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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $1,041,281,874 based upon a closing market price of $3.80 on
March 22, 2001 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.
The number of shares outstanding of the registrant's common stock as of
March 22, 2001 was 278,001,053 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 2001
Annual Meeting of Shareholders (Part III)
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PART I
ITEM 1. BUSINESS.
(DOLLARS IN THOUSANDS)
Service Corporation International is the largest funeral and cemetery
company in the world. The term "Company" or "SCI" includes the registrant and
its subsidiaries, unless the context indicates otherwise. As of December 31,
2000, the Company operated 3,611 funeral service locations, 569 cemeteries and
200 crematoria located in 18 countries on five continents. The Company conducts
funeral service operations in all 18 countries and cemetery operations in all
countries in North America, South America, Australia and certain countries
within Europe. As of December 31, 2000, the Company's largest markets were North
America and France, which when combined represent approximately 84% of the
Company's consolidated revenues, 83% of consolidated operating income before
non-recurring items and 78% of the Company's total operating locations. For
financial information about the Company's reportable segments, see note fourteen
to the consolidated financial statements in Item 8 of this Form 10-K.
Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses which resulted in creating the world's
largest network of funeral service locations and cemeteries. The Company is now
focused on a series of growth initiatives designed to increase revenues
internally without significant outlays of capital. The Company's unparalleled
network of funeral service locations and cemeteries form the foundation for
these growth initiatives. The Company's network gives the Company the ability to
create a national brand name in the industry as well as the ability to enter
into affinity relationships to provide the Company's products and services to
organizations that require a national network of funeral service locations and
cemeteries. Along with these internal growth initiatives, the Company is focused
on increasing cash flow and reducing its outstanding debt. The Company is also
in the process of divesting certain funeral service locations and cemeteries in
North America that are not well aligned with the Company's long-term strategy
and is in discussions with various third parties concerning the possibility of
joint venturing certain of the Company's international operations. Proceeds from
divestitures or joint venturing programs will be used by the Company to further
reduce its debt.
The Company was incorporated in Texas in July of 1962. The Company's
principal corporate offices are located at 1929 Allen Parkway, Houston, Texas
77019 and its telephone number is (713) 522-5141.
FUNERAL AND CEMETERY OPERATIONS
The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries, crematoria and related businesses. The operations
are organized into a North American division covering the United States and
Canada and a European division responsible for all operations in Europe, and
other international operations managed in the Pacific Rim and South America.
Each division is under the direction of divisional executive management with
substantial industry experience. Local funeral service location and cemetery
managers, under the direction of the divisional management, receive support and
resources from the Company's headquarters in Houston, Texas and have substantial
autonomy with respect to the manner in which services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales activities.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various
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names because most operations were acquired as existing businesses. Some of the
Company's funeral service locations in its international operations operate
under certain brand names specific for a general area or country. In 2000, the
Company started branding its operations in North America under the name Dignity
Memorial(TM). While this process is intended to emphasize the Company's seamless
national network of funeral service locations and cemeteries in North America,
the original names associated with acquired operations with their inherent
goodwill and heritage will remain the same as before acquisition.
Funeral Service Locations. The Company's 3,611 funeral service locations
provide all professional services relating to funerals, including the use of
funeral facilities and motor vehicles. Funeral service locations sell caskets,
coffins, burial vaults, cremation receptacles, flowers and burial garments, and
other ancillary products and services. Certain funeral service locations also
operate crematoria. At December 31, 2000, the Company owned 193 funeral
service/cemetery combination locations and operated 55 flower shops engaged
principally in the design and sale of funeral floral arrangements. These flower
shops provide floral arrangements to some of the Company's funeral homes and
cemeteries. The number of deaths tends to be somewhat higher in the winter
months and the Company's funeral service locations generally experience a higher
volume of business during those months.
In addition to selling its services and products to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets, including its principal foreign markets. Funeral prearrangement
is a means through which a customer contractually agrees to the terms of a
funeral to be performed in the future. The funds collected from prearranged
funeral contracts are generally placed in trust accounts (pursuant to applicable
law) or are used to pay premiums on life insurance policies from third party
insurers. In certain situations pursuant to applicable laws, the Company will
post a surety bond as financial assurance in the amount of the preneed funeral
contract in lieu of placing certain funds in trust accounts or paying premiums
on life insurance policies. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in this Form 10-K for
further details on the Company's practice of posting such surety bonds. At
December 31, 2000, the total value of the Company's unperformed prearranged
funeral contracts was $4,537,669, of which approximately $396,000 is estimated
to be fulfilled in 2001. For additional information regarding prearranged
funeral activities, see notes two, three and five to the consolidated financial
statements in Item 8 of this Form 10-K.
Cemeteries. The Company's cemeteries sell interment rights associated with
cemetery property (including mausoleum spaces, lots and lawn crypts) and
cemetery merchandise including stone and bronze memorials, burial vaults,
caskets and cremation memorialization products. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries operate crematoria and certain cemeteries contain
gardens specifically for the purpose of memorialization associated with the
Company's cremation customers.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise and services may be required by law to be paid
into trust until the merchandise is purchased or the service is provided on
behalf of the customer. In certain situations pursuant to applicable laws, the
Company will post a surety bond as financial assurance for a certain amount of
the preneed cemetery contract in lieu of placing certain funds into trust
accounts. See the Financial Assurances section included in Financial Condition,
Liquidity and Capital Resources in this Form 10-K for further details on the
Company's practice of posting such surety bonds. For additional information
regarding cemetery preneed activities, see notes two, three and six to the
consolidated financial statements in Item 8 of this Form 10-K.
Combined Funeral Service Locations and Cemeteries. The Company currently
owns 193 funeral service/cemetery combination locations in North America in
which a funeral service location is physically located within one of the
Company's cemeteries. Combination locations allow certain facility, personnel
and equipment costs to be shared between the funeral service location and
cemetery and typically have a higher gross margin than if the funeral and
cemetery operations were operated separately. Combination locations also
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create synergies between funeral and cemetery sales forces and give consumers
added convenience to purchase both funeral and cemetery products and services at
a single location.
Death Care Industry. In North America and most international markets in
which the Company operates, the funeral and cemetery industry is characterized
by a large number of locally owned, independent operations. Since the Company's
inception in the 1960s, the Company has been focused on the acquisition and
consolidation of independent funeral homes and cemeteries in the very fragmented
death care industry. During the 1990s, the Company also expanded its operations
through consolidation in Europe, Australia and South America. During 1999, the
Company, as well as other consolidators in the death care industry,
significantly reduced the level of acquisition activity. The Company is now
focused on a series of growth initiatives designed to increase revenues
internally without significant outlay of capital. As part of its current
long-term strategy, the Company is in discussions with various third parties
concerning the possibility of joint venturing primarily the Company's
international operations and is also in the process of divesting certain funeral
service locations and cemeteries in North America.
To compete successfully, the Company's funeral service locations and
cemeteries must maintain good reputations and high professional standards in the
industry, as well as offer attractive products and services at competitive
prices. The Company believes it has an unparalleled network of funeral service
locations and cemeteries that offer high quality products and services at prices
that are competitive with independent funeral homes and cemeteries. Some of the
Company's funeral service locations in its international operations operate
under certain brand names specific for a general area or country. During 2000,
the Company began branding its network of funeral service locations in North
America under the Dignity Memorial(TM) brand name. A national brand name would
be new and unique to the death care industry in North America and would provide
many advantages to the Company discussed in more detail in Revenue Growth
Initiatives in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K.
In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is more stable. The west coast of the United States and the
states of Arizona and Florida have the highest concentration of cremation
consumers in North America. While cremations performed by the Company in North
America typically have higher gross profit margins than traditional funeral
services, cremations usually result in lower revenue and gross profit dollars to
the Company than traditional funeral services. In North America during 2000,
36.3% of all funeral services performed by the Company were cremation cases,
compared to 33.9% performed in 1999. The Company in 2000 continued to expand its
cremation memorialization products and cremation services in several North
American markets, which has resulted in higher average sales for cremation cases
compared to historical levels. The Company also continues to expand its
nationally branded cremation service locations called National Cremation
Service(R) (NCS). NCS currently operates in ten high cremation states and has
plans to expand into seven additional high cremation states. The Company
believes that the NCS consumer would not have chosen traditional funeral service
locations as an alternative to NCS, and therefore is considered an incremental
customer to the Company.
With the aging of the population in North America, the Company continues to
believe the death care industry possesses attractive characteristics, and the
Company is uniquely positioned with its unparalleled network of funeral service
locations and cemeteries to capture future market share with its current
initiatives.
DISCONTINUED OPERATIONS
The Company formerly owned insurance operations including ownership of a
French life insurance company (Auxia) and a U.S. life insurance company
(American Memorial Life Insurance Company or AMLIC). These insurance operations
assisted in the funding of contracts written by Company-owned or affiliated
funeral service locations. During 2000, the Company completed the sales of these
insurance operations. Accordingly, the consolidated financial statements in this
Form 10-K have been reclassified to reflect these operations as discontinued.
Operating results from Auxia have been included through August 31,
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2000 and the operating results from AMLIC have been included through September
30, 2000, the dates of disposition of the respective companies.
EMPLOYEES
At December 31, 2000, the Company employed 29,326 (17,232 in the United
States) persons on a full time basis and 10,690 (8,296 in the United States)
persons on a part time basis. Of the full time employees, 28,548 were in the
funeral and cemetery operations and 778 were in corporate or other overhead
activities and services. All of the Company's eligible United States employees
who so elect are covered by the Company's group health and life insurance plans.
Eligible United States employees are participants in retirement plans of the
Company or various subsidiaries, while foreign employees are covered by other
Company defined or government mandated benefit plans. Although labor disputes
are experienced from time to time, in general relations with employees are
considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various U.S. federal, state and foreign statutes, ordinances
and regulations. The Company believes that it is in substantial compliance with
the significant provisions of such statutes, ordinances and regulations. Since
1984, the Company has operated in the United States under the Federal Trade
Commission (FTC) comprehensive trade regulation rule for the funeral industry.
The rule contains minimum guidelines for funeral industry practices, requires
extensive price and other affirmative disclosures and imposes mandatory
itemization of funeral goods and services. From time to time in connection with
the Company's former strategy of growth through acquisitions, the Company has
entered into consent orders with the FTC that have required the Company to
dispose of certain operations to proceed with such acquisitions or have limited
the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a materially adverse
effect on the Company's operations.
The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry has
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that will generally end municipal control of the French
funeral service business and will allow free competition among funeral service
providers. Under such legislation, the Exclusive Municipal Authority was
abolished in January 1996, and the Municipal Monopoly was eliminated in January
1998. Cemeteries in France, however, are and will continue to be controlled by
municipalities and religious organizations, with third parties, including the
Company, providing cemetery merchandise such as markers and monuments to
consumers.
ITEM 2. PROPERTIES.
(DOLLARS IN THOUSANDS)
The Company's executive headquarters is located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and parking
garage. The other undivided one-half interest is owned by an unrelated third
party. The Company holds an option to acquire such interest for $2,000 in July
2005 and, at the option of the unrelated third party, is obligated to make such
acquisition. The property consists of approximately 127,000 square feet of
office space in the building and 185,000 square feet of parking space in the
parking garage. The Company leases all of the office space in the building
pursuant to a lease that expires June 30, 2005 providing for monthly rent of
$59. The Company pays all operating expenses. One half of the rent is paid to
the wholly owned subsidiary and the other half is paid to the owners of the
remaining undivided one-half interest. The Company owns and utilizes for
corporate activities two additional buildings located in Houston, Texas
containing a total of approximately 167,000 square feet of office space.
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At December 31, 2000, the Company owned approximately 63% of the real
estate and buildings of its 4,380 funeral service locations, cemeteries and
crematoria and leased facilities in connection with approximately 37% of such
operations. In addition, the Company leased two aircraft pursuant to cancelable
operating leases. At December 31, 2000, the Company operated 13,389 vehicles, of
which 3,633 were owned and 9,756 were leased. For additional information
regarding leases, see note eleven to the consolidated financial statements in
Item 8 of this Form 10-K.
At December 31, 2000, the Company's 569 cemeteries contain a total of
approximately 34,221 acres, of which approximately 49% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition and management of the
Company believes that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Previously Reported Litigation. The following discussion describes certain
litigation as of March 29, 2001, which was previously reported:
Civil Action H-99-0280; In Re Service Corporation International; In the
United States District Court for the Southern District of Texas, Houston
Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before
Judge Lynn N. Hughes and includes 21 class action lawsuits that were filed in
the United States District Court for the Southern District of Texas, two class
action lawsuits that were originally brought in the United States District Court
for the Eastern District of Texas, and a lawsuit brought in the United States
District Court for the Southern District of Texas by an individual who sold his
funeral home to SCI. The Consolidated Lawsuit names as defendants the Company
and three of the Company's current or former executive officers or directors:
Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne (the
Individual Defendants). The plaintiffs have filed a Consolidated Class Action
Complaint in the Consolidated Lawsuit alleging that defendants violated federal
securities laws by making materially false and misleading statements and failing
to disclose material information concerning the Company's prearranged funeral
business. The Consolidated Lawsuit seeks to recover an unspecified amount of
monetary damages. Since the litigation is in its preliminary stages and no
discovery has occurred, the Company cannot quantify its ultimate liability, if
any, for the payment of damages or predict the outcome of the litigation.
However, the Company moved to dismiss all of the allegations in the Consolidated
Lawsuit and believes that they do not provide a basis for the recovery of
damages because the Company made all required disclosures on a timely basis. The
Company and the Individual Defendants have also filed an Answer to the
Consolidated Class Action Complaint, and the Company intends to aggressively
defend this lawsuit.
The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of Company into Equity Corporation International (ECI);
(ii) purchased shares of Company common stock in the open market during the
period from July 17, 1998, through January 26, 1999 (the Class Period); (iii)
purchased Company call options in the open market during the Class Period; (iv)
sold Company put options in the open market during the Class Period; (v) held
employee stock options in ECI that became options to purchase Company common
stock pursuant to the merger; and (vi) held Company employee stock options to
purchase Company common stock under a stock plan during the Class Period.
Excluded from the foregoing categories are the Individual Defendants, the
members of their immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any time during
the Class Period. Judge Hughes has certified the Consolidated Lawsuit as a class
action. On May 10, 2000, Judge Hughes signed an order amending the class
definition to include James P. Hunter, III as a class member. Mr. Hunter was
Chairman, President and Chief Executive Officer of ECI at the time of its merger
with a wholly-owned subsidiary of the Company. Mr. Hunter and a related family
trust filed a separate lawsuit in state court in Angelina County, Texas, which
is discussed below.
The Company and the Individual Defendants have filed a Motion to Dismiss
the Consolidated Lawsuit; the plaintiffs have filed their Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the
Individual Defendants have filed a Reply to Plaintiffs' Opposition to
Defendants' Motion to
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Dismiss the Consolidated Lawsuit. The foregoing pleadings will be considered by
Judge Hughes in due course. A status conference is set for April 4, 2001.
Copies of the complaint in the Consolidated Lawsuit and the pleadings that
have been filed in response thereto and that are referred to herein are filed as
exhibits to this Annual Report on Form 10-K.
Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation
International et al; In the ________ Judicial District Court of Angelina County,
Texas. On November 10, 1999, James P. Hunter, III and a related family trust
filed a lawsuit against the Company, the Individual Defendants, two other
officers, an employee of the Company and PricewaterhouseCoopers LLP, the
Company's independent accountants, in state District Court in Angelina County,
Texas (Hunter Litigation). The plaintiffs allege, among other things, violations
of Texas securities law and statutory and common law fraud, and seek unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hunter Litigation denying the plaintiffs' allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hunter Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
On May 10, 2000, Judge Hughes entered an order in the Consolidated Lawsuit
in the federal district court staying the further prosecution of the Hunter
litigation in state court. Hunter and the related family trust appealed this
order, and the United States Court of Appeals for the Fifth Circuit lifted the
stay in an order of September 13, 2000. Following this appeal, Judge Hughes then
signed an order on October 5, 2000, prohibiting Mr. Hunter and the related
family trust from pursuing discovery in the Hunter Litigation. Judge Hughes
entered the order pursuant to the authority vested to him by the Securities
Litigation Uniform Standards Act of 1998. Hunter and the related family trust
filed a motion for a trial setting in the state district court.
A copy of the Plaintiff's Original Petition in the Hunter Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International; In
the ________ Judicial District Court of Angelina County, Texas (Fredrick
Litigation). This additional securities fraud case has been brought against the
Company by a former shareholder of ECI alleging causes of action exclusively
under Texas statutory and common law. The Company has filed an answer denying
plaintiff's allegations. Since the litigation is in its preliminary stages, the
Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Fredrick Litigation do not provide a basis for the
recovery of damages. The Company intends to vigorously defend this litigation.
New Litigation.
Cause No. 33701-01-01; Jack D. Rottman v. Service Corporation
International, et al; In the ________ Judicial District Court of Angelina
County, Texas. On December 28, 2000, Jack Rottman filed a lawsuit against the
Company, the Individual Defendants, two other officers, an employee of the
Company, and PricewaterhouseCoopers, L.L.P., the Company's independent
accountants, in state District Court in Angelina County, Texas (Rottman
Litigation). The plaintiff, a former officer of ECI, alleges, among other
things, violations of Texas securities law and statutory and common law fraud,
and seeks unspecified compensatory and exemplary damages. The Company and the
other defendants filed an answer in the Rottman Litigation denying the
plaintiff's allegations. Since the litigation is in its very preliminary stages,
the Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Rottman Litigation, like those in the Consolidated
Lawsuit, do not provide a basis for the recovery of damages because all required
disclosures were made on a timely basis. The Company intends to aggressively
defend this litigation.
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A copy of the Plaintiff's Original Petition in the Rottman Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
Cause No. 2000-63917; Jack T. Hammer v. Service Corporation International,
et al.; In the 165th Judicial District Court of Harris County, Texas. On
December 15, 2000, Jack T. Hammer filed a lawsuit against the Company, the
Individual Defendants, two other officers, an employee of the Company, and
PricewaterhouseCoopers, L.L.P., the Company's independent accountants, in state
District Court in Harris County, Texas (Hammer Litigation). The plaintiff, a
former director of ECI, alleges, among other things, violations of Texas
securities law and statutory and common law fraud, and seeks unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hammer Litigation denying the plaintiff's allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hammer Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
A copy of the Plaintiff's Original Petition in the Hammer Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 28, 2001 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
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R. L. Waltrip........................ (70) Chairman of the Board and Chief 1962
Executive Officer
B. D. Hunter......................... (71) Vice Chairman of the Board 1986
Jerald L. Pullins.................... (59) President and Chief Operating Officer 1992
Jeffrey E. Curtiss................... (52) Senior Vice President Chief Financial 2000
Officer
James M. Shelger..................... (51) Senior Vice President General Counsel 1987
and Secretary
J. Daniel Garrison................... (49) Vice President North American 1998
Cemetery Operations
W. Cardon Gerner..................... (46) Vice President Corporate Controller 1999
W. Mark Hamilton..................... (36) Vice President Prearranged Sales 1996
Frank T. Hundley..................... (41) Vice President Treasurer 2000
Lowell A. Kirkpatrick, Jr. .......... (42) Vice President Operational Management 1994
Systems
Stephen M. Mack...................... (49) Vice President North American Funeral 1998
Operations
Thomas L. Ryan....................... (35) Vice President International 1999
Operations
Eric D. Tanzberger................... (32) Vice President Investor Relations and 2000
Assistant Corporate Controller
Stephen J. Uthoff.................... (49) Vice President Chief Information 2000
Officer
Michael R. Webb...................... (43) Vice President Corporate Development 1998
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(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
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Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Hunter was appointed Vice Chairman of the Board in January 2000. Prior
thereto for more than five years, Mr. Hunter was the Chairman and Chief
Executive Officer of Huntco, Inc., an intermediate steel processor. Mr. Hunter
has been a director of the Company since 1986 and also served as Vice Chairman
of the Board of the Company from September 1986 to May 1989.
Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. From January 1992 until July 1999, Mr. Curtiss served
as Senior Vice President and Chief Financial Officer of Browning-Ferris
Industries, Inc., a waste services company.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Corporate
Controller. Before the acquisition, Mr. Gerner had been Senior Vice President
and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner
was a partner with Ernst & Young LLP.
Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
Prior thereto, Mr. Hundley served for more than five years in various capacities
at Banc of America Securities, LLC, its predecessors and affiliates, including
as Managing Director.
Mr. Ryan joined the Company in June 1996 as Director of Financial
Reporting. Since then, Mr. Ryan has served as Director of Investor Relations and
Managing Director and Chief Financial Officer of International Operations. Mr.
Ryan was promoted to Vice President International Finance in February 1999 and
appointed Vice President Operational Accounting and Analysis in February 2000
and became Vice President of International Operations in December 2000. Prior to
joining the Company, Mr. Ryan was a certified public accountant with Coopers &
Lybrand L.L.P. for more than five years.
Mr. Tanzberger joined the Company in August 1996 as Manager of Budgets &
Financial Analysis. Since then, Mr. Tanzberger has served as Vice President of
Operations/Western Division, Director of Investor Relations and Assistant
Corporate Controller. Mr. Tanzberger was promoted to Vice President Investor
Relations and Assistant Corporate Controller in January 2000. Prior to joining
the Company, Mr. Tanzberger was Assistant Corporate Controller at Kirby Marine
Transportation Corporation, an inland waterway barge and tanker company, from
January through August 1996. Prior thereto, he was a certified public accountant
with Coopers & Lybrand L.L.P. for more than five years.
Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President-Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.
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10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 2000, there were 7,457 holders of record of
the Company's common stock.
In October 1999, the Company suspended payment of regular quarterly cash
dividends on its outstanding common stock in order to focus on improving cash
flow and reducing existing debt. For the two years ended December 31, 1999 and
1998, dividends per share were $.27 and $.36, respectively.
The table below shows the Company's quarterly high and low common stock
prices for the three years ended December 31, 2000:
2000 1999 1998
------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ------ ------ ------ ------
First quarter....................... $7.00 $3.00 $38.50 $14.25 $43.69 $35.69
Second quarter...................... 5.44 2.81 21.19 13.31 44.63 38.94
Third quarter....................... 3.50 2.13 18.88 10.56 45.88 31.88
Fourth quarter...................... 2.56 1.69 10.31 6.44 39.25 29.81
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
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11
ITEM 6. SELECTED FINANCIAL DATA.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected consolidated financial data for the years December
31, 1996 through 2000 is derived from the Company's audited consolidated
financial statements. This data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes to the consolidated
financial statements included in Item 8 of this and previous year's Form 10-K.
In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101).
See note three to the consolidated financial statements in Item 8 of this Form
10-K for more details on the implementation of SAB No. 101. As a result of this
implementation, the Company has changed certain of its accounting policies
regarding the manner in which the Company records preneed sales activities. The
Company recorded a one time, non-cash charge of $909,315 as of January 1, 2000
representing the cumulative effect of this accounting change. The selected
consolidated financial data presented below for 2000 is reported after the
implementation of SAB No. 101 on January 1, 2000. The selected consolidated
statement of operations data presented below for 1999 and 1998 are reported on a
proforma basis as if the implementation of SAB No. 101 had occurred in those
years. The selected consolidated statement of operations data presented below
for 1997 and 1996 are reported on a historical basis, as it was impractical for
the Company to obtain the amounts on a proforma basis for these two years.
Further, results of operations from discontinued operations have been
reclassified for all periods presented to reflect these operations as
discontinued (see note four to the consolidated financial statements of Item 8
of this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
PROFORMA HISTORICAL
------------------------- -----------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
SELECTED CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue from continuing
operations.................... $ 2,564,730 $ 2,745,114 $ 2,354,822 $2,461,690 $2,287,543
Income (loss) from continuing
operations before
extraordinary gains and
cumulative effect of
accounting change............. (425,523) (210,668) 147,854 368,650 261,005
Net income (loss)................ (1,343,251) (191,856) 158,435 333,750 265,298
Earnings per share:
Income (loss) from continuing
operations before
extraordinary gains and
cumulative effect of
accounting change
Basic....................... (1.56) (.77) .58 1.51 1.11
Diluted..................... (1.56) (.77) .57 1.45 1.06
Net income (loss)
Basic....................... (4.93) (.70) .62 1.36 1.13
Diluted..................... (4.93) (.70) .61 1.31 1.08
Cash dividends per share...... -- .27 .36 .30 .24
SELECTED CONSOLIDATED BALANCE SHEET
DATA (HISTORICAL):
Total assets..................... 12,898,469 12,978,230 11,729,816 9,925,643 8,403,431
Long-term debt, less current
maturities.................... 3,114,515 3,636,067 3,764,590 2,634,699 2,048,737
Convertible preferred securities
of SCI Finance LLC............ -- -- -- -- 172,500
Stockholders' equity............. 1,975,821 3,495,273 3,154,102 2,726,004 2,235,317
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
INTRODUCTION
The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 2000, the Company operated 3,611 funeral service
locations, 569 cemeteries and 200 crematoria located in 18 countries on five
continents. The Company conducts funeral service operations in all 18 countries
and cemetery operations in North America, South America, Australia and certain
countries within Europe. As of December 31, 2000, the Company's largest markets
were North America and France, which when combined, represent approximately 84%
of the Company's consolidated revenues, 83% of consolidated income from
operations before non-recurring items and 78% of the Company's total operating
locations.
The funeral and cemetery operations are organized with a North America
division covering the United States and Canada, a European division responsible
for all operations in Europe and other international operations managed in the
Pacific Rim and South America. During 2000, the Company reorganized leadership
of its European operations to focus on stabilizing the Company's market share in
its European markets.
The majority of the Company's operations throughout the world are managed
in groups called clusters. Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual overhead costs by sharing
common resources such as operating personnel, preparation services, clerical
staff, limousines, hearses and preneed sales personnel. Personnel costs, the
largest of the operating expenses for the Company, are the cost components most
beneficially affected by clustering. The sharing of employees, as well as the
other costs mentioned, allow the Company to more efficiently utilize its
operating facilities. In the first quarter of 2000, the Company began the
process of implementing Central Processing Centers throughout North America in
order to further assist in the efficiencies of accounting and back-office
functions. Once implementation is complete, which is expected in 2001, these
Central Processing Centers will take further advantage of this clustering
concept in order to reduce personnel costs.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Both
funeral service locations and cemeteries can contain crematoria facilities. The
Company has approximately 197 combination facilities in which a funeral service
location is contained within a cemetery. The other services operations consist
of the Company's lending subsidiary, which previously provided capital financing
for independent funeral and cemetery operations. In 1999, the Company decided to
indefinitely suspend the operations of its lending subsidiary. On August 31,
2000, the Company sold a substantial portion of the loan portfolio of its
lending subsidiary. The operations of the lending subsidiary through August 31,
2000 have been included herein as other services. Subsequent to this sale date,
all activities on remaining loans will be recorded in other income in the
Company's consolidated statement of operations.
During 2000, the Company entered into definitive agreements to sell its
wholly owned insurance operations in France and the United States, thereby
discontinuing the operations of the Company's insurance segment and
reclassifying the financial statements in accordance with accounting principles
applicable to discontinued operations for all periods presented. In the third
quarter of 2000, the Company completed these transactions and recorded an after
tax loss of $43,733 associated with these disposals. The Company has entered
into marketing agreements with the purchasers, which became effective at the
closing of the transactions and are expected to produce more free cash flow for
the Company over the next several years than if the insurance operations were
owned by the Company. The marketing agreements with both the United States and
French insurance companies are also expected to provide enhanced opportunities
to sell prearranged funerals in the Company's worldwide funeral markets.
STRATEGIC INITIATIVES
Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses which resulted in creating the world's
largest network of funeral service locations and cemeteries.
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13
The Company believes this network forms the foundation of its growth initiatives
going forward. During the mid-1990s, the market to acquire funeral service
locations and cemeteries became extremely competitive which resulted in
increased acquisition prices and substantially reduced returns on invested
capital. In early 1999, the Company announced plans to significantly reduce the
level of its acquisition activity and pursue other means to create meaningful
growth from its existing operations. As a result, the Company's strategic plan
in 2000 was focused on reducing overhead costs, increasing cash flow and
reducing debt while at the same time developing key revenue initiatives designed
to drive future internal growth in the Company's core funeral and cemetery
operations without the outlay of significant capital. Management's current bonus
compensation plan is aligned with the execution of these elements of its
strategic plan.
Overhead Costs
The Company's overhead costs include corporate general and administrative
costs, regional field overhead costs and other home office costs related to
functions directly supporting field operations. As a result of the Company's
focus on overhead reduction, total overhead costs for the full year of 2000
decreased approximately 6.5% compared to the full year of 1999, excluding
overhead costs associated with the Company's trust administration functions. The
Company received substantial non-recurring receipts in 2000 from the collection
of amounts due to the Company from funeral and cemetery trust funds. To
accomplish the receipt of these funds, as well as to continue to provide normal
trust administration activities, the Company incurred approximately $11,700 more
costs in 2000 related to its trust administration functions compared to 1999. In
the first quarter of 2001, the Company outsourced its trust administration
functions to KPMG LLP which is expected to reduce future cash overhead costs
while at the same time continuing the timely collection of amounts due to the
Company from funeral and cemetery trust funds.
Operating Free Cash Flow
The Company's strategic plan in 2000 included the execution of several cash
flow initiatives that were designed to increase the Company's operating free
cash flow. The Company considers operating free cash flow to be cash funds that
can generally be used to reduce the Company's debt and is defined more
specifically in the Financial Condition, Liquidity and Capital Resources section
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company's total operating free cash flow for the year ended December
31, 2000 was $219,725, at the upper end of the Company's expected range of
$100,000 to $250,000. A summary of the Company's operating free cash flow is
shown below.
2001 OPERATING FREE
IMPROVEMENT IN CASH FLOW
1999 2000 2000 OVER 1999 RUN RATE TARGETS
-------- -------- -------------- -------------------
Total operating free cash
flow......................... $ (6,520) $219,725 $226,245 $200,000-$250,000
Recurring operating free cash
flow......................... $(88,720) $ 62,025 $150,745 $100,000-$150,000
The Company has improved total operating free cash flow by $226,245
primarily through the reduction of capital expenditures to maintenance levels
and the suspension of the Company's quarterly cash dividend. The Company also
executed several other cash initiatives in 2000 including the efficient
retrieval of funds due to the Company from certain funeral and cemetery trusts,
the realignment of preneed cemetery and prearranged funeral sales structures to
become more cash flow positive and the suspension of the Company's acquisition
program. The Company expects its total operating free cash flow (including
non-recurring receipts of funds) to be between the run rate targets of $200,000
to $250,000 by the end of 2001. Through March 15, 2001, the Company had already
received approximately $131,000 of non-recurring receipts of funds from certain
income tax refunds and from the collection of receivables from funeral and
cemetery trust funds.
Included in the Company's total operating free cash flow are receipts of
funds that are of a non-recurring nature totaling $157,700 for the full year of
2000 and $82,200 for the full year of 1999. These funds relate to the collection
of receivables due to the Company from funeral and cemetery trust funds.
Excluding these non-
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14
recurring receipts of funds, the Company's recurring operating free cash flow
was $62,025 in 2000 and a use of $88,720 in 1999. The Company continues to
implement existing and additional initiatives in 2001 to increase its recurring
operating free cash flow from 2000 levels. These cash flow initiatives are
categorized as revenue growth initiatives, working capital improvements, cost
reduction initiatives, asset redeployment and enhanced funeral and cemetery
trust administration and management. Revenue initiatives include such programs
as the Company's Dignity Memorial(TM) packaged funeral plans and the development
of affinity relationships. These initiatives are discussed in further detail in
the section Revenue Growth Initiatives included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations. Working capital
improvements include programs to accelerate customer collections and deliver
pre-sold merchandise to customers to satisfy trusting requirements. Cost
reduction initiatives include changes to the Company's employee benefit plans
and other overhead reductions primarily related to information technology costs.
The Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sale of its insurance subsidiaries and interest
savings as a result of proceeds received from divestitures completed in 2000 and
from proceeds to be received from the sale of certain North America funeral and
cemetery operations announced in January 2001. Enhanced cemetery and funeral
trust administration and management will allow the Company to increase operating
free cash flow by reducing processing times for trust claims and accelerate
trust distributions as well as the continuation of the Company's surety bond
program for additional financial assurance discussed in the Financial Assurances
section in Financial Condition, Liquidity and Capital Resources in this Form
10-K. The Company is currently in various stages of executing the above cash
flow initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow from $62,025 in 2000 to a run rate between $100,000 to $150,000 by the
end of 2001 and to a run rate between $200,000 to $250,000 by the end of 2002.
Long-Term Debt
The Company's total debt at December 31, 2000 was $3,291,297, which was
slightly below the Company's anticipated range of $3,300,000 to $3,600,000. The
Company's total debt balances are detailed below.
Peak debt at September 30, 1999................ $4,200,023
Debt at December 31, 1999...................... $4,060,016
Debt at December 31, 2000...................... $3,291,297
Target debt range at December 31, 2002......... $2,000,000-$2,500,000
The Company's debt reduction programs over the past fifteen months have
exceeded its expectations with its total debt being reduced by over $908,000 or
22% from the Company's peak debt level at September 30, 1999. The Company has
achieved this reduction of debt primarily through funds received from its total
operating free cash flow and the sale of certain assets and non-core businesses.
In 2000, the Company completed the sale of certain loans of its lending
subsidiary, the termination or assignment away of certain financial swap
agreements, the sale of its discontinued insurance operations and various other
asset sales. These transactions produced after tax cash proceeds of $489,369 in
2000 and, coupled with total operating free cash flow in 2000 were the primary
factors that allowed the Company to reduce its debt below its anticipated range
of $3,300,000 to $3,600,000 by the end of 2000.
The Company is continuing to sell certain non-strategic funeral and
cemetery operations in North America in 2001 that are not well aligned with the
Company's long-term strategy. The Company will also continue discussions with
various parties concerning the possibility of joint venturing primarily its
international operations. Alliances and joint ventures with strategic partners
could include groups that offer unique competitive advantages not previously
available to the Company, such as access to customer databases, marketing
services and prearrangement financing. Proceeds from any investments made by
strategic partners would be used by the Company to reduce its debt. With
substantial non-recurring receipt of funds expected in 2001, improvements in
recurring operating free cash flow described earlier, proceeds expected from
sales of
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certain non-strategic funeral and cemetery operations in North America and
proceeds from joint venture programs primarily with the Company's international
operations, the Company anticipates reducing its debt from the current level of
$3,291,297 to a range of $2,000,000 to $2,500,000 by the end of 2002.
Revenue Growth Initiatives
The Company has the largest network of funeral homes and cemeteries in the
world. The Company has unique opportunities to leverage this network by adding
new products and services, attracting new customers to its existing facilities
and to aggressively expand its current market share in its funeral and cemetery
markets. The Company plans to expand its market share and generate future
revenue growth through the execution of several initiatives without the outlay
of significant additional capital. Six of the Company's most important revenue
growth initiatives primarily being implemented in North America are listed
below.
- Creation of a seamless, national brand of funeral service locations under
the Dignity Memorial(TM) brand name.
- Implementation of Dignity Memorial(TM) funeral packages.
- Establishment of exclusive, national, branded affinity relationships with
employers, social, fraternal and charitable groups or institutions.
- Improvement of standards in customer service.
- Continued commitment to funeral and cemetery prearrangement.
- Expansion of cremation marketing, merchandising and services.
The development of the Dignity Memorial(TM) brand name is a unique
opportunity that the Company believes only it can pursue because of it size and
geographic diversity and creates the first national brand in the death care
industry for funeral service locations that will be recognized and portable on a
national basis. A national network with national portability of products and
services is important to the Company's current and prospective affinity
partners. The Dignity Memorial(TM) provider network will also be developed
through an affiliate program by offering non-SCI funeral service locations,
primarily in markets where the Company does not currently have coverage, the
opportunity to join the Dignity Memorial(TM) provider network and have access to
the Dignity Memorial(TM) branded products and services, prearranged funeral
funding services, merchandising expertise and Internet capabilities.
The Company is also in the process of implementing Dignity Memorial(TM)
branded funeral packages in North America which will be completed in 2001. The
Dignity Memorial(TM) funeral packages are designed to simplify customer decision
making and include new products and services which have traditionally not been
available through funeral service locations. Examples of these new products and
services include legal services, estate organizing and planning, grief
counseling and virtual family archiving services on the Internet. These new
products and services are designed to increase customer satisfaction while also
increasing funeral operating revenues and profitability.
The Company is continuing its efforts to execute agreements with affinity
partners on national, regional and local levels which provide exclusive, direct
access through mail or other agreed upon media to large groups of individuals
who meet the Company's ideal customer profile. The Company then tailors funeral
plans to suit the affinity partner's membership requirements. As an example, the
Company has begun implementation of specialized funeral plans through an
affinity relationship with the Veterans of Foreign Wars (VFW) and the VFW Ladies
Auxiliary in 2001, which includes VFW and branch of service logos, unique flag
and medal cases and specified services requested for VFW members.
Beginning in 1998 and completed in 2000, the Company implemented
comprehensive continuous customer surveys to provide valuable feedback from
consumers in order to enhance customer service and provide insight into consumer
preferences for additional products and services on a global basis. The Company
received responses from 48% of all families serviced in 2000 in North America
funeral service locations which indicated a high approval rating.
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The Company also remains committed to prearrangement programs with
consumers for funeral and cemetery products and services, which the Company
believes can increase future market share in its funeral service and cemetery
markets. At December 31, 2000, the Company had deferred preneed cemetery
contract revenues of $1,815,157 which will be recognized as revenues in future
periods. See note six to the consolidated financial statements in Item 8 of this
Form 10-K for further discussion of preneed cemetery sales activities. During
2000, the Company restructured its prearranged organization and compensation
plans to improve the cash flows from the Company's prearrangement activities. In
addition to funding approximately 75% of prearranged funeral contracts through
insurance sources creating general agency revenue and cash overrides, the
Company also introduced direct-to-consumer prearranged marketing in North
America in 2000 which opens a new marketing channel with consumers to expand the
scope of the Company's prearragement activities. The funds collected from
consumers for prearranged funeral contracts are generally placed in trust
accounts (pursuant to applicable law) or are used to pay premiums on life
insurance policies from third party insurers. At December 31, 2000, the Company
had deferred prearranged funeral contracts of $4,537,669. The recognition of
deferred prearranged funeral contract revenues is estimated to occur in the
following years as follows:
2001..................................................... $ 396,000
2002..................................................... 371,000
2003..................................................... 307,000
2004..................................................... 308,000
2005..................................................... 279,000
2006 through 2010........................................ 1,071,000
2011 and thereafter...................................... 1,805,669
----------
$4,537,669
==========
The Company also believes that there are significant opportunities
available to increase market share in the cremation segment of its markets
through more effective marketing of cremation products and services. While the
Company will continue to expand cremation memorialization products and services
at its traditional funeral service locations and cemeteries, the Company also
plans to expand the Company owned largest single provider of cremation services
in North America, National Cremation Service(R), from its existing base in ten
states into seven additional states by the end of 2002.
ACCOUNTING CHANGE
In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB No. 101)
which changes the Company's accounting policies regarding the manner in which
the Company records preneed sales activities. The implementation of SAB No. 101
had no effect on the consolidated cash flows of the Company. The accounting
change, which occurred as a result of the required implementation of SAB No.
101, has been treated as a change in accounting principle effective as of the
beginning of 2000. In general, the change requires the Company to recognize
preneed cemetery interment right revenue from constructed cemetery property when
at least 10% of the sales price is received in cash from the customer, defer all
preneed cemetery merchandise and service revenues and associated trust
investment earnings until the merchandise is delivered or the services are
performed, and to defer only obtaining costs that vary with and are primarily
related to the acquisition of new preneed cemetery and funeral business. For a
more detailed discussion of these changes, see note three to the consolidated
financial statements in Item 8 of this Form 10-K. The cumulative effect of these
changes resulted in an after tax charge of $909,315 or $3.34 per diluted share.
Generally, these changes will result in reduced cemetery revenues and
operating income and reduced funeral operating income in the near future. These
changes are due to the deferral of previously recognized preneed cemetery
merchandise, services and associated trust fund income until the merchandise is
delivered or the service is performed and recognizing as period costs certain
direct selling and marketing costs previously deferred associated with preneed
funeral activities.
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RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for
the years ended December 31, 2000, 1999 and 1998. As previously disclosed, the
Company implemented SAB No. 101 in 2000 which primarily changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. For purpose of the following discussion, 2000 financial
information is presented as reported with the implementation of SAB No. 101 at
the beginning of 2000, 1999 financial information is presented on a proforma
basis as if SAB No. 101 had been implemented during 1999 and an historical
basis, and 1998 financial information is presented as originally reported. All
comparisons in this results of operations section between 2000 and 1999 will be
discussed using proforma 1999 amounts. All comparisons in this results of
operations section between 1999 and 1998 will be discussed using historical 1999
amounts and information previously reported by the Company. The Company has
excluded the results of operations of its discontinued insurance operations from
the following discussions for years 2000, 1999 and 1998. During 2000, the
Company completed the sale of its discontinued insurance operations to third
parties. Results for the Company's continuing operations by geographic segment
are detailed in the following tables:
AS REPORTED
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,185,110 68.2% $659,295 96.1% $ 67,564 47.7% $1,911,969 74.5%
Cemetery.................. 540,410 31.1% 26,904 3.9% 73,953 52.3% 641,267 25.0%
Other Services............ 11,494 0.7% -- -- -- -- 11,494 0.5%
---------- ----- -------- ----- -------- ----- ---------- -----
$1,737,014 100.0% $686,199 100.0% $141,517 100.0% $2,564,730 100.0%
========== ===== ======== ===== ======== ===== ========== =====
Gross profit and margin
percentage:
Funeral................... $ 220,467 18.6% $ 38,509 5.8% $ 7,939 11.8% $ 266,915 14.0%
Cemetery.................. 41,558 7.7% 5,275 19.6% 11,599 15.7% 58,432 9.1%
Other Services............ 2,295 20.0% -- -- -- -- 2,295 20.0%
---------- ----- -------- ----- -------- ----- ---------- -----
$ 264,320 15.2% $ 43,784 6.4% $ 19,538 13.8% $ 327,642 12.8%
========== ===== ======== ===== ======== ===== ========== =====
PROFORMA
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,183,829 65.6% $769,014 96.5% $ 57,373 39.7% $2,010,216 73.2%
Cemetery.................. 598,852 33.2% 28,164 3.5% 87,124 60.3% 714,140 26.0%
Other Services............ 20,758 1.2% -- -- -- -- 20,758 0.8%
---------- ------ -------- ----- -------- ----- ---------- ------
$1,803,439 100.00% $797,178 100.0% $144,497 100.0% $2,745,114 100.0%
========== ====== ======== ===== ======== ===== ========== ======
Gross profit and margin
percentage:
Funeral................... $ 229,930 19.4% $ 55,737 7.2% $ 5,186 9.0% $ 290,853 14.5%
Cemetery.................. 40,472 6.8% 3,075 10.9% 23,842 27.4% 67,389 9.4%
Other Services............ (29,467) (141.9)% -- -- -- -- (29,467) (141.9)%
---------- ------ -------- ----- -------- ----- ---------- ------
$ 240,935 13.4% $ 58,812 7.4% $ 29,028 20.1% $ 328,775 12.0%
========== ====== ======== ===== ======== ===== ========== ======
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AS REPORTED
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,183,829 58.6% $780,206 95.8% $ 75,313 43.8% $2,039,348 67.8%
Cemetery.................. 816,695 40.4% 34,363 4.2% 96,794 56.2% 947,852 31.5%
Other Services............ 20,758 1.0% -- -- -- -- 20,758 0.7%
---------- ------ -------- ----- -------- ----- ---------- ------
$2,021,282 100.0% $814,569 100.0% $172,107 100.0% $3,007,958 100.0%
========== ====== ======== ===== ======== ===== ========== ======
Gross profit and margin
percentage:
Funeral................... $ 274,199 23.2% $ 79,270 10.2% $ 13,025 17.3% $ 366,494 18.0%
Cemetery.................. 205,040 25.1% 10,823 31.5% 31,856 32.9% 247,719 26.1%
Other Services............ (29,467) (141.9)% -- -- -- -- (29,467) (141.9)%
---------- ------ -------- ----- -------- ----- ---------- ------
$ 449,772 22.3% $ 90,093 11.1% $ 44,881 26.1% $ 584,746 19.4%
========== ====== ======== ===== ======== ===== ========== ======
AS REPORTED
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,007,462 56.1% $765,532 96.8% $ 56,142 51.5% $1,829,136 67.8%
Cemetery.................. 768,229 42.8% 25,564 3.2% 52,808 48.5% 846,601 31.4%
Other Services............ 20,580 1.1% -- -- -- -- 20,580 0.8%
---------- ----- -------- ----- -------- ----- ---------- -----
$1,796,271 100.0% $791,096 100.0% $108,950 100.0% $2,696,317 100.0%
========== ===== ======== ===== ======== ===== ========== =====
Gross profit and margin
percentage:
Funeral................... $ 287,012 28.5% $ 88,541 11.6% $ 9,054 16.1% $ 384,607 21.0%
Cemetery.................. 282,754 36.8% 7,936 31.0% 15,471 29.3% 306,161 36.2%
Other Services............ 9,441 45.9% -- -- -- -- 9,441 45.9%
---------- ----- -------- ----- -------- ----- ---------- -----
$ 579,207 32.2% $ 96,477 12.2% $ 24,525 22.5% $ 700,209 26.0%
========== ===== ======== ===== ======== ===== ========== =====
For the year ended December 31, 2000, the Company reported total revenues
from continuing operations of $2,564,730, representing a 6.6% decrease compared
to proforma total revenues for 1999 of $2,745,114. Gross profit from continuing
operations was relatively flat compared to the proforma results of 1999, while
the gross margin percentage increased slightly in 2000 to 12.8% compared to
12.0% from proforma 1999 results.
Funeral
Funeral revenues decreased from $2,010,216 in 1999 to $1,911,969 in 2000.
This decrease in funeral revenues was primarily attributable to a foreign
currency translation effect of approximately $100,000 negatively affecting
European funeral revenues in 2000 compared to 1999. The Company performed 6.0%
less funeral services in its European funeral service locations in 2000 compared
to 1999 as a result of a reduction in the number of deaths in Europe and from
losses in market share in the Company's French funeral service locations
primarily as a result of increased and new competition from the deregulation of
the funeral industry in France. For further information on the deregulation of
the funeral industry in France, see the section Regulation in Item 1 of this
Form 10-K. The Company reorganized its European management team in late 2000 to
try to stabilize its market share in France. The average revenue per funeral
service increased 0.8% in 2000 compared to 1999 in European funeral service
locations.
Funeral revenues in North America increased $1,281 in 2000 compared to
1999. North America funeral service locations performed 0.8% less funeral
services in 2000 compared to 1999 while the average revenue per funeral service
increased by 1.0% during 2000 from 1999 levels. In the fourth quarter of 2000,
the average revenue per funeral service in North America funeral service
locations increased 2.6% compared to the same
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period of 1999, an increase attributable to the Company's revenue growth
initiatives, such as the introduction of Dignity Memorial(TM) funeral packages
discussed earlier taking effect in the latter half of 2000.
Funeral gross profits decreased $23,938 in 2000 compared to 1999. While
funeral gross profits in North America decreased slightly in 2000 compared to
1999 as a result of less funeral services performed and inflationary cost
increases, most of the decrease in gross profits was attributable to funeral
gross profits decreasing $17,228 in European funeral service locations. The
primary reason for this decrease in funeral gross profits was a reduction in the
number of deaths in 2000 in Europe compared to 1999 as well as losses in market
share in French funeral service locations.
Funeral revenues increased by $210,212 in 1999 compared to 1998 primarily
as a result of acquisitions. Funeral revenues in North America funeral service
locations increased in 1999 compared to 1998 primarily as a result of the
Company's acquisition in January 1999 of Equity Corporation International (ECI),
formerly the fourth largest company in the death care industry. The Company also
acquired funeral service locations in Spain, Norway and the Netherlands in 1999
resulting in increased funeral revenues in European funeral service locations in
1999 compared to 1998. Funeral gross profits decreased by $18,113 in 1999
compared to 1998 primarily due to higher costs at acquired locations,
specifically related to the Company's merger with ECI in January 1999.
Typically, acquisitions will temporarily exhibit lower gross profit margins
until these locations have been fully assimilated into the Company's clusters.
Further, the gross margin percentage at ECI locations had been historically
lower than the Company's gross margin percentages and this has negatively
affected the total gross margin percentage in North America. The decrease in
European gross profit and margin percentage in 1999 was primarily the result of
less funeral services performed causing reduced profit due to the Company's
fixed cost structure, coupled with delays in labor negotiations in France
related to cost rationalization programs.
Cemetery
Cemetery revenues decreased from $714,140 in 1999 to $641,267 in 2000. This
decrease in cemetery revenues was primarily attributable to decreases in
revenues in North America cemetery operations. North America cemetery revenues
decreased $58,442 in 2000 compared to 1999 as a result of significant changes to
cemetery employee compensation plans which began to be implemented in late 1999.
The Company changed the cemetery employee compensation plans to increase cash
flow in this business segment which had the impact of adversely affecting
cemetery revenues in 2000.
Cemetery gross profits decreased from $67,389 in 1999 to $58,432 in 2000.
This decrease in cemetery gross profits was primarily attributable to higher
cancellation costs in cemetery operations in South America included in the
Company's other foreign cemetery segment. Cemetery gross profits in North
America increased by $1,086 in 2000 compared to 1999 as a result of the above
mentioned changes to cemetery employee compensation plans and other cost
measures in North America cemetery operations.
Cemetery revenues increased by $101,251 in 1999 compared to 1998 primarily
as a result of acquisitions. The increase of $48,466 in 1999 North America
cemetery revenues compared to 1998 was primarily the result of an increase in
revenues as a result of the Company's January 1999 merger with ECI, partially
offset by the decrease of net cemetery trust earnings and a reduction of
operating earnings related to the sale of excess undeveloped cemetery property.
The increases in revenue of $8,799 from European operations in 1999 compared to
1998 were the result of acquisitions in the United Kingdom and Belgium in 1999
and the $43,986 increase in 1999 revenues compared to 1998 from other foreign
operations was the result of acquisitions in Chile, Argentina and Uruguay.
Cemetery gross profits decreased by $58,442 in 1999 compared to 1998
primarily as a result of increased costs from North America cemetery operations.
These increased costs were primarily the result of increases in property costs
and commission expenses, prior to the implementation of the above mentioned
changes to cemetery employee compensation plans in late 1999, related to
heritage cemetery property sales initiatives coupled with reductions in net
cemetery trust earnings and operating earnings related to the sale of excess
undeveloped cemetery property. The 1999 increase of $16,385 in other foreign
gross profits was the result of
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increases in the gross margin percentage from the Company's acquired South
American operations. The gross margin percentage in Argentina improved to 24.0%
in 1999 from 19.4% in 1998.
Other Services
The Company's other services operations consist of the Company's lending
subsidiary, which previously provided capital financing for independent funeral
and cemetery operations. In 1999, the Company decided to indefinitely suspend
the operations of its lending subsidiary. On August 31, 2000, the Company sold a
substantial portion of the loan portfolio of its lending subsidiary. The
operations of the lending subsidiary through August 31, 2000 have been included
herein as other services. Subsequent to this sale date, all activities on
remaining loans have been recorded in other income in the Company's consolidated
statement of operations.
The Company acquired by deed in lieu of foreclosure the collateral
underlying certain loans in its portfolio. The Company recorded a provision for
loan losses of $38,608 in 1999 associated with the lending subsidiary's loans
that were not being held for sale. See note seventeen to the consolidated
financial statements in Item 8 of this Form 10-K for further discussion of these
non-recurring charges related to the Company's lending subsidiary.
Other Income and Expenses
The Company's general and administrative expenses decreased from $82,585 in
1999 to $79,932 in 2000. General and administrative expenses were higher in 1999
than 2000 primarily due to higher information technology costs in 1999 related
to year 2000 (Y2K) preparation, implementation of EVA(R) based incentive
compensation models and the Company's North America proprietary point of sale
systems that were placed into production in 1999. General and administrative
expenses were $66,839 in 1998 which were lower than 1999 levels due to the high
expenses in 1999 noted above.
Interest expense was $281,548 in 2000 compared to $238,185 in 1999 and
$177,053 in 1998. The increase in interest expense in 2000 over 1999 and 1998
levels reflects the high financing costs associated with the use of the
Company's credit facilities in 2000 rather than its commercial paper programs in
1999 and 1998, as well as overall interest rate increases. The Company has made
substantial progress in 2000 in reducing its debt and expects interest expense
to be in the range of $230,000 and $250,000 in 2001.
Other income was $34,636 in 2000 compared to $31,759 for 1999 and $43,649
in 1998. Other income primarily contains income from various notes receivable of
the Company's lending subsidiary subsequent to August 31, 2000 (see earlier
discussion of other services operations), equity from earnings of investments in
certain companies, gains and losses from the sales of businesses that are
disposed of for strategic or government mandated purposes and cash overrides
from prearranged funeral sales with the Company's formerly owned insurance
operations in North America and France (see discontinued operations discussions
in Item 1 of this Form 10-K).
Cremations
In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is more stable. The west coast of the United States and the
states of Arizona and Florida have the highest concentration of cremation
consumers in North America. While cremations performed by the Company in North
America typically have higher gross profit margins than traditional funeral
services, cremations usually result in lower revenue and gross profit dollars to
the Company than traditional funeral services. In North America during 2000,
36.3% of all funeral services performed by the Company were cremation cases,
compared to 33.9% performed in 1999. The Company in 2000 continued to expand its
cremation memorialization products and services in several North America markets
which has resulted in higher average sales for cremation cases compared to
historical levels. The Company also continues to expand its nationally branded
cremation service locations called National Cremation Service(R) (NCS). NCS
currently operates in ten high cremation states and has plans to continue to
expand into seven additional
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high cremation states. The Company believes that the NCS consumer would not have
chosen the Company's traditional funeral service locations as an alternative to
NCS, and therefore is considered an incremental customer to the Company.
Restructuring and Non-Recurring Charges
In 2000, the Company recorded several non-recurring items related to
extraordinary gains on early extinguishments of debt, net losses associated with
the sales of the Company's discontinued insurance operations, estimated losses
from the planned divestitures of certain North America funeral homes and
cemeteries, the reduction of the carrying value of an equity investment in North
America, a loss on the sale of a minority interest in the stock of the Company's
United Kingdom operations and certain changes to estimates in the Company's
restructuring and non-recurring charges recorded in 1999. The above
non-recurring items resulted in the Company incurring charges of $453,067 on a
pretax basis or $1.64 per diluted share in 2000. In 1999, the Company recorded
non-recurring items related to cost rationalization programs, a provision for
loan losses related to the Company's lending subsidiary and extraordinary gains
on early extinguishments of debt. These items resulted in the Company recording
net non-recurring charges of $398,080 on a pretax basis or $.98 per diluted
share in 1999. For further information detailing these non-recurring items
recorded in 2000 and 1999, see note seventeen to the consolidated financial
statements in Item 8 of this Form 10-K.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses which resulted in creating the world's
largest network of funeral service locations and cemeteries. Funding required
for the Company's acquisition program had historically been generated through
public and private offerings of debt and the issuance of equity securities
supplemented by the Company's revolving credit facilities and commercial paper.
In early 1999, the Company announced plans to significantly reduce the level of
its acquisition activity and pursue other means to create meaningful growth from
its existing operations. As a result, the Company's strategic plan in 2000 was
focused on reducing overhead costs, increasing cash flow and reducing its debt.
The Company executed several cash flow initiatives in 2000 related to ongoing
operations of the Company that were designed to increase the Company's operating
free cash flow. The Company also executed initiatives in 2000 resulting in cash
flows from the sale of certain assets and non-core businesses. The Company's
initiatives related to ongoing operations of the Company included the reduction
of capital expenditures to maintenance levels, the efficient retrieval of funds
due to the Company from certain funeral and cemetery trusts, the realignment of
preneed cemetery and prearranged funeral sales structures to become more cash
flow positive and the suspension of the Company's quarterly cash dividend and
acquisition program. During 2000, the Company also completed the sale of certain
loans of its lending subsidiary, terminated or assigned away certain financial
swap agreements, sold its discontinued insurance operations and sold various
other assets.
The reduction of capital expenditures to maintenance levels, suspension of
the Company's quarterly cash dividend and the implementation of other cash flow
initiatives and sales of assets and non-core businesses significantly improved
the Company's operating free cash flow and created substantial cash proceeds in
2000 which were used by the Company to reduce its debt. The Company defines
operating free cash flow as adjusted cash flow from operating activities, less
capital expenditures and dividends paid. Adjusted cash flow from operating
activities includes cash flow provided by operating activities as reflected in
the consolidated statement of cash flow adjusted to exclude (i) cash flow
provided by operating activities of the Company's discontinued insurance
operations, (ii) cash payments associated with the Company's non-recurring and
restructuring charges in 1999 and 2000 and (iii) other proceeds or payments
(included in cash flow provided by operating activities) which are of a
non-recurring operational nature. Generally, operating free cash flow is cash
funds that can be used to reduce the Company's debt.
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The following details the Company's execution during 2000 towards its goals
of increasing its operating free cash flow, as well as certain goals for 2001
and 2002.
TWELVE MONTHS YEAR 2000
ENDED BENCHMARKS 2001 2002
DECEMBER 31, 2000 ACHIEVED RUN RATE TARGETS RUN RATE TARGETS
----------------- ----------------- ----------------- -----------------
Operating free cash flow:
Consolidated cash flow provided by
operating activities.................. $ 368,240(1)
Amount pertaining to discontinued
insurance operations.................. (144,640)
Payments on restructuring charges....... 46,655
Effect of swap agreement terminations... 32,840
---------
Adjusted cash flow from operating
activities............................ 303,095
Capital expenditures.................... (83,370)
---------
TOTAL OPERATING FREE CASH FLOW............ $ 219,725 $100,000-$250,000 $200,000-$250,000 --
Less: Non-recurring receipts of funds... (157,700)
---------
RECURRING OPERATING FREE CASH FLOW........ $ 62,025 -- $100,000-$150,000 $200,000-$250,000
=========
Estimated after tax proceeds from sales of
assets and non-core businesses.......... $ 489,369 $200,000-$500,000 $200,000-$500,000 --
========= ================= ================= =================
TOTAL CASH FLOW AVAILABLE......... $ 709,094 $300,000-$750,000 $400,000-$750,000 --
========= ================= ================= =================
- ---------------
(1) The net effect of prearranged funeral production and maturities has been
reclassed from cash flows from investing activities to cash flows from
operating activities as discussed in note two to the consolidated financial
statements in Item 8 of this Form 10-K.
Included in the Company's total operating free cash flow in 2000 of
$219,725 are non-recurring receipts of funds totaling $157,700 relating to the
collection of receivables due to the Company from funeral and cemetery trust
funds. The Company continues to implement existing and additional initiatives in
2001 to increase its recurring operating free cash flow from 2000 levels. These
cash flow initiatives are categorized as (i) revenue growth initiatives, (ii)
working capital improvement, (iii) cost reduction initiatives, (iv) asset
redeployment, and (v) enhanced funeral and cemetery trust administration and
management. Revenue initiatives include such programs as the Company's Dignity
Memorial(TM) packaged funeral plans and the development of affinity
relationships. These initiatives are discussed in further detail in Revenue
Growth Initiatives included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Working capital improvements
include programs to accelerate customer collections and deliver pre-sold
merchandise to customers to satisfy trusting requirements. Cost reduction
initiatives include changes to the Company's employee benefit plans and other
overhead reductions primarily related to information technology costs. The
Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently, such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sales of its insurance operations and interest
savings as a result of proceeds received from divestitures completed in 2000 and
from proceeds to be received from the sale of certain North America funeral and
cemetery operations announced in January 2001. Enhanced cemetery and funeral
trust administration and management will allow the Company to increase operating
free cash flow by reducing processing times of trust claims and accelerate trust
distributions as well as the continuation of the Company's surety bond program
for additional financial assurance discussed in the Financial Assurances section
herein. The Company is currently in various stages of executing the above cash
flow initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow from $62,025 in 2000 to a run rate between $200,000 to $250,000 by the
end of 2002. The Company also expects recurring operating free cash flow to have
a run rate between $100,000 to $150,000 by the end of 2001 as a result of the
implementation of its current cash flow initiatives.
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The Company's total debt at December 31, 2000 was $3,291,297, which was
slightly below the Company's anticipated range of $3,300,000 to $3,600,000. The
Company's total debt balances are detailed below.
Peak debt at September 30, 1999............... $4,200,023
Debt at December 31, 1999..................... $4,060,016
Debt at December 31, 2000..................... $3,291,297
Target debt range at December 31, 2002........ $2,000,000 - $2,500,000
The Company's debt reduction programs over the past fifteen months have
exceeded its expectations with its total debt being reduced by over $908,000 or
22% from the Company's peak debt level at September 30, 1999. The Company has
achieved this reduction of debt primarily through funds received from its total
operating free cash flow and the sale of certain assets and non-core businesses,
both discussed earlier in this section. The Company is continuing to sell
certain funeral and cemetery operations in North America in 2001 that are not
well aligned with the Company's long-term strategy. The Company will also
continue discussions with various parties concerning the possibility of joint
venturing primarily its international operations. Alliances and joint ventures
with strategic partners could include groups that offer unique competitive
advantages not previously available to the Company, such as access to customer
databases, marketing services and prearrangement financing. Proceeds from any
investments made by strategic partners will be used by the Company to reduce its
debt. With substantial non-recurring receipt of funds expected in 2001,
improvements in recurring operating free cash flow described earlier, proceeds
expected from sales of certain funeral and cemetery operations in North America
and proceeds from joint venture programs with the Company's international
operations, the Company anticipates reducing its debt from the current level of
$3,291,297 to a range of $2,000,000 to $2,500,000 by the end of 2002.
At December 31, 2000, the Company had current maturities of long-term debt
of $176,782. The Company anticipates having funds available to eliminate these
current maturities in 2001 through recurring operating free cash flow, proceeds
from certain asset sales or joint venturing programs and other non-recurring
receipts of funds. Through March 15, 2001, the Company had already received
approximately $131,000 of non-recurring funds from certain income tax refunds
and from the collection of receivables from funeral and cemetery trust funds.
Of the Company's total long-term debt at December 31, 2000 of $3,114,515,
the largest component is related to the Company's primary credit agreements
maturing in June 2002. These credit agreements provide for borrowing up to
$988,287 as of December 31, 2000 and consist of two committed facilities -- a
2-year term loan and a 5-year, multi-currency revolving facility, both due in
June 2002. These credit agreements were amended effective November 2000.
Significant terms of the amendments include certain agreements made by the
Company to reduce commitment amounts on the credit facilities based upon net
cash proceeds generated from joint venture and asset sale transactions closed
after November 2000; changes to definitions and calculations of financial
covenants related to a maximum debt-to-capitalization ratio, a minimum interest
coverage ratio and a minimum net worth requirement; limits on the amount of
Company assets that could be joint ventured or sold; and certain restrictions on
future acquisition activity without lender approval. Under the terms of the
amended credit agreements, the covenants will continue to be calculated using
information without the implementation of SAB No. 101, until such time as the
Company negotiates revised covenant calculations under the credit agreements.
For further information on these credit facilities, see note eight to the
consolidated financial statements in Item 8 of this Form 10-K. As of March 26,
2001, the Company had $658,455 outstanding under these credit agreements which
provided for borrowings of up to $975,279 on this date. With non-recurring
receipts of funds expected in 2001 and 2002, improvements in recurring operating
free cash flow described earlier, proceeds expected from sales of certain
funeral and cemetery operations in North America and proceeds from joint venture
programs primarily with the Company's international operations, the Company
believes funds will be available to reduce these maturities due in 2002 allowing
for the refinancing of remaining balances outstanding, if any.
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EBITDA
The Company reported EBITDA before non-recurring items for the years ended
December 31, 2000 and 1999 of $532,453 and $586,273, respectively. EBITDA
included continuing and discontinued operations for both periods and is
calculated by adding depreciation and amortization expense and interest expense
to the Company's pretax earnings after excluding non-recurring items defined in
the section Restructuring and Non-Recurring Charges in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Financial Assurances
In support of the Company's operations, the Company has entered into
arrangements with certain insurance companies whereby such insurance companies
agree to issue surety bonds on behalf of the Company, as financial assurance
and/or as required by existing state and local regulations. The surety bonds are
used for various business purposes; however, the majority of the surety bonds
issued and outstanding have been issued to support the Company's prearranged
funeral and preneed cemetery activities. The underlying obligations that such
surety bonds insure are appropriately recorded on the Company's consolidated
balance sheet as Deferred prearranged funeral contract revenues and Deferred
preneed cemetery contract revenues (see notes five and six to the consolidated
financial statements in Item 8 of this Form 10-K for further details regarding
the Company's prearranged funeral and preneed cemetery activities). The total
surety bonds outstanding as of December 31, 2000 and 1999 were $215,350 and
$182,322, respectively.
Sources and Uses of Cash
Net cash provided by operating activities was $368,240 in 2000 compared to
$393,610 in 1999. Included in these totals is $144,640 and $141,650 of net cash
provided by discontinued operations for 2000 and 1999, respectively. From
continuing operations, net cash provided by operating activities was $223,600 in
2000 compared to $251,960 in 1999. The Company received non-recurring receipts
of funds of $157,700 and $82,200 in 2000 and 1999, respectively, relating to the
collection of receivables from certain funeral and cemetery trust funds which
are included in net cash provided by continuing operations. Excluding these non-
recurring receipts of funds, net cash provided by continuing operations
decreased by approximately $104,000 in 2000 compared to 1999 primarily as a
result of decreases in the gross profits of the Company's core funeral and
cemetery operations in 2000 compared to 1999, increases in cash interest paid as
well as from increases in other assets in 2000 related to federal income tax
refunds to be received in 2001.
Net cash provided by investing activities from continuing and discontinued
operations was $193,068 in 2000 compared to net cash used in investing
activities of $384,742 in 1999. Included in these totals are $122,966 and
$197,587 of net cash used in investing activities by discontinued operations in
2000 and 1999, respectively. The Company limited its capital expenditures to
maintenance levels in 2000 resulting in a reduction of cash used for capital
expenditures of $123,761 in 2000 compared to 1999. The Company also received in
2000 substantial proceeds from sales of assets and non-core businesses which are
included in net cash provided by investing activities in 2000.
Net cash used in financing activities was $564,463 in 2000 compared to
$266,756 in 1999. The Company used substantial proceeds from sales of assets and
non-core businesses and from operating free cash flow to make substantial
reductions to its debt in 2000 which is reflected in the Company's financing
activities.
OTHER MATTERS
Subsequent to December 31, 2000, the Company adopted Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities: An Amendment of FASB Statement 133," in accordance
with the extension provided for in SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." In accordance with these Standards, the Company will
recognize a charge to income, net of applicable taxes, of approximately $7,500
in the first quarter of 2001. These statements establish accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or
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liabilities in the statement of financial position and measurement of those
instruments at fair value. Changes in the fair value of derivatives will be
recorded either in earnings or in other comprehensive income, based on the type
of risk for which the instrument is determined to be an effective hedge. Any
change in fair value of an instrument that is not designated as a hedge, or any
portion of a change in fair value of a hedging instrument that is deemed
ineffective, will be immediately recognized in earnings.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be accompanied by words such
as "believe," "estimate," "project," "expect," "anticipate" or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however, many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results of the Company to differ materially
from those in forward-looking statements include, among others, the following:
1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g. marketable security
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly but not limited to, levels of
interest expense and negative currency translation effects.
2) Changes in credit relationships impacting the availability of
credit and the general availability of credit in the marketplace.
3) The Company's ability to successfully implement and complete its
strategic plan as defined in this Form 10-K, including the interest of
third parties to enter into and consummate alliances and joint ventures
with the Company.
4) The Company's ability to generate expected proceeds from the sale
of certain funeral and cemetery operations and to implement plans to
improve recurring operating free cash flow.
5) Changes in consumer demand and/or pricing for the Company's
products and services caused by several factors, such as changes in local
death rates, cremation rates, competitive pressures and local economic
conditions.
6) The Company's ability to successfully implement ongoing cost
reduction initiatives, as well as changes in domestic and international
economic, political and/or regulatory environments, which could negatively
effect the implementation of the Company's cost reduction initiatives.
7) The Company's ability to successfully implement certain strategic
revenue and marketing initiatives resulting in increased volume through its
existing facilities.
8) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies.
9) The Company's ability to successfully exploit its substantial
purchasing power with certain of the Company's vendors.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information presented below should be read in conjunction with notes
nine and ten to the consolidated financial statements in Item 8 of this Form
10-K.
The Company historically used derivatives primarily in the form of interest
rate swaps and cross-currency interest rate swaps in combination with local
currency borrowings in order to manage its mix of fixed and floating rate debt
and to hedge the Company's net investment in foreign assets. The derivative
instruments held by the Company were for hedging purposes and were neither
leveraged nor speculative in nature.
In 2000, the Company eliminated its participation in derivative
transactions by terminating or assigning away all foreign currency and interest
rate swaps as mentioned in note nine to the consolidated financial statements in
Item 8 of this Form 10-K, thereby removing the Company's hedges of foreign
exchange rate and interest rate exposure and the diversification of floating
rate exposure mentioned above.
At December 31, 2000, the Company's total debt consisted of approximately
76% of fixed interest rate debt at a weighted average rate of 6.81% and
approximately 24% of floating interest rate debt at a weighted average rate of
7.94%. At December 31, 1999, after giving consideration to the interest rate
swaps, the Company's total debt consisted of approximately 61% of fixed interest
rate debt at a weighted average rate of 6.36% and approximately 39% of floating
interest rate debt at a weighted average rate of 6.49%. Approximately 35% of the
Company's floating rate exposure, as of December 31, 2000, is based in eight
markets other than the United States (28% at December 31, 1999).
The Company does not have a significant investment in foreign operations
that are in highly inflationary economies. Approximately 24% of the Company's
net investment and 26% of its operating income are denominated in foreign
currencies at December 31, 2000.
Marketable Equity and Debt Securities -- Price Risk
In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise sales, the affiliated funeral and cemetery trust funds own
investments in equity securities and mutual funds which are sensitive to current
market prices. Cost and market values as of December 31, 2000 and 1999, are
presented in notes five and six to the consolidated financial statements in Item
8 of this Form 10-K.
Market-Rate Sensitive Instruments -- Interest Rate and Currency Risk
At December 31, 2000, the Company's debt instruments were subject to
interest rate and currency exchange rate risk. The Company performs sensitivity
analyses to assess the impact of these risks on earnings. This analysis reflects
the impact of a hypothetical 10% adverse change in market rates. In actuality,
market rate volatility is dependent on many factors that are impossible to
forecast. Therefore, the adverse changes described below could differ
substantially from the hypothetical 10% impact.
A sensitivity analysis of those instruments with variable interest rate
components was modeled to assess the impact that changing interest rates could
have on pretax earnings. The sensitivity analysis assumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pretax earnings, on an annual
basis, would be negatively impacted by approximately $6,301 on December 31,
2000, and $9,402 on December 31, 1999.
A similar model was used to assess the impact of changes in foreign
currencies on interest expense. At December 31, 2000, the Company's debt
exposure was primarily associated with the British pound, Canadian dollar and
Australian dollar. A 10% adverse change in the strength of the U.S. dollar
against these currencies would have negatively impacted the Company's interest
expense, on an annual basis, by approximately $1,998 on December 31, 2000, and
$11,451 on December 31, 1999.
25
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 27
Consolidated Statement of Operations for the three years
ended December 31, 2000................................... 28
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... 29
Consolidated Statement of Cash Flows for the three years
ended December 31, 2000................................... 30
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2000............................. 31
Notes to Consolidated Financial Statements.................. 32
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 64
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
26
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Service Corporation International
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Service Corporation International at December 31, 2000 and 1999, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. As
discussed in note three to the consolidated financial statements, the Company
changed its method of accounting for preneed sales activities.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2001
27
29
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................ $ 2,564,730 $ 3,007,958 $ 2,696,317
Costs and expenses...................................... (2,237,088) (2,423,212) (1,996,108)
----------- ----------- -----------
Gross profit............................................ 327,642 584,746 700,209
General and administrative expenses..................... (79,932) (82,585) (66,839)
Restructuring and non-recurring charges................. (461,072) (362,428) --
----------- ----------- -----------
Operating income (loss)................................. (213,362) 139,733 633,370
Interest expense........................................ (281,548) (238,185) (177,053)
Other income............................................ 34,636 31,759 43,649
Loss on sale of investment.............................. (56,704) -- --
----------- ----------- -----------
Income (loss) from continuing operations before income
taxes, extraordinary gains and cumulative effect of
accounting change..................................... (516,978) (66,693) 499,966
(Provision) benefit for income taxes.................... 91,455 15,469 (168,405)
----------- ----------- -----------
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting change..................................... (425,523) (51,224) 331,561
Income from discontinued operations (net of income taxes
of $6,543, $12,076 and $7,980 respectively)........... 13,347 16,927 10,581
Loss on disposals of discontinued operations (net of
income taxes of $73,839).............................. (43,733) -- --
Extraordinary gains on early extinguishments of debt
(net of income taxes of $12,630 and $1,071)........... 21,973 1,885 --
Cumulative effect of accounting change (net of income
taxes of $552,491).................................... (909,315) -- --
----------- ----------- -----------
Net income (loss).............................. $(1,343,251) $ (32,412) $ 342,142
=========== =========== ===========
Earnings per share:
Basic:
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting change................................... $ (1.56) $ (.19) $ 1.30
Income from discontinued operations................... .05 .06 .04
Loss from disposals of discontinued operations........ (.16) -- --
Extraordinary gains on early extinguishments of
debt................................................ .08 .01 --
Cumulative effect of accounting change................ (3.34) -- --
----------- ----------- -----------
Net income (loss).............................. $ (4.93) $ (.12) $ 1.34
=========== =========== ===========
Diluted:
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting change................................... $ (1.56) $ (.19) $ 1.27
Income from discontinued operations................... .05 .06 .04
Loss from disposals of discontinued operations........ (.16) -- --
Extraordinary gains on early extinguishments of
debt................................................ .08 .01 --
Cumulative effect of accounting change................ (3.34) -- --
----------- ----------- -----------
Net income (loss).............................. $ (4.93) $ (.12) $ 1.31
=========== =========== ===========
Basic weighted average number of shares................. 272,172 272,281 256,271
=========== =========== ===========
Diluted weighted average number of shares............... 272,544 273,792 262,520
=========== =========== ===========
(See notes to consolidated financial statements)
28
30
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------------
2000 1999
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 47,909 $ 57,814
Receivables, net of allowances............................ 449,989 585,269
Inventories............................................... 170,056 190,343
Net assets of discontinued operations..................... -- 208,851
Other..................................................... 239,345 101,220
----------- -----------
Total current assets.............................. 907,299 1,143,497
----------- -----------
Prearranged funeral contracts............................... 4,080,367 2,898,139
Long-term receivables....................................... 1,329,375 1,532,225
Cemetery property, at cost.................................. 2,026,484 2,182,410
Property, plant and equipment, at cost (net)................ 1,675,263 1,879,979
Deferred charges and other assets........................... 717,170 907,513
Names and reputations (net)................................. 2,162,511 2,434,467
----------- -----------
$12,898,469 $12,978,230
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 501,355 $ 576,751
Current maturities of long-term debt...................... 176,782 423,949
Income taxes.............................................. 6,143 40,080
----------- -----------
Total current liabilities......................... 684,280 1,040,780
----------- -----------
Long-term debt.............................................. 3,114,515 3,636,067
Deferred prearranged funeral contract revenues.............. 4,537,669 3,186,081
Deferred preneed cemetery contract revenues................. 1,815,157 --
Deferred income taxes....................................... 503,292 864,780
Other liabilities........................................... 267,735 755,249
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 272,507,010 and 272,064,618 issued and
outstanding (net of 2,502,190 and 2,792,503 treasury
shares at par)......................................... 272,507 272,064
Capital in excess of par value............................ 2,156,824 2,156,301
Retained earnings (deficit)............................... (216,353) 1,126,898
Accumulated other comprehensive loss...................... (237,157) (59,990)
----------- -----------
Total stockholders' equity........................ 1,975,821 3,495,273
----------- -----------
$12,898,469 $12,978,230
=========== ===========
(See notes to consolidated financial statements)
29
31
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
----------- --------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,343,251) $ (32,412) $ 342,142
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net income from discontinued operations, net of tax..... (13,347) (16,927) (10,581)
Extraordinary gains on early extinguishments of debt,
net of tax............................................ (21,973) (1,885) --
Loss on disposals of discontinued operations, net of
tax................................................... 43,733 -- --
Cumulative effect of accounting change, net of tax...... 909,315 -- --
Depreciation and amortization........................... 224,031 246,090 197,330
Provision (benefit) for deferred income taxes........... 45,039 (57,263) 50,517
Restructuring and non-recurring charges................. 461,072 362,428 --
Payments on restructuring charges....................... (46,655) (37,553) --
Net effect of interest rate component of swap
terminations.......................................... (32,840) -- --
Loss on sale of investment.............................. 56,704 -- --
Gains from dispositions (net)........................... (17,180) (19,752) (30,627)
Provision for loan impairment........................... -- 38,608 --
Change in assets and liabilities net of effects from
acquisitions:
Decrease (increase) in receivables.................... 191,137 (219,680) (224,525)
(Increase) decrease in other assets................... (265,504) 28,893 (81,896)
Decrease in other liabilities......................... (109,975) (6,621) (17,464)
Other................................................. 30,775 7,273 (7,710)
Net effect of prearranged funeral production and
maturities............................................ 112,519 (39,239) (35,522)
----------- --------- -----------
Net cash provided by continuing operations.................. 223,600 251,960 181,664
Net cash provided by discontinued operations................ 144,640 141,650 111,435
----------- --------- -----------
Net cash provided by operating activities................... 368,240 393,610 293,099
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (83,370) (207,131) (251,825)
Proceeds from sales of discontinued operations............ 278,025 -- --
Proceeds from sales of property and equipment............. 92,593 115,846 42,844
Acquisitions, net of cash acquired........................ (1,907) (102,647) (709,972)
Loans issued by lending subsidiary........................ (5,104) (76,110) (142,017)
Proceeds from sales of loans by lending subsidiary........ 84,803 -- --
Principal payments received on loans by lending
subsidiary.............................................. 21,649 97,569 70,178
Deposits of restricted cash............................... (68,753) -- --
Purchases of equity investments........................... -- (1,400) (6,968)
Other..................................................... (1,902) (13,282) 6,047
----------- --------- -----------
Net cash provided by (used in) continuing operations........ 316,034 (187,155) (991,713)
Net cash used in discontinued operations.................... (122,966) (197,587) (32,641)
----------- --------- -----------
Net cash provided by (used in) investing activities......... 193,068 (384,742) (1,024,354)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under revolving
credit agreements....................................... (395,096) 504,279 100,294
Payments of debt.......................................... (126,342) (259,004) (76,329)
Long-term debt issued..................................... -- -- 1,100,000
Early extinguishments of debt............................. (194,097) (365,936) --
Net effect of cross-currency component of swap
terminations............................................ 143,498 -- --
Repurchase of common stock................................ -- (45,750) --
Dividends paid............................................ -- (96,779) (88,360)
Bank overdrafts and other................................. 7,574 (3,566) 5,956
----------- --------- -----------
Net cash (used in) provided by financing activities......... (564,463) (266,756) 1,041,561
Effect of foreign currency.................................. (131) (12,101) 1,027
----------- --------- -----------
Net (decrease) increase in cash and cash equivalents........ (3,286) (269,989) 311,333
Adjust for change in cash and cash equivalents associated
with discontinued operations.............................. (6,619) 58,660 (89,067)
Cash and cash equivalents of continuing operations at
beginning of period....................................... 57,814 269,143 46,877
----------- --------- -----------
Cash and cash equivalents of continuing operations at end of
period.................................................... $ 47,909 $ 57,814 $ 269,143
=========== ========= ===========
(See notes to consolidated financial statements)
30
32
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED
CAPITAL IN RETAINED OTHER
COMMON EXCESS OF EARNINGS COMPREHENSIVE
STOCK PAR VALUE (DEFICIT) INCOME (LOSS) TOTAL
-------- ---------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1997........................ $252,924 $1,493,246 $ 983,353 $ (3,519) $ 2,726,004
Comprehensive income:
Net income........................................ 342,142 342,142
Other comprehensive income:
Foreign currency translation...................... 8,748 8,748
Unrealized gain on securities, net................ 10,149 10,149
-----------
Total other comprehensive income............ 18,897
-----------
Comprehensive income................................ 361,039
Common Stock issued:
Stock option exercises and stock grants........... 3,593 56,485 60,078
Acquisitions...................................... 2,499 94,625 97,124
Debenture conversions............................. 185 2,409 2,594
Dividends on common stock ($.36 per share).......... (92,737) (92,737)
-------- ---------- ----------- --------- -----------
Balance at December 31, 1998........................ 259,201 1,646,765 1,232,758 15,378 3,154,102
Comprehensive loss:
Net loss.......................................... (32,412) (32,412)
Other comprehensive loss:
Foreign currency translation...................... (39,036) (39,036)
Unrealized loss on securities, net................ (36,332) (36,332)
-----------
Total other comprehensive loss.............. (75,368)
-----------
Comprehensive loss.................................. (107,780)
Common Stock issued:
Stock option exercises and stock grants........... 170 1,382 1,552
Acquisitions...................................... 15,506 550,325 565,831
Debenture conversions............................. 48 718 766
Repurchase of common stock.......................... (2,861) (42,889) (45,750)
Dividends on common stock ($.27 per share).......... (73,448) (73,448)
-------- ---------- ----------- --------- -----------
Balance at December 31, 1999........................ 272,064 2,156,301 1,126,898 (59,990) 3,495,273
Comprehensive loss:
Net loss.......................................... (1,343,251) (1,343,251)
Other comprehensive loss:
Foreign currency translation...................... (202,709) (202,709)
Unrealized loss on securities, net................ (4,792) (4,792)
Minimum pension liability adjustment, net......... (12,724) (12,724)
Reclassification adjustment for realized loss on
securities...................................... 27,014 27,014
Reclassification adjustment for realized loss on
foreign currency translation.................... 16,044 16,044
-----------
Total other comprehensive loss.............. (177,167)
-----------
Comprehensive loss.................................. (1,520,418)
Common Stock issued:
Stock option exercises and stock grants........... 33 100 133
Acquisitions...................................... 61 186 247
Contribution to employee 401(k)................... 356 456 812
Repurchase of common stock.......................... (7) (219) (226)
-------- ---------- ----------- --------- -----------
Balance at December 31, 2000........................ $272,507 $2,156,824 $ (216,353) $(237,157) $ 1,975,821
======== ========== =========== ========= ===========
(See notes to consolidated financial statements)
31
33
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world
through its funeral service and cemetery operations. At December 31, 2000, the
Company operated 3,611 funeral service locations, 569 cemeteries and 200
crematoria located in 18 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces, lots and lawn
crypts) and sell cemetery related merchandise. Cemetery items are sold on an
atneed or preneed basis. Company personnel at cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries also operate crematoria. There are 193 combination locations that
contain a funeral service location within a Company owned cemetery.
NOTE TWO
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Service Corporation International and all majority-owned
subsidiaries (the Company). Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation with no effect on the
consolidated financial position, results of operations or cash flows.
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories and Cemetery Property: Funeral merchandise and cemetery burial
property and merchandise are stated at the lower of average cost or market.
Property, Plant and Equipment, net: Property, plant and equipment are
recorded at cost. Maintenance and repairs are charged to expense whereas
renewals and major replacements are capitalized. Costs of property sold or
retired and the related accumulated depreciation are removed from the
consolidated balance sheet; resulting gains and losses are included in the
consolidated statement of operations.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as purchases are
included in Names and reputations and generally amortized on a straight line
basis over 40 years which, in the opinion of management, is not necessarily the
maximum period benefited. Fair values determined at the date of acquisition are
determined by management or independent appraisals. Many of the Company's
acquired funeral service locations have been providing high quality service to
client families for many years. Such loyalty often forms the basic valuation of
the funeral
32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
business. Additionally, the death care industry has historically exhibited
stable cash flows. The Company monitors the recoverability of names and
reputations based on projections of future undiscounted cash flows of the
acquired businesses. Accumulated amortization of names and reputations from
continuing operations as of December 31, 2000 and 1999 was $311,826 and
$246,285, respectively.
Depreciation and Amortization: Depreciation of property, plant and
equipment is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property and plant are depreciated over
a period ranging from seven to fifty years, equipment is depreciated over a
period from five to twenty years and leasehold improvements are depreciated over
a range of five to fifty years. For the years ended December 31, 2000,
depreciation expense from continuing operations was $109,995, $130,121 and
$114,431, respectively.
For the years ended December 31, 2000, 1999 and 1998 amortization expense
of names and reputations from continuing operations was $65,541, $66,367 and
$44,566, respectively.
Prepaid management, consultative and non-competition agreements, primarily
with former owners and key employees of businesses acquired, are amortized on a
straight-line basis over the lives (generally from five to ten years) of the
respective contracts. Amortization expense associated with these agreements for
the years ended December 31, 2000, 1999 and 1998 was $21,527, $26,659 and
$25,403, respectively.
Net obtaining costs incurred pursuant to the sales of trust funded and
third party insurance funded prearranged funeral contracts are deferred and
amortized over 20 years, a period representing the estimated life of the
prearranged funeral. In connection with the change in accounting associated with
Staff Accounting Bulletin No. 101 (SAB No. 101) (see note three to the
consolidated financial statements), the Company wrote off certain previously
deferred net obtaining costs. Amortization associated with net obtaining costs
for the years ended December 31, 2000, 1999 and 1998 were $7,116, $21,904 and
$12,930, respectively.
Other miscellaneous amortization from continuing operations for the years
ended December 31, 2000, 1999 and 1998 was $19,852, $1,039 and $0, respectively.
Foreign Currency Translation: All assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at exchange rates in
effect as of the end of the reporting period. Revenue and expense items are
translated at the average exchange rates for the reporting period. The resulting
translation adjustments are included in stockholders' equity as a component of
accumulated other comprehensive income (loss) in the consolidated statement of
stockholders' equity.
With respect to transactions denominated in currencies other than the
functional currencies of the Company's operations, both realized and unrealized
currency gains and losses associated with these transactions are recorded
through the consolidated statement of operations.
Funeral Operations: Funeral revenue is recognized when the funeral service
is performed. The Company's trade receivables consist primarily of funeral
services already performed. An allowance for doubtful accounts has been provided
based on historical experience. The Company sells price guaranteed prearranged
funeral contracts through various programs providing for future funeral services
at prices prevailing when the agreements are signed. Revenues associated with
sales of prearranged funeral contracts (which include accumulated trust earnings
and increasing insurance benefits) are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements).
In 2000, the net effect of prearranged funeral production and maturities
has been reclassified from cash flows from investing activities to cash flows
from operating activities. While cash flows related to these price guaranteed
prearranged funeral contracts have characteristics of both cash flows from
operating and investing activities, the predominant characteristics are those of
cash flows from operating activities. For comparative purposes, the
reclassification was made to the 1999 and 1998 consolidated statement of cash
flows.
33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cemetery Operations: Sales of atneed cemetery interment rights,
merchandise and services are recognized when the service is performed or
merchandise delivered. Preneed cemetery interment right sales of constructed
cemetery burial property are deferred until a minimum percentage of the sales
price has been collected. Revenues related to the preneed sale of unconstructed
cemetery burial property will be deferred until such property is constructed and
a minimum percentage of the sales price has been collected. Further, the Company
defers certain direct obtaining costs associated with these sales which are
expensed as revenue is recognized (see notes three and six to the consolidated
financial statements). Prior to the change in accounting related to SAB No. 101,
all cemetery interment right sales, together with associated merchandise and
services, were recorded as income at the time contracts are signed.
Costs related to the sales of interment rights include property and other
costs related to cemetery development activities, and are charged to operations
using the specific identification method. Costs related to merchandise and
services are based on actual costs incurred or estimates of future costs
necessary, including provisions for inflation when required.
Allowances for customer cancellations are provided at the date of sale
based upon historical experience. Pursuant to state law, all or a portion of the
proceeds from cemetery merchandise or services sold on a preneed basis may be
required to be paid into trust funds. Merchandise and services funds trusted at
December 31, 2000 and 1999 were $942,896 and $822,829, respectively. The Company
defers realized investment earnings related to these merchandise and services
trusts until the associated merchandise is delivered or services are performed.
A portion of the proceeds from the sale of cemetery property is required by
state law to be paid into perpetual care trust funds. Earnings from these trusts
are recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs, which are expensed as incurred. Perpetual care funds trusted
at December 31, 2000 and 1999 were $516,885 and $519,538, respectively. The
principal of such perpetual care trust funds generally cannot be withdrawn by
the Company and therefore is not included in the consolidated balance sheet. See
note six to the consolidated financial statements regarding preneed cemetery
activity.
Derivatives: Amounts to be paid or received under interest rate swaps,
including the interest rate provisions of the cross-currency swaps, are recorded
on the accrual basis over the life of the swap agreements as an adjustment to
interest expense. The related net amounts payable to, or receivable from, the
counterparties are included in accrued liabilities or current receivables,
respectively. Gains and losses resulting from currency movements on the
cross-currency swaps that hedge the Company's net foreign investments are
reflected in other comprehensive income (loss) in the consolidated statement of
stockholders' equity, with the related net amounts due to, or from, the
counterparties included in other liabilities, or other assets, respectively. Net
deferred gains and losses on early termination of interest rate swaps are
amortized into interest expense over the remaining lives of the original
agreements.
Recent Accounting Pronouncements: In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company
will adopt SFAS No. 133, as well as SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133," effective January 1, 2001. In accordance with these
Standards, the Company will recognize a charge to income, net of applicable
taxes, of approximately $7,500. This amount will be classified as a cumulative
effect of a change in accounting principle. This initial charge primarily
relates to the recognition of net deferred charges from interest rate gains and
losses realized in the termination or assignment away of swap agreements. These
charges are currently being amortized into interest expense over the terms of
the swap agreements, whereas the new standards require recognition as the
derivative gains and losses are incurred.
34
36
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THREE
ACCOUNTING CHANGE
In 2000, the Company implemented Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB No. 101) which changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. The implementation of SAB No. 101 had no effect on the
consolidated cash flows of the Company. As a result of the required change, the
Company's preneed sales activities are affected as follows:
- Preneed sales of cemetery interment rights (cemetery burial
property) -- revenue and all costs associated with the sales of preneed
cemetery interment rights are recognized in accordance with the retail
land sales provisions of Statement of Financial Accounting Standards No.
66 "Accounting for the Sales of Real Estate" (FAS No. 66). Under FAS No.
66, recognition of revenue and associated costs from constructed cemetery
property must be deferred until a minimum percentage of the sales price
has been collected. Revenues related to the preneed sale of unconstructed
cemetery property will be deferred until such property is constructed and
meets the criteria of FAS No. 66 described above. Previously, the preneed
interment rights revenue and associated costs were recognized at the time
the contract was signed with the customer.
- Preneed sales of cemetery merchandise (primarily markers and
vaults) -- revenue and all costs associated with the sales of preneed
cemetery merchandise are deferred until the merchandise is delivered.
Previously, the preneed cemetery merchandise revenue and associated costs
were recognized at the time the contract was signed with the customer.
- Preneed sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) -- revenue and all
costs associated with the sales of preneed cemetery services are deferred
until the services are performed. Previously, the revenue and associated
costs were recognized at the time the contract was signed with the
customer.
- Prearranged funeral and preneed cemetery customer obtaining
costs -- costs incurred related to obtaining new preneed cemetery and
prearranged funeral business are accounted for under the provisions of
Statement of Financial Accounting Standards No. 60 "Accounting and
Reporting by Insurance Enterprises" (FAS No. 60). Under FAS No. 60,
obtaining costs, which include only costs that vary with and are
primarily related to the acquisition of new preneed cemetery and
prearranged funeral business, are deferred. Previously, with respect to
the prearranged funeral business, deferred obtaining costs included
variable and fixed direct obtaining costs as well as direct marketing
costs. With respect to the preneed cemetery business, obtaining costs
were previously expensed as incurred.
- Cemetery merchandise and services trust investment earnings -- investment
earnings generated by assets included in merchandise and services trusts
are deferred until the associated merchandise is delivered or services
performed. Previously, the trust earnings were recognized as earned in
the trust.
35
37
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The change in the Company's accounting policies resulting from
implementation of SAB No. 101 has been treated as a change in accounting
principle effective as of January 1, 2000. The cumulative effect of the
accounting change through December 31, 1999 resulted in a charge to net income
of $909,315 (net of a $552,491 tax benefit), or $3.34 per diluted share recorded
on January 1, 2000. The following table shows the unaudited proforma effects of
retroactive application using the newly adopted accounting policies compared to
historical results for the years ended December 31, 1999 and 1998.
1999 1998
----------------------- -----------------------
PROFORMA HISTORICAL PROFORMA HISTORICAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues from continuing
operations......................... $2,745,114 $3,007,958 $2,354,822 $2,696,317
Income (loss) from continuing
operations before extraordinary
gains.............................. $ (210,668) $ (51,224) $ 147,854 $ 331,561
Net income (loss).................... (191,856) (32,412) 158,435 342,142
Basic earnings per share:
Income (loss) from continuing
operations before extraordinary
gains........................... $ (.77) $ (.19) $ .58 $ 1.30
Net income (loss).................. (.70) (.12) .62 1.34
Diluted earnings per share:
Income (loss) from continuing
operations before extraordinary
gains........................... $ (.77) $ (.19) $ .57 $ 1.27
Net income......................... (.70) (.12) .61 1.31
NOTE FOUR
DISCONTINUED OPERATIONS
In the third quarter of 2000, the Company completed the sales of its wholly
owned insurance operations, Auxia and American Memorial Life Insurance Company
(AMLIC). The financial statements have been reclassified to reflect these
operations as discontinued. The operating results for Auxia have been included
through August 31, 2000 and the operating results for AMLIC have been included
through September 30, 2000, the dates of disposition of the respective
companies. The net assets of these discontinued operations prior to the dates of
disposition were segregated on the balance sheet and the components have been
detailed below.
Summary operating results of discontinued operations:
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Revenues.......................................... $ 295,062 $ 313,855 $ 178,773
Cost and expenses................................. (275,172) (284,852) (160,212)
--------- --------- ---------
Income from discontinued operations before income
taxes........................................... 19,890 29,003 18,561
Provision for income taxes........................ (6,543) (12,076) (7,980)
--------- --------- ---------
Income from discontinued operations............... $ 13,347 $ 16,927 $ 10,581
========= ========= =========
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of discontinued operations:
DECEMBER 31,
1999
------------
Assets:
Cash and cash equivalents................................. $ 30,407
Receivables, net of allowances............................ 19,858
Other current assets...................................... 11,240
Investments............................................... 1,318,635
Long-term receivables..................................... 30,193
Property, plant and equipment, at cost (net).............. 1,546
Deferred charges and other assets......................... 379,454
Names and reputations (net)............................... 40,889
----------
Total assets...................................... $1,832,222
==========
Liabilities:
Accounts payable and accrued liabilities.................. $ 13,096
Income taxes payable...................................... 3,989
Reserves and annuity benefits............................. 1,313,328
Deferred income taxes..................................... 8,243
Other liabilities......................................... 284,715
----------
Total liabilities................................. $1,623,371
----------
Net assets of discontinued operations....................... $ 208,851
==========
NOTE FIVE
PREARRANGED FUNERAL ACTIVITIES
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreements are signed. Payments under these contracts are generally placed
in trust accounts (pursuant to applicable law) or are used to pay premiums on
life insurance or annuity contracts.
The balance in Prearranged funeral contracts represents amounts due from
trust funds, customer receivables or third party insurance companies related to
unperformed, price guaranteed prearranged funeral contracts. A corresponding
credit is recorded to Deferred prearranged funeral contract revenues.
Previously, this amount excluded prearranged funeral contracts funded through
the Company's discontinued insurance operations. However, upon disposal of these
operations in the third quarter of 2000, the amounts associated with those
contracts to be funded by the Company's discontinued insurance operations were
recorded consistent with contracts funded by other third party insurance
companies.
Funeral revenue is recognized on prearranged funeral contracts at the time
the funeral service is performed. Trust earnings and increasing insurance
benefits are accrued and deferred until the services are performed, at which
times these funds are also recognized in funeral revenues. Such amounts are
intended to cover future increases in the cost of providing a price guaranteed
funeral service. Net obtaining costs incurred pursuant to the sales of trust
funded and third party insurance funded prearrangements are included in Deferred
charges and other assets. These obtaining costs, which include sales commissions
and certain other direct costs that vary with and are primarily related to the
acquisition of new prearranged funeral business, are deferred and amortized over
20 years, a period representing the estimated life of the prearranged funeral
contracts. The aggregate net costs deferred as of December 31, 2000 and 1999
were $137,412 and $345,383, respectively (see note three to the consolidated
financial statements).
37
39
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prearranged Funeral Contracts
As previously mentioned, the balance in prearranged funeral contracts
represents amounts due from trust funds, customer receivables or third party
insurance companies related to unperformed, price guaranteed prearranged funeral
contracts. The components of prearranged funeral contracts in the consolidated
balance sheet, as well as the total value of unperformed prearranged funeral
contracts, at December 31 is as follows:
2000 1999
---------- ----------
Trusts:
Trust assets.............................................. $1,355,545 $1,405,273
Receivables from customers................................ 249,763 290,997
Allowance for cancellation................................ (143,408) (148,523)
---------- ----------
Net trust related assets.......................... 1,461,900 1,547,747
Third Party Insurance:
Receivables from third party insurance companies.......... 2,825,991 1,463,029
Allowance for cancellation................................ (207,524) (112,637)
---------- ----------
Net third party insurance related assets.......... 2,618,467 1,350,392
---------- ----------
Prearranged funeral contracts............................... 4,080,367 2,898,139
Discontinued insurance operations:
Receivables from discontinued insurance companies......... -- 1,164,331
Allowance for cancellation................................ -- (62,960)
---------- ----------
Net discontinued insurance related assets......... -- 1,101,371
---------- ----------
Total value of prearranged funeral contracts................ $4,080,367 $3,999,510
========== ==========
The allowance for cancellation is based on historical experience and is
equivalent to approximately 8.6% of the total balance at December 31, 2000 and
9.0% of prearranged funeral contracts at December 31, 1999. Accumulated earnings
from trust funds and increasing insurance benefits of third party insurance
companies have been included to the extent that they have been accrued through
December 31, 2000 and 1999, respectively. The cumulative trust funded total has
been reduced by allowable cash withdrawals for trust earnings and amounts
retained by the Company pursuant to various state laws.
The activity in prearranged funeral contracts for the years ended December
31 is as follows:
2000 1999
---------- ----------
Beginning balance........................................... $2,898,139 $2,588,806
Net sales................................................. 238,823 216,754
Acquisitions (dispositions)............................... (87,747) 267,754
Realized earnings and increasing insurance benefits for
third party insurance companies........................ 141,823 113,902
Maturities................................................ (336,495) (199,693)
Change in cancellation reserve............................ 2,294 (46,382)
Reclassification of discontinued insurance operations..... 1,223,157 --
Cumulative effect of accounting change.................... 59,326 --
Distributed earnings, effect of foreign currency and
other.................................................. (58,953) (43,002)
---------- ----------
Ending balance.............................................. $4,080,367 $2,898,139
========== ==========
The cost and market value of the assets held in the trust funds underlying
the Company's prearranged funeral contracts at December 31 are detailed below.
In addition to these assets held in trust funds, the
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has net receivables due from third party insurance companies of
$2,618,467 and $1,350,392 at December 31, 2000 and 1999, respectively.
2000 1999
----------------------- -----------------------
COST MARKET COST MARKET
---------- ---------- ---------- ----------
Cash and cash equivalents............ $ 146,258 $ 147,412 $ 234,614 $ 231,299
Fixed Income Securities:
U.S. Treasury...................... 81,711 81,785 117,827 108,898
Foreign government................. 157,704 165,977 137,983 141,778
Corporate.......................... 29,371 29,158 14,686 15,363
Mortgage-backed.................... 123,478 121,773 125,186 117,308
Asset-backed....................... 83,234 83,424 10,277 10,178
Municipal.......................... 3,606 3,662 9,724 9,498
Other.............................. 6,926 6,928 64 51
Equity securities:
Preferred stock.................... 185 153 -- --
Common stock....................... 453,890 470,576 452,767 564,758
Mutual funds:
Equity............................. 108,204 102,214 138,615 148,789
Fixed income....................... 75,398 76,440 97,862 93,837
Private equity and other............. 85,580 101,623 65,668 68,322
---------- ---------- ---------- ----------
Prearranged funeral trust assets..... $1,355,545 $1,391,125 $1,405,273 $1,510,079
========== ========== ========== ==========
Deferred Prearranged Funeral Contract Revenues
Deferred prearranged funeral contract revenues represents the original
contract price, trust earnings and increasing insurance benefits on unperformed
funeral contracts generally funded by trust or third party insurance companies.
The total amounts associated with unperformed prearranged funeral contracts
consists of two components: (i) contracts funded by trust or third party
insurance companies and (ii) contracts funded by the Company's discontinued
insurance operations. Upon disposal of the Company's discontinued insurance
operations, the Company recorded the amounts associated with unperformed funeral
contracts to be funded by these discontinued operations consistent with
contracts funded by other third party insurance companies.
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes for the years ended December 31 the activity
in deferred prearranged funeral contract revenues as well as reflecting the
total value of unperformed prearranged funeral contracts.
2000 1999
---------- ----------
Beginning balance -- Deferred prearranged funeral contract
revenues.................................................. $3,186,081 $2,819,794
Net sales................................................. 246,164 213,526
Acquisitions/dispositions................................. (83,513) 272,295
Realized earnings and increasing insurance benefits from
third party insurance companies........................ 143,710 113,705
Maturities................................................ (270,097) (227,871)
Change in cancellation reserve............................ 2,293 (46,381)
Reclassification of discontinued insurance operations..... 1,223,157 --
Cumulative effect of accounting change.................... 94,975 --
Effect of foreign currency and other...................... (5,101) 41,013
---------- ----------
Ending balance -- Deferred prearranged funeral contract
revenues.................................................. 4,537,669 3,186,081
Unperformed contracts funded by discontinued insurance
operations................................................ -- 1,101,371
---------- ----------
Total value of unperformed prearranged funeral contracts.... $4,537,669 $4,287,452
========== ==========
NOTE SIX
PRENEED CEMETERY ACTIVITIES
Pursuant to the implementation of SAB No. 101 in 2000, the Company changed
it accounting policies regarding the manner in which the Company records preneed
sales activities. As discussed in detail in note three to the consolidated
financial statements, the Company is now deferring revenues associated with
certain preneed cemetery sales activities until cemetery burial property is
constructed and meets the criteria of FAS No. 66, merchandise is delivered or
services are performed. As of January 1, 2000, the Company had deferred preneed
contract cemetery revenue of $1,639,606, net of cancellation reserve of
$182,207. The following table summarizes the activity during 2000 in deferred
preneed cemetery contract revenues.
2000
----------
Balance as of January 1, 2000 from cumulative effect of
accounting change......................................... $1,639,606
Net sales................................................. 406,483
Acquisitions (dispositions) and other..................... 1,317
Realized earnings on merchandise and services trust
funds.................................................. 25,939
Maturities................................................ (240,118)
Change in cancellation reserve............................ (18,070)
----------
Balance as of December 31, 2000............................. $1,815,157
==========
40
42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Merchandise and Services Trusts
Amounts paid into cemetery merchandise and services trusts are included in
long-term receivables, at cost. The cost and market values associated with the
assets held in the cemetery merchandise and services trust funds underlying the
Company's long-term receivables at December 31 were as follows:
2000 1999
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Cash and cash equivalents.................. $ 77,376 $ 77,408 $160,246 $160,738
Fixed Income Securities:
U.S. Treasury............................ 131,095 135,304 105,413 98,430
Foreign government....................... 9,308 9,349 9,272 9,275
Corporate................................ 15,946 16,318 13,091 11,197
Mortgage-backed.......................... 147,782 149,658 145,758 140,760
Asset-backed............................. 85,947 89,427 560 545
Municipal................................ 109 114 114 111
Other.................................... 4,717 4,643 356 305
Equity securities:
Preferred stock.......................... 129 101 -- --
Common stock............................. 268,510 261,720 215,695 220,071
Mutual funds:
Equity................................... 105,330 94,827 99,165 100,463
Fixed income............................. 64,207 64,515 57,367 53,648
Private equity and other................... 32,440 31,169 15,792 16,518
-------- -------- -------- --------
Preneed cemetery merchandise and services
trust assets............................. $942,896 $934,553 $822,829 $812,061
======== ======== ======== ========
As a result of implementing SAB No. 101 (see note three to the consolidated
financial statements), all realized investment earnings for the year ended
December 31, 2000 related to these cemetery merchandise and services trust funds
are deferred until the associated merchandise is delivered or service is
performed. Prior to 2000, the realized investment earnings were recognized as
earned in the trusts. For the year ended December 31, 2000, realized investment
earnings related to these cemetery merchandise and service trust funds that were
deferred amounted to $25,939. The realized investment earnings recognized in the
consolidated statement of operations related to these cemetery merchandise and
services trust funds were $19,947, $39,930 and $69,466 for the years ended
December 31, 2000, 1999 and 1998, respectively.
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Perpetual Care Trusts
The cost and market values associated with the assets held in perpetual
care trust funds at December 31 were as follows:
2000 1999
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Cash and cash equivalents.................. $ 42,690 $ 43,074 $ 48,582 $ 50,478
Fixed Income Securities:
U.S. Treasury............................ 60,153 62,818 39,567 39,202
Foreign government....................... 17,387 19,542 19,269 18,493
Corporate................................ 56,992 58,469 39,096 39,520
Mortgage-backed.......................... 84,204 84,767 69,734 70,970
Asset-backed............................. 29,519 31,064 7,667 7,982
Municipal................................ 89 162 244 260
Other.................................... 1,804 3,169 113 47
Equity securities:
Preferred stock.......................... -- -- -- --
Common stock............................. 50,602 59,228 12,994 23,813
Mutual funds:
Equity................................... 50,909 47,675 103,454 83,403
Fixed income............................. 91,690 84,317 148,742 141,859
Private equity and other................... 30,846 31,989 30,076 31,631
-------- -------- -------- --------
Perpetual care trust assets................ $516,885 $526,274 $519,538 $507,658
======== ======== ======== ========
Realized investment earnings from these perpetual care trust funds are
recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs, which are expensed as incurred. The realized investment
earnings related to these perpetual care trust funds were $26,660, $25,950 and
$27,814 for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE SEVEN
INCOME TAXES
The provision or benefit for income taxes includes United States federal
income taxes, determined on a consolidated return basis, foreign, state and
local income taxes.
Income (loss) from continuing operations before income taxes, extraordinary
gains and cumulative effect of an accounting change for the years ended December
31 is as follows:
2000 1999 1998
--------- -------- --------
United States....................................... $(474,256) $(77,304) $411,578
Foreign............................................. (42,722) 10,611 88,388
--------- -------- --------
$(516,978) $(66,693) $499,966
========= ======== ========
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax provision (benefit) for the years ended December 31 consisted of
the following:
2000 1999 1998
--------- -------- --------
Current:
United States..................................... $(149,465) $ 23,155 $ 97,929
Foreign........................................... 12,436 13,141 10,881
State and local................................... 535 5,498 9,078
--------- -------- --------
(136,494) 41,794 117,888
--------- -------- --------
Deferred:
United States..................................... 47,923 (22,460) 48,261
Foreign........................................... (13,717) (30,928) (5,871)
State and local................................... 10,833 (3,875) 8,127
--------- -------- --------
45,039 (57,263) 50,517
--------- -------- --------
Total provision (benefit)................. $ (91,455) $(15,469) $168,405
========= ======== ========
The Company made income tax payments on continuing operations of
approximately $56,007, $24,500 and $126,000, excluding income tax refunds of
$35,032, $8,488 and $9,538, for the years ended December 31, 2000, 1999 and
1998, respectively.
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate for the years ended December 31 were as follows:
2000 1999 1998
--------- -------- --------
Computed tax provision (benefit) at the applicable
federal statutory income tax rate............... $(180,942) $(23,343) $174,988
State and local taxes, net of federal income tax
benefits........................................ 7,389 1,055 11,183
Dividends received deduction and tax exempt
interest........................................ (2,005) (210) (1,178)
Amortization of names and reputations............. 11,485 11,844 6,423
Enacted tax rate change........................... -- -- (2,218)
Foreign jurisdiction tax rate difference.......... (14,472) (16,899) (19,612)
Write down of assets.............................. 92,155 11,528 (260)
Other............................................. (5,065) 556 (921)
--------- -------- --------
Provision (benefit) for income taxes.... $ (91,455) $(15,469) $168,405
========= ======== ========
Total effective tax rate................ (17.7)% (23.2)% 33.7%
========= ======== ========
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted marginal tax rates. The tax effects of temporary differences and
carry-forwards that give rise to significant portions of deferred tax assets and
liabilities as of December 31 consisted of the following:
2000 1999
--------- ----------
Receivables, principally due to sales of cemetery interment
rights and related products............................... $ -- $ 279,153
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... 549,555 541,063
Property, plant and equipment and investments, principally
due to depreciation and to purchase accounting
adjustments............................................... 118,433 78,650
Other....................................................... 142,320 130,943
--------- ----------
Deferred tax liabilities.................................. 810,308 1,029,809
--------- ----------
Receivables, principally due to sales of cemetery interment
rights and related products............................... (163,952) --
Deferred revenue on prearranged funeral and cemetery
contracts, principally due to earnings from trust funds... (133,620) (21,987)
Accrued liabilities......................................... (93,381) (98,434)
Loss and foreign tax credit carry-forwards.................. (72,424) (73,851)
--------- ----------
Deferred tax assets....................................... (463,377) (194,272)
--------- ----------
Valuation allowance......................................... 69,199 27,278
--------- ----------
Net deferred income taxes................................. $ 416,130 $ 862,815
========= ==========
Tax expense resulting from allocating certain tax benefits directly to
capital in excess of par value totaled $42,794 at December 31, 1998 and was
insignificant at December 31, 1999 and 2000.
Current refundable income taxes and current deferred tax assets are
included in Other current assets, long-term deferred tax assets are included in
Deferred charges and other assets, with current taxes payable and current
deferred tax liabilities being reflected as Income taxes on the consolidated
balance sheet.
At December 31, 2000 and 1999, United States income taxes had not been
provided on $264,379 and $309,000, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention to permanently reinvest
such earnings. Although it is not practicable to determine the deferred tax
liability on the unremitted earnings, income taxes paid by the Company's foreign
subsidiaries will be available to significantly reduce any U.S. tax if these
foreign earnings are remitted.
As of December 31, 2000 the Company recorded a charge to reduce the
carrying value of a Canadian equity investment. A deferred tax asset and
valuation allowance has been established related to this charge. Various
subsidiaries have international, federal and state operating loss carry-forwards
of $470,295 with expiration dates through 2018. The Company believes that some
uncertainty exists with respect to future realization of these loss
carry-forwards, therefore a valuation allowance has been established for the
carry-forwards not expected to be realized. The increase in the valuation
allowance is primarily attributable to the charge to reduce the carrying value
of the Canadian equity investment.
44
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating loss carry-forwards will expire as follows:
2001..................................................... $ 3,585
2002..................................................... 4,578
2003..................................................... 15,375
2004..................................................... 20,062
2005..................................................... 83,237
Thereafter............................................... 343,458
--------
Total.......................................... $470,295
========
NOTE EIGHT
DEBT
Debt as of December 31 was as follows:
2000 1999
---------- ----------
Bank credit agreements and commercial paper................. $ 789,750 $1,179,704
6.375% notes due in 2000.................................... -- 150,000
6.75% notes due in 2001..................................... 123,000 150,000
8.72% amortizing notes due in 2002.......................... 39,149 71,174
8.375% notes due in 2004.................................... 51,840 51,840
7.375% notes due in 2004.................................... 250,000 250,000
6.0% notes due in 2005...................................... 591,550 600,000
7.2% notes due in 2006...................................... 150,000 150,000
6.875% notes due in 2007.................................... 150,000 150,000
6.5% notes due in 2008...................................... 200,000 200,000
7.7% notes due in 2009...................................... 200,000 200,000
6.95% amortizing notes due in 2010.......................... 49,202 52,557
7.875% debentures due in 2013............................... 55,627 55,627
7.0% notes due in 2015 (putable in 2002).................... 186,040 300,000
6.3% notes due in 2020 (putable in 2003).................... 300,000 300,000
Medium term notes, maturities through 2019, fixed average
interest rate of 9.32%.................................... 35,720 35,720
Convertible debentures, interest rates range from
4.75%-5.5%, due through 2008, conversion price ranges from
$11.25-$50.00............................................. 49,213 49,213
Mortgage and other notes payable with maturities through
2050...................................................... 86,219 136,368
Deferred loan costs......................................... (16,013) (22,187)
---------- ----------
Total debt........................................ 3,291,297 4,060,016
Less current maturities..................................... (176,782) (423,949)
---------- ----------
Total long-term debt.............................. $3,114,515 $3,636,067
========== ==========
The Company's primary credit agreements, as amended, provide for borrowings
up to $988,287 and consisted of two committed facilities -- a 2-year term loan
and a 5-year, multi-currency revolving facility. These credit facilities were
amended in November 2000. Significant terms of the amendments include certain
agreements made by the Company to reduce commitment amounts on the credit
facilities based upon net cash proceeds generated from joint venture and asset
sale transactions closed after November 2000; changes to definitions and
calculations of financial covenants related to a maximum debt-to-capitalization
ratio, a minimum interest coverage ratio and a minimum net worth requirement;
limits on the amount of Company assets that could be joint ventured or sold; and
certain restrictions on future acquisition activity without lender
45
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approval. Under the terms of the amended credit agreements, the covenants will
continue to be calculated using information without the implementation of SAB
No. 101, until such time as the Company negotiates revised covenant calculations
under the credit agreements. These facilities are primarily used for general
corporate purposes.
The commitment for the 2-year term loan, originally $300,000, had been
reduced to $296,486 at December 31, 2000. The commitment for the 5-year,
multi-currency revolving facility, originally $700,000, was $691,801 at December
31, 2000. This 5-year facility also includes provisions for borrowings up to
$500,000 in various foreign currencies. Both facilities mature in June 2002.
Interest rates for these facilities are based on various indices as determined
by the Company.
A facility fee is paid quarterly on the total commitment for each facility.
The fee ranges from 0.25% to 0.50% depending on the Company's senior debt
ratings. The fee was 0.50% and 0.25% at December 31, 2000 and 1999,
respectively.
Approximately $789,750 was outstanding under the above facilities at
December 31, 2000, with a weighted average rate of 7.95% ($870,545 at December
31, 1999, with a weighted average interest rate of 6.97%). Of these borrowings,
approximately $271,263 was denominated in various foreign currencies under the
5-year facility at December 31, 2000 ($295,545 at December 31, 1999).
The Company's commercial paper program is backed by the above facilities;
however, the Company's downgraded credit ratings have rendered it unable to
access the commercial paper market. At December 31, 2000, all previously issued
commercial paper had matured. Commercial paper outstanding at December 31, 1999,
was $309,159 with a weighted average interest rate of 6.58%.
The Company's outstanding debt at December 31, 2000 had a weighted average
interest rate of 7.08%, compared to 6.83% at December 31, 1999. The Company was
not a party to any swap agreements at December 31, 2000; however, at December
31, 1999, after giving consideration to outstanding swap agreements, the
weighted average interest rate was 6.41%.
The Company's debt at December 31, 2000, consisted of approximately 24% of
floating interest rate debt at 7.94% and approximately 76% of fixed interest
rate debt at a weighted average interest rate of 6.81%. At December 31, 1999,
the Company's debt and derivative instruments, excluding the lending
subsidiary's debt, consisted of approximately 39% of floating interest rate debt
at a weighted average rate of 6.49% and approximately 61% of fixed interest rate
debt at a weighted average rate of 6.36%.
During the year ended December 31, 2000, the Company repurchased certain
bonds in the open market with an aggregate face value of $228,700 as follows:
$79,290 of the 6.375% notes due 2000; $27,000 of the 6.75% notes due 2001;
$113,960 of the 7.00% notes due 2015, putable in 2002; and $8,450 of the 6.00%
notes due 2005. The repurchase resulted in extraordinary gains on early
extinguishment of debt totaling $21,973 (net of tax of $12,630).
In accordance with the stated maturity, October 2, 2000, the Company
retired the 6.375% senior notes, in the amount of $70,710, by refinancing the
indebtedness under its existing credit facilities. On October 30, 2000, the
Company had a short-term credit facility, in the amount of $600,000, which
expired with no borrowings outstanding.
The Company had $68,753 in restricted cash recorded in Deferred charges and
other assets on the consolidated balance sheet as security for various credit
instruments at December 31, 2000. Approximately $30,208 was related to two
embedded options associated with the Company's 6.30% senior notes due 2020
(putable 2003). The remaining $38,545 was used to secure various other
obligations. The total balance deposited in restricted accounts at March 26,
2001, was $102,493 of which $29,969 was related to the two options previously
mentioned.
46
48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approximately $22,983 of assets pledged as collateral for
the mortgage and other notes payable.
Cash interest payments for the three years ended December 31, 2000, totaled
$244,638, $237,682 and $165,788, respectively. Included in net cash interest
paid of $244,638 in 2000 is $16,673 of funds received related to the termination
and assigning away of certain financial swap agreements, resulting in gross cash
interest paid in 2000 of $261,311.
The aggregate maturities on debt for the five years subsequent to December
31, 2000, are as follows: 2001 -- $176,782; 2002 -- $995,814; 2003 -- $325,367;
2004 -- $321,178; 2005 -- $621,456.
NOTE NINE
DERIVATIVES
Historically, the Company entered into various derivative instruments,
which were primarily interest rate and cross-currency swap agreements, to hedge
potential exposures in the interest rate and foreign exchange rate markets. The
Company used these swap agreements to hedge the Company's net investment in
foreign assets and to manage its mix of fixed and floating rate debt. The
Company has procedures to monitor and control the use of derivatives and only
enters into transactions with a limited group of creditworthy financial
institutions. The Company does not engage in derivative transactions for
speculative or trading purpose, nor is it a party to leveraged derivatives.
During the first quarter of 2000, the Company materially modified its
participation in derivative transactions by terminating or assigning away
certain interest rate swaps and all cross-currency interest rate swaps, thereby
removing the Company's hedges of foreign exchange rate exposure. A total
notional value of $2,860,327 was eliminated in this process. The net proceeds
from these terminations and assignments totaled $110,658, which was primarily
used to extinguish debt. These proceeds have been classified according to the
following components: $21,849 was due to the Company as accrued interest
receivable, $143,498 resulted from foreign exchange rate gains and $54,689
resulted from interest rate losses.
The amount associated with the foreign exchange rate gains reduced the
corresponding amount due from counterparties recorded in Deferred charges and
other assets. The amount associated with the interest rate losses has been
amortized into interest expense over the remaining term of the swap agreements.
Approximately $11,331 has been amortized into interest expense for the year
ended December 31, 2000.
The Company was not a party to any swap agreements at December 31, 2000
(representing a net asset of $122,581 at December 31, 1999), after having
terminated or assigned away all interest rate and cross-currency swaps during
the year then ended. Fair values were obtained from the counterparties to the
agreements and represent their estimate of the amount the Company would pay or
receive to terminate the swap agreements based upon the existing terms and
current market conditions.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities: An Amendment of FASB Statement 133," in accordance
with the extension provided for in SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." In accordance with these standards, the Company will
recognize a charge to income, net of applicable taxes, of approximately $7,500.
NOTE TEN
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
47
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents, trade receivables and accounts payable approximate fair values due
to the short-term maturities of these instruments. It is not practicable to
estimate the fair value of receivables due on cemetery contracts or prearranged
funeral contracts (other than prearranged funeral trust funds and cemetery
merchandise trust funds, see notes five and six to the consolidated financial
statements) without incurring excessive costs because of the large number of
individual contracts with varying terms. In prior years, the carrying value of
our lending subsidiary's receivables approximated fair value, as the majority of
the loan portfolio carries market rates of interest. In August 2000, the Company
sold the majority of the assets of its lending subsidiary. The remaining loan
portfolio at December 31, 2000, had a net book value of $34,305 ($191,373 at
December 31, 1999). In addition, the Company had $10,494 in outstanding undrawn
commitments at December 31, 2000 ($46,885 at December 31, 1999). See note nine
to the consolidated financial statements regarding the Company's derivative
financial instruments.
The fair market value of the Company's debt at December 31 was as follows:
2000 1999
---------- ----------
Bank credit agreements and commercial paper................. $ 631,800 $1,179,704
6.375% notes due in 2000.................................... -- 140,550
6.75% notes due in 2001..................................... 117,465 133,050
8.72% amortizing notes due in 2002.......................... 28,506 70,944
8.375% notes due in 2004.................................... 32,918 42,872
7.375% notes due in 2004.................................... 157,500 203,500
6.0% notes due in 2005...................................... 343,360 441,600
7.2% notes due in 2006...................................... 86,250 114,300
6.875% notes due in 2007.................................... 85,500 107,400
6.5% notes due in 2008...................................... 112,000 137,200
7.7% notes due in 2009...................................... 110,000 143,400
6.95% amortizing notes due in 2010.......................... 27,061 38,104
7.875% debentures due in 2013............................... 51,230 32,152
7.0% notes due in 2015 (putable in 2002).................... 137,640 254,100
6.3% notes due in 2020 (putable in 2003).................... 204,000 244,800
Medium term notes, maturities through 2019, fixed average
interest rate of 9.32%.................................... 20,299 24,152
Convertible debentures...................................... 28,578 59,672
Mortgage notes and other debt............................... 86,219 136,368
---------- ----------
Total debt........................................ $2,260,326 $3,503,868
========== ==========
The fair value of the fixed rate long-term borrowings was 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 market value of
convertible securities has been estimated based on the respective shares of
Company common stock into which such securities may be converted. The Company
has historically reported the market value of its bank credit agreements at book
value since such agreements have variable interest rates. However, at December
31, 2000, the fair market value of these credit agreements is less than book
value based upon existing market pricing and terms for comparable bank credit
agreements.
The Company grants credit in the normal course of business, and the credit
risk with respect to these funeral, cemetery and prearranged funeral receivables
due from customers is generally considered minimal because of the wide
dispersion of the customers served. Procedures are in effect to monitor the
creditworthiness of customers, and bad debts have not been significant in
relation to the volume of revenues.
48
50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Customer payments on prearranged funeral contracts that are placed into
state regulated trusts, used to pay premiums on life insurance contracts or
bonded generally do not subject the Company to collection risk. Insurance funded
contracts are subject to supervision by state insurance departments and are
protected in the majority of states by insurance guaranty acts.
NOTE ELEVEN
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
2001...................................................... $ 60,678
2002...................................................... 51,893
2003...................................................... 40,287
2004...................................................... 34,060
2005...................................................... 25,078
Thereafter................................................ 83,614
--------
Subtotal........................................ 295,610
Less:
Subleases............................................... (851)
--------
Total........................................... $294,759
========
The majority of these operating leases contain one of the following
options: (a) purchase the property at the fair value at date of exercise, (b)
purchase the property for a value determined at the inception of the lease or
(c) renew for the fair rental value at the end of the primary term of the lease.
Some of the equipment leases contain residual value exposures. Rental expense
was $94,629, $88,437 and $69,196 for the years ended December 31, 2000, 1999 and
1998, respectively.
The Company has entered into management, consultative and noncompetition
agreements (generally for five to ten years) with certain officers and employees
of the Company and former owners of businesses acquired. During the years ended
December 31, 2000, 1999 and 1998, $75,141, $104,650 and $74,578 was charged to
expense, respectively. At December 31, 2000, the maximum estimated future
commitment under all agreements with a remaining term in excess of one year is
$243,612, including $5,329 with certain officers of the Company. In December
1999, the Company modified several of the above agreements as part of a cost
rationalization program (see note seventeen to the consolidated financial
statements).
The Company has a minimum purchase agreement with a major casket
manufacturer for its North American operations with an original commitment of
$750,000 over six years. The agreement contains provisions to increase the
minimum annual purchases for normal price increases. In addition, the contract
provides for a one-year extension period in which the Company is required to
purchase any remaining commitment that exists at the end of the original term.
The remaining commitment over the next four years is $555,000 (2001 -- $115,000;
2002 -- $130,000; 2003 -- $145,000; 2004 -- $165,000).
NOTE TWELVE
STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock, $1
per share par value. No shares were issued as of December 31, 2000. At December
31, 2000, 500,000,000 common shares of $1 par value were authorized, 272,507,010
shares were issued and outstanding (272,064,618 at December 31, 1999), net of
2,502,190 shares held, at par, in treasury (2,792,503 at December 31, 1999).
49
51
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the rights holders to purchase certain securities of the Company or the
acquiring company. The rights, which are redeemable by the Company for $.01 per
right, expire in July 2008 unless extended.
The Company has benefit plans whereby shares of the Company's common stock
may be issued pursuant to the exercise of stock options granted to officers and
key employees. The Company's Amended 1996 Incentive Plan reserves 24,000,000
shares of common stock for future awards of stock options, restricted stock and
other stock based awards to officers and key employees of the Company. The
Company's 1996 Non-qualified Incentive Plan reserves 6,700,000 shares of common
stock for future awards of nonqualified stock options to employees who are not
officers of the Company. Under the Company's 1995 Stock Plan for Non-Employee
Directors, non-employee directors automatically receive yearly awards of
restricted stock through the year 2000. Each award is for 3,000 shares of common
stock and vests after one year of service.
The plans allow for options to be granted as either non-qualified or
incentive stock options. The options are granted with an exercise price equal to
the then current market price of the Company's common stock. The options are
generally exercisable at a rate of 33 1/3% each year unless, at the discretion
of the Company's Compensation Committee of the Board of Directors, alternative
vesting methods are allowed. At December 31, 2000 and 1999, 15,713,000 options
had been granted to officers and key employees of the Company which contain
alternative vesting methods. Under the alternative vesting methods, partial or
full accelerated vesting will occur when the price of Company common stock
reaches pre-determined prices. If the pre-determined stock prices are not met in
the required time period, the options will fully vest in periods ranging from
eight to ten years from date of grant. At December 31, 2000 and 1999, 11,187,894
and 16,903,290 shares, respectively, were reserved for future option grants
under all stock option plans.
The following tables set forth certain stock option information:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at December 31, 1997.......................... 19,313,451 $20.81
---------- ------
Granted................................................. 2,953,553 36.66
Exercised............................................... (4,785,496) 13.50
Cancelled............................................... (102,992) 26.62
---------- ------
Outstanding at December 31, 1998.......................... 17,378,516 25.48
---------- ------
Granted................................................. 5,080,339 17.06
Assumed................................................. 1,199,273 23.65
Exercised............................................... (73,181) 14.74
Cancelled............................................... (3,691,837) 24.94
---------- ------
Outstanding at December 31, 1999.......................... 19,893,110 23.36
---------- ------
Granted................................................. 7,288,650 4.89
Exercised............................................... -- --
Cancelled............................................... (1,887,967) 24.92
---------- ------
Outstanding at December 31, 2000.......................... 25,293,793 $17.92
========== ======
Exercisable at December 31, 2000.......................... 12,262,434 $21.45
========== ======
Exercisable at December 31, 1999.......................... 8,575,226 $20.42
========== ======
Exercisable at December 31, 1998.......................... 6,435,679 $17.23
========== ======
50
52
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICE DECEMBER 31, 2000 CONTRACTUAL LIFE PRICE DECEMBER 31, 2000 PRICE
- -------------- ----------------- ---------------- --------- ----------------- ---------
$ 0.00 -- 9.41 7,137,200 6.2 $ 4.90 -- $ --
9.41 -- 20.00 9,306,162 5.1 15.84 6,976,216 15.46
20.00 -- 30.00 3,406,824 2.4 25.62 2,994,279 25.34
30.00 -- 40.00 5,412,941 4.1 33.69 2,276,609 34.55
40.00 -- 50.00 30,666 2.8 41.75 15,330 41.96
---------- --- ------ ---------- ------
$ 0.00 -- 50.00 25,293,793 4.8 $17.92 12,262,434 $21.45
========== === ====== ========== ======
For the years ended December 31, 2000, 1999 and 1998, respectively, 33,000,
30,000, and 30,000 shares of restricted stock were awarded at average fair
values of $4.03, $19.06 and $40.88, respectively.
If the Company had elected to recognize compensation cost for its option
plans based on the fair value at the grant dates for awards under those plans,
net income (loss) and earnings (loss) per share would have been changed for the
years ended December 31 to the pro forma amounts indicated below:
2000 1999 1998
----------- -------- --------
Net income (loss):
As reported...................................... $(1,343,251) $(32,412) $342,142
Pro forma........................................ (1,367,986) (64,015) 318,057
Basic earnings (loss) per share:
As reported...................................... $ (4.93) $ (.12) $ 1.34
Pro forma........................................ (5.03) (.23) 1.24
Diluted earnings (loss) per share:
As reported...................................... $ (4.93) $ (.12) $ 1.31
Pro forma........................................ (5.02) (.23) 1.22
The fair value of the Company's stock options used to compute pro forma net
income (loss) and earnings (loss) per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 2000, 1999 and 1998, respectively:
dividend yield of 0%, 0%, and 1%, expected volatility of 57.2%, 41.6% and 28.3%,
a risk free interest rate of 6.7%, 5.5% and 5.5%; and an expected holding period
of 7 years for all three years.
51
53
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's components of other comprehensive income (loss) at December
31 are as follows:
ACCUMULATED
FOREIGN CURRENCY UNREALIZED GAIN MINIMUM OTHER
TRANSLATION (LOSSES) ON PENSION LIABILITY COMPREHENSIVE
ADJUSTMENT SECURITIES ADJUSTMENT INCOME (LOSS)
---------------- --------------- ----------------- -------------
Balance at December 31,
1997........................ $ (7,480) $ 3,961 $ -- $ (3,519)
Activity in 1998............ 8,748 10,149 -- 18,897
--------- -------- -------- ---------
Balance at December 31,
1998........................ 1,268 14,110 -- 15,378
Activity in 1999............ (39,036) (36,332) -- (75,368)
--------- -------- -------- ---------
Balance at December 31,
1999........................ (37,768) (22,222) -- (59,990)
Activity in 2000............ (202,709) (4,792) (12,724) (220,225)
Reclassification adjustment
for sales of discontinued
operations............... 16,044 27,014 -- 43,058
--------- -------- -------- ---------
Balance at December 31,
2000........................ $(224,433) $ -- $(12,724) $(237,157)
========= ======== ======== =========
NOTE THIRTEEN
RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all
United States employees, a supplemental retirement plan for certain current and
former key employees (SERP), a supplemental retirement plan for officers and
certain key employees (Senior SERP), and a retirement plan for non-employee
directors (Directors' Plan). In 2000, the Company also established a 401(k)
employee savings plan.
Effective December 31, 2000, the Company curtailed its United States
noncontributory, defined pension plan and its supplemental retirement plans for
certain current and former key employees, officers and non-employee directors.
This curtailment occurred subsequent to the valuation of the plans; therefore,
the impact of the curtailment will not be recognized until the first quarter of
2001 and is not expected to be material.
Retirement benefits for the United States pension plan are generally based
on years of service and compensation. This contribution is an actuarially
determined amount consistent with the funding requirements of the Employee
Retirement Income Security Act of 1974. Assets of the pension plan consist
primarily of bank money market funds, fixed income investments and marketable
equity securities. The marketable equity securities include shares of Company
common stock with a value of $578 and $2,292 at December 31, 2000 and 1999,
respectively.
Retirement benefits under the SERP are based on years of service and
average monthly compensation, reduced by benefits under the pension plan and
Social Security. The Senior SERP provides retirement benefits based on years of
service and position. The Directors' Plan provides for an annual benefit to
directors following their retirement, based on a vesting schedule. The Company
purchased various life insurance policies on the participants in the SERP,
Senior SERP and Directors' Plan with the intent to use the proceeds or any cash
value buildup from such policies to assist in funding, at least to the extent of
such assets, the plans' funding requirements.
The Company's United Kingdom operation has a defined benefit pension plan.
The Company and employees contribute to the plan consistent with United Kingdom
funding requirements. Most other foreign employees are covered by various
foreign government mandated or defined contribution plans which are adequately
funded and are not considered significant to the financial condition or results
of operations of the Company. The plans' liabilities and their related costs are
computed in accordance with the laws of the individual countries and appropriate
actuarial practices.
52
54
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net periodic benefit cost for the years ended December 31
were as follows:
2000 1999 1998
-------- -------- --------
Service cost -- benefits earned during the period.... $ 15,941 $ 16,378 $ 14,595
Interest cost on projected benefit obligation........ 14,965 12,962 13,039
Return on plan assets................................ (13,688) (13,576) (14,035)
Settlement charge.................................... -- 1,073 --
Amortization of unrecognized transition asset........ (440) (469) (481)
Amortization of prior service cost................... 1,126 1,115 1,106
Recognized net (gain) loss........................... (449) 390 215
-------- -------- --------
$ 17,455 $ 17,873 $ 14,439
======== ======== ========
The Plans' funded status at December 31 were as follows (based on
valuations as of September 30):
2000 1999
-------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $193,415 $193,828
Service cost................................................ 15,941 16,378
Contributions paid by participants.......................... 1,392 1,373
Interest cost............................................... 14,965 12,962
Plan amendments............................................. 132 157
Actuarial (gain) loss....................................... 775 (7,373)
Benefits paid............................................... (24,507) (22,957)
Effect of foreign currency.................................. (3,136) (953)
-------- --------
Benefit obligation at end of year........................... $198,977 $193,415
======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $158,892 $151,380
Actual return on plan assets................................ 2,910 9,766
Employer contributions...................................... 17,788 20,309
Contributions paid by participants.......................... 1,392 1,373
Benefits paid............................................... (24,507) (22,957)
Effect of foreign currency.................................. (3,709) (979)
-------- --------
Fair value of plan assets at end of year.................... $152,766 $158,892
======== ========
Funded status of plan....................................... $(46,211) $(34,523)
Fourth quarter contributions................................ 3,870 474
Unrecognized actuarial loss................................. 27,001 15,728
Unrecognized prior service cost............................. 3,932 4,956
Unrecognized net transition asset........................... (1,759) (2,346)
Effect of foreign currency.................................. 21 (3)
-------- --------
Net amount recognized....................................... $(13,146) $(15,714)
======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET:
Prepaid benefit cost........................................ $ 6,370 $ 10,719
Accrued benefit liability................................... (42,885) (31,884)
Intangible asset............................................ 3,995 5,451
Accumulated other comprehensive income...................... 19,374 --
-------- --------
Net amount recognized....................................... $(13,146) $(15,714)
======== ========
53
55
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plans' weighted-average assumptions were as follows:
2000 1999
---- ----
Discount rate used to determine obligations................. 7.64% 7.49%
Assumed rate of compensation increase....................... 4.86 4.91
Assumed rate of return on plan assets....................... 8.93 8.94
During 2000, the Company established an employee savings plan that
qualifies under section 401(k) of the Internal Revenue Code for the exclusive
benefit of their United States employees. Under the plan, participating
employees may defer a portion of their pretax and/or after tax income in
accordance with specified guidelines up to a maximum of 15%. The Company then
matches a percentage of the employee contributions through contributions of the
Company's common stock. For 2000, the Company match was 25% up to the first 6%
of employee contributions. The total value of Company matched common stock
contributions in 2000 was $812. Subsequent to year end, the Company increased
its employer match for the 401(k) plan based on years of service to a range of
75% to 135% up to the first 6% of deferred contributions.
NOTE FOURTEEN
SEGMENT REPORTING
The Company's operations are product based and geographically based and
primary reportable operating segments presented below include funeral and
cemetery operations. The Company's geographic segments include North America,
Europe and Other Foreign. The Company conducts funeral and cemetery operations
in all geographical regions. In 2000, the Company completed sales of its wholly
owned insurance operations. As such, these operations have been reclassified and
reported as discontinued operations (see note four to the consolidated financial
statements).
54
56
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's reportable segment information is as follows:
REPORTABLE
FUNERAL CEMETERY SEGMENTS
---------- ---------- -----------
Revenues from external customers:
2000.......................................... $1,911,969 $ 641,267 $ 2,553,236
1999.......................................... 2,039,348 947,852 2,987,200
1998.......................................... 1,829,136 846,601 2,675,737
Depreciation and amortization:
2000.......................................... $ 157,174 $ 40,162 $ 197,336
1999.......................................... 174,150 56,725 230,875
1998.......................................... 152,396 28,584 180,980
Operating income:
2000.......................................... $ 266,915 $ 58,432 $ 325,347
1999.......................................... 366,494 247,719 614,213
1998.......................................... 384,607 306,161 690,768
Total assets:
2000.......................................... $7,865,099 $4,464,622 $12,329,721
1999.......................................... 7,546,186 4,661,780 12,207,966
1998.......................................... 6,944,480 4,012,685 10,957,165
Capital expenditures:
2000.......................................... $ 40,660 $ 43,943 $ 84,603
1999.......................................... 905,790 432,083 1,337,873
1998.......................................... 590,065 369,212 959,277
Operating locations at year end (unaudited):
2000.......................................... 3,751 629 4,380
1999.......................................... 3,961 585 4,546
1998.......................................... 3,578 488 4,066
55
57
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles certain reportable segment amounts to the
Company's corresponding consolidated amounts:
REPORTABLE LENDING
SEGMENTS SUBSIDIARY CORPORATE CONSOLIDATED
----------- ---------- --------- ------------
Revenues from external customers:
2000................................ $ 2,553,236 $ 11,494 $ -- $ 2,564,730
1999................................ 2,987,200 20,758 -- 3,007,958
1998................................ 2,675,737 20,580 -- 2,696,317
Depreciation and amortization:
2000................................ $ 197,336 $ -- $ 26,695 $ 224,031
1999................................ 230,875 -- 15,215 246,090
1998................................ 180,980 7 16,343 197,330
Total assets(1):
2000................................ $12,329,721 $ 40,120 $528,628 $12,898,469
1999................................ 12,207,966 193,784 576,480 12,978,230
1998................................ 10,957,165 271,448 501,203 11,729,816
Capital expenditures(2):
2000................................ $ 84,603 $ -- $ 13,192 $ 97,795
1999................................ 1,337,873 -- 29,187 1,367,060
1998................................ 959,277 180 21,253 980,710
- ---------------
(1) Total assets includes the net assets of discontinued operations as a
component of corporate assets.
(2) Consolidated capital expenditures include $14,425, $1,159,929 and $728,885
for the years ended December 31, 2000, 1999 and 1998, respectively, for
purchases of property, plant and equipment, cemetery property, and names and
reputations of acquired businesses. The 2000 amount above is related to the
Company acquiring by deed in lieu of foreclosure the collateral underlying
certain loans from the Company's lending subsidiary. Excluding these capital
expenditures related to acquired businesses which are included in
Acquisitions, net of cash acquired in the Cash flows from investing
activities in the consolidated statement of cash flows, the Company had
consolidated capital expenditures of $83,370, $207,131 and $251,825 for the
years ended December 31, 2000, 1999 and 1998, respectively.
The following table reconciles operating income from reportable segments to
the Company's consolidated income (loss) from continuing operations before
income taxes, extraordinary gains and cumulative effect of accounting change:
2000 1999 1998
--------- --------- ---------
Operating Income:
Reportable segments............................. $ 325,347 $ 614,213 $ 690,768
Lending subsidiary operating income (loss)...... 2,295 (29,467) 9,441
General and administrative expenses............. (79,932) (82,585) (66,839)
Restructuring and non-recurring charges......... (461,072) (362,428) --
--------- --------- ---------
Operating income (loss) from continuing
operations...................................... (213,362) 139,733 633,370
Interest expense................................ (281,548) (238,185) (177,053)
Other income.................................... 34,636 31,759 43,649
Loss on sale of investment...................... (56,704) -- --
--------- --------- ---------
Income (loss) from continuing operations before
income taxes, extraordinary gains and cumulative
effect of accounting change..................... $(516,978) $ (66,693) $ 499,966
========= ========= =========
56
58
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, the Company realigned its management of geographic segments to
focus on total European operations. Although total amounts reported have not
changed, the Company has made certain reclassifications in all years in order to
properly reflect the results of these geographic segments.
The Company geographic segment information was as follows:
NORTH OTHER
AMERICA EUROPE FOREIGN TOTAL
---------- ---------- -------- ----------
Revenues from external customers:
2000................................ $1,737,014 $ 686,199 $141,517 $2,564,730
1999................................ 2,021,282 814,569 172,107 3,007,958
1998................................ 1,796,271 791,096 108,950 2,696,317
Operating income (loss)(1):
2000................................ $ (251,705) $ 19,823 $ 18,520 $ (213,362)
1999................................ 96,521 14,195 29,017 139,733
1998................................ 521,286 96,476 15,608 633,370
Long-lived assets:
2000................................ $4,905,990 $1,154,260 $521,178 $6,581,428
1999................................ 5,407,022 1,441,113 556,234 7,404,369
1998................................ 4,495,546 1,541,384 421,485 6,458,415
Operating locations at year end
(unaudited):
2000................................ 2,256 1,942 182 4,380
1999................................ 2,291 2,071 184 4,546
1998................................ 1,843 2,054 169 4,066
- ---------------
(1) Operating income (loss) includes $461,072 and $362,428 in restructuring
charges in December 31, 2000 and 1999, respectively. In 2000 and 1999,
respectively, $439,632 and $279,078 relates to North America, $20,424 and
$75,898 relates to Europe and $1,016 and $7,452 relates to Other Foreign.
Included in the North American figures above are the following United
States amounts:
2000 1999 1998
---------- ---------- ----------
Revenues from external customers................. $1,657,553 $1,940,640 $1,718,773
Operating income (loss).......................... $ (168,655) $ 81,934 $ 504,591
Long-lived assets................................ $4,648,778 $5,041,006 $4,163,222
Operating locations at year end (unaudited)...... 2,092 2,137 1,686
Included in the European figures above are the following French amounts:
2000 1999 1998
-------- -------- --------
Revenues from external customers.................. $415,615 $505,630 $524,418
Operating income (loss)........................... $ 9,391 $ (1,860) $ 60,810
Long-lived assets................................. $344,369 $468,532 $480,979
Operating locations at year end (unaudited)....... 1,169 1,236 1,214
57
59
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIFTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts was as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Cash and cash equivalents:
Cash...................................................... $ 36,309 $ 32,116
Commercial paper and temporary investments................ 11,600 25,698
---------- ----------
$ 47,909 $ 57,814
========== ==========
Receivables and allowances:
Current:
Trade accounts......................................... $ 276,747 $ 329,104
Cemetery contracts..................................... 255,815 294,893
Loans and other notes receivable....................... 23,486 73,510
---------- ----------
556,048 697,507
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 64,852 77,080
Unearned finance charges............................... 41,207 35,158
---------- ----------
106,059 112,238
---------- ----------
$ 449,989 $ 585,269
========== ==========
Long-term:
Cemetery contracts..................................... $ 653,975 $ 591,489
Trusted cemetery merchandise sales..................... 886,270 800,306
Loans and other notes receivable....................... 149,200 325,324
---------- ----------
1,689,445 1,717,119
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 272,865 97,285
Unearned finance charges............................... 87,205 87,609
---------- ----------
360,070 184,894
---------- ----------
$1,329,375 $1,532,225
========== ==========
58
60
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rates on cemetery contracts and loans and other notes receivable
range from 3.5% to 14.5% at December 31, 2000 (7.0% to 14.5% at December 31,
1999). Included in long-term loans and other notes receivable at December 31,
2000, are $445 in notes with officers, employees and former employees of the
Company ($10,392 at December 31, 1999), the majority of which are collateralized
by real estate, and $4,786 in notes with other related parties ($19,796 at
December 31, 1999).
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Cemetery property:
Undeveloped land.......................................... $1,840,772 $1,913,904
Developed land, lawn crypts and mausoleums................ 185,712 268,506
---------- ----------
$2,026,484 $2,182,410
========== ==========
Property, plant and equipment:
Land...................................................... $ 353,144 $ 446,668
Buildings and improvements................................ 1,401,996 1,408,424
Operating equipment....................................... 484,569 547,594
Leasehold improvements.................................... 59,937 61,237
---------- ----------
2,299,646 2,463,923
Less: accumulated depreciation............................ (624,383) (583,944)
---------- ----------
$1,675,263 $1,879,979
========== ==========
Accounts payable and accrued liabilities:
Trade payables............................................ $ 91,834 $ 102,204
Payroll................................................... 92,416 95,222
Interest.................................................. 54,471 61,881
Insurance................................................. 50,358 46,940
Bank overdraft............................................ 30,924 24,566
Restructuring charge balance.............................. 47,803 89,812
Other..................................................... 133,549 156,126
---------- ----------
$ 501,355 $ 576,751
========== ==========
NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- -------
Common stock issued under restricted stock plans...... $ 133 $ 410 $ 1,196
Minimum liability under retirement plans.............. (12,724) -- (535)
Debenture conversions to common stock................. -- 766 2,594
Common stock issued in acquisitions................... 247 565,831 97,124
Debt issued in acquisitions........................... -- -- 28,560
59
61
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEEN
EARNINGS PER SHARE
The basic and diluted per share computations for income (loss) from
continuing operations before extraordinary gains and cumulative effect of
accounting change were for the years ended December 31 as follows:
2000 1999 1998
------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Income (numerator):
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting change -- basic..................... $(425,523) $(51,224) $331,561
After tax interest on convertible debentures...... 190 408 1,368
--------- -------- --------
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting change -- diluted................... $(425,333) $(50,816) $332,929
========= ======== ========
Shares (denominator):
Shares -- basic................................... 272,172 272,281 256,271
Stock options and warrants........................ 23 673 4,290
Convertible debentures............................ 349 838 1,959
--------- -------- --------
Shares -- diluted................................. 272,544 273,792 262,520
========= ======== ========
Earnings (loss) per share from continuing operations
before extraordinary gains and cumulative effect
of accounting change:
Basic............................................. $ (1.56) $ (.19) $ 1.30
Diluted........................................... $ (1.56) $ (.19) $ 1.27
The computation of diluted earnings per share excludes outstanding stock
options with exercise prices greater than the average market price of the
Company's common stock for the year, because the inclusion of such options would
be antidilutive. The number of antidilutive options that were excluded from
diluted earnings per share and could potentially dilute basic earnings per share
in the future were 25,271, 19,220 and 13,089 shares in 2000, 1999 and 1998,
respectively. In addition, diluted earnings per share excludes 1,717, 1,232 and
128 shares in 2000, 1999 and 1998, respectively, that are issuable upon
conversion of the Company's convertible debentures because the inclusion of such
shares would be antidilutive.
NOTE SEVENTEEN
RESTRUCTURING AND NON-RECURRING CHARGES
The Company recorded restructuring and non-recurring charges in the first
quarter of 1999 (First Quarter 1999 Charge), the fourth quarter of 1999 (Fourth
Quarter 1999 Charge) and the fourth quarter of 2000 (Fourth Quarter 2000
Charge). Additionally, the Company established reserves in 1999 on loans
previously made by the Company's lending subsidiary (Impaired Loans), and in
2000 adjusted estimates for certain items originally included in the Fourth
Quarter 1999 Charge.
The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999 and consisted of the following: (1)
severance costs of $56,757; (2) a charge of $19,123 of which $2,153 related to
terminated projects representing costs associated with certain construction
projects that have been cancelled and $16,970 related to costs associated with
acquisition due diligence which will no longer be
60
62
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursued; (3) a $7,245 charge for business and facility closures, primarily in
the Company's European operations; and (4) a remaining charge of $6,759
consisting of various other cost initiatives.
The $56,757 for severance costs is related to the termination of five
executive contractual relationships and the involuntary termination of
approximately 100 employees in North America (of which approximately 20 were
located in the corporate office), 600 employees in France, 85 employees in other
European operations and 10 employees in other foreign operations. The positions
terminated were both operational and administrative in nature. The severance
costs related to the executive contractual relationships will be paid out
according to the terms of the respective agreements and will extend through
2005.
The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The Fourth Quarter 1999 Charge consisted of the following: (1)
severance costs of $150,675; (2) asset impairment of $73,728 associated with
assets held for sale which were written down to estimated fair value; (3) asset
impairment of $18,245 associated with loans made by the Company's lending
subsidiary held for sale which were written down to estimated fair value; (4)
$12,719 of informational technology costs associated with projects that will no
longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease
obligations related to facility closures; and (6) $10,623 of various other
items.
The $150,675 of severance costs is related to the involuntary termination
of 1,141 employees of the Company. Included in this total are 715 employees in
the Company's international operations, 385 employees in North America, 33
employees in the Company's corporate home office and 8 executive officers of the
Company. Of the 715 employees in the Company's international operations, 290 are
additional involuntary terminations in France pursuant to the Company's First
Quarter Charge. In the North America total, 316 individuals were former owners
of independent funeral homes and cemeteries that were purchased by the Company
and represent approximately $92,180 of the $150,675 of severance costs. These
individuals were under employment, consultant and/or covenant-not-to-compete
contractual agreements and have been relieved from their obligations or
restrictions under their agreements. Such individuals will continue to be paid
by the Company pursuant to such contractual terms, the majority of which will be
paid by 2007. The other positions terminated were both operational and
administrative in nature and the severance costs are expected to be paid out
through 2001. The severance costs associated with the executive officers will be
paid in accordance with the terms of the respective agreements and will extend
through 2005.
The $73,728 of charges related to assets held for sale consists of
approximately $59,655 in the Company's North American operations, approximately
$11,645 in the Company's international operations and approximately $2,428 of
corporate assets. The $59,655 of charges in North America include approximately
50 funeral homes or cemeteries and approximately 45 individual parcels of
undeveloped cemetery property or excess land that are held for sale and being
reduced to their estimated fair values. The Company believes it is a prudent
strategy to hold these underperforming assets for sale and redeploy the proceeds
from such sales to reduce debt.
The asset impairment associated with the lending subsidiary's loans
represents the estimated amount necessary to sell 205 loans with a fair value of
$176,272. The Company decided, except for existing commitments, to indefinitely
suspend the operations of its lending subsidiary and to sell a portion of the
loan portfolio in 2000. In connection with selling the portfolio of loans
discussed above, the Company was also relieved of all but $10,494 of loan
commitments to extend credit (see note ten to the consolidated financial
statements).
The Impaired Loans charge in 1999 totaled $38,608 and related to loans not
being held for sale by the Company's lending subsidiary. The face value of the
47 loans subject to the reserve was $61,315 at December 31, 1999. In 2000, the
Company acquired by deed in lieu of foreclosure the collateral underlying
61
63
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these loans previously on non-accrual status. Subsequent to acquiring those
locations, the Company sold the majority of these locations during the year.
In the second quarter of 2000, the Company made a change in estimate for
certain items originally included in the Fourth Quarter 1999 Charge. These
changes primarily related to increasing the provision for asset impairment by
$22,250 to further write down to estimated fair value the loans made by the
Company's lending subsidiary which were held for sale, offset by a reduction in
the provision of $11,229 for funeral home and cemetery properties previously
written down to their fair value, which were no longer being held for sale.
The Fourth Quarter 2000 Charge totaled $447,791 and related to planned
divestitures as a result of a North American facility review, the reduction of
the carrying value of an equity investment in North America and certain
additional changes to estimates in the Company's restructuring and non-recurring
charges recorded in 1999. Of the total Fourth Quarter 2000 Charge, $351,159 of
charges related to the planned divestitures of 230 funeral service locations
anticipated to be sold as funeral businesses, 174 funeral service locations
anticipated to be sold as real estate and 105 cemeteries; $83,256 of charges to
reduce the carrying value of the Company's equity investment in Arbor Memorial
Services Inc.; and $13,376 of net charges as a result of changes in estimates to
the Company's 1999 charges. The changes primarily consisted of $5,739 to further
write down to estimate fair value certain remaining loans made by the Company's
lending subsidiary, $12,000 to write down to fair value assets held in the
Company's European operations, offset by a reduction of $4,363 in previously
estimated severance costs in the Company's International operations.
The utilization of the restructuring charges was as follows:
UTILIZATION FOR TWELVE
MONTHS ENDED
ADDITIONS OR DECEMBER 31, 2000
ORIGINAL BALANCE AT ADJUSTMENTS ---------------------- BALANCE AT
CHARGE AMOUNT DECEMBER 31, 1999 DURING 2000 CASH NON-CASH DECEMBER 31, 2000
------------- ----------------- ------------ --------- ---------- -----------------
First Quarter 1999 Charge...... $ 89,884 $ 25,245 $ -- $ 8,300 $ 10,735 $ 6,210
Fourth Quarter 1999 Charge..... 272,544 135,944 26,657 38,355 37,287 86,959
Fourth Quarter 2000 Charge..... 434,415 -- 434,415 -- 434,415 --
-------- -------- -------- ------- -------- -------
$796,843 $161,189 $461,072 $46,655 $482,437 $93,169
======== ======== ======== ======= ======== =======
Of the remaining total restructuring charge balance, approximately $91,608
relates to severance costs. Further of the $93,169 remaining reserves, $47,803
is included in Accounts Payable and Accrued Liabilities and $45,366 is included
in Other Liabilities in the Consolidated Balance Sheet based on the expected
timing of payment.
In October 2000, the Company executed the sale of a 21% minority interest
in the stock of the Company's United Kingdom operations. As a result, the
Company recorded a loss on the sale of investment of $56,704 on a pretax basis
in 2000.
62
64
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE EIGHTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR
--------- -------- -------- --------- -----------
Revenues:
2000........................... $ 683,493 $636,545 $615,703 $ 628,989 $ 2,564,730
Proforma 1999.................. 660,454 2,745,114
1999........................... 832,260 745,836 708,191 721,671 3,007,958
Gross profit:
2000........................... 117,065 72,068 71,862 66,647 327,642
Proforma 1999.................. 17,528 328,775
1999........................... 211,570 169,333 123,754 80,089 584,746
Income (loss) from continuing
operations before extraordinary
gains and cumulative effect of
accounting change:
2000........................... 20,937 (16,443) (10,846) (419,171) (425,523)
Proforma 1999.................. (227,178) (210,668)
1999........................... 37,607 69,923 29,351 (188,105) (51,224)
Net income (loss):
2000........................... (876,641) 4,556 (49,626) (421,540) (1,343,251)
Proforma 1999.................. (223,317) (191,856)
1999........................... 43,768 76,013 32,055 (184,248) (32,412)
Basic earnings (loss) per share
from continuing operations
before extraordinary gains and
cumulative effect of accounting
change:
2000........................... .08 (.06) (.04) (1.54) (1.56)
Proforma 1999.................. (.83) (.77)
1999........................... .13 .26 .11 (.69) (.19)
Diluted earnings (loss) per share
from continuing operations
before extraordinary gains and
cumulative effect of accounting
change:
2000........................... .08 (.06) (.04) (1.54) (1.56)
Proforma 1999.................. (.83) (.77)
1999........................... .13 .26 .11 (.69) (.19)
Gross profit includes a provision for loan impairment of $38,608 in the
fourth quarter of 1999 related to loans held by the Company's lending
subsidiary. Income (loss) from continuing operations before extraordinary gains
and cumulative effect of accounting change includes restructuring charges of
$89,884 in the first quarter of 1999 and $272,544 in the fourth quarter of 1999,
$447,791 in the fourth quarter of 2000, and changes in estimates to the fourth
quarter 1999 charge of $13,281 in the second quarter of 2000 and $13,376 in the
fourth quarter of 2000.
63
65
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2000
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD
- ----------- ---------- ---------- ----------- ------------- ----------
(IN THOUSANDS)
Current --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 2000.... $77,080 $20,005 $(18,558) $(13,675) $ 64,852
Year ended December 31, 1999.... 53,292 22,585 11,498 (10,295) 77,080
Year ended December 31, 1998.... 52,597 27,190 2,327 (28,822) 53,292
Due After One Year --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 2000.... $97,285 $19,885 $159,705 $ (4,010) $272,865
Year ended December 31, 1999.... 38,707 47,418 11,169 (9) 97,285
Year ended December 31, 1998.... 35,964 3,650 (499) (408) 38,707
Deferred Tax Valuation Allowance:
Year ended December 31, 2000.... $27,278 $41,921 $ -- $ -- $ 69,199
Year ended December 31, 1999.... 13,058 14,220 -- -- 27,278
Year ended December 31, 1998.... 15,327 (2,269) -- -- 13,058
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily cumulative effect of accounting change and acquisitions and
dispositions of operations.
64
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by PART III (Items 10, 11, 12 and 13) has been
omitted as the Company intends to file with the Commission not later than 120
days after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement (i) with
respect to Item 10 under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," (ii) with respect to Items 11 and 13
under the captions "Certain Information with Respect to Officers and Directors,"
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" and (iii) with respect to Item 12 under the caption "Voting
Securities and Principal Holders." The information as specified in the preceding
sentence is incorporated herein by reference; provided however, notwithstanding
anything set forth in this Form 10-K, the information under the captions
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" in such Proxy Statement, and the information in the first two paragraphs
under the caption "Audit Committee Report" in such Proxy Statement, are not
incorporated by reference into this Form 10-K.
The information regarding the Company's executive officers called for by
Item 401 of Regulation S-K has been included in PART I of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedule:
The financial statements and schedule are listed in the accompanying Index
to Financial Statements and Related Schedule on page 26 of this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 68-72 are
filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, the Company filed a Form 8-K
dated December 4, 2000 reporting (i) under "Item 5. Other Events" the Company's
announcement of the completion of an amendment to its bank credit facility
agreements, and (ii) under "Item 7. Financial Statements and Exhibits" the
exhibits comprised of the Company's press release dated December 4, 2000 and two
amendments to the Company's bank credit facility agreements.
(c) Included in (a) above.
(d) Included in (a) above.
65
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Service Corporation International, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SERVICE CORPORATION INTERNATIONAL
By: /s/ JAMES M. SHELGER
-----------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)
Dated: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ R.L. WALTRIP* Chairman of the Board and March 30, 2001
- ----------------------------------------------------- Chief Executive Officer
(R.L. Waltrip)
/s/ JEFFREY E. CURTISS* Senior Vice President Chief March 30, 2001
- ----------------------------------------------------- Financial Officer (Principal
(Jeffrey E. Curtiss) Financial Officer)
/s/ W. CARDON GERNER Vice President Corporate March 30, 2001
- ----------------------------------------------------- Controller (Principal
(W. Cardon Gerner) Accounting Officer)
/s/ ANTHONY L. COELHO* Director March 30, 2001
- -----------------------------------------------------
(Anthony L. Coelho)
/s/ JACK FINKELSTEIN* Director March 30, 2001
- -----------------------------------------------------
(Jack Finkelstein)
/s/ A.J. FOYT, JR.* Director March 30, 2001
- -----------------------------------------------------
(A.J. Foyt, Jr.)
/s/ JAMES H. GREER* Director March 30, 2001
- -----------------------------------------------------
(James H. Greer)
/s/ B.D. HUNTER* Director March 30, 2001
- -----------------------------------------------------
(B.D. Hunter)
/s/ VICTOR L. LUND* Director March 30, 2001
- -----------------------------------------------------
(Victor L. Lund)
66
68
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN W. MECOM, JR.* Director March 30, 2001
- -----------------------------------------------------
(John W. Mecom, Jr.)
/s/ CLIFTON H. MORRIS, JR.* Director March 30, 2001
- -----------------------------------------------------
(Clifton H. Morris, Jr.)
/s/ E.H. THORNTON, JR.* Director March 30, 2001
- -----------------------------------------------------
(E.H. Thornton, Jr.)
/s/ W. BLAIR WALTRIP* Director March 30, 2001
- -----------------------------------------------------
(W. Blair Waltrip)
/s/ EDWARD E. WILLIAMS* Director March 30, 2001
- -----------------------------------------------------
(Edward E. Williams)
*By: /s/ JAMES M. SHELGER
-----------------------------------------------
(James M. Shelger, as Attorney-In-Fact
For each of the Persons indicated)
67
69
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Registration Statement No.
333-10867 on Form S-3).
3.2 -- Articles of Amendment to Restated Articles of
Incorporation. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended September 30,
1996).
3.3 -- Statement of Resolution Establishing Series of Shares of
Series D Junior Participating Preferred Stock, dated July
27, 1998. (Incorporated by reference to Exhibit 3.2 to
Form 10-Q for the fiscal quarter ended June 30, 1998).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.1 to Form 10-Q for the fiscal quarter ended September
30, 1999).
4.1 -- Rights Agreement dated as of May 14, 1998 between the
Company and Harris Trust and Savings Bank. (Incorporated
by reference to Exhibit 99.1 to Form 8-K dated May 14,
1998).
4.2 -- Agreement Appointing a Successor Rights Agent Under
Rights Agreement, dated June 1, 1999, by the Company,
Harris Trust and Savings Bank and The Bank of New York.
(Incorporated by reference to Exhibit 4.1 to Form 10-Q
for the fiscal quarter ended June 30, 1999).
10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated
by reference to Exhibit 10.1 to Form 10-K for the fiscal
year ended December 31, 1991).
10.2 -- Form of First Amendment to Retirement Plan For
Non-Employee Directors
10.3 -- Agreement dated May 14, 1992 between the Company, R. L.
Waltrip and related parties relating to life insurance.
(Incorporated by reference to Exhibit 10.4 to Form 10-K
for the fiscal year ended December 31, 1992).
10.4 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and R.L. Waltrip. (Incorporated
by reference to Exhibit 10.3 to Form 10-K for the fiscal
year ended December 31, 1998).
10.5 -- Non-Competition Agreement and Amendment to Employment
Agreement, dated November 11, 1991, among the Company, R.
L. Waltrip and Claire Waltrip. (Incorporated by reference
to Exhibit 10.9 to Form 10-K for the fiscal year ended
December 31, 1992).
10.6 -- Employment Agreement, dated January 1, 1999, between SCI
Executive Services, Inc. and W. Blair Waltrip.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q
for the fiscal quarter ended March 31, 1999).
10.7 -- Separation and Release Agreement, dated January 18, 2000,
among the Company, SCI Executive Services, Inc. and W.
Blair Waltrip. (Incorporated by reference to Exhibit 10.6
to Form 10-K for the fiscal year ended December 31,
1999).
10.8 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and Jerald L. Pullins.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the fiscal quarter ended June 30, 1998).
10.9 -- Employment Agreement, dated January 1, 1999, between SCI
Executive Services, Inc. and James M. Shelger.
(Incorporated by reference to Exhibit 10.13 to Form 10-K
for the fiscal year ended December 31, 1999).
68
70
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10 -- Employment and Non-Competition Agreement, dated February
28, 2001, between SCI Executive Services, Inc. and B. D.
Hunter.
10.11 -- Employment and Non-Competition Agreement, dated February
28, 2001, between SCI Executive Services, Inc. and
Jeffrey E. Curtiss.
10.12 -- Form of Employment Agreement pertaining to officers
(other than the officers identified in the preceding
exhibits).
10.13 -- Form of 1986 Stock Option Plan. (Incorporated by
reference to Exhibit 10.21 to Form 10-K for the fiscal
year ended December 31, 1991).
10.14 -- Amendment to 1986 Stock Option Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.11 to Form
10-K for the fiscal year ended December 31, 1996).
10.15 -- Amendment to 1986 Stock Option Plan, dated November 13,
1997. (Incorporated by reference to Exhibit 10.12 to Form
10-K for the fiscal year ended December 31, 1997).
10.16 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.17 -- First Amendment to Amended 1987 Stock Plan. (Incorporated
by reference to Exhibit 10.23 to Form 10-K for the fiscal
year ended December 31, 1993).
10.18 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 4.12 to Registration Statement
No. 333-00179 on Form S-8).
10.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated February 12, 1997. (Incorporated by reference to
Exhibit 10.15 to Form 10-K for the fiscal year ended
December 31, 1996).
10.20 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997. (Incorporated by reference to
Exhibit 10.17 to Form 10-K for the fiscal year ended
December 31, 1997).
10.21 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.22 -- Amendment to 1995 Incentive Equity Plan, dated February
12, 1997. (Incorporated by reference to Exhibit 10.18 to
Form 10-K for the fiscal year ended December 31, 1996).
10.23 -- Amendment to 1995 Incentive Equity Plan, dated November
13, 1997. (Incorporated by reference to Exhibit 10.21 to
Form 10-K for the fiscal year ended December 31, 1997).
10.24 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated
by reference to Annex A to Proxy Statement dated April
17, 1995).
10.25 -- Amended 1996 Incentive Plan. (Incorporated by reference
to Annex A to Proxy Statement dated April 13, 1999).
10.26 -- Split Dollar Life Insurance Plan. (Incorporated by
reference to Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 1995).
10.27 -- Supplemental Executive Retirement Plan for Senior
Officers (as Amended and Restated Effective as of January
1, 1998). (Incorporated by reference to Exhibit 10.28 to
Form 10-K for the fiscal year ended December 31, 1998).
10.28 -- Form of First Amendment to Supplemental Executive
Retirement Plan for Senior Officers.
69
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.29 -- Deferred Compensation Plan. (Incorporated by reference to
Exhibit 10.31 to Form 10-K for the fiscal year ended
December 31, 1997).
10.30 -- Amendment No. 5 to Service Corporation International
Employee Stock Purchase Plan. (Incorporated by reference
to Exhibit 10.31 to Form 10-K for the fiscal year ended
December 31, 1999).
10.31 -- Form of First Amendment to SCI 401(k) Retirement Savings
Plan.
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Accountants
(PricewaterhouseCoopers LLP).
24.1 -- Powers of Attorney.
99.1 -- Competitive Advance and Revolving Credit Facility
Agreement (Facility A), dated June 27, 1997, among the
Company, The Chase Manhattan Bank ("Chase") as
administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.1 to Form 10-K for the fiscal year ended
December 31, 1999).
99.2 -- Agreement and First Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
June 26, 1998, among the Company, Chase as administrative
agent and the banks and other financial institutions
named therein. (Incorporated by reference to Exhibit 99.2
to Form 10-K for the fiscal year ended December 31,
1999).
99.3 -- Agreement and Second Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
June 25, 1999, among the Company, Chase as administrative
agent and the banks and other financial institutions
named therein. (Incorporated by reference to Exhibit 99.3
to Form 10-K for the fiscal year ended December 31,
1999).
99.4 -- Agreement and Third Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
November 2, 1999, among the Company, Chase as
administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.4 to Form 10-K for the fiscal year ended
December 31, 1999).
99.5 -- Agreement and Fourth Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
November 14, 2000, among the Company, Chase as
administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.2 to Form 8-K dated December 4, 2000).
99.6 -- Competitive Advance and Revolving Credit Facility
Agreement (Facility B), dated June 27, 1997, among the
Company, subsidiaries of the Company named therein, Chase
as administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.5 to Form 10-K for the fiscal year ended
December 31, 1999).
99.7 -- Agreement and First Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility B), dated
November 2, 1999, among the Company, subsidiaries of the
Company named therein, Chase as administrative agent and
the banks and other financial institutions named therein.
(Incorporated by reference to Exhibit 99.6 to Form 10-K
for the fiscal year ended December 31, 1999).
70
72
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.8 -- Agreement and Second Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility B), dated
November 14, 2000, among the Company, subsidiaries of the
Company named therein, Chase as administrative agent and
the banks and other financial institutions named therein.
(Incorporated by reference to Exhibit 99.3 to Form 8-K
dated December 4, 2000).
99.9 -- Consolidated Class Action Complaint filed September 3,
1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to
Exhibit 99.1 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.10 -- Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.11 -- Defendants' Motion to Dismiss the Consolidated Class
Action Complaint filed October 8, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.12 -- Plaintiffs' Opposition to Defendants' Motion to Dismiss
the Consolidated Class Action Complaint filed November 5,
1999 in Civil Action No. H-99-280, In Re Service
Corporation International. (Incorporated by reference to
Exhibit 99.4 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.13 -- Defendants' Reply to Plaintiffs' Opposition to
Defendants' Motion to Dismiss the Consolidated Class
Action Complaint filed November 24, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.12 to Form 10-K
for the fiscal year ended December 31, 1999).
99.14 -- Plaintiffs' Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James P.
Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PriceWaterhouseCoopers, L.L.P.; in
the Judicial District Court of Angelina County, Texas.
(Incorporated by reference to Exhibit 99.5 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.15 -- Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.14. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal
year ended December 31, 1999).
99.16 -- Plaintiff's Original Petition filed December 28, 2000 in
Cause No. 33701-01-01, Jack D. Rottman v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers,
L.L.P.; in the ____ Judicial District Court of Angelina
County, Texas.
99.17 -- Defendants' Motion to Transfer Venue and Original Answer
in response to the Original Petition referred to in
Exhibit 99.16.
99.18 -- Plaintiff's Original Petition filed December 15, 2000, in
Cause No. 2000-63917, Jack T. Hammer v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers,
L.L.P.; in the 165th Judicial District Court of Harris
County, Texas.
99.19 -- Defendants' Original Answer to the Original Petition
referred to in Exhibit 99.18.
71
73
In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.31.
Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as
exhibits to this report certain instruments with respect to long-term debt under
which the total amount of securities authorized thereunder does not exceed 10
percent of the total assets of Registrant and its subsidiaries on a consolidated
basis. Registrant agrees to furnish a copy of any such instrument to the
Commission upon request.
72