-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WVh/ajL0z9Fl4Id1jvnCICaA+yNdsKWtWZt5j+iYpjdOPY/hr0yxDgs1Ek7fNeQ2 XT3Lj9eVL96s0fHxeIdn1A== 0000950129-98-001340.txt : 19980331 0000950129-98-001340.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950129-98-001340 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY CORP INTERNATIONAL CENTRAL INDEX KEY: 0000928155 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 752521142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13017 FILM NUMBER: 98578748 BUSINESS ADDRESS: STREET 1: 415 S FIRST ST STREET 2: STE 210 CITY: LUFKIN STATE: TX ZIP: 75901 BUSINESS PHONE: 4096318700 MAIL ADDRESS: STREET 1: ANDREWS & KURTH L L P STREET 2: 4200 TEXAS COMMERCE TOWER CITY: HOUSTON STATE: TX ZIP: 77002 10-K 1 EQUITY CORPORATION INTERNATIONAL - 12/31/97 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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 75-2521141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 415 SOUTH FIRST STREET, SUITE 210 75901 LUFKIN, TEXAS (Zip Code)
Registrant's telephone number, including area code (409) 631-8700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 16, 1998, there were 21,229,405 shares of Equity Corporation International Common Stock, $.01 par value, issued and outstanding, 20,616,841 of which, having an aggregate market value of approximately $490,938,526, were held by non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement related to the registrant's 1998 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- Item 1. Business.................................................... 1 The Company................................................. 1 The Deathcare Industry...................................... 1 Business Strategy........................................... 3 Acquisition Program......................................... 3 Operations.................................................. 4 Competition................................................. 6 Trust Funds................................................. 7 Regulation.................................................. 8 Employees................................................... 8 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 13 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 22 Item 10. Directors and Executive Officers of the Registrant.......... 23 Item 11. Executive Compensation...................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 23 Item 13. Certain Relationships and Related Transactions.............. 23 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 24
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE This Form 10-K contains forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, 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 and information. 3 PART I ITEM 1. BUSINESS THE COMPANY Equity Corporation International ("ECI" or the "Company") is the fourth largest publicly traded provider of deathcare services and products in the United States, primarily serving communities located in non-metropolitan and select suburban areas. As of December 31, 1997, the Company operated 259 funeral homes and 76 cemeteries in 33 states and one Canadian province. For the year ended December 31, 1997, the Company generated net revenues of $135.1 million. The Company's funeral homes perform all of the services related to funerals, provide funeral facilities and vehicles and sell related merchandise. The Company's funeral homes are primarily located in communities with populations ranging from 10,000 to 250,000 residents. The Company's cemeteries perform all of the services related to interment and sell cemetery interment rights and services, mausoleum spaces and related merchandise. The Company's cemeteries are primarily located in communities with populations ranging from 75,000 to 500,000 residents. In order to improve the efficiency and profitability of its operations, the Company's funeral homes and cemeteries are generally operated in "clusters" or groups within a given geographic area. The clustering of funeral homes and the clustering of cemeteries provide opportunities to share personnel, vehicles and other resources, effect operating and administrative cost reductions and implement revenue enhancing cross-marketing programs. ECI believes it is differentiated from the other large, national deathcare companies by its focus on the consolidation of funeral homes and cemeteries in non-metropolitan areas of the United States. The Company has focused on non-metropolitan areas in order to take advantage of the unique opportunities offered by such areas as compared to metropolitan areas, including (i) the opportunity to establish and maintain higher market shares as a result of the smaller number of deathcare providers typically found in a non-metropolitan area, (ii) the relatively lower level of competition for acquisitions in such areas and (iii) the stronger preference in such areas for traditional funeral services and burials. ECI has also begun to acquire funeral homes and cemeteries in select suburban areas which possess characteristics similar to the Company's traditional non-metropolitan markets. As used herein, unless the context indicates otherwise, the terms "ECI" and the "Company" refer to Equity Corporation International, its consolidated subsidiaries and their respective predecessors. The Company's principal executive office is located at 415 South First Street, Suite 210, Lufkin, Texas 75901, and its telephone number is (409) 631-8700. For financial information regarding the Company's segments, including the identifiable assets of the Company by industry segment, see Note 13 to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K. THE DEATHCARE INDUSTRY Deathcare companies provide products and services to families in three principal areas: (i) ceremony and tribute, generally through a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. The deathcare industry in the United States is characterized by the following attributes: Fragmented Nature. It is estimated that there are approximately 22,000 funeral homes and 9,600 commercial (as opposed to religious, family, fraternal, military or municipal) cemeteries in the United States. Many of these properties are owned by small, family-owned firms that control one or several funeral homes or cemeteries in a single community. Based upon industry estimates, ECI and the four other publicly traded providers of deathcare services in the United States represented less than 21% of the total 1996 United States deathcare industry revenues. 1 4 Barriers to Entry. The deathcare industry is characterized by significant barriers to the establishment of a new funeral home or cemetery in an existing market, the most formidable of which typically is local heritage and tradition. Heritage and tradition, particularly in non-metropolitan areas where there are fewer market participants, afford an established funeral home or cemetery a local franchise which tends to foster family loyalty. Other barriers to entry include local zoning restrictions, substantial capital requirements, increasing regulatory burdens and scarcity of suitable cemetery land in certain areas. In addition, established firms' backlog of preneed, prefunded funerals or presold cemetery and mausoleum spaces also makes it difficult for new entrants to gain a foothold in the marketplace. Stability. Death rates in the United States are fairly predictable, thereby lending stability to the deathcare industry. The number of deaths in the United States has increased at a compound rate of approximately one percent per year since 1980 and, according to the Bureau of the Census, is expected to increase by approximately one percent per year through 2010. In addition, the ownership of funeral home and cemetery businesses has traditionally passed from generation to generation within the same family and the aggregate number of funeral homes and cemeteries in the United States has remained relatively constant. Over the past several years, the following trends have developed in the deathcare industry: Consolidation. As the deathcare industry has matured, a trend toward consolidation has developed. From the standpoint of individual owners, this trend appears to result principally from family succession issues, a desire for liquidity, increasing tax and estate planning complexities and the increasing competitive threat posed by the large deathcare providers. The active acquisition market for funeral homes and cemeteries provides a source of potential liquidity that was not as readily available to individual owners in the past. From the standpoint of the large deathcare providers, the consolidation trend is driven by the benefits derived from economies of scale, improved managerial control and more effective strategic and financial planning. The consolidation trend has accelerated in recent years as several large deathcare companies have expanded their operations significantly through acquisitions. Clustered Operations. There has also been a trend for firms to cluster their funeral homes and cemetery operations. Clusters refer to funeral homes and/or cemeteries which are grouped together in a geographical region. Clusters provide cost savings to funeral homes and cemeteries and a higher level of service to client families through the sharing of personnel, vehicles and other resources. In addition, funeral home and cemetery clusters provide opportunities for a company to cross-market the full range of deathcare services with limited incremental overhead expense. Combined Operations. In recent years, there has been an increase in the number of firms establishing combined operations. Combined operations refer to funeral home and cemetery operations conducted on a single site. These operations provide cost savings through shared resources and cross- marketing opportunities. The ability to offer the full range of products and services at one location has proven to be a competitive advantage which tends to increase the market share and profitability of both the funeral home and cemetery. Preneed Marketing. In addition to sales at the time of death (i.e., on an "at need" basis), an increasing number of deathcare products and services are being sold prior to the time of death (i.e., on a "preneed" basis) by deathcare providers who have developed sophisticated marketing staffs that actively promote such products and services. At the same time, consumers are becoming more aware of the benefits of advanced planning, such as the financial assurance and peace of mind achieved by establishing in advance a fixed price and type of service, and the elimination of the emotional strain of making deathcare plans at the time of need. Effective marketing of preneed products and services ensures a backlog of future business. Cremation. In recent years there has been steady, gradual growth in the number of families in the United States that have chosen cremation as an alternative to traditional methods of burial. According to industry studies, it is estimated that cremations will represent approximately 25% of all dispositions of human remains in the United States by the year 2000, as compared with approximately 21% in 1996 and 2 5 10% in 1980. Many areas of the United States and many non-metropolitan communities exhibit materially lower rates of cremation as a result of religious and cultural traditions. Cremation historically has been marketed as a less costly alternative to interment. However, cremation is increasingly marketed as part of a complete deathcare package that includes traditional funeral services and memorialization. BUSINESS STRATEGY The Company's strategy is to continue to expand through the aggressive acquisition of premier funeral homes and cemeteries in non-metropolitan and select suburban areas of the United States and Canada and to generate increasing levels of profitability through the implementation of proven revenue-enhancement and cost-containment programs. Acquisitions. The Company's acquisition program is focused on: - acquiring premier properties that can serve as anchor locations for new clusters; - expanding existing clusters with the acquisition of adjacent properties; and - acquiring cemeteries that complement the Company's existing funeral home clusters, and acquiring funeral homes that complement the Company's existing cemetery clusters. Profitability Enhancement. The Company believes that it can enhance revenues and reduce costs at its properties, particularly its newly acquired properties, through, among other things, the following: - introducing the Company's funeral merchandising and sales training programs at newly acquired funeral homes; - implementing professional preneed sales efforts at newly acquired cemeteries, which often have had limited historical preneed sales, and marketing a broader line of cemetery products and services; - improving the revenues and earnings of its established operations by assisting local managers with on-going programs to market services more effectively and enhance the reputation of their operations in the community; - sharing sales leads and other cross-marketing opportunities that are anticipated to develop as the Company acquires cemeteries that complement existing funeral home clusters and funeral homes that complement existing cemetery clusters; - sharing personnel, vehicles and other resources within funeral home and cemetery clusters; - realizing favorable pricing and terms from suppliers through volume discounts on significant expenditures, such as vehicles, caskets, vaults and memorials; and - consolidating and centralizing certain administrative and financial management functions while retaining critical operational functions at the local level. ACQUISITION PROGRAM The Company intends to continue its active acquisition program focused on premier funeral homes and cemeteries in non-metropolitan and select suburban areas throughout the United States and Canada. The Company's funeral home acquisition effort is primarily targeted at markets with approximately 10,000 to 250,000 residents where a single property or cluster of properties can be a leading or dominant competitor in that market area. The Company's cemetery acquisition effort is primarily targeted at markets with approximately 75,000 to 500,000 residents that are large enough to support an aggressive preneed sales effort. The Company typically retains the former owners and other key personnel of acquired funeral homes and, where appropriate, the former owners and other key personnel of acquired cemeteries, and gives them significant operating responsibility in an effort to ensure the continuation of high quality services and the maintenance of the acquired operation's unique reputation, heritage and long-standing local relationships. In nearly all cases, acquired funeral homes and cemeteries continue operations under the same tradenames as 3 6 were used by the prior owners. In addition, the Company views the experienced management of certain acquired operations as potential regional and corporate management candidates. As a result, the Company believes that it may be regarded as a particularly attractive acquiror by some independent owners because such owners may be afforded a greater opportunity for advancement with the Company than they may be afforded on their own or with the other large deathcare providers. In evaluating specific properties for acquisition, the Company considers such factors as the property's location, reputation, heritage, physical size, volume of business, profitability, available inventory, name recognition, aesthetics, potential for development or expansion, competitive market position, pricing structure and the quality of operating management. The Company follows a disciplined approach based on specific financial criteria for determining acquisition prices. 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. The Company typically enters into management, consulting and non-competition agreements with former owners and key executive personnel of acquired funeral homes and, where appropriate, acquired cemeteries. The Company maintains a full-time professional corporate development staff headed by a senior corporate executive with substantial deathcare industry experience. The corporate development staff is responsible for identifying, evaluating, negotiating and closing acquisitions of funeral homes and cemeteries. Other members of the Company's senior and regional management teams are also actively involved in the acquisition process. The Company is continually evaluating and negotiating potential funeral home and cemetery acquisitions. The Company typically enters into letters of intent related to potential acquisitions when an agreement in principle has been reached between the parties. Such letters of intent are generally intended to be non-binding and are subject to various contingencies, which may include completing satisfactory due diligence, negotiating definitive agreements and obtaining approval of the Company's Board of Directors. The Company is currently involved in various stages of acquisition negotiations with respect to a number of funeral homes and cemeteries, and, as of March 5, 1998, had completed or signed letters of intent relating to the acquisition of 49 funeral homes and five cemeteries for purchase prices totaling approximately $82.5 million. OPERATIONS Funeral Home Operations. As of December 31, 1997, the Company operated 255 funeral homes in 30 states and 4 funeral homes in one Canadian province. Funeral home operations accounted for approximately 65%, 60% and 57% of the Company's net revenues for the years ended December 31, 1997, 1996 and 1995, respectively. Approximately 33%, 41% and 54% of the Company's funeral home net revenues (approximately 21%, 26% and 31% of the Company's total net revenues) for the years ended December 31, 1997, 1996 and 1995, respectively, were attributable to funeral home operations in Texas. In order to improve the efficiency and profitability of its operations, the Company's funeral homes are generally operated in clusters within a given geographic area. The clustering of funeral homes provides opportunities to share personnel, vehicles and other resources, effect operating and administrative cost reductions and implement cross-marketing programs. The Company's operations are primarily located in non-metropolitan and select suburban areas, where clusters typically generate fewer operating economies than in metropolitan areas principally due to greater distances between properties and lower volumes of funerals and interments. The Company believes, however, that it achieves significant economic benefits by clustering its operations. The Company's funeral homes are organized geographically into operating groups, each of which is under the direction of a management team with substantial funeral home experience. Although certain financial management and policy matters are centralized, management teams and local funeral home directors have substantial autonomy in determining the manner in which their services and products are marketed and delivered and their funeral homes are managed. The Company believes that this strategy permits each local 4 7 firm to maintain its unique style of operation and to capitalize on its reputation and heritage, while the Company maintains centralized supervisory controls and provides specialized services at the corporate level. The Company's funeral homes offer a complete range of services to meet families' funeral needs, including family consultation, the removal and preparation of remains, the sale of caskets and related funeral products, the use of funeral home facilities for visitation and worship and transportation services. Most of the Company's funeral homes have a non-denominational chapel on the premises, thereby permitting family visitation and religious services to take place at one location, which reduces transportation costs to the Company and inconvenience to the family. All of the Company's funeral homes offer cremation. Cremations accounted for approximately 23% of the dispositions performed by the Company in 1997. Approximately 31% of the Company's cremations for 1997 was attributable to the Company's Florida operations, a state in which the cremation rate is substantially higher than the national average. Excluding the Company's Florida operations, cremations accounted for approximately 18% of the dispositions performed by the Company in 1997. Cremations are often combined with traditional funeral services and various types of memorialization. While cremations have historically generated gross profit margins similar to those for traditional funeral services, cremations generally result in lower average revenue and gross profit dollars when compared to traditional funeral services. In addition to sales of funeral services and products at the time of need, the Company also markets funeral services and products on a preneed basis. Preneed funeral contracts enable families to establish in advance the type of service to be performed, the products to be used and the cost of such products and services in accordance with prices prevailing at the time the agreement is signed rather than when the products and services are delivered. Preneed funeral contracts permit families to eliminate the emotional strain of making deathcare plans at the time of need and enable the Company to establish a portion of its future market share. Because of the nature of the markets served by the Company's funeral homes, however, the Company does not extensively market preneed funeral contracts. Nevertheless, the Company will market preneed funeral contracts in specific markets where the Company deems it necessary to build current and future market share or in response to sales campaigns launched by competitors. The Company has historically sold preneed funeral contracts at prices similar to those obtained for at need funeral services. Proceeds from the sale of preneed funeral contracts are not recognized as revenues until the time the funeral service is performed. The Company sold or obtained through acquisitions 25,471 preneed funeral contracts in the year ended December 31, 1997. At December 31, 1997, the Company had a backlog of 67,369 preneed funeral contracts to be delivered in the future. Preneed funeral contracts fulfilled as a percentage of the total funerals performed was approximately 21%, 19% and 19% for the years ended December 31, 1997, 1996 and 1995, respectively. Preneed funeral contracts are paid for by the customer through either lump-sum payments or on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance policies intended to fund preneed funeral contracts cover the original contract price and generally include built-in escalation clauses designed to offset future inflationary cost increases. The Company's selection of trust or insurance arrangements depends primarily on the individual customer's preference and the regulatory requirements of the applicable state. In the case of trust-funded contracts, state law requires that all or a portion of the payments received by the Company for preneed funeral contracts be placed in trust accounts established by the Company. See "-- Trust Funds -- Preneed Funeral Trusts." Insurance-funded contracts are offered principally through third-party insurance underwriters specializing in preneed funeral contracts. In the event of cancellation of a preneed funeral contract, the Company complies with its contractual obligations and applicable state laws, which generally require a refund of all principal amounts held in trust, and in some cases accrued interest. In addition to preneed funeral contracts, the Company also offers "preplanned" funeral arrangements whereby a client determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Preplanned funeral arrangements permit families to avoid the emotional strain of making deathcare plans at the time of need and enable a funeral home to establish relationships with clients that frequently lead to at need sales. 5 8 Cemetery Operations. As of December 31, 1997 the Company operated 76 cemeteries in 17 states. Cemetery operations accounted for 34%, 38% and 43% of the Company's net revenues for the years ended December 31, 1997, 1996 and 1995, respectively. The Company's cemeteries are organized geographically into regional operating groups, each of which is under the direction of an operations director with substantial cemetery experience. Cemetery marketing efforts are coordinated by regional sales vice presidents. The Company aggressively markets cemetery interment rights, merchandise and services on a preneed basis. The Company believes that consumers throughout the United States increasingly favor commercial perpetual care cemeteries, such as those operated by the Company, over non-perpetual care cemeteries, many of which are operated by family, fraternal and religious organizations. The Company has an extensive training program for all cemetery sales personnel, including senior sales managers and entry-level sales counselors. Cemetery sales prospects are generated through the use of a variety of media, including direct response advertising, direct mailings, door-to-door surveys, telephone surveys and purchaser referrals. The Company's cemetery products and services include interment services and rights to interment in cemetery sites, including grave sites, crypts, niches, family and community mausolea and columbaria and related cemetery merchandise such as markers, monuments, memorials and burial vaults. Cemetery operations generate revenues through sales of interment rights, markers and memorials; fees for interment and cremation services and marker and memorial installations; interest income from installment sales contracts; and investment income from preneed cemetery merchandise. Cemetery interment rights, interment services and merchandise are sold either on a preneed or at need basis. Preneed cemetery sales are usually financed by the Company through installment sale contracts, generally with terms not exceeding five years (or seven years for some of the larger purchases). Preneed sales of cemetery interment rights and other related services and products are recorded as revenues when the contract is signed, with concurrent recognition of related costs. The Company typically receives payment of at least 5% of the sales price at the time the contract is signed. Allowances for customer cancellations and refunds are accrued at the date of sale based upon historical experience. Customers generally have the option to cancel a contract for cemetery products within three days of the date of sale and receive a refund of amounts paid. After this three-day period, the Company generally does not refund amounts received under such contracts. Preneed cemetery sales represented approximately 72%, 69% and 67% of the Company's cemetery net revenues for the years ended December 31, 1997, 1996 and 1995, respectively. The Company is generally required under state laws to deposit in trust a specified percentage of the current cost of providing cemetery merchandise sold prior to the time of need. The Company also provides maintenance of cemetery grounds pursuant to perpetual care contracts and state laws that require the Company to place a portion of the proceeds from sales of cemetery interment rights into a perpetual care trust or endowment fund. See "-- Trust Funds -- Preneed Cemetery Merchandise Trusts" and "-- Trust Funds -- Perpetual Care Trusts." COMPETITION The Company currently competes for acquisitions with, among others, four publicly held North American deathcare companies with operations in the United States, Service Corporation International ("SCI"), The Loewen Group, Inc., Stewart Enterprises, Inc. and Carriage Services, Inc., as well as smaller national and regional consolidators. While a significant amount of acquisition activity appears to be concentrated on funeral homes and cemeteries in metropolitan areas, which are not areas of primary interest to the Company, the Company faces intense competition in the acquisition of funeral homes and cemeteries in many of the areas in which it has focused its acquisition program. Prices for funeral homes and cemeteries have increased substantially in recent years, and in some cases competitors have paid acquisition prices substantially in excess of those that the Company felt were appropriate. Accordingly, no assurance can be given that the Company will be successful in expanding its operations through acquisitions or that funeral homes and cemeteries will be available at reasonable prices or on reasonable terms. 6 9 The Company's funeral home and cemetery operations generally face competition in the markets that they serve. Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. The sale of funeral services and products and cemetery interment rights and merchandise on a preneed basis has increasingly been used by many companies as an important marketing tool to build market share. Due to the importance of reputation and heritage, market share increases are usually gained over a long period of time. TRUST FUNDS General. The Company has established a variety of trusts in connection with its funeral home and cemetery operations as required under applicable state law. Such trusts include (i) preneed funeral trusts, (ii) preneed cemetery merchandise trusts and (iii) perpetual care trusts. These trusts are typically administered by independent financial institutions selected by the Company. The Company also uses independent professional managers to advise the Company on investment matters. Preneed Funeral Trusts. Preneed funeral trusts hold the funds paid by the purchasers of preneed funeral contracts pending use of the funds at the time of need. In most states in which the Company operates, a percentage (depending on applicable state law) of the proceeds from the sale of each preneed funeral contract can be retained by the Company with the balance deposited in a trust. In most states, the Company is not permitted to withdraw principal or investment income from such trusts until the time the funeral service is performed. Earnings on trust funds increase the amount of cash to be received by the Company at the time the funeral service is performed and historically have allowed the Company to adequately cover the inflationary increase in costs of funeral services. While direct marketing costs and commissions incurred with the sale of preneed funeral contracts are a current use of cash, such costs are deferred for financial reporting purposes and recognized over 12 years, which approximates the expected timing of the performance of services related to preneed contracts. Proceeds from the sale of preneed funeral contracts and earnings on such proceeds are not recognized as revenue until the time the funeral service is performed. All price guaranteed preneed funeral contracts are included in the Company's consolidated balance sheet as a long-term asset with a corresponding credit to deferred preneed funeral contract revenues. The aggregate balance of the Company's preneed funeral contracts held in trust was approximately $94 million and $59 million as of December 31, 1997 and 1996, respectively, which was included in preneed funeral contracts in the Company's consolidated balance sheet. Preneed Cemetery Merchandise Trusts. The Company is generally required under applicable state laws to deposit in preneed cemetery merchandise trusts a percentage (which varies from state to state) of either the net sales price or the current cost of providing cemetery merchandise or services purchased by a customer prior to the time of need. Such amounts are generally deposited in trust on a pro rata basis as payments are received from the customer. Income on cemetery merchandise trusts is recognized in cemetery net revenues in the period the trust earnings accrue. The Company is permitted to withdraw from such trusts principal and the related investment income when the cemetery merchandise is purchased by the Company, the services are performed or the merchandise contract is canceled. The Company's preneed cemetery merchandise trust funds had an aggregate balance of approximately $26 million and $14 million as of December 31, 1997 and 1996, respectively. The funds contained in the Company's preneed cemetery merchandise trusts are included in the Company's consolidated balance sheet as long-term receivables. The cost of preneed cemetery merchandise is accrued as a liability and included in deferred cemetery costs in the Company's consolidated balance sheet. Perpetual Care Trusts. The purpose of a perpetual care trust is to provide the funds necessary to maintain cemetery property and memorials in perpetuity. Pursuant to state law, a portion (which varies from state to state, but is generally 10%) of the proceeds from each sale of a cemetery interment right is placed in such a trust. While the Company does not have the right to withdraw the principal balance at any time, the Company is entitled to withdraw substantially all of the investment income from its perpetual care trusts to be used for cemetery and memorial maintenance. The aggregate principal balance in the Company's perpetual care trusts was approximately $25 million and $16 million as of December 31, 1997 and 1996, respectively, none of which 7 10 was included in the Company's consolidated balance sheet. Investment income from the perpetual care trust funds is included in the Company's consolidated statement of operations when earned. For additional information with respect to the Company's trusts, see Notes 1 and 4 to the audited consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K. REGULATION The Company's funeral home operations are comprehensively regulated by the Federal Trade Commission ("FTC") under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder (the "Funeral Rule"). The Funeral Rule contains minimum standards for funeral industry practices, requires extensive price and other affirmative disclosures to the customer at the time of sale and imposes a mandatory itemization requirement for the sale of funeral products and services. The Company is subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the United States Environmental Protection Agency community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require the Company to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. The Company is also subject to the federal Americans with Disabilities Act and similar laws which, among other things, may require that the Company modify its facilities to comply with minimum accessibility requirements for disabled persons. The Company's operations, including its preneed sales and trust funds, are also subject to extensive regulation, supervision and licensing under numerous other federal, state and local laws and regulations. See "-- Trust Funds." The Company believes that it is in substantial compliance with all such laws and regulations. Federal and state legislatures and regulatory agencies frequently propose new laws, rules and regulations which, if enacted, could have a material adverse effect on the Company's operations and on the deathcare industry in general. As discussed above, a significant portion of the Company's funeral home operations are located in the state of Texas. Any material adverse change in the regulatory requirements applicable to Texas funeral home operations could have a material adverse effect on the Company's results of operations. The Company cannot predict the outcome of any proposed legislation or regulations or the effect that any such legislation or regulations, if enacted, might have on the Company. EMPLOYEES As of December 31, 1997, the Company and its subsidiaries employed approximately 1,450 full-time and approximately 1,050 part-time employees. Management believes that its relationship with its employees is good. Except for a small number of maintenance employees in Illinois, no employees of the Company or its subsidiaries were members of a collective bargaining unit. ITEM 2. PROPERTIES As of December 31, 1997, the Company operated 259 funeral homes and 76 cemeteries in 33 states and one province in Canada. The Company owned the real estate and buildings of 208 of its funeral homes and 71 of its cemeteries, leased facilities in connection with 51 of its funeral homes, and operated 5 of its cemeteries pursuant to management contracts. The leases with respect to funeral homes leased by the Company have remaining terms ranging from 1 to 10 years, and the Company generally has renewal options or a right of first refusal on any proposed sale of these funeral homes. Seven of the Company's funeral homes are located on property contiguous to and operated in combination with a Company-owned cemetery. The 76 cemeteries operated by the Company cover a total of approximately 3,200 acres, of which approximately 50% is available 8 11 for future development. The Company does not anticipate any shortage of available space in its current cemeteries for the foreseeable future. The following table sets forth certain information, as of December 31, 1997, regarding the funeral homes and cemeteries operated by the Company in each state:
NUMBER OF NUMBER OF FUNERAL HOMES CEMETERIES ------------- ---------- Alabama..................................................... 14 3 Arizona..................................................... 1 -- Arkansas.................................................... 1 1 California.................................................. 2 1 Connecticut................................................. 1 -- Florida..................................................... 14 5 Georgia..................................................... 2 15 Illinois.................................................... 15 1 Indiana..................................................... 15 -- Iowa........................................................ 13 1 Louisiana................................................... 8 -- Maine....................................................... 20 -- Maryland.................................................... -- 1 Massachusetts............................................... 1 -- Mississippi................................................. 3 -- Missouri.................................................... 17 1 Nebraska.................................................... 6 -- New Hampshire............................................... 3 -- New Jersey.................................................. 1 -- New Mexico.................................................. 5 1 New York.................................................... 9 -- North Carolina.............................................. 1 17 Ohio........................................................ 3 -- Oklahoma.................................................... 10 2 Oregon...................................................... 4 5 Saskatchewan (Canada)....................................... 4 -- South Carolina.............................................. -- 4 South Dakota................................................ 4 -- Tennessee................................................... -- 6 Texas....................................................... 73 7 Vermont..................................................... 3 -- Virginia.................................................... 1 5 West Virginia............................................... 3 -- Wisconsin................................................... 2 -- --- -- Total............................................. 259 76 === ==
As of December 31, 1997, the Company's corporate headquarters occupied approximately 36,227 square feet of leased office space in Lufkin, Texas. As of December 31, 1997, the Company operated approximately 900 vehicles, of which 800 were owned and 100 were leased. The Company presently leases two aircraft. The specialized nature of the Company's business requires that its facilities be well-maintained. Management believes that this standard is met. 9 12 ITEM 3. LEGAL PROCEEDINGS The Company and certain of its subsidiaries are parties to a number of legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the Company. The Company carries insurance with coverages and coverage limits that it believes to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company's operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange under the symbol "EQU." The following table presents the quarterly high and low sale prices as reported by the Nasdaq National Market prior to June 6, 1997 and by the New York Stock Exchange thereafter during each quarterly period shown below. The sale prices set forth below have been adjusted to reflect a 3-for-2 stock split in October 1996.
HIGH LOW ---- --- 1996: First Quarter............................................. 20 15 3/8 Second Quarter............................................ 20 1/2 17 5/8 Third Quarter............................................. 22 1/8 16 3/8 Fourth Quarter............................................ 25 1/2 17 1/4 1997: First Quarter............................................. 23 5/8 18 1/2 Second Quarter............................................ 25 1/2 19 3/4 Third Quarter............................................. 24 11/16 19 7/8 Fourth Quarter............................................ 24 1/2 18 1/2
As of March 16, 1998, there were 21,229,405 shares of Common Stock outstanding held by 171 holders of record and the Company believes there were approximately 6,200 beneficial owners of the Common Stock. The Company has never paid a cash dividend on the Common Stock. The Company currently intends to retain earnings to finance the growth and development of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. Any future change in the Company's dividend policy will be made at the discretion of the Company's Board of Directors in light of the financial condition, capital requirements, earnings and prospects of the Company and any restrictions under credit agreements, as well as other factors the Board of Directors may deem relevant. The Company's Credit Facility permits the payment of dividends only to the extent the Company maintains a specified minimum net worth (approximately $201.1 million as of December 31, 1997) and certain financial ratios. The Company's net worth as of December 31, 1997 was approximately $226.5 million. 10 13 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 1994 1993(1) -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net revenues: Funeral.................................... $ 87,160 $ 54,854 $ 36,261 $ 27,382 $21,432 Cemetery................................... 46,239 35,035 27,740 21,919 847 Other...................................... 1,674 2,085 -- -- -- -------- -------- -------- -------- ------- Total net revenues................. 135,073 91,974 64,001 49,301 22,279 -------- -------- -------- -------- ------- Gross profit: Funeral.................................... 22,330 15,050 8,819 7,580 6,118 Cemetery................................... 14,580 10,137 8,477 6,157 47 Other...................................... 750 950 -- -- -- -------- -------- -------- -------- ------- Total gross profit................. 37,660 26,137 17,296 13,737 6,165 General and administrative expenses.......... 7,560 5,848 4,782 3,885 1,521 -------- -------- -------- -------- ------- Income from operations....................... 30,100 20,289 12,514 9,852 4,644 Interest expense............................. 6,331 2,374 2,207 3,178 701 -------- -------- -------- -------- ------- Income before income taxes and extraordinary item....................................... 23,769 17,915 10,307 6,674 3,943 Provision for income taxes................... 9,070 7,589 4,071 2,728 1,388 Extraordinary item, net...................... -- -- -- (198) -- -------- -------- -------- -------- ------- Net income................................... 14,699 10,326 6,236 3,748 2,555 Preferred stock dividends.................... -- -- -- -- 1,563 -------- -------- -------- -------- ------- Net income attributable to common stock...... $ 14,699 $ 10,326 $ 6,236 $ 3,748 $ 992 ======== ======== ======== ======== ======= Earnings per share(2): Basic: Continuing operations................... $ 0.71 $ 0.58 $ 0.42 $ 0.40 $ 1.58 Extraordinary item...................... -- -- -- (0.02) -- -------- -------- -------- -------- ------- Net income.............................. $ 0.71 $ 0.58 $ 0.42 $ 0.38 $ 1.58 ======== ======== ======== ======== ======= Weighted average number of common shares outstanding........................... 20,597 17,781 14,699 9,854 628 ======== ======== ======== ======== ======= Assuming full dilution: Continuing operations................... $ 0.70 $ 0.57 $ 0.42 $ 0.39 $ 0.15 Extraordinary item...................... -- -- -- (0.02) -- -------- -------- -------- -------- ------- Net income.............................. $ 0.70 $ 0.57 $ 0.42 $ 0.37 $ 0.15 ======== ======== ======== ======== ======= Weighted average number of common and equivalent shares outstanding......... 20,952 18,068 14,835 10,002 6,613 ======== ======== ======== ======== =======
11 14
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................ $ 17,666 $ 19,179 $ 9,093 $ 4,495 $ 5,973 Preneed funeral contracts.................. 235,891 156,028 102,889 72,318 48,817 Total assets............................... 717,700 443,891 305,159 211,307 83,095 Deferred preneed funeral contract revenues................................ 242,185 161,153 107,969 76,447 51,640 Long-term debt, net of current maturities.............................. 171,303 49,197 54,518 4,037 8,244 Redeemable preferred stock(3).............. -- -- -- -- 20,844 Total stockholders' equity (deficit)....... 226,532 177,464 91,665 84,083 (503)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- OPERATING DATA: Funeral Operations: Funeral homes in operation at end of period.................................. 259 178 119 95 79 Funeral services performed................. 19,486 12,483 8,332 6,181 5,127 Preneed funeral contracts sold or obtained through acquisitions.................... 25,471 16,176 12,415 6,397 2,124 Backlog of preneed funeral contracts at end of period............................... 67,369 45,978 32,199 21,084 16,103 Cemetery Operations: Cemeteries in operation at end of period... 76 64 61 48 3 Interments performed....................... 11,053 9,137 7,080 6,283 293
- --------------- (1) The Company's financial and operating data as of and for the year ended December 31, 1993 does not reflect the operations of MLI/The Loftis Corporation ("MLI"), which were acquired effective January 1, 1994. As a result of the MLI acquisition and certain other factors, the Company believes that its results of operations for 1993 are not necessarily comparable with its results of operations for subsequent periods. (2) Basic earnings per share is based on the weighted average number of common shares issued and outstanding during the period. Diluted earnings per share is based on the weighted average number of common and equivalent shares outstanding during the period which takes into consideration (i) for 1997, 1996 and 1995, the dilutive effect of stock options and restricted stock issued under the Company's Incentive Plan based on the treasury stock method, (ii) for 1994 and 1993, the issuance of 228,372 shares of Common Stock at a price of approximately $6.13 per share in June 1994 reflected under the treasury stock method prior to issuance and (iii) for 1993, the dilutive effect of a warrant exercisable for common shares held by SCI. The redeemable preferred stock dividends are deducted from 1993 net income for purposes of calculating earnings per share. In February 1998, the Company issued $143.8 million aggregate principal amount of convertible subordinated debentures that are convertible into 5,306,386 shares of Common Stock. On a pro forma basis, the assumed conversion of these debentures would have an antidilutive effect on the Company's diluted earnings per share for all periods presented. The weighted average number of common and equivalent shares outstanding reflects a 579-for-one stock split in June 1994 and a 3-for-2 stock split in October 1996. (3) Effective January 1, 1994, the Company's redeemable preferred stock and a warrant exercisable for common shares of the Company held by SCI were exchanged for 5,896,860 shares of Common Stock. 12 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION General. The Company commenced operations in May 1990 through the acquisition of 71 funeral homes and 3 cemeteries from SCI. Although the Company acquired 23 additional funeral homes from May 1990 through December 1993 that complemented existing properties, management's primary focus during this period was on improving the operating efficiency and profitability of the properties acquired from SCI. Over this period, the Company disposed of or consolidated 15 funeral homes that, in general, did not meet its growth or financial performance criteria. Beginning in 1994, the Company adopted a growth strategy which emphasizes an aggressive acquisition program and the implementation of proven revenue-enhancement and cost-containment programs. As part of this growth strategy, the Company has significantly expanded its corporate development capabilities from only one full-time professional to a full-time professional corporate development staff headed by a senior corporate executive who has substantial deathcare industry experience. The corporate development staff has full-time responsibility for identifying, evaluating, negotiating and closing acquisitions of funeral homes and cemeteries. With the Company's experienced corporate development staff and management team, the Company believes it is well positioned to take advantage of the continuing consolidation trend in the deathcare industry. The Company's future results of operations will depend in large part on the Company's ability to continue to make acquisitions on attractive terms and to successfully integrate and manage the acquired properties. The following table sets forth certain income statement data for the Company in dollar amounts as well as percentages of net revenues for the periods presented.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ---------------------------- ----------------------- 1997 1996 1995 1997 1996 1995 -------- ------- ------- ----- ----- ----- (IN THOUSANDS) Net revenues.............................. $135,073 $91,974 $64,001 100.0% 100.0% 100.0% ======== ======= ======= ===== ===== ===== Gross profit.............................. $ 37,660 $26,137 $17,296 27.9% 28.4% 27.0% General and administrative expenses....... 7,560 5,848 4,782 5.6 6.4 7.5 -------- ------- ------- ----- ----- ----- Income from operations.................... 30,100 20,289 12,514 22.3 22.0 19.5 Interest expense.......................... 6,331 2,374 2,207 4.7 2.6 3.4 Provision for income taxes................ 9,070 7,589 4,071 6.7 8.2 6.4 -------- ------- ------- ----- ----- ----- Net income...................... $ 14,699 $10,326 $ 6,236 10.9% 11.2% 9.7% ======== ======= ======= ===== ===== =====
The Company's net revenues increased by 46.9% to $135.1 million in 1997 from $92.0 million in 1996 and income from operations increased by 48.4% to $30.1 million in 1997 from $20.3 million in 1996. Income from operations increased to 22.3% of net revenues in 1997 from 22.0% in 1996. The increase in income from operations as a percentage of net revenues was primarily attributable to increased economies of scale as the Company's general and administrative expenses are spread over a larger revenue base, offset in part by the increased proportion of acquired operations to the Company's total operating results in 1997 over 1996. 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 the new policies and procedures implemented by the Company. The increase in interest expense to $6.3 million in 1997 from $2.4 million in 1996 was primarily attributable to higher levels of acquisition indebtedness. The Company's net revenues increased by 43.7% to $92.0 million in 1996 from $64.0 million in 1995 and income from operations increased by 62.1% to $20.3 million in 1996 from $12.5 million in 1995. Income from operations increased to 22.0% of net revenues in 1996 from 19.5% of net revenues in 1995. The increase in income from operations as a percentage of net revenues was primarily attributable to (i) increases in revenues and improved operational efficiencies at funeral home operations, (ii) the buyout of several long-term licensing and lease agreements for $2.1 million which generated a gross profit of $1.0 million in 1996, and (iii) economies of scale realized by the Company as general and administrative expenses were spread over a 13 16 larger revenue base. The increase in interest expense to $2.4 million in 1996 from $2.2 million in 1995 was primarily attributable to higher average levels of acquisition indebtedness partially offset by the repayment of the Credit Facility with proceeds from the Company's May 1996 equity offering. Funeral Home Operations. The following table sets forth the number of funeral homes operated by the Company for the periods presented.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Funeral homes operated at beginning of period............... 178 119 95 Acquisitions................................................ 84 59 27 Dispositions and consolidations............................. (3) -- (3) --- --- --- Funeral homes operated at end of period..................... 259 178 119 === === ===
The Company's funeral home revenues are generated primarily through the sale of funeral services and merchandise. Proceeds from the sale of funeral services at the time of need are recorded as revenues in the period of sale. Proceeds from the sale of preneed funeral contracts are not recognized until the funeral service is performed. Preneed funeral contracts are funded by the customer through either lump sum or installment payments placed in trust or through the purchase of a life insurance policy. Balances in trust accounts and proceeds from insurance policies are made available to the Company at the time the related funeral services are performed. Trust principal amounts and the cash value of insurance policies are refunded to customers upon cancellation of contracts where required by state law. Preneed funeral trust earnings and increasing benefits under insurance policies are accrued and deferred until the related funeral services are performed. Earnings on trust funds increase the amount of cash to be received by the Company at the time the funeral service is performed and historically have allowed the Company to adequately cover the inflationary increase in costs of funeral services. See "Business -- Trust Funds." Commissions and direct marketing costs related to preneed funeral contracts are also deferred and recognized over 12 years, which approximates the expected timing of the performance of services related to preneed contracts. All principal, earnings, receivables and deferred costs associated with price guaranteed preneed funeral contracts are included in the Company's consolidated balance sheet as long-term assets with a corresponding credit to deferred preneed funeral contract revenues. Aggressive preneed funeral sales are frequently associated with highly competitive market areas or are utilized to rapidly build market share. Because of the significant market share of most of the Company's funeral homes in their areas of operation, the Company does not extensively market preneed funeral contracts. The Company does, however, market preneed funeral contracts in specific markets where it is necessary to build current and future market share or in response to sales campaigns launched by competitors, but typically does not sell such preneed funeral contracts at a discount to current at need sales prices. Many of the Company's acquired funeral homes have provided high quality service to client families for many decades. The resulting client loyalty often represents a substantial portion of the value of a funeral business. The excess of purchase price over the fair value of identifiable net tangible assets acquired in transactions accounted for as a purchase are included in names and reputations and generally are amortized on a straight-line basis over 40 years. Cemetery Operations. The following table sets forth the number of cemeteries operated by the Company for the periods presented.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Cemeteries operated at beginning of period.................. 64 61 48 Acquisitions................................................ 12 3 13 -- -- -- Cemeteries operated at end of period........................ 76 64 61 == == ==
14 17 The Company's cemetery net revenues are generated primarily through the sale of cemetery interment rights, interment services and related merchandise which are sold either on a preneed or at need basis. Approximately 72.0%, 68.5% and 67.3% of the Company's cemetery net revenues for the years ended December 31, 1997, 1996 and 1995, respectively, are attributable to sales made prior to the time of need. Revenues from preneed cemetery sales are recognized when the contract is signed, with concurrent recognition of related costs. The Company typically receives payment of at least 5% of the sales price at the time the contract is signed. Allowances for customer cancellations and refunds are accrued at the time of sale based upon historical experience. Costs of cemetery merchandise are accrued at the time of sale based upon actual costs incurred or estimated future costs. Preneed cemetery sales are usually financed by the Company through installment sale contracts bearing interest at rates currently ranging from 12.5% to 14.5% per annum. Finance charges are recognized as cemetery revenues over the terms of the related installment receivables. Generally, a portion of the proceeds from the sale of cemetery interment rights is deposited into perpetual care trusts or endowment funds in accordance with state law. Principal balances in these trusts (including, in some states, realized and unrealized capital gains) must generally be held in perpetuity. Accordingly, the trust fund corpus is not reflected in the Company's consolidated financial statements. The Company recognizes and withdraws currently all dividend and interest income earned and, where permitted, any capital gains realized by the perpetual care trusts to provide for the maintenance of cemetery properties. Additionally, pursuant to state law, a portion of the proceeds from the sale of preneed cemetery merchandise may also be required to be paid into cemetery merchandise trusts. Principal held in these trusts is made available to the Company upon delivery of the merchandise or upon cancellation of the contract by the customer after three days of the date of sale. These amounts are reflected in long-term receivables in the Company's consolidated balance sheet. The Company recognizes income on these trusts when earned. RESULTS OF OPERATIONS The following is a discussion of the Company's results of operations for the three years in the period ended December 31, 1997. For purposes of this discussion, funeral homes and cemeteries owned and operated throughout 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," and operations disposed of during either period being compared are referred to as "disposed operations." YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996. Total net revenues for the year ended December 31, 1997 increased 46.9% to $135.1 million from $92.0 million for the year ended December 31, 1996. The increase in net revenues reflects a $38.4 million increase in net revenues attributable to acquired operations and a $5.9 million or 7.6% increase in net revenues from existing operations. The increase in revenues from existing operations was attributable primarily to increases in preneed sales at the Company's cemetery operations combined with slight increases in average funeral sales prices, partially offset by slightly lower funeral volumes. Included in net revenues for the year ended December 31, 1997 is $1.7 million related to the sale of one of the Company's funeral homes in exchange for a cemetery and $250,000 in cash. Included in net revenues for the year ended December 31, 1996 is $2.1 million resulting from the Company's sale of several long-term licensing and lease agreements related to three funeral homes which had previously been operated by a third party. Gross profit for the year ended December 31, 1997 increased 44.1% to $37.7 million from $26.1 million for the year ended December 31, 1996. The increase in gross profit is due primarily to an $8.6 million increase attributable to acquired operations and a $3.4 million or 14.6% increase from existing operations. The increase in gross profit from existing operations was primarily attributable to increased preneed sales along with improved operational efficiencies at the Company's cemetery operations. 15 18 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 years ended December 31, 1997 and 1996.
YEAR ENDED DECEMBER 31, CHANGE ------------------ ------------------ 1997 1996 AMOUNT PERCENT ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations................................ $45,786 $44,714 $ 1,072 2.4% Acquired operations................................ 41,374 9,273 32,101 * Disposed operations................................ -- 867 (867) * ------- ------- ------- Total funeral net revenues................. $87,160 $54,854 $32,306 58.9% ======= ======= ======= Gross profit: Existing operations................................ $13,325 $13,003 $ 322 2.5% Acquired operations................................ 9,005 1,862 7,143 * Disposed operations................................ -- 185 (185) * ------- ------- ------- Total funeral gross profit................. $22,330 $15,050 $ 7,280 48.4% ======= ======= =======
- --------------- * Not meaningful Total funeral net revenues for the year ended December 31, 1997 increased 58.9% to $87.2 million from $54.9 million for the year ended December 31, 1996, due primarily to a $32.1 million increase attributable to acquired operations. Revenues from existing operations increased by 2.4% from the prior year due primarily to a 3.4% increase in the average revenue per funeral service performed, offset in part by a 0.8% decrease in the number of funeral services performed. Total funeral gross profit for the year ended December 31, 1997 increased 48.4% to $22.3 million from $15.1 million for the year ended December 31, 1996. Excluding the effects of the disposed funeral home operations, funeral gross margin decreased to 25.6% from 27.5% in the prior year due primarily to acquired operations, which generally have lower gross margins as compared to the Company's existing operations. Funeral gross margin at existing operations was 29.1% for both years as improvements in the Company's pricing and merchandising strategies offset the decline in volume discussed above. Gross profit at acquired operations increased to 21.8% from 20.1% in 1996, reflecting price improvements and cost containment programs implemented by the Company. 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 years ended December 31, 1997 and 1996.
YEAR ENDED DECEMBER 31, CHANGE ------------------ ------------------ 1997 1996 AMOUNT PERCENT ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations................................ $38,619 $33,762 $ 4,857 14.4% Acquired operations................................ 7,620 1,273 6,347 * ------- ------- ------- Total cemetery net revenues................ $46,239 $35,035 $11,204 32.0% ======= ======= ======= Gross profit: Existing operations................................ $13,005 $ 9,972 $ 3,033 30.4% Acquired operations................................ 1,575 165 1,410 * ------- ------- ------- Total cemetery gross profit................ $14,580 $10,137 $ 4,443 43.8% ======= ======= =======
- --------------- * Not meaningful 16 19 Total cemetery net revenues for the year ended December 31, 1997 increased 32.0% to $46.2 million from $35.0 million for the year ended December 31, 1996, due to increases attributable to acquired operations along with significant increases from existing operations. Revenues from existing operations increased by 14.4% from the prior year due primarily to the full year results of an aggressive preneed marketing program initiated in the fourth quarter of 1996, along with improved investment performance from the Company's merchandise trusts. Total cemetery gross profit for the year ended December 31, 1997 increased 43.8% to $14.6 million from $10.1 million in 1996. Cemetery gross margin at existing operations increased to 33.7% from 29.5% in 1996, reflecting improved operational efficiencies and operating leverage in the Company's existing cemetery operations. Cemetery gross margin at acquired operations improved to 20.7% from 13.0% in 1996, due to improved operating efficiencies realized as a result of the implementation of the Company's preneed sales marketing and cost containment programs. General and administrative expenses for the year ended December 31, 1997 increased $1.7 million or 29.3% over the year ended December 31, 1996. This increase resulted primarily from increased personnel costs associated with the expansion of the Company's corporate infrastructure necessary to support a higher rate of growth. Excluding the effects of nonrecurring items such as the revenues recorded on the asset exchange and sale of licensing and lease agreements discussed above, general and administrative expenses as a percentage of net revenues from continuing operations decreased to 5.7% in 1997 from 6.5% in the prior year as general and administrative expenses are being spread over a larger revenue base. Interest expense for the year ended December 31, 1997 increased $3.9 million to $6.3 million from $2.4 million for the year ended December 31, 1996, due primarily to significantly higher debt levels as average indebtedness outstanding in 1997 increased to $110.9 million from $52.4 million for 1996. This increase in average indebtedness outstanding is a result of increased acquisition activity during 1997 along with the payoff in 1996 of $52.7 million borrowed under the Company's Credit Facility with a portion of the proceeds of an equity offering in May 1996. Partially offsetting this increase was the paydown of approximately $13.0 million borrowed under the Company's Credit Facility with a portion of the proceeds of an equity offering in February 1997. Interest income of approximately $41,000 and $276,000 related to the temporary investment of equity offering proceeds has been netted against interest expense for the years ended December 31, 1997 and 1996, respectively. The Company's effective tax rate for the year ended December 31, 1997 decreased to 38.2% from 42.4% in 1996. The Company's effective tax rate for 1997 is lower than its estimated effective tax rate of 39%, due primarily to a reduction to its income tax provision in the third quarter of 1997 of $200,000, representing the difference between the Company's estimated and actual tax liability for the year ended December 31, 1996. The 1996 tax provision includes 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 its effective tax rate for 1998 to approximate 39%. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. Total net revenues for the year ended December 31, 1996 increased 43.7% or $28.0 million over 1995. The increase in net revenues reflects a $23.3 million increase in net revenues attributable to acquired operations and a $2.6 million, or 4.7% increase in net revenues from existing operations. The substantial increase in net revenues from acquired operations is due primarily to the full period results of the 27 funeral homes and 13 cemeteries acquired in 1995 and the partial period results of the 59 funeral homes and three cemeteries acquired in 1996. The remainder of the increase in net revenues of $2.1 million results from the buyout of several long-term licensing and lease agreements related to three funeral homes which had been previously operated by a third party since January 1993. Gross profit for the year ended December 31, 1996 increased 51.1% to $26.1 million from $17.3 million for the year ended December 31, 1995. The increase in gross profit reflects a $6.1 million increase attributable to acquired operations and $1.7 million, or 10.7% increase from existing operations. The increase in gross profit from existing operations was attributable primarily to increased revenues at both funeral home and cemetery operations as well as improved operational efficiencies at funeral home operations. The remainder of the 17 20 increase in gross profit of $1.0 million relates to the gain recognized on the buyout of the long-term licensing and lease agreements. 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 year ended December 31, 1996 and 1995.
YEAR ENDED DECEMBER 31, CHANGE ------------------ ------------------ 1996 1995 AMOUNT PERCENT ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations................................ $32,212 $30,630 $ 1,582 5.2% Acquired operations................................ 22,642 5,631 17,011 * ------- ------- ------- Total funeral net revenues................. $54,854 $36,261 $18,593 51.3% ======= ======= ======= Gross profit: Existing operations................................ $ 9,602 $ 7,758 $ 1,844 23.8% Acquired operations................................ 5,448 1,061 4,387 * ------- ------- ------- Total funeral gross profit................. $15,050 $ 8,819 $ 6,231 70.7% ======= ======= =======
- --------------- * Not meaningful. Total funeral net revenues for the year ended December 31, 1996 increased 51.3% to $54.9 million from $36.3 million for the year ended December 31, 1995. The increase in funeral net revenues reflects a $17.0 million increase from acquired operations and a $1.6 million, or 5.2% increase from existing operations. The increase in revenues from existing operations is primarily attributable to a 5.6% increase in the average revenue per regular funeral service performed partially offset by a decrease of approximately 0.8% in the number of regular funeral services performed. Total funeral gross profit for the year ended December 31, 1996 increased 70.7% to $15.1 million from $8.8 million for year ended December 31, 1995. The increase in funeral gross profit reflects a $4.4 million increase from acquired operations and a $1.8 million, or 23.8% increase from existing operations. Funeral gross margin improved to 27.4% from 24.3%. Funeral gross margin at existing operations improved to 29.8% from 25.3% primarily as a result of sales price increases exceeding the cost increases in merchandising and salaries as well as maximizing the leverage off of allocable fixed operating costs. Funeral gross margin at acquired operations improved to 24.1% from 18.8% primarily due to volume improvement, profitability enhancements and cost efficiencies beginning to be implemented. 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 year ended December 31, 1996 and 1995.
YEAR ENDED DECEMBER 31, CHANGE ------------------ ----------------- 1996 1995 AMOUNT PERCENT ------- ------- ------ ------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations................................. $26,811 $25,750 $1,061 4.1% Acquired operations................................. 8,224 1,990 6,234 * ------- ------- ------ Total cemetery net revenues................. $35,035 $27,740 $7,295 26.3% ======= ======= ====== Gross profit: Existing operations................................. $ 8,192 $ 8,322 $ (130) (1.6)% Acquired operations................................. 1,945 155 1,790 * ------- ------- ------ Total cemetery gross profit................. $10,137 $ 8,477 $1,660 19.6% ======= ======= ======
- --------------- * Not meaningful. 18 21 Total cemetery net revenues for the year ended December 31, 1996 increased 26.3% to $35.0 million from $27.7 million for the year ended December 31, 1995. The increase in cemetery net revenues reflects a $6.2 million increase from acquired operations and a $1.1 million, or 4.1%, increase from existing operations. The increase in net revenues from existing operations resulted primarily from an increase in preneed sales and income recognized on earnings from merchandise trusts partially offset by a 1.7% decrease in at need sales. The preneed sales increased as a result of aggressive marketing that occurred primarily in the fourth quarter. The merchandise trust earnings increased as a result of higher average balances in such trusts as well as improved investment performance. The decrease in at need revenues was a result of slightly lower interment volume with no price increases. Total cemetery gross profit for the year ended December 31, 1996 increased 19.6% to $10.1 million from $8.5 million for the year ended December 31, 1995. The increase reflects a $1.8 million increase from acquired operations partially offset by a $130,000, or 1.6%, decrease from existing operations. Cemetery gross margin at existing operations decreased to 30.6% from 32.3%, primarily as a result of higher selling and fixed operating costs as a percentage of revenue partially offset by lower maintenance expenses as a percentage of net revenues. Selling and fixed operating costs as a percentage of net revenues increased primarily as a result of inefficiencies incurred in connection with the consolidation of the Company's cemetery corporate operations from Georgia to Texas as well as the cemetery management transition which occurred in the middle of 1996. The decrease in maintenance expense as a percentage of net revenues from 1995 was primarily related to the increase in earnings recognized from perpetual care trusts. Earnings recognized from perpetual care trusts are used to defray maintenance and upkeep of the cemetery grounds. Although investments in perpetual care trusts are primarily conservative interest bearing instruments, earnings recognized from perpetual care trusts increased due to improved investment returns as well as to higher average balances in such trusts as compared to 1995. Cemetery gross margin at acquired operations was 23.7% primarily because they had not been operated by the Company long enough to fully implement its preneed marketing programs to enable leveraging off of the maintenance and fixed operating costs which generally start being incurred immediately after the acquisition. General and administrative expenses for the year ended December 31, 1996 increased $1.1 million, or 22.3% over the year ended December 31, 1995. This increase resulted primarily from increased personnel costs as well as professional fees and insurance necessary to support a higher rate of growth and, to a lesser extent, increased facility and travel expense as a result of consolidating the cemetery corporate operations from Georgia to the Company's corporate headquarters in Lufkin, Texas. Additionally, general and administrative expenses for the year ended December 31, 1996 include $300,000 of legal fees incurred in connection with an action brought against the Company by Loewen Group International, Inc. (which has since been dismissed) offset by a $600,000 gain related to insurance proceeds received on a funeral home facility which was destroyed by fire. General and administrative expenses as a percentage of net revenues, excluding the effects of the gain on the aforementioned buyout, decreased to 6.5% in the year ended December 31, 1996 from 7.5% in the corresponding period in 1995, reflecting economies of scale realized by the Company as expenses are spread over a larger revenue base. Interest expense for the year ended December 31, 1996 increased $167,000, or 7.6% from the year ended December 31, 1995. The increase was the result of overall higher average levels of indebtedness partially offset by a lower average interest rate on borrowed funds in 1996 as compared to 1995. Although the average levels of indebtedness for the last half of 1996 were actually lower than the comparable period in 1995 as a result of the repayment of all amounts borrowed under the Credit Facility from the proceeds of the May 1996 equity offering, it did not completely offset the much higher average levels of indebtedness in the first half of 1996 as compared to the comparable period in 1995. Interest income of approximately $276,000 related to temporary investment of the May 1996 equity offering proceeds has been netted against interest expense. The Company's effective tax rate for the year ended December 31, 1996 was 42.4% compared to 39.5% for the year ended in December 31, 1995. The higher rate in 1996 was due primarily to an increase in the Company's statutory federal income tax rate from 34% to 35% as the Company exceeded the taxable income threshold requiring the higher tax rate during 1996, and a one-time charge of $565,000 to revalue the 19 22 Company's deferred tax liability accounts to appropriately reflect the higher statutory rate. This was partially reduced by the utilization of state net operating loss carryforwards. 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 $8.0 million at December 31, 1997, representing a decrease of $4.6 million from December 31, 1996. For the year ended December 31, 1997, net cash flow provided from operating activities was approximately $8.0 million, cash used in investing activities totaled approximately $29.8 million and cash provided from financing activities amounted to approximately $17.1 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 $20.0 million primarily attributable to a 33.3% increase in preneed cemetery sales which are usually financed on an installment basis over 36 months. Significant components of cash used in investing activities included capital expenditures of $12.5 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. Additionally, the Company utilized approximately $17.5 million of internal funds, including funds drawn on the Credit Facility at December 31, 1996, to consummate funeral home and cemetery acquisitions during 1997. Significant components of cash provided from financing activities included (i) $22.1 million of net proceeds received in February 1997 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; (ii) borrowings totaling approximately $18.9 million which were used for general corporate purposes including, among other things, tax payments, long-term supply agreements and refinancings of certain notes payable issued in connection with the Company's acquisitions; offset by (iii) lump sum payments totaling approximately $11.4 million to extinguish certain seller financed notes and normal scheduled debt payments. Long-term debt, including current maturities, at December 31, 1997 totaled $172.2 million as compared to $49.7 million at December 31, 1996. The increase was principally attributable to increased acquisition activity during 1997, partially offset by the payoff of $13.0 million outstanding under the Credit Facility with a portion of the proceeds from the issuance of Common Stock in February 1997, as described below. Due to increases in recent and projected acquisition activity, the Company increased its borrowing capacity under the Credit Facility in September 1997 to $225 million from $100 million. Long-term debt at December 31, 1997 consisted of $156.7 million drawn under the Credit Facility and $15.5 million owed under various notes payable to sellers of funeral homes and cemeteries. As of December 31, 1997, the Credit Facility also supported letters of credit totaling $3.2 million related to one of the Company's 1996 acquisitions. The Company obtained a release from these letters of credit in the first quarter of 1998 and the Company currently has no letters of credit outstanding. At December 31, 1997, $65.1 million was available for borrowings under the Credit Facility. Any amounts repaid under the Credit Facility, including amounts previously supporting the letters of credit outstanding at December 31, 1997, are available for future borrowings under the terms of the Credit Facility. 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 6.83% and 6.39% at December 31, 1997 and 1996, 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 20 23 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, 1998, 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. 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. Subsequent to December 31, 1997, the Company completed an underwritten private placement of $143.8 million aggregate principal amount of 4.5% convertible subordinated debentures (the "Debentures"), including approximately $18.8 million related to the exercise of the over-allotment option granted by the Company to the underwriters. 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 totaling approximately $139.8 million (after selling commissions) were used to pay down the Credit Facility. The selling commissions and related expenses totaling approximately $4.6 million have been deferred and will be amortized ratably over the term of the Debentures. 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. As of December 31, 1997, approximately 661,000 shares of Common Stock remained available for issuance pursuant to the Company's acquisition "shelf" registration statement. 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. 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. YEAR 2000 The year 2000 issue is the result of computer programs using two digits to define the applicable year rather than four. Any programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. A computer system which is not year 2000 compliant would not be able to correctly process certain data, or, in extreme situations, system failure could result. As part of the Company's continuing program to update its information systems in anticipation of future growth, the Company is currently involved in the installation of year 2000 compliant software for its cemetery corporate operations and is evaluating software systems for its cemetery operations at the field level. The 21 24 Company has also recently purchased year 2000 compliant software to be used for its funeral corporate and field operations and expects to have year 2000 compliant software in place for substantially all of its operations by mid-year 1999. As part of its initial assessment of its year 2000 exposure, the Company has identified certain critical path items and has developed a timetable for the completion of these projects in a timely manner. In the event that year 2000 compliant software is not in place on a timely basis, however, the Company's results of operations could be adversely affected. The Company has also made inquiries of certain of its vendors to determine what impact, if any, their year 2000 compliance exposure might have on the Company's operations and has received assurances that the vendors' systems are or will be year 2000 compliant in a timely manner. Accordingly, the Company does not expect the year 2000 issue in regard to its vendors' operations to have a material effect on its financial position, results of operations or cash flows. 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 In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the way that public enterprises report segment information in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits". This statement revises and standardizes employers' disclosures about pension and other postretirement benefit plans. These statements are all effective for fiscal years beginning after December 15, 1997. The Company does not believe implementation of SFAS Nos. 130, 131 or 132 will have a material effect on its financial position, results of operation or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this Item 8 are incorporated under Item 14 in Part IV of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 22 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item as to the directors and executive officers of the Company is hereby incorporated by reference from the information appearing under the captions "-- Election of Directors -- Directors and Nominees for Director," "-- Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement which involves the election of directors and will be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 120 days of the end of the Company's fiscal year ended December 31, 1997. ITEM 11. EXECUTIVE COMPENSATION The information required by this item as to the management of the Company is hereby incorporated by reference from the information appearing under the captions "Executive Compensation" and "Election of Directors -- Director Compensation" in the Company's definitive proxy statement which involves the election of directors and will be filed with the Commission pursuant to the Exchange Act within 120 days of the end of the Company's fiscal year ended December 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item as to the ownership by management and others of securities of the Company is hereby incorporated by reference from the information appearing under the caption "Voting Securities and Principal Stockholders" in the Company's definitive proxy statement which involves the election of directors and will be filed with the Commission pursuant to the Exchange Act within 120 days of the end of the Company's fiscal year ended December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Until February 1997, SCI and its subsidiaries owned approximately 43% of the shares of the Company's outstanding Common Stock. SCI disposed of all of the shares of the Company's Common Stock beneficially owned by it and its subsidiaries in February 1997. Additional information required by this item as to certain business relationships and transactions with management and other related parties of the Company is hereby incorporated by reference to such information appearing under the captions "Executive Compensation -- Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Company's definitive proxy statement which involves the election of directors and will be filed with the Commission pursuant to the Exchange Act within 120 days of the end of the Company's fiscal year ended December 31, 1997. 23 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 FINANCIAL STATEMENTS The following financial statements and the Report of Independent Accountants are filed as a part of this report on the pages indicated:
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Balance Sheet as of December 31, 1997 and 1996...................................................... F-3 Consolidated Statement of Income for the Years Ended December 31, 1997, 1996 and 1995.......................... F-4 Consolidated Statement of Changes in Stockholders' Equity for the Years ended December 31, 1997, 1996 and 1995...... F-5 Consolidated Statement of Cash Flows for the Years ended December 31, 1997, 1996 and 1995.......................... F-6 Notes to Consolidated Financial Statements.................. F-7
(a) 2 FINANCIAL STATEMENT SCHEDULES The following Financial Statement Schedule and the Report of Independent Accountants on Financial Statement Schedule are included in this report on the pages indicated: Report of Independent Accountants on Financial Statement Schedule.................................................. S-1 Financial Statement Schedule II -- Valuation and Qualifying Accounts................... S-2
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (a) 3 EXHIBITS The exhibits to this report have been included only with the copies of this report filed with the Commission. Copies of individual exhibits will be furnished to stockholders upon written request to the Company and payment of a reasonable fee.
EXHIBIT NO, DESCRIPTION ----------- ----------- 3.1+ -- Amended and Restated Certificate of Incorporation (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Reg. No. 33-98052)) 3.2+ -- Amended and Restated Bylaws (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Reg. No. 33-98052)) 4.1+ -- Form of Certificate representing shares of Common Stock (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 4.2+ -- Stockholder Rights Agreement, dated October 31, 1994, between the Company and American Stock Transfer & Trust Company, as Rights Agent (filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.3+ -- Certificate of Designation of the Series One Junior Participating Preferred Stock (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 33-98052)) 4.4+ -- First Amendment to Stockholder Rights Agreement, dated September 10, 1996, between the Company and American Stock Transfer & Trust Company, as Rights Agent (filed as Exhibit 6 to the Company's Registration Statement on Form 8-A/A (Amendment No. 2)).
24 27
EXHIBIT NO, DESCRIPTION ----------- ----------- 4.5+ -- Registration Agreement, dated December 22, 1995, among Equity Corporation International, Investment Capital Corporation and Service Corporation International (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Reg. No. 33-80841)) 10.1+* -- Employment Agreement, dated February 1, 1994, between the Company and James P. Hunter, III (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.2+* -- Employment Agreement, dated March 7, 1994, between the Company and Jack D. Rottman (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.3+* -- Employment Agreement, dated July 22, 1994, between the Company and Billy C. Wells (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.4+* -- Employment Agreement, dated February 1, 1995, between the Company and W. Cardon Gerner (filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.5+* -- Employment Agreement, dated April 8, 1996 between the Company and William C. McNamara (filed as Exhibit 99.2 to the Company's report on Form 8-K filed on May 3, 1996) 10.6+* -- Stockholder's Agreement, dated June 30, 1994, between the Company and Jack D. Rottman (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.7+ -- Stock Registration Agreement, dated February 1, 1994, among the Company and Investment Capital Corporation, James P. Hunter, III and Robert W. Loftis (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.8+ -- First Amendment to Stock Registration Agreement, dated September 1, 1994, among the Company and Investment Capital Corporation, Kanawha, L.L.C., James P. Hunter, III and Robert W. Loftis (filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.9+ -- Second Amendment to Stock Registration Agreement, dated May 31, 1995, among the Company and James P. Hunter, III, Investment Capital Corporation, Kanawha, L.L.C., The Loftis Foundation, Inc. and Robert Wayne Loftis (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Reg. No. 33-92876)) 10.10+* -- Equity Corporation International Amended and Restated 1994 Long-Term Incentive Plan, amended as of October, 1996 (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 10.11* -- Amendment to Amended and Restated Equity Corporation International 1994 Long-Term Incentive Plan, dated May 21, 1997 10.12+* -- Form of Incentive Stock Option Agreement for Executive Officers under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.13+* -- Form of Non-Qualified Employee Stock Option Agreement for Executive Officers under 1994 Long-Term Incentive Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.14+* -- Form of Non-Qualified Stock Option Agreement for employees under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
25 28
EXHIBIT NO, DESCRIPTION ----------- ----------- 10.15+* -- Form of Non-Qualified Employee Stock Option Agreement for employees of the Cemetery Division under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.16+* -- Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Form of Non-Qualified Employee Stock Option Agreement for Executive Officers under the 1994 Long-Term Incentive Plan, dated August 14, 1997 10.18+* -- Option #2 of Amendment and Restatement of Agreement between ECI Cemetery Services, Inc. and certain employees concerning replacement of former deferred compensation arrangements with restricted stock award programs (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.19+* -- Option #3 of Amendment and Restatement of Agreement between ECI Cemetery Services, Inc. and certain employees concerning replacement of former deferred compensation arrangements with restricted stock award programs (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.20+ -- Form of Indemnification Agreement with Executive Officers and Directors (filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.21* -- Form of Executive Severance Agreement dated effective August 14, 1997. 10.22+* -- Equity Corporation International 1997 Employee Stock Purchase Plan (filed as Exhibit 4.7 to the Company's Registration Statement on Form S-8 (Reg. No. 333-25303)) 10.23+* -- Consulting Agreement, dated as of September 12, 1996, between the Company and James P. Hunter, III (filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 10.24+ -- Amended and Restated Credit Agreement, dated September 2, 1997, among the Company, the Banks named therein and NationsBank of Texas, N.A., as Agent for the Banks (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997) 21.1 -- List of Subsidiaries as of December 31, 1997 23.1 -- Consent of Coopers & Lybrand L.L.P. 24.1 -- A power of attorney, pursuant to which amendments to this Report may be filed, is included on the signature page contained in Part IV of this Report 27 -- Financial Data Schedule 27.1 -- Restated Financial Data Schedules
- --------------- + Incorporated herein by reference to the indicated filing. * 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 December 31, 1997. 26 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Lufkin, State of Texas on March 27, 1998. EQUITY CORPORATION INTERNATIONAL By: /s/ JAMES P. HUNTER, III ---------------------------------- James P. Hunter, III Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned, directors and officers of Equity Corporation International (the "Company"), do hereby severally constitute and appoint James P. Hunter, III and W. Cardon Gerner and each or any of them, our true and lawful attorneys and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ JAMES P. HUNTER, III Chairman of the Board, March 27, 1998 - ----------------------------------------------------- President and Chief Executive James P. Hunter, III Officer (Principal Executive Officer) /s/ W. CARDON GERNER Senior Vice President -- Chief March 27, 1998 - ----------------------------------------------------- Financial W. Cardon Gerner Officer -- (Principal Financial and Accounting Officer) /s/ J. PATRICK DOHERTY Director March 27, 1998 - ----------------------------------------------------- J. Patrick Doherty /s/ JACK T. HAMMER Director March 27, 1998 - ----------------------------------------------------- Jack T. Hammer /s/ THOMAS R. MCDADE Director March 27, 1998 - ----------------------------------------------------- Thomas R. McDade /s/ KENNETH W. SMITH Director March 27, 1998 - ----------------------------------------------------- Kenneth W. Smith /s/ BOB BULLOCK Director March 27, 1998 - ----------------------------------------------------- Bob Bullock
27 30 INDEX TO FINANCIAL STATEMENTS
PAGE ---- AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants......................... F-2 Consolidated Balance Sheet as of December 31, 1997 and 1996................................................... F-3 Consolidated Statement of Income for the Years Ended December 31, 1997, 1996 and 1995....................... F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995........... F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995....................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 31 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Equity Corporation International: We have audited the accompanying consolidated balance sheet of Equity Corporation International and subsidiaries, as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Equity Corporation International and subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas March 5, 1998 F-2 32 EQUITY CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET (THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, -------------------- 1997 1996 -------- -------- Current assets: Cash and cash equivalents................................. $ 8,039 $ 12,654 Receivables, net of allowances............................ 15,412 9,050 Inventories............................................... 9,134 6,029 Other..................................................... 2,181 1,825 -------- -------- Total current assets.............................. 34,766 29,558 Preneed funeral contracts................................. 235,891 156,028 Cemetery properties, at cost.............................. 117,087 84,706 Long-term receivables, net of allowances.................. 55,393 37,226 Property, plant and equipment, at cost (net).............. 94,684 57,263 Deferred charges and other assets......................... 24,284 7,986 Names and reputations (net)............................... 155,595 71,124 -------- -------- Total assets...................................... $717,700 $443,891 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $ 14,077 $ 6,943 Income taxes payable...................................... 51 294 Deferred income taxes..................................... 2,114 2,605 Current maturities of long-term debt...................... 858 537 -------- -------- Total current liabilities......................... 17,100 10,379 Deferred preneed funeral contract revenues................ 242,185 161,153 Long-term debt............................................ 171,303 49,197 Deferred cemetery costs................................... 27,224 21,268 Deferred income taxes..................................... 31,106 22,799 Other liabilities......................................... 2,250 1,631 Commitments and contingencies Stockholders' equity: Preferred stock........................................ -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 21,119,362 and 19,322,723 issued and outstanding in 1997 and 1996, respectively............ 211 193 Capital in excess of par value......................... 191,902 157,468 Retained earnings...................................... 34,502 19,803 Foreign currency translation adjustment................ (83) -- -------- -------- Total stockholders' equity........................ 226,532 177,464 -------- -------- Total liabilities and stockholders' equity........ $717,700 $443,891 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 33 EQUITY CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- ------- ------- Net revenues Funeral................................................... $ 87,160 $54,854 $36,261 Cemetery.................................................. 46,239 35,035 27,740 Other..................................................... 1,674 2,085 -- -------- ------- ------- Total revenues.................................... 135,073 91,974 64,001 -------- ------- ------- Costs and expenses Funeral................................................... 64,830 39,804 27,442 Cemetery.................................................. 31,659 24,898 19,263 Other..................................................... 924 1,135 -- -------- ------- ------- Total costs and expenses.......................... 97,413 65,837 46,705 -------- ------- ------- Gross profit.............................................. 37,660 26,137 17,296 General and administrative expenses......................... 7,560 5,848 4,782 -------- ------- ------- Income from operations.................................... 30,100 20,289 12,514 Interest expense............................................ 6,331 2,374 2,207 -------- ------- ------- Income before income taxes................................ 23,769 17,915 10,307 Provision for income taxes.................................. 9,070 7,589 4,071 -------- ------- ------- Net income........................................ $ 14,699 $10,326 $ 6,236 ======== ======= ======= Earnings per share: Basic..................................................... $ 0.71 $ 0.58 $ 0.42 ======== ======= ======= Assuming full dilution.................................... $ 0.70 $ 0.57 $ 0.42 ======== ======= ======= Weighted average number of common and equivalent shares outstanding: Basic..................................................... 20,597 17,781 14,699 ======== ======= ======= Assuming full dilution.................................... 20,952 18,068 14,835 ======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 34 EQUITY CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK CAPITAL IN CUMULATIVE ------------------- EXCESS OF RETAINED TRANSLATION STOCKHOLDERS' SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENT EQUITY ---------- ------ ---------- -------- ----------- ------------- Balance, December 31, 1994... 14,688,859 $147 $ 80,695 $ 3,241 $ -- $ 84,083 Net income................. -- -- -- 6,236 -- 6,236 Common stock issued: Acquisitions............ 8,332 -- 119 -- -- 119 Option exercises........ 112,500 1 1,167 -- -- 1,168 Other................... 37,560 -- 59 -- -- 59 ---------- ---- -------- ------- ----- -------- Balance, December 31, 1995... 14,847,251 148 82,040 9,477 -- 91,665 Net income................. -- -- -- 10,326 -- 10,326 Common stock issued: Equity offering......... 4,335,000 43 72,964 -- -- 73,007 Acquisitions............ 113,455 1 2,414 -- -- 2,415 Option exercises........ 1,999 -- 22 -- -- 22 Other................... 25,018 1 28 -- -- 29 ---------- ---- -------- ------- ----- -------- Balance, December 31, 1996... 19,322,723 193 157,468 19,803 -- 177,464 Net income................. -- -- -- 14,699 -- 14,699 Common stock issued: Equity offering......... 1,199,178 12 22,089 -- -- 22,101 Acquisitions............ 571,690 6 11,845 -- -- 11,851 Option exercises........ 10,500 -- 140 -- -- 140 Other................... 15,271 -- 360 -- -- 360 Foreign currency translation adjustment.............. -- -- -- -- (83) (83) ---------- ---- -------- ------- ----- -------- Balance, December 31, 1997... 21,119,362 $211 $191,902 $34,502 $ (83) $226,532 ========== ==== ======== ======= ===== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 35 EQUITY CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 -------- -------- ------- Cash flows from operating activities: Net income................................................ $ 14,699 $ 10,326 $ 6,236 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 8,428 4,801 3,458 Provision for bad debts and contract cancellations..... 6,250 3,742 3,217 Gain on sale of assets................................. (750) (1,489) (42) Deferred income taxes.................................. 1,303 1,392 816 Changes in assets and liabilities, net of effects from acquisitions: Receivables............................................ (19,982) (12,382) (7,482) Inventories............................................ (713) 283 (282) Other current assets................................... (284) (515) 263 Other long-term assets................................. (4,514) (2,636) (2,998) Accounts payable and accrued liabilities............... 2,917 1,601 (998) Income taxes payable................................... (52) (895) 901 Preneed funeral contracts and associated deferred revenues............................................. 722 (36) 123 -------- -------- ------- Net cash provided by operating activities......... 8,024 4,192 3,212 -------- -------- ------- Cash flows from investing activities: Capital expenditures...................................... (12,521) (8,318) (7,691) Proceeds from sale of assets.............................. 139 4,192 68 Acquisitions, net of cash acquired........................ (17,519) (21,541) (906) Other..................................................... 113 196 106 -------- -------- ------- Net cash used in investing activities............. (29,788) (25,471) (8,423) -------- -------- ------- Cash flows from financing activities: Net proceeds from issuance of common stock................ 22,601 73,029 974 Borrowings on debt........................................ 18,950 11,615 11,123 Payments on debt.......................................... (24,402) (56,944) (6,485) -------- -------- ------- Net cash provided by financing activities......... 17,149 27,700 5,612 -------- -------- ------- Increase (decrease) in cash and cash equivalents............ (4,615) 6,421 401 Cash and cash equivalents at beginning of year.............. 12,654 6,233 5,832 -------- -------- ------- Cash and cash equivalents at end of year.................... $ 8,039 $ 12,654 $ 6,233 ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements. F-6 36 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Equity Corporation International ("ECI") and its wholly owned subsidiaries (the "Company") is a provider of deathcare services and products primarily to communities located in non-metropolitan and suburban areas of the United States and Canada. At December 31, 1997, the Company operated 259 funeral homes and 76 cemeteries in 33 states and one Canadian province. Principles of Consolidation The consolidated financial statements include ECI and all majority-owned subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years have been made to conform to current period classifications. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Funeral Operations The Company recognizes revenue on funeral sales at the time the services are performed. The Company's trade receivables consist primarily of funeral services already performed. An allowance for doubtful accounts has been provided for those accounts which management estimates will not be collected in the future. All price guaranteed preneed funeral sales contracts (including insurance funded contracts) are included in the accompanying consolidated balance sheet as a long-term asset with a corresponding credit to deferred preneed funeral contract revenues. Preneed funeral trust earnings are deferred until the funeral service is performed. Additionally, increasing benefits under insurance funded contracts are accrued and deferred until the funeral service is performed. Cemetery Operations Sales of cemetery interment rights, interment services and related merchandise are recorded as revenues when customer contracts are executed with concurrent recognition of related costs. Costs related to the sales of cemetery interment rights include cemetery property and costs related to cemetery development activities and are charged to operations using the specific identification method. Costs related to sales of interment services and merchandise are based on actual costs incurred or estimates of future costs. Allowances for customer cancellations and refunds are provided at the date of sale based upon historical experience. Generally, a portion of the proceeds from the sale of cemetery interment rights is required by state law to be paid into perpetual care trust funds. Principal balances in these trusts (including realized and unrealized capital gains in some states) must generally be held in perpetuity. Accordingly, the trust fund corpus is not reflected in the Company's consolidated financial statements. Earnings from these trusts are recognized currently and are intended to defray cemetery maintenance costs. The amount of perpetual care funds trusted at December 31, 1997 and 1996 was approximately $24,924 and $16,249, respectively, and such principal generally cannot be withdrawn by the Company. Earnings recognized on perpetual care trusts for the years ended December 31, 1997, 1996 and 1995 were approximately $1,525, $1,304 and $934, respectively. Additionally, pursuant to state law, a portion of the proceeds from the sale of preneed cemetery merchandise may also be required to be paid into trust funds. The Company's preneed cemetery merchandise trusts funds F-7 37 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) had aggregate balances of approximately $26,194 and $14,316 at December 31, 1997 and 1996, respectively, which approximated fair value. The Company recognizes income on these merchandise trusts in current cemetery net revenues as trust earnings accrue. Earnings recognized on merchandise trusts for the years ended December 31, 1997, 1996 and 1995 were approximately $2,470 $1,113 and $535, respectively. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Inventories Inventories, consisting of funeral merchandise (primarily caskets) and cemetery merchandise (primarily vaults and crypts) are stated at cost, which is not in excess of market, determined using the first-in, first-out (FIFO) method for funeral merchandise and the average cost method for cemetery merchandise. Property, Plant and Equipment Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful lives of the various classes of depreciable assets, ranging from five to thirty-nine years. The Company periodically reviews its properties for possible impairment whenever events or changes in circumstance might indicate that the carrying amount of an asset may not be recoverable. Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized. Gains and losses from dispositions are included in operations. Depreciation expense for the years ended December 31, 1997, 1996 and 1995, was $4,892, $3,038 and $2,010, respectively. Deferred Obtaining Costs Included in "Deferred charges and other assets" are obtaining costs consisting of sales commissions and other direct marketing costs applicable to preneed funeral contracts which are deferred and recognized over 12 years, which approximates the expected timing of the performance of services related to preneed funeral contracts. The aggregate costs deferred as of December 31, 1997 and 1996 were approximately $1,908 and $1,582, respectively. Covenants Not to Compete Included in "Deferred charges and other assets" are prepaid noncompetition agreements entered into with former owners and key employees of businesses acquired. Noncompetition agreements are amortized using the straight-line method over the period of the agreement. At December 31, 1997 and 1996, prepaid covenants not to compete amounted to approximately $6,047 and $4,882, respectively. Names and Reputations The excess of purchase price over the fair value of identifiable net tangible assets acquired in transactions accounted for as a purchase are included in "Names and reputations (net)" and generally are amortized on a straight-line basis over 40 years which, in the opinion of management, is not necessarily the maximum period benefited. Many of the Company's acquired funeral homes have provided high quality service to client families for many decades. The resulting client loyalty often represents a substantial portion of the value of a funeral business. The recoverability of Names and reputations is evaluated periodically as events or circumstances indicate a possible inability to recover its carrying amount. Recoverability is then determined by comparing the undiscounted net cash flows of the assets to which the Names and reputations applies to the net book value (including the Names and reputations) of those assets. The accumulated amortization of Names and F-8 38 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reputations, at December 31, 1997 and 1996, was approximately $5,580 and $2,750, respectively. The amortization charged against income was approximately $2,830, $1,214 and $640 for the three years ended December 31, 1997, 1996 and 1995, respectively. Foreign Currency Translation The functional currency for the Company's Canadian subsidiaries is the Canadian Dollar. All assets and liabilities of Canadian subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of the reporting period. Income and expense items are translated at average exchange rates for the reporting period. The resulting translation adjustments are recorded as a component of stockholders' equity. The effect of exchange rate changes on cash for the year ended December 31, 1997 was not significant. Recent FASB Pronouncements In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the way that public enterprises report segment information in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits". This statement revises and standardizes employers' disclosures about pension and other postretirement benefit plans. These statements are all effective for fiscal years beginning after December 15, 1997. The Company does not believe implementation of SFAS Nos. 130, 131 or 132 will have a material effect on its financial position, results of operation or cash flows. 2. ACQUISITIONS The following table is a summary of acquisitions made during the years ended December 31, 1997 and 1996:
1997 1996 ---- ---- Number acquired: Funeral homes............................................. 84 59 Cemeteries................................................ 12 3 Purchase price.............................................. $156,098 $ 65,047
The purchase price in both years consisted primarily of combinations of cash, common stock and debt issued. The excess of purchase price over the fair value of net assets acquired is included in Names and reputations (net). In connection with these acquisitions, the Company enters into customary employment, consulting and noncompetition agreements with certain employees and former owners of the businesses acquired. In certain situations, the Company will prepay a portion of the noncompetition agreements and amortize such prepayments on a straight-line basis over the terms of the agreements. The purchase prices indicated above do not include $952 and $832 for noncompetition agreements which were prepaid to individuals related to businesses acquired in 1997 and 1996, respectively. The acquisitions have been F-9 39 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accounted for as purchases and their operating results have been included since their respective date of acquisition. The effect of acquisitions on the consolidated balance sheet at December 31, was as follows:
1997 1996 --------- -------- Current assets.............................................. $ 7,373 $ 3,994 Preneed funeral contracts................................... 66,221 41,365 Cemetery properties......................................... 30,283 6,036 Long-term receivables....................................... 8,536 (319) Property, plant and equipment............................... 30,058 17,223 Deferred charges and other assets........................... 13,998 603 Names and reputations....................................... 87,136 40,367 Current liabilities......................................... (3,348) (624) Deferred preneed funeral contract revenues.................. (66,668) (41,561) Long-term debt.............................................. (127,879) (40,009) Deferred cemetery costs..................................... (6,972) (803) Deferred income taxes....................................... (6,513) (978) Noncurrent liabilities...................................... (211) (465) Common stock issued......................................... (11,851) (2,415) --------- -------- Total............................................. 20,163 22,414 Less cash acquired........................................ 2,644 873 --------- -------- Cash used for acquisitions................................ $ 17,519 $ 21,541 ========= ========
The following represents the unaudited pro forma results of operations as if all of the above noted business combinations had occurred at the beginning of 1996:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- Net revenues................................................ $159,494 $150,856 Income before income taxes.................................. 25,087 20,568 Net income.................................................. 15,503 11,854 Earnings per common and equivalent share: Basic..................................................... $ 0.74 $ 0.64 Diluted................................................... $ 0.73 $ 0.63
The pro forma results of operations should not be construed as indicative of the Company's results of operations had the acquisitions been consummated on the dates indicated and are not intended to project the Company's results of operations for any future period. 3. DISPOSITIONS During January 1997, the Company acquired one cemetery from Service Corporation International ("SCI"), a former significant stockholder of the Company (Note 7), 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 in the first quarter of 1997. During March 1996, the Company conveyed to SCI licensing and lease agreements related to three funeral home operations which had been previously operated by an unaffiliated third party for an aggregate F-10 40 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purchase price of $2,085. This amount and $1,135 of related costs and expenses are included in net revenues and costs and expenses, respectively, for the year ended December 31, 1996. 4. 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 $104,523 and $67,364 will be funded by trusts and approximately $131,368 and $88,664 will be funded by insurance policies as of December 31, 1997 and 1996, respectively. Accumulated earnings from trust funds and increasing insurance benefits have been included to the extent that they have accrued through December 31, 1997 and 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 December 31, 1997 and 1996, the amounts collected and held in trusts, at cost, which approximates market, were approximately $93,900 and $59,246, 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. 5. INCOME TAXES Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates. Significant components of the Company's deferred tax liabilities and assets at December 31, were as follows:
1997 1996 ------- ------- Developed and undeveloped land.............................. $28,093 $22,231 Property, plant and equipment............................... 2,950 2,062 Receivables related to sales of cemetery interment rights and related products...................................... 3,989 3,751 Names and reputations....................................... 2,556 669 Deferred obtaining costs.................................... 778 650 Other....................................................... 408 475 ------- ------- Total deferred tax liabilities.................... 38,774 29,838 ------- ------- Preneed funeral contracts................................... 2,499 2,280 Allowance for bad debts and cancellation reserves........... 1,926 1,350 Deferred compensation....................................... 309 181 Other....................................................... 820 623 ------- ------- Total deferred tax assets......................... 5,554 4,434 ------- ------- Net deferred tax (assets) liabilities....................... $33,220 $25,404 ======= =======
F-11 41 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the provision for income taxes for the years ended December 31, were as follows:
1997 1996 1995 ------ ------ ------ Current tax expense: Federal.......................................... $7,442 $5,399 $2,868 State............................................ 298 798 387 Foreign.......................................... 27 -- -- ------ ------ ------ Total current............................ 7,767 6,197 3,255 ------ ------ ------ Deferred tax expense: Federal.......................................... 1,216 1,282 738 State............................................ 87 110 78 ------ ------ ------ Total deferred........................... 1,303 1,392 816 ------ ------ ------ Total tax expense........................ $9,070 $7,589 $4,071 ====== ====== ======
United States income taxes have not been provided on the undistributed earnings of the Company's Canadian subsidiaries since it is the Company's intention to reinvest such earnings indefinitely. The differences between the federal tax rate and the Company's effective tax rate at December 31, were as follows:
1997 1996 1995 ------ ------ ------ Tax at U.S. statutory rate......................... $8,319 $6,270 $3,504 State income taxes, net of federal tax............. 250 590 307 Increase in federal marginal tax rate.............. -- 565 -- Nondeductible amortization......................... 422 180 139 Other, net......................................... 79 (16) 121 ------ ------ ------ $9,070 $7,589 $4,071 ====== ====== ====== Total effective tax rate........................... 38.2% 42.4% 39.5%
During the year ended December 31, 1996, the Company exceeded the taxable income threshold requiring the Company's statutory federal income tax rate to be increased from 34 percent to 35 percent. As a result, the provision for income taxes for the year ended December 31, 1996 includes an adjustment to deferred taxes of $565 related to this increase in the statutory federal income tax rate. Income taxes paid during the years ending December 31, 1997, 1996, and 1995 were approximately $8,010, $6,974 and $2,308, respectively. F-12 42 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. DEBT Long-term debt consisted of the following at December 31:
1997 1996 -------- -------- Credit facility.......................................... $156,700 $ 35,000 Notes payable............................................ 14,441 13,914 Other.................................................... 1,020 820 -------- -------- 172,161 49,734 Less current maturities................................ 858 537 -------- -------- $171,303 $ 49,197 ======== ========
In September 1997, the Company amended and increased its borrowing capacity under its revolving credit agreement with a group of banks (the "Credit Facility") to $225,000 from $100,000. 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, 1998, subject to annual renewal options. The Credit Facility is used for acquisition financing and general corporate purposes. 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 commitment fees on unused funds depending on the Leverage Ratio. The weighted average interest rates on amounts borrowed under the Credit Facility were 6.83% and 6.39% at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the Credit Facility also supported letters of credit totaling $3,152 related to one of the Company's acquisitions in 1996. The Company obtained a release from these letters of credit in the first quarter of 1998. 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 the 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 (approximately $201,054 as of December 31, 1997). Notes payable include notes issued by funeral home and cemetery subsidiaries to financial institutions and individuals with varying maturities through 2015, collateralized by property and equipment, or in certain instances, guaranteed by the Company. Interest rates on these notes range from 4.9% to 12.6%. Aggregate principal payments on long-term debt for each of the five years and thereafter subsequent to December 31, 1997 are $858, $10,711, $616, $488, $156,034 and $3,454, respectively. Interest paid during the years ended December 31, 1997, 1996 and 1995 was approximately $4,422, $2,426 and $1,865, 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") including approximately $18,750 related to the exercise of the over-allotment option granted by the Company to the underwriters. 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 of approximately $139,797 (after selling commissions of approximately $3,953) were used to pay down the Credit Facility. The selling commissions and related expenses totaling approximately $4,616 have been deferred and will be amortized ratably over the term of the Debentures (Note 9). F-13 43 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. CAPITAL STOCK Common Stock Holders of the Company's common stock are entitled to receive dividends if, as and when declared by the Board of Directors of the Company out of funds legally available only after payment of, or provision for, full dividends on all outstanding shares of any series of preferred stock and after the Company has made provision for any sinking funds for any series of preferred stock. The Company has never paid cash dividends on its common stock. On May 1, 1996, the Company completed a public offering of 4,335,000 shares of its common stock at $18.00 per share, including 585,000 shares sold to the underwriters pursuant to the overallotment option granted to them, for net proceeds of approximately $73,007 (after selling commissions and estimated related expenses of approximately $5,023). The net proceeds were used to pay off amounts outstanding under the Credit Facility and the remainder was used for general corporate purposes, including acquisitions. On September 10, 1996, the Company's Board of Directors declared a 3-for-2 split of the Company's common stock to be effected as a stock dividend. The record date for purposes of the stock dividend was September 23, 1996, and the stock was distributed on October 2, 1996. All share and per share information in the accompanying consolidated financial statements have been retroactively restated to reflect the effects of the stock split. 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. The Company received net proceeds of approximately $22,101 (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 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. Preferred Stock The authorized capital stock of the Company also consists of 10,000,000 shares of preferred stock, par value $.01 per share, of which 500,000 shares are designated as the Series One Junior Participating Preferred Stock (the "Series One Preferred Stock"). No shares of preferred stock were issued as of December 31, 1997. The preferred stock is issuable by the Board of Directors in one or more series, with the number of shares of each series and the designations, powers, preferences, qualifications, limitations or restrictions of each series to be determined by the Board of Directors. Among the specific matters that may be determined by the Board of Directors are: the annual rate of dividends; the redemption price, if any; the terms of a sinking fund, if any; the amount payable in the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company; conversion rights, if any; and voting powers, if any. All series of preferred stock will rank equally and be identical in all respects except as may otherwise be provided in the Certificate of Designations establishing such series. The Board of Directors of the Company, without obtaining stockholder approval, may issue shares of the preferred stock with voting rights or conversion rights that could affect the voting power of the holders of common stock. The issuance of any shares of preferred stock could be utilized, under certain circumstances, in an attempt to prevent an acquisition of the Company. Except in connection with the preferred share purchase rights, the Company has no present intention to issue any shares of preferred stock. On October 11, 1994, the Board of Directors declared a dividend distribution of one preferred share purchase right (the "Right") for each outstanding share of common stock on such date and issued thereafter. The Rights become exercisable in the event of certain attempts to acquire 20% or more of the common stock of the Company, subject to certain exceptions. Each right entitles the registered holder to purchase from the F-14 44 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company one one-hundred fiftieth of a share of Series One Preferred Stock, at a price of $30.00 per one one-hundred fiftieth of a share, subject to adjustment under certain circumstances. The Rights expire on October 11, 2004. The Series One Preferred Stock will rank junior to all other Series of Preferred Stock that may be established by the Board of Directors with respect to the payment of dividends and the distribution of assets upon liquidation. In general, the voting, dividend and liquidation rights of Series One Preferred Stock are designed so that one one-hundred fiftieth of a share of Series One Preferred Stock will be the economic equivalent of one share of common stock. 1994 Long-Term Incentive Plan The 1994 Long-Term Incentive Plan, as amended (the "Incentive Plan"), provides up to 1,950,000 shares of the Company's common stock for issuance to key employees, consultants and advisors and provides for the granting of stock options, stock appreciation rights, performance shares, restricted stock, restricted stock units and other stock-based awards. The Incentive Plan is administered by a committee of the Company's Board of Directors comprised of non-employee directors (the "Committee"). Stock options granted under the Incentive Plan may be either nonqualified stock options, or may qualify as incentive stock options. The exercise price of any stock option may not be less than the fair market value of the underlying common stock as of the date of grant. Except for the deferred compensation agreements with certain employees of the Company's cemetery operations (Note 8), incentive stock options and nonqualified stock options granted under the Incentive Plan are generally exercisable in one-fifth and one-third increments on each of the first five and three anniversaries of the date of grant, respectively, or, in the case of certain options granted to officers of the Company in 1997, based on predetermined prices for the Company's common stock. The Incentive Plan also provides for automatic stock option grants to directors who are not otherwise employed by the Company or its subsidiaries. Upon commencement of service, a non-employee director will receive a nonqualified stock option to purchase 10,000 shares of common stock and continuing non-employee directors annually will receive nonqualified options to purchase an additional 5,000 shares of common stock. Stock options granted to non-employee directors will become exercisable in one-third increments on each of the first three anniversaries of the date of grant. Stock appreciation rights may be granted in tandem with a stock option, in addition to a stock option, or freestanding and unrelated to a stock option. Stock appreciation rights may not be exercisable earlier than six months after the date of grant or after the expiration of ten years from the date of grant and may not have an exercise price of less than the fair market value of the common stock on the date of grant. Upon the grant of performance shares, the Committee will establish performance goals for each performance cycle on the basis of such criteria as the Committee may select. After the end of a performance cycle, the Committee will determine the number of performance shares which have been earned on the basis of performance in relation to the established performance goals. Payment values of earned performance shares will be distributed either in cash or common stock. The Committee determines the participants to whom restricted stock and restricted stock units shall be granted, the number of shares of restricted stock and the number of restricted stock units to be granted to each participant, the duration of the restricted period during which, and the conditions under which, the restricted stock and restricted stock units may be forfeited to the Company, and the other terms and conditions of such awards. Individual restricted periods may be shortened, lengthened or waived by the Committee at any time in its discretion. The Committee may also grant stock unit awards in the form of common stock or units, the value of which is based, in whole or in part, on the value of the common stock. Subject to the provisions of the Incentive Plan, stock unit awards are subject to such terms and conditions as the Committee may determine. F-15 45 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company accounts for its stock-based compensation plans in accordance with the disclosure requirements of SFAS No. 123 "Accounting for Stock-Based Compensation" which encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments based on a fair-value method of accounting. The Company has chosen to continue to recognize compensation expense for its stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations. The following table summarizes the activity relating to stock options under the Incentive Plan for the years ended December 31 (Share amounts in thousands):
1997 1996 1995 ------------------------- ------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE ------ ---------------- ------ ---------------- ------ ---------------- Outstanding at beginning of period............. 1,037 $12.96 683 $10.11 548 $ 8.67 Granted............ 580 22.19 363 18.32 248 12.64 Exercised.......... 11 9.07 2 8.67 113 8.67 Cancelled.......... 4 17.59 7 14.20 -- -- ----- ----- --- Outstanding at end of period............. 1,602 $16.31 1,037 $12.96 683 $10.11 ===== ===== ===
The following table summarizes information about stock options outstanding under the Incentive Plan at December 31, 1997. (Share amounts in thousands.)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ------------------------------ NUMBER WGTD. AVG WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE RANGE OF OUTSTANDING REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE EXERCISE PRICES AT 12/31/97 CONTRACT LIFE PER SHARE AT 12/31/97 PER SHARE --------------- ----------- ------------- ---------------- ----------- ---------------- $ 8.67 to $10.17........... 522 6.88 Yrs. $ 8.95 404 $ 8.85 $14.33 to $20.00........... 534 8.54 17.35 208 16.57 $22.25 to $23.75........... 546 9.60 22.33 -- -- ----- --- $ 8.67 to $23.75........... 1,602 8.36 Yrs. $16.31 612 $11.48 ===== ===
At December 31, 1996, options were outstanding at prices ranging from $8.67 to $19.67 per share, of which approximately 319,000 were immediately exercisable. At December 31, 1995, options were outstanding at prices ranging from $8.67 to $14.33 per share, of which 123,000 were immediately exercisable. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997, 1996 and 1995, respectively: dividend yield of 0.0% for all years; expected volatility of 21.85% for 1997 and 21.32% for 1996 and 1995; risk-free interest rates are different for each grant and range from 5.94% to 6.54% for grants made in 1997 and from 5.28% to 6.99% for grants made in 1996; and the expected lives of the options range from 5 to 6 years for all grants. The weighted average fair value of the options granted during the years ended December 31, 1997, 1996 and 1995 was $8.05, $5.90 and $4.05 per share, respectively. Employee Stock Purchase Plan In May 1997, the stockholders of the Company approved the Equity Corporation International 1997 Employee Stock Purchase Plan ("ESPP"), whereby the Company is authorized to issue up to 500,000 shares F-16 46 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of Common Stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the ESPP, employees may choose at the beginning of each six-month Option Period, as defined, to have up to 10 percent of their Base Earnings withheld to purchase the Company's Common Stock at a discount by exercising stock options granted under the ESPP. The purchase price for the Common Stock is 85 percent of the market value of the Common Stock, as defined. The Company sold a total of 18,684 shares of Common Stock under the ESPP in 1997 at exercise prices ranging from $17.43 to $19.66 per share. There were no outstanding options under the ESPP at December 31, 1997. The fair value of each stock option granted under the ESPP is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997: dividend yield of 0.0%; expected volatility of 21.85%; risk-free interest rate at date of grants of 5.30%; and the expected lives of the options under the ESPP is six months. The weighted average fair value of the options granted under the ESPP for the year ended December 31, 1997, was $7.43 per share. Had compensation cost for the Company's Incentive Plan and ESPP been determined in accordance with SFAS 123, the Company's net income and earnings per share amounts would have been as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------ ------ Net income.............................................. $13,766 $9,949 $6,222 Earnings per share: Basic................................................. $ 0.67 $ 0.56 $ 0.42 Assuming full dilution................................ $ 0.66 $ 0.55 $ 0.42
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. 8. INCENTIVE ARRANGEMENTS AND EMPLOYEE BENEFIT PLANS The Company has entered into deferred compensation agreements pursuant to which certain qualified employees of its cemetery operations may earn incentive cash compensation based upon performance goals established for individual employees. The incentive amount for each employee vests over a ten-year period, initially with 30% vesting on the third anniversary of the determination date and an additional 10% vesting on each anniversary thereafter until full vesting on the tenth anniversary. All of the deferred compensation agreements were amended during 1996 and 1995 to provide that vested amounts as of an employee's determination date in 1995 would be satisfied by a cash payment and unvested amounts as of such date would be satisfied by the issuance of 62,578 shares of restricted stock in the aggregate. The restrictions generally lapse over the employees' original vesting period as discussed above. Additionally, achievement of performance goals for 1995 and beyond result in a combination of deferred cash bonus and stock option awards generally vesting after the fourth year of grant. At December 31, 1997, amounts granted under these deferred compensation agreements aggregated approximately $1,814, of which approximately $702 was accrued. In addition, certain employees of the Company's funeral operations are eligible for participation in a bonus program pursuant to which such employees may earn a bonus of up to 30% of their base salaries if certain annual performance goals are met, which goals are established annually by the Company's compensation committee. The Company sponsors a retirement savings plan which covers all employees who have met certain eligibility requirements for the plan. The Company may make discretionary contributions to the plan. To date, the Company has made no contributions to the plan. F-17 47 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. EARNINGS PER SHARE The Company adopted the provisions of SFAS No. 128, "Earnings per Share," effective January 1, 1997. All prior periods presented have 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:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Income (numerator) Net income.......................................... $14,699 $10,326 $ 6,236 ======= ======= ======= Shares (denominator) Shares -- basic..................................... 20,597 17,781 14,699 Options............................................. 333 269 135 Other............................................... 22 18 1 ------- ------- ------- Shares -- diluted................................... 20,952 18,068 14,835 ======= ======= ======= Earnings per share: Basic............................................... $ 0.71 $ 0.58 $ 0.42 ======= ======= ======= Diluted............................................. $ 0.70 $ 0.57 $ 0.42 ======= ======= =======
Options to purchase an aggregate 546,000 shares of common stock at exercise prices ranging from $22.25 per share to $23.75 per share were excluded from the calculation of diluted earnings per share for 1997 because their effect would have been antidilutive. The options, which expire on dates ranging from May 2007, to December 2007, were still outstanding at December 31, 1997. The Debentures issued in February 1998 (Note 6) would have had an antidilutive effect on diluted earnings per share for all periods presented assuming conversion on a pro forma basis. 10. SUPPLEMENTARY INFORMATION The detail of certain balance sheet accounts, at December 31, was as follows:
1997 1996 ------- ------- Receivables and allowances: Trade..................................................... $15,792 $ 9,053 Other..................................................... 1,768 1,413 ------- ------- 17,560 10,466 Less allowance for bad debts.............................. 2,148 1,416 ------- ------- $15,412 $ 9,050 ======= ======= Long-term: Installment contracts..................................... $40,302 $31,096 Cemetery merchandise receivables.......................... 26,194 14,316 ------- ------- 66,496 45,412 Less: Allowance for contract cancellations...................... 4,046 2,669 Unearned finance charges.................................. 7,057 5,517 ------- ------- $55,393 $37,226 ======= =======
F-18 48 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest rates on installment contracts range from 12.5% to 14.5%, at December 31, 1997.
1997 1996 -------- ------- Inventories: Caskets................................................... $ 4,961 $ 3,364 Interment rights.......................................... 715 456 Mausolea and lawn crypts.................................. 751 759 Other..................................................... 2,707 1,450 -------- ------- $ 9,134 $ 6,029 ======== ======= Property, plant and equipment: Land...................................................... $ 18,259 $11,384 Buildings and improvements................................ 64,716 39,135 Equipment................................................. 26,099 16,691 -------- ------- 109,074 67,210 Less accumulated depreciation and amortization............ 14,390 9,947 -------- ------- $ 94,684 $57,263 ======== ======= Accounts payable and accrued liabilities: Trade..................................................... $ 5,133 $ 2,427 Compensation.............................................. 2,463 1,868 Interest.................................................. 2,119 342 Other..................................................... 4,362 2,306 -------- ------- $ 14,077 $ 6,943 ======== =======
11. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company has entered into various operating leases, whereby it is generally obligated for an initial term of 10 years, with renewal options ranging from 5 to 20 years. Certain of the leases contain escalation clauses and purchase options. Most of the leases require the Company to pay for repairs, taxes, and insurance expense and include contingent rentals based on varying percentages of net revenues generated by the related funeral home. Rent expense for the years ended December 31, 1997, 1996 and 1995 was approximately $2,200, $1,541 and $1,658, respectively. Agreements The Company has entered into various employment, consulting, and noncompetition agreements with key employees and former owners of businesses acquired. These agreements are generally for five to fifteen years and provide for payments either at the date of the agreement or in future annual, semi-annual, or monthly installments. The aggregate amounts remaining to be paid in future periods if all such commitments are fulfilled by all parties was approximately $48,044 at December 31, 1997. F-19 49 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under noncancelable operating leases with initial or remaining terms of one or more years and the employment, consulting and noncompetition agreements discussed above consisted of the following at December 31, 1997:
LEASES AGREEMENTS ------- ---------- 1998........................................................ $ 1,687 $11,062 1999........................................................ 1,570 9,505 2000........................................................ 1,426 8,101 2001........................................................ 1,123 6,298 2002........................................................ 980 3,977 Thereafter.................................................. 3,520 9,101 ------- ------- Total minimum obligations......................... $10,306 $48,044 ======= =======
The Company has additionally secured employment agreements with various officers of the Company. The agreements generally provide for the employee's annual base salary and bonus participation. The agreements also generally provide for one year noncompetition agreements and severance payments of up to one year's salary in the event the employee is terminated without cause. In August 1997, the Company entered into severance agreements with its executive officers that provide for certain benefits in the event that an executive officer is terminated in connection with a Change in Control of the Company, as defined in the agreements. Year 2000 The year 2000 issue is the result of computer programs using two digits to define the applicable year rather than four. Any programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. A computer system which is not year 2000 compliant would not be able to correctly process certain data, or, in extreme situations, system failure could result. As part of the Company's continuing program to update its information systems in anticipation of future growth, the Company is currently involved in the installation of year 2000 compliant software for its cemetery corporate operations and is evaluating software systems for its cemetery operations at the field level. The Company has also recently purchased year 2000 compliant software to be used for its funeral corporate and field operations and expects to have year 2000 compliant software in place for substantially all of its operations by mid-year 1999. As part of its initial assessment of its year 2000 exposure, the Company has identified certain critical path items and has developed a timetable for the completion of these projects in a timely manner. In the event that year 2000 compliant software is not in place on a timely basis, however, the Company's results of operations could be adversely affected. The Company has also made inquiries of certain of its vendors to determine what impact, if any, their year 2000 compliance exposure might have on the Company's operations and has received assurances that the vendors' systems are or will be year 2000 compliant in a timely manner. Accordingly, the Company does not expect the year 2000 issue in regard to its vendors' operations to have a material effect on its financial position, results of operations or cash flows. Litigation The Company and certain of its subsidiaries are parties to a number of legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the Company. F-20 50 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS Credit Risk The Company maintains cash balances at financial institutions located throughout the United States which are insured by the Federal Deposit Insurance Corporation up to $100 at each institution. The Company accounts at these institutions, at times, may exceed the federally insured limits. The Company has not experienced any losses in such accounts. The Company grants customers credit in the normal course of business and the credit risk with respect to trade and long-term receivables is generally considered minimal because of the wide geographic area served. Procedures are in effect to monitor the credit worthiness of customers and appropriate allowances have been made. Prearranged funeral contracts generally do not subject the Company to collection risk because customer payments are either placed in state supervised trusts or used to pay premiums on life insurance contracts. Insurance funded contracts are subject to supervision by state insurance departments and are protected in the majority of states by insurance guaranty acts. Fair Value of Financial Instruments The following estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair values due to the short term maturities of these instruments. The carrying amounts of the Company's fixed rate long-term borrowings, totaling $15,274 and $13,867 at December 31, 1997 and 1996, respectively, approximate their fair value, because their interest rates approximate rates currently available for debt securities with similar terms. The carrying amounts under the Company's Credit Facility approximates fair value because the rate on this agreement is variable, based on current market. It is not practicable to estimate the fair value of receivables due on cemetery contracts without incurring excessive costs because of the large number of individual contracts with varying terms. The carrying amounts of preneed funeral contracts and the related deferred preneed funeral revenues approximate their fair value. 13. MAJOR SEGMENTS OF BUSINESS The Company conducts its funeral and cemetery operations throughout the United States and in one Canadian province. The Company's Canadian operations are not considered material to the Company's funeral operations. Operating and financial data for the Company's operating segments follows:
FUNERAL CEMETERY CORPORATE CONSOLIDATED -------- -------- --------- ------------ Net revenues: 1997.................................... $ 88,834 $ 46,239 $ -- $135,073 1996.................................... 56,939 35,035 -- 91,974 1995.................................... 36,261 27,740 -- 64,001 Operating expenses: 1997.................................... $ 65,754 $ 31,659 $ 7,560 $104,973 1996.................................... 40,939 24,898 5,848 71,685 1995.................................... 27,442 19,263 4,782 51,487
F-21 51 EQUITY CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUNERAL CEMETERY CORPORATE CONSOLIDATED -------- -------- --------- ------------ Income from operations: 1997.................................... $ 23,080 $ 14,580 $(7,560) $ 30,100 1996.................................... 16,000 10,137 (5,848) 20,289 1995.................................... 8,819 8,477 (4,782) 12,514 Identifiable assets: 1997.................................... $496,267 $207,775 $13,658 $717,700 1996.................................... 294,373 134,229 15,289 443,891 1995.................................... 177,412 119,566 8,181 305,159 Depreciation and amortization: 1997.................................... $ 6,411 $ 1,605 $ 412 $ 8,428 1996.................................... 3,358 1,118 325 4,801 1995.................................... 2,082 1,107 269 3,458 Capital expenditures: 1997.................................... $ 6,717 $ 5,090 $ 714 $ 12,521 1996.................................... 4,580 2,997 741 8,318 1995.................................... 5,442 1,380 869 7,691 Number of operating locations at: December 31, 1997....................... 259 76 -- 335 December 31, 1996....................... 178 64 -- 242 December 31, 1995....................... 119 61 -- 180
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH ------- ------- ------- ------- 1997 Net revenues......................................... $32,254 $30,912 $33,151 $38,756 Gross profit......................................... 10,000 8,335 8,442 10,883 Net income........................................... 4,490 3,056 3,174 3,979 Earnings per share: Basic............................................. $ 0.22 $ 0.15 $ 0.15 $ 0.19 Assuming full dilution............................ $ 0.22 $ 0.15 $ 0.15 $ 0.19 1996 Net revenues......................................... $23,080 $21,526 $21,052 $26,316 Gross profit......................................... 7,386 6,134 5,243 7,374 Net income........................................... 2,237 2,645 2,112 3,332 Earnings per share:(1) Basic............................................. $ 0.15 $ 0.15 $ 0.11 $ 0.17 Assuming full dilution............................ $ 0.15 $ 0.14 $ 0.11 $ 0.17
- --------------- (1) Earnings per share for 1996 quarters reflect the effects of a 3-for-2 stock split in October 1996. F-22 52 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Equity Corporation International: Our report on the consolidated financial statements of Equity Corporation International and subsidiaries is included on page F-2 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a) in this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Houston, Texas March 5, 1998 S-1 53 EQUITY CORPORATION INTERNATIONAL SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------ BALANCE CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END DESCRIPTION OF YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS OF YEAR ----------- --------- ---------- ----------- ---------- ---------- Year ended December 31, 1997: Allowance for bad debts and Contract cancellations....... $4,085,206 $6,250,451 $1,269,631 $5,411,263 $6,194,025 ========== ========== ========== ========== ========== Year ended December 31, 1996: Allowance for bad debts and Contract cancellations....... $2,815,081 $3,741,729 $ 940,201 $3,411,805 $4,085,206 ========== ========== ========== ========== ========== Year ended December 31, 1995: Allowance for bad debts and Contract cancellations....... $2,294,843 $3,217,125 $ 617,754 $3,314,641 $2,815,081 ========== ========== ========== ========== ==========
- --------------- (1) Relates to valuation allowance established at acquired companies on the date of acquisitions. S-2 54 EXHIBIT INDEX
EXHIBIT NO, DESCRIPTION ----------- ----------- 3.1+ -- Amended and Restated Certificate of Incorporation (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Reg. No. 33-98052)) 3.2+ -- Amended and Restated Bylaws (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Reg. No. 33-98052)) 4.1+ -- Form of Certificate representing shares of Common Stock (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 4.2+ -- Stockholder Rights Agreement, dated October 31, 1994, between the Company and American Stock Transfer & Trust Company, as Rights Agent (filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.3+ -- Certificate of Designation of the Series One Junior Participating Preferred Stock (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 33-98052)) 4.4+ -- First Amendment to Stockholder Rights Agreement, dated September 10, 1996, between the Company and American Stock Transfer & Trust Company, as Rights Agent (filed as Exhibit 6 to the Company's Registration Statement on Form 8-A/A (Amendment No. 2)). 4.5+ -- Registration Agreement, dated December 22, 1995, among Equity Corporation International, Investment Capital Corporation and Service Corporation International (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Reg. No. 33-80841)) 10.1+* -- Employment Agreement, dated February 1, 1994, between the Company and James P. Hunter, III (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.2+* -- Employment Agreement, dated March 7, 1994, between the Company and Jack D. Rottman (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.3+* -- Employment Agreement, dated July 22, 1994, between the Company and Billy C. Wells (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.4+* -- Employment Agreement, dated February 1, 1995, between the Company and W. Cardon Gerner (filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.5+* -- Employment Agreement, dated April 8, 1996 between the Company and William C. McNamara (filed as Exhibit 99.2 to the Company's report on Form 8-K filed on May 3, 1996) 10.6+* -- Stockholder's Agreement, dated June 30, 1994, between the Company and Jack D. Rottman (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.7+ -- Stock Registration Agreement, dated February 1, 1994, among the Company and Investment Capital Corporation, James P. Hunter, III and Robert W. Loftis (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.8+ -- First Amendment to Stock Registration Agreement, dated September 1, 1994, among the Company and Investment Capital Corporation, Kanawha, L.L.C., James P. Hunter, III and Robert W. Loftis (filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546))
55
EXHIBIT NO, DESCRIPTION ----------- ----------- 10.9+ -- Second Amendment to Stock Registration Agreement, dated May 31, 1995, among the Company and James P. Hunter, III, Investment Capital Corporation, Kanawha, L.L.C., The Loftis Foundation, Inc. and Robert Wayne Loftis (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Reg. No. 33-92876)) 10.10+* -- Equity Corporation International Amended and Restated 1994 Long-Term Incentive Plan, amended as of October, 1996 (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 10.11* -- Amendment to Amended and Restated Equity Corporation International 1994 Long-Term Incentive Plan, dated May 21, 1997 10.12+* -- Form of Incentive Stock Option Agreement for Executive Officers under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.13+* -- Form of Non-Qualified Employee Stock Option Agreement for Executive Officers under 1994 Long-Term Incentive Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.14+* -- Form of Non-Qualified Stock Option Agreement for employees under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.15+* -- Form of Non-Qualified Employee Stock Option Agreement for employees of the Cemetery Division under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.16+* -- Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the 1994 Long-Term Incentive Plan (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Form of Non-Qualified Employee Stock Option Agreement for Executive Officers under the 1994 Long-Term Incentive Plan, dated August 14, 1997 10.18+* -- Option #2 of Amendment and Restatement of Agreement between ECI Cemetery Services, Inc. and certain employees concerning replacement of former deferred compensation arrangements with restricted stock award programs (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.19+* -- Option #3 of Amendment and Restatement of Agreement between ECI Cemetery Services, Inc. and certain employees concerning replacement of former deferred compensation arrangements with restricted stock award programs (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.20+ -- Form of Indemnification Agreement with Executive Officers and Directors (filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Reg. No. 33-82546)) 10.21* -- Form of Executive Severance Agreement dated effective August 14, 1997. 10.22+* -- Equity Corporation International 1997 Employee Stock Purchase Plan (filed as Exhibit 4.7 to the Company's Registration Statement on Form S-8 (Reg. No. 333-25303)) 10.23+* -- Consulting Agreement, dated as of September 12, 1996, between the Company and James P. Hunter, III (filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
56
EXHIBIT NO, DESCRIPTION ----------- ----------- 10.24+ -- Amended and Restated Credit Agreement, dated September 2, 1997, among the Company, the Banks named therein and NationsBank of Texas, N.A., as Agent for the Banks (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997) 21.1 -- List of Subsidiaries as of December 31, 1997 23.1 -- Consent of Coopers & Lybrand L.L.P. 24.1 -- A power of attorney, pursuant to which amendments to this Report may be filed, is included on the signature page contained in Part IV of this Report 27 -- Financial Data Schedule 27.1 -- Restated Financial Data Schedules
- --------------- + Incorporated herein by reference to the indicated filing. * Management contract or compensatory plan. EX-10.11 2 AMENDMENT TO 1994 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.11 AMENDMENT TO THE EQUITY CORPORATION INTERNATIONAL 1994 LONG-TERM INCENTIVE PLAN This Amendment ("Amendment") to the Equity Corporation International 1994 Long-Term Incentive Plan is effective upon the date of its adoption by the Board of Directors of Equity Corporation International (the "Company"). R E C I T A L S: WHEREAS, in October, 1994, the stockholders of the Company adopted the Equity Corporation International 1994 Long-Term Incentive Plan (the "Plan") to promote the interests of the Company and its stockholders as further set forth in such Plan; and WHEREAS, pursuant to Section 11(h) of the Plan, the Board of Directors may amend the Plan or any portion thereof; and WHEREAS, the Board of Directors have determined that it is in the best interest of the Company and its stockholders to amend certain provisions of the Plan; A M E N D M E N T NOW THEREFORE, the Plan is hereby amended as follows: Amendment to Section 6(a)(2) Section 6(a)(2) is amended in its entirety to read as follows: (2) Non-Employee Directors shall automatically receive Nonqualified Stock Options to purchase Common Stock without the exercise of the discretion of any person or persons as set forth herein. Upon commencement of service, a Non-Employee Director will receive a Nonqualified Stock Option to purchase 10,000 shares of 2 Common Stock (22,500 shares for those Non-Employee Directors who serve in such capacities upon the effective date of this Plan). In addition, each Non- Employee Director who is in office immediately after each annual meeting of the Company's stockholders held during the term of the Plan and who is not then entitled to receive an Option pursuant to the foregoing sentence due to commencement of service will receive, as of the date of such meeting, Nonqualified Stock Options to purchase an additional 5,000 shares of Common Stock. Options granted to Non-Employee Directors will become exercisable in one-third (1/3) increments on each of the first three anniversaries of the date of grant." Except as expressly amended hereby all of the other terms and conditions of the Plan shall remain in full force and effect. Capitalized terms not otherwise defined herein shall have the same meanings as are assigned to such terms in the Plan. Approved by the Board of Directors of the Company May 21, 1997. EX-10.17 3 NON-QUALIFIED EMPLOYEE STOCK OPTION AGREEMENT 1 EXHIBIT 10.17 NON-QUALIFIED STOCK OPTION AGREEMENT This Agreement is made as of the 14th day of August, 1997 ("Date of Grant") by and between EQUITY CORPORATION INTERNATIONAL, a Delaware corporation (the "Company"), and _______________________________ (the "Employee"). To carry out the purposes of the Equity Corporation International 1994 Long-Term Incentive Plan (the "Plan") by affording the Employee the opportunity to purchase shares of the $0.01 par value common stock of Equity Corporation International ("Stock"), the Company and the Employee hereby agree as follows: 1. Grant of Option. The Company hereby irrevocably grants to the Employee the right and option (the "Option") to purchase all or any part of the number of shares of Stock set forth below the Employee's name on the signature page hereof, on the terms and conditions set forth herein and in the Plan. This Option is not an incentive stock option within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Purchase Price. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $22.25 per share, which is deemed to be not less than the fair market value of the Stock subject to this Option. 3. Exercise of Option. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company, at any time and from time to time, but only to the extent this Option is then vested and exercisable. This Option shall become vested and exercisable with respect to 100% of the shares of Stock subject to the Option on the ninth (9th) anniversary of the Date of Grant, subject to Section 4 hereof regarding the Accelerated Vesting of the Option. With respect to an Employee whose "Employment Relationship" (as defined in Section 8 hereof) with the Company terminates, the Employee's vested interest in the Option shall be determined as of such termination date and the extent to which Section 4 accelerates the vesting of the Option shall be determined only with respect to events occurring on or before such termination date. 4. Accelerated Vesting of Option. (a) Vesting Upon a Change-in-Control. Notwithstanding any other provision hereof, in the event of a "Change-in-Control" of the Company, the Option shall become vested and exercisable with respect to 100% of the shares of Stock subject to the Option, provided the Employee's "Employment Relationship" (as defined in Section 8 hereof) with the Company has not terminated on or before the effective date of such "Change-in-Control". For purposes of this Agreement, the term "Change-in-Control" shall have the meaning provided in the "Executive Severance Agreement" 2 dated August 14, 1997, as the same may be amended, that is then in effect with respect to the Employee. If the Executive Severance Agreement is not in effect on the date an alleged Change-in-Control occurs or if the executive Severance Agreement has been amended so that the term "Change-in-Control" or its equivalent is not defined therein, then the definition of the term "Change-in-Control" as set forth in the Plan shall apply. (b) Vesting Upon Achieving Stock Price Performance Targets. (i) Vesting of all or a specified percentage of the Option will be accelerated during the four-year "Performance Period" (as defined below) based on the per share Stock price performance of the Company's Stock during the Performance Period, provided the Employee's "Employment Relationship" (as defined in Section 8 hereof) with the Company has not terminated on or before the last day of the applicable Performance Period. For purposes of this Agreement, the term "Performance Period" is defined to mean the four-year period ending on the fourth (4th) anniversary of the Date of Grant, and shall include three (3) consecutive one-year Performance Periods ending on the first (1st) through the third (3rd) anniversaries of the Date of Grant, respectively. With respect to the full four-year Performance Period, if the Target "Average Stock Price" of $58.50 is achieved at any time during the Performance Period, the Option shall at that time become vested and exercisable with respect to 100% of the shares of Stock subject to the Option. With respect to each of the three included one-year Performance Periods, if the Target "Average Stock Price" set forth in the table below for such Period is achieved at any time during such Period, the Option shall at that time become vested and exercisable with respect to the specified percentage of the then unvested shares of Stock subject to the Option. For purposes of this Agreement, the term "Average Stock Price" is defined to mean the average closing price per share of Stock during any fifteen (15) consecutive trading days for the Stock during the applicable Performance Period determined in a manner consistent with the determination of "Fair Market Value" under the Plan. -2- 3 Performance Period Target Average Percentage of the Then Ending on the Stock Price Nonvested Shares Subject Specified Date Per Share to Option Which Vest August 14, 1998 $29.50 25% August 14, 1999 $37.00 33% August 14, 2000 $46.50 50% August 14, 2001 $58.50 100% (ii) If (A) the $58.50 Target Average Stock Price for the four-year Performance Period described in Section 4(b)(i) hereof is not achieved, (B) the percentage growth rate of the Standard & Poor's 500 Index for the four-year Performance Period is less than seventy-four percent (74%), being seventy- five percent (75%) of its percentage growth rate determined for the four-year period of August 14, 1993 through August 14, 1997, and (C) the Company's per share Average Stock Price for the fifteen (15) consecutive trading days ending with the last day of the four-year Performance Period is equal to or greater than $22.50 multiplied by the "Peer Group's" average total shareholder return percentage determined for the four-year Performance Period by the independent accounting firm then engaged by the Company, then the Option shall, on the last day of the four-year Performance Period, become vested and exercisable with respect to 100% of the shares of Stock subject to the Option. For this purpose, the term "Peer Group" is defined to mean Loewen Group, Inc., Service Corporation International, and Stewart Enterprises, Inc. (and their respective successors). (c) Vesting Upon Termination During the Four-Year Performance Period. If (i) the Employee's "Employment Relationship" with the Company (as defined in Section 8 hereof) terminates during the four-year Performance Period and after August 14, 1999 by reason of death, disability (as such term is defined in the Executive Severance Agreement described in Section 4(a) hereof), "Retirement" (as defined in Section 5(b) hereof), or termination "Without Cause" (as such term is defined in the Executive Severance Agreement described in Section 4(a) hereof), and (ii) the Employee is not vested and exercisable with respect to 100% of the shares of Stock subject to the Option, then the Option shall, on the date of such termination, become vested and exercisable with respect to the following percentage of the shares of Stock subject to the Option, reduced by the percentage of the shares of Stock subject to the Option which had become vested and exercisable prior to the Employee's termination. For this purpose, the percentages set forth in the following table shall -3- 4 be pro rated on a fully completed monthly basis if the Employee's termination occurs during the third or fourth years of the Performance Period.
Number of Years From Date of Grant to Date Percentage of the Shares Employment Relationship Terminates Subject to the Option Which Vest 2 years or less 0% More than 2 years but less than 3 years 50% More than 3 years but less than 4 years 75% 4 years 100%
5. Transferability. This Option is not transferable by the Employee otherwise than by will or the laws of descent and distribution, and may be exercised only by Employee during his lifetime and while his Employment Relationship with the Company continues, except that: (a) If the Employee's Employment Relationship with the Company terminates for any reason other than disability (as such term is defined in the Executive Severance Agreement described in Section 4(a) hereof), death or "Retirement" (as defined in Section 5(b) hereof), this Option may be exercised by Employee (or his estate or the person who acquires this Option by bequest or inheritance or by reason of death of the Employee) at any time during the period of three (3) months following such termination, but only as to the number of vested and exercisable shares of Stock subject to the Option. (b) If the Employee's Employment Relationship with the Company terminates by reason of disability (as such term is defined in the Executive Severance Agreement described in Section 4(a) hereof), death or "Retirement" (as defined below), this Option may be exercised by Employee (or his estate or the person who acquires this Option by bequest or inheritance or by reason of the death of Employee) at any time during the period of one (1) year following such termination, but only as to the number of vested and exercisable shares of Stock subject to the Option. For purposes of this Agreement, the term "Retirement" is defined to mean the retirement of the Employee after the Employee has achieved the age of 60 and has completed at least five years of employment with the Company. -4- 5 6. Expiration of Option. Except as hereinafter provided, this Option shall not be exercisable in any event after the expiration of ten (10) years from the Date of Grant. The purchase price of shares as to which this Option is exercised shall be paid in full in cash at the time of such exercise or, if the Employee so elects, payment may be made, in whole or in part, by delivery of a number of shares of Stock (plus cash if necessary) having a fair market value equal to such purchase price or part thereof. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to him, the Employee (or the person permitted to exercise this Option in the event of the Employee's death) shall not be or have any of the rights or privileges of a stockholder of the Company with respect to shares acquirable upon the exercise of this Option. 7. Status of Stock. The Company has registered for issue under the Securities Act of 1933, as amended (the "Act") the shares of Stock acquirable upon exercise of this Option, and intends to keep such registration effective throughout the period this Option is exercisable. In the absence of an effective registration or an available exemption from registration under the Securities Act of 1933, as amended (the "Act"), delivery of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. In the event exemption from registration under the Act is available upon an exercise of this Option, the Employee (or the person permitted to exercise this Option in the event of the Employee's death), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. No sale or disposition of share Stock acquired upon exercise of this Option shall be made in the absence of a registration statement being on file with respect to such shares under the Act, unless an opinion of counsel or other evidence satisfactory to the Company that such sale or disposition will not constitute a violation of the registration provisions of the Act or any other applicable securities laws is first obtained. The certificates representing shares of Stock acquired under this Option may bear such legend as the Committee administering the Plan ("Committee") deems appropriate, referring to the provisions of this Section. 8. Employment Relationship. For purposes of this Agreement, the Employee's "Employment Relationship" with the Company shall be defined to include (i) any period in which he is an employee of either the Company or a subsidiary corporation (as defined in Section 424 of the Code) of the Company, or a corporation or a subsidiary corporation of such corporation assuming or substituting a new option for this Option, and (ii) any period in which he is a director of either the Company or its successor. The Employee's Employment Relationship will terminate, for purposes of this agreement only, on the date the Employee is neither an employee (as defined above) nor a director of the Company or its successor. Any question as to whether and when there has been a termination of such Employment Relationship, and the cause of such termination, shall be determined by the Board of Directors, and the determination by such body shall be final. Nothing in this Agreement or the Plan shall confer upon the Employee any right to continue in the employ -5- 6 of or as a director of the Company or any of its affiliate corporations or interfere in any way with the right of the Company or any such affiliate corporation to terminate such employment or the right of the shareholders to terminate such directorship at any time. 9. Withholding of Tax. Upon an exercise of this Option, the Company (or the employing corporation) may be required to withhold United States federal, state and local tax with respect to the realization of compensation pursuant to such exercise. The Company (or the employing corporation) is hereby authorized to satisfy any such withholding requirement out of (i) any cash distributable upon such exercise, and (ii) any other cash compensation then or thereafter payable to the Employee. To the extent that the Company in its sole discretion determines that such sources are or may be insufficient to fully satisfy such withholding requirement, the Employee, as a condition to the exercise of this Option, shall deliver to the Company cash in an amount determined by the Company to be sufficient to satisfy any such withholding requirement. 10. Effect of Certain Changes. (a) If there is any change in the number of issued shares of Stock through the declaration of stock dividends, or through recapitalization resulting in stock splits, or combinations or exchanges of such shares, the number of shares subject to the Option granted pursuant to this Agreement that have not been exercised or lapsed, and the price per share of such Options shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number of shares of Stock, provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (b) In the event of a change in the Stock of the Company as presently constituted, which is limited to a change of all of its authorized shares with a par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be a Stock within the meaning of this Agreement and the Plan. (c) To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. 11. Payment of Transfer Taxes, Fees and Other Expenses. The Company agrees to pay any and all original issue taxes and stock transfer taxes that may be imposed on the issuance of shares acquired pursuant to exercise of this Option, together with any and all other fees and expenses necessarily incurred by the Company in connection therewith. 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under the Employee. -6- 7 13. Notices. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Company at 415 South First, Suite 210, Lufkin, Texas, 75901, and to the Employee at the address set forth on the last page of this Agreement or at such other address as either party may hereafter designate in writing to the other. 14. Laws Applicable to Construction. This Option has been granted, executed and delivered in the State of Texas, and the interpretation, performance and enforcement of this Agreement, shall be governed by the laws of the State of Texas, as applied to contracts executed in and performed wholly within the State of Texas. 15. Interpretation. In the event of any ambiguity in this Agreement, any term which is not defined in this Agreement, or any matters as to which this Agreement is silent, the Plan shall govern including, without limitation, the provisions thereof pursuant to which the Committee has the power, among others, to (i) interpret the Plan, (ii) prescribe, amend and rescind rules and regulations relating to the Plan, and (iii) make all other determinations deemed necessary or advisable for the administration of the Plan. 16. Headings. The headings of paragraphs herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any of the provisions of this Agreement. 17. Amendment. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. -7- 8 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officers thereunto duly authorized, and the Employee has executed this Agreement, all on the day and year first above written. EQUITY CORPORATION INTERNATIONAL By: ------------------------------------ James P. Hunter, III Chairman of the Board EMPLOYEE Name of Employee: ---------------------- No. of Shares: ------------------------- ADDRESS: ------------------------------- --------------------------------------- --------------------------------------- -8- EX-10.21 4 EXECUTIVE SEVERANCE AGREEMENT - 8/14/97 1 EXHIBIT 10.21 EXECUTIVE SEVERANCE AGREEMENT EQUITY CORPORATION INTERNATIONAL EFFECTIVE AUGUST 14, 1997 2 TABLE OF CONTENTS
Article Section Page 1 Definitions 1 ----------- 2 Severance Benefits 2.1 Right to Severance Benefits 6 2.2 Description of Severance Benefits 7 2.3 Termination for Total and Permanent Disability 7 2.4 Termination for Retirement or Death 7 2.5 Termination for Cause or by the Executive Other 8 Than for Good Reason 2.6 Notice of Termination 8 3 Form and Timing of Severance Benefits 3.1 Form and Timing of Severance Benefits 8 3.2 Withholding of Taxes 8 4 Tax Indemnity 4.1 Limitation on Termination Payment 8 4.2 Subsequent Imposition of Excise Tax 10 5 The Company's Payment Obligation 5.1 Payment Obligations Absolute 10 5.2 Contractual Rights to Benefits 10 6 Term of Agreement 6.1 Term 11 7 Arbitration and Legal Fees 7.1 Arbitration 11 7.2 Payment of Expenses and Legal Fees 11 8 Successors 8.1 Company's Successors 11 8.2 Executive's Successors 12
3 TABLE OF CONTENTS (CONT'D)
Article Section Page 9 Miscellaneous 9.1 Employment Status 12 9.2 Beneficiaries 12 9.3 Entire Agreement 12 9.4 Gender and Number 12 9.5 Severability 12 9.6 Modification 13 9.7 Applicable Law 13
4 EXECUTIVE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of 14th day of August, 1997, by and between Equity Corporation International, a Delaware corporation (hereinafter referred to as the "Company") and _________________________ (hereinafter referred to as the "Executive"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company has approved the Company entering into severance agreements with certain key executives of the Company; WHEREAS, the Executive is a key executive of the Company; WHEREAS, should the possibility of a Change-in-Control of the Company arise, the Board believes it imperative that the Company and the Board should be able to rely on the Executive to continue in the Executive's position and receive and rely on the Executive's advice, if it requests it, as to the best interests of the Company and its shareholders without concern that the Executive might be distracted by the personal uncertainties and risks created by the possibility of a Change-in-Control; and WHEREAS, the Executive and the Company desire that the terms of this Agreement shall be in addition to the provisions set forth in the Executive's post-employment consulting agreement regarding the Executive's entitlement to payments for the promise to render consulting services for a period of time following termination of employment with the Company; NOW THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of the Executive's advice and counsel notwithstanding the possibility, threat, or occurrence of a Change-in-Control of the Company, to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive agree as follows: Article 1. Definitions Whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below: (a) "Agreement" means this Executive Severance Agreement. (b) "Base Salary" means the salary of record paid to the Executive as annual salary, excluding amounts received under incentive or other bonus plans, whether or not deferred. 5 (c) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (d) "Beneficiary" means the persons or entities designated or deemed designated by the Executive pursuant to Section 9.2. (e) "Board" means the Board of Directors of the Company. (f) "Cause" shall be determined by the Committee, in good faith, and shall mean the occurrence of any one or more of the following: (i) The Executive's willful and continued failure to substantially perform the Executive's duties (other than any such failure resulting from the Executive's Disability) after a written demand for substantial performance has been delivered by the Committee to the Executive that specifically identifies the manner in which the Committee believes that the Executive has not substantially performed the Executive's duties, and the Executive fails to remedy such failure within thirty (30) calendar days after receiving such notice; or (ii) The Executive's conviction (including a trial, plea of guilty or plea of nolo contendere) for committing an act of fraud, embezzlement, theft, or other act constituting a felony; or (iii) The Executive's willful and continued engagement in gross misconduct or willful and continued violation of a Company policy which is materially and demonstrably injurious to the Company after a written demand to cease such misconduct or violation has been delivered by the Committee to the Executive that specifically identifies the manner in which the Committee believes that the Executive has violated this Paragraph (iii), and the Executive fails to cease such misconduct or violation and remedy any injury suffered by the Company as a result thereof within thirty (30) calendar days after receiving such notice. However, no act or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. (g) "Change-in-Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following events occurs on or following the effective date of this Agreement: (i) Any Person (other than those Persons in control of the Company on the Effective Date of this Agreement, a trustee or other fiduciary holding Page 2 6 securities under an employee benefit plan of the Company, or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; or (ii) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who were members of the Board at the beginning of such period (and any new Director whose election by the Company's stock holders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was so approved) cease for any reason to constitute a majority thereof; or (iii) The stockholders of the Company approve: (A) a plan of complete liquidation of the Company; (B) an agreement for the sale or disposition of all or substantially all the Company's assets; or (C) a merger, consolidation, or reorganization of the Company with or involving any other corporation, other than a merger, consolidation, or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization. However, in no event shall a Change-in-Control be deemed to have occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change-in-Control transaction. The Executive shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Executive is an equity participant in the purchasing company or group (except for: (i) passive ownership of less than three percent (3%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change-in-Control by the Committee. (h) "Code means the Internal Revenue Code of 1986, as amended. (i) "Committee" means the Compensation Committee of the Board or any other committee appointed by the Board to perform the functions of the Compensation Committee. Page 3 7 (j) "Company" means Equity Corporation International, a Delaware corporation (including any and all subsidiaries), or any successor thereto as provided in Article 8. (k) "Disability" means: (i) The mental or physical disability, either occupational or non-occupational in cause, which satisfies the definition of "total and permanent disability" in the disability policy or plan provided by the Company covering the Executive; or (ii) If no such policy or plan is then covering the Executive, a physical or mental infirmity which, as determined by the Committee, in good faith, upon receipt of and in reliance on sufficient competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice, impairs the Executive's ability to substantially perform the Executive's duties for a period of at least one hundred eighty (180) consecutive days. (l) "Effective Date" means the date this Agreement is approved by the Committee, or such other date as the Board shall designate in its resolution approving this Agreement. (m) "Effective Date of Termination" means the date on which a Qualifying Termination occurs which causes the payment of Severance Benefits. (n) "Exchange Act" means the Securities Exchange Act of 1 934, as amended. (o) "Executive" means ________________________. (p) "Good Reason" means any event or condition described in Subsections (i) through (ix) below which occurs simultaneous with or after a Change-in-Control: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, represents an adverse change from the Executive's status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with the Executive's status, title, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect the Executive to any office or position held by the Executive prior to such Change-in-Control, except in connection with the termination of the Executive's employment for Disability, Cause, as a Page 4 8 result of the Executive's death or retirement or by the Executive other than for Good Reason; (ii) A reduction in the Executive's Base Salary or any failure to pay the Executive any compensation or benefits to which the Executive is entitled within five (5) days of the date due; (iii) A failure to increase the Executive's Base Salary at least annually at a percentage of Base Salary no less than the average percentage increase (other than increases resulting from the Executive's promotion) granted to the Executive during the three (3) full years ended prior to a Change-in-Control (or such lesser number of full years during which the Executive was employed), unless such failure occurs in connection with the Company's failure to increase the employee's base salaries for the fiscal year for which such failure occurs of the peer executives of the Company and its affiliates, including the peer executives of any company acquiring control of the Company in such Change-in-Control and its affiliates. (iv) The Company's requiring the Executive to be based at any place outside a 30-mile radius from the Executive's current place of employment; (v) The failure by the Company to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation or employee benefit plans in which the Executive was participating immediately prior to the Effective Date, unless a substitute or replacement plan has been implemented which provides substantially identical compensation and benefits to the Executive or (B) provide the Executive with compensation and benefits, in the aggregate, at least equal (in terms) of benefit levels and/or reward opportunities to those provided for under each other compensation or employee benefit plan, program and practice as in effect at any time within ninety (90) days preceding the Effective Date or at any time thereafter; (vi) The insolvency or the filing (by any party, including the Company) of a petition for the bankruptcy of the Company; (vii) Any material breach by the Company of any provision of this Agreement or any provision of any employment agreement between the Executive and the Company; (viii) Any purported termination of the Executive's employment for Cause by the Company which is not for Cause; or Page 5 9 (ix) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement. Additionally, any event described in Subsections (i) through (ix) above which occurs prior to a Change-in-Control, but which the Executive reasonably demonstrates (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change-in-Control, or (B) otherwise arose in connection with, or in anticipation of a Change-in-Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change-in-Control. (q) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (r) "Qualifying Termination" means the termination of the Executive's employment with the Company for either of the following reasons: (i) The Executive resigns for Good Reason; or (ii) The Company terminates the Executive for any reason other than for Cause. (s) "Retirement" means: (i) The Executive's voluntary termination of employment with the Company at or following "normal retirement age" (as defined in the Company's retirement plan covering the Executive) or, (ii) If there is no such plan, the Executive's voluntary termination of employment with the Company at or following age 65. (t) "Severance Benefits" means the compensation described in Section 2.2. Article 2. Severance Benefits 2.1. Right to Severance Benefits. (a) The Executive shall be entitled to receive from the Company the Severance Benefits described in Section 2.2 if there has been a Change-in-Control of the Company and if, within eighteen (18) calendar months thereafter, the Executive's employment with the Company shall end by reason of a Qualifying Termination. Page 6 10 (b) The Executive shall not be entitled to receive such Severance Benefits if the Executive is terminated for Cause, if the Executive resigns other than for Good Reason, or if the Executive's employment with the Company ends due to the Executive's death, Retirement or Disability (refer to Sections 2.3 to 2.5 for a summary of severance compensation payable to the Executive in connection with a termination of employment for any such reason). 2.2 Description of Severance Benefits. If the Executive becomes entitled to receive Severance Benefits, as provided in Sections 2.1, and subject to the limits set forth in Article 4, the Company shall pay to the Executive and provide the Executive with the following: (a) An amount equal to three (3) times the highest rate of the Executive's annual Base Salary in effect at any time up to and including the Effective Date of Termination; (b) An amount equal to the greater of: (i) the Executive's average annual bonus earned over the last three (3) years; or (ii) the Executive's target bonus established for the bonus plan year in which the Executive's Effective Date of Termination occurs; (c) An amount equal to the Executive's unpaid Base Salary and accrued, unused vacation through the Effective Date of Termination; and (d) A continuation of any Company-provided or sponsored healthcare-related benefits under which the Executive and/or the Executive's family is covered as of the effective date of the Change-in-Control. These benefits shall be provided by the Company to the Executive immediately upon the Effective Date of Termination and shall continue to be provided for eighteen (18) months from the Effective Date of Termination; such benefits shall be provided to the Executive at the same premium cost and at the same coverage level as in effect as of the Executive's Effective Date of Termination; and any such benefit shall be discontinued prior to the end of the eighteen (18) month period if the Executive receives a substantially similar benefit from a subsequent employer, as determined by the Compensation Committee in good faith. 2.3. Termination for Total and Permanent Disability. Following a Change-in-Control of the Company, if the Executive's employment is terminated due to Disability, the Executive shall receive the Executive's Base Salary through the Effective Date of Termination, at which point in time the Executive's compensation and benefits, if any, shall be determined in accordance with the Company's retirement, insurance, and other applicable plans and programs then in effect, and the Company shall have no further obligations to the Executive under this Agreement. 2.4. Termination for Retirement or Death. Following a Change-in-Control of the Company, if the Executive's employment is terminated by reason of the Executive's Retirement or death, Page 7 11 the Company shall pay the Executive or the Executive's beneficiary(ies) his full Base Salary and accrued, unused vacation through the Effective Date of Termination, at the rate then in effect, plus all other amounts to which the Executive or the Executive's beneficiary(ies) are entitled to under any retirement, survivor's benefits, insurance, and other applicable programs of the Company then in effect, and the Company shall have no further obligations to the Executive and the Executive's beneficiary(ies) under this Agreement. 2.5. Termination for Cause or by the Executive Other Than for Good Reason. Following a Change-in-Control of the Company, if the Executive's employment is terminated either: (i) by the Company for Cause; or (ii) by the Executive for any reason other than Good Reason, the Company shall pay the Executive his full Base Salary and accrued, unused vacation through the Effective Date of Termination, at the rate then in effect, plus all other amounts to which the Executive is entitled under any compensation and benefit plans of the Company, at the time such payments are due, and the Company shall have no further obligations to the Executive under this Agreement. 2.6. Notice of Termination. Any termination by the Executive for any reason or by the Company for Cause shall be communicated by Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Article 3. Form and Timing of Severance Benefits 3.1. Form and Timing of Severance Benefits. The Severance Benefits described in Sections 2.2(a), (b), and (c) shall be paid in cash to the Executive in a single lump sum as soon as practicable following the Effective Date of Termination, but in no event beyond thirty (30) days from such date. 3.2. Withholding of Taxes. The Company shall withhold from any amounts payable under this Agreement all Federal, state, city, or other taxes as legally shall be required. Article 4. Tax Indemnity 4.1. Limitation on Termination Payment. (a) Determination of Termination Payment Limit. Notwithstanding any other provision of this Agreement, if Severance Benefits payable to the Executive under this Agreement or other benefits payable under any other agreement or plan of the Company (in the aggregate "Total Payments") would constitute an "excess parachute payment," then the payments to be made to the Executive under this Agreement shall be reduced as provided in Section 4.1(b) such that the value of the aggregate Total Page 8 12 Payments that the Executive is entitled to receive shall be the maximum amount which the Executive may receive without becoming subject to the tax imposed by Section 4999 of the Code. However, the payments to be made to the Executive under this Agreement shall not be reduced if this results in the Executive receiving a greater net benefit than the Executive would have received had a reduction not occurred and an excise tax been paid pursuant to Code Section 4999. For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall be valued as provided in the Code and regulations. (b) Procedure for Establishing Limitation on Termination Payment. (i) Within sixty (60) days following delivery of the Notice of Termination (as described in Section 2.6) or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an "excess parachute payment" as defined in Section 28OG of the Code, the Executive and the Company, at the Company's expense, shall obtain the opinion of such legal counsel, which need not be unqualified, as the Executive may choose, which sets forth: (i) the amount of the Executive's "annualized includible compensation for the base period" (as defined in Code Section 28OG(d)(1)); (ii) the present value of the Total Payments; and (iii) the amount and present value of any "excess parachute payment." The opinion of such legal counsel shall be supported by the opinion of a certified public accounting firm and, if necessary, a firm of recognized executive compensation consultants. Such opinion shall be binding upon the Company and the Executive. (ii) If such opinion determines that there would be an "excess parachute payment" and the Severance Benefits are to be reduced in accordance with Section 4.1(a), the Severance Benefits hereunder or any other payment determined by such counsel to be includible in Total Payments shall be reduced or eliminated as specified by the Executive in writing delivered to the Company within thirty (30) days of the Executive's receipt of such opinion, or, if the Executive fails to so notify the Company, then as the Company shall reasonably determine. (iii) The provisions of this Section 4.1 (b), including the calculations, notices, and opinion provided for herein shall be based upon the conclusive presumption that: (i) the compensation and benefits provided for in Section 2.2, and (ii) any other compensation earned prior to the Effective Date of Termination by the Executive pursuant to the Company's compensation programs (if such payments would have been made in the future in any event, even though the Page 9 13 timing of such payment is triggered by the Change-in-Control), are reasonable. 4.2. Subsequent Imposition of Excise Tax. If, notwithstanding compliance with the provisions of Sections 4.1(a), and 4.1(b), it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the total payments is considered to be a "parachute payment," subject to excise tax under Section 4999 of the Code, which was not contemplated to be a "parachute payment" at the time of payment (so as to accurately determine whether a limitation should have been applied to the total payments to maximize the net benefit to the Executive, as provided in Section 4.1 (b)), the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the Executive's marginal total tax rate for the year in which the payment contemplated under this Section 4.2 is made. Article 5. The Company's Payment Obligation 5.1. Payment Obligations Absolute. (i) The Company's obligation to pay or provide Severance Benefits shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against the Executive or anyone else. All Severance Benefits paid or provided by the Company shall be final, and the Company shall not seek to recover all or any part of such Severance Benefit from the Executive or from whomsoever may be entitled thereto, for any reasons whatsoever except as may be consistent with Section 2.2(d); and (ii) The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments and arrangements required to be made under this Agreement, except to the extent provided in Section 2.2(d). 5.2. Contractual Rights to Severance Benefits. This Agreement establishes and vests in the Executive a contractual right to the Severance Benefits to which the Executive is entitled hereunder. However, nothing herein contained shall require or be deemed to require, or prohibit or be deemed to prohibit, the Company to segregate, earmark, or otherwise set aside any funds or other assets, in trust or otherwise, to provide for any payments to be made or required hereunder. Page 10 14 Article 6. Term of Agreement 6.1 Term. This Agreement will commence on the Effective Date and shall continue in effect for eighteen (18) months, the last day of which shall be the "Expiration Date." However, at the end of such eighteen (18) month period and, if extended, at the end of each additional year thereafter, the term of this Agreement shall be extended automatically for one (1) additional year, unless the Committee delivers written notice three (3) months prior to the end of such term, or extended term, to the Executive, that the Agreement will not be extended. In such case, the Agreement will terminate at the end of the term, or extended term, then in progress. However, in the event a Change-in-Control occurs during the original or any extended term, this Agreement will remain in effect for the longer of: (i) eighteen (18) months beyond the month in which such Change-in-Control occurred; or (ii) until all obligations of the Company hereunder have been fulfilled, and until all benefits required hereunder have been paid to the Executive. Article 7. Arbitration and Legal Fees 7.1. Arbitration. The Executive and the Company agree to have any dispute or controversy arising under or in connection with this Agreement settled by arbitration, conducted before an arbitrator or panel of arbitrators selected in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. The Executive and the Company agree that any decision rendered in any such arbitration proceeding shall be final and binding and that each of the parties waives their rights to seek remedies in court, including the right to jury trial. 7.2. Payment of Expenses and Legal Fees. All expenses of such arbitration, including the fees and expenses of the counsel for the Executive and the Company, shall be borne by the Company and/or the Executive in the amount determined by the arbitrator. Article 8. Successors 8.1 Company's Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) of all or substantially all the business and/or assets of the Company or of any division or subsidiary thereof to expressly assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company or successor entity in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive had terminated the Executive's employment with the Company Page 11 15 voluntarily for Good Reason. Except for the purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Effective Date of Termination. 8.2 Executive's Successors. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Executive should die while any amount would still be payable to the Executive hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to the Executive's Beneficiary. If the Executive has not named a Beneficiary, then such amounts shall be paid to the Executive's devisee, legatee, or other designee, or if there is no such designee, to the Executive's estate. Article 9. Miscellaneous 9.1. Employment Status. The Executive and the Company acknowledge that, except as may be provided under any other agreement between the Executive and the Company, the employment of the Executive by the Company is "at will," and, prior to the effective date of a Change-in-Control, may be terminated by either the Executive or the Company at any time. Upon a termination of the Executive's employment prior to the effective date of a Change-in- Control, there shall be no further rights under this Agreement; provided, however, that if such an employment termination shall arise in connection with, or in anticipation of, a Change-in-Control, then the Executive's rights shall be the same as if the termination had occurred within eighteen (18) months following a Change-in-Control. 9.2. Beneficiaries. The Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits owing to the Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Committee. The Executive may make or change such designation at any time. 9.3. Entire Agreement. This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof. However, this Agreement shall be in addition to the provisions set forth in the Executive's post-employment consulting agreement, dated September 10, 1996, regarding the Executive's entitlement to payments for the promise to render consulting services for a period of time following termination of employment. 9.4. Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 9.5. Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, Page 12 16 and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included. Further, the captions of this Agreement are not part of the provisions hereof and shall have no force and effect. 9.6. Modification. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and by authorized member of the Committee, or by the respective parties' legal representatives and successors. 9.7. Applicable Law. To the extent not preempted by the laws of the United States, the laws of the state of Texas shall be the controlling law in all matters relating to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of __________________, 1997. - ------------------------------------- ATTEST: Equity Corporation International (Corporate Seal) By: By: --------------------------------- --------------------------------- Page 13 EX-21.1 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 EQUITY CORPORATION INTERNATIONAL LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1997
STATE OF COMPANY INCORPORATION ------- ------------- 1. ECI Capital Corporation..................................... DE 2. ECI Capital Corporation Limited............................. AB, Canada 3. ECI-Carr Funeral Home, Inc.................................. DE 4. ECI-Henderson Funeral Home, Inc............................. DE 5. ECI Life Insurance Agency, Inc.............................. MA 6. ECI Management Services Inc................................. DE 7. ECI Services, Inc........................................... DE 8. ECI Services of Canada Limited.............................. SD, Canada 9. Equity Corporation International of Texas................... TX 10. ECI-Chapel Hill, Inc........................................ DE 11. ECI Services of Alabama, Inc................................ DE 12. ECI Services of Arizona, Inc................................ DE 13. ECI Services of Arkansas, Inc............................... DE 14. Nelson Acquisition Company.................................. AR 15. ECI Services of California, Inc............................. DE 16. ECI Services of Connecticut, Inc............................ DE 17. ECI Services of Florida, Inc................................ DE 18. San Jose Funeral Home, Inc.................................. FL 19. Stowers Funeral Home, Inc................................... FL 20. ECI Services of Georgia, Inc................................ DE 21. ECI Services of Illinois, Inc............................... DE 22. ECI Services of Indiana, Inc................................ DE 23. Carmony Funeral Homes, Ltd.................................. IN 24. ECI Services of Iowa, Inc................................... DE 25. Willim Funeral Home, Inc.................................... IA 26. ECI Services of Louisiana, Inc.............................. DE 27. ECI Services of Maine, Inc.................................. DE 28. ECI Services of Massachusetts, Inc.......................... DE 29. ECI Services of Minnesota, Inc.............................. DE 30. ECI Services of Mississippi, Inc............................ DE 31. Waters Funeral Home, Inc.................................... MS 32. ECI Services of Missouri, Inc............................... DE 33. ECI Services of Nebraska, Inc............................... NE 34. ECI Services of New Hampshire, Inc.......................... DE 35. Fleury & Patry Funeral Homes, Inc........................... NH 36. ECI Services of New Jersey, Inc............................. DE 37. H.T. Layton & Son Home for Funerals, Inc.................... NJ 38. ECI Services of New Mexico, Inc............................. DE 39. ECI Services of New York, Inc............................... DE 40. Alvah Halloran and Son, Inc................................. NY 41. Light's Funeral Home, Inc................................... NY 42. Eldan Holding Corp., Inc.................................... NY 43. Daniel J. Schaefer., Inc.................................... NY 44. ECI Services of North Carolina, Inc......................... DE 45. ECI Services of Ohio, Inc................................... DE
2
STATE OF COMPANY INCORPORATION ------- ------------- 46. Hahn Funeral Home, Inc...................................... OH 47. Halteman-Fett & Dyer Funeral Home, Inc...................... OH 48. ECI Services of Oklahoma, Inc............................... DE 49. Altebaumer Funeral Homes, Inc............................... OK 50. Ray Smith Funeral Home, Inc................................. OK 51. ECI Services of South Carolina, Inc......................... DE 52. ECI Services of South Dakota, Inc........................... DE 53. ECI Services of Texas, Inc.................................. DE 54. Gipson Funeral Home, Inc.................................... TX 55. ECI Services of Vermont, Inc................................ DE 56. ECI Services of Virginia, Inc............................... DE 57. ECI Services of West Virginia, Inc.......................... DE 58. ECI Services of Wisconsin, Inc.............................. DE 59. Fuller-Speckien Funeral Home, Inc........................... WI 60. Huntsville Funeral Home, Inc................................ TX 61. ECI Stowers, Inc............................................ DE 62. JPH Properties, Inc......................................... TX 63. Lake View Funeral Home, Inc................................. IL 64. Professional Funeral Associates, Inc........................ TX 65. ECI Cemetery Services, Inc.................................. DE 66. ECI Cemetery Management Services, Inc....................... DE 67. ECI Cemetery Services of Alabama, Inc....................... DE 68. ECI Cemetery Services Arkansas, Inc......................... DE 69. ECI Cemetery Services of California, Inc.................... DE 70. ECI Cemetery Services of Florida, Inc....................... GA 71. Beverly Hills Memorial Gardens, Inc......................... FL 72. ECI Cemetery Services of Georgia, Inc....................... GA 73. ECI Cemetery Services of Illinois, Inc...................... DE 74. Lake View Memorial Gardens, Inc............................. IL 75. ECI Cemetery Services of Iowa, Inc.......................... DE 76. ECI Cemetery Services of Maryland, Inc...................... DE 77. ECI Cemetery Services of Missouri, Inc...................... DE 78. The Oak Hill Realty Company................................. MO 79. ECI Cemetery Services of New Mexico, Inc.................... DE 80. ECI Cemetery Services of North Carolina, Inc................ GA 81. ECI Cemetery Services of Oklahoma, Inc...................... DE 82. ECI Cemetery Services of Oregon, Inc........................ DE 83. ECI Cemetery Services of South Carolina, Inc................ GA 84. ECI Cemetery Services of Tennessee, Inc..................... TN 85. ECI Cemetery Services of Texas, Inc......................... TX 86. Garden of Memories Memorial Park of Lufkin, Inc............. TX 87. ECI Cemetery Services of Virginia, Inc...................... VA 88. ECI-Sunny Lane, Inc......................................... DE 89. Lake View Management Company, Inc........................... DE
EX-23.1 6 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Equity Corporation International ("the Company") on Form S-3 (File No. 333-4436), Form S-4 (File No. 33-92876) and Form S-8 (File Nos. 33-98052 and 333-25303) of our reports dated March 5, 1998, on our audits of the consolidated financial statements and financial statement schedule of the Company as of December 31, 1997, and 1996 and for each of the three years in the period ended December 31, 1997, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Houston, Texas March 27, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 8,039 0 15,792 2,148 9,134 34,766 109,074 14,390 717,700 17,100 171,303 0 0 211 226,321 717,700 62,791 135,073 19,902 97,413 0 1,147 6,331 23,769 9,070 14,699 0 0 0 14,699 .71 .70
EX-27.1 8 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEETS AND INCOME STATEMENTS AS OF AND FOR THE PERIODS INDICATED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS 6-MOS YEAR 9-MOS 6-MOS DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1996 SEP-30-1997 JUN-30-1997 DEC-31-1996 SEP-30-1996 JUN-30-1996 7,407 6,845 12,654 4,900 14,607 0 0 0 0 0 12,549 10,296 8,908 6,785 5,441 2,499 2,023 1,416 1,219 1,026 7,791 7,152 6,029 6,008 5,542 29,114 26,215 29,558 19,777 26,760 101,967 87,159 67,210 62,368 53,757 13,186 11,914 9,947 9,532 8,864 636,285 570,973 443,891 400,377 358,146 12,890 11,334 10,379 8,856 7,807 136,513 98,226 49,197 28,902 10,845 0 0 0 0 0 0 0 0 0 0 208 208 193 192 128 215,041 211,677 177,271 171,688 169,462 636,285 570,973 443,891 400,377 358,146 45,639 29,710 41,772 30,206 20,729 96,317 63,166 91,974 65,658 44,606 14,067 9,170 12,610 8,959 5,773 69,540 44,831 65,837 46,895 31,086 0 0 0 0 0 810 512 486 508 332 3,758 1,924 2,374 1,690 1,487 17,349 12,577 17,915 12,703 9,153 6,629 5,031 7,589 5,709 4,271 10,720 7,546 10,326 6,994 4,882 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,720 7,546 10,326 6,994 4,882 .52 .37 0.58 .40 .45 .51 .36 0.57 .40 .44 Includes effect of a 3-for-2 stock split in October 1996. Prior Financial Data Schedules have not been restated for this recapitalization.
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