ITEM 1. BUSINESS.
OVERVIEW
The Company operates the second-largest number of funeral homes and cemeteries in North America and the largest number of funeral homes in Canada. In addition to providing services at the time of death ("at-need"), the Company also sells funeral, cemetery and cremation services on a pre-arranged basis ("pre-need"). As at March 14, 1997, the Company operated 984 funeral homes throughout North America. This included 862 funeral homes in the United States (including locations in Puerto Rico) and 122 funeral homes in Canada. In addition, as at such date, the Company operated 350 cemeteries in the United States and six cemeteries in Canada. As at the close of business on March 14, 1997, the Company had negotiated agreements for the acquisition of a further 50 funeral homes and 78 cemeteries in the United States and one funeral home in Canada. As at March 14, 1997, the Company also operated four insurance subsidiaries which sell a variety of life insurance products, primarily to fund funeral services purchased through a pre-need arrangement.
The Company's management structure and remuneration practices are designed to support and encourage entrepreneurial drive and individual responsibility. Each funeral home and cemetery is operated as a distinct profit center, with monthly and annual financial performance monitored by regional and corporate management in accordance with budgeted projections. Local managers are given a high degree of autonomy because the Company believes that, as members of the local community, they are best able to judge how to conduct day-to-day operations in a manner consistent with the established character of the particular business and the needs of the community.
Loewen serves as the holding company for all operations of the Company, which are contained in subsidiary and associated entities. Loewen was incorporated under the Company Act of British Columbia on October 30, 1985. The principal executive offices of the Company are located at 4126 Norland Avenue, Burnaby, British Columbia V5G 3S8, telephone number (604) 299-9321. The Company also maintains corporate offices at 50 East RiverCenter Boulevard, Suite 800, Covington, Kentucky 41011 and at 3190 Tremont Avenue, Trevose, Pennsylvania 19053.
BUSINESS OPERATIONS
The Company's operations are comprised of three business divisions: funeral homes, cemeteries and insurance. In August 1996, the Company created a regional management structure to organize its operations into seven geographic regions. Within each of these regions, five of which are in the United States and two of which are in Canada, the Company has integrated certain aspects of its funeral home and cemetery divisions. Management believes that the new organizational structure will enable the Company to capitalize on regional operating efficiencies and to better realize synergies.
FUNERAL HOMES
The Company's funeral homes offer a full range of funeral services, encompassing the collection of remains, registration of death, professional embalming, use of funeral home facilities, sale of caskets and other merchandise, transportation to a place of worship or funeral chapel for a religious service and transportation to a cemetery or crematorium. To provide the public with the opportunity to choose the service that is most appropriate from both a personal and financial perspective, the Company offers complete funeral services (including caskets and related merchandise) at prices ranging from approximately $750 to $7,500 (and averaging approximately $3,500).
Substantially all of the Company's funeral homes provide basic cremation services, and the Company has proprietary programs designed to provide a full range of service alternatives to families choosing
cremation. In 1996, cremations accounted for approximately 28% of all funeral services performed by the Company. As a percentage of all funeral services in the United States, cremations have been increasing by approximately 1% annually over the past five years and, in 1996, accounted for approximately 21% of all funeral services performed in the United States.
Funeral operations accounted for approximately 61% of the Company's consolidated revenue for 1996. Amounts paid for funeral services are recorded as revenue at the time the service is performed. Payments made for pre-need funeral contracts are either placed in trust by the Company or are used on behalf of the purchaser of the pre-need contract to pay premiums on life insurance polices under which the Company is designated as the beneficiary. At the date of performing a pre-arranged funeral service, the Company records as funeral revenue the amount originally trusted or the insurance contract amount, together with related accrued earnings retained in trust and increased insurance benefits. The Company's gross pre-arranged funeral sales were approximately $190 million for 1996, compared with approximately $97 million in 1995.
CEMETERIES
The Company's cemetery division assists families in making burial arrangements and offers a complete line of cemetery products (including a selection of burial spaces, burial vaults, lawn crypts, memorials, niches and mausoleum crypts), the opening and closing of graves and cremation services.
The Company's cemetery operations comprised approximately 32% of the Company's consolidated revenue for 1996, the majority of which was derived from pre-need sales of cemetery products and services. The pre-need sale of interment rights and related products and services is recorded as revenue when customer contracts are signed. At that time, costs related to the sale are also recorded and an allowance is established for future cancellations and refunds, based on management's estimates of expected cancellations. A portion of the proceeds received by the Company from pre-need merchandise sales is generally set aside in merchandise trust funds to provide for the future delivery of the cemetery products. Pre-need sales are usually financed by the Company over three to four years at interest rates ranging from 10% to 15%.
In addition, the Company provides for the long-term maintenance of its cemetery properties by placing a portion, typically 10%, of the proceeds from the sale of interment rights into a perpetual care trust fund. The income from these funds is used to offset the maintenance costs of operating the cemeteries. At December 31, 1996, the Company had approximately $160 million in perpetual care trust funds.
INSURANCE
The Company operates four insurance subsidiaries, all of which were acquired in conjunction with certain funeral home acquisitions. These insurance subsidiaries operate in Texas, Louisiana, Mississippi and Arizona and sell a variety of life insurance products to fund funerals. Revenue from the Company's insurance operations totaled approximately $72 million in 1996.
COMPETITION
Competition generally arises from two sources in the funeral service industry. The first form is competition among local funeral homes and cemeteries for at-need and pre-need business. The market share of a single funeral home or cemetery in any community is often a function of the name, reputation and location of that funeral home or cemetery. Accordingly, gains in market share within a community are usually achieved over a long period of time.
The Company also faces competition in its ongoing acquisition program. In the North American funeral service industry acquisition market, the Company's competition includes Service Corporation
International ("SCI"), Stewart Enterprises, Inc. ("Stewart"), Equity Corporation International ("ECI") and Carriage Services, Inc. ("CSI"), all of which are publicly-traded funeral service companies with significant United States operations, as well as other non-public regional consolidators. On occasion, the Company also has experienced competition on a local level from consolidators who have focused on acquiring funeral home and cemetery properties in a concentrated geographic area.
REGULATION
The funeral service industry is regulated primarily on a state and provincial basis with a vast majority of jurisdictions requiring licensing and supervision of individuals who provide funeral-related services. A number of jurisdictions also regulate the sale of pre-need services and the administration of any resulting trust funds or insurance contracts. In addition, concerns regarding lack of competition have led a few jurisdictions to enact legislation designed to encourage competition by restricting the common ownership of funeral homes, cemeteries and related operations within a specific geographic region.
The Company's United States operations must also comply with federal legislation, including the laws administered by the Occupational Safety and Health Administration, the Americans with Disabilities Act and the Federal Trade Commission ("FTC") regulations. The FTC administers the Trade Regulation Rule on Funeral Industry Practices, the purpose of which is to prevent unfair or deceptive acts or practices in connection with the provision of funeral goods or services.
The Company's insurance company subsidiaries are subject to regulation by the states in which they are domiciled and the states in which their products are sold.
ENVIRONMENTAL RISK
Management believes that the Company's primary environmental risk arises in connection with the acquisition of a funeral home or cemetery property. The Company manages this risk by conducting extensive environmental due diligence of all potential acquisition candidates. Management endeavors to ensure that environmental issues are identified and addressed in advance of acquisition or are covered by an indemnity by the seller or an offset to the purchase price.
EMPLOYEES
At December 31, 1996, the Company employed approximately 16,000 people with approximately 500 people employed at the Company's corporate offices. Management believes that its relationship with employees is good. Fewer than 150 of the Company's employees are members of collective bargaining units. All full-time and eligible part-time employees who have been employed by the Company for more than 90 days are entitled to five free Common shares as part of the Company's "Sharing The Vision" program.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's properties consist primarily of funeral homes and cemeteries. Of the Company's 956 funeral homes at December 31, 1996 (including 46 funeral homes located on or adjacent to a cemetery property), 46 were leased facilities and 58 were mortgaged as security for loans from the seller of the property or to a commercial lender. Generally the Company has a right of first refusal and an option to purchase its leased premises.
The Company's 313 cemeteries at December 31, 1996 contained an aggregate of approximately 15,000 acres of which approximately 60% were developed. Twenty four of the Company's cemeteries are not owned but are managed by the Company and eight cemeteries are mortgaged as security for loans from the seller of the property.
The Company's corporate offices in Burnaby, British Columbia, and Trevose, Pennsylvania occupy 54,000 and 52,000 square feet, respectively, in buildings owned by the Company. The corporate offices in Covington, Kentucky occupy 27,000 square feet under a lease agreement expiring in 2001.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
CLASS ACTIONS ALLEGING SECURITIES LAWS VIOLATIONS
On November 4, 1995, a class action lawsuit claiming violations of federal securities laws was filed on behalf of a class of purchasers of Company securities against Loewen and five individuals who were officers of the Company (four of whom were also directors) in the United States District Court for the Eastern District of Pennsylvania. LGII, Loewen Group Capital, L.P., a limited partnership of which LGII is the sole general partner ("LGC"), and the lead underwriters (the "Underwriters") of LGC's 1994 offering of Monthly Income Preferred Securities ("MIPS"), were subsequently added as defendants. On November 7, 1995, a class action lawsuit was filed on behalf of a class of purchasers of Loewen's Common shares without par value ("Common shares") against Loewen and the same individual defendants in the United States District Court for the Southern District of Mississippi alleging Federal securities law violations and related common law claims. On December 1, 1995, a class action lawsuit was filed on behalf of a class of purchasers of the Company's securities against Loewen, LGII, LGC and the same individual defendants in the United States District Court for the Eastern District of Pennsylvania.
The complaints with respect to the class actions alleged that the defendants failed to disclose the Company's anticipated liability in connection with certain litigation with Gulf National Insurance Company and certain of its affiliates ("Gulf National"). The Pennsylvania class actions also alleged failure to disclose the Company's potential liability in connection with certain litigation with Provident American Corporation and one of its subsidiaries ("Provident"). The Company settled the lawsuits with Gulf National and Provident during the first quarter of 1996.
Pursuant to a Transfer Order filed April 15, 1996 by the Judicial Panel on Multidistrict Litigation, the Mississippi class action was transferred to the Eastern District of Pennsylvania for consolidation of pretrial proceedings with the two Pennsylvania class actions. On September 16, 1996, the plaintiffs filed a Consolidated and Amended Class Action Complaint (the "Consolidated Class Action Complaint"). Procedurally, the Consolidated Class Action Complaint supersedes the complaints filed in the class actions. Plaintiffs allege three causes of action in the Consolidated Class Action Complaint: (i) Loewen, LGII, LGC and the five individual defendants violated Sections 10(b) and 20(a) and the implementing anti-fraud rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) LGII, LGC and three of the five individual defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), in connection with the MIPS offering and (iii) Loewen, LGII and LGC made material misstatements in connection with the MIPS offering in violation of Sections 12(2) and 15 of the Securities Act. Plaintiffs seek compensatory money damages in an unspecified amount, together with attorneys fees, expert fees and other costs and disbursements. Punitive damages are not sought.
The defendants filed their Answer to the Consolidated Class Action Complaint on November 1, 1996, in which they have denied the material allegations and raised certain affirmative defenses. The parties have commenced discovery and document production. No depositions have been taken.
The parties have stipulated to the provisional certification of plaintiff classes consisting of: (i) all purchasers of Common shares or MIPS on an American stock exchange or in public offerings during the period from April 16, 1993 through November 1, 1995, with respect to the Exchange Act claims; and (ii) all persons who purchased MIPS pursuant to the public offering in August 1994, with respect to the Securities Act claims. Defendants have retained all rights to conduct discovery on class issues and to move to modify the class definitions or to decertify the classes. Plaintiffs have agreed to stay all proceedings, including all discovery, relating to disclosures about the Provident litigation. Plaintiffs have the right to lift the stay upon written notice, which must be provided 90 days before the end of discovery or the beginning of trial.
On June 11, 1996, all claims against the Underwriters were dismissed without prejudice, by agreement of the parties. Prior to the dismissal, the Underwriters had indicated to the Company that they would seek indemnity from the Company for costs incurred. The Company paid the Underwriters' costs through the date of dismissal. The Company expects that the Underwriters will seek further indemnity from the Company if any of the claims against the Underwriters are reinstated.
The Company referred the claims to its insurance carrier under its directors and officers liability insurance policy. On February 9, 1996, the carrier denied coverage of the claim. The Company believes that such denial was improper. On March 21, 1996, the Company commenced an action in British Columbia Supreme Court seeking a declaration that the policy covers indemnification with respect to the class action. As of March 27, 1997, the Supreme Court had not ruled on the action. The Company cannot predict at this time the extent to which any settlement or litigation that may result from these claims will ultimately be covered by insurance, if at all.
The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to the class actions has been made in the 1996 Consolidated Financial Statements.
ROE ET AL., PALLADINO ET AL., O'SULLIVAN AND SCHNEIDER
In October 1995, Roe and 22 other families filed a lawsuit against LGII and Osiris Holding Corporation ("Osiris") in Florida Circuit Court in St. Petersburg. In early April 1996, a related lawsuit, PALLADINO ET AL., was filed by eight families against LGII and Osiris in Florida Circuit Court in St. Petersburg, and was assigned to the same judge handling the Roe matter. In June 1996, the Roe and Palladino lawsuits were consolidated and amended to include a total of 90 families, and in July 1996, the Palladino lawsuit was dismissed. In October 1996, a Fifth Amended Complaint ("Complaint") was filed bringing the number of plaintiff families to 150. The gravamen of the Complaint is that, in July 1992, employees of the Royal Palm Cemetery facility who were installing a sprinkler line disturbed the remains of infants in one section of the cemetery. The specific claims include tortious interference with a dead body (intentional and grossly negligent conduct so extreme and outrageous as to imply malice) and negligent infliction of emotional distress. The Complaint also names Loewen and LGII as defendants (on an alter ego theory) and includes claims for negligent retention of certain cemetery employees. Each plaintiff identified in the Complaint is seeking damages in excess of $15,000, but the Complaint alleges aggregate damage in excess of $40,000,000. In addition, in May 1996, Sean M. O'Sullivan filed a lawsuit against Osiris and LGII and in July 1996, Karen Schneider filed a lawsuit against Osiris and LGII. The factual allegations underlying the O'Sullivan and Schneider complaints are identical to those alleged in the Complaint. Schneider has been named in the Complaint and the Schneider lawsuit has been dismissed. A mediation was held on November 14, 1996, but the parties did not reach an agreement. However, over the past
several months, nearly 100 families have settled their claims for de minimis sums, leaving the number of plaintiff families at 51. The Complaint was dismissed for pleading deficiencies. The plaintiffs have indicated that they will file a Sixth Amended Complaint.
At the time the remains allegedly were disturbed, the Royal Palm Cemetery was owned by Osiris. Osiris was acquired by the Company in March 1995. The insurance carriers for Osiris and Loewen have assumed the defense of these claims, subject to a reservation of rights. The insurance carrier for Loewen has stated that it may take the position that each gravesite claim is separately subject to the per claim policy deductible of $250,000. Accordingly, no assurance can be made that insurance coverage will be available. The annual Osiris policy limit is $11,000,000 and the annual Loewen policy limit is $80,000,000.
The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the 1996 Consolidated Financial Statements.
ESNER ESTATE
On February 1, 1995, Stuart B. Esner and Sandra Esner (the "Executors") as co-executor for the Estate of Gerald F. Esner (the "Esner Estate") filed an action in the Court of Common Pleas in Bucks County, Pennsylvania against Osiris and a law firm (the "Law Firm") that previously represented Osiris and its principal shareholders, Gerald F. Esner, Lawrence Miller and William R. Shane. Messrs. Miller and Shane currently are executive officers of the Company and LGII.
The complaint alleged that Osiris breached the terms of a Second Amended and Restated Shareholders' Agreement among Messrs. Esner, Miller and Shane (the "Shareholders' Agreement") by attempting to repurchase shares of Osiris held by the Esner Estate (the "Esner Shares") without complying with the terms of the Shareholders' Agreement, and that the Law Firm breached its fiduciary duty and committed malpractice in connection with the drafting of the Shareholders' Agreement and its representation of Esner and Osiris. The Executors asked the Court (i) to have the value of Osiris reappraised pursuant to the terms of the Shareholders' Agreement and (ii) to require Osiris to repurchase the Esner Shares pursuant to a new appraisal and the alleged terms of the Shareholders' Agreement or, alternatively, to pay the Esner Estate the fair value of the Esner Shares as determined by the new appraisal.
In March 1995, LGII purchased all of the issued and outstanding shares of Osiris, including the Esner Shares. In connection with the purchase, LGII entered into an indemnification agreement whereby Messrs. Miller and Shane agreed to indemnify and hold LGII harmless with respect to any claims, liabilities, losses and expenses, including reasonable attorney's fees, in connection with or arising from the Esner Estate litigation.
On April 9, 1996, the Executors filed a second complaint, which names Messrs. Miller and Shane and LGII as defendants. The second complaint alleges breach of contract, fraud and related claims against Messrs. Miller and Shane, and that LGII joined a civil conspiracy by acquiring Osiris. The Executors request compensatory damages of $24,300,000 against the various defendants, and seek punitive damages from Messrs. Miller and Shane. The two cases were consolidated by the Court.
On October 9, 1996, the Executors instituted a new civil action against the Law Firm. On November 18, 1996 the Executors instituted a new civil action against the individual partners of the Law Firm. In both complaints, the Executors expanded upon the allegations against the Law Firm contained in the previous complaints. By stipulation approved by the Court on February 24, 1997, the parties agreed to consolidate all suits and to permit the Executors to file a Third Amended Complaint, which was filed on February 10, 1997. The prayers for relief remain unchanged. Osiris and Messrs. Miller and Shane have filed preliminary challenges to the Third Amended Complaint. Likewise, LGII has moved for a dismissal
of the claims against it for failure to state a claim upon which relief can be granted. That motion and the preliminary challenges are all pending.
The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the 1996 Consolidated Financial Statements.
SERVICE CORPORATION INTERNATIONAL
On October 2, 1996, SCI filed an action in the United States District Court for the Southern District of Texas (the "Texas Action"), alleging that Loewen falsely suggested to its shareholders that it has standing to bring an action to block or impede SCI's unsolicited exchange offer on federal antitrust grounds. SCI also seeks a declaratory judgment that Loewen lacks standing to bring such an action on federal antitrust grounds. SCI asserts a claim under Texas common law, based upon its allegations that Loewen's actions have tortiously interfered with SCI's "prospective business relationships" with Loewen's shareholders. As relief for this assertion, SCI seeks an unspecified amount of damages for claimed injuries resulting from Loewen's alleged interference with these prospective relationships. In an amended complaint filed October 3, 1996, SCI also alleges that the foregoing actions, as well as Loewen's alleged failure to disclose certain information respecting the Prime and Rose Hills transactions, constitute violations of Section 14(e) of the Exchange Act. As relief, SCI seeks an injunction against future violations of that statute. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information regarding SCI's unsolicited exchange offer and the Prime and Rose Hills transactions.
On October 10, 1996, Loewen, LGII and Ridge Chapels, Inc., a subsidiary of LGII, commenced an action in the United States District Court for the Eastern District of New York (the "New York Action"), seeking to enjoin SCI preliminarily and permanently from completing its unsolicited exchange offer on the grounds that a combination of SCI and Loewen would violate Section 7 of the Clayton Act. According to the complaint, SCI's unsolicited offer for control of Loewen, if successful, may substantially lessen competition in numerous local markets for (i) the sale of funeral services, (ii) the sale of funeral services on a "pre-need" basis, (iii) the sale of cemetery services, and (iv) the purchase of funeral homes, cemeteries and crematoria. Loewen also accuses SCI and ECI (a competitor of Loewen in which SCI had a 40% interest in October 1996), of conspiracy to eliminate Loewen as a competitive force in the funeral services industry, in violation of Section 1 of the Sherman Act. On October 10, 1996, Loewen filed Motions for Expedited Discovery and for a Preliminary Injunction to enjoin the unsolicited exchange offer and, on October 15, 1996, filed a Verified First Amended Complaint.
On October 11, 1996, Loewen moved to dismiss or stay the Texas Action. On October 15, 1996, SCI moved to dismiss, stay or transfer the New York Action. A hearing was held on SCI's motion on October 17, 1996, at the conclusion of which the District Court denied SCI's motion. On October 23, 1996, Magistrate Judge Caden of the District Court entered a Memorandum and Order allowing expedited discovery with respect to Loewen's motion for a preliminary injunction. On October 29, 1996, the District Court overruled the objections of SCI to the Magistrate Judge's Order but stayed commencement of discovery proceedings, which stay was extended by stipulation until the resolution of the pending motions in the Texas Actions described below.
On October 21, 1996, SCI filed a Motion for Preliminary Injunction in the Texas Action, seeking to enjoin Loewen from pursuing its antitrust claims in any forum other than the federal District Court in Texas. The matter was referred to Magistrate Judge Johnson, who issued a Memorandum Recommending Entry of a Preliminary Injunction on October 28, 1996. Magistrate Judge Johnson recommended that the District Court restrain Loewen from proceeding in the New York Action (or elsewhere) until it had resolved Loewen's pending motion to dismiss. In a telephone conference on October 28, 1996, the District
Court declined to enter any injunctive relief at that time. A hearing on Loewen's motion to dismiss was held on November 6, 1996. On November 23, 1996, the Texas District Court issued a Memorandum Opinion in which it: (i) denied SCI's motion for a preliminary injunction against the New York Action; and (ii) granted Loewen's motion to dismiss the Texas Action, subject to the New York Court's permitting SCI to raise its above-described tortious interference and violation of Section14(e) claims as counterclaims in the New York Action. SCI's above-described declaratory judgment claim was dismissed outright.
On December 11, 1996, SCI filed its Answer to Loewen's Verified First Amended Complaint, in which it denies liability and asserts various defenses and asserts counterclaims against Loewen, which counterclaims parallel generally the above-described claims for tortious interference and violation of Section14(e) claims asserted in the Texas Action. Loewen believes that the counterclaims are without merit and intends to contest them vigorously. Loewen has served discovery requests upon SCI and ECI to which both objected. On December 11, 1996, Magistrate Judge Caden ordered expedited discovery to proceed. SCI filed objections to the Magistrate Judge's order, which objections were denied by the District Court on January 7, 1997.
On December 11, 1996, ECI filed a Motion to Dismiss the claims against it, on grounds of improper venue and lack of personal jurisdiction. On December 18, 1996, Loewen filed a Motion for Expedited Discovery respecting jurisdiction over ECI, and the parties agreed that Loewen would not be required to respond to the Motion to Dismiss until either a date certain after denial of its Motion for Expedited Discovery or, if that Motion were granted, completion of jurisdictional discovery. On January 8, 1997, Magistrate Judge Caden entered an order providing that Loewen could take certain expedited discovery respecting jurisdiction over ECI.
On January 7, 1997, SCI announced that it had withdrawn its proposed exchange offer. On January 14, 1997, Loewen sent a letter to the New York Court stating that it will move for leave to file an amended complaint seeking permanent injunctive relief against future actions by SCI and/or ECI against Loewen in violation of the antitrust laws. On January 15, 1997, SCI sent a letter to the New York Court stating that it believes Loewen's claims are moot and will seek dismissal of those claims. Discovery from the parties has been temporarily suspended by agreement. On January 16, 1997, ECI sent a letter to the New York Court, seeking to suspend discovery until the Court rules on the contemplated motions by Loewen and SCI. On January 20, 1997, Loewen sent a letter to the Court seeking leave to move to dismiss SCI's counterclaims, to which SCI responded on January 22, 1997, by letter requesting dismissal of the entire action.
At the New York Court's suggestion, the parties are discussing possible resolution of the action in a manner that would end the current proceedings but preserve jurisdiction in the New York Court over similar disputes in the future, if any.
No provision with respect to these legal proceedings has been made in the 1996 Consolidated Financial Statements.
DERIVATIVE SUIT
On September 26, 1996, Jerry Krim filed a purported derivative and class action against Loewen's current directors and one former director and against Loewen as a nominal defendant in the Los Angeles County Superior Court. The plaintiff alleges, on behalf of himself and all of Loewen's current and former shareholders, that the defendants "improperly responded to an offer by Service Corporation International to combine the two companies," refused to negotiate with SCI, agreed to pay an inflated price for the Rose Hills properties in Los Angeles, adopted a supposed "poison pill" supermajority voting provision requiring 75% approval of a merger, and adopted a Shareholders Protection Rights Plan, each allegedly in violation of the directors' fiduciary duties. Plaintiff seeks preliminary and permanent injunctive relief that would, among other things, (i) require the defendants to cooperate with any person having a bona fide interest in proposing a transaction and take certain other actions that allegedly would "maximize shareholder value,"
(ii) enjoin the Shareholders Protection Rights Plan in its entirety, (iii) enjoin the consummation of the Rose Hills transaction, (iv) enjoin the supermajority voting requirements, (v) require an accounting for unspecified damages, and (vi) compensate the plaintiffs for their fees and costs. On October 17, 1996, the Court denied the plaintiff's motion for expedited discovery. On November 8, 1996, Loewen and those individual defendants upon whom service had purportedly been made appeared specially and moved to quash service of the summons for lack of jurisdiction or, in the alternative, to dismiss or stay the action on grounds of forum non conveniens. On December 10, 1996, the Court granted the defendants' motion to quash the summons and denied the plaintiffs' request for discovery. The action was dismissed, and no appeal has been filed.
No provision with respect to this legal proceeding has been made in the 1996 Consolidated Financial Statements.
ROJAS ET AL.
On February 22, 1995, Juan Riveras Rojas, Leyda Rivera Vega, the Conjugal Partnership constituted between them, and Carlos Rivera Bustamente instituted a legal action against Loewen, LGII and a subsidiary in the United States District Court for the District of Puerto Rico. The complaint alleges that the defendants breached a contract and ancillary agreements with the plaintiffs relating to the purchase of funeral homes and cemeteries, and committed related torts. The plaintiffs seek compensatory damages of $12,500,000, and unspecified punitive damages (although the Company is advised by counsel that there is no entitlement to punitive damages under Puerto Rican law). The Company has filed a motion to dismiss the complaint on the grounds of failure to join an indispensable party. In addition, the Company claims it has suffered damages far in excess of the amount claimed by the plaintiffs as a result of breach of contract and related torts on the part of the plaintiffs. A subsidiary of the Company has filed a complaint seeking damages in excess of $19,000,000 from the plaintiffs in the General Court of Justice of the Commonwealth of Puerto Rico. The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the 1996 Consolidated Financial Statements.
FELDHEIM ET AL. V. SI-SIFH CORP. ET AL.
In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. were acquired by the Company in March 1996 when the Company acquired the assets of S.I. Acquisition Associates, L.P.
Plaintiffs hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. The plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also allege unfair trade practices in violation of Louisiana's insurance code and trade practices laws.
Plaintiffs seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies and allowing a plaintiff to select a more expensive casket than provided for in the policy, upon payment of the difference in retail value, without forfeiting the other benefits provided for in the policy.
As of the date hereof, no discovery has taken place. The Company has determined that it is not possible at this time to predict the final outcome of this legal proceeding, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the 1996 Consolidated Financial Statements.
ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company's operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. The Company policies are designed to control environmental risk upon acquisition through extensive due diligence and corrective measures taken prior to acquisition. The Company believes environmental liabilities to be immaterial individually and in the aggregate.
OTHER
The Company is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operation or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
EXECUTIVE OFFICERS OF LOEWEN
The following table sets forth certain information with respect to the current executive officers of Loewen. The ages of the executive officers are shown as of March 14, 1997.
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FOOTNOTES APPEAR ON THE FOLLOWING PAGE.
(1) Prior to September 15, 1993, Mr. Loewen was President and Chief Executive Officer of Loewen.
(2) Mr. Hogenkamp became President and Chief Operating Officer of Loewen on September 15, 1993. From March 23, 1993 to September 15, 1993, Mr. Hogenkamp served as Senior Vice-President, Operations of Loewen. Prior to that time, Mr. Hogenkamp served as Vice-President, Operations of Loewen.
(3) Mr. McKinnon became Executive Vice-President of Loewen in April 1996. From May 1994 to April 1996, Mr. McKinnon was self-employed as a consultant. From January 1993 to May 1994, Mr. McKinnon was President of Crown Packaging Ltd., a producer of recycled paperboard and paper packaging products in Western Canada. Prior to January 1993, Mr. McKinnon was President and Chief Operating Officer of Paperboard Industries Corporation, a producer of recycled paperboard and paperboard packaging.
(4) Mr. Miller became Executive Vice-President, Operations of Loewen in July 1996. From March 1995 to July 1996, Mr. Miller was President, Cemetery and Combination Division of Loewen. Prior to that time, Mr. Miller was President of Osiris, a cemetery holding company that was acquired by LGII in March 1995.
(5) Mr. Ballantyne became Senior Vice-President, Financial Control and Administration of Loewen in May 1996. Prior to that time, Mr. Ballantyne was Senior Vice-President, Finance and Chief Financial Officer of CUC Broadcasting Limited in Toronto, Ontario, Canada.
(6) Mr. Cowan became Senior Vice-President, Corporate Development of Loewen in October 1996. Prior to that time, Mr. Cowan was Vice-President, Corporate Investments of Marathon Realty Company Limited in Vancouver, British Columbia, Canada.
(7) Mr. Shane became Senior Vice-President and Chief Financial Officer, Cemetery and Combination Division of Loewen in March 1995. Prior to that time, Mr. Shane was Vice-President of Osiris, a cemetery holding company that was acquired by LGII in March 1995.
(8) Mr. Wagler became Senior Vice-President, Finance and Chief Financial Officer of Loewen in March 1995. Prior to that time, Mr. Wagler was a Senior Vice President of ABN AMRO Bank, in Vancouver, British Columbia, Canada.
(9) Mr. Amato became Regional President, Operations, North East Region of Loewen in August 1996. From November 1994 to August 1996, Mr. Amato served as Vice-President, Operations, North East Division of Loewen. Prior to November 1994, Mr. Amato served as Senior Vice-President, Corporate Development of Loewen.
(10) Mr. Cashner became Regional President, Operations, South East Region of Loewen in August 1996. From February 1994 to August 1996, Mr. Cashner served as Vice-President, Cemetery and Combination Division, South and Eastern Region. Prior to that time, Mr. Cashner served in managerial positions at Loewen.
(11) Mr. Schaefer became Regional President, Operations, South Central Region of Loewen in August 1996. Prior to that time, Mr. Schaefer served as Vice-President, Operations, South Central Division of Loewen.
(12) Mr. Stache became Regional President, North Central Region of Loewen in August 1996. Prior to that time, Mr. Stache served as Regional Manager and Vice-President, Operations of Osiris, a cemetery holding company that was acquired by LGII in March 1995.
(13) Mr. Ward became Regional President, West Region of Loewen in August 1996. Prior to that time, Mr. Ward served as Vice-President, Operations, Western Division of Loewen.
(14) Mr. Rath became Vice-President, Operations, Eastern Canada Region of Loewen in August 1996. From April 1993 to August 1, 1996, Mr. Rath served as Loewen's Director of Operations, Eastern Canada. Prior to that time, Mr. Rath served as Loewen's Regional Manager, Ontario.
(15) Mr. Wiesner became Vice-President, Operations, Western Canada Region of Loewen in August 1996. From April 1993 to August 1, 1996, Mr. Wiesner served as Loewen's Director of Operations, Western Canada. Prior to that time, Mr. Wiesner served as Loewen's Regional Manager, Alberta and Saskatchewan.
(16) Mr. Birch became Vice-President, Corporate Development & Law of Loewen in January 1994. From February 1993 to January 1994, Mr. Birch served as Assistant Vice-President, Corporate Development & Law of Loewen. Prior to that time, Mr. Birch served as Corporate Counsel of Loewen.
(17) Mr. Hawes became Vice-President, Finance of Loewen in October 1994. From January 1993 to October 22, 1994, Mr. Hawes served as Director of Treasury Operations of Loewen. Prior to that time, Mr. Hawes served as Manager, Treasury Operations of Loewen.
(18) Mr. Hyndman became Vice-President, Law and Corporate Secretary of Loewen in March 1995. From November 1994 to March 1995, Mr. Hyndman served as Corporate Secretary of Loewen. Prior to November 1994, Mr. Hyndman served as Senior Vice-President, Law and General Counsel and Corporate Secretary of Loewen.
(19) Mr. Laundy became Vice-President, Corporate Communications of Loewen in August 1996. Prior to that time, Mr. Laundy was Vice-President, Public Affairs of the Vancouver Stock Exchange.
(20) Mr. Nakagawa became Vice-President, Insurance Operations of Loewen in August 1996. From March 1995 to August 1996, Mr. Nakagawa was self-employed as a consultant. Prior to that time, Mr. Nakagawa served as Vice-President, Finance and Chief Financial Officer of J.S. McMillan Fisheries Ltd.
(21) Mr. Ryan has been Vice-President, Taxation of LGII since October 1996. From March 1994 to October 1996, Mr. Ryan was Director of Taxation of LGII. From September 1992 to March 1994, Mr. Ryan was a Senior Tax Manager of KPMG, in Seattle, Washington. Prior to that time, Mr. Ryan was a Partner and Senior Manager of KPMG, in Vancouver, British Columbia.
(22) Mr. Scott became Vice-President, Finance and Investment Management of Loewen in July 1996. From November 1995 to June 1996, Mr. Scott was self-employed as a consultant to Loewen. Prior to that time, Mr. Scott served as Vice-President and Director of Wood Gundy Inc., an investment dealer in Vancouver, British Columbia.
(23) Mr. Stilgenbauer became Vice-President, Operations, Funeral Homes of Loewen in February 1996. Prior to that time, Mr. Stilgenbauer served as Senior Vice-President, Operations of Hook-Superx and President of Superx Drugs, a division of Hook-Superx.
(24) Mr. Strom became Vice-President, Cemeteries of Loewen in March 1995. Prior to that time, Mr. Strom was Vice-President, Sales of Osiris, a cemetery holding company that was acquired by LGII in March 1995.
No executive officer of Loewen is related by blood, marriage or adoption to any director or other executive officer of Loewen.
There are no arrangements or understandings between any executive officer of Loewen and any other person pursuant to which the executive officer was selected to serve as an executive officer of Loewen.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Common shares of Loewen have been listed on the New York Stock Exchange since October 2, 1996 under the symbol "LWN." Prior to such listing, the Common shares were quoted on the Nasdaq National Market under the symbol "LWNG" ("LWNGF" prior to June 6, 1996).
The Common shares have been trading on The Toronto Stock Exchange since May 6, 1987 under the symbol "LWN" and commenced trading on The Montreal Exchange on April 28, 1993, also under the symbol "LWN."
The following table sets forth, for the periods indicated, the range of high and low sales prices, as reported by the New York Stock Exchange, the Nasdaq National Market and The Toronto Stock Exchange.
As at March 14, 1997, there were 2,090 record holders of Loewen's Common shares.
DIVIDENDS
In May 1995, the Company declared a dividend of $0.05 per Common share. In December 1995, the Board of Directors deferred the declaration of a second semi-annual dividend for 1995 pending resolution of the effects of the Gulf National litigation. In February 1996, the Company declared a dividend of $0.05 per Common share as the second semi-annual dividend in respect of 1995. The Company declared a dividend of $0.07 per Common share in June 1996 and a dividend of $0.08 per Common share in December 1996.
The general policy of Loewen is to increase the dividend rate on its Common shares as earnings grow. The declaration and payment of future dividends will be determined by the Board of Directors and will depend upon earnings and, among other things, the Company's operating and financial position, capital requirements and general business conditions.
The payment of cash, stock and deemed dividends on the Common shares is generally subject to Canadian withholding tax. The rate of withholding tax is 25% or such lesser amount as may be provided by treaty between Canada and the country of residence of the recipient. Under the current income tax treaty between the United States and Canada, such withholding tax rate is reduced to 15%.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources--Restrictions on Payment of Dividends" and Note 6 to the 1996 Consolidated Financial Statements for a discussion of certain restrictions on Loewen's ability to pay dividends.
SALES OF UNREGISTERED EQUITY SECURITIES
Loewen did not sell any unregistered equity securities during the fourth quarter of 1996.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
FORWARD-LOOKING STATEMENTS
Management believes that the aggregate purchase price for acquisitions in 1997 will approximate $600 to $750 million. Management has established a goal for 1997 fully-diluted earnings per share ("1997 EPS") of $1.55 to $1.60. The foregoing statements and certain other statements made in this Form 10-K, in other filings made with the Securities and Exchange Commission, and elsewhere (including oral statements made on behalf of the Company) are forward-looking statements within the meaning of Section 27A(i) of the Securities Act and Section 21E(i) of the Exchange Act. Shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those estimated, projected or predicted. In addition, forward-looking statements are based on management's knowledge and judgment as of the date that such statements are made. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
CAUTIONARY STATEMENTS
The following important factors, among others, could cause 1997 EPS, acquisition levels and other future results to differ materially from estimates, predictions or projections included in forward-looking statements.
1. ACQUISITION LEVELS. The funeral services industry acquisition market is extremely competitive. The Company's competition for acquisitions includes SCI, Stewart, ECI and CSI, all of which are publicly-traded companies with significant United States operations. Aggressive pricing by the Company's competitors, particularly for strategic operations, may result in increased acquisition costs. The timing and certainty of completion of potential acquisitions are based on many factors, including the availability of financing. There can be no assurance that funds will be available to complete all future acquisitions, and there can be no assurance that the Company will complete any specific number or dollar amount of acquisitions in a particular year.
2. REVENUE. The most significant component of increases in revenue is the level of acquisitions, discussed above. In addition, revenue is affected by the volume of services rendered, and the mix and pricing of services and products sold. The foregoing may be affected by fluctuations in the number of deaths, competitive pricing strategies, pre-need sales and other sales programs implemented by the Company.
3. LEGAL PROCEEDINGS. The Company's 1995 results were materially and adversely affected by the unanticipated outcome of certain legal proceedings. There currently are legal proceedings pending against the Company, the outcome of which could be material. The Company is unable to predict the outcome of such proceedings at this time.
4. OTHER. 1997 EPS and consolidated financial results also may be affected by (i) the ability of the Company to manage its growth by implementing appropriate management and administrative support structures, (ii) margins achieved by newly-acquired and established operations, (iii) the cost of the Company's financing arrangements (including interest rates on long-term debt), (iv) the number of Common shares outstanding, (v) competition, (vi) the Company's effective tax rate, (vii) the accounting treatment of acquisitions and the valuation of assets, (viii) the amount and growth rate of the Company's general and administrative costs and (ix) changes in applicable accounting principles and governmental regulations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected consolidated financial and operating information of the Company for each year in the five-year period ended December 31, 1996. The selected consolidated financial information is derived from the Company's audited consolidated financial statements for such periods. The Company's consolidated financial statements are prepared in accordance with Canadian GAAP. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the 1996 Consolidated Financial Statements and Notes thereto.
The financial results for the year ended December 31, 1996 include $18.7 million of finance and other costs related to SCI's October 1996 hostile takeover proposal for the Company, which proposal was withdrawn in January 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding SCI's hostile takeover proposal. The financial results for the year ended December 31, 1995 include an aggregate of $195.7 million for legal settlements and litigation related finance costs and certain general and administrative costs related to the legal settlements.
- -------------------------- (1) Certain of the comparative figures have been reclassified to conform to the presentation adopted in 1996.
(2) Fully diluted earnings (loss) per share figures are calculated in accordance with Canadian GAAP and assume, if dilutive (a) exercise of employee and other stock options effective on their dates of issue and that the funds derived therefrom were invested at annual after-tax rates of return ranging from 5.85% to 9.10%, and (b) conversion of the Series C Preferred Shares effective on the date of the issue of the Series C Receipts and the add-back of the dividends during the period. See Note 9 to the 1996 Consolidated Financial Statements.
(3) The 1995 loss is not sufficient to cover fixed charges by a total of approximately $126.6 million and as such the ratio of earnings to fixed charges has not been computed. Reference is made to the Statement re Computation of Earnings to Fixed Charges Ratio (Canadian GAAP), which is Exhibit 12.1 to this Form 10-K.
(4) Total long-term debt comprises long-term debt, including current portion.
(5) The numbers of locations for 1994 and 1993 include adjustments and consolidations related to prior periods.
Had the Company's Consolidated Financial Statements been prepared in accordance with U.S. GAAP (see Note 21 to the 1996 Consolidated Financial Statements), selected consolidated financial information would have been as follows:
- -------------------------- (1) Certain of the comparative figures have been reclassified to conform to the presentation adopted in 1996.
(2) The 1995 loss is not sufficient to cover fixed charges by a total of approximately $128.3 million and as such the ratio of earnings to fixed charges has not been computed. Reference is made to the Statement re Computation of Earnings to Fixed Charges Ratio (U.S. GAAP), which is Exhibit 12.2 to this Form 10-K.
(3) Total long-term debt comprises long-term debt, including current portion.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company operates the second-largest number of funeral homes and cemeteries in North America and the largest number of funeral homes in Canada. In addition to providing services at the time of need, the Company also makes funeral, cemetery and cremation arrangements on a pre-need basis. As at March 14, 1997, the Company operated 984 funeral homes throughout North America. This included 862 funeral homes in the United States (including locations in Puerto Rico) and 122 funeral homes in Canada. In addition, as at such date, the Company operated 350 cemeteries in the United States (including locations in Puerto Rico) and six cemeteries in Canada. As at March 14, 1996, the Company also operates four insurance subsidiaries which sell a variety of life insurance products, primarily to fund funerals purchased through a pre-need arrangement.
The funeral service industry has a number of attractive characteristics. Historically the funeral service industry has had a low business failure risk compared with most other businesses and has not been significantly affected by economic or market cycles. According to the 1994 Business Failure Record published by The Dun & Bradstreet Corporation, the average business failure rate in the United States in 1994 was 86 per 10,000. The 1994 failure rate of the funeral service and crematoria industry was 8 per 10,000, among the lowest of all industries. In addition, future demographic trends are expected to contribute to the continued stability of the funeral service industry. The U.S. Department of Commerce, Bureau of the Census, projects that the number of deaths in the United States will grow at approximately 1.0% annually from 1990 through 2010. Finally, the funeral service industry in North America is highly fragmented, consisting primarily of small, stable, family-owned businesses. Management estimates that notwithstanding the increasing trend toward consolidation over the last few years, only approximately 11% of the 23,500 funeral homes and approximately 9% of the 11,000 cemeteries in North America are currently owned and operated by the five largest publicly-traded North American funeral service companies.
The Company capitalizes on these attractive industry fundamentals through a growth strategy that emphasizes three principal components: (i) acquiring a significant number of small, family-owned funeral homes and cemeteries; (ii) acquiring "strategic" operations consisting predominantly of large, multi- location urban properties that generally serve as platforms for acquiring small, family-owned businesses in surrounding regions; and (iii) improving the revenue and profitability of newly-acquired and established operations. As a result of the successful implementation of this strategy, the Company has grown significantly. Managing the Company's growth is critical to profitability, and will continue to be one of the most important responsibilities and challenges facing the Company.
On January 7, 1997, SCI publicly withdrew its unsolicited proposal to acquire Loewen through an exchange offer announced in October 1996. SCI had proposed to exchange $45 worth of common stock for each Common share of Loewen tendered and $29.51 worth of common stock for each Series C Preferred Share of Loewen tendered. In October 1996, the Loewen Board of Directors unanimously determined that the offer was inadequate and not in the best interests of Loewen or its shareholders and recommended that, if the offer were commenced, Loewen shareholders should not tender their shares.
RESULTS OF OPERATION
Detailed below are the Company's operating results for the years ended December 31, 1996, 1995 and 1994, expressed in dollar amounts as well as relevant percentages. Revenue, gross margin data and expenses other than income taxes are presented as a percentage of revenue. Income taxes are presented as a percentage of earnings (loss) before income taxes, including equity and other earnings in associated companies.
The Company's operations are comprised of three business divisions: funeral homes, cemeteries and insurance. See Note 18 to the 1996 Consolidated Financial Statements in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS OF LGII, NEWEOL INVESTMENTS LTD. AND LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K BECAUSE THE OUTSTANDING SHARES OF EACH OF SUCH COMPANIES CONSTITUTE A "SUBSTANTIAL PORTION" OF THE COLLATERAL (WITHIN THE MEANING OF SECURITIES AND EXCHANGE COMMISSION RULE 3-10 UNDER REGULATION S-X) THAT SECURES THE SERIES 1 THROUGH 4 NOTES THAT WERE ISSUED BY LGII AND GUARANTEED BY LOEWEN.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders The Loewen Group Inc.
We have audited the consolidated balance sheets of The Loewen Group Inc. as at December 31, 1996 and 1995 and the consolidated statements of operations, retained earnings and changes in financial position for each of the years in the three year period ended December 31, 1996. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II included in item 14 of the Company's annual report on Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable asurance 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1996 and 1995 and the results of its operations and the changes in its financial position for each of the years in the three year period ended December 31, 1996, in accordance with generally accepted accounting principles in Canada. As required by the Company Act of the Province of British Columbia, we report that, in our opinion, these principles have been applied on a consistent basis. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/S/ KPMG Chartered Accountants Vancouver, Canada March 3, 1997
THE LOEWEN GROUP INC. CONSOLIDATED BALANCE SHEETS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
COMMITMENTS AND CONTINGENCIES (NOTES 6, 11, 12 AND 20)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE LOEWEN GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE LOEWEN GROUP INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE LOEWEN GROUP INC. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which, in the case of the Company, generally conform with those established in the United States, except as explained in Note 21.
The United States dollar is the principal currency of the Company's business and accordingly the consolidated financial statements are expressed in United States dollars.
BASIS OF CONSOLIDATION
The accounts of all subsidiary companies have been included in the consolidated financial statements from their respective dates of acquisition of control or formation. All subsidiaries are wholly owned at December 31, 1996 except for a few companies with small minority interests. The Company's operating subsidiaries in the United States are held through Loewen Group International, Inc. ("LGII") .
The Company accounts for its common share investment in companies in which it has significant influence by the equity method. The Company's proportionate share of income (loss) as reported, net of amortization of excess purchase price over net assets acquired, is included in income and added to (deducted from) the cost of the investment. Common share dividends received reduce the carrying amount of the investment.
Other long-term investments including preferred share investments are accounted for using the cost method.
The Company accounts for its investment in joint ventures using the proportionate consolidation method.
All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in accordance 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from those estimates.
PREARRANGED FUNERAL SERVICES
Prearranged funeral services provide for future funeral services generally determined by prices prevailing at the time the contract is signed. The payments made under the contract are either placed in trust or are used to pay the premiums of life insurance policies under which the Company will be designated as beneficiary. Except for insurance commissions and amounts not required to be trusted which are used to defray initial costs of administration, no income is recognized until the performance of a specific funeral.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Trust fund principal amounts and insurance contract amounts, together with trust fund investment earnings retained in trust and annual insurance benefits, are deferred until the service is performed. The Company estimates that trust fund investment earnings and annual insurance benefits exceed the increase in cost over time of providing the related services. Upon performance of the specific funeral service, the Company will recognize the trust fund principal amount or insurance contract amount together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Direct obtaining costs related to the sale of prearranged funeral services are included in other assets and amortized over a period of ten years, approximating the period the benefits are expected to be realized. Indirect obtaining costs relating to the sale of prearranged funeral services are expensed in the period incurred.
CEMETERY OPERATIONS
Pre-need sales of cemetery interment rights and other related products and services are recorded as revenue when customer contracts are signed with concurrent recognition of related costs. Allowances for customer cancellations and refunds are provided at the date of sale based on management's estimates of expected cancellations. Actual cancellation rates in the future may result in a change in estimate.
A portion of the proceeds from cemetery sales is generally required by law to be paid into perpetual or endowment care trust funds. Cemetery revenue is recorded net of the amount to be deposited to perpetual or endowment care trust funds. Earnings of perpetual or endowment care trust funds are used to defray the maintenance costs of cemeteries. Additionally, pursuant to state law, a portion of the proceeds from the sale of pre-need merchandise and services may also be required to be paid into trust funds which are recorded as long-term receivables.
INSURANCE OPERATIONS
(A) INSURANCE REVENUE
The Company earns insurance revenue through the sale of industrial life and ordinary life insurance policies.
(B) INSURANCE INVESTED ASSETS
Bonds and other fixed-term securities are carried at amortized cost. Net realized gains and losses are deferred and amortized to income over the remaining term to maturity of the security sold. Equity securities are carried at moving average market value. Net realized gains and losses on the disposal of equity securities are deferred and amortized to income on a declining balance basis.
(C) INSURANCE POLICY LIABILITIES
Insurance policy liabilities represent an estimate of the amount which, together with future premiums and investment income, will be sufficient to pay future benefits, dividends and expenses on insurance and annuity contracts. Liabilities are computed using the policy premium method which involves the use of estimates concerning such factors as mortality and morbidity rates, future investment yields, future expense levels and rates of surrender. Consequently policy liabilities include reasonable provisions for adverse
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) deviations from those estimates. These assumptions will be revised if it is determined that future experience differs substantially from that previously assumed.
ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company's operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. The Company policies are designed to control environmental risk upon acquisition through extensive due diligence and corrective measures taken prior to acquisition and ongoing maintenance programs after acquisition.
INVENTORIES
Inventories are valued at the lower of cost, determined primarily on a specific identification basis or a first in first out basis, and net realizable value.
CEMETERY PROPERTY
Cemetery property, including capitalized interest, consists of developed and undeveloped cemetery property and is valued at average cost, which is not in excess of market value. Amounts are expensed to costs and expenses as sales of cemetery plots occur.
PROPERTY AND EQUIPMENT
Property and equipment is recorded initially at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
NAMES AND REPUTATIONS
The amount paid for the names and reputations of operations acquired is equivalent to the excess of the purchase price over the fair value of identifiable net assets acquired, as determined by management. Amortization is provided on a straight-line basis over 40 years.
Covenants not to compete included with names and reputations on the consolidated balance sheet represent amounts prepaid under non-competition agreements with certain key management personnel of acquired operations. Amortization of such prepaid covenants not to compete is provided on a straight-line basis over the terms of the relevant agreements, typically ten years.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS
The Company monitors the recoverability of long-lived assets, including names and reputations, based on factors such as current market value, future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets. The Company's policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable.
DEFERRED FINANCE COSTS
Deferred finance costs included in other assets on the consolidated balance sheet represent the costs of negotiating and securing the Company's long-term debt and preferred securities of subsidiary and are being amortized to earnings on a straight-line basis over the respective term of the related debt. These costs include legal fees, accounting fees, underwriting and agency fees and other related costs.
ACQUISITION COSTS
The Company's policy is to capitalize direct acquisition costs incurred on potential acquisitions. Upon completion of an acquisition, these costs are allocated to the assets acquired and are subject to the accounting policies outlined above. On certain acquisitions, a portion of the consideration is contingent upon future operating results. Such consideration, if any, is allocated to the assets acquired once determinable. Direct acquisition costs related to acquisitions not completed are written off.
DERIVATIVE INSTRUMENTS
The Company enters into derivative transactions with financial institutions only as hedges of other financial transactions and not for speculative purposes. The Company's policies do not allow leveraged transactions and are designed to minimize credit and concentration risk with counter-parties.
The Company enters into interest rate swap agreements to manage interest rate exposure on its long-term debt. The difference between the amounts paid and received is accrued and accounted for as an adjustment to interest expense over the life of the swap agreement.
The Company uses basic swap and option products to manage its exposure to interest rate movements when anticipated financing transactions are probable and the significant characteristics and expected terms are identified. Any gain or loss as a result of the hedging is deferred and amortized as an adjustment to interest expense over the life of the financing instrument hedged. If at any point in time, a hedging transaction no longer meets the criteria of a hedge, any gain or loss is recognized in current earnings.
The Company may also use foreign exchange forward contracts, options and futures to hedge the Company's exposure to fluctuations in foreign exchange rates. Gains or losses as a result of the hedge transaction are accounted for as an adjustment to the related transaction.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHARE ISSUE EXPENSES
The costs of issuing shares, net of income tax recoveries thereon, are applied to reduce the stated value of such shares.
DEFERRED INCOME TAXES
The Company follows the allocation method for accounting for income taxes. Under this method recognition is given in the financial statements to the tax effects of timing differences between income for financial statement and income tax purposes. The differences arise primarily from provisions for legal settlements and related costs, intercompany charges, interest, depreciation, amortization, deferred finance costs, direct marketing costs, provision for bad debts and contract cancellations, operating loss carryforwards, cemetery sales and share issue costs.
EARNINGS PER SHARE
Basic earnings per share figures are calculated based on net earnings available to Common shareholders using the weighted average number of Common shares outstanding during the respective periods.
Fully diluted earnings per share figures assume exercise of options, convertible preference shares and Management Equity Investment Plan ("MEIP") options, if dilutive, effective on their dates of issue and that the funds derived therefrom would have been invested at an annual after tax rate of return of 6.55% (1995 -- 6.19%, 1994 -- 6.18%).
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Canadian operations, which are accounted for as self-sustaining, have been translated into United States dollars at the rates of exchange as at the balance sheet dates, and revenue and expenses are translated at the average rates of exchange for the periods of operation. Gains or losses arising from the translation are deferred and are classified as "Foreign exchange adjustment" within Shareholders' equity.
NOTE 2. ACQUISITIONS
During the year ended December 31, 1996, the Company acquired 149 funeral homes, 135 cemeteries and two insurance companies in the United States, and ten funeral homes and one cemetery in Canada. Included in these acquisitions is the purchase of certain net assets of S.I. Acquisition Associates L.P. ("S.I.") of Donaldsonville, Louisiana, for approximately $155,800,000, including costs of acquisition. S.I. concurrently acquired all the outstanding shares of Ourso Investment Corporation. The S.I. assets include 15 funeral homes, two cemeteries and two insurance companies.
During the year ended December 31, 1995, the Company acquired 170 funeral homes and 61 cemeteries in the United States and seven funeral homes and three cemeteries in Canada.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 2. ACQUISITIONS (CONTINUED) All of the Company's acquisitions have been accounted for by the purchase method. The preliminary purchase price allocation for certain of these acquisitions has been estimated based on available information at the time and is subject to revision. The effect of acquisitions at dates of purchase on the Consolidated Balance Sheet is shown below. Included in the 1996 amounts is $11,794,000 representing the present value of total contingent payments of approximately $13,500,000 which the Company recorded in the third quarter of 1996 when the outcome of the contingency related to a 1995 acquisition became determinable.
The following table reflects, on an unaudited pro-forma basis, the combined results of the Company's operations acquired during the period ended December 31, 1996 as if all such acquisitions had taken place at the beginning of the respective years presented. Appropriate adjustments have been made to reflect the accounting basis used in recording these acquisitions. This pro-forma information does not purport to be
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 2. ACQUISITIONS (CONTINUED) indicative of the results of operations that would have resulted had the acquisitions been in effect for the entire years presented, and is not intended to be a projection of future results or trends.
NOTE 3. PREARRANGED FUNERAL SERVICES
Included in the consolidated balance sheets at December 31, 1996, as prearranged funeral services is $334,420,000 (1995 -- $245,854,000), representing amounts deposited in accordance with state trusting laws with various financial institutions and insurance companies, together with accrued earnings. The Company will receive the prearranged funeral trust amounts when the funeral services are performed.
AMOUNTS HELD IN PREARRANGED FUNERAL TRUSTS
As at December 31, 1996, total prearranged funeral trust assets were approximately equal to the market value. The weighted average rate of return on the above prearranged funeral trust assets for the year ended December 31, 1996 was 5.2% (1995 -- 5.1%, 1994 -- 4.7%).
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 4. INVESTMENTS
(A) ARBOR
The investment in Arbor, an operator of funeral homes and cemeteries in Canada, is accounted for by the equity method commencing January 1, 1995. As at October 31, 1996, Arbor had total assets and liabilities of $439,261,000 and $293,808,000 respectively (1995 -- $287,617,000 and $188,837,000 respectively) and total revenues of $129,978,000 (1995--$117,269,000). The Company's equity in the earnings of Arbor in 1996 was $1,879,000 (1995 -- $1,391,000). Included in the Company's retained earnings are $2,888,000 (1995 -- $1,199,000) of undistributed earnings of Arbor.
(B) PRIME
On August 26, 1996, the Company acquired 235.2941 Common shares of Prime for $16,000,000, representing 23.5% of Prime's voting common stock, and 100% of Prime's non-voting preferred stock for $62,000,000. Blackstone Capital Partners II Merchant Banking Fund L.P. and certain affiliates (together, "Blackstone") acquired 764.7059 Common shares, representing 76.5% of Prime's voting common stock for $52,000,000. On February 14, 1997, the Company and Blackstone agreed to adjust their respective ownership of Prime's voting common stock retroactively to August 26, 1996. No adjustment to the aggregate purchase price was made. After giving effect to the readjustment, the Company has paid $14,500,000 for 213.2353 Common shares and Blackstone has paid $52,000,000 for 764.7059 Common shares representing 21.8% and 78.2% respectively of Prime's voting common shares. The Company has acquired 100% of Prime's non-voting preferred stock. A 10% cumulative annual payment-in-kind dividend is payable on the preferred stock.
Prime holds all of the outstanding common shares of Prime Succession, Inc., an operator of funeral homes and cemeteries in the United States. Prime Succession Inc. was purchased on August 26, 1996 for
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 4. INVESTMENTS (CONTINUED) approximately $320,000,000 of which $130,000,000 was funded by Blackstone and the Company, and $190,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $230,000,000, was established as goodwill in Prime Succession, Inc. and is being amortized over 40 years.
Blackstone and the Company have the right to designate five and three nominees, respectively, to the Prime Board of Directors. Blackstone controls the strategic operating, investing and financing policies of Prime. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its shares in Prime to a party other than to an affiliate of itself.
The Company accounts for its investment in preferred shares of Prime by the cost method. For the period August 26, 1996 to December 31, 1996, income of $2,300,000 was recorded representing the cumulative annual payment-in-kind dividend.
The Company accounts for its investment in common shares of Prime by the equity method. Under this method, the Company records its proportionate share of the net earnings (loss) of Prime after deducting the payment-in-kind dividend. For the period August 26, 1996 to December 31, 1996, a loss of $1,144,000 was recorded representing the Company's proportionate share of the loss attributable to the common shares of Prime.
Under a Put/Call Agreement entered into with Blackstone, the Company has the option to acquire ("Call") Blackstone's common share interest in Prime commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. Blackstone has the option to sell ("Put") its common share interest to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement.
The prices for the Call and the Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value is determined at the Put or Call date based on a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"), after deduction of certain liabilities. The multiple to be applied to EBITDA is also determined through a formula which is based on future EBITDA. Any payment to Blackstone under the Call or the Put may be in the form of cash or Common shares of the Company, at the Company's option.
Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 24.1% compound return per annum thereon regardless of the calculated equity value. Any additional equity value attributable to Blackstone common share interest is determined on the basis of a formula set forth in the Put/Call Agreement.
Upon a Put by Blackstone, there is no guaranteed return to Blackstone. Any payment to Blackstone is limited to Blackstone's share of the calculated equity value based on a formula set forth in the Put/Call Agreement.
Any payment to Blackstone is subject to Blackstone or the Company exercising their respective rights under the Put or the Call. It is not currently possible to determine whether Blackstone or the Company will exercise such rights. Furthermore, any amount to be paid pursuant to the Put is dependent on calculated
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 4. INVESTMENTS (CONTINUED) equity value which is based on EBITDA of future periods. Accordingly, it is not possible at this date to estimate the future amount that may be payable to Blackstone on the exercise of the Put or the Call.
The Company provides various administrative services to Prime under an Administrative Services Agreement for an annual fee of $250,000.
Summarized financial data for Prime for the period August 26, 1996 to December 31, 1996, are presented as follows:
(C) RH HOLDINGS
On November 19, 1996, the Company acquired 204.5454 Common shares of RH Holdings for $9,000,000, representing 20.45% of RH Holdings' voting common shares, and 100% of RH Holdings' non-voting preferred shares, with a cumulative annual payment-in-kind dividend of 10%, for $86,000,000. The Company's total investment of $95,000,000 consisted of $72,000,000 in cash and a contribution by the Company of 14 funeral homes and two combination funeral home and cemetery properties located in California valued at $23,000,000. Blackstone acquired 795.4546 Common shares, representing 79.55% of RH Holdings' voting common stock for $35,000,000.
RH Holdings holds all of the outstanding common shares of Rose Hills Company ("RHC") and the cemetery related assets of Rose Hills Memorial Park Association, representing the largest single location cemetery in the United States. These companies were purchased on November 19, 1996 for approximately $285,000,000 of which $130,000,000 was funded by Blackstone and the Company, and $155,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $130,000,000 was established as goodwill in RH Holdings and is being amortized over 40 years.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 4. INVESTMENTS (CONTINUED)
Blackstone and the Company have the right to designate five and three nominees, respectively, to the RH Holdings' Board of Directors. Blackstone controls the strategic operating, investing and financing policies of RH Holdings. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its shares in RH Holdings to a party other than to an affiliate of itself.
The Company accounts for its investment in preferred shares of RH Holdings by the cost method. For the period November 19, 1996 to December 31, 1996, income of $932,000 was recorded representing the cumulative annual payment-in-kind dividend.
The Company accounts for its investment in common shares of RH Holdings by the equity method. Under the equity method, the Company records its proportionate share of the net earnings (loss) of RH Holdings after deducting the payment-in-kind dividend. For the period November 19, 1996 to December 31, 1996, a loss of $468,000 was recorded representing the Company's proportionate share of the loss attributable to the common shares of RH Holdings. The properties contributed by the Company had a net carrying value of $20,382,000. The Company has deferred a gain of $2,618,000 on the disposition of these properties and will recognize the gain if and when the properties are sold. The deferred gain is recorded in other liabilities on the consolidated balance sheet.
Under a Put/Call Agreement entered into with Blackstone, the Company has the option to Call Blackstone's common share interest in RH Holdings commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price to be determined pursuant to the terms of the Put/Call Agreement. Blackstone has the option to Put its common share interest to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement.
The prices for the Call and Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value will be determined at the Put or Call date based on a multiple of EBITDA, after deduction of certain liabilities. The multiple to be applied to EBITDA will also be determined through a formula which is based on future EBITDA. Any payment to Blackstone under the Call or the Put may be in the form of cash or the stock of the Company, subject to certain conditions, at the Company's option.
Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 22.5% compound return per annum thereon regardless of the calculated equity value. Any additional equity attributable to Blackstone common share interest will be determined on the basis of a formula set forth in the Put/Call Agreement.
Upon a Put by Blackstone, there will be no guaranteed return to Blackstone. Any payment to Blackstone will be limited to Blackstone's share of the calculated equity value based on a formula set forth in the terms of the agreement.
Any payment to Blackstone will be subject to Blackstone or the Company exercising their respective rights under the Put or the Call. It is not currently possible to determine whether Blackstone or LGII will exercise such rights. Furthermore, any amount to be paid pursuant to the Put is dependent on calculated
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 4. INVESTMENTS (CONTINUED) equity value which is based on EBITDA of future periods. Accordingly, it is not possible at this date to estimate the future amount that may be payable to Blackstone on the exercise of the Put or the Call.
The Company provides various management and administrative services to RHC and subsidiaries under an Administrative Services Agreement for an annual fee of $250,000. If the Administrative Services Agreement becomes terminable by Blackstone due to the Company's material breach thereof or other failure to comply in any material respect, Blackstone under the Put will receive, at a minimum, its original investment plus a 25% compound return per annum thereon which increases to 27.5% in the event of a change in control of the Company, regardless of the calculated equity value.
(D) INVESTMENTS OF JOINT VENTURE
The Company is a party to a joint venture for investment purposes. The investment balance represents the Company's proportionate share of the joint venture's investment in credit card receivables. The Company's proportionate share of the joint venture's liabilities is $36,897,000 (1995 -- $34,114,000), resulting in a net investment of $290,000 (1995 -- $144,000).
NOTE 5. INSURANCE INVESTED ASSETS
The Company earned $16,883,000 of investment income on these assets at December 31, 1996 (1995 -- $3,289,000) and $1,882,000 and $1,522,000 of unrealized gains and losses, respectively, on the carrying value of these investments at December 31, 1996 (1995 -- $3,348,000 and $325,000 respectively).
Maturities of fixed maturity securities, excluding mortgage-backed securities and collateralized mortgage obligations, are estimated as follows: $3,750,000 due in one year or less (1995 -- $5,000,000), $56,000,000 due in one to five years (1995 -- $8,000,000), $47,958,000 due in five to ten years (1995 -- $21,000,000), and $25,018,000 due after ten years (1995 -- $13,000,000). Maturities on an amortized cost basis are approximately the same as the market value basis at December 31, 1996. The Company had approximately $124,193,000 in mortgage-backed securities and collateralized mortgage obligations at December 31, 1996 (1995 -- $32,000,000).
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 6. LONG-TERM DEBT
(a) On May 31, 1996, the Company, LGII and their senior lenders entered into a collateral trust arrangement whereby senior lenders would share certain collateral on a pari passu basis. This collateral is held by a trustee for the equal and ratable benefit of the various holders of senior indebtedness. This group consists principally of lenders under the Company's bank revolving credit agreements, the MEIP bank term loan, the Canadian bank term loan, the senior amortizing notes and the senior notes. At December 31, 1996, the indebtedness owed to senior lenders subject to the collateral trust arrangement, including holders of certain letters of credit, aggregated $1,331,000,000.
The collateral includes (i) a pledge for the benefit of the senior lenders of the shares held by the Company of substantially all of its subsidiaries and (ii) all of the financial assets of LGII (LGII does not have material assets other than financial assets).
As part of the 1994 Management Equity Investment Plan, see Note 9(e), the MEIP bank term loan is additionally secured by Senior Exchangeable Debentures.
(b) Certain of the above loan agreements contain various restrictive provisions, including change of control provisions and provisions restricting payment of dividends on Common and Preferred shares, restricting encumbrance of assets, limiting redemption or repurchase of shares, limiting disposition of assets, limiting the amount of additional debt, limiting the amount of capital expenditures and requiring
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 6. LONG-TERM DEBT (CONTINUED) the Company to maintain specified financial ratios. At December 31, 1996, approximately $26,000,000 of the Company's retained earnings were not restricted and available for payment of dividends under the most restrictive agreement.
(c) The Company's primary bank revolving credit agreement was entered into on May 31, 1996 and provides for borrowings of up to $750,000,000 with a maturity of May 29, 2001. Initial borrowings under this facility were used to repay in full and retire a previous $400,000,000 revolving credit agreement. The Company also has a Cdn.$50,000,000 revolving credit agreement with a maturity of July 15, 1999. At December 31, 1996, $237,000,000 and $33,489,000 (Cdn.$45,900,000) were outstanding under the Company's primary and Canadian revolving credit agreements respectively.
The Company's bank revolving credit agreements and MEIP bank term loan bear interest at floating rates based on U.S. Libor, Canadian Bankers Acceptance rates or the prime rates of certain banks, plus an applicable margin depending upon a combination of the Company's ability to maintain specified financial ratios and the Company's long-term debt credit ratings. The Company is also required to pay a commitment fee on the unused portion of the revolving credit agreements. The Canadian bank term loan bears interest at 10.29%.
(d) Repayment of the senior amortizing notes commenced November 1, 1995 for Series A, B and C and commences September 11, 1997 for Series D and February 25, 1998 for Series E, all in equal annual amounts to the respective due dates.
(e) In March 1996, LGII consummated a private placement of two series of senior notes guaranteed by the Company (Series 1 and 2) for gross proceeds of $350,000,000. In October 1996, these notes were exchanged for notes registered under Securities Act.
In October 1996, LGII consummated a private placement of two series of senior notes guaranteed by the Company (Series 3 and 4) for gross proceeds of $350,000,000. In March 1997, these notes were exchanged for notes registered under the Securities Act.
(f) The notes issued under legal settlements represents a promissory note in the amount of $80,000,000 payable over 20 years in equal annual installments of $4,000,000, without interest. Interest is accrued on the discounted amount and is included in accounts payable and accrued liabilities. Annual payments will eliminate this accrual and the balance will be applied to the promissory note, see Note 11.
(g) The Company incurred and paid approximately $91,000,000 of interest during 1996 (1995 -- $54,000,000), of which approximately $2,100,000 (1995 -- $2,700,000) was capitalized as cost of construction or development of cemetery property.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 6. LONG-TERM DEBT (CONTINUED) (h) Maturities of long-term debt are as follows:
NOTE 7. PREFERRED SECURITIES OF SUBSIDIARY
On August 15, 1994, 3,000,000 9.45% Cumulative Monthly Income Preferred Securities, Series A ("MIPS") were issued by Loewen Group Capital, L.P. ("LGC") in a public offering for an aggregate amount of $75,000,000. LGC is a limited partnership and LGII as its general partner manages its business and affairs. LGII serves as the holding company for all United States assets and operations of the Company. The consolidated financial statements of LGII are prepared in accordance with Canadian generally accepted accounting principles and are presented in United States dollars.
Summarized financial data for LGII are presented as follows:
The MIPS are due August 31, 2024 and are subject to redemption at par at the option of LGC, in whole or in part, from time to time, on or after August 31, 2004.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 7. PREFERRED SECURITIES OF SUBSIDIARY (CONTINUED) Holders of the MIPS are entitled to receive cumulative dividends at an annual rate of 9.45% of the liquidation preference of $25 per MIPS. The dividends accrue from the date of original issuance and are payable monthly in arrears.
The Company has the right to defer payment of dividends on the MIPS for one or more periods, each not to exceed 60 consecutive months. In this event the Company may not declare or pay dividends on, or redeem, purchase or acquire or make a liquidation payment with respect to any class of its capital stock.
The Company has guaranteed certain payment obligations of LGII to LGC and of LGC to the MIPS holders. The guarantees are subordinated to all liabilities of the Company and are unsecured.
The net earnings (loss) of LGII reflects $15,884,000 (1995 -- $34,896,000, 1994 -- $3,661,000) of inter-company charges which are eliminated in the Company's consolidated financial statements.
NOTE 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's policy is not to use derivative instruments for speculation. The Company does not trade in financial instruments and is not a party to leveraged derivatives.
(A) SWAP AGREEMENTS AND INTEREST RATE OPTIONS
The Company has entered into swap agreements and interest rate options with a number of different commercial banks and financial institutions to manage its interest rate exposure on fixed rate long-term debt. At December 31, 1996, such agreements included:
(1) An interest rate swap agreement with a commercial bank, having a notional principal amount of $50,000,000 in which the Company will pay a floating Libor based rate determined semi-annually (5.6875% at December 31, 1996) and receive a fixed rate of 5.725%. The Company has entered into an offsetting interest rate swap agreement with the same commercial bank, having a notional principal amount of $50,000,000 in which the Company will receive a floating Libor based rate determined on the same day as the original interest rate swap agreement and pay a fixed rate of 5.810%. After offsetting, the Company will pay a fixed rate of 0.085% under the agreement. The agreement expires in August 1997.
(2) Three interest rate swap agreements with commercial banks and financial institutions, each having a notional principal amount of $25,000,000. The Company will receive floating Libor based rates determined quarterly (5.500% at December 31, 1996) and will pay fixed rates of 5.755%, 6.200% and 6.190% under the agreements. The agreements expire in June 1999, June 2001 and June 2001, respectively.
(3) An interest rate swap agreement with a commercial bank, having a notional principal amount of Cdn.$15,000,000. The Company will receive floating Bankers Acceptance based rates determined quarterly (3.17% at December 31, 1996) and will pay a fixed rate of 7.430% under the agreement. The agreement expires in September 1997.
The Company is exposed to credit losses in the event of non-performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counterparties.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) (B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, current indebtedness, accrued settlements and accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of insurance liabilities and the Put/Call Agreements have been omitted because it is not practicable to determine fair value with sufficient reliability. For further information about these items see Notes 5 and 4 respectively. Financial instruments with a carrying value different from their fair value include:
The fair value of insurance invested assets and certain investments and long-term receivables are determined based on quoted market prices. For certain long-term receivables and other investments, fair value is estimated by discounting the future cash flows, including interest payments, using rates currently available for investments of similar terms and maturity. The investments for which it is not practicable to estimate fair value comprise primarily the preferred share investments in Prime and RH Holdings. The long-term receivables for which it is not practicable to estimate fair value comprise primarily installment receivables on cemetery sales, which generally have terms of three to five years and bear interest ranging from 8% to 15%.
The fair value of liabilities of a joint venture and long-term debt subject to fixed interest rates is estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The fair value of long-term debt subject to floating market rates approximates its carrying value. The fair value of the preferred securities of a subsidiary is estimated based upon quoted market prices.
The fair value of the swap agreements is the estimated amount the counterparty would receive or pay to hypothetically terminate or exchange the agreements based on market factors. The fair value of futures contracts are estimated based on quoted market prices and represents the cost to close out the position.
NOTE 9. SHARE CAPITAL
(A) AUTHORIZED
200,000,000 (1995 -- 3,000,000) First Preferred shares without par value
40,000,000 (1995 -- 40,000,000) Class A shares without par value
750,000,000 (1995 -- 500,000,000) Common shares without par value
On May 16, 1996, the authorized capital of the Company was increased to 750,000,000 Common shares without par value, 40,000,000 Class A shares without par value and 200,000,000 First Preferred shares without par value of which 1,000,000 shares are designated as 7.75% Cumulative Redeemable Convertible First Preferred Shares, Series A, 425,000 shares are designated as Convertible First Preferred Shares, Series B, see Note 9(e), and 8,800,000 shares are designated as 6.00% Cumulative Redeemable Convertible First Preferred Shares, Series C, see Note 9(d).
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 9. SHARE CAPITAL (CONTINUED) (B) ISSUED AND OUTSTANDING
(C) COMMON SHARES ISSUED UNDER LEGAL SETTLEMENTS
As part of the settlement agreement of February 1, 1996, with Gulf National Insurance Company and certain of its affiliates ("Gulf National"), the Company issued 1,500,000 Common shares. In addition, as part of the settlement with Provident American Corporation and a subsidiary ("Provident"), the Company issued 1,000,000 Common shares of the Company. The shares were valued based on the guaranteed price under the settlement agreements, see Note 11.
(D) FIRST PREFERRED SHARES
First Preferred shares may be issued from time to time in one or more series and in such numbers and with such special rights and restrictions as the directors of the Company determine.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 9. SHARE CAPITAL (CONTINUED)
During 1994, as part of the Management Equity Investment Plan, 425,000 shares were designated as Convertible First Preferred shares, Series B of the Company. Each Convertible First Preferred share is convertible into ten Common shares at any time prior to July 13, 2011. No Series B Preferred shares have been issued.
In January 1996, the Company completed a public offering in Canada and a simultaneous private placement in the United States of 8,800,000 Convertible First Preferred Shares Series C Receipts for gross proceeds of Cdn.$220,000,000 (U.S.$161,000,000). The gross proceeds were deposited with an escrow agent and were subsequently exchanged for 8,800,000 Series C Preferred shares, and all of the net proceeds were released to the Company. A holder of Series C Preferred shares will have the right at any time before January 1, 2003, to convert each Series C Preferred share into that number of Common shares determined by dividing Cdn.$25.00 by Cdn.$38.125. Thereafter, a holder of Series C Preferred shares will have the right on January 1, 2003, and on the first business day of each quarter thereafter, to convert all or part of such Series C Preferred shares into that number of Common shares determined by dividing Cdn.$25.00 plus accrued and unpaid dividends by the greater of Cdn.$3.00 and 95% of the Current Market Price (as defined) on the date of conversion.
The holders of the Series C Preferred shares are entitled, as and when declared by the Board of Directors, to a fixed preferential cumulative cash dividend of 6% per year, payable quarterly.
The Series C Preferred Shares will not be redeemable by the Company prior to July 1, 1999.
On or after July 1, 1999, the Series C Preferred shares will be redeemable by the Company, upon giving not less than 30 days notice, at a redemption price equal to Cdn.$25.00 per share together with accrued and unpaid dividends. Prior to July 1, 2001, the redemption will only be effected by the issuance of Common shares, determined by dividing the redemption price by the greater of Cdn.$3.00 and 95% of the Current Market Price at the date of redemption. On and after July 1, 2001, the redemption may be effected by the issuance of Common shares or payment of a cash amount.
In the event of the liquidation, dissolution or winding up of the Company or other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of the Series C Preferred shares shall be entitled to receive the redemption price before any amounts are paid to the holders of Common shares or any other class of shares ranking junior to the Series C Preferred shares.
(E) MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")
4,250,000 Common shares of the Company were reserved upon adoption by the Company of the MEIP on June 15, 1994. Senior Exchangeable Debentures amounting to $127,670,000 were issued by LGII to a wholly-owned subsidiary of LGII formed to act as agent for the MEIP. The Debentures are due July 15, 2001 and bear interest at floating rates. Each $300.40 of principal amount of Debentures will be exchangeable for one Convertible First Preferred share, Series B of the Company, each of which will be convertible into ten Common shares of the Company. As part of the MEIP, the present participants paid $3,409,240 (1995 - $3,827,023) for option rights to acquire $68,184,792 (1995 - $77,052,600) of Debentures exercisable as to 50% in 1999, 25% in 2000 and 25% in 2001, of which $751,000 was paid by the Chairman of the Company. If an option expires unexercised, the participant will receive a refund without interest of
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 9. SHARE CAPITAL (CONTINUED) the amount paid to acquire such option right. In addition, the Chairman paid $2,253,000 for the right and obligation to acquire $45,060,000 of Debentures with the same exercise dates.
(F) SHAREHOLDER PROTECTION RIGHTS PLAN
On April 20, 1990, the Board of Directors of the Company approved a Shareholder Protection Rights Plan (the "Plan"), which was confirmed by the shareholders in accordance with the provisions of the Plan at the Annual General Meeting on May 24, 1990. The Plan was amended on June 18, 1991 to adjust the Exercise Price consequent upon the two-for-one stock split of the Company. The Plan was also amended on April 7, 1994 to further adjust the Exercise Price and to amend the definition of "Inherited Acquisitions." The Plan was reconfirmed by the shareholders at the Annual General Meeting on May 17, 1995 for a further five-year period expiring April 20, 2000.
The Plan is meant to discourage unfair take-over bid tactics and to give the Board of Directors time, if there is an unsolicited bid, to pursue alternatives to maximize shareholder value. To preserve the shareholders' right to consider take-over bids on a fully-informed basis, the Plan provides that a bidder's position may be substantially diluted if it does not make either a "permitted bid" directly to all shareholders or negotiate with the Board for a waiver of the Plan's provisions.
Under the Plan, each Common shareholder is entitled to receive one right in certain situations. The rights however will not trade separately from the Common shares unless a take-over bid is announced or someone, excluding "Grandfathered Persons," acquires 20% of the Common shares. To the Company's knowledge, only Raymond L. Loewen and Anne Loewen are Grandfathered Persons.
The rights issued to Common shareholders under the Plan entitle the holder, upon the occurrence of certain triggering events, to acquire Common shares in the Company at a 50% discount to the market. Triggering events include the acquisition of 20% or more of the Common shares in a transaction not approved by the Board of Directors. However, the rights are not triggered by certain permitted bids that are made to all holders of Common shares and that are approved by a majority vote of independent shareholders.
By creating the potential for substantial dilution of an unfair bidder's position, the Plan encourages an acquirer to proceed by way of a permitted bid or to approach the Board with a view to negotiation. The Plan's permitted bid provision allows bidders to take bids directly to all the shareholders. The Plan thus preserves the shareholder's right to consider such bids on a fully-informed basis. The Company, at the time of the adoption of the Plan, was not aware of any pending or threatened take-over bid for the Company. The Company is not presently aware of any pending or threatened take-over bid for the Company. On January 7, 1997, Service Corporation International ("SCI") withdrew its unsolicited hostile takeover proposal, see Note 14.
There are exceptions to the Plan to permit the acquisition of shares by (i) persons who held more than 20% of the Common shares on April 20, 1990, subject to certain restrictions, and (ii) registered pension plans whose governing legislation prohibits them from holding more than 30% and who are acquiring the Common shares independently for investment.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 9. SHARE CAPITAL (CONTINUED) (G) STOCK OPTION PLANS
The Company has separate fixed stock option plans for its United States and Canadian employees which enable the Company to grant options to its employees and directors. The option plans are administered by the Compensation Committee of the Company's Board of Directors. Each participant enters into an option agreement which sets forth, among other things, the number of options granted, the exercise price and the vesting conditions of the options. The exercise price of an option may not be less than the market price of the Company's stock on the trading day immediately prior to the grant date and in no event may an option terminate later than ten years after the grant date of such option.
A summary status of the Company's fixed stock option plans and changes during the two years ended December 31, 1996, are as follows:
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 9. SHARE CAPITAL (CONTINUED) The following table summarizes information about the Company's fixed stock options outstanding at December 31, 1996:
NOTE 10. FOREIGN EXCHANGE ADJUSTMENT
The foreign exchange adjustment account represents the net changes due to exchange rate fluctuations in the equivalent United States dollar book values of the Company's net investments in self-sustaining non-United States operations since their respective dates of acquisition.
NOTE 11. LEGAL PROCEEDINGS
GULF NATIONAL SETTLEMENT
On February 1, 1996, the Company and Gulf National executed a settlement agreement pursuant to which, among other things, the parties agreed to a full and mutual release of all claims against each other. The Company delivered to Gulf National $50,000,000 in cash, 1,500,000 Common shares ("Gulf National Settlement Shares") and a promissory note in the amount of $80,000,000 payable over 20 years in equal installments of $4,000,000, without interest. The Gulf National Settlement Shares were issued in February 1996, and a registration statement registering the resale of the Gulf National Settlement Shares filed with the Securities and Exchange Commission ("SEC") was declared effective in December 1996.
The Company recorded a charge against its 1995 earnings in the amount of $135,000,000 before taxes of $49,530,000 to account for the Gulf National settlement. This amount represents the cash portion, the
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) present value of the non-interest bearing promissory note and the guaranteed value of the Gulf National Settlement Shares.
PROVIDENT SETTLEMENT
On February 4, 1996, Provident and the Company settled certain litigation and on March 19, 1996, the parties entered into a settlement providing for a full mutual release from all claims against each other, and the Company delivered 1,000,000 Common shares ("Provident Settlement Shares") and $3,000,000 in cash to Provident and certain designees. The Company filed a registration statement registering the resale of the Provident Settlement Shares with the SEC, which was declared effective in July 1996.
The Company recorded a charge against its 1995 earnings in the amount of $30,000,000 before taxes of $10,800,000 to account for the Provident settlement.
CLASS ACTIONS ALLEGING SECURITIES LAWS VIOLATIONS
On November 4, 1995, a class action lawsuit claiming violations of federal securities laws was filed on behalf of a class of purchasers of Company securities against the Company and five individuals who were officers of the Company (four of whom were also directors) in the United States District Court for the Eastern District of Pennsylvania. LGII, LGC, and the lead underwriters (the "Underwriters") of LGC's 1994 offering of Monthly Income Preferred Securities ("MIPS"), were subsequently added as defendants. On November 7, 1995, a class action lawsuit was filed on behalf of a class of purchasers of Common shares against the Company and the same individual defendants in the United States District Court for the Southern District of Mississippi alleging Federal securities law violations and related common law claims. On December 1, 1995, a class action lawsuit was filed on behalf of a class of purchasers of the Company's securities against the Company, LGII, LGC and the same individual defendants in the United States District Court for the Eastern District of Pennsylvania.
The complaints with respect to the class actions alleged that the defendants failed to disclose the Company's anticipated liability in connection with certain litigation with Gulf National. The Pennsylvania class actions also alleged failure to disclose the Company's potential liability in connection with certain litigation with Provident. The Company settled the lawsuits with Gulf National and Provident during the first quarter of 1996.
Pursuant to a Transfer Order filed April 15, 1996 by the Judicial Panel on Multidistrict Litigation, the Mississippi class action was transferred to the Eastern District of Pennsylvania for consolidation of pretrial proceedings with the two Pennsylvania class actions. On September 16, 1996, the plaintiffs filed a Consolidated and Amended Class Action Complaint (the "Consolidated Class Action Complaint"). Procedurally, the Consolidated Class Action Complaint supersedes the complaints filed in the class actions. Plaintiffs allege three causes of action in the Consolidated Class Action Complaint: (i) the Company, LGII, LGC and the five individual defendants violated Sections 10(b) and 20(a) and the implementing anti-fraud rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) LGII, LGC and three of the five individual defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), in connection with the MIPS offering and (iii) the Company, LGII and LGC made material misstatements in connection with the MIPS offering in
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) violation of Sections 12(2) and 15 of the Securities Act. Plaintiffs seek compensatory money damages in an unspecified amount, together with attorneys fees, expert fees and other costs and disbursements. Punitive damages are not sought.
The defendants filed their Answer to the Consolidated Class Action Complaint on November 1, 1996, in which they have denied the material allegations and raised certain affirmative defenses. The parties have commenced discovery and document production. No depositions have been taken.
The parties have stipulated to the provisional certification of plaintiff classes consisting of: (i) all purchasers of Common shares or MIPS on an American stock exchange or in public offerings during the period from April 16, 1993 through November 1, 1995, with respect to the Exchange Act claims; and (ii) all persons who purchased MIPS pursuant to the public offering in August 1994, with respect to the Securities Act claims. Defendants have retained all rights to conduct discovery on class issues and to move to modify the class definitions or to decertify the classes. Plaintiffs have agreed to stay all proceedings, including all discovery, relating to disclosures about the Provident litigation. Plaintiffs have the right to lift the stay upon written notice, which must be provided 90 days before the end of discovery or the beginning of trial.
On June 11, 1996, all claims against the Underwriters were dismissed without prejudice, by agreement of the parties. Prior to the dismissal, the Underwriters had indicated to the Company that they would seek indemnity from the Company for costs incurred. The Company paid the Underwriters' costs through the date of dismissal. The Company expects that the Underwriters will seek further indemnity from the Company if any of the claims against the Underwriters are reinstated.
The Company referred the claims to its insurance carrier under its directors and officers liability insurance policy. On February 9, 1996, the carrier denied coverage of the claim. The Company believes that such denial was improper. On March 21, 1996, the Company commenced an action in British Columbia Supreme Court seeking a declaration that the policy covers indemnification with respect to the Class Action. As of the date hereof, the Supreme Court has not ruled on the action. The Company cannot predict at this time the extent to which any settlement or litigation that may result from these claims will ultimately be covered by insurance, if at all.
The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to the class actions has been made in the Company's 1996 consolidated financial statements.
ROE ET AL., PALLADINO ET AL., O'SULLIVAN AND SCHNEIDER
In October 1995, Roe and 22 other families filed a lawsuit against LGII and Osiris Holding Corporation ("Osiris") in Florida Circuit Court in St. Petersburg. In early April 1996, a related lawsuit, Palladino et al., was filed by eight families against LGII and Osiris in Florida Circuit Court in St. Petersburg, and was assigned to the same judge handling the Roe matter. In June 1996, the Roe and Palladino lawsuits were consolidated and amended to include a total of 90 families, and in July 1996, the Palladino lawsuit was dismissed. In October 1996, a Fifth Amended Complaint ("Complaint") was filed
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) bringing the number of plaintiff families to 150. The gravamen of the Complaint is that, in July 1992, employees of the Royal Palm Cemetery facility who were installing a sprinkler line disturbed the remains of infants in one section of the cemetery. The specific claims include tortious interference with a dead body (intentional and grossly negligent conduct so extreme and outrageous as to imply malice) and negligent infliction of emotional distress. The Complaint also names the Company and LGII as defendants (on an alter ego theory) and includes claims for negligent retention of certain cemetery employees. Each plaintiff identified in the Complaint is seeking damages in excess of $15,000, but the Complaint alleges aggregate damage in excess of $40,000,000. In addition, in May 1996, Sean M. O'Sullivan filed a lawsuit against Osiris and LGII and in July 1996, Karen Schneider filed a lawsuit against Osiris and LGII. The factual allegations underlying the O'Sullivan and Schneider complaints are identical to those alleged in the Complaint. Schneider has been named in the Complaint and the Schneider lawsuit has been dismissed. A mediation was held on November 14, 1996, but the parties did not reach an agreement. However, over the past several months, nearly 100 families have settled their claims for de minimus sums, leaving the number of plaintiff families at 51. The Complaint was dismissed for pleading deficiencies. The plaintiffs have indicated that they will file a Sixth Amended Complaint.
At the time the remains allegedly were disturbed, the Royal Palm Cemetery was owned by Osiris. Osiris was acquired by the Company in March 1995. The insurance carriers for Osiris and the Company have assumed the defense of these claims, subject to a reservation of rights. The insurance carrier for the Company has stated that it may take the position that each gravesite claim is separately subject to the per claim policy deductible of $250,000. Accordingly, no assurance can be made that insurance coverage will be available. The annual Osiris policy limit is $11,000,000 and the annual Company policy limit is $80,000,000.
The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's 1996 consolidated financial statements.
ESNER ESTATE
On February 1, 1995, Stuart B. Esner and Sandra Esner (the "Executors") as co-executor for the Estate of Gerald F. Esner (the "Esner Estate") filed an action in the Court of Common Pleas in Bucks County, Pennsylvania against Osiris and a law firm (the "Law Firm") that previously represented Osiris and its principal shareholders, Gerald F. Esner, Lawrence Miller and William R. Shane. Messrs. Miller and Shane currently are executive officers of the Company and LGII.
The complaint alleged that Osiris breached the terms of a Second Amended and Restated Shareholders' Agreement among Messrs. Esner, Miller and Shane (the "Shareholders' Agreement") by attempting to repurchase shares of Osiris held by the Esner Estate (the "Esner Shares") without complying with the terms of the Shareholders' Agreement, and that the Law Firm breached its fiduciary duty and committed malpractice in connection with the drafting of the Shareholders' Agreement and its representation of Esner and Osiris. The Executors asked the Court (i) to have the value of Osiris reappraised pursuant to the terms of the Shareholders' Agreement and (ii) to require Osiris to repurchase
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) the Esner Shares pursuant to a new appraisal and the alleged terms of the Shareholders' Agreement or, alternatively, to pay the Esner Estate the fair value of the Esner Shares as determined by the new appraisal.
In March 1995, LGII purchased all of the issued and outstanding shares of Osiris, including the Esner Shares. In connection with the purchase, LGII entered into an indemnification agreement whereby Messrs. Miller and Shane agreed to indemnify and hold LGII harmless with respect to any claims, liabilities, losses and expenses, including reasonable attorney's fees, in connection with or arising from the Esner Estate litigation.
On April 9, 1996, the Executors filed a second complaint, which names Messrs. Miller and Shane and LGII as defendants. The second complaint alleges breach of contract, fraud and related claims against Messrs. Miller and Shane, and that LGII joined a civil conspiracy by acquiring Osiris. The Executors request compensatory damages of $24,300,000 against the various defendants, and seek punitive damages from Messrs. Miller and Shane. The two cases were consolidated by the Court.
On October 9, 1996, the Executors instituted a new civil action against the Law Firm. On November 18, 1996, the Executors instituted a new civil action against the individual partners of the Law Firm. In both complaints, the Executors expanded upon the allegations against the Law Firm contained in the previous complaints. By stipulation approved by the Court on February 24, 1997, the parties agreed to consolidate all suits and to permit the Executors to file a Third Amended Complaint, which was filed on February 10, 1997. The prayers for relief remain unchanged. Osiris and Messrs. Miller and Shane have filed preliminary challenges to the Third Amended Complaint. Likewise, LGII has moved for a dismissal of the claims against it for failure to state a claim upon which relief can be granted. That motion and the preliminary challenges are all pending.
The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's 1996 consolidated financial statements.
SERVICE CORPORATION INTERNATIONAL
On October 2, 1996, Service Corporation International ("SCI") filed an action in the United States District Court for the Southern District of Texas (the "Texas Action"), alleging that the Company falsely suggested to its shareholders that it has standing to bring an action to block or impede SCI's unsolicited exchange offer on federal antitrust grounds. SCI also seeks a declaratory judgment that the Company lacks standing to bring such an action on federal antitrust grounds. SCI asserts a claim under Texas common law, based upon its allegations that the Company's actions have tortiously interfered with SCI's "prospective business relationships" with the Company's shareholders. As relief for this assertion, SCI seeks an unspecified amount of damages for claimed injuries resulting from the Company's alleged interference with these prospective relationships. In an amended complaint filed October 3, 1996, SCI also alleges that the foregoing actions, as well as the Company's alleged failure to disclose certain information respecting
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) the Prime and Rose Hills transactions, constitute violations of Section 14(e) of the Exchange Act. As relief, SCI seeks an injunction against future violations of that statute.
On October 10, 1996, the Company, LGII and Ridge Chapels, Inc., a subsidiary of LGII, commenced an action in the United States District Court for the Eastern District of New York (the "New York Action"), seeking to enjoin SCI preliminarily and permanently from completing its unsolicited exchange offer on the grounds that a combination of SCI and the Company would violate Section 7 of the Clayton Act. According to the complaint, SCI's unsolicited offer for control of the Company, if successful, may substantially lessen competition in numerous local markets for (i) the sale of funeral services, (ii) the sale of funeral services on a "pre-need" basis, (iii) the sale of cemetery services, and (iv) the purchase of funeral homes, cemeteries and crematoria. The Company also accuses SCI and Equity Corporation International, Inc. (a competitor of the Company in which SCI had a 40% interest in October 1996) ("ECI"), of conspiracy to eliminate the Company as a competitive force in the funeral services industry, in violation of Section 1 of the Sherman Act. On October 10, 1996, the Company filed Motions for Expedited Discovery and for a Preliminary Injunction to enjoin the unsolicited exchange offer and, on October 15, 1996, filed a Verified First Amended Complaint.
On October 11, 1996, the Company moved to dismiss or stay the Texas Action. On October 15, 1996, SCI moved to dismiss, stay or transfer the New York Action. A hearing was held on SCI's motion on October 17, 1996, at the conclusion of which the District Court denied SCI's motion. On October 23, 1996, Magistrate Judge Caden of the District Court entered a Memorandum and Order allowing expedited discovery with respect to the Company's motion for a preliminary injunction. On October 29, 1996, the District Court overruled the objections of SCI to the Magistrate Judge's Order but stayed commencement of discovery proceedings, which stay was extended by stipulation until the resolution of the pending motions in the Texas Actions described below.
On October 21, 1996, SCI filed a Motion for Preliminary Injunction in the Texas Action, seeking to enjoin the Company from pursuing its antitrust claims in any forum other than the federal District Court in Texas. The matter was referred to Magistrate Judge Johnson, who issued a Memorandum Recommending Entry of a Preliminary Injunction on October 28, 1996. Magistrate Judge Johnson recommended that the District Court restrain the Company from proceeding in the New York Action (or elsewhere) until it had resolved the Company's pending motion to dismiss. In a telephone conference on October 28, 1996, the District Court declined to enter any injunctive relief at that time. A hearing on the Company's motion to dismiss was held on November 6, 1996. On November 23, 1996, the Texas District Court issued a Memorandum Opinion in which it: (i) denied SCI's motion for a preliminary injunction against the New York Action; and (ii) granted the Company's motion to dismiss the Texas Action, subject to the New York Court's permitting SCI to raise its above-described tortious interference and violation of Section14(e) claims as counterclaims in the New York Action. SCI's above-described declaratory judgment claim was dismissed outright.
On December 11, 1996, SCI filed its Answer to the Company's Verified First Amended Complaint, in which it denies liability and asserts various defenses and asserts counterclaims against the Company, which counterclaims parallel generally the above-described claims for tortious interference and violation of Section14(e) claims asserted in the Texas Action. The Company believes that the counterclaims are without merit
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) and intends to contest them vigorously. The Company has served discovery requests upon SCI and ECI to which both objected. On December 11, 1996, Magistrate Judge Caden ordered expedited discovery to proceed. SCI filed objections to the Magistrate Judge's order, which objections were denied by the District Court on January 7, 1997.
On December 11, 1996, ECI filed a Motion to Dismiss the claims against it, on grounds of improper venue and lack of personal jurisdiction. On December 18, 1996, the Company filed a Motion for Expedited Discovery respecting jurisdiction over ECI, and the parties agreed that the Company would not be required to respond to the Motion to Dismiss until either a date certain after denial of its Motion for Expedited Discovery or, if that Motion were granted, completion of jurisdictional discovery. On January 8, 1997, Magistrate Judge Caden entered an order providing that the Company could take certain expedited discovery respecting jurisdiction over ECI.
On January 7, 1997, SCI announced that it had withdrawn its proposed exchange offer. On January 14, 1997, the Company sent a letter to the New York Court stating that it will move for leave to file an amended complaint seeking permanent injunctive relief against future actions by SCI and/or ECI against the Company in violation of the antitrust laws. On January 15, 1997, SCI sent a letter to the New York Court stating that it believes the Company's claims are moot and will seek dismissal of those claims. Discovery from the parties has been temporarily suspended by agreement. On January 16, 1997, ECI sent a letter to the New York Court, seeking to suspend discovery until the Court rules on the contemplated motions by the Company and SCI. On January 20, 1997, the Company sent a letter to the Court seeking leave to move to dismiss SCI's counterclaims, to which SCI responded on January 22, 1997, by letter requesting dismissal of the entire action.
At the New York Court's suggestion, the parties are discussing possible resolution of the action in a manner that would end the current proceedings but preserve jurisdiction in the New York Court over similar disputes in the future, if any.
No provision with respect to these legal proceedings has been made to date in the Company's 1996 consolidated financial statements.
DERIVATIVE SUIT
On September 26, 1996, Jerry Krim filed a purported derivative and class action against the Company's current directors and one former director and against the Company as a nominal defendant in the Los Angeles County Superior Court. The plaintiff alleges, on behalf of himself and all of the Company's current and former shareholders, that the defendants "improperly responded to an offer by SCI to combine the two companies," refused to negotiate with SCI, agreed to pay an inflated price for the Rose Hills properties in Los Angeles, adopted a supposed "poison pill" supermajority voting provision requiring 75% approval of a merger, and adopted a Shareholders Protection Rights Plan, each allegedly in violation of the directors' fiduciary duties. Plaintiff seeks preliminary and permanent injunctive relief that would, among other things, (i) require the defendants to cooperate with any person having a bona fide interest in proposing a transaction and take certain other actions that allegedly would "maximize shareholder value," (ii) enjoin the Shareholders Protection Rights Plan in its entirety, (iii) enjoin the consummation of the Rose Hills transaction, (iv) enjoin the supermajority voting requirements, (v) require
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) an accounting for unspecified damages, and (vi) compensate the plaintiffs for their fees and costs. On October 17, 1996, the Court denied the plaintiff's motion for expedited discovery. On November 8, 1996, the Company and those individual defendants upon whom service had purportedly been made appeared specially and moved to quash service of the summons for lack of jurisdiction or, in the alternative, to dismiss or stay the action on grounds of forum non conveniens. On December 10, 1996, the Court granted the defendants' motion to quash the summons and denied the plaintiffs' request for discovery. The action was dismissed, and no appeal has been filed.
No provision with respect to this legal proceeding has been made in the Company's 1996 consolidated financial statements.
ROJAS ET AL.
On February 22, 1995, Juan Riveras Rojas, Leyda Rivera Vega, the Conjugal Partnership constituted between them, and Carlos Rivera Bustamente instituted a legal action against the Company, LGII and a subsidiary in the United States District Court for the District of Puerto Rico. The complaint alleges that the defendants breached a contract and ancillary agreements with the plaintiffs relating to the purchase of funeral homes and cemeteries, and committed related torts. The plaintiffs seek compensatory damages of $12,500,000, and unspecified punitive damages (although the Company is advised by counsel that there is no entitlement to punitive damages under Puerto Rican law). The Company has filed a motion to dismiss the complaint on the grounds of failure to join an indispensable party. In addition, the Company claims it has suffered damages far in excess of the amount claimed by the plaintiffs as a result of breach of contract and related torts on the part of the plaintiffs. A subsidiary of the Company has filed a complaint seeking damages in excess of $19,000,000 from the plaintiffs in the General Court of Justice of the Commonwealth of Puerto Rico. The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's 1996 consolidated financial statements.
FELDHEIM ET AL. V. SI-SIFH CORP. ET AL.
In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. were acquired by LGII in March 1996 when LGII acquired the assets of S.I. Acquisition Associates, L.P.
Plaintiffs hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. Plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 11. LEGAL PROCEEDINGS (CONTINUED) material information regarding the policy benefits and limitations. Plaintiffs also allege unfair trade practices in violation of Louisiana's insurance code and trade practices laws.
Plaintiffs seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honour the policies and allowing a plaintiff to select a more expensive casket than provided for in the policy, upon payment of the difference in retail value, without forfeiting the other benefits provided for in the policy.
As of the date hereof, no discovery has taken place. The Company has determined that it is not possible at this time to predict the final outcome of this legal proceeding, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's 1996 consolidated financial statements.
OTHER
The Company is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operation or liquidity.
NOTE 12. COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1996, the Company was committed to operating lease payments for premises, aircraft, helicopter, automobiles and office equipment in the following approximate amounts:
Total rent expense for each of the years in the three year period ended December 31, 1996 was $12,626,000, $10,590,000 and $10,098,000 respectively.
(B) COVENANTS NOT TO COMPETE
In connection with various acquisitions, the Company has entered into non-competition agreements ("covenants not to compete") with certain key management personnel of operations acquired. The Company's payments under the agreements may be made variously at closing or over future periods and
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) are expensed over the terms of the specific contracts. At December 31, 1996, the agreements in place will result in future payments in the following approximate amounts:
(C) ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company believes environmental contingencies and liabilities to be immaterial individually and in the aggregate.
NOTE 13. RETIREMENT PLANS
The Company has a defined contribution retirement plan covering substantially all United States employees. There are no required future contributions under this plan in respect of past service. The Company has a 401K Profit Sharing Plan for United States employees who may defer between 2% and 15% of their compensation. The Company contributes a minimum of 2% of employees' eligible compensation to the 401K Plan.
The Company has a Registered Retirement Savings Plan for Canadian employees who may contribute 3% of their compensation which is matched by an equal contribution to the plan by the Company on behalf of employees. There are no required future contributions under these plans in respect of past service.
The total expense for retirement plans for the three years ended December 31, 1996 was $2,318,000, $1,934,000 and $1,250,000 respectively.
NOTE 14. HOSTILE TAKEOVER PROPOSAL
On January 7, 1997, SCI publicly withdrew its unsolicited proposed offer to acquire the Company through an exchange offer announced in October 1996. Pursuant to the proposed exchange offer, SCI would exchange $45 worth of Common stock for each Common share of the Company tendered and $29.51 worth of Common stock for each Series C Preferred share of the Company tendered. In September 1996, the Board of Directors of the Company unanimously determined that the offer was inadequate and not in the best interests of the Company or its shareholders and recommended that, if the offer were commenced, the Company's shareholders should not tender their shares.
Effective as of October 10, 1996, in order to attract and retain key executives and managers of the Company in the context of a threatened change in control of the Company, the Board of Directors of the Company, upon the recommendation of the Compensation Committee thereof, approved the execution of individual change-in-control severance agreements ("Severance Agreements") with approximately 80 of the Company's executives and managers ("Executives"). With the exception of Mr. Loewen, certain
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 14. HOSTILE TAKEOVER PROPOSAL (CONTINUED) executive officers of the Company entered into such a Severance Agreement. Under each Severance Agreement, if there is a "change in control" (as defined), an Executive becomes entitled to severance pay amounting to one to three years' compensation, and certain other benefits during the "Severance Period" (as defined), if the Executive's employment terminates for any reason other than "cause" (as defined) or if the Executive terminates his or her employment for certain specified reasons. Each Severance Agreement also provides that the Executive is entitled to a retention bonus if the Executive remains employed by the Company for 30 days after a change in control. Benefits under the Severance Agreements can be reduced in certain circumstances.
In addition, the Board of Directors of the Company adopted a change-in-control severance compensation plan ("Severance Plan") that is designed to provide certain benefits to full-time salaried employees of the Company whose principal duties include corporate or regional management responsibilities. Under the Severance Plan, upon a "change in control" (as defined), each of the participants is entitled to a severance payment if, within 24 months after a change in control, the participant is terminated other than by reason of death, voluntary termination or retirement, or for "Just Cause" (as defined). Benefits payable under the Severance Plan can be reduced in certain circumstances.
Effective as of October 10, 1996, the Board of Directors of the Company authorized the Company to enter into indemnification agreements with certain of its directors and officers whereby the Company will agree to indemnify such person against all costs, charges and expenses incurred by reason of being a director or officer of the Company.
In late September, 1996, the Company on considering the possible effects of the hostile takeover proposal on its acquisition program, determined that access to capital markets might have been restricted or unavailable if the hostile takeover proposal remained outstanding for a long period of time. The Company concluded that an immediate debt issue was available and was the best alternative to provide continued liquidity during the likely period of the hostile takeover proposal. In October 1996, LGII consummated a private issue of two series of senior notes guaranteed by the Company for gross proceeds of $350,000,000. As the Company had not planned a long-term debt issue in late 1996, it believes that the incremental interest cost of the long-term debt issue over its bank revolving credit agreement is a direct result of the hostile takeover proposal. Included in finance costs related to the hostile takeover proposal is the incremental cost of $1,313,000 before income tax benefit for the period to December 31, 1996, which amount was determined as if the $350,000,000 debt issue was funded by the Company's bank revolving credit agreement.
In addition, the Company determined that it should obtain certain amendments from its bank lenders to provide flexibility during the hostile takeover proposal. The Company believes these amendment fees would not have been required if not for the hostile takeover proposal and has expensed the aggregate amendment fees of $1,917,000 before income tax benefit. These fees also are included in finance costs related to the hostile takeover proposal.
The other costs related to the hostile takeover proposal by SCI are comprised primarily of legal and financial advisory fees. In aggregate, the $15,448,000 incurred was composed of $9,890,000 in legal fees, $2,000,000 in investment banking advisory fees, with the balance made up of fees to other advisors. No income tax benefit relating to these other costs has been reflected in the consolidated financial statements.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 14. HOSTILE TAKEOVER PROPOSAL (CONTINUED) The Company has indemnified certain of its advisors against certain liabilities, including liabilities under United States and Canadian securities laws, arising out of their engagements.
NOTE 15. INCOME TAXES
The Company's effective income tax rate is derived as follows:
The Company paid income taxes for each of the years in the three year period ended December 31, 1996 amounting to $21,180,000, $19,131,000 and $16,485,000 respectively.
NOTE 16. CHANGES IN OTHER NON-CASH BALANCES
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 17. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain balance sheet accounts as at December 31, is as follows:
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 17. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 18. SEGMENTED INFORMATION
The following information corresponds to the Company's major industry segments, all of which operate in North America.
NOTE 19. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, as part of the normal course of operations, the Company chartered a jet aircraft, a motor vessel and a helicopter at competitive rates from companies which the Chairman of the Company owns or controls. For each of the years in the three year period ended December 31, 1996, the total costs of the charters amounted to $605,110, $1,622,448 and $1,269,000 respectively, of which ($52,900), $108,924 and $132,000 respectively, remained outstanding at the year end.
In connection with the intended transfer of each of these assets to companies owned by third parties, the Company provided interim financing to companies owned by the Chairman of the Company totalling $1,750,000. The interim financing was repaid in full by October 1996.
The intended transfer of the motor vessel to a third party was not consummated. On October 28, 1996, the Company purchased all of the shares of the company that owned the vessel, 476822 B.C. Ltd. ("BC Ltd."), for an effective purchase price of Cdn.$7,860,000. In the transaction, the motor vessel was valued at Cdn.$7,200,000 and the other assets were valued at cost and aggregated approximately Cdn.$660,000. A third party appraisal of the motor vessel had established its fair market value at Cdn.$7,350,000 and its replacement value at Cdn.$12,500,000.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 19. RELATED PARTY TRANSACTIONS (CONTINUED) The Chairman has an option to reacquire either the motor vessel and related assets (the "Boat Assets") or the shares of BC Ltd. until October 1, 2006, under certain circumstances including a change in control of the Company. The option price for the Boat Assets is their fair market value, and the option price for the shares is the fair market value of the net assets of BC Ltd.
During the year, the company which owned the jet aircraft and helicopter sold them to a third party. The Company has leased the jet aircraft and helicopter from the third party at commercially reasonable terms.
The Board of Directors of the Company approved the transactions pertaining to the jet aircraft in July 1996 and the transactions pertaining to the motor vessel and helicopter in September 1996.
As part of the 1995 acquisition of Osiris Holding Corporation ("Osiris"), the Company has recorded as a long-term liability, $27,840,000. The balance outstanding is the present value of total remaining contingent payments of approximately $33,800,000 which the Company expects to pay over a five year period to the former shareholders of Osiris, two of whom are officers of the Company.
In addition, as part of the 1995 acquisition of Shipper Management ("Shipper"), the Company has recorded as a long-term liability, $6,841,000 representing the present value of total remaining contingent payments of approximately $8,500,000 which the Company recorded in the third quarter of 1996 when the outcome of the contingency became determinable and which the Company expects to pay over a six year period to the former shareholders of Shipper, one of whom is an officer of the Company.
NOTE 20. SUBSEQUENT EVENTS
During the period from January 1, 1997 to March 3, 1997, the Company acquired 19 funeral homes and 11 cemeteries. The aggregate cost of these transactions was approximately $35,467,000.
In March 1997, the Company has committed to acquire certain funeral homes, cemeteries and related operations, subject in most instances to certain conditions including approval by the Company's Board of Directors. The aggregate cost of these transactions, if completed, will be approximately $284,254,000.
NOTE 21. UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada. These principles differ in the following material respects from those in the United States as summarized below:
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 21. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (A) EARNINGS (LOSS) AND EARNINGS (LOSS) PER COMMON SHARE
The following average number of shares were used for the computation of primary and fully diluted earnings (loss) per share:
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 21. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (B) BALANCE SHEET
The amounts in the consolidated balance sheet that differ from those reported under Canadian GAAP are as follows:
(C) STATEMENT OF CASH FLOWS
Under United States GAAP, cash provided by financing and applied to investing would decrease by approximately $63,000,000 (1995--$106,000,000, 1994--$19,000,000) for non-cash debt and common share consideration on acquisitions. Similarly, cash provided by financing and applied to investing would decrease by approximately $2,600,000 (1995--nil, 1994--nil) for non-cash proceeds on disposal of certain subsidiaries, see Note 4(c).
Cash applied to operations and cash provided by financing activities would decrease by $112,000,000 because shares and debt issued for legal settlements would be considered non-cash transactions.
(D) INSURANCE OPERATIONS
PRESENT VALUE OF INSURANCE POLICIES
Under United States GAAP, the Company recognizes an asset that represents the actuarilly-determined present value of the projected future profits of the insurance in-force at dates of acquisition. Canadian GAAP does not recognize such an asset. The asset is being amortized to insurance expense over the estimated life of the insurance in-force at the date of acquisition. In 1995, United States GAAP differences were not significant.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 21. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) DEFERRED POLICY ACQUISITION COSTS
Under United States GAAP, the Company defers costs related to the production of new business, which consist principally of commissions, certain underwriting expenses, and the costs of issuing policies. Deferred acquisition costs are amortized over the expected premium-paying periods of the related policies. Canadian GAAP does not permit deferral of such costs. In 1995, United States GAAP differences were not significant.
INSURANCE POLICY LIABILITIES
Insurance policy liabilities, which represent liabilities for future policy benefits, are accounted for under United States GAAP using the net level premium method which involves different actuarial assumptions and methodologies than the policy premium method used for Canadian GAAP. In addition, under Canadian GAAP, all actuarial assumptions are re-evaluated on a periodic basis, resulting in adjustments to insurance policy liabilities and insurance costs and expenses. Under United States GAAP, assumptions established at the time a policy is written are locked in and only revised if it is determined that future experience will worsen from that previously assumed.
(E) UNREALIZED GAINS AND LOSSES
Under United States GAAP, fixed maturity securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Fixed maturity securities classified as held-to-maturity were approximately $83,719,000 at December 31, 1996 (1995--$23,000,000). Debt and equity securities that are held with the objective of trading to generate profits on short-term differences in price are carried at fair value, with changes in fair value reflected in the results of operations. At December 31, 1996, securities classified as trading were approximately $5,600,000. All other fixed maturity and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and carried at fair value which was approximately $316,028,000 at December 31, 1996 (1995--$74,000,000). Available-for-sale securities may be sold in response to changes in interest rates and liquidity needs. Unrealized holding gains and losses related to available-for-sale investments, after deducting amounts allocable to income taxes, are reflected as a separate component of stockholders' equity. There were no significant unrealized gains or losses on securities available-for-sale as of December 31, 1996. Unrealized holding gains and losses related to trading investments, after deducting amounts allocable to income taxes, are reflected in earnings.
(F) INCOME TAXES
Under United States GAAP, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Temporary differences are tax-effected at current rates whereas under Canadian GAAP, temporary differences are tax-effected at historic rates. There was no deferred tax effect of changes in tax rates during 1996.
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 21. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) The Company's deferred tax liabilities under FAS 109 at December 31, are as follows:
The Company believes realization of its net deferred tax assets is more likely than not. The Company's ability to realize its deferred tax assets is based on several factors, including a presumption of future profitability in certain jurisdictions and is subject to some degree of uncertainty. At December 31, 1996, the Company had a valuation allowance of $3,499,000 (1995--$2,228,000) During the year ended December 31, 1996, the Company increased its valuation allowance by $1,271,000 for operating loss carryforwards.
(G) CHANGE IN ACCOUNTING POLICY
During the year ended December 31, 1994, the Company changed its revenue recognition policy with regard to pre-need sales of cemetery interment rights and other related products. Previously revenue was recognized in accordance with principles prescribed for sales of real estate.
(H) CHANGE IN REPORTING CURRENCY
Effective January 1, 1994, the Company adopted the United States dollar as its reporting currency as a result of the significance of business activities conducted in the United States and of shareholdings held by residents of the United States.
(I) RECENT UNITED STATES ACCOUNTING STANDARDS
The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based Compensation, for United States GAAP purposes, to account for grants under the Company's existing stock based compensation plans.
The Company continues to record compensation expense for United States GAAP purposes following the intrinsic value principles of APB 25 for Accounting for Stock Issued to Employees in accounting for
THE LOEWEN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES
NOTE 21. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) the plans. Under APB 25, no compensation expense has been recognized for its stock-based compensation plans in 1996 (1995--$191,000, 1994--$220,000). Had compensation cost been determined based on fair value at the grant dates for awards under those plans consistent with the measurement provisions of FAS 123, net earnings under United States GAAP would have been $58,860,000 for the year ended December 31, 1996 (1995--$(76,600,000)) and primary and fully diluted earnings per share would have been $0.87 and $0.86 respectively (1995--($1.69) and ($1.69), respectively) For these purposes, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions; dividend yield 0.5% (1995--0.5%), expected volatility 24% (1995--24%), Canadian risk-free interest rates 5.68% (1995--7.65%) United States risk-free interest rates 5.57% (1995--6.58%) and expected average option term of 3.4 years (1995--4.5 years). The weighted average fair value of the options granted is $6.78 (1995--$9.42) per option.
NOTE 22. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period.
THE LOEWEN GROUP INC. SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------
(1) Certain of the comparative figures have been reclassified to conform to the presentation adopted for the year ended December 31, 1996.
LOEWEN GROUP INTERNATIONAL, INC. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders Loewen Group International, Inc.
We have audited the consolidated balance sheets of Loewen Group International, Inc. as at December 31, 1996 and 1995 and the consolidated statements of operations and retained earnings (deficit) and changes in financial position for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1996 and 1995, and the results of its operations and the changes in its financial position for each of the years in the three year period ended December 31, 1996, in accordance with generally accepted accounting principles in Canada.
/s/ KPMG Chartered Accountants Vancouver, Canada March 3, 1997, except as to Note 21(b), which is as of March 27, 1997.
LOEWEN GROUP INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
LOEWEN GROUP INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
LOEWEN GROUP INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated on February 25, 1987 under the laws of the State of Delaware and is directly and indirectly a wholly owned subsidiary of The Loewen Group Inc. ("Parent Company"). The United States dollar is the principal currency of the Company's business and accordingly the consolidated financial statements are expressed in United States dollars.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada and generally conform with those established in the United States, except as explained in Note 22.
BASIS OF CONSOLIDATION
The accounts of all subsidiary companies have been included in the consolidated financial statements from their respective dates of acquisition of control or formation. All subsidiaries are wholly owned at December 31, 1996 except for a few companies with small minority interests.
The Company accounts for its common share investment in companies in which it has significant influence by the equity method. The Company's proportionate share of income as reported, net of amortization of excess purchase price over net assets acquired, is included in income and added to the cost of the investment. Common share dividends received reduce the carrying amount of the investment.
Other long-term investments including preferred shares are accounted for using the cost method.
All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in accordance 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from those estimates.
PREARRANGED FUNERAL SERVICES
Prearranged funeral services provide for future funeral services generally determined by prices prevailing at the time the contract is signed. The payments made under the contract are either placed in trust or are used to pay the premiums of life insurance policies under which the Company will be designated as beneficiary. Except for insurance commissions and amounts not required to be trusted which are used to defray initial costs of administration, no income is recognized until the performance of a specific funeral.
Trust fund principal amounts and insurance contract amounts, together with trust fund investment earnings retained in trust and annual insurance benefits, are deferred until the service is performed. The Company estimates that trust fund investment earnings and annual insurance benefits exceed the increase in cost over time of providing the related services. Upon performance of the specific funeral service, the Company will recognize the trust fund principal amount or insurance contract amount together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Direct obtaining costs
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) related to the sale of prearranged funeral services are included in other assets and amortized over a period of ten years, approximating the period the benefits are expected to be realized. Indirect obtaining costs relating to the sale of prearranged funeral services are expensed in the period incurred.
CEMETERY OPERATIONS
Pre-need sales of cemetery interment rights and other related products and services are recorded as revenue when customer contracts are signed with concurrent recognition of related costs. Allowances for customer cancellations and refunds are provided at the date of sale based on management's estimates of expected cancellations. Actual cancellation rates in the future may result in a change in estimate.
A portion of the proceeds from cemetery sales is generally required by law to be paid into perpetual or endowment care trust funds. Cemetery revenue is recorded net of the amount to be deposited to perpetual or endowment care trust funds. Earnings of perpetual or endowment care trust funds are used to defray the maintenance costs of cemeteries. Additionally, pursuant to state law, a portion of the proceeds from the sale of pre-need merchandise and services may also be required to be paid into trust funds which are recorded as long-term receivables.
INSURANCE OPERATIONS
(A) INSURANCE REVENUE
The Company earns insurance revenue through the sale of industrial life and ordinary life insurance policies.
(B) INSURANCE INVESTED ASSETS
Bonds and other fixed-term securities are carried at amortized cost. Net realized gains and losses are deferred and amortized to income over the remaining term to maturity of the security sold. Equity securities are carried at moving average market value. Net realized gains and losses on the disposal of equity securities are deferred and amortized to income on a declining balance basis.
(C) INSURANCE POLICY LIABILITIES
Insurance policy liabilities represent an estimate of the amount which, together with future premiums and investment income, will be sufficient to pay future benefits, dividends and expenses on insurance and annuity contracts. Liabilities are computed using the policy premium method which involves the use of estimates concerning such factors as mortality and morbidity rates, future investment yields, future expense levels and rates of surrender. Consequently, policy liabilities include reasonable provisions for adverse deviations from those estimates. These assumptions will be revised if it is determined that future experience differs substantially from that previously assumed.
ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company's operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. The Company policies are designed to control environmental risk upon acquisition
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) through extensive due diligence and corrective measures taken prior to acquisition and ongoing maintenance programs after acquisition.
INVENTORIES
Inventories are valued at the lower of cost, determined primarily on a specific identification basis or a first in first out basis, and net realizable value.
CEMETERY PROPERTY
Cemetery property, including capitalized interest, consists of developed and undeveloped cemetery property and is valued at average cost, which is not in excess of market value. Amounts are expensed to costs and expenses as sales of cemetery plots occur.
PROPERTY AND EQUIPMENT
Property and equipment is recorded initially at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
NAMES AND REPUTATIONS
The amount paid for the names and reputations of operations acquired is equivalent to the excess of the purchase price over the fair value of identifiable net assets acquired, as determined by management. Amortization is provided on a straight-line basis over 40 years.
Covenants not to compete included with names and reputations on the consolidated balance sheet represent amounts prepaid under non-competition agreements with certain key management personnel of acquired operations. Amortization of such prepaid covenants not to compete is provided on a straight-line basis over the terms of the relevant agreements, typically ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company monitors the recoverability of long-lived assets, including names and reputations, based on factors such as current market value, future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets. The Company's policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable.
DEFERRED FINANCE COSTS
Deferred finance costs included in other assets on the consolidated balance sheet represent the costs of negotiating and securing the Company's long-term debt and preferred securities of subsidiary and are
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) being amortized to earnings on a straight-line basis over the respective term of the related debt. These costs include legal fees, accounting fees, underwriting and agency fees and other related costs.
ACQUISITION COSTS
The Company's policy is to capitalize direct acquisition costs incurred on potential acquisitions. Upon completion of an acquisition, these costs are allocated to the assets acquired and are subject to the accounting policies outlined above. On certain acquisitions, a portion of the consideration is contingent upon future operating results. Such consideration, if any, is allocated to the assets acquired once determinable. Direct acquisition costs related to acquisitions not completed are written off.
DERIVATIVE INSTRUMENTS
The Company enters into derivative transactions with financial institutions only as hedges of other financial transactions and not for speculative purposes. The Company's policies do not allow leveraged transactions and are designed to minimize credit and concentration risk with counter-parties. The Company enters into interest rate swap agreements to manage interest rate exposure on its long-term debt. The difference between the amounts paid and received is accrued and accounted for as an adjustment to interest expense over the life of the swap agreement.
The Company uses basic swap and option products to manage its exposure to interest rate movements when anticipated financing transactions are probable and the significant characteristics and expected terms are identified. Any gain or loss as a result of the hedging is deferred and amortized as an adjustment to interest expense over the life of the financing instrument hedged. If at any point in time, a hedging transaction no longer meets the criteria of a hedge, any gain or loss is recognized in current earnings.
The Company also uses foreign exchange forward contracts, options and futures to hedge the Company's exposure to fluctuations in foreign exchange rates. Gains or losses as a result of the hedge transaction are accounted for as an adjustment to the related transaction.
SHARE ISSUE EXPENSES
The costs of issuing shares, net of income tax recoveries thereon, are applied to reduce the stated value of such shares.
DEFERRED INCOME TAXES
The Company follows the allocation method for accounting for income taxes. Under this method recognition is given in the financial statements to the tax effects of timing differences between income for financial statement and income tax purposes. The differences arise primarily from provisions for legal settlements and related costs, inter-company charges, interest, depreciation, amortization, deferred finance costs, direct marketing costs, provision for bad debts and contract cancellations, operating loss carryforwards, cemetery sales and share issue costs.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 2. CHANGES IN ACCOUNTING POLICY
During the year ended December 31, 1994, the Company changed its revenue recognition policy with regard to pre-need sales of cemetery interment rights and other related products. Previously revenue was recognized in accordance with principles prescribed for sales of real estate.
NOTE 3. ACQUISITIONS
During the year ended December 31, 1996, the Company acquired 149 funeral homes, 135 cemeteries and two insurance companies. Included in these acquisitions is the purchase of certain net assets of S.I. Acquisition Associates L.P. ("S.I.") of Donaldsville, Louisiana, for approximately $155,800,000, including costs of acquisition. S.I. concurrently acquired all of the outstanding shares of Ourso Investment Corporation. The S.I. assets included 15 funeral homes, two cemeteries and two insurance companies.
During the year ended December 31, 1995, the Company acquired 170 funeral homes and 61 cemeteries.
All of the Company's acquisitions have been accounted for by the purchase method. The preliminary purchase price allocation for certain of these acquisitions has been estimated based on available information at the time and is subject to revision. The effect of acquisitions at dates of purchase on the Consolidated Balance Sheet is shown below. Included in these amounts is $11,794,000 representing the present value of total contingent payments of approximately $13,500,000 which the Company recorded in
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 3. ACQUISITIONS (CONTINUED) the third quarter of 1996 when the outcome of the contingency related to a 1995 acquisition became determinable.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 3. ACQUISITIONS (CONTINUED) The following table reflects, on an unaudited pro-forma basis, the combined results of the Company's operations acquired during the period ended December 31, 1996 as if all such acquisitions had taken place at the beginning of the respective years presented. Appropriate adjustments have been made to reflect the accounting basis used in recording these acquisitions. This pro-forma information does not purport to be indicative of the results of operations that would have resulted had the acquisitions been in effect for the entire years presented, and is not intended to be a projection of future results or trends.
NOTE 4. PREARRANGED FUNERAL SERVICES
Included in the consolidated balance sheets at December 31, 1996, as prearranged funeral services is $274,266,000 (1995--$190,687,000), representing amounts deposited in accordance with state trusting laws with various financial institutions together with accrued earnings. The Company will receive the prearranged funeral trust amounts when the funeral services are performed.
AMOUNTS HELD IN PREARRANGED FUNERAL TRUSTS
As at December 31, 1996, total prearranged funeral trust assets were approximately equal to market value. The weighted average rate of return on the above prearranged funeral trust assets for the year ended December 31, 1996 was 5.1% (1995--4.9%, 1994--4.9%).
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. INVESTMENTS
(A) PRIME
On August 26, 1996, the Company acquired 235.2941 Common shares of Prime for $16,000,000, representing 23.5% of Prime's voting common stock, and 100% of Prime's non-voting preferred stock for $62,000,000. Blackstone Capital Partners II Merchant Banking Fund L.P. and certain affiliates (together, "Blackstone") acquired 764.7059 Common shares, representing 76.5% of Prime's voting common stock for $52,000,000. On February 14, 1997, the Company and Blackstone agreed to adjust their respective ownership of Prime's voting common stock retroactively to August 26, 1996. No adjustment to the aggregate purchase price was made. After giving effect to the readjustment, the Company has paid $14,500,000 for 213.2353 Common shares and Blackstone has paid $52,000,000 for 764.7059 Common shares representing 21.8% and 78.2% respectively of Prime's voting common shares. The Company has acquired 100% of Prime's non-voting preferred stock. A 10% cumulative annual payment-in-kind dividend is payable on the preferred stock.
Prime holds all of the outstanding common shares of Prime Succession, Inc., an operator of funeral homes and cemeteries in the United States. Prime Succession, Inc. was purchased on August 26, 1996 for approximately $320,000,000 of which $130,000,000 was funded by Blackstone and the Company, and $190,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $230,000,000, was established as goodwill in Prime Succession, Inc. and is being amortized over 40 years.
Blackstone and the Company have the right to designate five and three nominees, respectively, to the Prime Board of Directors. Blackstone controls the strategic operating, investing and financing policies of Prime. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its shares in Prime to a party other than to an affiliate of itself.
The Company accounts for its investment in preferred shares of Prime by the cost method. For the period August 26, 1996 to December 31, 1996, income of $2,300,000 was recorded representing the cumulative annual payment-in-kind dividend.
The Company accounts for its investment in common shares of Prime by the equity method. Under this method, the Company records its proportionate share of the net earnings (loss) of Prime after deducting the payment-in-kind dividend. For the period August 26, 1996 to December 31, 1996, a loss of
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. INVESTMENTS (CONTINUED) $1,144,000 was recorded representing the Company's proportionate share of the loss attributable to the common shares of Prime.
Under a Put/Call Agreement entered into with Blackstone, the Company has the option to acquire ("Call") Blackstone's common share interest in Prime commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the terms of the Put/Call Agreement. Blackstone has the option to sell ("Put") its common share interest to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement.
The prices determined for the Call and the Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value is determined at the Put or Call date based on a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"), after deduction of certain liabilities. The multiple to be applied to EBITDA is also determined through a formula which is based on future EBITDA. Any payment to Blackstone under the Call or the Put may be in the form of cash or Common shares of the Company, at the Company's option.
Upon a Call, Blackstone will receive at a minimum, its original investment plus a 24.1% compound return per annum thereon regardless of the calculated equity value. Any additional equity value attributable to Blackstone common share interest is determined on the basis of a formula set forth in the Put/Call Agreement.
Upon a Put by Blackstone, there is no guaranteed return to Blackstone. Any payment to Blackstone is limited to Blackstone's share of the calculated equity value based on a formula set forth in the Put/Call Agreement.
Any payment to Blackstone is subject to Blackstone or the Company exercising their respective rights under the Put or the Call. It is not currently possible to determine whether Blackstone or the Company will exercise such rights. Furthermore, any amount to be paid pursuant to the Put is dependent on calculated equity value which is based on EBITDA of future periods. Accordingly, it is not possible at this date to estimate the future amount that may be payable to Blackstone on the exercise of the Put or the Call.
The Company provides various administrative services to Prime under an Administrative Services Agreement for an annual fee of $250,000.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. INVESTMENTS (CONTINUED) Summarized financial data for Prime for the period August 26, 1996 to December 31, 1996, are presented as follows:
(C) RH HOLDINGS
On November 19, 1996, the Company acquired 204.5454 common shares of RH Holdings for $9,000,000, representing 20.45% of RH Holdings' voting common shares, and 100% of RH Holdings' non-voting preferred shares, with a cumulative annual payment-in-kind dividend of 10%, for $86,000,000. The Company's total investment of $95,000,000 consisted of $72,000,000 in cash and a contribution by the Company of 14 funeral homes and two combination funeral home and cemetery properties located in California valued at $23,000,000. Blackstone acquired 795.4546 common shares, representing 79.55% of RH Holdings' voting common stock for $35,000,000.
RH Holdings holds all of the outstanding common shares of Rose Hills Company ("RHC") and the cemetery related assets of Rose Hills Memorial Park Association, representing the largest single location cemetery in the United States. These companies were purchased on November 19, 1996 for approximately $285,000,000 of which $130,000,000 was funded by Blackstone and the Company, and $155,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $130,000,000 was established as goodwill in RH Holdings and is being amortized over 40 years.
Blackstone and the Company have the right to designate five and three nominees, respectively, to the RH Holdings' Board of Directors. Blackstone controls the strategic operating, investing and financing policies of RH Holdings. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its shares in RH Holdings to a party other than to an affiliate of itself.
The Company accounts for its investment in preferred shares of RH Holdings by the cost method. For the period November 19, 1996 to December 31, 1996, income of $932,000 was recorded representing the cumulative annual payment-in-kind dividend.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. INVESTMENTS (CONTINUED) The Company accounts for its investment in common shares of RH Holdings by the equity method. Under the equity method, the Company records its proportionate share of the net earnings (loss) of RH Holdings after deducting the payment-in-kind dividend. For the period November 19, 1996 to December 31, 1996, a loss of $468,000 was recorded representing the Company's proportionate share of the loss attributable to the common shares of RH Holdings. The properties contributed by the Company had a net carrying value of $20,382,000. The Company has deferred a gain of $2,618,000 on the disposition of these properties and will recognize the gain if and when the properties are sold. The deferred gain is recorded in other liabilities on the consolidated balance sheet.
Under a Put/Call Agreement entered into with Blackstone, the Company has the option to Call Blackstone's common share interest in RH Holdings commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the terms of the Put/Call Agreement. Blackstone has the option to Put its common share interest to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement.
The prices determined for the Call and Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value will be determined at the Put or Call date based on a multiple of EBITDA, after deduction of certain liabilities. The multiple to be applied to EBITDA will also be determined through a formula which is based on future EBITDA. Any payment to Blackstone under the Call or the Put may be in the form of cash or the stock of the Company, subject to certain conditions, at the Company's option.
Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 22.5% compound return per annum thereon regardless of the calculated equity value. Any additional equity attributable to Blackstone common share interest will be determined on the basis of a formula set forth in the Put/Call Agreement.
Upon a Put by Blackstone, there will be no guaranteed return to Blackstone. Any payment to Blackstone will be limited to Blackstone's share of the calculated equity value based on a formula set forth in the terms of the agreement.
Any payment to Blackstone will be subject to Blackstone or the Company exercising their respective rights under the Put or the Call. It is not currently possible to determine whether Blackstone or LGII will exercise such rights. Furthermore, any amount to be paid pursuant to the Put is dependent on calculated equity value which is based on EBITDA of future periods. Accordingly, it is not possible at this date to estimate the future amount that may be payable to Blackstone on the exercise of the Put or the Call.
The Company provides various management and administrative services to RHC and subsidiaries under an Administrative Services Agreement for an annual fee of $250,000. If the Administrative Services Agreement becomes terminable by Blackstone due to the Company's material breach thereof or other failure to comply in any material respect, Blackstone under the Put will receive, at a minimum, its original investment plus a 25% compound return per annum thereon which increases to 27.5% in the event of a change in control of the Company, regardless of the calculated equity value.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 6. INSURANCE INVESTED ASSETS
The Company earned $16,883,000 of investment income on these assets at December 31, 1996 (1995--$3,289,000) and $1,882,000 and $1,522,000 of unrealized gains and losses, respectively, on the carrying values of these investments at December 31, 1996 (1995--$3,348,000 and $325,000 respectively).
Maturities of fixed maturity securities, excluding mortgage-backed securities and collateralized mortgage obligations, are estimated as follows: $3,750,000 due in one year or less (1995--$5,000,000), $56,000,000 due in one to five years (1995--$8,000,000), $47,958,000 due in five to ten years (1995-- $21,000,000), and $25,018,000 due after ten years (1995--$13,000,000). Maturities on an amortized cost basis are approximately the same as the market value basis at December 31, 1996. The Company had approximately $124,193,000 in mortgage-backed securities and collateralized mortgage obligations at December 31, 1996 (1995--$32,000,000).
NOTE 7. LOANS AND ADVANCES FROM (TO) AFFILIATES
The term loan and certain revolving credit loans from an affiliated company are secured under a collateral trust arrangement with a group of senior lenders to the Company and Parent Company, see Note 8. The $590,040,000 term loan is comprised of $206,000,000 due August 15, 1999, $199,650,000 due April 11, 2000 and $184,390,000 due February 1, 2001.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 8. LONG-TERM DEBT
(a) On May 31, 1996, the Company, the Parent Company and their senior lenders entered into a collateral trust arrangement whereby senior lenders would share certain collateral on a pari passu basis. This collateral is held by a trustee for the equal and ratable benefit of the various holders of senior indebtedness. This group consists principally of senior lenders to the Parent Company and lenders under the Company's bank revolving credit agreement, the MEIP bank term loan, senior amortizing notes, the senior notes and certain loans from an affiliated company, see Note 7. At December 31, 1996, the indebtedness owed to senior lenders and subject to the collateral trust arrangement, including holders of certain letters of credit, aggregated $1,844,670,000.
The collateral includes (i) a pledge for the benefit of the senior lenders of the shares held by the Parent Company of substantially all of its subsidiaries (including the Company and its subsidiaries) and (ii) all of the financial assets of the Company (the Company does not have material assets other than financial assets).
(b) Certain of the above loan agreements contain various restrictive provisions, including change of control provisions, restricting payment by the Parent Company of dividends on Common and Preferred shares, restricting encumbrance of assets, limiting redemption or repurchase by the Parent Company of its shares, limiting disposition of assets, limiting the amount of additional debt, limiting the amount of capital expenditures and maintaining specified financial ratios of the Parent Company and its subsidiaries. The Company's insurance subsidiaries are subject to certain state regulations which restrict distributions, loans and advances from such subsidiaries to the Company. At December 31, 1996, the net assets of such subsidiaries aggregated $101,405,000.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 8. LONG-TERM DEBT (CONTINUED) (c) The Company's bank revolving credit agreement was entered into on May 31, 1996 and provides for borrowings of up to $750,000,000 with a maturity of May 29, 2001. Initial borrowings under this facility were used to repay in full and retire a previous $400,000,000 revolving credit agreement.
The Company's bank revolving credit agreement and MEIP bank term loan bear interest at floating rates based on U.S. Libor or the prime rates of certain banks, plus an applicable margin depending upon a combination of the Parent Company's ability to maintain specified consolidated financial ratios and long-term debt credit ratings. The Company is also required to pay a commitment fee on the unused portion of the revolving credit agreement.
(d) Repayment for the senior amortizing notes commenced November 1, 1995 for Series A and B and commences February 25, 1998 for Series E in equal amounts.
(e) In March 1996, the Company consummated a private placement of two series of senior notes guaranteed by the Parent Company (Series 1 and 2) for gross proceeds of $350,000,000. In October 1996, these notes were exchanged for notes registered under the Securities Act.
In October 1996, the Company consummated a private placement of two series of senior notes guaranteed by the Parent Company (Series 3 and 4) for gross proceeds of $350,000,000. In March 1997, these notes were exchanged for notes registered under the Securities Act.
(f) The notes issued under legal settlements represent a promissory note in the amount of $80,000,000 payable over 20 years in equal annual installments of $4,000,000, without interest. Interest is accrued on the discounted amount and is included in accounts payable and accrued liabilities. Annual payments will eliminate this accrual and the balance will be applied to the promissory note, see Note 12.
(g) The Company incurred and paid approximately $78,800,000 of interest to third parties during 1996 (1995 -- $42,000,000), of which approximately $2,000,000 (1995 -- $2,600,000) was capitalized as cost of construction or development of cemetery property.
(h) Maturities of long-term debt are as follows:
NOTE 9. PREFERRED SECURITIES OF SUBSIDIARY
On August 15, 1994, 3,000,000 9.45% Cumulative Monthly Income Preferred Securities, Series A ("MIPS") were issued by Loewen Group Capital, L.P. ("LGC") in a public offering for an aggregate
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 9. PREFERRED SECURITIES OF SUBSIDIARY (CONTINUED) amount of $75,000,000. LGC is a limited partnership and the Company as its general partner manages its business and affairs.
The MIPS are due August 31, 2024 and are subject to redemption at par at the option of LGC, in whole or in part, from time to time, on or after August 31, 2004.
Holders of the MIPS will be entitled to receive cumulative dividends at an annual rate of 9.45% of the liquidation preference of $25 per MIPS. The dividends accrue from the date of original issuance and are payable monthly in arrears.
The Company has the right to defer payment of dividends on the MIPS for one or more periods, each not to exceed 60 consecutive months. In this event the Parent Company may not declare or pay dividends on, or redeem, purchase or acquire or make a liquidation payment with respect to any class of its capital stock.
The Parent Company has guaranteed certain payment obligations of the Company to LGC and of LGC to the MIPS holders. The guarantees are subordinated to all liabilities of the Parent Company and are unsecured.
NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's policy is not to use derivative instruments for speculation. The Company does not trade in financial instruments and is not a party to leveraged derivatives.
(A) SWAP AGREEMENTS AND INTEREST RATE OPTIONS
The Company has entered into swap agreements and interest rate options with a number of different commercial banks and financial institutions to manage its interest rate exposure on fixed rate long-term debt. At December 31, 1996, such agreements included three interest rate swap agreements with commercial banks and financial institutions, each having a notional principal amount of $25,000,000. The Company will receive floating Libor based rates determined quarterly (5.500% at December 31, 1996) and will pay fixed rates of 5.755%, 6.200% and 6.190%. The agreements expire in June 1999, June 2001 and June 2001, respectively.
The Company is exposed to a credit loss in the event of non-performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counterparties.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, current indebtedness, accrued settlements and accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of insurance liabilities and the Put/Call Agreement have been omitted because it is not practicable to determine fair value with sufficient reliability. For further
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) information about these items see Notes 6 and 5 respectively. Financial instruments with a carrying value different from their fair value include:
The fair value of insurance invested assets and certain investments and long-term receivables are determined based on quoted market prices. For certain long-term receivables, fair value is estimated by discounting the future cash flows, including interest payments, using rates currently available for investments of similar terms and maturity. The investments for which it is not practicable to estimate fair value comprise primarily the preferred share investments in Prime and RH Holdings. The long-term receivables for which it is not practicable to estimate fair value comprise primarily installment receivables on cemetery sales, which generally have terms of three to five years and bear interest ranging from 8% to 15%.
The fair value of loans and advances from affiliates and long-term debt subject to fixed interest rates is estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors. The fair value of long-term debt, subject to floating market rates, approximate their carrying values. The fair value of the preferred securities of a subsidiary is estimated based upon quoted market prices.
The fair value of the swap agreements is the estimated amount the counterparty would receive or pay to hypothetically terminate or exchange the agreements based on market factors. The fair value of futures contracts are estimated based on quoted market prices. The fair value of futures contracts represents the cost to close out the position.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 11. SHARE CAPITAL
(A) AUTHORIZED
3,000 Common shares with a par value of $0.01.
(B) ISSUED AND OUTSTANDING
In March, 1996, the Company issued 117 common shares to affiliated companies for gross proceeds of $75,068,721, and received capital contributions from affiliated companies totalling $100,000,000.
NOTE 12. LEGAL PROCEEDINGS
GULF NATIONAL SETTLEMENT
On February 1, 1996, the Company and Gulf National Insurance Company and certain of its affiliates ("Gulf National") executed a settlement agreement pursuant to which, among other things, the parties agreed to a full and mutual release of all claims against each other. The Company delivered to Gulf National $50,000,000 in cash, 1,500,000 million Common shares of the Parent Company ("Gulf National Settlement Shares") and a promissory note in the amount of $80,000,000 payable over 20 years in equal installments of $4,000,000, without interest. The Gulf National Settlement Shares were issued in February 1996 and a registration statement registering the resale of the Gulf National Settlement Shares filed with the Securities and Exchange Commission ("SEC") was declared effective in December 1996.
The Company recorded a change against its 1995 earnings in the amount of $134,800,000 before taxes of $49,457,000 to account for the Gulf National settlement. This amount represents the cash portion, the present value of the non-interest bearing promissory note and the guaranteed value of Common shares to be issued.
PROVIDENT SETTLEMENT
On February 4, 1996, Provident American Corporation and one of its subsidiaries ("Provident") and the Company settled certain litigation and on March 19, 1996, the parties entered into a settlement providing for a full mutual release from all claims against each other, and the Company delivered 1,000,000 Common shares of the Parent Company ("Provident Settlement Shares"), and $3,000,000 in cash to Provident and certain designees. The Parent Company filed a registration statement registering the resale of the Provident Settlement Shares with the SEC, which was declared effective in July 1996.
The Company recorded a charge against its 1995 earnings in the amount of $30,000,000 before taxes of $10,800,000 to account for the Provident settlement.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) CLASS ACTIONS ALLEGING SECURITIES LAWS VIOLATIONS
On November 4, 1995, a class action lawsuit claiming violations of federal securities laws was filed on behalf of a class of purchasers of Parent Company securities against the Parent Company and five individuals who were officers of the Parent Company (four of whom were also directors) in the United States District Court for the Eastern District of Pennsylvania. The Company, LGC, and the lead underwriters (the "Underwriters") of LGC's 1994 offering of Monthly Income Preferred Securities ("MIPS"), were subsequently added as defendants. On November 7, 1995, a class action lawsuit was filed on behalf of a class of purchasers of Common shares against the Parent Company and the same individual defendants in the United States District Court for the Southern District of Mississippi alleging Federal securities law violations and related common law claims. On December 1, 1995, a class action lawsuit was filed on behalf of a class of purchasers of the Parent Company's securities against the Parent Company, the Company, LGC and the same individual defendants in the United States District Court for the Eastern District of Pennsylvania.
The complaints with respect to the class actions alleged that the defendants failed to disclose the Company's anticipated liability in connection with certain litigation with Gulf National. The Pennsylvania class actions also alleged failure to disclose the Company's potential liability in connection with certain litigation with Provident. The Parent Company settled the lawsuits with Gulf National and Provident during the first quarter of 1996.
Pursuant to a Transfer Order filed April 15, 1996 by the Judicial Panel on Multidistrict Litigation, the Mississippi class action was transferred to the Eastern District of Pennsylvania for consolidation of pretrial proceedings with the two Pennsylvania class actions. On September 16, 1996, the plaintiffs filed a Consolidated and Amended Class Action Complaint (the "Consolidated Class Action Complaint"). Procedurally, the Consolidated Class Action Complaint supersedes the complaints filed in the class actions. Plaintiffs allege three causes of action in the Consolidated Class Action Complaint: (i) the Parent Company, the Company, LGC and the five individual defendants violated Sections 10(b) and 20(a) and the implementing anti-fraud rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the Company, LGC and three of the five individual defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), in connection with the MIPS offering and (iii) the Parent Company, the Company and LGC made material misstatements in connection with the MIPS offering in violation of Sections 12(2) and 15 of the Securities Act. Plaintiffs seek compensatory money damages in an unspecified amount, together with attorneys fees, expert fees and other costs and disbursements. Punitive damages are not sought.
The defendants filed their Answer to the Consolidated Class Action Complaint on November 1, 1996, in which they have denied the material allegations and raised certain affirmative defenses. The parties have commenced discovery and document production. No depositions have been taken.
The parties have stipulated to the provisional certification of plaintiff classes consisting of: (i) all purchasers of Common shares or MIPS on an American stock exchange or in public offerings during the period from April 16, 1993 through November 1, 1995, with respect to the Exchange Act claims; and (ii) all persons who purchased MIPS pursuant to the public offering in August 1994, with respect to the Securities Act claims. Defendants have retained all rights to conduct discovery on class issues and to move to modify the class definitions or to decertify the classes. Plaintiffs have agreed to stay all proceedings, including all
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) discovery, relating to disclosures about the Provident litigation. Plaintiffs have the right to lift the stay upon written notice, which must be provided 90 days before the end of discovery or the beginning of trial.
On June 11, 1996, all claims against the Underwriters were dismissed without prejudice, by agreement of the parties. Prior to the dismissal, the Underwriters had indicated to the Parent Company that they would seek indemnity from the Parent Company for costs incurred. The Parent Company paid the Underwriters' costs through the date of dismissal. The Company expects that the Underwriters will seek further indemnity from the Parent Company if any of the claims against the Underwriters are reinstated.
The Parent Company referred the claims to its insurance carrier under its directors and officers liability insurance policy. On February 9, 1996, the carrier denied coverage of the claim. The Parent Company believes that such denial was improper. On March 21, 1996, the Parent Company commenced an action in British Columbia Supreme Court seeking a declaration that the policy covers indemnification with respect to the Class Action. As of the date hereof, the Supreme Court has not ruled on the action. The Parent Company cannot predict at this time the extent to which any settlement or litigation that may result from these claims will ultimately be covered by insurance, if at all.
The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to the class actions has been made in the Parent Company's or the Company's 1996 consolidated financial statements.
ROE ET AL., PALLADINO ET AL., O'SULLIVAN AND SCHNEIDER
In October 1995, Roe and 22 other families filed a lawsuit against the Company and Osiris Holding Corporation ("Osiris") in Florida Circuit Court in St. Petersburg. In early April 1996, a related lawsuit, Palladino et al., was filed by eight families against the Company and Osiris in Florida Circuit Court in St. Petersburg, and was assigned to the same judge handling the Roe matter. In June 1996, the Roe and Palladino lawsuits were consolidated and amended to include a total of 90 families, and in July 1996, the Palladino lawsuit was dismissed. In October 1996, a Fifth Amended Complaint ("Complaint") was filed bringing the number of plaintiff families to 150. The gravamen of the Complaint is that, in July 1992, employees of the Royal Palm Cemetery facility who were installing a sprinkler line disturbed the remains of infants in one section of the cemetery. The specific claims include tortious interference with a dead body (intentional and grossly negligent conduct so extreme and outrageous as to imply malice) and negligent infliction of emotional distress. The Complaint also names the Parent Company and the Company as defendants (on an alter ego theory) and includes claims for negligent retention of certain cemetery employees. Each plaintiff identified in the Complaint is seeking damages in excess of $15,000, but the Complaint alleges aggregate damage in excess of $40,000,000. In addition, in May 1996, Sean M. O'Sullivan filed a lawsuit against Osiris and the Company and in July 1996, Karen Schneider filed a lawsuit against Osiris and the Company. The factual allegations underlying the O'Sullivan and Schneider complaints are identical to those alleged in the Complaint. Schneider has been named in the Complaint and the Schneider lawsuit has been dismissed. A mediation was held on November 14, 1996, but the parties did not reach an agreement. However, over the past several months, nearly 100 families have settled their claims for de minimus sums, leaving the number of plaintiff families at 51. The Complaint was dismissed for pleading deficiencies. The plaintiffs have indicated that they will file a Sixth Amended Complaint.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) At the time the remains allegedly were disturbed, the Royal Palm Cemetery was owned by Osiris. Osiris was acquired by the Parent Company in March 1995. The insurance carriers for Osiris and the Parent Company have assumed the defense of these claims, subject to a reservation of rights. The insurance carrier for the Parent Company has stated that it may take the position that each gravesite claim is separately subject to the per claim policy deductible of $250,000. Accordingly, no assurance can be made that insurance coverage will be available. The annual Osiris policy limit is $11,000,000 and the annual Parent Company policy limit is $80,000,000.
The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's 1996 consolidated financial statements.
ESNER ESTATE
On February 1, 1995, Stuart B. Esner and Sandra Esner (the "Executors") as co-executor for the Estate of Gerald F. Esner (the "Esner Estate") filed an action in the Court of Common Pleas in Bucks County, Pennsylvania against Osiris and a law firm (the "Law Firm") that previously represented Osiris and its principal shareholders, Gerald F. Esner, Lawrence Miller and William R. Shane. Messrs. Miller and Shane currently are executive officers of the Parent Company and the Company.
The complaint alleged that Osiris breached the terms of a Second Amended and Restated Shareholders' Agreement among Messrs. Esner, Miller and Shane (the "Shareholders' Agreement") by attempting to repurchase shares of Osiris held by the Esner Estate (the "Esner Shares") without complying with the terms of the Shareholders' Agreement, and that the Law Firm breached its fiduciary duty and committed malpractice in connection with the drafting of the Shareholders' Agreement and its representation of Esner and Osiris. The Executors asked the Court (i) to have the value of Osiris reappraised pursuant to the terms of the Shareholders' Agreement and (ii) to require Osiris to repurchase the Esner Shares pursuant to a new appraisal and the alleged terms of the Shareholders' Agreement or, alternatively, to pay the Esner Estate the fair value of the Esner Shares as determined by the new appraisal.
In March 1995, the Company purchased all of the issued and outstanding shares of Osiris, including the Esner Shares. In connection with the purchase, the Company entered into an indemnification agreement whereby Messrs. Miller and Shane agreed to indemnify and hold the Company harmless with respect to any claims, liabilities, losses and expenses, including reasonable attorney's fees, in connection with or arising from the Esner Estate litigation.
On April 9, 1996, the Executors filed a second complaint, which names Messrs. Miller and Shane and the Company as defendants. The second complaint alleges breach of contract, fraud and related claims against Messrs. Miller and Shane, and that the Company joined a civil conspiracy by acquiring Osiris. The Executors request compensatory damages of $24,300,000 against the various defendants, and seek punitive damages from Messrs. Miller and Shane. The two cases were consolidated by the Court.
On October 9, 1996, the Executors instituted a new civil action against the Law Firm. On November 18, 1996 the Executors instituted a new civil action against the individual partners of the Law
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) Firm. In both complaints, the Executors expanded upon the allegations against the Law Firm contained in the previous complaints. By stipulation approved by the Court on February 24, 1997, the parties agreed to consolidate all suits and to permit the Executors to file a Third Amended Complaint, which was filed on February 10, 1997. The prayers for relief remain unchanged. Osiris and Messrs. Miller and Shane have filed preliminary challenges to the Third Amended Complaint. Likewise, the Company has moved for a dismissal of the claims against it for failure to state a claim upon which relief can be granted. That motion and the preliminary challenges are all pending.
The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's 1996 consolidated financial statements.
SERVICE CORPORATION INTERNATIONAL
On October 2, 1996, SCI filed an action in the United States District Court for the Southern District of Texas (the "Texas Action"), alleging that the Parent Company falsely suggested to its shareholders that it has standing to bring an action to block or impede SCI's unsolicited exchange offer on federal antitrust grounds. SCI also seeks a declaratory judgment that the Parent Company lacks standing to bring such an action on federal antitrust grounds. SCI asserts a claim under Texas common law, based upon its allegations that the Parent Company's actions have tortiously interfered with SCI's "prospective business relationships" with the Parent Company's shareholders. As relief for this assertion, SCI seeks an unspecified amount of damages for claimed injuries resulting from the Parent Company's alleged interference with these prospective relationships. In an amended complaint filed October 3, 1996, SCI also alleges that the foregoing actions, as well as the Parent Company's alleged failure to disclose certain information respecting the Prime and Rose Hills transactions, constitute violations of Section 14(e) of the Exchange Act. As relief, SCI seeks an injunction against future violations of that statute.
On October 10, 1996, the Parent Company, the Company and Ridge Chapels, Inc., a subsidiary of the Company, commenced an action in the United States District Court for the Eastern District of New York (the "New York Action"), seeking to enjoin SCI preliminarily and permanently from completing its unsolicited exchange offer on the grounds that a combination of SCI and the Parent Company would violate Section 7 of the Clayton Act. According to the complaint, SCI's unsolicited offer for control of the Parent Company, if successful, may substantially lessen competition in numerous local markets for (i) the sale of funeral services, (ii) the sale of funeral services on a "pre-need" basis, (iii) the sale of cemetery services, and (iv) the purchase of funeral homes, cemeteries and crematoria. The Parent Company also accuses SCI and Equity Corporation International, Inc. (a competitor of the Parent Company in which SCI had a 40% interest in October 1996) ("ECI"), of conspiracy to eliminate the Parent Company as a competitive force in the funeral services industry, in violation of Section 1 of the Sherman Act. On October 10, 1996, the Parent Company filed Motions for Expedited Discovery and for a Preliminary Injunction to enjoin the unsolicited exchange offer and, on October 15, 1996, filed a Verified First Amended Complaint.
On October 11, 1996, the Parent Company moved to dismiss or stay the Texas Action. On October 15, 1996, SCI moved to dismiss, stay or transfer the New York Action. A hearing was held on SCI's motion on
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) October 17, 1996, at the conclusion of which the District Court denied SCI's motion. On October 23, 1996, Magistrate Judge Caden of the District Court entered a Memorandum and Order allowing expedited discovery with respect to the Parent Company's motion for a preliminary injunction. On October 29, 1996, the District Court overruled the objections of SCI to the Magistrate Judge's Order but stayed commencement of discovery proceedings, which stay was extended by stipulation until the resolution of the pending motions in the Texas Actions described below.
On October 21, 1996, SCI filed a Motion for Preliminary Injunction in the Texas Action, seeking to enjoin the Parent Company from pursuing its antitrust claims in any forum other than the federal District Court in Texas. The matter was referred to Magistrate Judge Johnson, who issued a Memorandum Recommending Entry of a Preliminary Injunction on October 28, 1996. Magistrate Judge Johnson recommended that the District Court restrain the Parent Company from proceeding in the New York Action (or elsewhere) until it had resolved the Parent Company's pending motion to dismiss. In a telephone conference on October 28, 1996, the District Court declined to enter any injunctive relief at that time. A hearing on the Parent Company's motion to dismiss was held on November 6, 1996. On November 23, 1996, the Texas District Court issued a Memorandum Opinion in which it: (i) denied SCI's motion for a preliminary injunction against the New York Action; and (ii) granted the Parent Company's motion to dismiss the Texas Action, subject to the New York Court's permitting SCI to raise its above- described tortious interference and violation of Section14(e) claims as counterclaims in the New York Action. SCI's above-described declaratory judgment claim was dismissed outright.
On December 11, 1996, SCI filed its Answer to the Parent Company's Verified First Amended Complaint, in which it denies liability and asserts various defenses and asserts counterclaims against the Parent Company, which counterclaims parallel generally the above-described claims for tortious interference and violation of Section14(e) claims asserted in the Texas Action. The Parent Company believes that the counterclaims are without merit and intends to contest them vigorously. The Parent Company has served discovery requests upon SCI and ECI to which both objected. On December 11, 1996, Magistrate Judge Caden ordered expedited discovery to proceed. SCI filed objections to the Magistrate Judge's order, which objections were denied by the District Court on January 7, 1997.
On December 11, 1996, ECI filed a Motion to Dismiss the claims against it, on grounds of improper venue and lack of personal jurisdiction. On December 18, 1996, the Parent Company filed a Motion for Expedited Discovery respecting jurisdiction over ECI, and the parties agreed that the Parent Company would not be required to respond to the Motion to Dismiss until either a date certain after denial of its Motion for Expedited Discovery or, if that Motion were granted, completion of jurisdictional discovery. On January 8, 1997, Magistrate Judge Caden entered an order providing that the Parent Company could take certain expedited discovery respecting jurisdiction over ECI.
On January 7, 1997, SCI announced that it had withdrawn its proposed exchange offer. On January 14, 1997, the Parent Company sent a letter to the New York Court stating that it will move for leave to file an amended complaint seeking permanent injunctive relief against future actions by SCI and/ or ECI against the Parent Company in violation of the antitrust laws. On January 15, 1997, SCI sent a letter to the New York Court stating that it believes the Parent Company's claims are moot and will seek dismissal of those claims. Discovery from the parties has been temporarily suspended by agreement. On January 16, 1997, ECI sent a letter to the New York Court, seeking to suspend discovery until the Court rules on the contemplated motions by the Parent Company and SCI. On January 20, 1997, the Parent
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) Company sent a letter to the Court seeking leave to move to dismiss SCI's counterclaims, to which SCI responded on January 22, 1997, by letter requesting dismissal of the entire action.
At the New York Court's suggestion, the parties are discussing possible resolution of the action in a manner that would end the current proceedings but preserve jurisdiction in the New York Court over similar disputes in the future, if any.
No provision with respect to these legal proceedings has been made to date in the Parent Company's or the Company's 1996 consolidated financial statements.
DERIVATIVE SUIT
On September 26, 1996, Jerry Krim filed a purported derivative and class action against TLGI's current directors and one former director and against the Parent Company as a nominal defendant in the Los Angeles County Superior Court. The plaintiff alleges, on behalf of himself and all of the Parent Company's current and former shareholders, that the defendants "improperly responded to an offer by Service Corporation International ("SCI") to combine the two companies," refused to negotiate with SCI, agreed to pay an inflated price for the Rose Hills properties in Los Angeles, adopted a supposed "poison pill" supermajority voting provision requiring 75% approval of a merger, and adopted a Shareholders Protection Rights Plan, each allegedly in violation of the directors' fiduciary duties. Plaintiff seeks preliminary and permanent injunctive relief that would, among other things, (i) require the defendants to cooperate with any person having a bona fide interest in proposing a transaction and take certain other actions that allegedly would "maximize shareholder value," (ii) enjoin the Shareholders Protection Rights Plan in its entirety, (iii) enjoin the consummation of the Rose Hills transaction, (iv) enjoin the supermajority voting requirements, (v) require an accounting for unspecified damages, and (vi) compensate the plaintiffs for their fees and costs. On October 17, 1996, the Court denied the plaintiff's motion for expedited discovery. On November 8, 1996, the Parent Company and those individual defendants upon whom service had purportedly been made appeared specially and moved to quash service of the summons for lack of jurisdiction or, in the alternative, to dismiss or stay the action on grounds of forum non conveniens. On December 10, 1996, the Court granted the defendants' motion to quash the summons and denied the plaintiffs' request for discovery. The action was dismissed, and no appeal has been filed.
No provision with respect to this legal proceeding has been made in the Parent Company's or the Company's 1996 consolidated financial statements.
ROJAS ET AL.
On February 22, 1995, Juan Riveras Rojas, Leyda Rivera Vega, the Conjugal Partnership constituted between them, and Carlos Rivera Bustamente instituted a legal action against the Parent Company, the Company and a subsidiary in the United States District Court for the District of Puerto Rico. The complaint alleges that the defendants breached a contract and ancillary agreements with the plaintiffs relating to the purchase of funeral homes and cemeteries, and committed related torts. The plaintiffs seek compensatory damages of $12,500,000, and unspecified punitive damages (although the Parent Company is advised by counsel that there is no entitlement to punitive damages under Puerto Rican law). The Parent Company has filed a motion to dismiss the complaint on the grounds of failure to join an indispensable
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 12. LEGAL PROCEEDINGS (CONTINUED) party. In addition, the Parent Company claims it has suffered damages far in excess of the amount claimed by the plaintiffs as a result of breach of contract and related torts on the part of the plaintiffs. A subsidiary of the Parent Company has filed a complaint seeking damages in excess of $19,000,000 from the plaintiffs in the General Court of Justice of the Commonwealth of Puerto Rico. The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's 1996 consolidated financial statements.
FELDHEIM ET AL. V. SI-SIFH CORP. ET AL.
In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and the Company in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. were acquired by the Company in March 1996 when the Company acquired the assets of S.I. Acquisition Associates, L.P.
Plaintiffs hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. The plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also allege unfair trade practices in violation of Louisiana's insurance code and trade practices laws.
Plaintiffs seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies and allowing a plaintiff to select a more expensive casket than provided for in the policy, upon payment of the difference in retail value, without forfeiting the other benefits provided for in the policy.
As of the date hereof, no discovery has taken place. The Parent Company has determined that it is not possible at this time to predict the final outcome of this legal proceeding, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's 1996 consolidated financial statements.
OTHER
Each of the Parent Company and the Company is party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on its respective financial position, results of operation or liquidity.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 13. COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1996, the Company was committed to operating lease payments for premises, automobiles and office equipment in the following approximate amounts:
Total rent expense for the year ended December 31, 1996 was $11,144,000 (1995 -- $9,011,000; 1994 -- $8,536,000).
(B) COVENANTS NOT TO COMPETE
In connection with various acquisitions, the Company has entered into non-competition agreements ("covenants not to compete") with certain key management personnel of operations acquired. The Company's payments under the agreements may be made variously at closing or over future periods and are expensed over the terms of the specific contracts. At December 31, 1996, the agreements in place will result in future payments in the following approximate amounts:
(C) ENVIRONMENTAL CONTINGENCIES AND LIABILITIES
The Company believes environmental contingencies and liabilities to be immaterial individually and in the aggregate.
NOTE 14. RETIREMENT PLAN
The Company has a defined contribution retirement plan covering substantially all employees. There are no required future contributions under this plan in respect of past service. The Company's 401(K) Profit Sharing Plan allows employees to defer between 2% and 15% of their compensation. The Company contributes a minimum of 2% of employees' eligible compensation to the 401(K) Plan.
The total expense for the retirement plan for the year ended December 31, 1996 was $1,802,000, $1,514,000 and $862,000 respectively.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 15. HOSTILE TAKEOVER PROPOSAL
On January 7, 1997, SCI publicly withdrew its unsolicited proposed exchange offer to acquire the Parent Company through an exchange offer announced in October 1996. Pursuant to the proposed exchange offer, SCI would exchange $45 worth of common stock for each Common share of the Parent Company tendered and $29.51 worth of common stock for each Series C Preferred share of the Parent Company tendered. In September 1996, the Board of Directors of the Parent Company unanimously determined that the offer was inadequate and not in the best interests of the Parent Company or its shareholders and recommended that, if the offer were commenced, the Parent Company's shareholders should not tender their shares. Effective as of October 10, 1996, in order to attract and retain key executives and managers of the Parent Company in the context of a threatened change in control of the Parent Company, the Board of Directors of the Parent Company, upon the recommendation of the Compensation Committee thereof, approved the execution of individual change-in-control severance agreements ("Severance Agreements") with approximately 80 of the Parent Company's executives and managers ("Executives"). With the exception of Mr. Loewen, certain of the executive officers of the Parent Company entered into such a Severance Agreement. Under each Severance Agreement, if there is a "change in control" (as defined), an Executive becomes entitled to severance pay amounting to one to three years' compensation, and certain other benefits during the "Severance Period" (as defined), if the Executive's employment terminates for any reason other than "cause" (as defined) or if the Executive terminates his or her employment for certain specified reasons. Each Severance Agreement also provides that the Executive is entitled to a retention bonus if the Executive remains employed by the Parent Company for 30 days after a change in control. Benefits under the Severance Agreements can be reduced in certain circumstances.
In addition, the Board of Directors of the Parent Company adopted a change-in-control severance compensation plan ("Severance Plan") that is designed to provide certain benefits to full-time salaried employees of the Parent Company whose principal duties include corporate or regional management responsibilities. Under the Severance Plan, upon a "change in control" (as defined), each of the participants is entitled to a severance payment if, within 24 months after a change in control, the participant is terminated other than by reason of death, voluntary termination or retirement, or for "Just Cause" (as defined). Benefits payable under the Severance Plan can be reduced in certain circumstances.
Effective as of October 10, 1996, the Board of Directors of the Parent Company authorized the Parent Company to enter into indemnification agreements with certain of its directors and officers whereby the Parent Company will agree to indemnify such person against all costs, charges and expenses incurred by reason of being a director or officer of the Parent Company.
In late September 1996, the Parent Company on considering the possible effects of the hostile takeover proposal on its acquisition program, determined that access to capital markets might have been restricted or unavailable if the hostile takeover proposal remained outstanding for a long period of time. The Parent Company concluded that an immediate debt issue was available and was the best alternative to provide continued liquidity during the likely period of the hostile takeover proposal. In October 1996, the Company consummated a private placement of two series of senior notes guaranteed by the Parent Company for gross proceeds of $350,000,000. As the Parent Company had not planned a long-term debt issue in late 1996, it believes that the incremental interest cost of the long-term debt issue over its bank revolving credit agreement is a direct result of the hostile takeover proposal. Included in finance costs related to the hostile takeover proposal is the incremental cost of $1,313,000 before income tax benefit for
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 15. HOSTILE TAKEOVER PROPOSAL (CONTINUED) the period to December 31, 1996 which amount was determined as if the $350,000,000 debt issue was funded by the Company's bank revolving credit agreement.
In addition, the Company determined that it should obtain certain amendments from its bank lenders to provide flexibility during the hostile takeover proposal. The Company believes these amendment fees would not have been required if not for the hostile takeover proposal and has expensed the aggregate amendment fee of $1,917,000 before income tax benefit. These fees are also included in finance costs related to the hostile takeover proposal.
The other costs relating to the hostile takeover proposal by SCI are comprised primarily of legal and financial advisory fees. In aggregate, the $9,789,000 incurred by the Company was composed of $8,978,000 in legal fees with the balance made up of fees to other advisors. No income tax benefit relating to these costs has been reflected in the consolidated financial statements.
The Company has indemnified certain of its advisors against certain liabilities, including liabilities under United States and Canadian securities laws, arising out of their engagements.
NOTE 16. INCOME TAXES
The Company's effective income tax rate is derived as follows:
The Company paid income taxes for each of the years in the three year period ended December 31, 1996 amounting to $9,965,000, $9,384,000 and $11,508,000.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 17. CHANGES IN OTHER NON-CASH BALANCES
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 18. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain balance sheet accounts as at December 31, is as follows:
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 18. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
NOTE 19. RELATED PARTIES
During the year ended December 31, 1996, as part of the normal course of operations, the Company chartered a jet aircraft, a motor vessel and a helicopter at competitive rates from companies which the Chairman of the Company owns or controls. For each of the years in the three year period ended December 31, 1996, the total costs of the charters amounted to $381,330, $1,051,389 and $786,000 respectively, of which $0, $108,924 and $42,000 respectively, remains outstanding at the year end.
In connection with the intended transfer of each of these assets to companies owned by third parties, the Parent Company provided interim financing to companies owned by the Chairman of the Company totalling $1,750,000. The interim financing was repaid in full by October 1996.
The intended transfer of the motor vessel to a third party was not consummated. On October 28, 1996, the Parent Company purchased all of the shares of the company that owned the vessel, 476822 B.C. Ltd. ("BC Ltd."), for an effective purchase price of Cdn. $7,860,000. In the transaction, the motor vessel was valued at Cdn. $7,200,000 and the other assets were valued at cost and aggregated approximately Cdn. $660,000. A third party appraisal of the motor vessel had established its fair market value at Cdn. $7,350,000 and its replacement value at Cdn. $12,500,000.
The Chairman has an option to reacquire either the motor vessel and related assets (the "Boat Assets") or the shares of BC Ltd. until October 1, 2006 under certain circumstances including a change in
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 19. RELATED PARTIES (CONTINUED) control of the Parent Company. The option price of the Boat Assets is their fair market value, and the option price for the shares is the fair market value of the net assets of BC Ltd.
During the year, the company which owned the jet aircraft and helicopter sold them to a third party. The Company has leased the jet aircraft and helicopter from the third party at commercially reasonable terms.
The Board of Directors of the Parent Company approved the transactions pertaining to the jet aircraft in July 1996 and the transactions pertaining to the motor vessel and helicopter in September 1996.
On August 6, and December 27, 1996, the Company entered into agreements to sell cemetery installment contract receivables to an affiliate of the Company for approximately $57,000,000. The Company realized a loss of $4,891,000 on the sale.
As part of the 1995 acquisition of Osiris Holding Corporation ("Osiris"), the Company has recorded as a long-term liability $27,840,000. The balance outstanding is the present value of total remaining contingent payments of approximately $33,800,000 which the Company expects to pay over a five year period to the former shareholders of Osiris, two of whom are officers of the Company.
In addition, as part of the 1995 acquisition of Shipper Management Company ("Shipper"), the Company has recorded as a long-term liability, $6,841,000 representing the present value of total contingent payments of approximately $8,500,000 which the Company recorded in the third quarter of 1996 when the outcome of the contingency became determinable and which the Company expects to pay over a six year period to the former shareholders of Shipper, two of whom are officers of the Company.
The Company has guaranteed indebtedness of participants of the 1994 Management Equity Investment Plan totaling approximately $3,300,000 (1995--$3,500,000).
During the fiscal year ended December 31, 1996, the Company paid approximately $7,700,000 (1995-- $5,400,000) for insurance and other services to a related company.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 20. SEGMENTED INFORMATION
The following information corresponds to the Company's major industry segments, all of which operate in North America.
NOTE 21. SUBSEQUENT EVENTS
(A) ACQUISITIONS
During the period from January 1, 1997 to March 3, 1997, the Company acquired 16 funeral homes and 11 cemeteries. The aggregate cost of these transactions was approximately $32,200,000.
As at March 3, 1997, the Company has committed to acquire certain funeral homes, cemeteries and related operations, subject in most instances to certain conditions including approval by the Company's Board of Directors. The aggregate cost of these transactions, if completed, will be approximately $281,200,000.
(B) PRIME AND RH HOLDINGS
On March 27, 1997, the Company transferred substantially all of its investment in Prime and Rose Hills to an affiliated company.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 22. UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada. These principles differ in the following material respects from those in the United States as summarized below:
(A) EARNINGS (LOSS) AND RETAINED EARNINGS
(B) BALANCE SHEET
The amounts in the consolidated balance sheet that differ from those reported under Canadian GAAP are as follows:
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 22. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (C) STATEMENT OF CASH FLOWS
Under United States GAAP, cash provided by financing would decrease by approximately $63,000,000 (1995--$106,000,000, 1994--$19,000,000) for non-cash debt and common share consideration on acquisitions. Similarly, cash provided by financing and applied to investing would decrease by approximately $2,600,000 (1995--nil, 1994--nil) for non-cash proceeds on disposal of certain subsidiaries, see Note 5(c).
Cash applied to operations and cash provided by financing activities would decrease by $111,800,000 because shares and debt issued for legal settlements would be considered non-cash transactions.
(D) INSURANCE OPERATIONS
PRESENT VALUE OF INSURANCE POLICIES.
Under United States GAAP, the Company recognizes an asset that represents the actuarilly-determined present value of the projected future profits of the insurance in-force at dates of acquisition. Canadian GAAP does not recognize such an asset. The asset is being amortized to insurance expense over the estimated life of the insurance in-force at the date of acquisition. In 1995, United States GAAP differences were not considered significant.
DEFERRED POLICY ACQUISITION COSTS
Under United States GAAP, the Company defers costs related to the production of new business which consist principally of commissions, certain underwriting expenses, and the costs of issuing policies. Deferred acquisition costs are amortized over the expected premium-paying periods of the related policies. Canadian GAAP does not permit deferral of such costs. In 1995, United States GAAP differences were considered significant.
INSURANCE POLICY LIABILITIES
Insurance policy liabilities, which represent liabilities for future policy benefits, are accounted for under United States GAAP using the net level premium method which involves different actuarial assumptions and methodologies than the policy premium method used for Canadian GAAP, all actuarial assumptions are re-evaluated on a periodic basis, resulting in adjustments to insurance policy liabilities and insurance costs and expenses. Under United States GAAP, assumptions established at the time a policy is written are locked in and only revised if it is determined that future experience will worsen from that previously assumed.
(E) UNREALIZED GAINS AND LOSSES
Under United States GAAP, fixed maturity securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Fixed maturity securities classified as held-to-maturity at December 31, 1996 were approximately $83,719,000 (1995--$23,000,000). Fixed maturity and equity securities that are held with the objective of trading to generate profits on short-term differences in price are carried at fair value, with changes in fair value reflected in the results of operations. At December 31, 1996, debt securities classified as trading were
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 22. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) approximately $5,600,000. All other fixed maturity and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and carried at fair value which was approximately $316,028,000 (1995--$74,000,000). Available-for-sale securities may be sold in response to changes in interest rates and liquidity needs. Unrealized holding gains and losses related to available-for-sale investments, after deducting amounts allocable to income taxes, are reflected as a separate component of stockholders' equity. There were no significant unrealized gains or losses on securities available-for-sale as of December 31, 1996. Unrealized holding gains and losses related to trading investments, after deducting amounts allocable to income taxes, are reflected in earnings. There were no significant unrealized gains or losses on trading securities as of December 31, 1996.
(F) INCOME TAXES
Under United States GAAP, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Temporary differences are tax-effected at current rates whereas under Canadian GAAP, temporary differences are tax-effected at historic rates. There was no deferred tax effect of changes in tax rates during 1996.
The Company's deferred tax liabilities under FAS 109 at December 31, are as follows:
The Company believes realization of its net deferred tax assets is more likely than not. The Company's ability to realize its deferred tax assets is based on several factors, including a presumption of future profitability in certain jurisdictions, and is subject to some degree of uncertainty. At December 31, 1996, the Company had a valuation allowance of $3,499,000 (1995--$2,228,000). During the year ended December 31, 1996, the Company increased its valuation allowance by $1,271,000 for operating loss carryforwards.
LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 22. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (G) RECENT UNITED STATES ACCOUNTING STANDARDS
The Parent Company has a stock-based compensation plan which enables the Parent Company to grant options to employees of the Company. The option plan is administered by the Compensation Committee of the Parent Company's Board of Directors. Each participant enters into an option agreement which sets forth, among other things, the number of options granted, the exercise price and the vesting conditions of the options. The exercise price of an option may not be less than the market price of the Parent Company's stock on the trading day immediately prior to the grant date and in no event may an option terminate later than ten years after grant date of such option.
The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based Compensation for United States GAAP purposes.
The Company continues to record compensation expense for United States GAAP purposes following the intrinsic value principles of APB 25, Accounting for Stock Issued to Employees, in accounting for the plans.
Had compensation cost been determined based on fair value at the grant dates for awards under those plans, under FAS 123, net earnings would have been charged an additional $2,828,000 (1995--$653,000).
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions; dividend yield 0.5% (1995--0.5%), expected volatility 24% (1995--24%), United States risk-free interest rates 5.57% (1995--6.58%) and expected average option term of 2.9 years (1995--4.5 years). The weighted average fair value of the options granted is $6.25 (1995--$9.33) per option.
NOTE 23. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period.
NEWEOL INVESTMENTS LTD. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholder Neweol Investments Ltd.
We have audited the consolidated balance sheets of Neweol Investments Ltd., as defined in Note 1 to the financial statements, as at December 31, 1996 and 1995 and the consolidated statements of operations and retained earnings and cash flows for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Neweol Investments Ltd. as at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996, in accordance with generally accepted accounting principles in the United States. As required by the Company Act of British Columbia, we report that, in our opinion, these principles have been applied on a consistent basis.
/S/ KPMG
Chartered Accountants Vancouver, Canada March 3, 1997, except for Note 15, which is as of March 27, 1997
NEWEOL INVESTMENTS LTD. (SEE NOTE 1) CONSOLIDATED BALANCE SHEETS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1) CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1) CONSOLIDATED STATEMENTS OF CASH FLOWS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Neweol Investments Ltd. ("Neweol") was incorporated on November 6, 1992 under the federal laws of Canada and continued on June 3, 1993 under the laws of the Province of British Columbia as a wholly owned subsidiary of The Loewen Group Inc. ("Parent Company'). The principal activities of the Company, which commenced operations in 1994, are to provide financing to other subsidiaries of the Parent Company ("affiliates") and to hold investments in affiliated and non-affiliated companies.
The consolidated financial statements have been prepared in United States dollars in accordance with accounting principles generally accepted in the United States. The consolidated financial statements require the use of management estimates. As a result, actual results could differ from those estimates.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission ("SEC").
These consolidated financial statements include Neweol's 85% ownership interests in Loewen Finance (Wyoming) Limited Liability Company ("LFW"), Loewen Trading Corporation, Eagle Financial Associates, LLC, and 100% ownership interest in 1096952 Ontario Limited, and its equity investment in its affiliate Loewen Group International, Inc. ("LGII") (collectively the "Company"). These interests constitute the ongoing operations of Neweol subsequent to a reorganization that occurred July 19 and August 13, 1996. These consolidated financial statements exclude certain subsidiaries of Neweol which were transferred to an affiliate effective July 19 and August 13, 1996 and accordingly are not intended to be a complete presentation of the historical consolidated financial position, results of operations, and cash flows of Neweol. To the extent that Neweol's interests in those subsidiaries were not transferred as a result of the reorganization, such interests are reflected in the accompanying financial statements.
All significant intercompany balances and transactions have been eliminated from the consolidated financial statements.
Neweol has no operations independent of those carried on by its subsidiaries. Neweol is dependent on future remittances from its subsidiaries or capital contributions from its Parent Company to satisfy its obligations, substantially all of which are to affiliates.
INVESTMENTS
The Company initially records investments acquired from third parties at cost and investments acquired from entities under common control at the transferor's carrying value. The Company follows the equity method of accounting for investments where it has significant influence over the investee. The excess of the Company's carrying value of the investment as reported on the balance sheet and the underlying equity in the net assets of Arbor Memorial Services Inc. ("Arbor") is amortized over the estimated weighted average useful lives of the underlying assets and included in equity in earnings and losses of investees in the statements of operations and retained earnings and cash flows.
ACCOUNTING FOR INCOME TAXES
The Company follows the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the future tax effects of temporary differences between the carrying amounts of
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
FOREIGN CURRENCY
The assets and liabilities of the Canadian operations have been translated into United States dollars at the rates of exchange at the balance sheet dates, and revenues and expenses are translated at the average rates of exchange for the periods of operation. Unrealized gains and losses arising from the translation are deferred and are classified as "Foreign exchange adjustment" within shareholder equity.
NOTE 2. NOTES RECEIVABLE FROM AFFILIATE
The revolving credit loans are due on demand. Effective August 1, 1996, interest is earned at a fixed rate of 11.5% (1995--rates ranged from 9.06% to 10.01% per annum) on the term loans and the revolving credit loans (1995--U.S. prime plus 2%) respectively.
The notes receivable from affiliate are secured under a collateral trust arrangement whereby senior lenders to the affiliate and the Parent Company would share certain collateral on a pari passu basis. This collateral is held by a trustee for equal and ratable benefit of the various holders of senior indebtedness.
The collateral includes (i) a pledge for the benefit of the senior lenders of the shares held by the Parent Company of substantially all its subsidiaries (including the Company, certain of its subsidiaries and its investment in LGII) and (ii) all of the financial assets of LGII (LGII does not have material assets other than financial assets).
NOTE 3. INVESTMENT
The Company holds 713,825 Class A voting shares (1995--680,225) of Arbor representing 28.3% (market value $14,843,144) and 2,154,352 Class B non-voting shares (1995--2,057,752) representing 27.5% (market value $43,618,319). This investment has been accounted for by the equity method commencing January 1, 1995, the date the Company determined it had significant influence over Arbor. Arbor's fiscal year end is October 31, 1996. Accordingly the Company records its equity in the earnings of Arbor on a two month lag. The Company's equity in the earnings of Arbor amounted to $1,879,000 (1995--
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 3. INVESTMENT (CONTINUED) $1,391,000) in 1996. Arbor is a Canadian funeral services company and at October 31, 1996, Arbor had assets and liabilities of $439,261,000 and $293,808,000 respectively (1995--$287,617,000 and $188,837,000 respectively) and total revenues of $129,978,000 (1995--117,269,000).
NOTE 4. INVESTMENTS IN AFFILIATES
On July 13, 1995, the Company acquired a 15% interest in LGII from the Parent Company. LGII serves as the holding company for the Parent Company's United States funeral, cemetery and insurance operations. This investment was recorded at the Parent Company's carrying value of approximately $27,202,000. During 1996, the Company contributed additional capital of $26,181,000. The Company's equity in the loss of LGII amounted to approximately ($321,000) for the year ended December 31, 1996 (1995--($20,834,850)). At December 31, 1996, LGII had assets and liabilities of approximately $3,088,393,000 and $2,875,743,000 respectively (1995--$1,960,714,000 and $1,918,264,000).
NOTE 5. LEGAL PROCEEDINGS
The Parent Company and LGII are subject to material legal proceedings and contingencies, as disclosed below:
GULF NATIONAL SETTLEMENT
On February 1, 1996, the Parent Company and Gulf National Insurance Company and certain of its affiliates ("Gulf National") executed a settlement agreement pursuant to which, among other things, the parties agreed to a full and mutual release of all claims against each other. The Parent Company delivered to Gulf National $50,000,000 in cash, 1,500,000 Common shares ("Gulf National Settlement Shares") and a promissory note in the amount of $80,000,000 payable over 20 years in equal installments of $4,000,000, without interest. The Gulf National Settlement Shares were issued on February 9, 1996 and a registration statement registering the resale of the Gulf National Settlement Shares filed with the SEC was declared effective in December 1996.
The Parent Company recorded a charge against its 1995 earnings in the amount of $134,800,000 before taxes of $49,457,000 to account for the Gulf National settlement. This amount represents the cash portion, the present value of the non-interest bearing promissory note and the guaranteed value of the Gulf National Settlement Shares.
PROVIDENT SETTLEMENT
On February 4, 1996, Provident American Corporation and one of its subsidiaries ("Provident") and the Parent Company settled certain litigation and on March 19, 1996, the parties entered into a settlement providing for a full mutual release from all claims against each other, and the Parent Company delivered 1,000,000 Common shares ("Provident Settlement Shares"), and $3,000,000 in cash to Provident and
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) certain designees. The Parent Company filed a registration statement registering the resale of the Provident Settlement Shares with the SEC which was declared effective in July 1996.
The Parent Company recorded a charge against its 1995 earnings in the amount of $30,000,000 before taxes of $10,800,000 to account for the Provident settlement.
CLASS ACTIONS ALLEGING SECURITIES LAWS VIOLATIONS
On November 4, 1995, a class action lawsuit claiming violations of federal securities laws was filed on behalf of a class of purchasers of Parent Company securities against the Parent Company and five individuals who were officers of the Parent Company (four of whom were also directors) in the United States District Court for the Eastern District of Pennsylvania. LGII, Loewen Group Capital, L.P., a limited partnership of which LGII is the sole general partner ("LGC"), and the lead underwriters (the "Underwriters") of LGC's 1994 offering of Monthly Income Preferred Securities ("MIPS"), were subsequently added as defendants. On November 7, 1995, a class action lawsuit was filed on behalf of a class of purchasers of Common shares against the Parent Company and the same individual defendants in the United States District Court for the Southern District of Mississippi alleging Federal securities law violations and related common law claims. On December 1, 1995, a class action lawsuit was filed on behalf of a class of purchasers of the Parent Company's securities against the Parent Company, LGII, LGC and the same individual defendants in the United States District Court for the Eastern District of Pennsylvania.
The complaints with respect to the class actions alleged that the defendants failed to disclose the Parent Company's anticipated liability in connection with certain litigation with Gulf National. The Pennsylvania class actions also alleged failure to disclose the Parent Company's potential liability in connection with certain litigation with Provident. The Parent Company settled the lawsuits with Gulf National and Provident during the first quarter of 1996.
Pursuant to a Transfer Order filed April 15, 1996 by the Judicial Panel on Multidistrict Litigation, the Mississippi class action was transferred to the Eastern District of Pennsylvania for consolidation of pretrial proceedings with the two Pennsylvania class actions. On September 16, 1996, the plaintiffs filed a Consolidated and Amended Class Action Complaint (the "Consolidated Class Action Complaint"). Procedurally, the Consolidated Class Action Complaint supersedes the complaints filed in the class actions. Plaintiffs allege three causes of action in the Consolidated Class Action Complaint: (i) the Parent Company, LGII, LGC and the five individual defendants violated Sections 10(b) and 20(a) and the implementing anti-fraud rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) LGII, LGC and three of the five individual defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), in connection with the MIPS offering and (iii) the Parent Company, LGII and LGC made material misstatements in connection with the MIPS offering in violation of Sections 12(2) and 15 of the Securities Act. Plaintiffs seek compensatory money damages in an unspecified amount, together with attorneys fees, expert fees and other costs and disbursements. Punitive damages are not sought.
The defendants filed their Answer to the Consolidated Class Action Complaint on November 1, 1996, in which they have denied the material allegations and raised certain affirmative defenses. The parties have commenced discovery and document production. No depositions have been taken.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) The parties have stipulated to the provisional certification of plaintiff classes consisting of: (i) all purchasers of Common shares or MIPS on an American stock exchange or in public offerings during the period from April 16, 1993 through November 1, 1995, with respect to the Exchange Act claims; and (ii) all persons who purchased MIPS pursuant to the public offering in August 1994, with respect to the Securities Act claims. Defendants have retained all rights to conduct discovery on class issues and to move to modify the class definitions or to decertify the classes. Plaintiffs have agreed to stay all proceedings, including all discovery, relating to disclosures about the Provident litigation. Plaintiffs have the right to lift the stay upon written notice, which must be provided 90 days before the end of discovery or the beginning of trial.
On June 11, 1996, all claims against the Underwriters were dismissed without prejudice, by agreement of the parties. Prior to the dismissal, the Underwriters had indicated to the Parent Company that they would seek indemnity from the Parent Company for costs incurred. The Parent Company paid the Underwriters' costs through the date of dismissal. The Parent Company expects that the Underwriters will seek further indemnity from the Parent Company if any of the claims against the Underwriters are reinstated.
The Parent Company referred the claims to its insurance carrier under its directors and officers liability insurance policy. On February 9, 1996, the carrier denied coverage of the claim. The Parent Company believes that such denial was improper. On March 21, 1996, the Parent Company commenced an action in British Columbia Supreme Court seeking a declaration that the policy covers indemnification with respect to the Class Action. As of the date hereof, the Supreme Court has not ruled on the action. The Parent Company cannot predict at this time the extent to which any settlement or litigation that may result from these claims will ultimately be covered by insurance, if at all.
The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to the class actions has been made in the Parent Company's or LGII's 1996 consolidated financial statements.
ROE ET AL., PALLADINO ET AL., O'SULLIVAN AND SCHNEIDER
In October 1995, Roe and 22 other families filed a lawsuit against LGII and Osiris Holding Corporation ("Osiris") in Florida Circuit Court in St. Petersburg. In early April 1996, a related lawsuit, Palladino et al., was filed by eight families against LGII and Osiris in Florida Circuit Court in St. Petersburg, and was assigned to the same judge handling the Roe matter. In June 1996, the Roe and Palladino lawsuits were consolidated and amended to include a total of 90 families (the "Consolidated Roe Complaint"), and in July 1996, the Palladino lawsuit was dismissed. In October 1996, a Fifth Amended Complaint ("Complaint") was filed bringing the number of plaintiff families to 150. The gravamen of the Complaint is that, in July 1992, employees of the Royal Palm Cemetery facility who were installing a sprinkler line disturbed the remains of infants in one section of the cemetery. The specific claims include tortious interference with a dead body (intentional and grossly negligent conduct so extreme and outrageous as to imply malice) and negligent infliction of emotional distress. The Complaint also names the Parent Company and LGII as defendants (on an alter ego theory) and includes claims for negligent retention of certain cemetery employees. Each plaintiff identified in the Complaint is seeking damages in excess of $15,000, but the Complaint alleges aggregate damage in excess of $40,000,000. In addition, in
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) May 1996, Sean M. O'Sullivan filed a lawsuit against Osiris and LGII and in July 1996, Karen Schneider filed a lawsuit against Osiris and LGII. The factual allegations underlying the O'Sullivan and Schneider complaints are identical to those alleged in the Complaint. Schneider has been named in the Complaint and the Schneider lawsuit has been dismissed. A mediation was held on November 14, 1996 but the parties did not reach an agreement. However, over the past several months, nearly 100 families have settled their claims for de minimus sums, leaving the number of plaintiff families at 51. The Complaint was dismissed for pleading deficiencies. The plaintiffs have indicated that they will file a Sixth Amended Complaint.
At the time the remains allegedly were disturbed, the Royal Palm Cemetery was owned by Osiris. Osiris was acquired by LGII in March 1995. The insurance carriers for Osiris and the Parent Company have assumed the defense of these claims, subject to a reservation of rights. The insurance carrier for the Parent Company has stated that it may take the position that each gravesite claim is separately subject to the per claim policy deductible of $250,000. Accordingly, no assurance can be made that insurance coverage will be available. The annual Osiris policy limit is $11,000,000 and the annual Parent Company policy limit is $80,000,000.
The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or LGII's 1996 consolidated financial statements.
ESNER ESTATE
On February 1, 1995, Stuart B. Esner and Sandra Esner (the "Executors") as co-executor for the Estate of Gerald F. Esner (the "Esner Estate") filed an action in the Court of Common Pleas in Bucks County, Pennsylvania against Osiris and a law firm (the "Law Firm") that previously represented Osiris and its principal shareholders, Gerald F. Esner, Lawrence Miller and William R. Shane. Messrs. Miller and Shane currently are executive officers of the Parent Company and LGII.
The complaint alleged that Osiris breached the terms of a Second Amended and Restated Shareholders' Agreement among Messrs. Esner, Miller and Shane (the "Shareholders' Agreement") by attempting to repurchase shares of Osiris held by the Esner Estate (the "Esner Shares") without complying with the terms of the Shareholders' Agreement, and that the Law Firm breached its fiduciary duty and committed malpractice in connection with the drafting of the Shareholders' Agreement and its representation of Esner and Osiris. The Executors asked the Court (i) to have the value of Osiris reappraised pursuant to the terms of the Shareholders' Agreement and (ii) to require Osiris to repurchase the Esner Shares pursuant to a new appraisal and the alleged terms of the Shareholders' Agreement or, alternatively, to pay the Esner Estate the fair value of the Esner Shares as determined by the new appraisal.
In March 1995, LGII purchased all of the issued and outstanding shares of Osiris, including the Esner Shares. In connection with the purchase, LGII entered into an indemnification agreement whereby Messrs. Miller and Shane agreed to indemnify and hold LGII harmless with respect to any claims, liabilities, losses and expenses, including reasonable attorney's fees, in connection with or arising from the Esner Estate litigation.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) On April 9, 1996, the Executors filed a second complaint, which names Messrs. Miller and Shane and LGII as defendants. The second complaint alleges breach of contract, fraud and related claims against Messrs. Miller and Shane, and that LGII joined a civil conspiracy by acquiring Osiris. The Executors request compensatory damages of $24,300,000 against the various defendants, and seek punitive damages from Messrs. Miller and Shane. The two cases were consolidated by the Court.
On October 9, 1996, the Executors instituted a new civil action against the Law Firm. On November 18, 1996 the Executors instituted a new civil action against the individual partners of the Law Firm. In both complaints, the Executors expanded upon the allegations against the Law Firm contained in the previous complaints. By stipulation approved by the Court on February 24, 1997, the parties agreed to consolidate all suits and to permit the Executors to file a Third Amended Complaint, which was filed on February 10, 1997. The prayers for relief remain unchanged. Osiris and Messrs. Miller and Shane have filed preliminary challenges to the Third Amended Complaint. Likewise, LGII has moved for a dismissal of the claims against it for failure to state a claim upon which relief can be granted. That motion and the preliminary challenges are all pending.
The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or LGII's 1996 consolidated financial statements.
SERVICE CORPORATION INTERNATIONAL
On October 2, 1996, Service Corporation International ("SCI") filed an action in the United States District Court for the Southern District of Texas (the "Texas Action"), alleging that the Parent Company falsely suggested to its shareholders that it has standing to bring an action to block or impede SCI's unsolicited exchange offer on federal antitrust grounds. SCI also seeks a declaratory judgment that the Parent Company lacks standing to bring such an action on federal antitrust grounds. SCI asserts a claim under Texas common law, based upon its allegations that the Parent Company's actions have tortiously interfered with SCI's "prospective business relationships" with the Parent Company's shareholders. As relief for this assertion, SCI seeks an unspecified amount of damages for claimed injuries resulting from the Parent Company's alleged interference with these prospective relationships. In an amended complaint filed October 3, 1996, SCI also alleges that the foregoing actions, as well as the Parent Company's alleged failure to disclose certain information respecting the Prime and Rose Hills transactions, constitute violations of Section 14(e) of the Exchange Act. As relief, SCI seeks an injunction against future violations of that statute.
On October 10, 1996, the Parent Company, LGII and Ridge Chapels, Inc., a subsidiary of LGII, commenced an action in the United States District Court for the Eastern District of New York (the "New York Action"), seeking to enjoin SCI preliminarily and permanently from completing its unsolicited exchange offer on the grounds that a combination of SCI and the Parent Company would violate Section 7 of the Clayton Act. According to the complaint, SCI's unsolicited offer for control of the Parent Company, if successful, may substantially lessen competition in numerous local markets for (i) the sale of funeral services, (ii) the sale of funeral services on a "pre-need" basis, (iii) the sale of cemetery services, and (iv) the purchase of funeral homes, cemeteries and crematoria. The Parent Company also accuses SCI and
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) Equity Corporation International, Inc. (a competitor of the Parent Company in which SCI had a 40% interest in October 1996) ("ECI"), of conspiracy to eliminate the Parent Company as a competitive force in the funeral services industry, in violation of Section 1 of the Sherman Act. On October 10, 1996, the Parent Company filed Motions for Expedited Discovery and for a Preliminary Injunction to enjoin the unsolicited exchange offer and, on October 15, 1996, filed a Verified First Amended Complaint.
On October 11, 1996, the Parent Company moved to dismiss or stay the Texas Action. On October 15, 1996, SCI moved to dismiss, stay or transfer the New York Action. A hearing was held on SCI's motion on October 17, 1996, at the conclusion of which the District Court denied SCI's motion. On October 23, 1996, Magistrate Judge Caden of the District Court entered a Memorandum and Order allowing expedited discovery with respect to the Parent Company's motion for a preliminary injunction. On October 29, 1996, the District Court overruled the objections of SCI to the Magistrate Judge's Order but stayed commencement of discovery proceedings, which stay was extended by stipulation until the resolution of the pending motions in the Texas Actions described below.
On October 21, 1996, SCI filed a Motion for Preliminary Injunction in the Texas Action, seeking to enjoin the Parent Company from pursuing its antitrust claims in any forum other than the federal District Court in Texas. The matter was referred to Magistrate Judge Johnson, who issued a Memorandum Recommending Entry of a Preliminary Injunction on October 28, 1996. Magistrate Judge Johnson recommended that the District Court restrain the Parent Company from proceeding in the New York Action (or elsewhere) until it had resolved the Parent Company's pending motion to dismiss. In a telephone conference on October 28, 1996, the District Court declined to enter any injunctive relief at that time. A hearing on the Parent Company's motion to dismiss was held on November 6, 1996. On November 23, 1996, the Texas District Court issued a Memorandum Opinion in which it: (i) denied SCI's motion for a preliminary injunction against the New York Action; and (ii) granted the Parent Company's motion to dismiss the Texas Action, subject to the New York Court's permitting SCI to raise its above- described tortious interference and violation of Section14(e) claims as counterclaims in the New York Action. SCI's above-described declaratory judgment claim was dismissed outright.
On December 11, 1996, SCI filed its Answer to the Parent Company's Verified First Amended Complaint, in which it denies liability and asserts various defenses and asserts counterclaims against the Parent Company, which counterclaims parallel generally the above-described claims for tortious interference and violation of Section14(e) claims asserted in the Texas Action. The Parent Company believes that the counterclaims are without merit and intends to contest them vigorously. The Parent Company has served discovery requests upon SCI and ECI to which both objected. On December 11, 1996, Magistrate Judge Caden ordered expedited discovery to proceed. SCI filed objections to the Magistrate Judge's order, which objections were denied by the District Court on January 7, 1997.
On December 11, 1996, ECI filed a Motion to Dismiss the claims against it, on grounds of improper venue and lack of personal jurisdiction. On December 18, 1996, the Parent Company filed a Motion for Expedited Discovery respecting jurisdiction over ECI, and the parties agreed that the Parent Company would not be required to respond to the Motion to Dismiss until either a date certain after denial of its Motion for Expedited Discovery or, if that Motion were granted, completion of jurisdictional discovery. On January 8, 1997, Magistrate Judge Caden entered an order providing that the Parent Company could take certain expedited discovery respecting jurisdiction over ECI.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) On January 7, 1997, SCI announced that it had withdrawn its proposed exchange offer. On January 14, 1997, the Parent Company sent a letter to the New York Court stating that it will move for leave to file an amended complaint seeking permanent injunctive relief against future actions by SCI and/ or ECI against the Parent Company in violation of the antitrust laws. On January 15, 1997, SCI sent a letter to the New York Court stating that it believes the Parent Company's claims are moot and will seek dismissal of those claims. Discovery from the parties has been temporarily suspended by agreement. On January 16, 1997, ECI sent a letter to the New York Court, seeking to suspend discovery until the Court rules on the contemplated motions by the Parent Company and SCI. On January 20, 1997, the Parent Company sent a letter to the Court seeking leave to move to dismiss SCI's counterclaims, to which SCI responded on January 22, 1997, by letter requesting dismissal of the entire action.
At the New York Court's suggestion, the parties are discussing possible resolution of the action in a manner that would end the current proceedings but preserve jurisdiction in the New York Court over similar disputes in the future, if any.
No provision with respect to these legal proceedings has been made to date in the Parent Company's or LGII's 1996 consolidated financial statements.
DERIVATIVE SUIT
On September 26, 1996, Jerry Krim filed a purported derivative and class action against the Parent Company's current directors and one former director and against the Parent Company as a nominal defendant in the Los Angeles County Superior Court. The plaintiff alleges, on behalf of himself and all of the Parent Company's current and former shareholders, that the defendants "improperly responded to an offer by SCI to combine the two companies," refused to negotiate with SCI, agreed to pay an inflated price for the Rose Hills properties in Los Angeles, adopted a supposed "poison pill" supermajority voting provision requiring 75% approval of a merger, and adopted a Shareholders Protection Rights Plan, each allegedly in violation of the directors' fiduciary duties. Plaintiff seeks preliminary and permanent injunctive relief that would, among other things, (i) require the defendants to cooperate with any person having a bona fide interest in proposing a transaction and take certain other actions that allegedly would "maximize shareholder value," (ii) enjoin the Shareholders Protection Rights Plan in its entirety, (iii) enjoin the consummation of the Rose Hills transaction, (iv) enjoin the supermajority voting requirements, (v) require an accounting for unspecified damages, and (vi) compensate the plaintiffs for their fees and costs. On October 17, 1996, the Court denied the plaintiff's motion for expedited discovery. On November 8, 1996, the Parent Company and those individual defendants upon whom service had purportedly been made appeared specially and moved to quash service of the summons for lack of jurisdiction or, in the alternative, to dismiss or stay the action on grounds of forum non conveniens. On December 10, 1996, the Court granted the defendants' motion to quash the summons and denied the plaintiffs' request for discovery. The action was dismissed, and no appeal has been filed.
No provision with respect to this legal proceeding has been made in the Parent Company's or LGII's 1996 consolidated financial statements.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) ROJAS ET AL.
On February 22, 1995, Juan Riveras Rojas, Leyda Rivera Vega, the Conjugal Partnership constituted between them, and Carlos Rivera Bustamente instituted a legal action against the Parent Company, LGII and a subsidiary in the United States District Court for the District of Puerto Rico. The complaint alleges that the defendants breached a contract and ancillary agreements with the plaintiffs relating to the purchase of funeral homes and cemeteries, and committed related torts. The plaintiffs seek compensatory damages of $12,500,000, and unspecified punitive damages (although the Parent Company is advised by counsel that there is no entitlement to punitive damages under Puerto Rican law). The Parent Company has filed a motion to dismiss the complaint on the grounds of failure to join an indispensable party. In addition, the Parent Company claims it has suffered damages far in excess of the amount claimed by the plaintiffs as a result of breach of contract and related torts on the part of the plaintiffs. A subsidiary of the Parent Company has filed a complaint seeking damages in excess of $19,000,000 from the plaintiffs in the General Court of Justice of the Commonwealth of Puerto Rico. The Parent Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or LGII's 1996 consolidated financial statements.
FELDHEIM ET AL. V. SI-SIFH CORP. ET AL.
In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. were acquired by LGII in March 1996 when LGII acquired the assets of S.I. Acquisition Associates, L.P.
Plaintiffs hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. Plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also allege unfair trade practices in violation of Louisiana's insurance code and trade practices laws.
Plaintiffs seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies and allowing a plaintiff to select a more expensive casket than provided for in the policy, upon payment of the difference in retail value, without forfeiting the other benefits provided for in the policy.
As of the date hereof, no discovery has taken place. The Parent Company has determined that it is not possible at this time to predict the final outcome of this legal proceeding, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or LGII's 1996 consolidated financial statements.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 5. LEGAL PROCEEDINGS (CONTINUED) OTHER
Each of the Parent Company and LGII is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on its respective financial position, results of operation or liquidity.
NOTE 6. INCOME TAXES
All income tax expense in 1996, 1995 and 1994 represent income taxes payable outside Canada. Income tax differed from amounts computed by applying Canadian federal and provincial income tax rates of 45.5% on earnings before income taxes as a result of the following:
NOTE 7. NOTES PAYABLE TO AFFILIATES AND DUE TO PARENT COMPANY
Notes payable to affiliates were issued in settlement of preferred share dividends and are due on demand. The amount due to the Parent Company has no designated repayment terms however, the Parent Company has agreed not to demand payment prior to June 30, 1998. The notes payable to affiliates and due to Parent Company are denominated in Canadian dollars and are non-interest bearing.
NOTE 8. REDEEMABLE PREFERRED SHARES
On January 31, 1995 the authorized share capital of Neweol was increased by creating 500,000,000 non-voting Preferred shares with a par value of Cdn. $1.00 each and a redemption price of Cdn. $1.00 per share plus all declared but unpaid dividends. The holders of the preferred shares receive priority in the payment of non-cumulative dividends, as declared annually by the directors at a rate to be determined by resolution of the directors. Upon liquidation, dissolution or wind-up, the preferred shareholders are entitled to distribution equal to the redemption price before any assets of Neweol shall be distributed to the common shareholders. The preferred shares are redeemable at Neweol's option upon 21 days notice and retractable by the holder upon 120 days notice at any time in whole or in part at the redemption price. The redeemable preferred shares were issued upon the cancellation of 20,000 Common shares.
NOTE 9. NOTES RECEIVABLE FROM PARENT COMPANY
Notes receivable from the Parent Company were issued in settlement of the sale of 13% of the issued and outstanding units of LFW to the Parent Company. The sale price of $78,633,000 was determined to be Neweol's carrying value, and no gain or loss was realized. The notes receivable from the Parent Company have no designated repayment terms. The notes receivable from the Parent Company are denominated in Canadian dollars and are non-interest bearing.
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 10. CAPITAL STOCK
ISSUED AND OUTSTANDING
NOTE 11. RELATED PARTY TRANSACTIONS
The Company receives administrative support from the Parent Company at no charge to the Company. Direct costs of the Company's operations are recorded as expenses.
LFW is managed by an affiliated entity. General and administrative expenses are primarily a result of amounts paid under this management agreement.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, receivables from affiliates, revolving credit loans receivable, accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these instruments. Financial instruments with a carrying value different from their fair value include:
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 13. PURCHASE OF RECEIVABLES
On August 6, and December 27, 1996, the Company entered into agreements to purchase cemetery installment contract receivables from subsidiaries of LGII for approximately $57,000,000. The Company has recorded the purchase at the gross amount of the cemetery installment contract receivables net of the allowance for doubtful accounts, unearned finance income and purchase discount. At December 31, 1996, the total unearned finance income is approximately $12,185,000 and the total purchase discount is approximately $4,891,000. At December 31, 1996, the allowance for doubtful accounts is approximately $4,500,000. The purchase discount and unearned finance income will be recognized as interest income in earnings over the collection period of the contract receivables. At December 31, 1996, the Company has recognized interest income of $955,000.
On August 1, 1996, the Company entered into a management and receivables servicing agreement with an affiliate, Loewen Financial Corporation ("LFC"), whereby LFC performs specified collection services on the receivables for a management and servicing fee equal to 109.8% of their cost of servicing the receivables.
Proceeds received by LFC from the collection of the receivables are advanced directly to LGII as loans from the Company pursuant to a Revolving Credit Facility entered into on August 1, 1996. Revolving credit loans may be made up to a maximum of $250,000,000 and bear interest at the Libor rate plus 300 basis points, as computed by the Company at December 31, 1996. Amounts outstanding under the Revolving Credit Facility are due on demand or December 31, 1999. As at December 31, 1996, the Company has advanced $3,679,000 to LGII pursuant to the Facility.
NOTE 14. NON-CASH TRANSACTIONS
The Company entered into the following non-cash transactions:
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT NUMBER OF SHARES
NOTE 15. SUBSEQUENT EVENTS
SALE OF ARBOR
Effective March 27, 1997 the Company transferred its investment in Arbor to TLGI Management Corp., an affiliated company, at carrying value.
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
The Members Loewen Finance (Wyoming) Limited Liability Company
We have audited the accompanying balance sheets of Loewen Finance (Wyoming) Limited Liability Company as at December 31, 1996 and 1995 and the related statements of income and retained earnings and cash flows for each of the years in the two year period ended December 31, 1996 and for the eight month period ended December 31, 1994. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on 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 financial position of Loewen Finance (Wyoming) Limited Liability Company as at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 1996 and for the eight month period ended December 31, 1994 in conformity with generally accepted accounting principles in the United States.
/s/ PEAT MARWICK Chartered Accountants Bridgetown, Barbados March 3, 1997
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (EXPRESSED IN U.S. DOLLARS)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS YEAR ENDED DECEMBER 31, 1996, 1995 AND FOR THE EIGHT MONTH PERIOD ENDED DECEMBER 31, 1994 (EXPRESSED IN U.S. DOLLARS)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996, 1995 AND FOR THE EIGHT MONTH PERIOD ENDED DECEMBER 31, 1994 (EXPRESSED IN U.S. DOLLARS)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS)
NOTE 1. GENERAL
The company was formed under the Wyoming Limited Liability Company Act on March 30, 1994.
It was registered in Barbados as an external company under the provisions of the Companies Act and conducts its principal activities as a licensee under the International Business Companies Act. It commenced operations on August 4, 1994, after having obtained its IBC license on April 27, 1994.
The principal activity of the company is to act as a finance company to affiliates of The Loewen Group Inc. Substantially all transactions are with related parties.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF ACCOUNTING
The company follows accrual basis accounting and in all material respects, financial statements have been prepared in accordance with generally accepted accounting principles in the United States.
(B) CORPORATION TAX
The company is subject to taxation in accordance with Section 10 of the Barbados International Business Companies Act, at rates between 1.0% to 2.5%.
For U.S. tax purposes the company is viewed as a fiscally transparent entity whereby its income is deemed to be that of its partners.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
Effective August 1, 1996, interest is earned at a fixed rate of 11.5% per annum on the term loans (1995 -- 9.06% to 10.01% per annum) and the revolving credit loans (1995 -- U.S. prime plus 2%), respectively.
The notes receivable from affiliate are secured under a collateral trust arrangement whereby senior lenders to Loewen Group International, Inc. ("LGII") and The Loewen Group Inc. ("TLGI") would share certain collateral on a PARI PASSU basis. This collateral is held by a trustee for the equal and ratable benefit of the various holders of senior indebtedness.
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (CONTINUED) The collateral includes (i) a pledge for the benefit of the senior lenders of the shares held by TLGI of substantially all its subsidiaries (including the Company) and (ii) all of the financial assets of LGII (LGII does not have material assets other than financial assets).
NOTE 4. CAPITAL
The capital of the company is divided into units with no par value. After the initial capital contributions, members may by agreement make further contributions in proportion to the units they hold. Changes in capital were as follows:
The company's units are held by:
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, due from related companies and due to affiliated companies and taxes payable approximate fair value due to the short-term maturities of these instruments. Financial instruments with a carrying value different from their fair value include:
Fair value estimates are made at a specific point in time, based on market conditions and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS)
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) matters of significant judgement and therefore, changes in assumptions could significantly affect the estimates.
NOTE 6. TAXES PAYABLE
Taxes payable comprise the following:
NOTE 7. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current year.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In accordance with General Instruction G(3), the information required by Item 10 (with the exception of certain information pertaining to executive officers, which is included in Part I hereof) has been omitted and is incorporated by reference from the Registrant's definitive proxy statement and information circular relating to its 1997 annual general meeting of shareholders (the "Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
In accordance with General Instruction G(3), the information required by Item 11 has been omitted and is incorporated by reference from the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
In accordance with General Instruction G(3), the information required by Item 12 has been omitted and is incorporated by reference from the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In accordance with General Instruction G(3), the information required by Item 13 has been omitted and is incorporated by reference from the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
THE LOEWEN GROUP INC.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Financial Position for the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Supplementary Data: Quarterly Financial Data (unaudited)
LOEWEN GROUP INTERNATIONAL, INC.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations and Retained Earnings (Deficit) for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
NEWEOL INVESTMENTS LTD. (SEE NOTE 1)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations and Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
LOEWEN FINANCE (WYOMING) LIMITED LIABILITY COMPANY
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Income and Retained Earnings for the Eight Month Period Ended December 31, 1994 and the Years Ended December 31, 1996 and 1995
Statements of Cash Flows for the Eight Month Period Ended December 31, 1994 and the Years Ended December 31, 1996 and 1995
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts
(3) EXHIBITS
- ------------------------
* Compensatory plan or management contract
(1) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 31, 1995
(2) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, filed on August 15, 1996
(3) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1995, filed on March 28, 1996, as amended
(4) Incorporated by reference from the S-4 Registration Statement filed with the Commission by LGII and Loewen (File Nos. 333-03135 and 333-03135-01) on May 3, 1996, as amended
(5) Incorporated by reference from the combined Form/F-3 Registration Statements filed with the Commission by Loewen and LGII, respectively (Nos. 33-81032 and 33-81034), on July 1, 1994, as amended
(6) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed on November 14, 1996
(7) Incorporated by reference from the S-4 Registration Statement filed with the Commission by LGII and Loewen (File Nos. 333-16319 and 333-16319-01), filed on November 18, 1996, as amended
(8) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No. 1 dated April 18, 1995, filed May 5, 1995
(9) Incorporated by reference from Loewen's Solicitation/Recommendation Statement on Schedule 14D-9 filed on October 10, 1996, as amended
(10) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated August 26, 1996, filed October 12, 1996, amended October 30, 1996
(11) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated November 19, 1996, filed December 27, 1996
(b) The following reports on Form 8-K were filed by the Company during the last quarter of fiscal 1996:
(d) Financial statements of LGII, Neweol Investments Ltd. and Loewen Finance (Wyoming) Limited Liability Company are included in this Annual Report on Form 10-K because the outstanding shares of each of such companies constitute a "substantial portion" of the collateral (within the meaning of Securities and Exchange Commission Rule 3-10 under Regulation S-X) that secures the Series 1 through 4 Notes that were issued by LGII and guaranteed by Loewen. See Item 8.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF U.S.$)
- ------------------------
(1) Primarily the opening balance for acquired companies.
(2) Uncollected receivables written off, net of recoveries.
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.
Dated: March 27, 1997 THE LOEWEN GROUP INC.
By: /s/ RAYMOND L. LOEWEN ----------------------------------------- Raymond L. Loewen Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Raymond L. Loewen, Timothy R. Hogenkamp and Paul Wagler, and each of them severally, acting alone and without the other, his true and lawful attorney-in-fact with authority to execute in the name of each such person, and to file with the Securities and Exchange Commission, together with any exhibits thereto and other documents therewith, any and all amendments to this Annual Report on Form 10-K necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such other changes in the Annual Report on Form 10-K as the aforesaid attorney-in-fact deems appropriate.
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 in the capacities and on the dates indicated.