$13,003 from $8,335 for the three months ended June 30, 1997. The increase in
gross profit is due primarily to a $3,437 increase attributable to acquired
operations and an $866, or 10.8% increase from existing operations. The
increase in gross profit from existing operations was due primarily to
improvements in product/services mix at both funeral home and cemetery
operations along with improvements in operational efficiencies at the
Company's funeral home operations. Included in gross profit for the current
year quarter is a $365 gain recorded in connection with the loss of the
funeral home facility noted above.
12
<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, 1998 and 1997.
<TABLE>
<CAPTION>
Three months
ended June 30, Change
(Dollars in thousands) 1998 1997 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 19,836 $ 18,323 $ 1,513 8.3%
Acquired operations.................. 13,027 888 12,139 *
------ ------ ------
Total funeral net revenues........ $ 32,863 $ 19,211 $ 13,652 71.1%
====== ====== ======
Gross profit:
Existing operations.................. $ 5,512 $ 4,336 $ 1,176 27.1%
Acquired operations.................. 2,871 371 2,500 *
------ ------ ------
Total funeral gross profit........ $ 8,383 $ 4,707 $ 3,676 78.1%
====== ====== ======
- ------
*Not meaningful
Total funeral net revenues for the three months ended June 30, 1998 increased
71.1% to $32,863 from $19,211 for the prior year quarter, due primarily to a
$12,139 increase attributable to acquired operations. The increase in revenues
from existing operations is primarily attributable to an increase in the
average revenue per regular funeral service performed and better than expected
sales of ancillary funeral products, offset in part by a slight decrease in
the number of funeral services performed.
Total funeral gross profit for the three months ended June 30, 1998 increased
78.1% to $8,383 from $4,707 for the three months ended June 30, 1997. Funeral
gross margin improved to 25.5% from 24.5% due primarily to margin improvements
achieved from the Company's existing operations. Funeral gross margin at
existing operations improved to 27.8% from 23.7% for the prior year quarter
due primarily to merchandising and cost containment programs initiated by the
Company in late 1997. Funeral gross margin for acquired operations was 22.0%
for the three months ended June 30, 1998. 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
significant margin improvement is realized at an acquired operation as a
result of new policies and procedures implemented by the Company.
13
<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, 1998 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Three months
ended June 30, Change
(Dollars in thousands) 1998 1997 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 10,603 $ 11,573 $ (970) (8.4)%
Acquired operations.................. 3,184 128 3,056 *
------ ------ ------
Total cemetery net revenues....... $ 13,787 $ 11,701 $ 2,086 17.8%
====== ====== ======
Gross profit:
Existing operations.................. $ 3,337 $ 3,647 $ (310) (8.5)%
Acquired operations.................. 918 (19) 937 *
------ ------ ------
Total cemetery gross profit....... $ 4,255 $ 3,628 $ 627 17.3%
====== ====== ======
- ------
*Not meaningful
Total cemetery net revenues for the three months ended June 30, 1998 increased
17.8% to $13,787 from $11,701 for the prior year quarter, due primarily to a
$3,056 increase from acquired operations. Cemetery net revenues attributable
to existing operations for the three months ended June 30, 1998 decreased 8.4%
to $10,603 from $11,573 for the prior year quarter, due primarily to a
decrease in preneed sales and lower trust investment income.
Cemetery gross margin at existing operations was 31.5% for both comparable
quarters due primarily to a better product/services mix, offset by increases
in maintenance costs. Cemetery gross margin for acquired operations improved
to 28.8% for the three months ended June 30, 1998, reflecting the success of
programs initiated by management to significantly reduce the maturation cycle
of new acquisitions. 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.
14
<PAGE>
General and administrative expenses for the three months ended June 30, 1998
increased $59, or 2.8% over the three months ended June 30, 1997. This
increase resulted primarily from increased personnel costs associated with the
Company's continued growth, offset in part by decreases in travel and
insurance expenses. General and administrative expenses as a percentage of net
revenues, excluding the effects of the proceeds received in connection with
the loss of the funeral home facility noted above, decreased to 4.6% in the
three months ended June 30, 1998 from 6.8% in the comparable prior year
quarter, reflecting increased economies of scale as expenses are spread over a
larger revenue base.
Interest expense for the three months ended June 30, 1998 increased to $3,465
from $1,143 for the three months ended June 30, 1997, due primarily to
significantly higher average debt levels. Average indebtedness outstanding for
the quarter ended June 30, 1998 increased to $238.4 million from $70.6 million
for the 1997 second quarter primarily as a result of acquisition activity
coupled with the paydown of approximately $13.0 million of the Credit Facility
from proceeds received in connection with an equity offering in the first
quarter of 1997.
The Company's effective tax rate for the three months ended June 30, 1998 was
39.0% compared to 40.0% for the second quarter of 1997. The Company expects
the effective tax rate for income generated in the remainder of 1998 will be
approximately 39.0%.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997:
Total net revenues for the six months ended June 30, 1998 increased 49.8% to
$94,603 from $63,166 for the six months ended June 30, 1997. The increase in
net revenues reflects a $31,173 increase in net revenues attributable to
acquired operations and a $1,186, or 2.1% increase in net revenues from
existing operations. The substantial increase in net revenues from acquired
operations is due primarily to the full period results of the Company's 1997
acquisitions and the partial period results of the 46 funeral homes and five
cemeteries acquired during the six months ended June 30, 1998. The increase in
net revenues from existing operations is due to increases in average revenue
per regular funeral service performed, offset in part by lower funeral
volumes. Included in net revenues for the six months ended June 30, 1998 are
insurance proceeds of $752 received in connection with the loss of the funeral
home facility noted above. Included in net revenues for the six months ended
June 30, 1997 are proceeds of $1,674 received in connection with the 1997
acquisition of a cemetery in exchange for one of the Company's funeral homes.
Gross profit for the six months ended June 30, 1998 increased 50.1% to $27,521
from $18,335 for the six months ended June 30, 1997. The increase in gross
profit is due primarily to an $8,261 increase attributable to acquired
operations and $1,310, or 8.0% increase from existing operations. The
increase in gross profit from existing operations was attributable to the
increase in funeral revenues noted above, along with a better product/services
mix and improvements in operational efficiencies at the Company's funeral home
operations. Included in gross profit for the six months ended June 30, 1998 is
a $365 gain recorded in connection with the loss of the funeral home facility
noted above. Included in gross profit for the six months ended June 30, 1997
is a $750 gain recorded in connection with the exchange noted above.
15
<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, 1998 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30, Change
(Dollars in thousands) 1998 1997 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 37,083 $ 35,772 $ 1,311 3.7%
Acquired operations.................. 28,572 3,889 24,683 *
------ ------ ------
Total funeral net revenues........ $ 65,655 $ 39,661 $ 25,994 65.5%
====== ====== ======
Gross profit:
Existing operations.................. $ 11,247 $ 9,971 $ 1,276 12.8%
Acquired operations.................. 7,139 892 6,247 *
------ ------ ------
Total funeral gross profit........ $ 18,386 $ 10,863 $ 7,523 69.3%
====== ====== ======
- ------
*Not meaningful
Total funeral net revenues for the six months ended June 30, 1998 increased
65.5% to $65,655 from $39,661 for the comparable prior year period, due
primarily to a $24,683 increase from acquired operations. The increase in
revenues from existing operations is primarily attributable to an increase in
the average revenue per regular funeral service performed along with
improvements in merchandising mix, offset in part by a decrease in the number
of funeral services performed.
Total funeral gross profit for the six months ended June 30, 1998 increased
69.3% to $18,386 from $10,863 for the six months ended June 30, 1997. Funeral
gross margin improved to 28.0% from 27.4% due to margin improvements achieved
from both the Company's existing and acquired operations. Funeral gross margin
at existing operations improved to 30.3% from 27.9% for the comparable prior
year period due primarily to merchandising and cost containment programs
initiated by the Company in late 1997. The improvement in funeral gross
margin at acquired operations to 25.0% from 22.9% in the comparable prior year
period was largely the result of the implementation of new merchandising
programs by the Company shortly after acquisition.
16
<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, 1998 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30, Change
(Dollars in thousands) 1998 1997 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Existing operations.................. $ 20,603 $ 20,728 $ (125) (0.6)%
Acquired operations.................. 7,593 1,103 6,490 *
------ ------ ------
Total cemetery net revenues....... $ 28,196 $ 21,831 $ 6,365 29.2%
====== ====== ======
Gross profit:
Existing operations.................. $ 6,516 $ 6,482 $ 34 0.5%
Acquired operations.................. 2,254 240 2,014 *
------ ------ ------
Total cemetery gross profit....... $ 8,770 $ 6,722 $ 2,048 30.5%
====== ====== ======
- ------
*Not meaningful
Total cemetery net revenues for the six months ended June 30, 1998 increased
29.2% to $28,196 from $21,831 for the comparable prior year period, due
primarily to a $6,490 increase attributable to acquired operations. Cemetery
net revenues attributable to existing operations for the six months ended June
30, 1998 decreased 0.6% to $20,603 from $20,728 for the same period in 1997,
due primarily to lower investment income, offset in part by a slight increase
in preneed sales.
Cemetery gross margin improved to 31.1% from 30.8% for the prior year period
due to margin improvements at both existing and acquired operations. Cemetery
gross margin at existing operations increased to 31.6% from 31.3% in 1997 due
primarily to a better product/services mix, partially offset by increases in
maintenance costs. Cemetery gross margin for acquired operations improved to
29.7% from 21.8% for the six months ended June 30, 1997, reflecting the
success of programs initiated by management to significantly reduce the
maturation cycle of new acquisitions as discussed above.
17
<PAGE>
General and administrative expenses for the six months ended June 30, 1998
increased $797, or 20.8% over the six months ended June 30, 1997. This
increase resulted primarily from increased personnel costs associated with the
Company's continued growth, offset in part by lower travel costs in the second
quarter of 1998. General and administrative expenses as a percentage of net
revenues, excluding the effects of the nonrecurring items noted above,
decreased to 4.9% in the six months ended June 30, 1998 from 6.2% for the
comparable prior year period, reflecting increased economies of scale as
expenses are spread over a larger revenue base.
Interest expense for the six months ended June 30, 1998 increased to $6,588
from $1,924 for the six months ended June 30, 1997, due primarily to
significantly higher average debt levels. Average indebtedness outstanding for
the first six months of 1998 increased to $212.1 million from $74.4 million
for the same period in 1997 primarily as a result of acquisition activity
coupled with the paydown of approximately $13.0 million of the Credit Facility
from proceeds received in connection with an equity offering in the first
quarter of 1997.
The Company's effective tax rate for the six months ended June 30, 1998 was
39.0% compared to 40.0% for the first six months of 1997. The Company expects
the effective tax rate for income generated in the remainder of 1998 will be
approximately 39.0%.
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 $8.7 million at June 30, 1998, representing
an increase of $0.7 million from December 31, 1997. For the six months ended
June 30, 1998, cash provided from operating activities was approximately $7.0
million, cash used in investing activities totaled approximately $9.7 million
and cash provided from financing activities amounted to approximately $3.3
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 $13.1 million primarily attributable to 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 $9.8 million related to, among other things, additions
and improvements at several funeral home facilities, the acquisition of
professional vehicles and maintenance equipment and upgrades to computer
systems and peripheral equipment. Significant components of cash provided by
financing activities included (i) $139.1 million of net proceeds received in
February 1998 in connection with the issuance of the Company's convertible
subordinated debentures described below and the use of these proceeds to pay
down the Company's Credit Facility; and (ii) borrowings of approximately $9.4
million which were used to extinguish certain seller financed notes and for
general corporate purposes.
18
<PAGE>
Long-term debt, including current maturities, at June 30, 1998 totaled $252.0
million as compared to $172.2 million at December 31, 1997. This increase was
principally attributable to acquisition activity. Long-term debt at June 30,
1998 consisted of $143.8 million of convertible subordinated debentures, $95.5
million drawn under the Credit Facility and $12.7 million owed under various
notes payable to sellers of funeral homes and cemeteries.
In February 1998, the Company completed an underwritten private placement of
$143.8 million aggregate principal amount of 4.5% convertible subordinated
debentures (the "Debentures"). The Debentures mature on December 31, 2004, are
convertible into shares of the Company's Common Stock at a conversion price of
$27.09 per share, and may not be redeemed by the Company prior to February 26,
2001. The net proceeds from the private placement were used to pay down the
Credit Facility. The selling commissions and related expenses have been
deferred and are being amortized ratably over the term of the Debentures.
Borrowings under the Credit Facility bear interest, at the Company's option,
at either (i) the prime rate or (ii) the London Interbank Offered Rate plus an
applicable margin, depending on the Company's Leverage Ratio, as defined. The
weighted average interest rates on amounts borrowed under the Credit Facility
were 6.70% and 6.83% at June 30, 1998 and December 31, 1997, respectively. In
addition, the Company pays commitment fees on unused funds depending on the
Company's Leverage Ratio. The Tranche A commitments under the Credit Facility
provide for $150 million of borrowings outstanding at any one time expiring
September 2, 2002. The Tranche B commitments under the Credit Facility provide
for $75 million of borrowings outstanding at any one time expiring September
1, 1999, subject to annual renewal options. The Credit Facility 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 and is collateralized by a
pledge of the stock of certain of the Company's subsidiaries. At June 30,
1998, $129.5 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.
The Company currently expects to acquire funeral homes and cemeteries for
purchase prices aggregating approximately $150 to $160 million in 1998. 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 April 1998, the Company
filed, and had declared effective, a "shelf" registration statement for the
issuance of up to 2,500,000 shares of Common Stock, including shares then
available under the Company's former acquisition shelf registration statement,
to be used in connection with future acquisitions. The Company anticipates
making routine capital expenditures of approximately $11 million in 1998. In
addition, the Company anticipates spending approximately $20 million over the
next 12 to 18 months for major construction and development projects,
including the construction of six new funeral homes, three of which will be
built on existing Company-owned cemetery property.
19
<PAGE>
Management believes that cash flow from operations and the borrowing capacity
available under the Credit Facility as a result of the repayment of such
indebtedness with the net proceeds of the Debentures should be sufficient to
meet its anticipated capital expenditures and other operating requirements and
to substantially fund acquisitions through 1998. The Company continually
evaluates alternatives, including additional debt or equity financing, to
ensure adequate funding for its operations, including planned capital
expenditures and projected acquisitions. However, because future cash flows
and the availability of financing at terms favorable to the Company are
subject to a number of variables, such as the number, size and rate of
acquisitions made by the Company, there can be no assurance that the Company's
capital resources will be sufficient to fund planned future levels of capital
expenditures and acquisitions. Additional debt and equity financings may be
required in connection with future acquisitions. The availability of these
capital sources will depend on prevailing market conditions and interest rates
and the then-existing financial condition of the Company.
SEASONALITY
Although the deathcare business is relatively stable and fairly predictable,
the Company's results of operations may periodically fluctuate due to limited
seasonality. 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 during the last three years.
RECENT FASB PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income", effective January
1, 1998. Currently, the Company's components of comprehensive income consist
of net income and the foreign currency translation adjustment related to the
operations of the Company's Canadian subsidiaries. The Company has elected to
report comprehensive income within the statement of stockholders' equity as
permitted by SFAS No. 130.
SUBSEQUENT EVENT
On August 6, 1998, the Company announced that it has entered into an Agreement
and Plan of Merger (the "Merger Agreement") with SCI to combine the two
companies. Pursuant to and subject to the terms of the Merger Agreement, each
of the issued and outstanding shares of the Company's Common Stock will be
converted in the merger into the right to receive the number of shares of SCI
common stock, par value $1.00 per share, ("SCI Common Stock") determined by
dividing $27.00 by the Average SCI Stock Price (as defined below); provided,
however, that (i) in the event the Average SCI Stock Price is greater than
$41.50, the Company's Common Stock shall be converted into the right to
receive the number of shares of SCI Common Stock determined by dividing $27.00
by $41.50 and (ii) in the event the Average SCI Stock Price is less than
$34.00, the Company's Common Stock shall be converted into the right to
receive the number of shares of SCI Common Stock determined by dividing $27.00
by $34.00.
The "Average SCI Stock Price" means the average of the Daily Per Share Prices
(as defined below) for the ten consecutive trading days ending on the third
trading day prior to the closing of the merger. The "Daily Per Share Price"
for any trading day means the weighted average of the per share selling prices
on the New York Stock Exchange, Inc. (the "NYSE") of SCI Common Stock (as
reported in the NYSE Composite Transactions) for that day.
The consummation of the merger, anticipated in the fourth quarter of 1998, is
subject to the approval of holders of a majority of the shares of the
Company's Common Stock outstanding and regulatory approvals pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Stockholders was held on May 20, 1998. Matters
presented to the stockholders for voting were the election of two directors, a
proposal to adopt the Equity Corporation International 1998 Long-Term
Incentive Plan (the "Plan") and the ratification of the appointment of the
Company's independent auditors for 1998. Each nominee for director received
18,853,544 votes for election and 24,199 votes were withheld. Shares voted for
adoption of the Plan totaled 11,506,355, with 7,339,430 shares voting against
adoption of the Plan and 30,158 shares abstaining. In connection with the
appointment of the independent auditors, 18,864,203 shares voted for
ratification, 4,503 shares voted against and 9,037 shares abstained.
ITEM 5. OTHER INFORMATION
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
Any proposal of stockholders to be included in the Company's proxy statement
relating to the Company's 1999 Annual Meeting of Stockholders pursuant to Rule
14a-8 under the Exchange Act must be received by the Company at its principal
executive offices no later than December 23, 1998; such proposal must also
comply with the Company's Bylaws and Rule 14a-8 if the proposal is to be
considered for inclusion in the Company's proxy statement for such meeting.
The Company must receive notice of any stockholder proposal to be brought
before the meeting outside the process of Rule 14a-8 at the Company's
principal executive offices not less than 90 days nor more than 180 days prior
to the meeting; provided, if the Company gives notice or prior public
disclosure of the date of the annual meeting less than 50 days before the
meeting, such stockholder notice must be received not later than the close of
business on the seventh day following the date on which the Company's notice
of the date of the annual meeting was mailed or public disclosure made. The
form of such stockholder notice must also comply with the Company's Bylaws.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1(1,2)- Equity Corporation International 1998 Long-Term Incentive
Plan, dated May 20, 1998 (filed as Exhibit A to the Company's
Proxy Statement on Schedule 14A, filed with the Securities and
Exchange Commission on April 22, 1998).
10.2(2) - Split-dollar agreement between the Company and James P.
Hunter, III.
10.3(2) - Split-dollar agreement between the Company and James P.
Hunter, III.
27 - Financial Data Schedule
(1) Incorporated herein by reference to the indicated filing.
(2) Management contract or compensatory plan.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1998
EQUITY CORPORATION INTERNATIONAL
By: /s/ W. Cardon Gerner
------------------------
Senior Vice President
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
22
</TABLE>
Exhibit 10.2
SPLIT-DOLLAR AGREEMENT
THIS AGREEMENT, made and entered into effective the date set forth below,
by and among EQUITY CORPORATION INTERNATIONAL, a Delaware corporation,
(hereinafter referred to as the "Corporation"), and JAMES P. HUNTER, III,
an individual residing in the State of Texas (hereinafter referred to as
the "Employee"), and J. PATRICK DOHERTY, an individual residing in the
State of Texas, Trustee of the James P. Hunter, III Family Trust, pursuant
to a certain Irrevocable Trust Agreement dated August 27, 1992 (hereinafter
referred to as the "Owner"),
WITNESSETH:
WHEREAS, the Employee is employed by the Corporation; and
WHEREAS, Owner is the owner of a certain policy of life insurance insuring
the life of Employee (hereinafter referred to as the "Policy"), which is
described in Exhibit A attached hereto and by this reference made a part
hereof, and which was issued by Great Southern Life Insurance Company
(hereinafter referred to as the "Insurer"); and
WHEREAS, the Corporation is willing to pay the premiums due on the Policy
as an additional employment benefit for the Employee, on the terms and
conditions hereinafter set forth; and
WHEREAS, the Corporation wishes to have the Policy collaterally assigned to
it by Owner in order to secure the repayment of the amounts which it will
pay toward the premiums on the Policy; and
WHEREAS, the parties intend that, by virtue of such collateral assignment
the Corporation shall receive only the right to be repaid its premium
payments hereunder, with the Owner retaining all other ownership rights in
the Policy as specified herein;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
contained herein, the parties hereto agree as follows:
1. The Owner has acquired the Policy from the Insurer in the total face
amount of $500,000.00. The parties hereto shall take any further action
which may be necessary to cause the Policy to conform to the provisions of
this Agreement. The parties hereto agree that the Policy shall be subject
to the terms and conditions of this Agreement and of the collateral
assignment filed with the Insurer relating to the Policy.
2. a. The Owner shall be the sole and absolute owner of the Policy, and
may exercise all ownership rights granted to the owner thereof by the terms
of the Policy, except as may otherwise be provided herein.
b. It is the intention of the parties to this Agreement and the
collateral assignment executed by the Owner to the Corporation in
connection herewith that the Owner shall retain all rights which the Policy
grants to the owner thereof, except the right of the Corporation to be
repaid the amounts which it pays toward the premiums on the Policy.
Specifically, but without limitation, the Corporation shall neither have
nor exercise any right as collateral assignee of the Policy which could in
any way defeat or impair the Owner's right to receive the cash surrender
value or the death proceeds of the Policy, in excess of the amount due the
Corporation hereunder. All provisions of this Agreement and of such
collateral assignment shall be construed so as to carry out such intention.
3. On or before the due date of each Policy premium, or within the grace
period provided therein, the Corporation shall pay the full amount of the
premium to the Insurer, and shall, upon request, promptly furnish the
Employee evidence of timely payment of such premium. The amount of annual
premiums paid by the Corporation during the six (6) years after the
effective date of this Agreement shall be no less than $54,000.00 per year.
The Corporation shall annually furnish the Employee a statement of the
amount of income reportable by the Employee for federal and state income
tax purposes, as a result of its payment of such premium.
4. To secure the repayment to the Corporation of the amount of the
premiums under the Policy, the Owner has assigned the Policy to the
Corporation as collateral, under the form used by the Insurer for such
assignments, which collateral assignment specifically limits the right of
the Corporation thereunder to the repayment of its payments toward premiums
on the Policy hereunder. Such repayment shall be made from the cash
surrender value of the Policy (as defined therein) if this Agreement is
terminated or if the Owner surrenders or cancels the Policy or from the
death proceeds of the Policy if the Employee should die while the Policy
and Agreement remain in force. In no event shall the Corporation have any
right to borrow against the Policy except for the purpose of paying
premiums on the Policy following six (6) years after the effective date of
this Agreement. Such collateral assignment shall not be terminated,
altered or amended by the Owner, without the express written consent of the
Corporation. The parties hereto agree to take all action necessary to
cause such collateral assignment to conform to the provisions of this
Agreement.
5. a. The Owner shall take no action with respect to the Policy which
would in any way compromise or jeopardize the Corporation's right to be
repaid the amounts it paid toward premiums on the Policy, without the
express written consent of the Corporation.
b. The Owner may pledge or assign the Policy, subject to the terms and
conditions of this Agreement, in order to secure a loan from the Insurer or
from a third party, in an amount which shall not exceed the cash surrender
value of the Policy (as defined therein) as of the date to which premiums
have been paid, less the amount of the premiums on the Policy paid by the
Corporation hereunder. Interest charges on such loan shall be the
responsibility of and be paid by the Owner.
c. The Owner shall have the sole right to surrender or cancel the
Policy. If the Policy is surrendered or cancelled, the Corporation shall
have the unqualified right to receive a portion of the cash surrender value
equal to the total amount of the premiums paid by it hereunder. Upon
receipt of the cash surrender value, the Owner shall pay to the Corporation
the portion of such cash surrender value to which it is entitled hereunder,
and shall retain the balance, if any.
6. a. Upon the death of the Employee, the Corporation and the Owner shall
promptly take all action necessary to obtain the death benefit provided
under the Policy.
b. The Corporation shall have the unqualified right to receive a
portion of such death benefit equal to the total amount of the premiums
paid by it hereunder. The balance of the death benefit provided under the
Policy, if any, shall be paid directly to the beneficiary or beneficiaries
designated by the Owner, in the manner and in the amount or amounts
provided in the beneficiary designation provision of the Policy. In no
event shall the amount payable to the Corporation hereunder exceed the
Policy proceeds payable at the death of the Employee. No amount shall be
paid from such death benefit to the beneficiary or beneficiaries designated
by the Owner, until the full amount due the Corporation hereunder has been
paid. The parties hereto agree that the beneficiary designation provision
of the Policy shall conform to the provisions hereof.
7. a. The obligations of the Corporation to pay premiums on the Policy
under this Agreement shall terminate, without notice, upon the occurrence
of any of the following events: (a) the total cessation of the business of
the Corporation and its subsidiaries; (b) the bankruptcy, receivership or
dissolution of the Corporation or (c) the date the Employee is neither (i)
an employee of the Corporation or a subsidiary corporation (as defined in
Section 425 of the Internal Revenue Code of 1986, as amended), (ii) a
director of the Corporation or its successor or (iii) a consultant to the
Corporation or a subsidiary corporation in accordance with any consulting
agreement in effect from time to time between Employee and the Corporation
or any subsidiary corporation; provided however in the event of a "Change-
in-Control" of the Corporation, the provisions of paragraph b. of this
Section 7 shall apply.
b. For purposes of this Agreement, the term "Change-in-Control" shall
have the meaning provided in the "Executive Severance Agreement" dated
August 14, 1997, between the Corporation and the Employee. Immediately
prior to a "Change-in-Control", the Corporation will create a "rabbi trust"
for the benefit of Owner pursuant to a trust agreement in such form as is
approved by counsel for the Corporation and the Owner and the Corporation
will transfer to such rabbi trust the excess of $324,000.00 over the
amounts of premiums theretofore paid on the Policy by the Corporation.
Following such Change-in-Control, this Agreement will continue and the
trustee of the rabbi trust shall pay the premiums on the Policy as they
become due thereafter.
8. At any time during the term of this Agreement, the Owner shall have the
option of repaying to the Corporation all or any portion of the total
amount of the premium payments made by the Corporation hereunder and Owner
shall be authorized to borrow against the cash value of the Policy in order
to fund such repayment. Upon receipt of the total amount of the premium
payments made by the Corporation hereunder, the Corporation shall release
the collateral assignment of the Policy, by the execution and delivery of
an appropriate instrument of release.
9. The Insurer shall be fully discharged from its obligations under the
Policy by payment of the Policy death benefit to the beneficiary or
beneficiaries named in the Policy, subject to the terms and conditions of
the Policy. In no event shall the Insurer be considered a party to this
Agreement, or any modification or amendment hereof. No provision of this
Agreement, nor of any modification or amendment hereof, shall in any way be
construed as enlarging, changing, varying or in any other way affecting the
obligations of the Insurer as expressly provided in the Policy, except
insofar as the provisions hereof are made a part of the Policy by the
collateral assignment executed by the Corporation and filed with the
Insurer in connection herewith.
10. a. The Corporation is hereby designated as the named fiduciary under
this Agreement. The named fiduciary shall have authority to control and
manage the operation and administration of this Agreement, and it shall be
responsible for establishing and carrying out a funding policy and method
consistent with the objectives of this Agreement.
b. The Corporation shall make all determinations concerning rights to
benefits under this Agreement. Any decision by the Corporation denying a
claim by the Owner or its beneficiary for benefits under this Agreement
shall be stated in writing and delivered or mailed to the Owner or such
beneficiary. Such decision shall set forth the specific reasons for the
denial, written to the best of the Corporation's ability in a manner that
may be understood without legal or actuarial counsel. In addition, the
Corporation shall afford a reasonable opportunity to the Owner or such
beneficiary for a full and fair review of the decision denying such claim.
11. This Agreement may not be amended, altered or modified, except by a
written instrument signed by the parties hereto, or their respective
successors or assigns, and may not be otherwise terminated except as
provided herein.
12. This Agreement shall be binding upon and inure to the benefit of the
Corporation and its successors and assigns, and the Employee, the Owner,
and their respective successors, assigns, heirs, executors, administrators
and beneficiaries.
13. Any notice, consent or demand required or permitted to be given under
the provisions of this Agreement shall be in writing, and shall be signed
by the party giving or making the same. If such notice, consent or demand
is mailed to a party hereto, it shall be sent by United States certified
mail, postage prepaid, addressed to such party's last known address as
shown on the records of the Corporation. The date of such mailing shall be
deemed the date of notice, consent or demand.
14. This Agreement, and the rights of the parties hereunder, shall be
governed by and construed in accordance with the laws of the State of
Texas.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, effective as of the 1st day of January, 1998.
"CORPORATION"
EQUITY CORPORATION INTERNATIONAL
By:
- ---------------------------------------
W. Cardon Gerner, Senior Vice President
"EMPLOYEE"
- ---------------------------------------
James P. Hunter, III
"Owner"
- ---------------------------------------
J. Patrick Doherty, Trustee
EXHIBIT "A"
The following life insurance policy is subject to the attached Split-Dollar
Agreement:
Insurer: Great Southern Life Insurance Company
Insured: James P. Hunter, III
Policy Number: 1901297
Face Amount: $500,000
Exhibit 10.3
SPLIT-DOLLAR AGREEMENT
THIS AGREEMENT, made and entered into effective the date set forth below,
by and among EQUITY CORPORATION INTERNATIONAL, a Delaware corporation,
(hereinafter referred to as the "Corporation"), and JAMES P. HUNTER, III,
an individual residing in the State of Texas (hereinafter referred to as
the "Employee"), and J. PATRICK DOHERTY, an individual residing in the
State of Texas, Trustee of the James P. Hunter, III Family Trust, pursuant
to a certain Irrevocable Trust Agreement dated August 27, 1992 (hereinafter
referred to as the "Owner"),
WITNESSETH:
WHEREAS, the Employee is employed by the Corporation; and
WHEREAS, Owner is the owner of a certain policy of life insurance insuring
the life of Employee (hereinafter referred to as the "Policy"), which is
described in Exhibit A attached hereto and by this reference made a part
hereof, and which was issued by American General Life Insurance Company
(hereinafter referred to as the "Insurer"); and
WHEREAS, the Corporation is willing to pay the premiums due on the Policy
as an additional employment benefit for the Employee, on the terms and
conditions hereinafter set forth; and
WHEREAS, the Corporation wishes to have the Policy collaterally assigned to
it by Owner in order to secure the repayment of the amounts which it will
pay toward the premiums on the Policy; and
WHEREAS, the parties intend that, by virtue of such collateral assignment
the Corporation shall receive only the right to be repaid its premium
payments hereunder, with the Owner retaining all other ownership rights in
the Policy as specified herein;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
contained herein, the parties hereto agree as follows:
1. The Owner has acquired the Policy from the Insurer in the total face
amount of $500,000.00. The parties hereto shall take any further action
which may be necessary to cause the Policy to conform to the provisions of
this Agreement. The parties hereto agree that the Policy shall be subject
to the terms and conditions of this Agreement and of the collateral
assignment filed with the Insurer relating to the Policy.
2. a. The Owner shall be the sole and absolute owner of the Policy, and
may exercise all ownership rights granted to the owner thereof by the terms
of the Policy, except as may otherwise be provided herein.
b. It is the intention of the parties to this Agreement and the
collateral assignment executed by the Owner to the Corporation in
connection herewith that the Owner shall retain all rights which the Policy
grants to the owner thereof, except the right of the Corporation to be
repaid the amounts which it pays toward the premiums on the Policy.
Specifically, but without limitation, the Corporation shall neither have
nor exercise any right as collateral assignee of the Policy which could in
any way defeat or impair the Owner's right to receive the cash surrender
value or the death proceeds of the Policy, in excess of the amount due the
Corporation hereunder. All provisions of this Agreement and of such
collateral assignment shall be construed so as to carry out such intention.
3. On or before the due date of each Policy premium, or within the grace
period provided therein, the Corporation shall pay the full amount of the
premium to the Insurer, and shall, upon request, promptly furnish the
Employee evidence of timely payment of such premium. The amount of annual
premiums paid by the Corporation during the six (6) years after the
effective date of this Agreement shall be no less than $37,511.00 per year.
The Corporation shall annually furnish the Employee a statement of the
amount of income reportable by the Employee for federal and state income
tax purposes, as a result of its payment of such premium.
4. To secure the repayment to the Corporation of the amount of the
premiums under the Policy, the Owner has assigned the Policy to the
Corporation as collateral, under the form used by the Insurer for such
assignments, which collateral assignment specifically limits the right of
the Corporation thereunder to the repayment of its payments toward premiums
on the Policy hereunder. Such repayment shall be made from the cash
surrender value of the Policy (as defined therein) if this Agreement is
terminated or if the Owner surrenders or cancels the Policy or from the
death proceeds of the Policy if the Employee should die while the Policy
and Agreement remain in force. In no event shall the Corporation have any
right to borrow against the Policy except for the purpose of paying
premiums on the Policy following six (6) years after the effective date of
this Agreement. Such collateral assignment shall not be terminated,
altered or amended by the Owner, without the express written consent of the
Corporation. The parties hereto agree to take all action necessary to
cause such collateral assignment to conform to the provisions of this
Agreement.
5. a. The Owner shall take no action with respect to the Policy which
would in any way compromise or jeopardize the Corporation's right to be
repaid the amounts it paid toward premiums on the Policy, without the
express written consent of the Corporation.
b. The Owner may pledge or assign the Policy, subject to the terms and
conditions of this Agreement, in order to secure a loan from the Insurer or
from a third party, in an amount which shall not exceed the cash surrender
value of the Policy (as defined therein) as of the date to which premiums
have been paid, less the amount of the premiums on the Policy paid by the
Corporation hereunder. Interest charges on such loan shall be the
responsibility of and be paid by the Owner.
c. The Owner shall have the sole right to surrender or cancel the
Policy. If the Policy is surrendered or cancelled, the Corporation shall
have the unqualified right to receive a portion of the cash surrender value
equal to the total amount of the premiums paid by it hereunder. Upon
receipt of the cash surrender value, the Owner shall pay to the Corporation
the portion of such cash surrender value to which it is entitled hereunder,
and shall retain the balance, if any.
6. a. Upon the death of the Employee, the Corporation and the Owner shall
promptly take all action necessary to obtain the death benefit provided
under the Policy.
b. The Corporation shall have the unqualified right to receive a
portion of such death benefit equal to the total amount of the premiums
paid by it hereunder. The balance of the death benefit provided under the
Policy, if any, shall be paid directly to the beneficiary or beneficiaries
designated by the Owner, in the manner and in the amount or amounts
provided in the beneficiary designation provision of the Policy. In no
event shall the amount payable to the Corporation hereunder exceed the
Policy proceeds payable at the death of the Employee. No amount shall be
paid from such death benefit to the beneficiary or beneficiaries designated
by the Owner, until the full amount due the Corporation hereunder has been
paid. The parties hereto agree that the beneficiary designation provision
of the Policy shall conform to the provisions hereof.
7. a. The obligations of the Corporation to pay premiums on the Policy
under this Agreement shall terminate, without notice, upon the occurrence
of any of the following events: (a) the total cessation of the business of
the Corporation and its subsidiaries; (b) the bankruptcy, receivership or
dissolution of the Corporation or (c) the date the Employee is neither (i)
an employee of the Corporation or a subsidiary corporation (as defined in
Section 425 of the Internal Revenue Code of 1986, as amended), (ii) a
director of the Corporation or its successor or (iii) a consultant to the
Corporation or a subsidiary corporation in accordance with any consulting
agreement in effect from time to time between Employee and the Corporation
or any subsidiary corporation; provided however in the event of a "Change-
in-Control" of the Corporation, the provisions of paragraph b. of this
Section 7 shall apply.
b. For purposes of this Agreement, the term "Change-in-Control" shall
have the meaning provided in the "Executive Severance Agreement" dated
August 14, 1997, between the Corporation and the Employee. Immediately
prior to a "Change-in-Control", the Corporation will create a "rabbi trust"
for the benefit of Owner pursuant to a trust agreement in such form as is
approved by counsel for the Corporation and the Owner and the Corporation
will transfer to such rabbi trust the excess of $225,066.00 over the
amounts of premiums theretofore paid on the Policy by the Corporation.
Following such Change-in-Control, this Agreement will continue and the
trustee of the rabbi trust shall pay the premiums on the Policy as they
become due thereafter.
8. At any time during the term of this Agreement, the Owner shall have the
option of repaying to the Corporation all or any portion of the total
amount of the premium payments made by the Corporation hereunder and Owner
shall be authorized to borrow against the cash value of the Policy in order
to fund such repayment. Upon receipt of the total amount of the premium
payments made by the Corporation hereunder, the Corporation shall release
the collateral assignment of the Policy, by the execution and delivery of
an appropriate instrument of release.
9. The Insurer shall be fully discharged from its obligations under the
Policy by payment of the Policy death benefit to the beneficiary or
beneficiaries named in the Policy, subject to the terms and conditions of
the Policy. In no event shall the Insurer be considered a party to this
Agreement, or any modification or amendment hereof. No provision of this
Agreement, nor of any modification or amendment hereof, shall in any way be
construed as enlarging, changing, varying or in any other way affecting the
obligations of the Insurer as expressly provided in the Policy, except
insofar as the provisions hereof are made a part of the Policy by the
collateral assignment executed by the Corporation and filed with the
Insurer in connection herewith.
10. a. The Corporation is hereby designated as the named fiduciary under
this Agreement. The named fiduciary shall have authority to control and
manage the operation and administration of this Agreement, and it shall be
responsible for establishing and carrying out a funding policy and method
consistent with the objectives of this Agreement.
b. The Corporation shall make all determinations concerning rights to
benefits under this Agreement. Any decision by the Corporation denying a
claim by the Owner or its beneficiary for benefits under this Agreement
shall be stated in writing and delivered or mailed to the Owner or such
beneficiary. Such decision shall set forth the specific reasons for the
denial, written to the best of the Corporation's ability in a manner that
may be understood without legal or actuarial counsel. In addition, the
Corporation shall afford a reasonable opportunity to the Owner or such
beneficiary for a full and fair review of the decision denying such claim.
11. This Agreement may not be amended, altered or modified, except by a
written instrument signed by the parties hereto, or their respective
successors or assigns, and may not be otherwise terminated except as
provided herein.
12. This Agreement shall be binding upon and inure to the benefit of the
Corporation and its successors and assigns, and the Employee, the Owner,
and their respective successors, assigns, heirs, executors, administrators
and beneficiaries.
13. Any notice, consent or demand required or permitted to be given under
the provisions of this Agreement shall be in writing, and shall be signed
by the party giving or making the same. If such notice, consent or demand
is mailed to a party hereto, it shall be sent by United States certified
mail, postage prepaid, addressed to such party's last known address as
shown on the records of the Corporation. The date of such mailing shall be
deemed the date of notice, consent or demand.
14. This Agreement, and the rights of the parties hereunder, shall be
governed by and construed in accordance with the laws of the State of
Texas.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, effective as of the 1st day of January, 1998.
"CORPORATION"
EQUITY CORPORATION INTERNATIONAL
- ---------------------------------------
W. Cardon Gerner, Senior Vice President
"EMPLOYEE"
- ---------------------------------------
James P. Hunter, III
"Owner"
- ---------------------------------------
J. Patrick Doherty, Trustee
EXHIBIT "A"
The following life insurance policy is subject to the attached Split-Dollar
Agreement:
Insurer: American General Life Insurance Company
Insured: James P. Hunter, III
Policy Number: U10003825L
Face Amount: $500,000
<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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,657
<SECURITIES> 0
<RECEIVABLES> 19,451
<ALLOWANCES> 3,815
<INVENTORY> 10,390
<CURRENT-ASSETS> 42,239
<PP&E> 138,398
<DEPRECIATION> 17,700
<TOTAL-ASSETS> 859,065
<CURRENT-LIABILITIES> 19,548
<BONDS> 251,252
0
0
<COMMON> 214
<OTHER-SE> 242,999
<TOTAL-LIABILITY-AND-EQUITY> 859,065
<SALES> 43,097
<TOTAL-REVENUES> 94,603
<CGS> 13,928
<TOTAL-COSTS> 67,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 878
<INTEREST-EXPENSE> 6,588
<INCOME-PRETAX> 16,302
<INCOME-TAX> 6,358
<INCOME-CONTINUING> 9,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,944
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
