Case Study
The Bankruptcy of The Loewen Group: Too Much Debt, Too Little Death
Prof. Ian Giddy, New York University
The Loewen Group (HBS Case 9-201-062)
In June 1999 the Loewen Group, the second largest funeral
company in North America, filed for Chapter 11 bankruptcy
simultaneously in the United Sates and Canada. The information that
follows describes the filing and provides some background on the
company.
Loewen
Files for Bankruptcy Protection
June 1, 2001
VANCOUVER, BC -- June 1, 1999 -- The Loewen Group Inc. (NYSE,TSE, ME:LWN) announced today that, in order to ensure time to implement a new strategic plan while concurrently reducing its debt structure to compete more effectively in the marketplace, the Board of Directors has authorized the Company to file a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code, as well as an application for creditor protection under the Companies' Creditors Arrangement Act (CCAA) in Canada.
The Loewen Group Chairman, John S. Lacey said, "The filings will enable the Company to move forward with the implementation of its strategic plan while it restructures its burdensome debt load. During the past three years, the Company has experienced increasingly intensive working capital needs primarily as a result of its aggressive pursuit of cemetery acquisitions versus its historical emphasis on funeral home operations. We must focus our energy on correcting our balance sheet and implementing a solid business plan."
Mr. Lacey said that the plan or "vision" is to return to the original focus of The Loewen Group as a funeral service company with strategically located ancillary cemetery operations. "In recent years, we have lost that focus as the Company has concentrated more on cemetery sales and less on funeral home operations that are our most profitable, core assets."
In conjunction with the filings, the Company's U.S. subsidiaries have received a commitment for up to US $ 200 million in debtor-in-possession (DIP) financing from First Union National Bank. The post-petition financing, which is subject to court approval, is expected to provide adequate funding for all post-petition trade and employee obligations as well as the Company's ongoing needs during the restructuring process. The Company's Canadian subsidiaries have sufficient liquidity to fund daily operations and do not anticipate the need for additional financing.
Company Background
(From a Company statement issued at the time of the bankruptcy filing)
The Lowen Group, Inc., and its hundreds of affiliated entities operates the second-largest number of funeral homes and cemeteries in North America (Service Corporation International is number-one). In addition to providing services at the time of need, the Company also makes funeral, cemetery and cremation arrangements on a pre-need basis. Today, the Company operates 1,116 funeral homes and 429 cemeteries throughout North America. During 1997, the Company expanded into the United Kingdom and now operates 32 funeral homes there. As of March 31, 1999, the Company also operated three insurance subsidiaries that principally sell a variety of life insurance products to fund funeral services purchased through a pre-need arrangement. The Loewen Group, Inc., serves as the holding company for all operations of the Company, which are contained in subsidiary and associated companies. Loewen was incorporated under the Company Act of British Columbia on October 30, 1985.
GROWTH BY ACQUISITION. Loewen pursued an aggressive growth strategy based primarily upon acquisitions. In the past three years the Company's growth strategy emphasized cemetery acquisitions, as compared to the historical emphasis on funeral home acquisitions. Since 1995, the Company has grown by 651 locations to 1,701 at December 31, 1998, including 348 additional cemeteries.
RECENT DIFFICULTIES. Loewen's recent financial results have been disappointing. Beginning in the second half of 1998, as part of its strategy to improve its results, liquidity and financial condition the Company virtually eliminated its acquisition program in order to concentrate on improving existing operations. This strategy focuses upon emphasizing cash flow from operations and, in particular, cash flow from cemetery operations. Also, efforts to reduce costs have been made, including the closure of the Company's Cincinnati and Trevose offices and consolidation of substantially all management functions in Burnaby.
MANAGEMENT CHANGES. Significant management changes occurred beginning in the fourth quarter of 1998. On October 8, 1998, Robert L. Lundgren was appointed President and Chief Executive Officer replacing Raymond L. Loewen who resigned on the same date. On December 17, 1998, the Company named three new outside directors, Thomas M. Taylor, John S. Lacey and William R. Riedl, to the Company's Board of Directors, replacing three inside directors who simultaneously retired from the Board. On January 22, 1999, the Company's Board of Directors appointed John S. Lacey as Chairman, replacing Co-Chairmen Robert L. Lundgren and Raymond L. Loewen. Through actions taken on March 30, 1999 and April 12, 1999, the Board of Directors was reduced from 14 to seven members.
RECENT ASSET SALES. On March 31, 1999, the Company completed the sale of 124 cemeteries and three funeral homes for gross proceeds of $193 million, of which $126.5 million was required to be paid to certain lenders, to an investor group led by McCown De Leeuw & Co., a private investment firm. The Company has two smaller groups of properties which are considered probable for sale.
BUSINESS OPERATIONS. The Company's operations are comprised of three businesses: funeral homes, cemeteries and insurance. The Company maintains a regional management structure for both funeral home and cemetery businesses that is organized in several geographic regions in the United States, Canada and Europe. Management believes that this recently implemented organizational structure will enable the Company to better manage local profit centers.
(1) FUNERAL HOMES. The Company's funeral homes offer a full range of funeral services, including the collection of remains, registration of death, professional embalming, use of funeral home facilities, sale of caskets and other merchandise, and transportation to a place of worship, funeral chapel, 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 averaging approximately $3,400.
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 merchandise and services to families choosing cremation. In 1998, cremations accounted for approximately 26% (27% in 1997) 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 1.0% annually over the past five years and, in 1997, accounted for approximately 24% of all funeral services performed in the United States.
Funeral operations accounted for approximately 56% of the Company's consolidated revenue for 1998. 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.
(2) CEMETERIES. The Company's cemetery operations assist families in making burial arrangements and offer a complete line of cemetery products (including a selection of burial spaces, burial vaults, lawn crypts, caskets, memorials, niches and mausoleum crypts), the opening and closing of graves and cremation services.
The Company's cemetery operations comprised approximately 36% of the Company's consolidated revenue for 1998, 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 in light of actual historical experience and trends. A portion of the proceeds received by the Company from pre-need merchandise and service sales is generally set aside in trust funds to provide for the future delivery of the cemetery products and services.
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, 1998, the Company's cemeteries had approximately $270 million in perpetual care trust funds, which are not reflected on the Company's balance sheet because the principal is required to stay in trust in perpetuity.
(3) INSURANCE. The Company operates three insurance subsidiaries licensed in 29 jurisdictions to principally sell a variety of life insurance products to fund funerals. Revenue from the Company's insurance operations totaled approximately $97 million in 1998, or 8% of the Company's consolidated revenue.
-------------------------------------------------------------------------- [00002] COMPANY'S CONSOLIDATED BALANCE SHEET AS AT MARCH 31, 1999 --------------------------------------------------------------------------
THE LOEWEN GROUP INC. CONSOLIDATED BALANCE SHEETS AS AT MARCH 31, 1999 EXPRESSED IN THOUSANDS OF U.S. DOLLARS (UNAUDITED)
ASSETS
Current assets Cash and term deposits................................... $ 78,611 Receivables, net of allowances........................... 204,481 Inventories................................................ 32,522 Prepaid expenses......................................... 18,032 ------------ 333,646 Long-term receivables, net of allowances................... 546,596 Cemetery property.......................................... 1,193,846 Property and equipment..................................... 796,931 Names and reputations...................................... 743,489 Insurance invested assets.................................. 269,567 Future income tax assets................................... 10,720 Prearranged funeral services............................... 413,846 Other assets............................................... 158,092 ------------ $ 4,466,733 ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities Current indebtedness..................................... $ 48,782 Accounts payable and accrued liabilities................. 137,877 Long-term debt, current portion.......................... 742,248 ------------ 928,907 Long-term debt, net of current portion..................... 1,395,987 Other liabilities.......................................... 370,035 Insurance policy liabilities............................... 171,795 Future income tax liabilities.............................. 200,961 Deferred prearranged funeral services revenue.............. 413,846
Preferred securities of subsidiary......................... 75,000
Shareholders' equity Common shares............................................ 1,274,163 Preferred shares......................................... 157,146 Deficit.................................................. (534,996) Foreign exchange adjustment.............................. 13,889 ------------ 910,202
------------ $ 4,466,733 ============
--------------------------------------------------------------------------
Source: http://bankrupt.com/loewen.txt |