“Payments made for pre-need 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
policies under which the company is the designated
beneficiary. At the date of performance of a pre-arranged
service, the company records as a funeral revenue the
amount originally trusted or the insurance contract amount,
together with all related insurance contract amount,
together with all related accrued trust earnings and
increased insurance benefits”2
Pre-arranged funeral services are included in other assets and amortised over a period of ten years approximating the period the benefits are expected to be realised.
The regulations regarding cemeteries focus on public health aspects and the care and maintenance of cemetery grounds. Funeral home companies are required to deposit a certain percentage from the proceeds of sales of interment rights (ie: the lot, crypt or riches for the final disposition of the remains). These perpetual care funds are held in perpetuity and is not considered an asset to the firm. The firm does however have the right to the interest earned on the funds in order to provide the care and maintenance of their cemeteries. The percentage required to be deposited into the perpetual care fund varies from 5% to 40%, depending on the area. In the event that the firm suspends its operation these funds can be made available through the province or municipality.
“The pre-need sale of interment rights and other related
products is recorded as revenue when customer contracts
are signed and, concurrently, related costs are recorded
and an allowance is established for customers cancellations
and refunds based on management’s estimated of expected
cancellations.”3
1995, was a controversial year for The Loewen Group Inc. The company showed its desire to expand within the funeral industry by acquiring funeral homes and cemeteries from Osiris Holding Corp., MHI Group as well as other companies. The speed in which they attempted to acquire new holdings made the company vulnerable to lawsuits. The company stated in its annual report that it has become more aware of this issue after the Gulf National incident. Although the company was severely affected financially by the settlement as demonstrated by the financing and liquidity ratios, the company showed its potential to maintain its position in the industry, as shown by the relative unchanged gross margin.
The company now finds itself highly leveraged (as demonstrated by the Scott Formula calculations) and therefore has the potential for big earnings for shareholders. This has also made the company vulnerable to outsiders, as demonstrated by the Service Corporation International’s attempt to take-over the company. If Loewen Group Incorporated is able to stop the take-over attempt, it will prove its stability.
REFERENCES
1. Loewen Group Incorporated, “The Loewen Group Inc. 1995 Annual Report”, H. MacDonald Printing.,1996, 1.
2. Loewen Group International Inc., [online] Available @ http://www.sec.gov/archives/edgar/data/845577/0000950109/09-96-003953.txt.
3. Ibid.
Freiedman, Jack P., Dictionary of Business Terms, New York, Barron’s Educational
Series Inc., 1994.
Gibbins, Michael, Financial Accounting: An Integrated Approach, 2nd Edition,
Scarborough, Nelson Canada, 1995.
Heimbecker, John, Final Purchase, Growing Demand, The Canadian Funeral Services
Industry, Ottawa, Statistics Canada, 1995.
The Loewen Group Inc., The Loewen Group Inc. 1995 Annual Report, Burnaby B.C.:
H. MacDonald Printing, 1996.
The Loewen Group International Inc., [online] Available @
http://www.sec.gov/archives/edgar/data/845577/0000950109/09-96-003953.txt.
Milner, Brian. “Loewen board rejects SCI takeover bid”, The Globe and Mail,
11 October 1996, B13.
Milner, Brian. “Rivals target Loewen assets”, The Globe and Mail,
23 Sepetember 1996, B1, B10.
Schreiner, John. “Loewen won’t concede defeat without exacting a high price” The
Financial Post 19 September 1996: 1-2.
Schreiner, John. “U.S. giant bids for Loewen” The Financial Post 18 September 1996:
1-2.
APPENDIX A: Death, Actual and Projected
Source: p.18 of Final Purchase, Growing Demand The Canadian Funeral Services Industry.
APPENDIX B: Average Funeral Costs
Source: p.13 of Final Purchase, Growing Demand The Canadian Funeral Services Industry.
APPENDIX C: Revenue by Source in the Funeral Services Industry
Source: p.6 of Final Purchase, Growing Demand The Canadian Funeral Services Industry.
APPENDIX D: Total Revenue of the Funeral Services Industry by Sector
Source: p.4 of Final Purchase, Growing Demand The Canadian Funeral Services Industry.
APPENDIX E: The Scott Formula
(Expressed in thousands of U.S. Dollars)
19951994Symbols
Total assets22629801326275A
Total liabilities1648298915136L
Total equity614682411139E
Total revenue599939417328REV
Net income(76684)38494NI
Interest expense5091334203INT
Income tax rate(38.1) %33.9 %TR
After-tax interest expense50913 * 1.381 = 7031134203 * .661 = 22608ATI = INT (1 – TR)
ROE (return on equity)(76684) / 614682 = (0.125)38494 / 411139 = 0.094NI / E
SR (sales return before interest)[(76684) + 70311] / 599939 = (0.011) [38494 + 22608] / 417328 = 0.146 [NI + ATI] / REV
AT (asset turnover)599939 / 2262980 = 0.265417328 / 1326275 = 0.315REV / A
ROA (return on assets)[(76684) + 70311] / 2262980 = (0.003) [38494 + 22608] / 1326275 = 0.046 [NI + ATI] / A
IN (average interest rate after tax)70311 / 1648298 = 0.04322608 / 915136 = 0.025ATI / L
D / E (debt-equity ratio)1648298 / 614682 = 2.682915136 / 411139 = 2.226L / E