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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 $10,632,528,700 based upon a closing market price of $42.50 on
March 26, 1998 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 26, 1998 was 255,840,952 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1998
Annual Meeting of Shareholders (Part III)
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PART I
ITEM 1. BUSINESS.
Service Corporation International was incorporated in Texas on July 5,
1962. The term "Company" or "SCI" includes the registrant and its subsidiaries,
unless the context indicates otherwise.
The Company is the largest provider of death care services in the world. At
December 31, 1997, the Company operated 3,127 funeral service locations, 392
cemeteries and 166 crematoria located in 17 countries on five continents. In
addition, the Company provides capital financing to independent funeral home and
cemetery operators.
The Company has continued to expand through the acquisition of funeral
service locations, cemeteries and crematoria, both domestically and
internationally. In 1997, the Company acquired 294 funeral service locations, 51
cemeteries and 19 crematoria. The Company has acquired most of its present
operations through acquisitions. For information regarding acquisitions, see
Note 3 to the consolidated financial statements in Item 8 of this Form 10-K.
For financial information about the Company's industry segments, including
the identifiable assets of the Company by industry segments, see Note 14 to the
consolidated financial statements in Item 8 of this Form 10-K.
FUNERAL AND CEMETERY OPERATIONS
The Funeral and Cemetery Operations consist of the Company's funeral
service locations, cemeteries and related businesses. The operations are
organized into two North American divisions covering the United States and
Canada and an international division responsible for all operations in Europe,
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 SCI'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 established primarily in
metropolitan areas to take advantage of operational efficiencies, including the
sharing of service personnel, vehicles, preparation services, clerical staff and
certain building facility costs.
Funeral Service Locations. The 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 certain
funeral service locations also operate crematoria. At December 31, 1997, the
Company owned 147 funeral service location/cemetery combinations and operated 54
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.
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 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 held in trust, are used to purchase life insurance or annuity
contracts from third party insurers or, with respect to French contracts, are
held in the Company's French insurance subsidiary. This French insurance
subsidiary sells prearranged funeral insurance contracts primarily in connection
with the Company's French funeral service operations. Funds paid on prearranged
funerals may not be withdrawn until the funeral is performed or until
cancellation by the customer. At December 31, 1997, the Company's unfulfilled
prearranged funeral contracts, including accumulated trust fund earnings and
increased benefits on insurance products, amounted to $3.163 billion, of which
$274 million is estimated to be fulfilled in 1998. The unfulfilled prearranged
funeral
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contracts at December 31, 1996 were $2.726 billion. For additional information
concerning prearranged funeral activities, see Note 4 to the consolidated
financial statements in Item 8 of this Form 10-K.
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 names because most
operations were acquired as existing businesses and generally continue to be
operated under the same name as before acquisition.
The death rate 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.
Since 1984, the Company has operated under the Federal Trade Commission's
("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 acquisitions,
the Company has entered into consent orders with the FTC that have required the
Company to dispose of certain operations to proceed with 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.
Cemeteries. The Company's cemeteries sell cemetery interment rights
(including mausoleum spaces and lawn crypts) and certain merchandise including
stone and bronze memorials and burial vaults. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries also operate crematoria.
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 may be required by law to be paid into trust
until the merchandise is purchased on behalf of the customer. For additional
information regarding cemetery trust funds, see Notes 2 and 5 to the
consolidated financial statements in Item 8 of this Form 10-K.
Death Care Industry. The funeral industry is characterized by a large
number of locally owned, independent operations. The Company believes that based
on the total number of funeral services performed in 1997, the Company,
including companies acquired by it, performed approximately 10%, 28%, 14% and
25% of the funeral services in North America, France, the United Kingdom and
Australia, respectively.
To compete successfully, the Company's funeral service locations must
maintain competitive prices, attractive, well-maintained and conveniently
located facilities, a good reputation and high professional standards. In
addition, heritage and tradition can provide an established funeral home with
the opportunity for repeat business from client families. Furthermore, an
established firm can generate future volume and revenues by marketing
prearranged funeral services.
The cemetery industry is also characterized by a large number of locally
owned independent operations. The Company's cemetery properties compete with
other cemeteries in the same general area. To compete successfully, the
Company's cemeteries must maintain competitive prices, attractive and
well-maintained properties, a good reputation, an effective sales force and high
professional standards.
FINANCIAL SERVICES OPERATION
Since 1988, the Company's wholly owned subsidiary, Provident Services, Inc.
("Provident"), has provided secured financing to independent funeral home and
cemetery operators. The majority of Provident's loans are made to clients
seeking to finance funeral home or cemetery acquisitions. Additionally,
Provident provides construction loans for funeral home or cemetery improvement
and expansion. Loan packages take traditional forms of secured financing
comparable to arrangements offered by leading commercial banks. Provident's
loans are generally made at interest rates which float with the prime lending
rate.
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At December 31, 1997, Provident had $199 million in loans outstanding and
$50 million of unfunded loan commitments. At December 31, 1996, Provident had
$146 million in loans outstanding and $55 million of unfunded loan commitments.
Provident obtains its funds primarily from the Company's variable interest rate
bank borrowings.
Provident is in competition with banks and other lending institutions, many
of which have substantially greater resources than Provident. However, Provident
believes that its knowledge of the death care industry provides it with the
ability to make more accurate assessments of funeral home and cemetery loans,
thereby providing Provident a competitive advantage in making such loans.
EMPLOYEES
At December 31, 1997, the Company employed 24,072 (15,403 in the United
States) persons on a full time basis and 12,120 (8,421 in the United States)
persons on a part time basis. Of the full time employees, 23,430 were in the
Funeral and Cemetery Operations, eight were in Financial Services and 634 were
in corporate 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, and
all eligible United States employees are participants in retirement plans of the
Company or various subsidiaries. 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 federal, state, local and Australian, Canadian,
French, United Kingdom and other foreign statutes, ordinances and regulations.
The Company believes that it is in substantial compliance with the significant
provisions of such statutes, ordinances and regulations. See discussion of FTC
funeral industry trade regulation and consent orders in "Funeral Service
Locations" above.
The French funeral services industry is currently undergoing significant
regulatory change. 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
SCI's French operations ("Exclusive Municipal Authority"). Legislation has been
passed that will generally end municipal control of the French funeral service
business and will allow the public to choose their funeral service provider.
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, such as SCI,
providing cemetery merchandise such as markers and monuments.
ITEM 2. PROPERTIES.
The Company's executive headquarters are 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 its
parking garage. The property consists of approximately 1.3 acres, 250,000 square
feet of office space in the building and 160,000 square feet of parking space in
the 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 $43,000
through July 2000 and $59,000 thereafter. 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 a three-story building at 1919 Allen Parkway,
Houston, Texas 77019 containing 43,000 square feet of office space.
At December 31, 1997, the Company owned the real estate and buildings of
2,552 of its funeral service and cemetery locations and leased facilities in
connection with 1,133 of such operations. In addition, the Company leased four
aircraft pursuant to cancelable leases. At December 31, 1997, the Company
operated 11,498 vehicles, of which 8,641 were owned and 2,857 were leased. For
additional information regarding leases, see Note 10 to the consolidated
financial statements in Item 8 of this Form 10-K.
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The Company's 392 cemeteries contain an aggregate of approximately 30,677
acres, of which approximately 54% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition. Management believes
that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is involved in legal proceedings, the Company does not
believe that any of the proceedings is material pursuant to the standards set
forth in Item 103 of Regulation S-K promulgated under the Securities Exchange
Act of 1934.
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 26, 1998 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)
------------ --- -------- ----------
R. L. Waltrip........................ (67) Chairman of the Board and Chief Executive 1962
Officer
L. William Heilbrodt................. (56) President and Chief Operating Officer 1988
W. Blair Waltrip..................... (43) Executive Vice President Operations 1980
Jerald L. Pullins.................... (56) Executive Vice President International 1992
Operations
John W. Morrow, Jr. ................. (62) Executive Vice President Special Services 1989
George R. Champagne.................. (44) Senior Vice President Chief Financial Officer 1989
Glenn G. McMillen.................... (55) Senior Vice President Operations 1993
Richard T. Sells..................... (58) Senior Vice President Preneed Sales 1987
James M. Shelger..................... (48) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner....................... (52) Senior Vice President Administration 1992
T. Craig Benson...................... (36) Vice President International Operations 1990
Gregory L. Cauthen................... (40) Vice President Treasurer 1995
J. Daniel Garrison................... (46) Vice President International Operations 1998
W. Mark Hamilton..................... (33) Vice President Prearranged Funeral Services 1996
Lowell A. Kirkpatrick, Jr. .......... (39) Vice President Operations, Finance and 1994
Development
Stephen M. Mack...................... (46) Vice President Corporate Operations 1998
Todd A. Matherne..................... (43) Vice President Operations, Finance 1996
and Development
Vincent L. Visosky................... (50) Vice President Operational Controller 1989
Michael R. Webb...................... (40) Vice President International Corporate 1998
Development
Henry M. Nelly, III.................. (53) President -- Provident Services, 1989
Inc., a subsidiary of the Company
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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. Matherne joined the Company in April 1995 as Managing Director Investor
Relations and was promoted in May 1996 to Vice President Investor Relations and
in February 1998 to Vice President Operations, Finance and Development. Prior
thereto, Mr. Matherne was Vice President and General Manager of Baker Hughes
Treatment Services, an environmental services business.
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. W. Blair Waltrip is a son of
R. L. Waltrip, T. Craig Benson is a son-in-law of R. L. Waltrip and T. Craig
Benson and W. Blair Waltrip are brothers-in-law.
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, 1997, there were 7,720 holders of record of
the Company's common stock.
The Company has declared 99 consecutive quarterly dividends on its common
stock since it began paying dividends in 1974. The dividend rate is currently
$.09 per share per quarter, or an indicated annual rate of $.36 per share. For
the three years ended December 31, 1997, dividends per share were $.30, $.24 and
$.22, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
First............................. $33.88 $26.88 $24.75 $19.44 $14.56 $13.13
Second............................ 36.00 29.63 30.13 24.13 15.81 13.44
Third............................. 35.75 29.81 29.44 27.63 19.75 15.19
Fourth............................ 38.00 27.88 30.75 26.50 22.00 18.81
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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ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues........................ $ 2,468,402 $2,294,194 $1,652,126 $1,117,175 $ 899,178
Income before extraordinary loss
and cumulative effect of
change in accounting
principle..................... 374,552 265,298 183,588 131,045 103,092
Net income...................... 333,750 265,298 183,588 131,045 101,061
Earnings per share**:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle --
Basic.................... 1.53 1.13 .92 .76 .62
Diluted.................. 1.47 1.08 .86 .71 .59
Net income --
Basic.................... 1.36 1.13 .92 .76 .61
Diluted.................. 1.31 1.08 .86 .71 .58
Dividends per share............. .30 .24 .22 .21 .20
Total assets.................... 10,306,863 8,869,770 7,672,387 5,161,888 3,683,304
Long-term debt.................. 2,634,699 2,048,737 1,712,464 1,330,177 1,062,222
Convertible preferred securities
of SCI Finance LLC............ -- 172,500 172,500 172,500 --
Stockholders' equity............ 2,726,004 2,235,317 1,975,345 1,196,622 884,513
Shares outstanding.............. 252,924 236,193 234,542 189,714 169,718
Ratio of earnings to fixed
charges*...................... 4.29 3.24 2.84 3.13 3.19
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* For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus
the minority interest of majority-owned subsidiaries with fixed charges and
plus fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt
costs, dividends on preferred securities of SCI Finance LLC and one-third of
rental expense which the Company considers representative of the interest
factor in the rentals.
** Earnings per share amounts have been restated to reflect the December 1997
adoption of Statement of Financial Accounting Standards No. 128.
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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)
A primary objective of the Company is to maximize shareholder value. To
accomplish this goal, one of the Company's strategies has been to provide
consistent growth in earnings per share. This growth strategy initiates with the
Company producing significant cash flow from its existing cluster operations,
then continues by using that cash to expand clusters through add-on
acquisitions, new construction, and improvements to existing locations. The
Company also expands its network through strategic acquisitions of larger,
multi-location death care companies, typically funding these transactions by
accessing the debt and equity markets when appropriate. All businesses are
continuously improved by further enhancing products, services and systems;
leveraging operating and overhead costs; strengthening buying power; and
expanding preneed sales.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established in and around
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
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, allow the Company to more efficiently utilize
its operating facilities during fluctuations in the number of funeral services
and cemetery interments performed in a given period. The Company's acquisitions
are primarily located within existing cluster areas or create new cluster area
opportunities. The Company has approximately 400 clusters, which range in size
from two operations to 67 operations. There may be more than one cluster in a
given metropolitan area, depending upon the level and degree of shared costs.
RESULTS OF OPERATIONS:
Year ended 1997 compared to 1996
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral............. $ 1,727,003 $ 1,663,387 $ 63,616 3.8%
Cemetery............ 724,862 612,421 112,441 18.4
Financial
services......... 16,537 18,386 (1,849) (10.1)
----------- ----------- -------- -----
2,468,402 2,294,194 174,208 7.6
Costs and expenses:
Funeral............. (1,318,920) (1,282,546) 36,374 2.8
Cemetery............ (452,965) (397,700) 55,265 13.9
Financial
services......... (8,905) (9,496) (591) (6.2)
----------- ----------- -------- -----
(1,780,790) (1,689,742) 91,048 5.4
Gross profit margin
and percentage:
Funeral............. 408,083 23.6% 380,841 22.9% 27,242 7.2
Cemetery............ 271,897 37.5% 214,721 35.1% 57,176 26.6
Financial
services......... 7,632 46.2% 8,890 48.4% (1,258) (14.2)
----------- ----- ----------- ----- -------- -----
$ 687,612 27.9% $ 604,452 26.3% $ 83,160 13.8%
=========== ===== =========== ===== ======== =====
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Funeral
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Existing clusters:
United States......................... $ 892,451 $ 820,860 $ 71,591 8.7%
France................................ 485,264 537,079 (51,815) (9.6)
Other European........................ 186,238 162,830 23,408 14.4
Other foreign......................... 114,389 115,707 (1,318) (1.1)
---------- ---------- -------- ----
1,678,342 1,636,476 41,866 2.6
---------- ---------- -------- ----
New clusters:*
United States......................... 21,061 4,475 16,586
Other European........................ 16,378 2,847 13,531
Other foreign......................... 2,113 -- 2,113
---------- ---------- --------
39,552 7,322 32,230
---------- ---------- -------- ----
Total clusters........................ 1,717,894 1,643,798 74,096 4.5
Non-cluster and disposed operations..... 9,109 19,589 (10,480)
---------- ---------- -------- ----
Total funeral revenues........ $1,727,003 $1,663,387 $ 63,616 3.8%
========== ========== ======== ====
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* Represents new geographic cluster areas entered into since the beginning of
1996 for the period that those businesses were owned by the Company.
The $41,866 increase in revenues at existing clusters was the result of a
2.4% increase in the number of funeral services performed (515,733 compared to
503,476) and a slightly higher average sales price ($3,254 compared to $3,250).
Acquisitions since January 1, 1996, included in existing clusters, accounted for
$97,843 of the existing cluster revenue increase. Excluding a $68,138 decrease
in French revenue caused exclusively by a change in the US dollar / French franc
exchange rate, businesses owned before 1996 had a revenue increase of $12,161.
The death rate in the Company's primary markets has remained relatively
constant for several years and is expected to remain at this rate for at least
the near future; however, due to the increasing proportion of people over age 65
in the Company's primary markets, demand for funeral services could increase in
the decades to come. It is anticipated that the Company's near term revenue
growth will continue to be primarily generated from acquired operations (added
to existing clusters and the creation of new clusters) as well as from improved
merchandising of funeral services and products. The Company is the world's
largest in the funeral service industry and currently performs approximately
10%, 28%, 14% and 25% of the funeral services in North America, France, the
United Kingdom and Australia, respectively. The Company believes that there are
approximately 8,000 potential acquisition candidates in North America that meet
its current metropolitan acquisition criteria and numerous other candidates
outside of North America. The Company plans to continue to aggressively seek to
acquire these potential candidates.
During the year ended December 31, 1997, the Company sold (net of
cancellations) approximately $509,000 of prearranged funeral services compared
to approximately $512,000 for the same period in 1996. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed. The current
emphasis on sales of prearranged funerals is expected to continue.
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Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Existing clusters:
United States......................... $ 581,633 $ 528,918 $ 52,715 10.0%
France................................ 415,056 466,136 (51,080) (11.0)
Other European........................ 144,513 123,517 20,996 17.0
Other foreign......................... 78,944 76,816 2,128 2.8
---------- ---------- -------- -----
1,220,146 1,195,387 24,759 2.1
---------- ---------- -------- -----
New clusters:*
United States......................... 15,805 3,192 12,613
Other European........................ 13,770 2,438 11,332
Other foreign......................... 1,753 -- 1,753
---------- ---------- -------- -----
31,328 5,630 25,698
---------- ---------- -------- -----
Total clusters........................ 1,251,474 1,201,017 50,457 4.2
Non-cluster and disposed operations..... 12,730 19,209 (6,479)
Administrative overhead................. 54,716 62,320 (7,604) (12.2)
---------- ---------- -------- -----
Total funeral costs and
expenses.................... $1,318,920 $1,282,546 $ 36,374 2.8%
========== ========== ======== =====
The $24,759 increase in costs and expenses from existing clusters is
primarily the result of the period to period increase in the number of funeral
services performed. Acquisitions since January 1, 1996, included in existing
clusters, accounted for $73,762 of the existing cluster cost increase. Excluding
a $60,399 decrease in French costs caused exclusively by a change in the US
dollar/French franc exchange rate, businesses owned before 1996 had a cost
increase of $11,396. The gross profit margin before administrative overhead for
existing clusters increased to 27.3% in 1997 from 27.0% in 1996. Typically,
acquisitions will temporarily exhibit slightly lower gross profit margins than
those experienced by the Company's existing locations at least until such time
as these locations are assimilated into the Company's cluster management
strategy.
The overall funeral gross profit margin improved in 1997 to 23.6%, compared
to 22.9% in 1996. Contributing to this period to period improvement were the
Company's French operations which had a margin improvement to 11.0% from 9.8%.
This margin percentage is consistent with the Company's expectations for these
operations.
Administrative overhead costs expressed as a percentage of total funeral
revenues, decreased to 3.2%, compared to 3.7% in 1996.
Cemetery
Cemetery revenues were as follows:
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
-------- -------- ---------- ----------
Existing clusters:
United States............................ $637,136 $546,462 $ 90,674 16.6%
Other European........................... 21,010 15,271 5,739 37.6
Other foreign............................ 49,024 46,155 2,869 6.2
-------- -------- -------- -----
707,170 607,888 99,282 16.3
-------- -------- -------- -----
New clusters*.............................. 10,517 -- 10,517
-------- -------- -------- -----
Total clusters................... 717,687 607,888 109,799 18.1
Non-cluster and disposed operations........ 7,175 4,533 2,642 58.3
-------- -------- -------- -----
Total cemetery revenues.......... $724,862 $612,421 $112,441 18.4%
======== ======== ======== =====
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Revenues from existing clusters increased $99,282. Included in the existing
cluster increase were $49,935 in increased revenues from cemeteries acquired
since the beginning of 1996, while revenues from existing cluster locations
owned before 1996 increased $49,347 due primarily to increased preneed sales of
property and merchandise, higher average sales prices for these items and higher
investment earnings on trusted amounts. The Company plans to continue to
emphasize the selling of preneed cemetery property and merchandise by
maintaining an active and well-trained sales force. Additionally, future growth
through acquisitions is considered likely.
Cemetery costs and expenses were as follows:
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
-------- -------- ---------- ----------
Existing clusters:
United States............................ $365,437 $329,530 $35,907 10.9%
Other European........................... 12,378 9,571 2,807 29.3
Other foreign............................ 26,875 25,288 1,587 6.3
-------- -------- ------- ----
404,690 364,389 40,301 11.1
-------- -------- ------- ----
New clusters*.............................. 8,191 13 8,178
-------- -------- ------- ----
Total clusters................... 412,881 364,402 48,479 13.3
Non-cluster and disposed operations........ 4,681 3,913 768 19.6
Administrative overhead.................... 35,403 29,385 6,018 20.5
-------- -------- ------- ----
Total cemetery costs and
expenses....................... $452,965 $397,700 $55,265 13.9%
======== ======== ======= ====
Costs and expenses at existing clusters increased $40,301 due primarily to
an increase of $31,667 from cemeteries acquired since the beginning of 1996,
while costs from existing cluster cemeteries acquired before 1996 increased
$8,634. The overall cemetery gross profit margin increased to 37.5% in 1997 from
35.1% last year. This increase reflects strong growth in sales of preneed
cemetery property and merchandise as well as continued cost control in all major
expense categories. Administrative overhead costs have increased to 4.9% of
revenues this year compared to 4.8% last year. Acquisitions typically have lower
gross profit margins, at least until such time that they are assimilated into
the Company's cluster management strategy and preneed selling programs are fully
implemented.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported gross profit of $7,632 for the year ended December 31,
1997, compared to $8,890 for the same period in 1996. Provident's average
outstanding loan portfolio during the current year decreased to $182,375
compared to $190,936 in 1996, and the average interest rate spread also
decreased to 3.18% compared to 3.64% in 1996.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.7% in 1997 compared to 2.8% in 1996. These expenses
increased $3,566 or 5.6% during the year primarily from increased personnel
costs.
Interest expense, which excludes the amount incurred by financial service
operations, decreased $1,837 or 1.3% during the current year. The decreased
interest expense reflects an approximately 130 basis point decrease in average
interest rates on indebtedness offset by the Company's higher debt level in
1997. The decreased average interest rate is primarily attributable to the
Company's 1997 refinancing of certain long-term debt and hedging programs
associated with its international investments.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a before tax gain of $68,100.
Dividends on preferred securities of SCI Finance LLC were
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$4,382 in 1997 compared to $10,781 in 1996, a decrease of $6,399 or 59.4%. This
decrease is the result of the May 1997 redemption of all outstanding shares of
its convertible preferred securities of SCI Finance LLC.
The provision for income taxes reflects a 35.4% effective tax rate for 1997
as compared to a 35.9% effective tax rate in 1996. The decrease in the effective
tax rate is due primarily to lower taxes from international operations (1997
included a tax benefit relating to enacted tax rate changes in certain foreign
tax jurisdictions), partially offset by the tax impact from the gain on sale of
the Company's interest in ECI which is reflected at the Company's higher
domestic tax rate.
RESULTS OF OPERATIONS:
Year ended 1996 compared to 1995
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------- INCREASE INCREASE
1996 1995 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral............. $ 1,663,387 $ 1,166,247 $497,140 42.6%
Cemetery............ 612,421 463,754 148,667 32.1
Financial
services......... 18,386 22,125 (3,739) (16.9)
----------- ----------- -------- -----
2,294,194 1,652,126 642,068 38.9
Costs and expenses:
Funeral............. (1,282,546) (871,096) 411,450 47.2
Cemetery............ (397,700) (303,312) 94,388 31.1
Financial
services......... (9,496) (12,497) (3,001) (24.0)
----------- ----------- -------- -----
(1,689,742) (1,186,905) 502,837 42.4
Gross profit margin
and percentage:
Funeral............. 380,841 22.9% 295,151 25.3% 85,690 29.0
Cemetery............ 214,721 35.1% 160,442 34.6% 54,279 33.8
Financial
services......... 8,890 48.4% 9,628 43.5% (738) (7.7)
----------- ----- ----------- ----- -------- -----
$ 604,452 26.3% $ 465,221 28.2% $139,231 29.9%
=========== ===== =========== ===== ======== =====
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Funeral
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1996 1995 INCREASE INCREASE
----------- ----------- ---------- ----------
Existing clusters:
United States......................... $ 807,829 $ 730,053 $ 77,776 10.7%
Other European........................ 141,969 130,849 11,120 8.5
Other foreign......................... 99,951 87,044 12,907 14.8
---------- ---------- -------- ----
1,049,749 947,946 101,803 10.7
---------- ---------- -------- ----
New clusters:*
United States......................... 25,203 10,999 14,204
Other European........................ 27,691 6,980 20,711
Other foreign......................... 15,450 4,278 11,172
France................................ 537,079 190,091 346,988
---------- ---------- --------
605,423 212,348 393,075
---------- ---------- -------- ----
Total clusters................ 1,655,172 1,160,294 494,878 42.7
Non-cluster and disposed operations..... 8,215 5,953 2,262
---------- ---------- -------- ----
Total funeral revenues........ $1,663,387 $1,166,247 $497,140 42.6%
========== ========== ======== ====
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1995 for the period that those businesses were owned by the Company.
The $101,803 increase in revenues at existing clusters was primarily the
result of a 7.7% increase in North American funeral services performed at
existing cluster locations (226,822 compared to 210,611) and a 3.0% higher
average sales price ($3,745 compared to $3,635). Included in this increase were
$79,290 in increased revenues from locations acquired since the beginning of
1995. The remaining existing cluster revenue increase of $22,513 was contributed
by operations acquired before 1995. The 1995 results for France represent
approximately four months of Company ownership. The increase in Other European
new cluster revenue is primarily due to non-French European operations added in
August 1995.
During the year ended December 31, 1996, the Company sold (net of
cancellations) approximately $512,000 of prearranged funeral services compared
to approximately $367,000 for the same period in 1995. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed.
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Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1996 1995 INCREASE INCREASE
------------ ---------- -------- ----------
Existing clusters:
United States.......................... $ 520,864 $482,497 $ 38,367 8.0%
Other European......................... 104,176 101,327 2,849 2.8
Other foreign.......................... 65,549 57,650 7,899 13.7
---------- -------- -------- ----
690,589 641,474 49,115 7.7
---------- -------- -------- ----
New clusters:*
United States.......................... 18,431 8,148 10,283
Other European......................... 24,978 6,986 17,992
Other foreign.......................... 10,855 3,396 7,459
France................................. 466,136 165,778 300,358
---------- -------- --------
520,400 184,308 336,092
---------- -------- -------- ----
Total clusters................. 1,210,989 825,782 385,207 46.6
Non-cluster and disposed operations...... 9,237 7,582 1,655
Administrative overhead.................. 62,320 37,732 24,588 65.2
---------- -------- -------- ----
Total funeral costs and
expenses..................... $1,282,546 $871,096 $411,450 47.2%
========== ======== ======== ====
The total gross profit for existing clusters increased to $359,160 in 1996
from $306,472 in 1995, and the related gross profit percentage for existing
clusters increased to 34.2% from 32.3% in 1995. Acquisitions since the beginning
of 1995, included in existing clusters, accounted for $23,980 of the existing
gross profit increase. The gross profit margin for those funeral operations in
existing clusters that were acquired before 1995 increased to 35.0% in 1996 from
32.7% in 1995 due to the increased revenues discussed above without a
corresponding percentage increase in personnel and other operating costs.
Contributing to the overall funeral gross profit margin decline (22.9%
compared to 25.3% in 1995) was the Company's French operations. French
operations had an increased gross profit margin of 9.8% in 1996, compared to
9.4% in 1995, however 1996 reflects a full year's results compared to the four
months of ownership in 1995. The French margin is consistent with the Company's
expectations for these operations which have historically produced lower gross
margins than the Company's operations in North America and Australia.
Administrative overhead costs expressed as a percentage of revenues increased in
1996 to 3.7%, compared to 3.2% in 1995. This administrative overhead cost
increase was primarily attributable to the addition of the French operations as
well as the Company's realignment of its North American operating structure.
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Cemetery
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States......................... $506,330 $395,821 $110,509 27.9%
Other European........................ 13,978 11,307 2,671 23.6
Other foreign......................... 46,485 39,979 6,506 16.3
-------- -------- -------- ----
566,793 447,107 119,686 26.8
-------- -------- -------- ----
New clusters:*
United States......................... 41,221 12,972 28,249
Other European........................ 1,307 796 511
-------- -------- --------
42,528 13,768 28,760
-------- -------- -------- ----
Total clusters................ 609,321 460,875 148,446 32.2
Non-cluster and disposed operations..... 3,100 2,879 221
-------- -------- -------- ----
Total cemetery revenues....... $612,421 $463,754 $148,667 32.1%
======== ======== ======== ====
Revenues for existing clusters increased due to an increased volume of
sales and higher average sales prices for property and merchandise. Included in
the existing cluster increase were $82,470 in increased revenues from cemeteries
acquired since the beginning of 1995. This increase was primarily due to the
impact of reporting a full year's results from a large United States acquisition
in October 1995. A majority of these properties were additions to existing
clusters. The remaining existing cluster revenue increase of $37,216 was
contributed by operations acquired before 1995.
Cemetery costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States......................... $304,732 $246,790 $ 57,942 23.5%
Other European........................ 8,404 5,799 2,605 44.9
Other foreign......................... 25,322 20,227 5,095 25.2
-------- -------- -------- ----
338,458 272,816 65,642 24.1
-------- -------- -------- ----
New clusters:*
United States......................... 24,547 8,581 15,966
United Kingdom........................ 1,181 570 611
-------- -------- --------
25,728 9,151 16,577
-------- -------- -------- ----
Total clusters................ 364,186 281,967 82,219 29.2
Non-cluster and disposed operations..... 4,129 3,509 620
Administrative overhead................. 29,385 17,836 11,549 64.8
-------- -------- -------- ----
Total cemetery costs and
expenses.................... $397,700 $303,312 $ 94,388 31.1%
======== ======== ======== ====
Costs at existing clusters increased $65,642 due primarily to an increase
of $48,864 from cemeteries acquired since the beginning of 1995, while costs
from existing cluster cemeteries acquired before 1995 increased $16,796. The
overall cemetery gross profit margin increased to 35.1% in 1996 from 34.6% in
1995. This increase reflects strong growth in sales of preneed cemetery property
and merchandise as well as continued cost control in all major expense
categories. Administrative overhead costs have increased to 4.8% of revenues in
1996 compared to 3.8% in 1995. This administrative overhead cost increase was
primarily
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attributable to increased costs from additional infrastructure added in the
Company's United Kingdom operations as well as the Company's realignment of its
North American operating structure.
Financial Services
Provident increased its gross margin percentage to 48.4% from 43.5%. This
was primarily attributable to early termination fees associated with the payoff
of outstanding loans in August 1996, by two of Provident's largest customers.
These payoffs reduced the average outstanding loan portfolio during 1996 to
approximately $191,000 with an average interest rate spread of 3.6% compared to
approximately $206,000 and 3.7%, respectively, in 1995.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
were 2.8% in 1996 compared to 3.2% in 1995. These expenses increased by
approximately $9,600 or 17.9% during the year primarily due to the recognition
of $6,000 in costs relating to the Loewen transaction (see below) as well as
increases in personnel costs. On October 3, 1996, The Company filed a
registration statement with the Securities and Exchange Commission
("Commission") that offered to acquire the outstanding shares of Loewen Group
Inc. ("Loewen"), a publicly traded death care company, through an exchange
offer. On January 7, 1997, the Company announced that it had withdrawn its
exchange offer for Loewen.
Interest expense, which excludes the amount incurred by financial service
operations, increased $20,409 or 17.3% during 1996 primarily from incremental
borrowings incurred to fund the Company's acquisition program. The 1996 increase
is the result of an increase of approximately $296,875 in the Company's average
debt (excluding debt related to Provident) outstanding during the year ended
December 31, 1996, compared to 1995. The increased interest associated with the
higher debt level was offset by a slightly lower average interest rate for the
year.
The provision for income taxes reflected a 35.9% effective tax rate for
1996 as compared to a 37.6% effective tax rate in 1995. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1997:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Commission. The Company believes cash from operations,
additional funds available under its revolving credit agreements, proceeds from
public and private offerings of securities will be sufficient to continue its
current acquisition program and operating policies.
At December 31, 1997, the Company had net working capital of $275,966 and a
current ratio of 1.52:1, compared to working capital of $106,497 and a current
ratio of 1.18:1 at December 31, 1996.
Revolving Credit Agreements
The Company has various revolving credit facilities and lines of credit
which currently provide for aggregate borrowings of approximately $1,140,000. At
December 31, 1997, approximately $530,000 was available under these facilities.
These facilities have financial compliance provisions that contain certain
restrictions on levels of net worth, debt, liens and guarantees.
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17
Sources and Uses of Cash
Cash Flows from Operating Activities: Net cash provided by operating
activities was $299,436 for the year ended December 31, 1997, compared to
$209,857 for the same period in 1996, an increase of $89,579. This increase was
primarily due to improved operating results in 1997. Significant uses of
operating cash include an increase in net receivables resulting from increased
sales of funeral services and cemetery products and merchandise.
Cash Flows from Investing Activities: Net cash used in investing activities
was $633,444 for the year ended December 31, 1997, compared to $480,126 for the
same period in 1996, an increase of $153,318. This increase was primarily due to
a $130,411 increase in cash used in acquisitions and $37,380 of increased
capital expenditures including new construction of facilities and major
improvements to existing properties. Cash used for capital expenditures was
$230,532 during the year ended December 31, 1997. Additionally, the Company used
approximately $88,000 to increase its investment in existing equity investees,
while approximately $147,000 in cash was provided by the sale of the Company's
interest in ECI. Cash used relating to prearranged funeral activities decreased
due to the timing of cash payments to and withdrawals from trusts, offset by
increased cash outlays on prearranged marketing efforts.
Cash Flows from Financing Activities: Net cash provided by financing
activities was $336,754 for the year ended December 31, 1997, compared to
$256,916 for the same period in 1996, an increase of $79,838.
As of December 31, 1997, the Company's debt to capitalization ratio was
49.8% compared to 47.3% at December 31, 1996. The interest rate coverage ratio
for the year ended December 31, 1997 was 4.43:1 (excluding the gain on the sale
of the Company's investment in ECI), compared to 3.62:1 for the same period in
1996. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash flow generated
and the low failure rate exhibited by these types of businesses. The Company
believes these acquired firms are capable of servicing the additional debt and
providing a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance
its future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. At December
31, 1997, the Company had approximately $530,000 of available borrowings under
various revolving credit facilities and lines of credit. At December 31, 1997,
the Company had the ability to issue $550,000 in securities registered with the
Commission under a shelf registration (In March 1998, the company issued
$500,000 of long-term notes under the shelf to repay borrowings under the
company's credit facilities). In addition, 15,369,000 shares of common stock and
a total of $201,000 of guaranteed promissory notes and convertible debentures
are registered with the Commission under a separate shelf registration to be
used exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts
and the funds collected are generally held in trust or are used to purchase a
life insurance or annuity contract. The principal amount of these prearranged
funeral contracts will be received in cash by a Company funeral service location
at the time the funeral is performed. Earnings on trust funds and increasing
benefits under insurance funded contracts also increase the amount of cash to be
received upon performance of the funeral and are intended to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. During 1997, the Company completed a review of the
prearranged trust investment process which included an asset/liability study.
This has resulted in a new investment program which entails the consolidation of
multiple trustees, the use of institutional managers with differing investment
styles and consolidated performance monitoring and tracking. This new program
targets a real return in excess of the amount necessary to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. This is accomplished by allocating the portfolio mix to the
appropriate investments that more accurately match the anticipated
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maturity of the policies. The Company is currently reallocating the portfolio to
achieve a new asset allocation of approximately 65% equity and 35% fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are
a current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American funerals performed annually approximates
25% and is expected to grow, thereby making the total number of funerals
performed more predictable.
Cremations
In recent years there has been steady, gradual growth in the number of
cremations that have been chosen as an alternative to traditional methods of
disposal of human remains. In 1997, nearly 33% of all families served by the
Company's North American funeral service locations selected the cremation
alternative, substantially more than the 20% national average according to
industry studies. The Company has a significant number of operating locations in
Florida and the west coast of North America where the cremation alternative
continues to gain acceptance. Based on industry studies, the Company believes
that cremations account for approximately 60-70% of all dispositions of human
remains in Australia and the United Kingdom. It is estimated that cremations
account for approximately 12% of all dispositions of human remains in France.
Though a cremation typically results in fewer sales dollars than a traditional
funeral service, the Company believes that funeral operations which are
predominantly cremation businesses typically have higher gross profit margin
percentages than those exhibited at traditional funeral operations. Cremation
memorialization has long been a tradition in the Australian and United Kingdom
markets. The Company has expanded its product alternatives in these markets
which has resulted in higher average sales. The Company has also established
markets in select areas within North America and believes that memorialization
of cremated remains represents a source of revenue growth.
Other Matters
The Company will adopt Statement of Financial Accounting Standards ("FAS")
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits", FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", and FAS No. 130 "Reporting Comprehensive Income" for the year
ended December 31, 1998. FAS No. 132 revises disclosures about pension and other
postretirement benefit plans, FAS No. 131 revises standards for reporting
information about operating segments, and FAS No. 130 establishes standards for
reporting and display of comprehensive income. The adoption of these disclosure
standards will not have a material impact on the consolidated financial
statements.
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs
to correctly differentiate the century from a date in which the year is
represented by only two digits. A computer system which is not year 2000
compliant might not be able to process certain data or possibly cause the entire
computer system to malfunction. The Company is currently assessing any potential
impact that changing to the year 2000 will have on the computer programs that
operate within the Company or are used by major vendors or service providers.
Cautionary Statement on Forward-looking Statements
The statements contained in this Annual Report that are not historical
facts are forward-looking statements within the meaning of the private
Securities Litigation Reform Act of 1995. These statements may
17
19
be accompanied by words such as "believe," "estimate," "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 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).
(2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
(3) Changes in consumer demand for the Company's services caused by
several factors such as changes in local death rates, cremation rates,
competitive pressures and local economic conditions.
(4) The Company's ability to identify and complete additional
acquisitions on terms that are favorable to the Company, to successfully
integrate acquisitions into the Company's business and to realize expected
cost savings in connection with such acquisitions. The Company's future
results may be materially impacted by changes in the level of acquisition
activity.
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.
Quantitative and Qualitative Disclosures about Market Risk
The Company uses 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
substantially hedge the Company's net investment in foreign assets. Accordingly,
movements in currency rates that impact the swaps are generally offset by a
corresponding movement in the value of the underlying assets being hedged and
movements in interest rates that impact the fair value of the interest rate
swaps are generally offset by a corresponding movement in the value of the
underlying debt being hedged. Similarly, currency movements that impact foreign
interest expense due under the cross-currency interest rate swaps are generally
offset by a corresponding movement in the earnings of the foreign operation.
Fair values included herein have been determined based on market prices provided
by counterparties. The information presented below should be read in conjunction
with notes four, eight and nine to the consolidated financial statements.
In general, interest rates are managed such that 40% to 60% of the total
debt (excluding debt which offsets the Provident loan receivable portfolio) is
floating rate and thus is sensitive to interest rate fluctuations. After giving
effect to the interest rate swaps, the Company's total debt has been converted
into approximately $1,078,000 of fixed interest rate debt at a weighted average
rate of 7.0% and approximately $1,386,000 of floating interest rate debt at a
weighted average rate of 5.5%. At December 31, 1997, a one percent increase in
the various floating rate indices referenced in the debt and swaps (excluding
amounts borrowed to issue loans by Provident) would cause a $13,860 net increase
in interest expense. However, the Company's overall sensitivity to floating
interest rates is diversified in that approximately 40% of the Company's
floating rate exposure is based in four markets other than the United States.
In general, the Company hedges up to 100% of its net investment in foreign
assets when such investment is considered significant and when it is reasonably
cost efficient to do so. The death care industries in countries where the
Company has foreign operations are generally stable and have had predictable
cash flows. In addition, those countries have not had highly inflationary
economies. Approximately one-third of the Company's net assets and one-quarter
of its operating income are denominated in foreign currencies. Due to the
cross-currency hedges described above, approximately 6% of the Company's net
assets and approximately 8% of the Company's operating earnings are subject to
translation risk.
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Equity-Price Risk Management
In connection with prearranged funeral operations and preneed cemetery
merchandise sales, the Company owns investments in equity securities and mutual
funds which are sensitive to current market prices. Cost and market values as of
December 31, 1997 and 1996, are presented in notes four and five to the
consolidated financial statements.
Market-Rate Sensitive Instruments and Risk Management
The following discussion about the Company's risk-management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
The following table summarizes the financial instruments and derivative
instruments held by the Company at December 31, 1997, which are sensitive to
changes in interest rates, foreign exchange rates, and equity prices. The
Company uses interest rate swaps and cross-currency interest rate swaps to
manage these primary market exposures associated with underlying assets and
liabilities. The Company uses these instruments to reduce risk by essentially
creating offsetting market exposures. The instruments held by the Company are
not leveraged and are held for non-speculative purposes.
For certain assets and debt, the table below presents principal cash flows
that exist by maturity date and the related average interest rate. For swaps,
the table presents the notional amounts and expected interest rates that the
Company will receive and pay that exist by contractual dates. The notional
amount represents the foreign currency notional amount converted to US dollars
at an estimated future currency exchange rate, and is used to calculate the
contractual payments to be exchanged under the contract. The variable rates are
estimated based on implied forward rates in the yield curve.
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FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER ASSET/(LIABILITY)
-------- --------- --------- --------- --------- ----------- -----------------
ASSETS
- -----
Provident receivables....... $ 15,922 $ 22,528 $ 21,264 $ 52,917 $ 58,218 $ 27,072 $ 197,921
Average rate.............. 9.34% 7.58% 9.99% 9.96% 8.48% 8.67%
Auxia debt securities....... 2,809 17,014 59,739 24,300 67,522 142,901 314,285
Average rate.............. 5.97% 5.97% 6.30% 6.82% 6.16% 6.16%
LIABILITIES
- --------
Fixed rate debt............. (64,570) (62,192) (193,285) (196,661) (328,456) (1,050,596) (2,016,511)
Average rate.............. 7.78% 7.83% 6.80% 7.12% 7.09% 7.35%
Floating rate debt
Floating rate notes....... (200,000) (200,000)
Bank revolving credit and
commercial paper........ (416,139) (200,450) (616,589)
Average rate.............. 5.97% 5.19%
DERIVATIVE CONTRACTS
- -----------------
INTEREST RATE SWAPS
US fixed to US floating..... 950,000 950,000 950,000 800,000 500,000 500,000 30,951
Average receive rate...... 6.87% 6.87% 6.87% 6.93% 7.19% 7.19%
Average pay rate.......... 5.74% 5.78% 5.95% 5.99% 6.06% 6.15%
US floating to US fixed..... 200,000 200,000 200,000 200,000 200,000 200,000 783
Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06% 6.15%
Average pay rate.......... 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Foreign currency floating to
foreign currency fixed.... 341,475 263,721 264,514 265,116 267,067 82,858 (20,085)
Average receive rate...... 4.83% 5.03% 5.35% 5.55% 5.76% 6.51%
Average pay rate.......... 6.60% 6.80% 6.80% 6.80% 6.79% 6.90%
Foreign currency floating to
foreign currency
floating.................. 81,992 83,301 84,275 85,062 85,736 85,736 (1,479)
Average receive rate...... 3.84% 4.12% 4.61% 4.93% 5.23% 5.42%
Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66%
Foreign currency fixed to
foreign currency
floating.................. 82,325 83,639 84,617 85,408 86,084 86,084 3,036
Average receive rate...... 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%
Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66%
CROSS-CURRENCY INTEREST RATE
SWAPS
US fixed to foreign currency
fixed..................... 702,391 682,268 532,955 506,191 407,039 407,039 83,237
Average receive rate...... 7.49% 7.43% 7.59% 7.52% 7.92% 7.92%
Average pay rate.......... 7.38% 7.29% 7.29% 7.15% 7.61% 7.61%
US fixed to foreign currency
floating.................. 368,448 285,933 282,575 276,260 275,168 189,097 20,956
Average receive rate...... 6.69% 6.67% 6.63% 6.57% 6.54% 7.07%
Average pay rate.......... 4.81% 4.90% 5.18% 5.36% 5.58% 6.14%
US floating to foreign
currency fixed............ 247,037 227,430 (40,619)
Average receive rate...... 5.73% 5.77%
Average pay rate.......... 5.39% 5.26%
US floating to foreign
currency floating......... 56,429 56,658 26,866 26,750 26,488 49,937
Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06%
Average pay rate.......... 5.18% 5.50% 6.13% 6.36% 6.67%
20
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 22
Consolidated Statement of Income for the three years ended
December 31, 1997......................................... 23
Consolidated Balance Sheet as of December 31, 1997 and
1996...................................................... 24
Consolidated Statement of Cash Flows for the three years
ended December 31, 1997................................... 25
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1997............................. 26
Notes to Consolidated Financial Statements.................. 27
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 50
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.
21
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of
Directors of Service Corporation International
We have audited the accompanying consolidated balance sheet of Service
Corporation International as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. We have also audited
the financial statement schedule for the three years ended December 31, 1997,
listed in the index at item 8 of this Form 10-K. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Service
Corporation International as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 18, 1998
22
24
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $ 2,468,402 $ 2,294,194 $ 1,652,126
Costs and expenses.................................. (1,780,790) (1,689,742) (1,186,905)
----------- ----------- -----------
Gross profit........................................ 687,612 604,452 465,221
General and administrative expenses................. (66,781) (63,215) (53,600)
----------- ----------- -----------
Income from operations.............................. 620,831 541,237 411,621
Interest expense.................................... (136,720) (138,557) (118,148)
Dividends on preferred securities of SCI Finance
LLC............................................... (4,382) (10,781) (10,781)
Other income........................................ 100,244 21,982 11,519
----------- ----------- -----------
(40,858) (127,356) (117,410)
----------- ----------- -----------
Income before income taxes and extraordinary loss... 579,973 413,881 294,211
Provision for income taxes.......................... (205,421) (148,583) (110,623)
----------- ----------- -----------
Income before extraordinary loss.................... 374,552 265,298 183,588
Extraordinary loss on early extinguishment of debt
(net of income taxes of $23,383).................. (40,802) -- --
----------- ----------- -----------
Net income.......................................... $ 333,750 $ 265,298 $ 183,588
=========== =========== ===========
Earnings per share:
Basic:
Income before extraordinary loss.................. $ 1.53 $ 1.13 $ .92
Extraordinary loss on early extinguishment of
debt........................................... (0.17) -- --
----------- ----------- -----------
Net income........................................ $ 1.36 $ 1.13 $ .92
=========== =========== ===========
Diluted:
Income before extraordinary loss.................. $ 1.47 $ 1.08 $ .86
Extraordinary loss on early extinguishment of
debt........................................... (0.16) -- --
----------- ----------- -----------
Net income........................................ $ 1.31 $ 1.08 $ .86
=========== =========== ===========
Basic weighted average number of shares............. 245,470 235,299 199,603
=========== =========== ===========
Diluted weighted average number of shares........... 257,781 252,870 229,967
=========== =========== ===========
(See notes to consolidated financial statements)
23
25
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46,877 $ 44,131
Receivables, net of allowances............................ 557,481 494,576
Inventories............................................... 172,169 139,019
Other..................................................... 34,881 36,314
----------- -----------
Total current assets.............................. 811,408 714,040
----------- -----------
Investments -- insurance subsidiary......................... 574,728 601,565
Prearranged funeral contracts............................... 2,610,632 2,159,348
Long-term receivables....................................... 981,121 809,287
Cemetery property, at cost.................................. 1,636,859 1,380,213
Property, plant and equipment, at cost (net)................ 1,644,137 1,457,075
Deferred charges and other assets........................... 549,862 371,608
Names and reputations (net)................................. 1,498,116 1,376,634
----------- -----------
$10,306,863 $ 8,869,770
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 425,631 $ 440,797
Current maturities of long-term debt...................... 64,570 113,876
Income taxes.............................................. 45,241 52,870
----------- -----------
Total current liabilities......................... 535,442 607,543
----------- -----------
Long-term debt.............................................. 2,634,699 2,048,737
Deferred income taxes....................................... 701,221 527,460
Other liabilities........................................... 546,140 552,443
Deferred prearranged funeral contract revenues.............. 3,163,357 2,725,770
Commitments and contingencies............................... -- --
Company obligated, mandatorily redeemable, convertible
preferred securities of SCI Finance LLC................... -- 172,500
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 252,923,784 and 236,193,427, respectively,
issued and outstanding................................. 252,924 236,193
Capital in excess of par value............................ 1,493,246 1,237,783
Retained earnings......................................... 983,353 728,108
Foreign currency translation adjustment................... (7,480) 22,315
Unrealized gain on securities available for sale, net of
tax.................................................... 3,961 10,918
----------- -----------
Total stockholders' equity........................ 2,726,004 2,235,317
----------- -----------
$10,306,863 $ 8,869,770
=========== ===========
(See notes to consolidated financial statements)
24
26
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income......................................... $ 333,750 $ 265,298 $ 183,588
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 157,550 129,819 92,541
Provision for deferred income taxes............. 19,212 56,902 45,164
Extraordinary loss on early extinguishment of
debt, net of income taxes..................... 40,802 -- --
Gains from dispositions (net)................... (89,252) (9,930) (1,024)
Change in assets and liabilities net of effects
from acquisitions:
(Increase) in receivables..................... (174,429) (167,338) (115,888)
(Increase) in other assets.................... (24,904) (36,781) (36,496)
Increase (decrease) in other liabilities...... 36,045 (26,365) 7,473
Other......................................... 662 (1,748) (3,860)
----------- ----------- ---------
Net cash provided by operating activities............ 299,436 209,857 171,498
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures............................... (230,532) (193,152) (125,231)
Changes in prearranged funeral balances............ (5,537) (51,485) (44,549)
Purchases of securities -- insurance subsidiary.... (1,407,588) (1,212,305) (86,014)
Sales of securities -- insurance subsidiary........ 1,383,934 1,177,499 49,769
Proceeds from sales of property and equipment...... 46,908 30,121 12,655
Acquisitions, net of cash acquired................. (409,731) (279,320) (693,627)
Loans issued by finance subsidiary................. (98,446) (86,858) (38,184)
Principal payments received on loans by finance
subsidiary...................................... 45,915 156,064 24,312
Proceeds from sale of equity investment............ 147,700 -- --
Purchases of equity investments.................... (87,643) (39,752) (16,076)
Other.............................................. (18,424) 19,062 (8,190)
----------- ----------- ---------
Net cash used in investing activities................ (633,444) (480,126) (925,135)
----------- ----------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving
credit agreements............................... 304,505 96,441 (453,959)
Long-term debt issued.............................. 650,000 300,000 862,848
Early extinguishment of debt....................... (449,998) -- --
Payments of debt................................... (91,464) (109,458) (135,960)
Common stock issued................................ -- -- 331,063
Dividends paid..................................... (69,888) (55,262) (43,676)
Bank overdrafts and other.......................... (6,401) 25,195 32,464
----------- ----------- ---------
Net cash provided by financing activities............ 336,754 256,916 592,780
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 2,746 (13,353) (160,857)
Cash and cash equivalents at beginning of period..... 44,131 57,484 218,341
----------- ----------- ---------
Cash and cash equivalents at end of period........... $ 46,877 $ 44,131 $ 57,484
=========== =========== =========
(See notes to consolidated financial statements)
25
27
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CAPITAL IN FOREIGN UNREALIZED
COMMON EXCESS OF RETAINED CURRENCY GAIN
STOCK PAR VALUE EARNINGS TRANSLATION ON SECURITIES
-------- ---------- -------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1994............... $189,714 $ 624,001 $381,509 $ 1,398 $ --
Add (deduct):
Net income............................... 183,588
Common stock issued:
Common stock offerings................ 18,350 312,713
Stock option exercises and stock
grants.............................. 696 5,792
Acquisitions.......................... 7,310 101,967
Debenture conversions................. 18,472 170,235
Dividends on common stock ($.22 per
share)................................ (46,535)
Foreign currency translation............. 349
Net change in unrealized gain on
securities............................ 5,786
-------- ---------- -------- ------- -------
Balance at December 31, 1995............... 234,542 1,214,708 518,562 1,747 5,786
Add (deduct):
Net income............................... 265,298
Common Stock issued:
Stock option exercises and stock
grants.............................. 723 6,940
Acquisitions.......................... 811 15,012 796
Debenture conversions................. 117 1,123
Dividends on common stock ($.24 per
share)................................ (56,548)
Foreign currency translation............. 20,568
Net change in unrealized gain on
securities............................ 5,132
-------- ---------- -------- ------- -------
Balance at December 31, 1996............... 236,193 1,237,783 728,108 22,315 10,918
Add (deduct):
Net income............................... 333,750
Common Stock issued:
Stock option exercises and stock
grants.............................. 820 9,296
Acquisitions.......................... 3,958 79,215 (3,832)
Debenture conversions................. 492 5,925
Conversion of convertible preferred
securities of SCI Finance LLC......... 11,461 161,027
Dividends on common stock ($.30 per
share)................................ (74,673)
Foreign currency translation............. (29,795)
Net change in unrealized gain on
securities............................ (6,957)
-------- ---------- -------- ------- -------
Balance at December 31, 1997............... $252,924 $1,493,246 $983,353 $(7,480) $ 3,961
======== ========== ======== ======= =======
(See notes to consolidated financial statements)
26
28
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. At
December 31, 1997, the Company operated 3,127 funeral service locations, 392
cemeteries and 166 crematoria located in 17 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 and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also operate crematoria.
The Company's financial services operations consist of a finance
subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital
financing to independent funeral home and cemetery operators.
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.
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
property and merchandise, are stated at the lower of average cost or market.
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 50 years, while equipment is depreciated over a
period from three to 20 years. For the three years ended December 31, 1997,
depreciation expense was $87,571, $74,854 and $52,828, respectively. Maintenance
and repairs are charged to expense whereas renewals and major replacements are
capitalized. 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 of the respective contracts.
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 agreement is 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
27
29
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
service is performed (see note four). The Company considers price guaranteed
prearranged funeral contracts to be investments made to retain and expand future
market share.
Cemetery Operations: All cemetery interment right sales, together with
associated merchandise, are 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 which are charged to operations using
the specific identification method. Allowances for customer cancellations are
provided at the date of sale based upon historical experience. Costs related to
merchandise are based on actual costs incurred or estimates of future costs
necessary to purchase the merchandise, including provisions for inflation when
required. Pursuant to state law, all or a portion of the proceeds from the sale
of cemetery merchandise may also be required to be paid into trust funds until
such merchandise is purchased by the Company for the customer. Merchandise funds
trusted at December 31, 1997 and 1996 were $515,051 and $390,534, respectively
(see note five). The Company recognizes realized trust income on these
merchandise trusts in current cemetery revenues as trust earnings accrue to
defray inflation costs recognized related to the unpurchased cemetery
merchandise. Additionally, 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, 1997 and 1996 were $371,984 and
$318,868, respectively, which approximates fair value. 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. For the three years
ended December 31, 1997, the earnings recognized from all cemetery trusts were
$74,971, $51,601 and $33,795, respectively.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as a purchase 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 business. Additionally, the death care industry has historically
exhibited stable cash flows as well as a low failure rate. The Company monitors
the recoverability of names and reputations based on projections of future
undiscounted cash flows of the acquired businesses. The amortization charged
against income was $37,649, $33,836 and $25,226 for the three years ended
December 31, 1997, respectively. Accumulated amortization of names and
reputations as of December 31, 1997 and 1996 was $136,398 and $101,426,
respectively.
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 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
being amortized into interest expense over the remaining lives of the original
agreements ($394 net unamortized loss at December 31, 1997).
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.
28
30
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THREE
ACQUISITIONS
The Company acquired certain funeral and cemetery operations both domestically
and internationally during the years ended December 31, 1997 and 1996. The
operating results of these acquisitions have been included since their
respective dates of acquisition. The following table is a summary of the
acquisitions made during the two years ended December 31, 1997:
1997 1996
-------- --------
Number acquired:
Funeral service locations................................. 294 210
Cemeteries................................................ 51 35
Crematoria................................................ 19 9
Purchase price.............................................. $643,000 $362,651
The purchase price in both years consisted primarily of combinations of
cash, Company common stock, issued and assumed debt.
The effect of the above acquisitions on the consolidated balance sheet at
December 31, was as follows:
1997 1996
--------- --------
Current assets.............................................. $ 38,569 $ 30,542
Prearranged funeral contracts............................... 86,452 61,994
Long-term receivables....................................... 31,522 (10,559)
Cemetery property........................................... 298,466 210,507
Property, plant and equipment............................... 162,992 93,482
Deferred charges and other assets........................... 13,417 (1,244)
Names and reputations....................................... 215,204 164,414
Current liabilities......................................... (67,464) (62,817)
Long-term debt.............................................. (63,307) (32,532)
Deferred income taxes and other liabilities................. (120,340) (85,635)
Deferred prearranged funeral contract revenues.............. (106,439) (72,213)
Stockholders' equity........................................ (79,341) (16,619)
--------- --------
Cash used for acquisitions........................ $ 409,731 $279,320
========= ========
NOTE FOUR
PREARRANGED FUNERAL ACCOUNTING
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreement is signed. Payments under these contracts are generally placed in
trust (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers in North America, the United Kingdom and
Australia or the Company's French prearranged funeral service life insurance
subsidiary ("Auxia"). Unperformed price guaranteed prearranged funeral contracts
are included in the consolidated balance sheet as "prearranged funeral
contracts" or, in the case of contracts funded by Auxia, "investments-insurance
subsidiary." A corresponding credit is recorded to "deferred prearranged funeral
contract revenues." Allowances for customer cancellations are provided at the
date of sale based on historical experience.
Amounts paid by the customer pursuant to the prearranged funeral contracts
are recognized in funeral revenue at the time the funeral is performed. Trust
earnings and increasing insurance benefits are accrued and deferred until the
service is performed at which time these funds are also recognized in funeral
revenues and are intended to cover future increases in the cost of providing a
price guaranteed funeral service. Included in
29
31
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred prearranged funeral contract revenues are net obtaining costs,
including sales commissions and certain other direct marketing costs, applicable
to prearranged funeral contracts which are deferred and will be expensed over a
period representing the average life of the prearranged contract.
PREARRANGED FUNERAL CONTRACTS
At December 31, 1997, $1,201,141 relate to trust funded contracts (which
includes $326,310 of amounts that have not yet been collected from customers)
and $1,409,491 relate to third party insurance funded contracts which will be
available to the Company at the time the funeral services are performed. At
December 31, 1996, $962,389 related to trust funded contracts ($235,433 due from
customers) and $1,196,959 relate to third party insurance funded contracts.
These amounts are shown net of estimated customer cancellations. The allowance
for cancellation is based on historical experience and is equivalent to
approximately 8% of the total balance. Accumulated realized earnings from trust
funds and increasing insurance benefits have been included to the extent that
they have accrued through December 31, 1997. The cumulative trust funded total
has been reduced by allowable cash withdrawals for realized trust earnings and
amounts retained by the Company pursuant to various state laws.
The cost and market value associated with the assets held in the trust
funds underlying the Company's prearranged funeral contracts are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- --------------------
COST MARKET COST MARKET
-------- ---------- -------- --------
Debt securities:
Government.......................... $333,626 $ 358,607 $245,736 $259,910
Corporate........................... 114,066 116,435 121,887 122,322
Equity securities..................... 411,489 461,016 164,630 208,082
Money market/other.................... 134,211 134,428 274,949 275,581
-------- ---------- -------- --------
$993,392 $1,070,486 $807,202 $865,895
======== ========== ======== ========
INVESTMENTS -- INSURANCE SUBSIDIARY
As part of the Company's funding of prearranged funeral contracts, Auxia
invests in securities which are considered as "available-for-sale" with
unrealized gains and losses excluded from earnings and reported net of income
taxes in stockholders' equity.
The cost, market value and unrealized gains or losses related to Auxia's
debt and equity securities were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
UNREALIZED UNREALIZED
----------------- -----------------
COST MARKET GAINS LOSSES COST MARKET GAINS LOSSES
-------- -------- ------- ------- -------- -------- ------- -------
Debt securities:
Foreign government...................... $292,991 $296,320 $ 3,503 $ (174) $220,256 $236,443 $16,187 $ --
Corporate............................... 17,883 17,965 95 (13) 210,235 210,428 385 (192)
Equity securities......................... 141,512 162,129 23,640 (3,023) 96,157 96,735 6,166 (5,588)
Mutual funds:
Money market/other...................... 29,027 29,235 208 -- 27,749 27,942 193 --
Debt.................................... 53,276 53,276 -- -- 61,471 61,471 -- --
-------- -------- ------- ------- -------- -------- ------- -------
$534,689 $558,925 $27,446 $(3,210) $615,868 $633,019 $22,931 $(5,780)
======== ======== ======= ======= ======== ======== ======= =======
30
32
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contractual maturities of Auxia's debt securities (at market value) as
of December 31, 1997, were as follows:
Within one year............................................. $ 2,809
After one year through five years........................... 168,575
After five years through ten years.......................... 107,303
After ten years............................................. 35,598
--------
$314,285
========
The following table summarizes the activity in prearranged funeral
contracts and investments-insurance subsidiary:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
Beginning balance........................................... $2,760,913 $2,368,932
Net sales................................................. 490,297 503,150
Acquisitions.............................................. 86,452 61,994
Realized earnings and increasing insurance benefits....... 164,853 111,950
Maturities................................................ (250,134) (249,705)
Increase in cancellation reserve.......................... (33,481) (25,962)
Distributed earnings, effect of foreign currency and
other.................................................. (33,540) (9,446)
---------- ----------
Ending balance.............................................. $3,185,360 $2,760,913
========== ==========
DEFERRED PREARRANGED FUNERAL CONTRACT REVENUES
"Deferred prearranged funeral contract revenues" on the consolidated
balance sheet includes the contract amount of all price guaranteed prearranged
funeral service contracts as well as the accrued trust earnings and increasing
insurance benefits. Also included in deferred prearranged funeral contract
revenues are net obtaining costs applicable to prearranged funeral contracts.
The aggregate net costs deferred as of December 31, 1997 and 1996 were $190,595
and $151,008, respectively. The Company defers additional accruals of trust
earnings and insurance benefits as they are earned until the performance of the
funeral service. Upon performance of the funeral service, the Company recognizes
the fixed contract price as well as total accumulated trust earnings and
increasing insurance benefits as funeral revenues.
The following table summarizes the activity in deferred prearranged funeral
contract revenues:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
Beginning balance........................................... $2,725,770 $2,362,053
Net sales................................................. 509,447 512,497
Acquisitions.............................................. 106,439 72,213
Realized earnings and increasing insurance benefits....... 164,853 111,950
Maturities................................................ (255,147) (252,603)
Increase in cancellation reserve.......................... (33,481) (25,962)
Deferred obtaining costs.................................. (67,742) (61,421)
Effect of foreign currency and other...................... 13,218 7,043
---------- ----------
Ending balance.............................................. $3,163,357 $2,725,770
========== ==========
31
33
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The recognition of future funeral revenues is estimated to occur in the
following years:
1998........................................................ $ 274,091
1999........................................................ 241,042
2000........................................................ 224,249
2001........................................................ 210,179
2002........................................................ 196,635
2003 through 2007........................................... 781,902
2008 and thereafter......................................... 1,235,259
----------
$3,163,357
==========
NOTE FIVE
CEMETERY MERCHANDISE TRUST FUNDS
The cost and market value associated with the assets held in the cemetery
merchandise trust funds (included in current and long-term receivables, at cost)
were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Debt securities:
Government............................... $169,823 $172,440 $ 72,394 $ 72,101
Corporate................................ 64,474 65,468 35,060 34,560
Equity securities.......................... 227,424 230,931 71,239 75,297
Money market/other......................... 53,330 53,254 211,841 211,896
-------- -------- -------- --------
$515,051 $522,093 $390,534 $393,854
======== ======== ======== ========
NOTE SIX
INCOME TAXES
The provision for income taxes includes United States income taxes,
determined on a consolidated return basis, foreign and state and local income
taxes.
Income before income taxes:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
United States........................................ $474,478 $309,431 $257,318
Foreign.............................................. 105,495 104,450 36,893
-------- -------- --------
$579,973 $413,881 $294,211
======== ======== ========
32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) consisted of the following:
Current:
United States...................................... $157,450 $ 65,709 $ 43,396
Foreign............................................ 7,022 14,158 12,949
State and local.................................... 21,737 11,814 9,114
-------- -------- --------
186,209 91,681 65,459
-------- -------- --------
Deferred:
United States...................................... 15,045 45,330 39,767
Foreign............................................ 1,432 3,238 (1,498)
State and local.................................... 2,735 8,334 6,895
-------- -------- --------
19,212 56,902 45,164
-------- -------- --------
Total provision...................................... $205,421 $148,583 $110,623
======== ======== ========
The Company made income tax payments of approximately $155,356, $99,377 and
$65,859, for the three years ended December 31, 1997, respectively. The
provision for income taxes for the year ended December 31, 1997, includes a
decrease to deferred taxes of $5,491 related to enacted tax law changes in the
United Kingdom and France.
The differences between the U.S. federal statutory tax rate and the
Company's effective rate were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Computed tax provision at the applicable U.S.
federal statutory income tax rate................ $202,991 $144,858 $102,974
State and local taxes, net of federal income tax
benefits......................................... 15,906 13,097 10,406
Dividends received deduction and tax exempt
interest......................................... (1,618) (2,108) (1,939)
Amortization of names and reputations.............. 5,622 4,765 4,554
Enacted foreign tax rate change.................... (5,491) -- --
Foreign jurisdiction tax rate difference........... (12,909) (11,849) (5,309)
Other.............................................. 920 (180) (63)
-------- -------- --------
Provision for income taxes....................... $205,421 $148,583 $110,623
-------- -------- --------
Total effective tax rate........................... 35.4% 35.9% 37.6%
======== ======== ========
33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and carry-forwards that give rise
to significant portions of deferred tax assets and liabilities consisted of the
following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Receivables, principally due to sales of cemetery interment
rights and related products............................... $186,900 $152,069
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... 460,592 383,687
Property, plant and equipment, principally due to
depreciation and to purchase accounting adjustments....... 129,796 110,907
Other....................................................... 40,773 --
-------- --------
Deferred tax liabilities.................................... 818,061 646,663
-------- --------
Deferred revenue on prearranged funeral contracts,
principally due to earnings from trust funds.............. (50,862) (34,092)
Accrued liabilities......................................... (24,768) (38,337)
Carry-forwards and foreign tax credits...................... (21,053) (7,484)
Other....................................................... -- (4,367)
-------- --------
Deferred tax assets......................................... (96,683) (84,280)
-------- --------
Valuation allowance......................................... 15,327 6,128
-------- --------
Net deferred income taxes................................... $736,705 $568,511
======== ========
During the three years ended December 31, 1997, tax expense resulting from
allocating certain tax benefits directly to capital in excess of par value
totaled $3,799, $2,410 and $1,165, respectively.
Current refundable income taxes and foreign current deferred tax assets are
included in other current assets, with current taxes payable and current
deferred taxes being reflected as "Income taxes" on the consolidated balance
sheet.
At December 31, 1997 and 1996, United States income taxes had not been
provided on $252,369 and $153,598, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention to reinvest such
earnings indefinitely.
As of December 31, 1997 the Company has United States foreign tax credit
carry-forwards of $5,311 which will expire in the years 2000 through 2002.
Various subsidiaries have federal and state operating loss carry-forwards of
$49,337 with expiration dates through 2012. The Company believes that some
uncertainty exists with respect to future realization of these tax credit and
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 foreign tax credits and operating losses
generated in the current year.
34
36
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SEVEN
DEBT
Debt was as follows:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Bank revolving credit agreements and commercial paper....... $ 616,589 $ 325,875
6.375% notes due in 2000.................................... 150,000 150,000
6.75% notes due in 2001..................................... 150,000 150,000
8.72% amortizing notes due in 2002.......................... 141,108 165,761
8.375% notes due in 2004.................................... 51,840 200,000
7.375% notes due in 2004.................................... 250,000 --
7.2% notes due in 2006...................................... 150,000 150,000
6.875% notes due in 2007.................................... 150,000 150,000
6.95% amortizing notes due in 2010.......................... 58,859 61,576
7.70% notes due in 2009..................................... 200,000 --
Floating rate notes due in 2011 (putable in 1999)........... 200,000 --
7.875% debentures due in 2013............................... 55,627 150,000
7.0% notes due in 2015 (putable in 2002).................... 300,000 300,000
Medium term notes, maturities through 2019, fixed average
interest rate of 9.31%.................................... 35,720 186,040
Convertible debentures, interest rates range from
4.75% -- 5.5%, due through 2007, conversion price ranges
from $11.25 -- $43.72..................................... 45,673 44,140
Mortgage and other notes payable with maturities through
2015, average interest rate of 7.05%...................... 156,931 151,836
Deferred loan costs......................................... (13,078) (22,615)
---------- ----------
Total debt.................................................. 2,699,269 2,162,613
Less current maturities..................................... (64,570) (113,876)
---------- ----------
Total long-term debt........................................ $2,634,699 $2,048,737
========== ==========
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consists of two committed facilities -- a 364-day facility and
5-year, multi-currency facility -- which are primarily used to support
commercial paper issuance and for general corporate needs.
The 364-day portion allows for borrowings up to $300,000. This facility
expires June 26, 1998, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may be converted into a 2
year term loan at the Company's option. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of 0.06% is
paid quarterly on the total commitment amount.
The 5-year facility allows for borrowings up to $700,000, including
$500,000 in various foreign currencies. This facility expires June 27, 2002.
Interest rates are based on various indices as determined by the Company. A
facility fee is paid quarterly on this facility's total commitment amount. The
facility fee, which ranges from 0.07% to 0.15%, is based on the Company's senior
debt ratings, and is currently set at 0.08%. At December 31, 1997, there was
$200,250 outstanding under this agreement at a weighted average interest rate of
5.19%.
As of December 31, 1997, there was $320,889 of commercial paper outstanding
backed by the above two facilities at a weighted average interest rate of 6.36%.
35
37
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The commercial paper borrowings and revolving notes generally have
maturities ranging from one to 90 days.
On October 3, 1997, Service Corporation International (Canada), ("SCIC"), a
wholly owned subsidiary of the Company, entered into a 364-day, $105,000
revolving credit agreement. This facility is used primarily to support
acquisition and working capital requirements of the Company's Canadian
subsidiaries. The facility fee is currently set at 0.08%. At December 31, 1997,
there was approximately $67,400 outstanding under this facility at an average
interest rate of 4.6%.
SCIC partially restructured its Canadian debt in March 1998, placing
approximately $147,000 into a new facility, replacing the immediately above
described facility. This new facility has a one year revolving period, and
allows SCIC, at its option, to convert to a five year term loan. This new
facility carries no facility fee. Interest rates are based on various indices as
determined by SCIC. The indebtedness has a put feature allowing the lender to
require the Company to purchase any outstanding indebtedness upon request.
The Company has several other bank lines of credit for approximately
$116,000 at rates similar to the primary revolving credit agreements. At
December 31, 1997, there was approximately $30,600 outstanding under those
agreements.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at December 31, 1997 are classified as long-term debt.
The Company uses these revolving credit agreements primarily to finance the
Company's ongoing acquisition programs. From time to time, the Company raises
debt and/or equity in the public markets to reduce its revolving credit facility
balances. The timing of these public debt or equity offerings is dependent on
numerous factors including market conditions, long and short term interest
rates, the Company's capitalization ratios and the outstanding balances under
the revolving credit facilities. Therefore, the Company has classified these
borrowings as long-term debt. Additionally, the Company has excluded these
borrowings from the five-year maturity of long-term debt disclosure due to the
uncertainty of the eventual term of the related debt. It is the Company's intent
to refinance such borrowings through the use of its credit agreements or other
long-term notes issued under a shelf registration filed with the Securities and
Exchange Commission (Commission).
During the first quarter of 1997, the Company initiated a tender offer for
three issues of its higher coupon debt and repurchased approximately $386,000 of
the three series, resulting in a $40,802 extraordinary loss, using commercial
paper and its revolving credit facility. In April 1997, the Company refinanced
these and other working capital borrowings by issuing $250,000 7.375% notes due
April 2004, and $200,000 7.7% notes due April 2009, which were sold through an
underwritten public offering as well as $200,000 of floating rate notes due
April 2011 (putable to the Company in April 1999) through a private placement.
In May 1996, the Company issued $300,000 of notes which were sold through
an underwritten public offering. These notes were issued in two tranches of
$150,000 each with maturities in June 2001 and 2006 and interest rates of 6.75%
and 7.2%, respectively. The proceeds of this offering were primarily used to
repay existing debt outstanding under the Company's revolving credit agreements.
Approximately $80,000 of the Company's facilities and cemetery properties
are pledged as collateral for the mortgage notes at December 31, 1997.
At December 31, 1997, the Company had $40,169 in letters of credit
outstanding primarily to guarantee funding of certain insurance claims.
In March 1998, the Company issued $500,000 of notes in an underwritten
offering pursuant to the Company's $1,000,000 shelf registration filed with the
Commission. These notes mature in 2008 as to the
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$200,000 and 2020 as to the $300,000 and have initial interest rates of 6.5% and
6.3%, respectively. The $300,000 notes contain certain early tender dates.
The aggregate principal payments on debt for the five years subsequent to
December 31, 1997, excluding amounts due to banks under revolving credit loan
agreements are: 1998-$64,570; 1999-$262,192; 2000-$193,285; 2001-$196,661 and
2002-$328,458.
Cash interest payments for the three years ended December 31, 1997 totaled
$162,521, $150,961 and $111,609, respectively.
Approximately $1,832,000 of the Company's debt consists of foreign
denominated debt of which approximately $1,504,000 was converted to foreign
currencies as a result of the cross-currency swaps.
Similarly, the stated coupons described above have substantially been
modified through the use of interest rate and cross-currency interest rate swaps
used in the management of interest rates within defined targets for fixed and
floating interest rate exposure. See note eight below.
During the three months ended December 31, 1997, pursuant to a shelf
registration filed with the Commission to be used exclusively for future
acquisitions, the Company guaranteed the following promissory notes issued
through subsidiaries in connection with various acquisitions of operations:
SUBSIDIARY AMOUNT
---------- ------
SCI Funeral Services of NY, Inc. .......................... (475)
SCI Indiana Funeral Services, Inc. ........................ (500)
SCI Illinois Services, Inc. ............................... (400)
SCI Michigan Funeral Services, Inc. ....................... (740)
SCI Illinois Services, Inc. ............................... (400)
SCI Michigan Funeral Services, Inc. ....................... (740)
SCI Illinois Services, Inc. ............................... (2,486)
SCI Texas Funeral Services, Inc. .......................... (678)
NOTE EIGHT
DERIVATIVES
The Company enters into 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
substantially hedge the Company's net investments in foreign assets. The Company
has procedures in place to monitor and control the use of derivatives and enters
into transactions only with a limited group of creditworthy financial
institutions. The Company does not engage in derivative transactions for
speculative or trading purposes, nor is it a party to leveraged derivatives.
In general, cross-currency swaps convert US dollar debt into the respective
foreign currency of the Company's various foreign operations. Such
cross-currency swaps are used in combination with local currency borrowings to
substantially hedge the Company's net investment in foreign operations. The
cross-currency swaps generally include interest rate provisions to enable the
Company to additionally hedge a portion of the earnings of its foreign
operations. Accordingly, movements in currency rates that impact the swap are
generally offset by a corresponding movement in the value of the underlying
assets being hedged. Similarly, currency movements that impact foreign expense
due under the cross-currency interest rate swaps are
37
39
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally offset by a corresponding movement in the earnings of the foreign
operation. The following tables present information about the Company's
derivatives:
DECEMBER 31, 1997
-------------------------------------------------------------------
WEIGHTED AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET ---------------- FAIR
AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE
---------- ------------ --------- ------- ------ --------
Interest Rate Swaps:
US dollar fixed to US dollar floating.... $ 450,000 $ -- 2001-2002 6.53% 5.89% $ 4,392
US dollar fixed to US dollar floating.... 300,000 -- 2004-2006 7.02% 5.78% 14,295
US dollar fixed to US dollar floating.... 200,000 -- 2009 7.43% 5.76% 12,264
US dollar floating to US dollar fixed.... 200,000 -- 2004 5.81% 5.72% 783
Canadian dollar floating to Canadian
dollar fixed........................... 78,138 -- 1999 2.64% 3.97% (4,024)
Canadian dollar floating to Canadian
dollar fixed........................... 38,456 -- 2007 1.41% 1.95% (1,927)
Canadian dollar floating to Canadian
dollar fixed effective 11/98........... 94,777 -- 2003 -- -- (5,559)
Australian dollar floating to Australian
dollar fixed........................... 42,270 -- 2006 5.91% 7.81% (3,672)
French franc floating to German mark
floating............................... 81,820 -- 2006 3.69% 3.99% (1,479)
French franc fixed to German mark
floating............................... 82,152 -- 2006 6.80% 5.38% 3,036
German mark floating to French franc
fixed.................................. 82,152 -- 2003 5.38% 6.20% (4,903)
Cross-Currency Interest Rate Swaps:
US dollar fixed to French franc fixed.... 250,000 44,736 2000-2002 6.05% 5.89% 42,540
US dollar fixed to French franc fixed.... 150,000 26,722 2007 7.00% 6.93% 20,516
US dollar fixed to French franc
floating............................... 100,000 13,183 2006 7.20% 3.93% 18,408
US dollar fixed to German mark
floating............................... 100,000 17,861 2003 5.37% 3.25% 19,016
US dollar fixed to British pound fixed... 385,386 (23,509) 2002-2004 8.46% 8.43% 20,181
US dollar fixed to British pound
floating............................... 28,222 (1,949) 2002 8.72% 7.94% (28,581)
US dollar floating to Australian dollar
fixed.................................. 132,296 11,526 1999-2000 5.91% 6.51% (36,676)
US dollar floating to Australian dollar
floating............................... 59,196 4,571 2000-2003 5.91% 5.07% 49,937
US dollar fixed to Canadian dollar
floating............................... 100,000 5,223 2010 6.95% 4.83% 7,264
US dollar fixed to Canadian dollar
floating............................... 81,727 3,589 1999 6.66% 3.94% 4,849
US dollar floating to French franc
fixed.................................. 117,834 (4,189) 2000 5.88% 4.23% (3,943)
---------- -------- --------
$3,154,426 $ 97,764 $126,717
========== ======== ========
DECEMBER 31, 1996
-------------------------------------------------------------------
WEIGHTED AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET ---------------- FAIR
AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE
---------- ------------ --------- ------- ------ --------
Interest Rate Swaps:
US dollar fixed to US dollar floating.... $ 525,000 $ -- 1999-2002 6.36% 5.57% $ (3,383)
US dollar fixed to US dollar floating.... 50,000 -- 2006 6.50% 5.50% (744)
Canadian dollar floating to Canadian
dollar fixed........................... 40,134 -- 1999 2.94% 7.57% (3,096)
Canadian dollar floating to Canadian
dollar fixed (effective 11/98)......... 98,911 -- 2003 -- -- (984)
Australian dollar floating to Australian
dollar fixed (effective 12/97)......... 51,656 -- 2006 -- -- 745
French franc floating to German mark
floating............................... 94,808 -- 2006 3.50% 3.47% (2,683)
French franc fixed to German mark
floating............................... 95,194 -- 2006 6.80% 5.10% (1,226)
German mark floating to French franc
fixed.................................. 95,194 -- 1998 5.10% 6.20% (193)
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
-------------------------------------------------------------------
WEIGHTED AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET ---------------- FAIR
AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE
---------- ------------ --------- ------- ------ --------
Cross-Currency Interest Rate Swaps:
US dollar fixed to French franc fixed.... 350,000 16,972 2002-2003 6.20% 5.94% 466
US dollar fixed to French franc fixed.... 150,000 7,151 2007 7.00% 6.93% (4,317)
US dollar fixed to French franc
floating............................... 100,000 (599) 2006 7.20% 3.74% 2,686
US dollar fixed to British pound fixed... 405,109 (40,394) 2002-2004 8.47% 7.98% 21,816
US dollar fixed to British pound
floating............................... 33,152 (3,477) 2002 8.72% 6.56% (37,755)
US dollar floating to British pound
floating............................... 76,375 (4,113) 1997 5.50% 6.30% (4,136)
US dollar floating to Australian dollar
fixed.................................. 67,568 (10,881) 1999-2000 5.63% 7.02% (54,636)
US dollar floating to Australian dollar
floating............................... 29,436 (5,531) 2000 5.63% 5.93% 38,604
US dollar fixed to Canadian dollar
fixed.................................. 75,000 133 1999 6.66% 6.64% (2,463)
US dollar fixed to Canadian dollar
floating............................... 100,000 1,089 2010 6.95% 3.54% (2,939)
---------- -------- --------
$2,437,537 $(39,650) $(54,238)
========== ======== ========
At December 31, 1997, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding $150,000 of Provident debt)
consists of approximately $1,078,000 of fixed interest rate debt at a weighted
average rate of 7.00% and approximately $1,386,000 of floating interest rate
debt at a weighted average rate of 5.50%. Additionally, approximately $1,832,000
of the Company's debt consists of foreign denominated debt.
Interest rate swap settlements are generally semiannual and match the
coupons of the underlying debt or related intercompany loan payments on the
foreign operations being hedged. In addition, as of December 31, 1997, $566,594
of the interest rate swaps contain provisions which require termination of the
swap or convert the swap to a new index if certain interest rate conditions are
met. In the cross-currency swaps, the notional amounts are exchangeable in
accordance with the terms of the swaps: at maturity for nonamortizing swaps or
according to defined amortization tables. Maturities of notional amounts
relating to derivative financial instruments held on December 31, 1997, are as
follows: 1999- $183,280; 2000-$406,152; 2001-$150,000; 2002-$541,108; and
thereafter -- $1,873,886.
NOTE NINE
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. The carrying amounts of
cash and cash equivalents, trade receivables and accounts payable approximate
fair values due to the short-term maturities of these instruments. The carrying
value of Provident's receivables approximates fair value as the majority of the
loan portfolio carries market rates of interest. It is not practicable to
estimate the fair value of receivables due on cemetery contracts or prearranged
funeral contracts (other than cemetery merchandise trust funds and prearranged
funeral trust funds, see notes four and five) without incurring excessive costs
because of the large number of individual contracts with varying terms. The
investments of the Company's insurance subsidiary are reported at fair value in
the consolidated balance sheet.
The Company has entered into various derivative financial instruments with
major financial institutions to hedge fluctuation exposures in interest and
foreign exchange rates (swap agreements). Fair values were obtained from
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. The net fair value of the
Company's various swap agreements at December 31, 1997 is an asset of $126,717
(see note eight). At December 31, 1996, the net fair value was a liability of
$54,238. The fair value
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's swap agreements may vary substantially with changes in interest
and currency rates. The Company's credit exposure is limited to the sum of the
fair value of positions that have become favorable to the Company and any
accrued interest receivable due from counterparties. Potential credit exposure
is dependent upon the maximum adverse impact of interest and currency movement.
Such potential credit exposure is minimized by selection of counterparties from
a limited group of high quality institutions and inclusion of certain contract
provisions. Management believes that any credit exposure with respect to its
favorable positions at December 31, 1997 is remote (see note eight).
Fair value of debt was as follows:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Bank revolving credit agreements and commercial paper....... $ 616,589 $ 325,875
6.375% notes due in 2000.................................... 150,285 149,220
6.75% notes due in 2001..................................... 151,755 149,876
8.72% amortizing notes due in 2002.......................... 150,266 174,861
8.375% notes due in 2004.................................... 57,055 215,404
7.375% notes due in 2004.................................... 260,725 --
7.2% notes due in 2006...................................... 155,730 150,087
6.875% notes due in 2007.................................... 152,265 146,154
6.95% notes due in 2010..................................... 60,336 60,388
7.70% notes due in 2009..................................... 214,980 --
Floating rate notes due in 2011 (putable in 1999)........... 200,000 --
7.875% debentures due in 2013............................... 61,001 155,048
7.0% notes due in 2015 (putable in 2002).................... 336,840 307,938
Medium term notes, maturities through 2018, fixed average
interest rate of 9.31%.................................... 43,636 214,178
Convertible debentures, interest rates range from
4.75% -- 5.5%, due through 2007, conversion price ranges
from $11.25 -- $43.72..................................... 83,258 39,243
Mortgage and other notes payable with maturities through
2015, average interest rate of 7.05%...................... 138,379 154,720
---------- ----------
Total debt........................................ $2,833,100 $2,242,992
========== ==========
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 carrying value of
convertible securities has been estimated based on the respective shares of SCI
common stock into which such securities may be converted. The carrying value of
the Company's revolving credit agreements approximate fair value because the
rates on such agreements are variable, based on current market conditions.
Provident is a party to financial instruments with potential credit risk.
The financial instruments result from loans made in the normal course of
business to meet the financing needs of borrowers who are principally
independent funeral home and cemetery operators. These financial instruments
also include loan commitments of approximately $50,000 at December 31, 1997
($55,017 at December 31, 1996) to extend credit. Provident's total loans
outstanding at December 31, 1997 were approximately $199,000. Provident
evaluates each borrower's creditworthiness and the amount loaned and collateral
obtained, if any, is determined by this evaluation.
The Company grants credit in the normal course of business and the credit
risk with respect to these trade, cemetery and prearranged funeral receivables
due from customers is generally considered minimal
40
42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Customer payments on prearranged funeral contracts that are placed in state
regulated trusts or used to pay premiums on life insurance contracts 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 TEN
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
1998........................................................ $62,462
1999........................................................ 44,340
2000........................................................ 32,928
2001........................................................ 24,517
2002........................................................ 19,481
Thereafter.................................................. 79,160
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. For the three
years ended December 31, 1997, rental expense was $71,225, $64,073 and $47,848,
respectively.
The Company has entered into management, consultative and noncompetition
agreements (generally for five to 10 years) with certain officers of the Company
and former owners and key employees of businesses acquired. During the three
years ended December 31, 1997, $68,667, $55,688 and $55,419, respectively, were
charged to expense. At December 31, 1997, the maximum estimated future expense
under all agreements with a remaining term in excess of one year is $321,265,
including $11,477 with certain officers of the Company.
The Company has a minimum purchase agreement with a major casket
manufacturer for its North American operations. The agreement contains
provisions to increase the minimum annual purchases for normal price increases
and for the maintenance of product quality. The agreement expires in December
1998 and contains a remaining purchase commitment of $54,815. During the three
years ended December 31, 1997, the Company purchased caskets for $57,574,
$54,431 and $48,828, respectively, under this agreement.
NOTE ELEVEN
CONVERTIBLE PREFERRED SECURITIES OF SCI FINANCE LLC
During 1997, the Company redeemed all the outstanding shares of its
convertible preferred shares into 11,178,522 shares of Company common stock and
cash.
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, 1997. At December
31, 1997, 500,000,000 common shares of $1 par value were authorized, 252,923,784
shares were issued and outstanding (236,193,427 at December 31, 1996), net of
66,373 shares held, at cost, in treasury (9,813 at December 31, 1996).
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 1997, 15,668,000 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 seven
to nine years from date of grant. At December 31, 1997 and 1996, 7,628,350 and
14,802,500 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, 1994......................... 10,374,052 $12.01
Granted................................................ 2,854,000 16.35
Exercised.............................................. (668,552) 7.53
Cancelled.............................................. (977,668) 12.81
---------- ------
Outstanding at December 31, 1995......................... 11,581,832 13.27
---------- ------
Granted................................................ 2,239,200 22.63
Exercised.............................................. (724,425) 8.82
Cancelled.............................................. (47,338) 20.45
---------- ------
Outstanding at December 31, 1996......................... 13,049,269 15.09
---------- ------
Granted................................................ 7,144,150 30.37
Exercised.............................................. (775,716) 12.51
Cancelled.............................................. (104,252) 22.85
---------- ------
Outstanding at December 31, 1997......................... 19,313,451 $20.81
---------- ------
Exercisable at December 31, 1997......................... 9,488,214 $14.07
========== ======
Exercisable at December 31, 1996......................... 1,055,435
==========
Exercisable at December 31, 1995......................... 1,206,762
==========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
- -------------- ------------ ---------------- --------- ------------ ---------
$ 8.33- 9.41 272,004 1.7 $ 9.01 272,004 $ 9.01
12.88-18.38 9,827,954 9.0 13.83 8,334,298 13.34
20.09-29.59 4,756,993 4.6 25.64 881,912 22.60
31.56-33.31 4,456,500 3.5 31.76 -- --
------------ ---------- --- ------ --------- ------
$ 8.33-33.31 19,313,451 6.5 $20.81 9,488,214 $14.07
============ ========== === ====== ========= ======
The Company's 1996 Incentive Plan reserves 12,000,000 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 4,000,000 shares of common stock for
future
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
For the three years ended December 31, 1997, 73,000, 49,600 and 128,600
shares of restricted stock were awarded at average fair values of $33.35, $25.76
and $14.60, respectively.
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 1998 unless extended.
The Company has adopted the disclosure-only provisions of FAS 123,
"Accounting for Stock-Based Compensation," and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans. 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,
consistent with the method prescribed by FAS 123, net income and earnings per
share would have been changed to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Net income
As reported........................................ $333,750 $265,298 $183,588
Pro forma.......................................... 315,733 252,929 181,285
Basic earnings per share
As reported........................................ $ 1.36 $ 1.13 $ .92
Pro forma.......................................... 1.30 1.07 .91
Diluted earnings per share
As reported........................................ $ 1.31 $ 1.08 $ .86
Pro forma.......................................... 1.25 1.03 .85
The fair value of the Company's stock options used to compute pro forma net
income and earnings 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 1997, 1996 and 1995, respectively: dividend
yield of 1%, 1% and 1%; expected volatility of 26.6%, 25.3% and 25.3%; a risk
free interest rate of 6.5%, 6.8% and 5.8%; and an expected holding period of 8,
9 and 7 years.
NOTE THIRTEEN
RETIREMENT PLANS
The Company has a noncontributory 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).
For the pension plan, retirement benefits are generally based on years of
service and compensation. The Company annually contributes to the pension plan
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 $12,141 at
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997. Most foreign employees are covered by various foreign
government mandated or defined contribution plans which are adequately funded
and are not considered material 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.
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 will provide 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 net cost for the four defined plans described above were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Service cost -- benefits earned during the period.... $ 9,806 $ 8,550 $ 6,996
Interest cost on projected benefit obligation........ 10,033 9,400 9,114
Return on plan assets................................ (22,121) (13,341) (15,752)
Net amortization and deferral of gain................ 15,838 9,747 12,189
-------- -------- --------
$ 13,556 $ 14,356 $ 12,547
======== ======== ========
The plans' funded status were as follows:
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
-------- ---------- -------- ----------
Vested benefit obligation................ $ 88,220 $ 38,388 $ 76,701 $ 40,130
======== ======== ======== ========
Accumulated benefit obligation........... $ 92,767 $ 39,754 $ 80,228 $ 40,245
======== ======== ======== ========
Projected benefit obligation............. $101,293 $ 39,840 $ 88,080 $ 40,280
Plans' assets at fair value.............. 125,166 -- 103,603 --
-------- -------- -------- --------
Plans' assets in excess (deficit) of
projected benefit obligation........... 23,873 (39,840) 15,523 (40,280)
Unrecognized net (gain) loss from past
experience and effects of changes in
assumptions............................ (5,539) 5,823 1,634 7,484
Prior service (benefit) cost not yet
recognized in net periodic pension
cost................................... (1,674) 8,364 (2,035) 10,749
-------- -------- -------- --------
Prepaid (accrued) pension cost........... 16,660 (25,653) 15,122 (22,047)
Adjustment for additional minimum
liability.............................. -- (14,101) -- (18,198)
-------- -------- -------- --------
Retirement plan asset (liability)........ $ 16,660 $(39,754) $ 15,122 $(40,245)
======== ======== ======== ========
44
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assumed rates were used in the determination of the plans'
funded status:
1997 1996
------------------- -------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------ ---------- ------ ----------
Discount rate used to determine obligations........... 7.25% 7.25% 7.5% 7.5%
Assumed rate of compensation increase................. 5.5 5.5 5.5 5.5
Assumed rate of return on plan assets................. 9.0 -- 8.5 --
NOTE FOURTEEN
MAJOR SEGMENTS OF BUSINESS
The Company conducts funeral and cemetery operations in 17 countries and
offers financial services in the United States.
FINANCIAL
FUNERAL CEMETERY SERVICES CORPORATE CONSOLIDATED
---------- ---------- ---------- ---------- ------------
Revenues:
1997.............................. $1,727,003 $ 724,862 $ 16,537 $ -- $ 2,468,402
1996.............................. 1,663,387 612,421 18,386 -- 2,294,194
1995.............................. 1,166,247 463,754 22,125 -- 1,652,126
Income from operations:
1997.............................. $ 408,083 $ 271,897 $ 7,632 $ (66,781) $ 620,831
1996.............................. 380,841 214,721 8,890 (63,215) 541,237
1995.............................. 295,151 160,442 9,628 (53,600) 411,621
Identifiable assets:
1997.............................. $6,553,708 $3,309,431 $ 200,562 $ 243,162 $10,306,863
1996.............................. 5,905,246 2,638,775 148,193 177,556 8,869,770
1995.............................. 5,110,145 2,157,906 218,963 185,373 7,672,387
Depreciation and amortization:
1997.............................. $ 127,359 $ 21,611 $ 5 $ 8,575 $ 157,550
1996.............................. 103,696 18,601 9 7,513 129,819
1995.............................. 72,477 11,772 33 8,259 92,541
Capital expenditures:(1)
1997.............................. $ 273,191 $ 404,100 $ 2 $ 14,698 $ 691,991
1996.............................. 234,673 268,039 -- 11,582 514,294
1995.............................. 442,227 480,372 10 6,090 928,699
Number of operating locations at
year end (unaudited):
1997.............................. 3,244 441 -- -- 3,685
1996.............................. 2,987 390 -- -- 3,377
1995.............................. 2,836 360 -- -- 3,196
- ---------------
(1) Includes $461,459, $321,142 and $803,468 for the three years ended December
31, 1997, respectively, for purchases of property, plant, and equipment and
cemetery property of acquired businesses.
45
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic segment information was as follows:
UNITED OTHER OTHER
STATES FRANCE EUROPEAN FOREIGN CONSOLIDATED
---------- ---------- ---------- -------- ------------
Revenues:
1997............................... $1,588,831 $ 485,264 $ 225,087 $169,220 $ 2,468,402
1996............................... 1,409,409 537,079 184,943 162,763 2,294,194
1995............................... 1,178,407 190,091 151,225 132,403 1,652,126
Income from operations:
1997............................... $ 471,237 $ 54,541 $ 44,747 $ 50,306 $ 620,831
1996............................... 400,622 52,204 37,376 51,035 541,237
1995............................... 314,698 18,743 34,214 43,966 411,621
Identifiable assets:
1997............................... $7,340,407 $1,171,877 $1,059,238 $735,341 $10,306,863
1996............................... 6,135,950 1,252,738 923,692 557,390 8,869,770
1995............................... 5,256,876 1,169,484 777,247 468,780 7,672,387
Number of operating locations at year
end (unaudited):
1997............................... 1,574 1,101 712 298 3,685
1996............................... 1,441 1,056 631 249 3,377
1995............................... 1,274 1,067 618 237 3,196
Number of funerals (unaudited):
1997............................... 231,243 148,223 102,985 50,678 533,129
1996............................... 217,471 150,269 92,491 50,039 510,270
1995............................... 198,682 49,298 81,101 44,381 373,462
46
48
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,
----------------------
1997 1996
---------- --------
Cash and cash equivalents:
Cash...................................................... $ 41,264 $ 41,344
Commercial paper and temporary investments................ 5,613 2,787
---------- --------
$ 46,877 $ 44,131
========== ========
Receivables and allowances:
Current:
Trade accounts......................................... $ 312,931 $273,696
Cemetery contracts..................................... 269,503 236,578
Loans and other........................................ 80,109 69,174
---------- --------
662,543 579,448
---------- --------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 52,597 45,155
Unearned finance charges............................... 52,465 39,717
---------- --------
105,062 84,872
---------- --------
$ 557,481 $494,576
========== ========
Long-term:
Cemetery contracts..................................... $ 387,566 $311,847
Trusted cemetery merchandise sales..................... 486,139 371,400
Loans and other........................................ 207,687 206,897
---------- --------
1,081,392 890,144
---------- --------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 35,964 29,951
Unearned finance charges............................... 64,307 50,906
---------- --------
100,271 80,857
---------- --------
$ 981,121 $809,287
========== ========
47
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rates on cemetery contracts and loans and other notes receivable
range from 1.5% to 19.0% at December 31, 1997. Included in loans and other notes
receivable are $16,049 in notes with officers and employees of the Company, the
majority of which are collateralized by real estate, and $24,095 in notes with
other related parties.
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Cemetery property:
Undeveloped land.......................................... $1,234,321 $1,003,961
Developed land, lawn crypts and mausoleums................ 402,538 376,252
---------- ----------
$1,636,859 $1,380,213
========== ==========
Property, plant and equipment:
Land...................................................... $ 422,877 $ 355,017
Buildings and improvements................................ 1,152,235 1,017,334
Operating equipment....................................... 413,108 358,577
Leasehold improvements.................................... 46,853 45,606
---------- ----------
2,035,073 1,776,534
---------- ----------
Less: accumulated depreciation............................ (390,936) (319,459)
---------- ----------
$1,644,137 $1,457,075
========== ==========
Accounts payable and accrued liabilities:
Trade payables............................................ $ 63,868 $ 68,912
Dividends................................................. 18,975 14,189
Payroll................................................... 70,957 78,233
Interest.................................................. 31,665 28,984
Insurance................................................. 41,799 33,263
Bank overdraft............................................ 29,977 48,312
Other..................................................... 168,390 168,904
---------- ----------
$ 425,631 $ 440,797
========== ==========
NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- ------- --------
Common stock issued under restricted stock plans.... $ 2,405 $ 1,278 $ 1,868
Minimum liability under retirement plans............ (4,097) (2,235) 4,213
Debenture conversions to common stock............... 6,417 1,240 188,707
Common stock issued in acquisitions................. 83,173 15,823 109,277
Debt issued in acquisitions......................... 21,325 26,467 114,609
Conversion of preferred securities of SCI Finance
LLC............................................... 167,911 -- --
48
50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEEN
EARNINGS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". All prior periods presented
have been restated to conform to this new standard. A reconciliation of the
numerators and denominators of the basic and diluted per share computations for
income before extraordinary item follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (numerator):
Income before extraordinary item -- basic........ $374,552 $265,298 $183,588
After tax interest on convertible debentures..... 4,611 8,031 13,384
-------- -------- --------
Income before extraordinary item -- diluted...... $379,163 $273,329 $196,972
======== ======== ========
Shares (denominator):
Shares -- basic.................................. 245,470 235,299 199,603
Stock options and warrants.................... 4,827 3,919 3,709
Convertible debentures........................ 2,212 2,187 15,190
Convertible preferred securities of SCI
Finance LLC................................. 5,272 11,465 11,465
-------- -------- --------
Shares -- diluted................................ 257,781 252,870 229,967
======== ======== ========
Earnings per share before extraordinary item:
Basic............................................ $ 1.53 $ 1.13 $ .92
Diluted.......................................... $ 1.47 $ 1.08 $ .86
======== ======== ========
NOTE SEVENTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST* SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
Revenues:
1997............................. $638,449 $601,141 $584,818 $643,994 $2,468,402
1996............................. 575,453 564,749 544,500 609,492 2,294,194
Gross profit:
1997............................. 188,152 163,183 151,772 184,505 687,612
1996............................. 160,168 144,063 131,378 168,843 604,452
Net income:
1997............................. 90,345 78,801 72,724 91,880 333,750
1996............................. 71,897 62,250 57,395 73,756 265,298
Basic earnings per share:
1997............................. .38 .33 .29 .36 1.36
1996............................. .31 .26 .25 .31 1.13
Diluted earnings per share:
1997............................. .36 .31 .28 .36 1.31
1996............................. .29 .25 .24 .30 1.08
- ---------------
* The quarter ended March 31, 1997 includes (1) a $68,100 gain ($42,000 after
tax) on the sale of the Company's interest in ECI and (2) a $40,802
extraordinary loss (net of tax) on the early extinguishment of debt.
49
51
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) OF PERIOD
----------- ---------- ---------- ----------- ------------- ---------
(THOUSANDS)
Current --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 1997.... $45,155 $23,400 $ 5,333 $(21,291) $ 52,597
Year ended December 31, 1996.... 34,147 14,187 6,638 (9,817) 45,155
Year ended December 31, 1995.... 20,156 8,853 10,904 (5,766) 34,147
Due After One Year -- Allowance for
contract cancellations and doubtful
accounts:
Year ended December 31, 1997.... $29,951 $ 6,202 $ 1,123 $ (1,312) $ 35,964
Year ended December 31, 1996.... 23,298 3,072 3,581 -- 29,951
Year ended December 31, 1995.... 16,086 2,999 4,689 (476) 23,298
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily acquisitions and dispositions of operations.
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. Notwithstanding anything set forth
in this Form 10-K, the information under the caption "Compensation Committee
Report on Executive Compensation" and under the captions "Overview of Executive
Compensation" and "Performance Graph" 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.
50
52
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 21 of this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 54-56 are
filed as part of this report.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
(c) Included in (a) above.
(d) Included in (a) above.
51
53
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
Dated: March 27, 1998 By: JAMES M. SHELGER
-------------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)
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
--------- ----- ----
R. L. WALTRIP* Chairman of the Board and Chief March 27, 1998
- ----------------------------------------------------- Executive Officer
(R. L. Waltrip)
GEORGE R. CHAMPAGNE* Senior Vice President Chief Financial March 27, 1998
- ----------------------------------------------------- Officer (Principal Financial
(George R. Champagne) Officer)
WESLEY T. MCRAE Corporate Controller of SCI March 27, 1998
- ----------------------------------------------------- Management Corporation, a
(Wesley T. McRae) subsidiary of the Registrant
(Principal Accounting Officer)
ANTHONY L. COELHO* Director March 27, 1998
- -----------------------------------------------------
(Anthony L. Coelho)
DOUGLAS M. CONWAY* Director March 27, 1998
- -----------------------------------------------------
(Douglas M. Conway)
JACK FINKELSTEIN* Director March 27, 1998
- -----------------------------------------------------
(Jack Finkelstein)
A. J. FOYT, JR.* Director March 27, 1998
- -----------------------------------------------------
(A. J. Foyt, Jr.)
JAMES J. GAVIN, JR.* Director March 27, 1998
- -----------------------------------------------------
(James J. Gavin, Jr.)
JAMES H. GREER* Director March 27, 1998
- -----------------------------------------------------
(James H. Greer)
L. WILLIAM HEILIGBRODT* Director March 27, 1998
- -----------------------------------------------------
(L. William Heiligbrodt)
52
54
SIGNATURE TITLE DATE
--------- ----- ----
B. D. HUNTER* Director March 27, 1998
- -----------------------------------------------------
(B. D. Hunter)
JOHN W. MECOM, JR.* Director March 27, 1998
- -----------------------------------------------------
(John W. Mecom, Jr.)
CLIFTON H. MORRIS, JR.* Director March 27, 1998
- -----------------------------------------------------
(Clifton H. Morris, Jr.)
E. H. THORNTON, JR.* Director March 27, 1998
- -----------------------------------------------------
(E. H. Thornton, Jr.)
W. BLAIR WALTRIP* Director March 27, 1998
- -----------------------------------------------------
(W. Blair Waltrip)
EDWARD E. WILLIAMS* Director March 27, 1998
- -----------------------------------------------------
(Edward E. Williams)
* By JAMES M. SHELGER
-------------------------------------------------
(James M. Shelger, as Attorney-In-Fact
For each of the Persons indicated)
53
55
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT NO. 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 C junior Participating Preferred Stock, dated
August 5, 1988. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended July 31, 1988).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.7 to Form 10-K for the fiscal year ended December 31,
1991).
4.1 -- Rights Agreement dated as of July 18, 1988 between the
Company and Texas Commerce Bank National Association.
(Incorporated by reference to Exhibit 1 to Form 8-K dated
July 18, 1988).
4.2 -- Amendment, dated as of May 10, 1990, to the Rights
Agreement, dated as of July 18, 1988, between the Company
and Texas Commerce Bank National Association.
(Incorporated by reference to Exhibit 1 to Form 8-K dated
May 10, 1990).
4.3 -- Agreement Appointing a Successor Rights Agent under
Rights Agreement, dated as of June 1, 1990, by the
Company and Ameritrust Company National Association.
(Incorporated by reference to Exhibit 4.1 to Form 10-Q
for the fiscal quarter ended June 30, 1990).
4.4 -- Undertaking to furnish instruments related to long-term
debt.
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 -- 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).
10.3 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1997, 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, 1996).
10.4 -- 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).
10.5 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and L. William Heiligbrodt.
10.6 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and W. Blair Waltrip.
10.7 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and John W. Morrow, Jr.
54
56
EXHIBIT NO. DESCRIPTION
----------- -----------
10.8 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1995, between Service
Corporation International and Jerald L. Pullins.
10.9 -- Form of Employment Agreement pertaining to officers
(other than the officers identified in the preceding
exhibits).
10.10 -- 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).
10.11 -- 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).
10.12 -- Amendment to 1986 Stock Option Plan, dated November 13,
1997.
10.13 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.14 -- 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).
10.15 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 4.12 to Registration Statement
No. 333-00179 on Form S-8).
10.16 -- 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).
10.17 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997.
10.18 -- Service Corporation International ECI Stock Option Plan.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the fiscal quarter ended September 30, 1994).
10.19 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.20 -- 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).
10.21 -- Amendment to 1995 Incentive Equity Plan, dated November
13, 1997.
10.22 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated
by reference to Annex A to Proxy Statement dated April
17, 1995).
10.23 -- 1996 Incentive Plan. (Incorporated by reference to Annex
A to Proxy Statement dated April 15, 1996).
10.24 -- Amendment to 1996 Incentive Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.22 to Form
10-K for the fiscal year ended December 31, 1996).
10.25 -- Amendment to 1996 Incentive Plan, dated November 13,
1997.
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).
55
57
EXHIBIT NO. DESCRIPTION
----------- -----------
10.27 -- Agreement for Reorganization, dated August 15, 1989 among
Morrow Partners, Inc., J.W. Morrow Investment Company,
John W. Morrow Jr., Billy Dee Davis and the Company;
Agreement-Not-To-Compete, dated August 15, 1989, between
John W. Morrow, Jr., Morrow Partners, Inc. and the
Company, and; Lease dated August 15, 1989, by John W.
Morrow, Jr. and Crawford A. Crim Funeral Home, Inc.
(Incorporated by reference to Exhibit 10.27 to Form 10-K
for the fiscal year ended December 31, 1989).
10.28 -- Supplemental Executive Retirement Plan for Senior
Officers (as Amended and Restated Effective as of
December 31, 1993). (Incorporated by reference to Exhibit
10.21 to Form 10-K for the fiscal year ended December 31,
1993).
10.29 -- First Amendment to Supplemental Executive Retirement Plan
for Senior Officers. (Incorporated by reference to
Exhibit 10.26 to Form 10-K for the fiscal year ended
December 31, 1994).
10.30 -- Second Amendment to Supplemental Executive Retirement
Plan for Senior Officers. (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the fiscal quarter ended
June 30, 1997).
10.31 -- Deferred Compensation Plan.
10.32 -- Second Supplemental Indenture, dated January 19, 1996,
between the Company and Texas Commerce Bank National
Association regarding Indenture dated May 1, 1970.
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Accountants (Coopers & Lybrand
L.L.P.).
24.1 -- Powers of Attorney.
27 -- Financial Data Schedules.
In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.26 and 10.28 through
10.31.
56