Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
---------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
---------------------
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
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
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 $3,989,412,852 based upon a closing market price of $14.875 on
March 30, 1999 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 30, 1999 was 271,968,548 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1999
Annual Meeting of Shareholders (Part III)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
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, 1998, the Company operated 3,442 funeral service locations, 433
cemeteries and 191 crematoria located in 20 countries on five continents. The
Company conducts funeral operations in all of the business locales in which it
operates, cemetery operations in all regions except France, and financial
services operations in North America and France. For financial information about
the Company's reportable segments, see Note Fifteen to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company has continued to expand through the acquisition of funeral
service locations, cemeteries and crematoria, both domestically and
internationally. In 1998, the Company acquired 308 funeral service locations, 47
cemeteries, 18 crematoria, and two insurance companies. The Company has acquired
most of its present operations through acquisitions. For information regarding
acquisitions, see Note Three to the consolidated financial statements in Item 8
of this Form 10-K. Although the Company is continuing to make acquisitions, the
Company is curtailing its acquisition activity as discussed in the third
paragraph of Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 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 a North American division 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 the Company's
headquarters in Houston, Texas and have substantial autonomy with respect to the
manner in which services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are 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.
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.
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, 1998, the
Company owned 156 funeral service location/cemetery combinations and operated 49
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 several 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 placed in trust accounts (pursuant to applicable law) or are used
to pay premiums on life insurance policies from third party insurers or the
Company's wholly owned insurance subsidiaries. At December 31, 1998, the total
value of the Company's
3
unperformed prearranged funeral contracts was $3.752 billion, of which
approximately $368 million is estimated to be fulfilled in 1999. For additional
information concerning prearranged funeral activities, see "Prearranged Funeral
Services" in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K and Note Four to the
consolidated financial statements in Item 8 of this Form 10-K.
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 Two and Six 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 1998, the Company,
including companies acquired by it, performed approximately 11%, 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 OPERATIONS
The financial services division represents a combination of the Company's
prearranged funeral and cemetery trust accounting and administration, investment
management, life insurance operations and the lending activities of Provident
Services, Inc., a wholly-owned subsidiary of the Company ("Provident").
The Company's insurance operations include ownership of a French life
insurance company (Auxia) and a U.S. life insurance company (American Memorial
Life Insurance Company). These wholly-owned subsidiaries assist in funding
contracts written by Company owned funeral service locations. For additional
information concerning the Company's financial services and insurance
operations, see Management's
2
4
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this Form 10-K and Notes Two, Four and Five to the consolidated financial
statements in Item 8 of this Form 10-K.
Since 1988, 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. At December 31, 1998, Provident had $270 million in loans outstanding and
$31 million of unfunded loan commitments. At December 31, 1997, Provident had
$198 million in loans outstanding and $50 million of unfunded loan commitments.
Provident obtains its funds primarily from the Company's variable interest rate
credit facilities.
EMPLOYEES
At December 31, 1998, the Company employed 27,618 (16,627 in the United
States) persons on a full time basis and 12,410 (9,148 in the United States)
persons on a part time basis. Of the full time employees, 26,567 were in the
funeral and cemetery operations, 397 were in financial services operations and
654 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. Eligible United States employees are participants in retirement
plans of the Company or various subsidiaries, while foreign employees are
covered by other Company defined or government mandated benefit plans. Although
labor disputes are experienced from time to time, in general relations with
employees are considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various U.S. federal, state and foreign statutes, ordinances
and regulations. The Company believes that it is in substantial compliance with
the significant provisions of such statutes, ordinances and regulations. See
discussion of FTC funeral industry trade regulation and consent orders in
"Funeral Service Locations" above.
The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry has
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments ("Municipal
Monopoly"), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
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 two additional buildings located in Houston, Texas
containing a total of approximately 167,000 square feet of office space.
3
5
At December 31, 1998, the Company owned the real estate and buildings of
3,187 of its funeral service and cemetery locations and leased facilities in
connection with 879 of such operations. In addition, the Company leased five
aircraft pursuant to cancelable leases. At December 31, 1998, the Company
operated 13,190 vehicles, of which 11,012 were owned and 2,178 were leased. For
additional information regarding leases, see Note Eleven to the consolidated
financial statements in Item 8 of this Form 10-K.
At December 31, 1998, the Company's 433 cemeteries contain a total of
approximately 31,186 acres, of which approximately 53% 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.
Since January 26, 1999, several lawsuits have been commenced on behalf of
persons who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into Equity Corporation International
("ECI"), (ii) purchased shares of Company common stock during certain specified
class periods or (iii) owned employee stock options in ECI. As of March 24,
1999, 20 class action lawsuits that had been originally filed in federal
district court in Houston had been consolidated into one action pending in that
court, and one additional class action lawsuit that had been originally filed in
the federal district court in Lufkin, Texas was still pending in that court.
These lawsuits allege violations of federal securities laws and name as
defendants the Company and certain of its officers and directors. As of the same
date, two former state court lawsuits, one of which was a class action, naming
the Company as defendant and alleging fraud and violations of Texas securities
and common law had been removed to the federal district court in Lufkin. The
lawsuits generally refer to the Company's January 26, 1999 public announcement
that the Company's diluted earnings per share for the fourth quarter of 1998 and
for the year ended December 31, 1998 would be lower than analyst expectations.
The lawsuits seek, among other things, to recover unspecified damages. Since the
litigation is in its very preliminary stages, no discovery has been taken, and
the Company cannot quantify its ultimate liability, if any, for the payment of
damages in these lawsuits. However, the Company believes that the allegations in
the lawsuits do not provide a basis for the recovery of damages because the
Company has made all the required disclosures on a timely basis. The Company is
seeking to transfer the lawsuits pending in Lufkin and consolidate them with the
action pending in federal district court in Houston. The Company intends to
aggressively defend the foregoing lawsuits. A list of (x) the styles of the
pending class action litigation matters, (y) the identities of the officers and
directors of SCI who have not been expressly excluded from the class
designations relating to former ECI stockholders and option holders and (z) the
identities of officers and directors of SCI who have been named as individual
defendants in certain pending litigation are set forth in Exhibit 99.1 to this
report, which Exhibit 99.1 is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
4
6
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 30, 1999 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........................ (68) Chairman of the Board, Chief 1962
Executive Officer and President
George R. Champagne.................. (45) Executive Vice President Chief 1989
Financial Officer
John W. Morrow, Jr................... (63) Executive Vice President North 1989
American Operations
Jerald L. Pullins.................... (57) Executive Vice President 1992
International Operations
W. Blair Waltrip..................... (44) Executive Vice President 1980
Gregory L. Cauthen................... (41) Senior Vice President 1995
Glenn G. McMillen.................... (56) Senior Vice President Assistant to 1993
Chairman
Richard T. Sells..................... (59) Senior Vice President Preneed Sales 1987
James M. Shelger..................... (49) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner....................... (53) Senior Vice President Administration 1992
T. Craig Benson...................... (37) Vice President International 1990
Operations
J. Daniel Garrison................... (47) Vice President International 1998
Operations
W. Cardon Gerner..................... (44) Vice President Controller 1999
W. Mark Hamilton..................... (34) Vice President 1996
Lowell A. Kirkpatrick, Jr. .......... (40) Vice President Operations, Finance 1994
and Development
Stephen M. Mack...................... (47) Vice President Operations 1998
Todd A. Matherne..................... (44) Vice President Treasurer 1996
Thomas L. Ryan....................... (33) Vice President International Finance 1999
Vincent L. Visosky................... (51) Vice President 1989
Michael R. Webb...................... (41) Vice President International 1998
Corporate Development
Henry M. Nelly, III.................. (54) President -- Provident Services, 1989
Inc., a subsidiary of the Company
- ---------------
(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.
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Controller.
Before the acquisition, Mr. Gerner had been Senior Vice President and Chief
Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner was a
partner with Ernst & Young LLP.
5
7
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.
Mr. Ryan joined the Company in June 1996 as Director of Financial
Reporting. Since then, Mr. Ryan has served as Director of Investor Relations and
Managing Director and Chief Financial Officer of International Operations. Mr.
Ryan was promoted to Vice President International Finance in February 1999.
Prior to joining the Company, Mr. Ryan was a certified public accountant with
Coopers & Lybrand L.L.P. for more than five years.
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.
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, 1998, there were 7,613 holders of record of
the Company's common stock.
The Company has declared 103 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, 1998, dividends per share were $.36, $.30 and
$.24, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
First............................. $43.69 $35.69 $33.88 $26.88 $24.75 $19.44
Second............................ 44.63 38.94 36.00 29.63 30.13 24.13
Third............................. 45.88 31.88 35.75 29.81 29.44 27.63
Fourth............................ 39.25 29.81 38.00 27.88 30.75 26.50
On March 26, 1999, the closing price of the Company's common stock was
$14.75 per share.
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.
6
8
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues......................... $2,875,090 $2,535,865 $2,355,342 $1,652,126 $1,117,175
Income before extraordinary
loss........................... 342,142 374,552 265,298 183,588 131,045
Net income....................... 342,142 333,750 265,298 183,588 131,045
Earnings per share:
Income before extraordinary
loss
Basic....................... 1.34 1.53 1.13 .92 .76
Diluted..................... 1.31 1.47 1.08 .86 .71
Net income
Basic....................... 1.34 1.36 1.13 .92 .76
Diluted..................... 1.31 1.31 1.08 .86 .71
Dividends per share.............. .36 .30 .24 .22 .21
Total assets..................... 13,266,158 10,514,930 9,020,778 7,768,982 5,196,690
Long-term debt................... 3,764,590 2,634,699 2,048,737 1,712,464 1,330,177
Convertible preferred securities
of SCI Finance LLC............. -- -- 172,500 172,500 172,500
Stockholders' equity............. 3,154,102 2,726,004 2,235,317 1,975,345 1,196,622
Shares outstanding............... 259,201 252,924 236,193 234,542 189,714
Ratio of earnings to fixed
charges*....................... 3.42 4.29 3.24 2.84 3.13
- ---------------
* 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.
7
9
Equity Corporation International
In January 1999, a wholly-owned subsidiary of the Company acquired ECI. The
combination occurred through a stock-for-stock transaction in which ECI
stockholders received approximately 15,500,584 shares of Company common stock.
Set forth below is certain summary financial information for ECI (Dollars
in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
Revenues............................................ $190,056 $135,073 $ 91,974
-------- -------- --------
Gross profit........................................ 51,003 37,660 26,137
-------- -------- --------
Net income.......................................... $ 16,247 $ 14,699 $ 10,326
-------- -------- --------
Current assets...................................... $ 61,692 $ 34,766 $ 29,558
Non-current assets.................................. 917,523 682,934 414,333
-------- -------- --------
Total assets........................................ $979,215 $717,700 $443,891
-------- -------- --------
Current liabilities................................. $ 31,019 $ 17,100 $ 10,379
Non-current liabilities............................. 690,722 474,068 256,048
-------- -------- --------
Total liabilities................................... $721,741 $491,168 $266,427
-------- -------- --------
Stockholders' equity................................ $257,474 $226,532 $177,464
-------- -------- --------
8
10
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)
The Company is the largest provider of death care services in the world. At
December 31, 1998, the Company operated 3,442 funeral service locations, 433
cemeteries and 191 crematoria located in 20 countries on five continents. The
Company conducts funeral operations in all of its business locales, cemetery
operations in all regions except France, and financial services operations in
North America and France. As of December 31, 1998, the Company's largest markets
are North America and France, which when combined, represent approximately 87%
of the Company's consolidated revenue, 90% of consolidated income from
operations and 75% of the Company's total operating locations.
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, 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, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
Historically, the Company's growth has been largely attributable to
acquisitions. In light of prevailing market prices for available acquisition
candidates, the Company is curtailing its acquisition activity. Additionally,
because of the current size of the Company, it is becoming increasingly
difficult to support the historical earnings growth rate through acquisitions.
Therefore, the Company intends to focus its efforts on maximizing the
profitability of existing clusters of facilities rather than the historically
heavy emphasis on acquisitions. The Company, though, will continue to acquire
domestic and foreign facilities where operating strategies and pricing
considerations are properly aligned.
RESULTS OF OPERATIONS -- FOURTH QUARTER 1998 COMPARED TO FOURTH QUARTER 1997:
Funeral and cemetery revenues were $687,996 in the fourth quarter 1998,
compared to $637,654 in the prior year quarter, a 7.9% increase. Funeral and
cemetery gross margins were $131,781 in the fourth quarter 1998 compared to
$180,615 in the prior year quarter, a 27.0% decrease. The large decrease in the
funeral and cemetery gross margins contributed significantly to the consolidated
net income and diluted earnings per share declines, quarter over quarter, of
35.6% and 36.1%, respectively. A 40.5% increase in interest expense, quarter
over quarter, was primarily responsible for the remainder of the declines.
Though total funeral and cemetery revenues increased quarter over quarter, the
rate of growth was less than expected. At the same time, costs and expenses had
been structured for an expected higher level of sales. Major items contributing
to the earnings decline included:
- A 2.7% decline in funeral revenues, quarter over quarter, at locations
owned before October 1, 1997. This represented approximately $11,000 and
was caused by weak death rates and lower average sales prices. The lower
average sales prices were due to a changing profile in the sales mix
reflecting an increased proportion of performed funerals from lower
average prearranged sales and an increased proportion of lower average
cremations.
- Approximately $19,000, or 6.3%, in additional funeral costs incurred at
locations acquired before October 1, 1997 due to higher merchandise,
personnel, facility and public relations costs primarily in North America
and the United Kingdom.
- Weak operating performances by locations acquired after September 30,
1997.
- Approximately $10,000, or 10.4%, in increased cemetery costs for
locations acquired before October 1, 1997 due to higher merchandise,
maintenance and administrative expenses primarily in North America.
Revenues at these locations grew by approximately $1,000, or .9%.
- Increased overhead costs included in the funeral and cemetery gross
margins, partially due to an anticipated higher level of revenues,
increased approximately $13,000, or 60.1%.
9
11
RESULTS OF OPERATIONS:
The operating results for the Company in 1998 compared to 1997 were below
expectations primarily as the result of disappointing fourth quarter funeral and
cemetery revenue and a cost structure that was geared toward a higher expected
level of revenue. These issues were discussed above and are discussed in more
detail below. Current expectations for the Company's 1999 outlook point to
continued pressure on operating margins as costs are expected to grow at a
faster percentage than revenues due primarily to the following issues. Revenue
growth is expected to continue to be negatively affected by potentially weak
death rates in several of the Company's major markets. In addition, cemetery
preneed sales are not expected to grow appreciably over 1998 levels due
primarily to continued sales staffing difficulties. The funeral business has a
high fixed cost structure (approximately 80%-90% of funeral costs) that does not
easily lend itself to reductions during periods of slower revenue growth. The
acquisition in January 1999 of Equity Corporation International (ECI),
previously the fourth largest death care company in North America, will exert
downward pressure on operating margins due to ECI's historically lower volume
operations.
Year ended 1998 compared to 1997
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------- INCREASE INCREASE
1998 1997 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral........................ $ 1,829,136 $ 1,720,291 $108,845 6.3%
Cemetery....................... 846,601 724,862 121,739 16.8
Financial services............. 199,353 90,712 108,641 119.8
----------- ----------- -------- -----
2,875,090 2,535,865 339,225 13.4
Costs and expenses:
Funeral........................ (1,444,529) (1,318,920) 125,609 9.5
Cemetery....................... (540,440) (452,965) 87,475 19.3
Financial services............. (171,351) (76,368) 94,983 124.4
----------- ----------- -------- -----
(2,156,320) (1,848,253) 308,067 16.7
Gross profit margin and
percentage:
Funeral........................ 384,607 21.0% 401,371 23.3% (16,764) (4.2)
Cemetery....................... 306,161 36.2 271,897 37.5 34,264 12.6
Financial services............. 28,002 14.0 14,344 15.8 13,658 95.2
----------- ---- ----------- ---- -------- -----
$ 718,770 25.0% $ 687,612 27.1% $ 31,158 4.5%
=========== ==== =========== ==== ======== =====
Funeral
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------- INCREASE INCREASE
1998 1997 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
North America.................... $ 1,006,654 $ 970,749 $ 35,905 3.7%
France........................... 524,418 480,473 43,945 9.1
Other European................... 241,114 203,479 37,635 18.5
Other foreign.................... 56,950 65,590 (8,640) (13.2)
----------- ----------- -------- -----
Total funeral
revenues............. $ 1,829,136 $ 1,720,291 $108,845 6.3%
=========== =========== ======== =====
The $35,905 increase in revenues from North American operations was
primarily the result of a $34,499 increase in revenues from existing clusters
(existing clusters represent geographic areas entered prior to January 1, 1997).
Included in the existing cluster increase was a $60,724 increase from locations
acquired since January 1, 1997, offset by a $26,225 decrease from locations
acquired prior to 1997. The number of funeral services performed by existing
clusters in North America increased 4.1% (259,071 compared to
10
12
248,781), while the average sales price decreased slightly by .5% ($3,817
compared to $3,836). The sales price decrease occurred because of continuing
changes in the Company's sales mix resulting from a higher proportion of
funerals from prearranged contracts being serviced and an increase in the number
of cremations performed both of which typically carry lower sales price averages
than traditional at need funeral services. The prearranged sales average has
been historically lower than the current at need sales average primarily due to
the servicing of older, lower average contracts typically sold by funeral homes
that have been acquired by the Company. In addition, the Company has lowered
sales prices in certain markets for competitive reasons. Locations included in
existing clusters, that were acquired since January 1, 1997 performed 25,999
funeral services compared to 10,378 in 1997, while locations acquired before
1997 performed 2.2% fewer funeral services in 1998 (233,072 compared to
238,403).
The increasing proportion of people over age 65 in the Company's primary
North American markets could increase demand for funeral services in the decades
to come. It is believed the Company currently performs approximately 11% of the
funeral services in North America.
Revenues from the Company's operations in France increased $43,945 in 1998
due primarily to acquisitions, since January 1, 1997, added to existing French
clusters. Also contributing to this increase was a 3.0% increase in average
sales prices and higher merchandise sales in 1998 at existing locations. The
total number of funeral services performed by the Company's French operations
during 1998 was 147,994, compared to 148,223 in 1997.
The $37,635 increase in revenues from other European operations is
primarily due to a 14.4% increase in the total number of funeral services
performed (117,776 compared to 102,985). Revenue from locations acquired since
January 1, 1997, increased $43,912 in 1998 ($57,514 compared to $13,602), while
volumes at these locations increased to 30,903 in 1998, compared to 7,140 in
1997. In 1998, the Company entered into new markets, including Norway and
expanded existing markets in Spain, Portugal and the Netherlands.
The decrease in revenues from other foreign operations is primarily due to
a 15.4% decline in the Australian to US currency exchange rates, offset by
increased revenues from a full year of operations in Argentina. The number of
funeral services performed by other foreign operations were 29,946 compared to
29,278 in 1997.
During the year ended December 31, 1998, the Company sold (net of
cancellations) approximately $490,000 of prearranged funeral services compared
to approximately $527,000 for the same period in 1997. 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 Company
expects to continue the emphasis on selling prearranged funerals.
Funeral gross margins were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------- PERCENTAGE
% OF % OF INCREASE INCREASE
1998 REVENUE 1997 REVENUE (DECREASE) (DECREASE)
-------- ------- -------- ------- ---------- ----------
North America.............. $284,332 28.2% $297,586 30.7% $(13,254) (4.5)%
France..................... 60,810 11.6 48,620 10.1 12,190 25.1
Other European............. 27,731 11.5 38,097 18.7 (10,366) (27.2)
Other foreign.............. 11,734 20.6 17,068 26.0 (5,334) (31.3)
-------- ---- -------- ---- -------- -----
Total funeral
gross margin... $384,607 21.0% $401,371 23.3% $(16,764) (4.2)%
======== ==== ======== ==== ======== =====
The decrease in gross margin percentage in North America is due to an
increase in costs and expenses of 7.3% while revenues increased 3.7%, as
discussed above. The increased costs and expenses are primarily due to higher
costs at locations acquired since January 1, 1997. 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. Costs for
locations acquired prior to 1997 were flat with the prior year.
11
13
The France gross margin increase is attributable to a revenue increase of
9.1%, while the corresponding increase in costs and expenses were 7.4%. The
Company continues to improve its French sales and merchandising efforts while
implementing additional cost efficiencies.
Despite increased revenues, the other European gross margin percentage
decreased due to a disproportionate increase in costs and expenses of 29.0%
($213,383 compared to $165,381). The increased costs and expenses are primarily
related to additional costs in the United Kingdom and operating costs incurred
by acquisitions made throughout Europe during the year.
The decrease in other foreign gross margin percentage is primarily due to
the Company's Australian operations. Excluding a 15.4% decline in the Australian
to US currency exchange rates, Australian revenue declined approximately 1.6%,
while Australian costs and expenses increased approximately 6.0%.
Cemetery
Cemetery revenues were as follows:
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1998 1997 INCREASE INCREASE
-------- -------- -------- ----------
North America.............................. $768,228 $671,112 $ 97,116 14.5%
Other European............................. 25,565 21,609 3,956 18.3
Other foreign.............................. 52,808 32,141 20,667 64.3
-------- -------- -------- ----
Total cemetery revenues.......... $846,601 $724,862 $121,739 16.8%
======== ======== ======== ====
The $97,116 increase in revenues from North American cemetery operations is
primarily due to an increase of $95,153 from existing clusters. Included in the
existing cluster increase was $69,483 from locations acquired since January 1,
1997, while revenues from existing cluster locations acquired before 1997
increased $25,670. Factors contributing to the total increase were increases in
preneed and at need sales of property and merchandise ($66,629), higher
investment earnings on trusted amounts ($18,594) and increased revenue from
sales of excess property ($11,893).
The increase in revenues from other foreign operations is primarily due to
the inclusion of a full year of cemetery operations in Argentina $24,365, offset
by a $3,698 decrease in cemetery revenue in Australia.
Cemetery gross margins were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------- PERCENTAGE
% OF % OF INCREASE INCREASE
1998 REVENUE 1997 REVENUE (DECREASE) (DECREASE)
-------- ------- -------- ------- ---------- ----------
North America.............. $282,754 36.8% $251,993 37.5% $30,761 12.2%
Other European............. 7,936 31.0 8,275 38.3 (339) (4.1)
Other foreign.............. 15,471 29.3 11,629 36.2 3,842 33.0
-------- ---- -------- ---- ------- ----
Total cemetery
gross margin... $306,161 36.2% $271,897 37.5% $34,264 12.6%
======== ==== ======== ==== ======= ====
North American cemetery gross margin increased $30,761 in 1998, primarily
due to corresponding growth in revenue discussed above. The 1998 decrease in
cemetery gross margin percentage (36.8% compared to 37.5%) is due to higher
costs at locations acquired since January 1, 1997 and higher overhead costs.
Recently acquired cemeteries will usually have lower gross margins than the
Company's existing cemeteries until a formal selling program can be developed
and until operating costs can be more efficiently managed through the cluster
management approach. Costs at existing cemeteries were .3% higher in 1998 versus
1997.
The decrease in other foreign gross profit margin percentage is due to the
inclusion of a full year of cemetery operations in Argentina. The gross profit
margin percentage from operations in Argentina was approximately 19.4% in 1998,
compared to 39.2% for the Company's operations in Australia. The Argentina
12
14
gross margin is consistent with the Company's expectations. These operations
have historically produced lower gross margins than the Company's operations in
North America or Australia. Australia's gross profit margin percentages were
flat with 1997.
Financial Services
Financial services represents a combination of the Company's lending
subsidiary, Provident Services, Inc. (Provident), and the Company's wholly-owned
insurance subsidiaries.
Financial services revenues were as follows:
YEARS ENDED
DECEMBER 31,
------------------ PERCENTAGE
1998 1997 INCREASE INCREASE
-------- ------- -------- ----------
Insurance:
North America............................. $ 81,832 $ -- $ 81,832 --%
France.................................... 96,941 74,175 22,766 30.7
-------- ------- -------- -----
Total insurance........................... 178,773 74,175 104,598 141.0
Provident (North America)................... 20,580 16,537 4,043 24.4
-------- ------- -------- -----
Total financial services
revenues........................ $199,353 $90,712 $108,641 119.8%
======== ======= ======== =====
The 1998 increase in insurance revenues is due primarily to the North
American acquisition of American Memorial Life Insurance Company (AML) effective
July 1998. Insurance revenues from the Company's French operations increased due
to increased premium revenue and investment earnings due to increases in the
sales of prearranged funerals. Revenue from Provident increased as a result of a
corresponding increase in its average loan portfolio during 1998 ($228,279
compared to $182,375).
Financial services gross margins were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
% OF % OF PERCENTAGE
1998 REVENUE 1997 REVENUE INCREASE INCREASE
------- ------- ------- ------- -------- ----------
Insurance:
North America............... $ 7,872 9.6% $ -- --% $ 7,872 --%
France...................... 10,689 11.0 6,712 9.0 3,977 59.3
------- ---- ------- ---- ------- -----
Total insurance............. 18,561 10.4 6,712 9.0 11,849 176.5
Provident (North America)..... 9,441 45.9 7,632 46.2 1,809 23.7
------- ---- ------- ---- ------- -----
Total financial
services gross
margin............ $28,002 14.0% $14,344 15.8% $13,658 95.2%
======= ==== ======= ==== ======= =====
The increase in North American insurance gross margin is due to the
acquisition of AML as discussed above, while the increase in French insurance
gross margin is primarily due to increased revenues.
Provident reported a gross profit of $9,441 for the year ended December 31,
1998 compared to $7,632 for the same period in 1997. The increase in gross
profit is due to the increase in Provident's average outstanding loan portfolio,
partially offset by a decrease in the average interest rate spread (3.14% this
year compared to 3.18% last year).
Other Income and Expenses
The Company's general and administrative expenses remained stable in 1998
($66,839 compared to $66,781). Expressed as a percentage of revenues, these
expenses decreased slightly to 2.3% in 1998 compared to 2.6% in 1997.
Interest expense, which excludes the amount incurred by financial service
operations, increased $40,333 or 29.5% during 1998. The average borrowings
during 1998 were $3,340,708 compared to $2,434,808 in 1997,
13
15
primarily due to additional borrowings for acquisitions. The average interest
rate in 1998 was 6.15% compared to 6.03% in 1997.
Other income was $43,649 in 1998, compared to $100,244 in 1997. This
decrease reflects a gain on the sale of the Company's equity interest in ECI
($68,077) recorded in 1997 (see note nineteen to the consolidated financial
statements).
The provision for income taxes reflects a 34.0% effective tax rate for
1998, compared to a 35.4% effective tax rate in 1997. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations. Both years included tax benefits relating to enacted tax rate
changes in certain foreign tax jurisdictions.
RESULTS OF OPERATIONS:
Year Ended 1997 Compared to 1996
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral........................ $ 1,720,291 $ 1,656,736 $ 63,555 3.8%
Cemetery....................... 724,862 612,421 112,441 18.4
Financial services............. 90,712 86,185 4,527 5.3
----------- ----------- -------- ----
2,535,865 2,355,342 180,523 7.7
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............. (76,368) (70,644) 5,724 8.1
----------- ----------- -------- ----
(1,848,253) (1,750,890) 97,363 5.6
Gross profit margin and
percentage:
Funeral........................ 401,371 23.3% 374,190 22.6% 27,181 7.3
Cemetery....................... 271,897 37.5 214,721 35.1 57,176 26.6
Financial services............. 14,344 15.8 15,541 18.0 (1,197) (7.7)
----------- ---- ----------- ---- -------- ----
$ 687,612 27.1% $ 604,452 25.7% $ 83,160 13.8%
=========== ==== =========== ==== ======== ====
Funeral
Funeral revenues were as follows:
YEAR ENDED DECEMBER 31, PERCENTAGE
----------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
North America........................... $ 970,749 $ 883,876 $ 86,873 9.8%
France.................................. 480,473 532,543 (52,070) (9.8)
Other European.......................... 203,479 169,660 33,819 19.9
Other foreign........................... 65,590 70,657 (5,067) (7.2)
---------- ---------- -------- ----
Total funeral revenues........ $1,720,291 $1,656,736 $ 63,555 3.8%
========== ========== ======== ====
The $86,873 increase in revenues from North American operations was
primarily the result of a $75,796 increase in revenues from existing clusters.
The number of funeral services performed by existing clusters in North America
increased 5.2% (245,633 compared to 233,383), while the average sales price
increased 3.3% ($3,833 compared to $3,710). Included in the existing cluster
increase was a $70,894 increase from locations acquired since January 1, 1996
and an increase of $4,902 from locations acquired prior to 1996. Locations
acquired since January 1, 1996 performed 30,418 funeral services during 1997
compared to 12,385 in 1996, while the average sales price increased 6.5% ($3,773
compared to $3,543). The increase from locations
14
16
acquired prior to 1996 is primarily due to a 3.3% higher average sales price
($3,842 compared to $3,720), offset by a 2.6% decrease in the number of funeral
services performed.
Revenues from French operations decreased $52,070 due to a 12.3% decline in
the French franc to US dollar currency exchange rate and a 1.4% decline in the
total funeral services performed (148,223 compared to 150,269). These declines
were partially offset by increased average sales prices (excluding the impact of
currency exchange rates discussed above).The $33,819 increase in revenues from
other European operations was primarily the result of an 11.3% increase in the
number of funeral services performed (102,985 compared to 92,491) as well as
improved average sales prices during 1997. This volume increase reflects a 5.9%
increase in volume reported by the Company's United Kingdom operations and the
effect of continued growth through acquisitions in Europe.
The decrease in revenues from other foreign operations is due primarily to
a 5.0% decline in the Australian to US currency exchange rate. The number of
funeral services performed by the Company's Australian operations declined 4.9%
in 1997, while average prices increased slightly (excluding the impact from
currency discussed above).
During the year ended December 31, 1997, the Company sold (net of
cancellations) approximately $527,000 of prearranged funeral services compared
to approximately $512,000 for the same period in 1996. These prearranged funeral
services are deferred and will be reflected in funeral revenues in the periods
that the funeral services are performed.
Funeral gross margins were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------------------------------- INCREASE INCREASE
1997 % OF REVENUE 1996 % OF REVENUE (DECREASE) (DECREASE)
-------- ------------ -------- ------------ ---------- ----------
North America.......... $297,586 30.7% $275,119 31.1% $22,467 8.2%
France................. 48,620 10.1 47,655 8.9 965 2.0
Other European......... 38,097 18.7 30,657 18.1 7,440 24.3
Other foreign.......... 17,068 26.0 20,759 29.4 (3,691) (17.8)
-------- ---- -------- ---- ------- -----
Total funeral
gross
margin..... $401,371 23.3% $374,190 22.6% $27,181 7.3%
======== ==== ======== ==== ======= =====
The slight decrease in gross margin percentage in North America is due to
lower margins reported by businesses acquired since January 1, 1996. Typically
acquisitions will temporarily exhibit slightly lower gross profit margins than
those experienced by the Company's existing locations until these locations are
assimilated into the Company's cluster management strategy. Margins at
businesses acquired before 1996 were virtually equal with the prior year.
The increase in other European gross margin percentage is primarily due to
improved results from the Company's United Kingdom operations in 1997, compared
to 1996.
The decrease in other foreign gross margin is primarily due to the decrease
in funeral revenues mentioned above and a 5.0% unfavorable change in the
Australian to US currency exchange rates.
Cemetery
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
---------- ---------- -------- ----------
North America............................ $671,112 $566,671 $104,441 18.4%
Other European........................... 21,609 15,285 6,324 41.4
Other foreign............................ 32,141 30,465 1,676 5.5
-------- -------- -------- ----
Total cemetery revenues........ $724,862 $612,421 $112,441 18.4%
======== ======== ======== ====
15
17
The $104,441 increase in North American cemetery revenue is due primarily
to a $93,858 increase in revenues from existing clusters. Included in the
existing cluster increase was $49,781 from locations acquired since January 1,
1996. Locations owned before January 1, 1996 contributed $44,077. Factors
contributing to the total increase included increased sales of preneed and at
need property and merchandise ($87,625), investment earnings on trusted amounts
($27,837), offset partially by fewer sales of excess property ($3,021).
The $6,324 increase in other European cemetery revenues is primarily due to
a $5,740 increase in revenues from locations acquired prior to 1996 in the
United Kingdom.
Cemetery gross margins were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------------------------------- INCREASE INCREASE
1997 % OF REVENUE 1996 % OF REVENUE (DECREASE) (DECREASE)
-------- ------------ -------- ------------ ---------- ----------
North America........... $251,993 37.5% $198,210 35.0% $53,783 27.1%
Other European.......... 8,275 38.3 4,315 28.2 3,960 91.8
Other foreign........... 11,629 36.2 12,196 40.0 (567) (4.6)
-------- ---- -------- ---- ------- ----
Total cemetery
gross
margin...... $271,897 37.5% $214,721 35.1% 57,176 26.6%
======== ==== ======== ==== ======= ====
The increase in gross margin from the Company's North American cemetery
operations is due to the increase in cemetery revenues from preneed and at need
cemetery sales, as well as increased trust investment income.
The increase in other European cemetery gross margin is due to the increase
in cemetery revenues as mentioned above at the Company's United Kingdom cemetery
locations.
Financial Services
Financial services revenues were as follows:
YEARS ENDED
DECEMBER 31, PERCENTAGE
----------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
------- ------- ---------- ----------
French insurance subsidiary..................... $74,175 $67,799 $6,376 9.4%
Provident (North America)....................... 16,537 18,386 (1,849) (10.1)
------- ------- ------ -----
Total financial services revenues..... $90,712 $86,185 $4,527 5.3%
======= ======= ====== =====
Financial services gross margins were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------------- INCREASE INCREASE
1997 % OF REVENUE 1996 % OF REVENUE (DECREASE) (DECREASE)
------- ------------ ------- ------------ ---------- ----------
French insurance
subsidiary............. $ 6,712 9.0% $ 6,651 9.8% $ 61 0.9%
Provident (North
America)............... 7,632 46.2 8,890 48.3 (1,258) (14.2)
------- ---- ------- ---- ------- -----
Total financial
services
gross
margin....... $14,344 15.8% $15,541 18.0% $(1,197) (7.7)%
======= ==== ======= ==== ======= =====
Provident's average outstanding loan portfolio during 1997 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
General and administrative expenses increased by approximately $3,566 or
5.6% during 1997 primarily due to increases in personnel costs and technology
costs. Expressed as a percentage of revenues, these expenses were 2.6% in 1997
compared to 2.7% in 1996.
16
18
Interest expense, which excludes the amount incurred by financial service
operations, decreased $1,837 or 1.3% during 1997. The decreased interest expense
is primarily attributable to the Company's 1997 refinancing of certain long-term
debt and hedging programs, which lowered the Company's average interest rate to
6.03% in 1997, compared to 7.10% in 1996. The average borrowings during 1997
were $2,434,808, compared to $2,068,072 in 1996.
Other income was $100,244 in 1997, compared to $21,982 in 1996, an increase
of $78,262. This increase reflects a gain on the sale of the Company's equity
interest in ECI ($68,077) recorded in 1997.
The provision for income taxes reflected a 35.4% effective tax rate for
1997 as compared to a 35.9% effective tax rate in 1996.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1998:
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 registered
securities. The Company believes cash from operations, additional funds
available under its revolving credit agreements, and proceeds from public and
private offerings of securities will be sufficient to continue its anticipated
acquisition program and policies.
At December 31, 1998, the Company had net working capital of $578,755 and a
current ratio of 1.92:1, compared to working capital of $275,966 and a current
ratio of 1.52:1 at December 31, 1997. The Company had a cash and cash
equivalents balance at December 31, 1998 of $358,210, compared to $46,877 at
December 31, 1997. Approximately, $160,000 of the December 31, 1998 cash balance
was contemplated to be used to repay ECI's revolving credit facility and other
cash needs. The Company purchased ECI in January 1999 (see "Other Matters" for
further information).
Revolving Credit Agreements
The Company has various revolving credit facilities and lines of credit
which currently provide for aggregate borrowings of approximately $1,800,000. At
Dec ember 31, 1998, approximately $1,149,000 was available under these
facilities. These facilities have financial compliance provisions that contain
certain restrictions on levels of net worth, debt, liens and guarantees (see
note eight to the consolidated financial statements for further information).
Sources and Uses of Cash
Cash Flows from Operating Activities: Net cash provided by operating
activities was $329,647 for the year ended December 31, 1998, compared to
$299,436 for the same period in 1997, an increase of $30,211. This increase was
primarily due to increases in net income and non-cash adjustments for
depreciation and amortization and deferred taxes, offset by growth in the
Company's receivables. The primary source of growth in the Company's receivables
is from increased sales of cemetery products and merchandise on a preneed basis.
Cash Flows from Investing Activities: Net cash used in investing activities
was $1,059,875 for the year ended December 31, 1998, compared to $633,444 for
the same period in 1997, an increase of $426,431. This increase was primarily
due to a $310,037 increase in cash used in acquisitions and $22,692 of increased
capital expenditures including new construction of facilities and major
improvements to existing properties. Cash used relating to prearranged funeral
activities includes amounts expended in the current year on prearranged
marketing efforts. The prior year included $147,700 in cash provided by the sale
of the Company's equity interest in ECI.
17
19
Cash Flows from Financing Activities: Net cash provided by financing
activities was $1,041,561 for the year ended December 31, 1998 compared to
$336,754 for the same period in 1997, an increase of $704,807. This increase is
mainly the result of two 1998 public issuances of long term notes totaling
$1,100,000, compared to a 1997 debt issuance for $650,000 and debt
extinguishment of approximately $450,000. Total cash provided by debt financing
activities was approximately $1,124,000 in 1998, compared to $413,043 in 1997.
As of December 31, 1998, the Company's debt to capitalization ratio was
55.0% compared to 49.8% at December 31, 1997. The interest rate coverage ratio
for the year ended December 31, 1998 was 3.72:1, compared to 4.43:1 for the same
period in 1997 (1997 ratio excludes the gain on the sale of the Company's
investment in ECI). Though the level of acquisition activity is expected to slow
from the 1998 level, the Company still 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, 1998, the Company had approximately $1,149,000 of available borrowings under
various revolving credit facilities and lines of credit. At December 31, 1998,
the Company had the ability to issue $900,000 in securities under a shelf
registration. In addition, 12,870,000 shares of common stock and a total of
$187,000 of guaranteed promissory notes and convertible debentures are
registered 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 life
insurance or annuity contracts. The amounts paid into trust funds or premiums
paid on insurance contracts on such 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
and annuity funded contracts also increase the amount of cash to be received
upon performance of the funeral.
The Company has an investment program which entails the ongoing
consolidation of multiple trustees, the use of institutional managers with
differing investment styles and consolidated performance monitoring and
tracking. This 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 maturity of the contracts. The Company anticipates an asset
allocation of approximately 65% equity and 35% fixed income. The Company's North
American prearranged trust portfolio earned a return of 18.0% in 1998 and 12.5%
in 1997 (including realized gains).
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. The Company sells prearranged funerals in most
of its service markets including its major foreign markets. AML, which was
acquired by the Company in 1998, has been a provider of insurance and annuity
products used to fund Company prearranged funerals for several years. 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 26.3% (25.1% in 1997)
and is expected to grow, thereby making the total number of funerals performed
more predictable, which will be recognized as funeral revenues in future
periods.
18
20
The total value of unperformed prearranged funeral contracts are trust
funded or insurance funded and represent the original contract value plus any
accumulated trust earnings or increasing insurance benefits. As of December 31,
1998 and 1997, unperformed prearranged funeral contracts are composed of the
following:
1998 1997
---------- ----------
Deferred prearranged funeral contract revenues.............. $2,819,794 $2,805,429
Contracts funded by company owned insurance subsidiaries.... 932,056 565,995
---------- ----------
$3,751,850 $3,371,424
========== ==========
The following table summarizes the changes in the total value of
unperformed prearranged funeral contracts.
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
Beginning balance........................................... $3,371,424 $2,876,778
Net sales................................................. 490,289 526,919
Acquisitions/dispositions................................. 138,976 102,346
Realized earnings and increasing insurance benefits....... 129,484 164,853
Maturities................................................ (274,107) (251,054)
Change in cancellation reserve............................ (16,608) (33,481)
Effect of foreign currency and other...................... (87,608) (14,937)
---------- ----------
Ending balance.............................................. $3,751,850 $3,371,424
========== ==========
The recognition of the total value of unperformed prearranged funeral
revenues is estimated to occur in the following years.
1999........................................................ $ 367,783
2000........................................................ 334,239
2001........................................................ 271,540
2002........................................................ 281,612
2003........................................................ 254,819
2004 through 2008........................................... 962,042
2009 and thereafter......................................... 1,279,815
----------
$3,751,850
==========
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 1998, 34.5% (33.3% in 1997) 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 17% 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 and margin growth.
19
21
Other Matters
In January, 1999, a wholly-owned subsidiary of the Company acquired ECI in
a stock for stock transaction valued at approximately $578,000 with assumed debt
of $252,000. ECI owned 326 funeral homes and 81 cemeteries in North America.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. Changes in the fair value of derivatives will be
recorded either in earnings or in other comprehensive income, based on the type
of risk for which the instrument is determined to be an effective hedge. Any
change in fair value of an instrument that is not designated as a hedge, or any
portion of a change in fair value of a hedging instrument that is deemed
ineffective, will be immediately recognized in earnings. The Company expects to
adopt the standard in the first quarter of fiscal year 2000 and is currently
assessing the impact that adoption will have on its consolidated financial
statements.
Several countries in which the Company operates will adopt usage of the
Euro in 1999. The Euro is a common currency being adopted by many of the
countries within the European community. The Company has established plans to
address operational and information system issues related to the Euro
conversion. The Company does not expect that the Euro conversion will have a
material adverse impact on the Company's consolidated financial position,
results of operations or cash flows.
The Company intends to repurchase the floating-rate notes, due 2011 and
putable in 1999, in the amount of $200,000. This debt instrument is expected to
be refinanced under the Company's commercial paper program before April 15,
1999. As of March 12, 1999, the Company estimates this repurchase will result in
an extraordinary charge of approximately $22,100 in 1999 ($14,300, net of tax).
In association with the review and analysis of its operating cost
structure, the Company anticipates recording a special charge to earnings in the
quarter ended March 31, 1999. Items being considered are: severance for employee
terminations; lease costs and asset write-offs for various offices and
operations to be closed; and costs related to construction projects that will
not be completed. The amount of the charge is expected to be between $80,000 and
$90,000 on a pre-tax basis.
Since January 26, 1999, several lawsuits have been commenced on behalf of
persons who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into ECI, (ii) purchased shares of
Company common stock during certain specified class periods or (iii) owned
employee stock options in ECI. As of March 24, 1999, 20 class action lawsuits
that had been originally filed in federal district court in Houston had been
consolidated into one action pending in that court, and one additional class
action lawsuit that had been originally filed in the federal district court in
Lufkin, Texas was still pending in that court. These lawsuits allege violations
of federal securities laws and name as defendants the Company and certain of its
officers and directors. As of the same date, two former state court lawsuits,
one of which was a class action, naming the Company as defendant and alleging
fraud and violations of Texas securities and common law had been removed to the
federal district court in Lufkin. The lawsuits generally refer to the Company's
January 26, 1999 public announcement that the Company's diluted earnings per
share for the fourth quarter of 1998 and for the year ended December 31, 1998
would be lower than analyst expectations. The lawsuits seek, among other things,
to recover unspecified damages. Since the litigation is in its very preliminary
stages, no discovery has been taken, and the Company cannot quantify its
ultimate liability, if any, for the payment of damages in these lawsuits.
However, the Company believes that the allegations in the lawsuits do not
provide a basis for the recovery of damages because the Company has made all the
required disclosures on a timely basis. The Company is seeking to transfer the
lawsuits pending in Lufkin and consolidate them with the action pending in
federal district court in Houston. The Company intends to aggressively defend
the foregoing litigation.
20
22
Year 2000 Issue
The Year 2000 issue, also known as "Y2K," refers to the inability of some
computer programs and computer-based microprocessors to correctly interpret the
century from a date in which the year is represented by only two digits (e.g.,
98). As a result, on or before January 1, 2000, computer systems used by
companies throughout the world may experience operating difficulties unless they
are modified or upgraded to properly process date related information. The Y2K
issue can arise at any point in a company's supply, manufacturing, processing,
distribution, or financial chains.
The Company has established Y2K Program Offices at its corporate offices in
Houston, Texas and Birmingham, England. These program offices, under the
direction of senior management, are responsible for advising and monitoring the
numerous facets of the Company's Y2K preparations. The Company has engaged an
external consulting firm to assist in oversight of the Company's Y2K
preparations and various assessment activities associated with discovering the
seriousness of the Y2K issue in the Pacific Rim and South America. Additionally,
the Company is utilizing internal personnel, contract project managers,
programmers and testers, as well as vendors, to identify Y2K issues, test and
implement the chosen solutions.
In order to adequately address the Y2K issue, efforts have been directed to
the following categories: production systems, networks, desktops, user developed
applications, vendor supplied software, facilities and telecommunications, and
the Company's supply chain. The following phases are common to all of these
categories: inventory and determination of criticality, discovery to determine
Y2K problems, analysis to determine corrective action, correction, testing, and
implementation. In addition to these activities, promotion of Y2K awareness and
development of contingency plans are part of the Company's Y2K preparation
effort.
STATE OF READINESS:
The majority of the Company's internal Y2K exposure exists at the corporate
office locations where the accounting and processing of the Company's business
transactions takes place. Individual operating locations (primarily funeral
homes and cemeteries) are substantially technology independent and thus face few
Y2K risks from internal systems.
Production systems: In 1998, in order to improve access to business
information through a common, integrated computing system across the company,
the Company began a worldwide computer systems replacement project utilizing
systems from Oracle Corporation (Oracle). While this project has begun at the
Company's Australian and European headquarters, global implementation will not
be achieved prior to the turn of the century. Therefore, all computer programs
expected to be replaced by Oracle are being made Y2K ready. The only exception
to this is in the United Kingdom where the implementation of Oracle is
proceeding in order to achieve Y2K readiness. In general, the Company's
production systems have progressed through the inventory, discovery, and
analysis phases and are in various stages of correction and testing. Production
systems make up the majority of the Company's "mission critical systems" and are
expected to be Y2K ready by mid-1999, with deployment completed by late-1999.
In many cases, deployment of the Y2K ready production systems to the
Company's many operating locations in North America will require new desktop
computers. At this point, it is the short time available for deployment, and not
the need for corrective action, that poses the largest risk to the Company. See
the section on Risks for more details.
Networks: Inventory, discovery and analysis of critical networks have been
completed at all of the Company's headquarter and regional locations and these
networks are in various stages of correction and testing. Accomplishing Y2K
readiness in this category has been complicated by Microsoft's recent change in
its position on the Y2K readiness of Windows NT 4.0, requiring customers to
install another software update to be considered fully Y2K compliant. Some
non-critical networks exist at individual operating locations and will be
assessed and made Y2K ready as time allows. Expectations are that all critical
networks will be Y2K ready by mid-1999.
Desktops: Testing has been conducted to determine the extent to which the
Y2K problem associated with desktops will affect the Company's ability to
conduct business. As none of the Company's critical
21
23
computer systems directly access date information from the desktop's real time
clock, it has been determined that very few desktops will pose a Y2K issue.
Coincidentally, as part of ongoing technology refresh programs and new
production systems' deployment, desktops are being upgraded, as needed, to
better meet the Company's business needs. As part of contingency planning,
personnel will be instructed on how to verify each desktop's date, and reset if
necessary, after January 1, 2000.
User developed applications: Inventory and discovery for items in this
category have been achieved. Very few critical applications were found to have
date dependencies. Those that do are being remediated and tested to ensure no
problems arise because of Y2K issues. Readiness should be achieved by mid-1999.
Vendor supplied software: It is the policy of the Company to query each
manufacturer of critical "off-the-shelf" software to ascertain the vendor's
statement regarding the Y2K readiness of their products. Once the vendor's
statement is obtained, upgrades, replacements and testing will be implemented to
minimize the risk of Y2K issues arising from the software. Accomplishing Y2K
readiness in this category is becoming increasingly challenging as vendors are
modifying previously stated positions on existing software, requiring customers
to install patches or upgrades to achieve full Y2K readiness. This has occurred
with at least three critical vendor supplied software packages the Company
currently uses. Given the moving target posed by the vendor's changing
statements, the Company has changed its expectations for critical items in this
category and plans to be using the latest vendor supplied patches and upgrades
by late-1999.
Facilities and telecommunications: The Company recognizes the potential for
Y2K issues to arise from embedded technology systems which may be in use at its
numerous facilities. Inventory, discovery and analysis are complete at the
Company's headquarters and most international operating locations. North
American operating locations are expected to complete these phases by mid-1999.
Telecommunications equipment has proven the most vulnerable, and plans are in
place to upgrade and/or replace equipment as necessary. Planning has begun to
obtain inventories from the remaining operating locations. All critical
facilities and telecommunication systems are expected to be Y2K ready by
late-1999.
Supply chain: Due to the Company's disparate locations and methods of
operation, assessing the Y2K readiness of the Company's supply chain must occur
at both the corporate level (for core supply chain relationships) and the local
level (for those relationships unique to a location). Inventory and discovery
have been completed at a number of operating locations and is ongoing at the
Company's headquarters. In general, responses to the Company's inquiries have
been less than informative, with many companies failing to respond. Planning has
begun to assign criticality to both corporate and local supply relationships and
additional efforts will be expended to ascertain the Y2K readiness of critical
suppliers. Contingency plans for critical suppliers are expected to be in place
by late-1999.
COSTS:
The aggregate costs for the Company to achieve Y2K readiness are not
expected to exceed $20,000 of which $4,800 represents lease payments which will
be incurred from 2000-2002. The $5,000 reduction from the September 30, 1998
estimate is primarily due to lower than anticipated Y2K issues in embedded
technology systems. All costs associated with Y2K readiness will be funded from
operating cash flows. The Company's actual costs incurred associated with Y2K
readiness through December 31, 1998 are estimated at $3,500.
In an effort to report material costs related to the Company's Y2K effort,
the Company has adopted a policy of capturing all costs of one thousand dollars
or more, all contractor expenses, and internal costs for dedicated resources
(those working exclusively on Y2K issues). As such the Company acknowledges that
there are many internal resources working part-time on Y2K-related issues for
which no payroll or overhead costs are being reported.
RISKS:
The majority of the Company's internal Y2K exposure exists at its corporate
offices where the Company's production systems operate. The failure to correct a
material Y2K problem at these locations could result in
22
24
an interruption of certain normal corporate business activities. Such a failure
would not, however, render the Company's various operating locations unable to
deliver goods and services.
The Company believes that the greatest risks continue to arise from the
uncertainty of the Y2K readiness of critical third party suppliers, both private
businesses and government entities, especially in the Company's international
markets. The possible consequences of critical third party suppliers not being
Y2K ready by January 1, 2000 could include temporary location closings, delays
in the delivery of goods and services, delays in the receipt of goods and
invoice and collection errors. Continued efforts by the Company to ascertain the
Y2K status of critical third party suppliers is expected to significantly reduce
the Company's level of uncertainty as the year 2000 approaches and, through the
use of contingency planning, the possibility of significant interruptions in
normal operations should be reduced.
At this time, the Company has no substantiated reason to believe that one
or more key third party suppliers will not be able to meet their obligations to
the Company after January 1, 2000; therefore, the Company believes that the
"most reasonably likely worst case scenario" would occur if deployment of the
Company's newly remediated proprietary funeral home financial system to all
North American locations was not completed by December 31, 1999. Such an
occurrence would not be materially disruptive to the Company. Contingencies for
this include modifying deployment schedules in late 1999 to ensure at least one
location is installed in each cluster and forwarding all transactions to be
input to the new system.
CONTINGENCY PLANS:
Because of the many uncertainties that exist, it is part of the Company's
Y2K preparation methodology that contingency plans be established for critical
systems in each of the categories outlined above. Contingency planning is
progressing at different stages at the Company's various locations. Contingency
plans for all critical production systems and plans for all individual operating
locations are expected to be in place by late-1999.
Quantitative and Qualitative Disclosures about Market Risk
The information presented below should be read in conjunction with Notes
Nine and Ten to the consolidated financial statements.
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. The
derivative instruments held by the Company are for hedging purposes and are
neither leveraged nor speculative in nature. The company expects no material
change in these policies in the coming year.
Movements in currency rates that impact the swaps are generally offset by a
corresponding movement in the value of the underlying assets being hedged.
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.
At December 31, 1998, after giving effect to the interest rate swaps, the
Company's total debt consists of approximately 74% of fixed interest rate debt
at a weighted average rate of 6.17% and approximately 26% of floating interest
rate debt at a weighted average rate of 6.15%. At December 31, 1997, the
Company's total debt consisted of approximately 44% of fixed interest rate debt
at a weighted average rate of 7.00% and approximately 56% of floating interest
rate debt at a weighted average rate of 5.50%. The Company's overall sensitivity
to floating interest rates is diversified in that approximately 47% of the
Company's floating rate exposure, as of December 31, 1998, is based in eight
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. Approximately 33.1% of the Company's net investment and
23.2% of its operating income are denominated in foreign currencies. Due to the
cross-currency hedges described above, approximately 13.3% of the Company's net
assets and approximately 3.5% of the Company's operating earnings are subject to
translation risk.
23
25
Marketable Equity and Debt Securities -- Price Risk
In connection with insurance operations, 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, 1998 and 1997, are presented in notes four,
five and six to the consolidated financial statements.
Market-Rate Sensitive Instruments -- Interest Rate and Currency Risk
The Company's financial instruments that are subject to interest rate and
currency risk consist of debt instruments, U.S. dollar interest rate swaps, and
cross-currency interest rate swaps. The Company performs sensitivity analyses to
assess the impact of these risks on earnings. This analysis reflects the impact
of a hypothetical 10% adverse change in market rates. In actuality, market rate
volatility is dependent on many factors that are impossible to forecast.
Therefore, adverse changes described below could differ substantially from the
hypothetical 10% impact. The analysis conducted below does not include Provident
assets or those of the insurance subsidiary. Instead, these are referenced
separately in tabular format below.
A sensitivity analysis of those instruments with variable interest rate
components is modeled to assess the impact that changing interest rates could
have on pre-tax earnings. The sensitivity analysis assumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pre-tax earnings, on an annual
basis, would be negatively impacted by $5,657 on December 31, 1998, and $7,624
on December 31, 1997.
A similar model is used to assess the impact of changes in foreign
currencies on interest expense. The Company's debt and derivative exposure is
primarily associated with the French franc, British pound, Canadian dollar,
Australian dollar, Spanish peseta, and the Norwegian krone. A 10% adverse change
in the U.S. dollar against these currencies would have negatively impacted the
Company's pre-tax earnings, on an annual basis, by $12,229 on December 31, 1998
and $10,838 on December 31, 1997.
For certain assets, the tables below present principal cash flows that
exist by maturity date and the related average interest rates:
AS OF DECEMBER 31, 1998:
FAIR VALUE
1999 2000 2001 2002 2003 THEREAFTER ASSET/(LIABILITY)
------- ------- ------- -------- ------- ---------- -----------------
Provident receivables........... $33,007 $14,369 $44,501 $107,117 $27,238 $ 43,297 $269,529
Average rate.................... 7.70% 9.24% 8.54% 8.12% 8.97% 8.38%
Insurance subsidiaries
investments in debt
securities.................... 85,316 70,369 76,233 108,416 74,231 503,804 918,369
Average rate.................... 5.85% 5.38% 5.84% 5.42% 5.90% 4.93%
AS OF DECEMBER 31, 1997:
FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER ASSET/(LIABILITY)
------- ------- ------- ------- ------- ---------- -----------------
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%
Insurance subsidiaries
investments in 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%
The unrealized gain on debt securities principally reflects changes in
interest rates. To reduce exposure to interest rate changes, portfolio
investments are selected so the weighted average duration of the investments
approximates the duration of associated policyholder liabilities. The insurance
companies are subject to reinvestment risk upon either sale or maturity of the
debt securities. Management believes that absence of any material amounts of
"high-yield" or "non-investment grade" investments in the portfolios of its
insurance subsidiaries enhances the ability of the insurance companies to
provide security to their policyholders.
24
26
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 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.
5) The ability of the Company, or its critical third party suppliers,
to adequately complete Y2K preparation efforts.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Quantitative and Qualitative Disclosures About Market Risk" set forth
in Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K.
25
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 27
Consolidated Statement of Income for the three years ended
December 31, 1998......................................... 28
Consolidated Balance Sheet as of December 31, 1998 and
1997...................................................... 29
Consolidated Statement of Cash Flows for the three years
ended December 31, 1998................................... 30
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1998............................. 31
Notes to Consolidated Financial Statements.................. 32
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 61
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
26
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Service Corporation International
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Service Corporation International at December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 24, 1999
27
29
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues........................................... $2,875,090 $2,535,865 $2,355,342
Costs and expenses................................. (2,156,320) (1,848,253) (1,750,890)
---------- ---------- ----------
Gross profit....................................... 718,770 687,612 604,452
General and administrative expenses................ (66,839) (66,781) (63,215)
---------- ---------- ----------
Income from operations............................. 651,931 620,831 541,237
Interest expense................................... (177,053) (136,720) (138,557)
Dividends on preferred securities of SCI Finance
LLC.............................................. -- (4,382) (10,781)
Other income....................................... 43,649 100,244 21,982
---------- ---------- ----------
(133,404) (40,858) (127,356)
---------- ---------- ----------
Income before income taxes and extraordinary
loss............................................. 518,527 579,973 413,881
Provision for income taxes......................... (176,385) (205,421) (148,583)
---------- ---------- ----------
Income before extraordinary loss................... 342,142 374,552 265,298
Extraordinary loss on early extinguishment of debt
(net of income taxes of $23,383)................. -- (40,802) --
---------- ---------- ----------
Net income......................................... $ 342,142 $ 333,750 $ 265,298
========== ========== ==========
Earnings per share:
Basic:
Income before extraordinary loss................. $ 1.34 $ 1.53 $ 1.13
Extraordinary loss on early extinguishment of
debt.......................................... -- (0.17) --
---------- ---------- ----------
Net income............................... $ 1.34 $ 1.36 $ 1.13
========== ========== ==========
Diluted:
Income before extraordinary loss................. $ 1.31 $ 1.47 $ 1.08
Extraordinary loss on early extinguishment of
debt.......................................... -- (0.16) --
---------- ---------- ----------
Net income............................... $ 1.31 $ 1.31 $ 1.08
========== ========== ==========
Basic weighted average number of shares............ 256,271 245,470 235,299
========== ========== ==========
Diluted weighted average number of shares.......... 262,520 257,781 252,870
========== ========== ==========
(See notes to consolidated financial statements)
28
30
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 358,210 $ 46,877
Receivables, net of allowances............................ 565,552 557,481
Inventories............................................... 189,070 172,169
Other..................................................... 96,248 34,881
----------- -----------
Total current assets.............................. 1,209,080 811,408
----------- -----------
Investments -- insurance subsidiaries....................... 1,234,678 574,728
Prearranged funeral contracts............................... 2,588,806 2,628,104
Long-term receivables....................................... 1,408,076 981,121
Cemetery property, at cost.................................. 2,035,897 1,636,859
Property, plant and equipment, at cost (net)................ 1,824,979 1,644,137
Deferred charges and other assets........................... 1,151,430 740,457
Names and reputations (net)................................. 1,813,212 1,498,116
----------- -----------
$13,266,158 $10,514,930
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 452,354 $ 425,631
Current maturities of long-term debt...................... 96,067 64,570
Income taxes.............................................. 81,904 45,241
----------- -----------
Total current liabilities......................... 630,325 535,442
----------- -----------
Long-term debt.............................................. 3,764,590 2,634,699
Reserves and annuity benefits -- insurance subsidiaries..... 1,207,169 565,995
Deferred prearranged funeral contract revenues.............. 2,819,794 2,805,429
Deferred income taxes....................................... 797,086 701,221
Other liabilities........................................... 893,092 546,140
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 259,201,104 and 252,923,784, respectively,
issued and outstanding................................. 259,201 252,924
Capital in excess of par value............................ 1,646,765 1,493,246
Retained earnings......................................... 1,232,758 983,353
Accumulated other comprehensive income (loss)............. 15,378 (3,519)
----------- -----------
Total stockholders' equity........................ 3,154,102 2,726,004
----------- -----------
$13,266,158 $10,514,930
=========== ===========
(See notes to consolidated financial statements)
29
31
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.......................................... $ 342,142 $ 333,750 $ 265,298
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 202,277 157,550 129,819
Provision for deferred income taxes.............. 56,308 19,212 56,902
Extraordinary loss on early extinguishment of
debt, net of income taxes...................... -- 40,802 --
Gains from dispositions (net).................... (30,627) (89,252) (9,930)
Realized (gains) losses on sale of investments... (23,287) -- --
Change in assets and liabilities net of effects
from acquisitions:
Increase in receivables........................ (228,325) (174,429) (167,338)
Increase in other assets....................... (71,824) (24,904) (36,781)
Increase (decrease) in other liabilities....... 86,501 36,045 (26,365)
Other.......................................... (3,518) 662 (1,748)
----------- ----------- -----------
Net cash provided by operating activities............. 329,647 299,436 209,857
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................ (253,224) (230,532) (193,152)
Changes in prearranged funeral contracts and
associated deferred revenues..................... (35,521) (5,537) (51,485)
Purchases of securities -- insurance subsidiaries... (1,225,955) (1,407,588) (1,212,305)
Sales of securities -- insurance subsidiaries....... 1,200,334 1,383,934 1,177,499
Proceeds from sales of property and equipment....... 43,793 46,908 30,121
Acquisitions, net of cash acquired.................. (719,768) (409,731) (279,320)
Loans issued by finance subsidiary.................. (142,017) (98,446) (86,858)
Principal payments received on loans by finance
subsidiary....................................... 70,178 45,915 156,064
Proceeds from sale of equity investment............. -- 147,700 --
Purchases of equity investments..................... (6,968) (87,643) (39,752)
Other............................................... 9,273 (18,424) 19,062
----------- ----------- -----------
Net cash used in investing activities................. (1,059,875) (633,444) (480,126)
----------- ----------- -----------
Cash flows from financing activities:
Increase in borrowings under revolving credit
agreements....................................... 100,294 304,505 96,441
Long-term debt issued............................... 1,100,000 650,000 300,000
Early extinguishment of debt........................ -- (449,998) --
Payments of debt.................................... (76,329) (91,464) (109,458)
Dividends paid...................................... (88,360) (69,888) (55,262)
Bank overdrafts and other........................... 5,956 (6,401) 25,195
----------- ----------- -----------
Net cash provided by financing activities............. 1,041,561 336,754 256,916
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 311,333 2,746 (13,353)
Cash and cash equivalents at beginning of period...... 46,877 44,131 57,484
----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 358,210 $ 46,877 $ 44,131
=========== =========== ===========
(See notes to consolidated financial statements)
30
32
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE
STOCK PAR VALUE EARNINGS INCOME (LOSS) TOTAL
-------- ---------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1995.............. $234,542 $1,214,708 $ 518,562 $ 7,533 $1,975,345
Comprehensive income:
Net income.............................. 265,298 265,298
Other comprehensive income:
Foreign currency translation............ 20,568 20,568
Unrealized gain on securities........... 5,132 5,132
----------
Total other comprehensive
income......................... 25,700
----------
Comprehensive income...................... 290,998
Common Stock issued:
Stock option exercises and stock
grants................................ 723 6,940 7,663
Acquisitions............................ 811 15,012 796 16,619
Debenture conversions................... 117 1,123 1,240
Dividends on common stock ($.24 per
share).................................. (56,548) (56,548)
-------- ---------- ---------- -------- ----------
Balance at December 31, 1996.............. 236,193 1,237,783 728,108 33,233 2,235,317
Comprehensive income:
Net income.............................. 333,750 333,750
Other comprehensive income:
Foreign currency translation............ (29,795) (29,795)
Unrealized loss on securities........... (6,957) (6,957)
----------
Total other comprehensive
income......................... (36,752)
----------
Comprehensive income...................... 296,998
Common Stock issued:
Stock option exercises and stock
grants................................ 820 9,296 10,116
Acquisitions............................ 3,958 79,215 (3,832) 79,341
Debenture conversions................... 492 5,925 6,417
Conversion of convertible preferred
securities of SCI Finance LLC......... 11,461 161,027 172,488
Dividends on common stock ($.30 per
share).................................. (74,673) (74,673)
-------- ---------- ---------- -------- ----------
Balance at December 31, 1997.............. 252,924 1,493,246 983,353 (3,519) 2,726,004
Comprehensive income:
Net income.............................. 342,142 342,142
Other comprehensive income:
Foreign currency translation............ 8,748 8,748
Unrealized gain on securities........... 10,149 10,149
----------
Total other comprehensive
income......................... 18,897
----------
Comprehensive income...................... 361,039
Common Stock issued:
Stock option exercises and stock
grants................................ 3,593 56,485 60,078
Acquisitions............................ 2,499 94,625 97,124
Debenture conversions................... 185 2,409 2,594
Dividends on common stock ($.36 per
share).................................. (92,737) (92,737)
-------- ---------- ---------- -------- ----------
Balance at December 31, 1998.............. $259,201 $1,646,765 $1,232,758 $ 15,378 $3,154,102
======== ========== ========== ======== ==========
(See notes to consolidated financial statements)
31
33
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world. At
December 31, 1998, the Company operated 3,442 funeral service locations, 433
cemeteries and 191 crematoria located in 20 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 sell cemetery related merchandise. Cemetery 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. There are 156 combination locations that contain a funeral
service location within a Company owned cemetery.
The financial services division represents a combination of the Company's
prearranged funeral and cemetery trust accounting and administration, investment
management, life insurance operations, and the lending activities of Provident
Services, Inc. (Provident), which provides capital financing for independent
funeral home and cemetery operations.
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 fifty years, equipment is depreciated over a
period from five to twenty years and leasehold improvements are depreciated over
a range of five to fifty years. For the three years ended December 31, 1998,
depreciation expense was $115,195, $87,571, and $74,854, 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
(generally from five to ten years) 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
32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prevailing when the agreements are signed. Revenues associated with sales of
prearranged funeral contracts (which include accumulated trust earnings and
increasing insurance benefits) are deferred until such time that the funeral
services are performed (see Note Four).
Cemetery Operations: All cemetery interment right sales, together with
associated merchandise sales, 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, and 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, 1998 and 1997 were $662,564 and
$515,051, respectively (see Note Six). 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, 1998 and 1997 were
$418,109 and $371,984, 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, 1998, the earnings recognized from all
cemetery trusts were $97,280, $74,971, and $51,601, respectively.
Insurance Operations: Effective in July 1998, the Company acquired American
Memorial Life Insurance Company (AML), an established funding entity for
prearranged funeral contracts. The Company accounts for AML under generally
accepted accounting principles for life insurance companies. The Company has
reclassified amounts included in the consolidated income statement and balance
sheet to conform the presentation of the results of operations and financial
condition of its French insurance subsidiary to the current approach. These
reclassifications had no effect on consolidated stockholders' equity, net income
or cash flows.
For traditional life products, premiums are recognized as revenue when due
from policyholders. Benefits and acquisition expenses are recognized as a
constant percentage of earned premiums. Computations of life insurance reserves
are based on anticipated investment yields (primarily 3% for the French
insurance company and 5.8% for the U.S. insurance companies), mortality,
surrenders, and provisions for unfavorable deviations.
For annuity products, premiums are recorded in a policyholder account which
is recorded to "Reserves and annuity benefits -- insurance subsidiaries".
Amounts assessed against the policyholder account for contract expenses and
mortality coverage are recorded as revenue in proportion to estimated gross
profits of the annuity contracts.
To the extent recoverable, certain costs incurred related to the
acquisition of new business are deferred. Such costs consist primarily of
commissions, underwriting, policy issuance and direct marketing. Such expenses
are referred to as deferred policy acquisition costs (DPAC). DPAC related to
different products is amortized at a constant percentage over the life of the
book of contracts as follows: over the expected premium paying period for
traditional life insurance; based on the present value of the estimated gross
margin amounts, with interest at the percentage used to calculate the assumed
investment yield, for participating life insurance; and based on the present
value of estimated gross profit amounts, with interest at the rate of interest
that accrues to the policyholder balances, for annuities. DPAC is included
within "Deferred charges and other assets" on the consolidated balance sheet.
33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also included within "Deferred charges and other assets" is the present
value of future profits (PVP) on business in force of acquired insurance
companies. Such amount represents the portion of costs to acquire such companies
that is allocated to the value of the right to receive future cash flows from
insurance contracts existing at the date of acquisition. PVP is amortized as
follows: over the expected premium paying period for traditional life insurance;
and over the estimated remaining life for annuities and participating life
insurance.
Investment income, net of investment expenses, and realized gains and
losses related to "Investments -- insurance subsidiaries" are included within
"Revenues" (see Note Five). Debt securities and marketable equity securities are
classified as available-for-sale and are carried at quoted market value, if
readily marketable, or at management's estimated fair value, if not readily
marketable. The change in the unrealized gain or loss, net of deferred income
tax, is recorded as a separate component of other comprehensive income in the
consolidated statement of stockholders' equity. Realized gains and losses on
investment transactions are determined on the specific identification basis.
When a decline in the value of a specific investment is considered to be other
than temporary, a provision for impairment is charged to earnings and the
carrying value of the investment is reduced. Premiums and discounts on fixed
debt securities are amortized over their expected average lives using the
interest method. Mortgage loans and real estate are generally carried at
amortized cost. Policy loans are stated at the aggregate unpaid balance.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as purchases are
included in "Names and reputations" and generally amortized on a straight line
basis over 40 years which, in the opinion of management, is not necessarily the
maximum period benefited. Fair values determined at the date of acquisition are
determined by management or independent appraisals. Many of the Company's
acquired funeral service locations have been providing high quality service to
client families for many years. Such loyalty often forms the basic valuation of
the funeral 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 $45,350, $37,649, and $33,836 for the three years ended
December 31, 1998, respectively. Accumulated amortization of names and
reputations as of December 31, 1998 and 1997 was $179,803 and $136,398,
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
amortized into interest expense over the remaining lives of the original
agreements.
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.
34
36
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THREE
ACQUISITIONS
The Company acquired certain funeral, cemetery, crematoria and insurance
operations both domestically and internationally during the years ended December
31, 1998 and 1997 (see Note Nineteen regarding the January 1999 purchase of
Equity Corporation International). 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, 1998:
1998 1997
-------- --------
Number acquired:
Funeral service locations................................. 308 294
Cemeteries................................................ 47 51
Crematoria................................................ 18 19
Insurance operations...................................... 2 --
Purchase price.............................................. $784,000 $643,000
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:
1998 1997
--------- ---------
Current assets.............................................. $ 52,339 $ 38,569
Investments -- insurance subsidiaries....................... 622,379 --
Prearranged funeral contracts............................... 51,990 86,452
Long-term receivables....................................... 91,299 31,522
Cemetery property........................................... 266,591 298,466
Property, plant and equipment............................... 108,152 162,992
Deferred charges and other assets........................... 422,299 13,417
Names and reputations....................................... 354,772 215,204
Current liabilities......................................... (84,562) (67,464)
Long-term debt.............................................. (53,609) (63,307)
Deferred income taxes and other liabilities................. (365,692) (120,340)
Reserves and annuity benefits -- insurance subsidiaries..... (594,848) --
Deferred prearranged funeral contract revenues.............. (54,218) (106,439)
Stockholders' equity........................................ (97,124) (79,341)
--------- ---------
Cash used for acquisitions........................ $ 719,768 $ 409,731
========= =========
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 agreements are signed. Payments under these contracts are placed in trust
accounts (pursuant to applicable law) or are used to pay premiums on life
insurance policies.
Unperformed price guaranteed prearranged funeral contracts that are not
funded through Company owned insurance subsidiaries are included in the
consolidated balance sheet as "Prearranged funeral contracts." This balance
represents amounts due from trust funds, customer receivables, or third party
insurance companies. A corresponding credit is recorded to "Deferred prearranged
funeral contract revenues."
35
37
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts paid by a customer under a prearranged funeral contract is recognized in
funeral revenue at the time the funeral service is performed. Trust earnings and
increasing insurance benefits are accrued and deferred until the services are
performed, at which times these funds are also recognized in funeral revenues
and are intended to cover future increases in the cost of providing a price
guaranteed funeral service. Net obtaining costs incurred pursuant to the sales
of trust funded and third party insurance funded prearrangements are included in
"Deferred charges and other assets". These obtaining costs include sales
commissions and certain other direct costs which are deferred and amortized over
a period representing the actuarially determined life of the prearranged
contracts. The aggregate net costs deferred as of December 31, 1998 and 1997
were $263,429 and $190,595, respectively.
Prearranged funeral contracts may also be funded by insurance policies
written by the Company's wholly-owned insurance subsidiaries. These insurance
subsidiaries follow generally accepted accounting principles for life insurance
companies (see Note Two). At December 31, 1998, approximately $397,363 of the
reserves and annuity benefits are associated with policies funding prearranged
funerals at non-Company owned funeral locations. Policy acquisition costs are
deferred as "Deferred charges and other assets" and amortized as prescribed by
generally accepted accounting principles for life insurance companies (see note
two). The aggregate net costs deferred as of December 31, 1998 and 1997 were
$13,832 and $2,495, respectively.
As of December 31, 1998, the total value of unperformed prearranged funeral
revenues expected to be recognized in future periods was $3,751,850 ($3,371,424
at December 31, 1997). The total value of unperformed prearranged funeral
contracts are trust funded or insurance funded and represent the original
contract value plus accumulated trust earnings or increasing insurance benefits.
Prearranged Funeral Contracts
The following table summarizes the components of prearranged funeral
contracts on the Company's consolidated balance sheet:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
Trusts:
Trust assets.............................................. $1,173,905 $ 979,315
Receivables from customers................................ 280,005 326,310
Allowance for cancellation................................ (115,206) (108,749)
---------- ----------
Net trust related assets.......................... 1,338,704 1,196,876
Third Party Insurance:
Receivables from third party insurance companies.......... 1,349,674 1,549,972
Allowance for cancellation................................ (99,572) (118,744)
---------- ----------
Net insurance related assets...................... 1,250,102 1,431,228
---------- ----------
Prearranged funeral contracts............................... $2,588,806 $2,628,104
========== ==========
The allowance for cancellation is based on historical experience and is
equivalent to approximately 8% of the total balance. Accumulated earnings from
trust funds and increasing insurance benefits of third party insurance companies
have been included to the extent that they have accrued through December 31,
1998. The cumulative trust funded total has been reduced by allowable cash
withdrawals for trust earnings and amounts retained by the Company pursuant to
various state laws.
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity in prearranged funeral
contracts:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
Beginning balance........................................... $2,628,104 $2,149,917
Net sales................................................. 285,931 447,023
Acquisitions/dispositions................................. 142,808 80,800
Realized earnings and increasing insurance benefits for
third party insurance companies........................ 105,866 116,462
Maturities................................................ (196,960) (195,919)
Change in cancellation reserve............................ (6,848) (33,481)
1998 reclassification of wholly-owned insurance
companies.............................................. (232,209) --
Distributed earnings, effect of foreign currency and
other.................................................. (137,886) 63,302
---------- ----------
Ending balance.............................................. $2,588,806 $2,628,104
========== ==========
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, 1998 DECEMBER 31, 1997
----------------------- ---------------------
COST MARKET COST MARKET
---------- ---------- -------- ----------
Debt securities:
Government.......................... $ 323,831 $ 356,853 $320,148 $ 345,046
Corporate........................... 103,835 106,190 113,007 115,372
Equity securities..................... 503,821 554,256 405,108 451,862
Money market/other.................... 242,418 228,085 141,052 131,197
---------- ---------- -------- ----------
$1,173,905 $1,245,384 $979,315 $1,043,477
========== ========== ======== ==========
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 for trust funded and third party insurance contracts
as well as the accrued trust earnings and increasing insurance benefits. The
Company defers trust earnings and increasing benefits of insurance contracts 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,
-------------------------
1998 1997
----------- -----------
Beginning balance........................................... $2,805,429 $2,282,838
Net sales................................................. 292,972 466,001
Acquisitions/dispositions................................. 138,422 99,897
Realized earnings and increasing insurance benefits from
third party insurance companies........................ 106,353 113,716
Maturities................................................ (192,817) (203,178)
Change in cancellation reserve............................ (6,848) (33,481)
1998 reclassification of wholly-owned insurance
companies.............................................. (232,209) --
Effect of foreign currency and other...................... (91,508) 79,636
---------- ----------
Ending balance.............................................. $2,819,794 $2,805,429
========== ==========
37
39
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIVE
INSURANCE OPERATIONS
The Company acquired AML effective July, 1998. In addition, the Company has
owned a French life insurance company for several years. The primary purpose of
these life insurance subsidiaries is to assist in funding the Company's
prearranged funeral program.
Investments -- Insurance Subsidiaries
As part of the Company's funding of prearranged funeral contracts, the
Company's wholly-owned life insurance subsidiaries invest in securities which
are considered as "available-for-sale." The cost, market value and unrealized
gains or losses related to debt and equity securities for December 31, 1998 and
1997 were as follows:
DECEMBER 31, 1998
---------------------------------------------
AMORTIZED UNREALIZED
COST MARKET VALUE GAINS LOSSES
---------- ------------ ------- -------
Debt securities:
U.S. treasury.......................... $ 8,841 $ 9,137 $ 296 $ --
French government...................... 241,033 251,187 10,545 (391)
Other foreign government (primarily
European)........................... 131,151 132,876 1,725 --
Corporate.............................. 338,181 341,191 5,895 (2,885)
Mortgage-backed........................ 145,790 147,254 1,757 (293)
Asset-backed........................... 32,340 32,925 704 (119)
Redeemable preferred stock............. 3,879 3,799 4 (84)
Equity securities:
Nonredeemable preferred stock.......... 1,246 1,335 89 --
Common stock........................... 85,439 117,493 33,483 (1,429)
Mutual funds:
Equity................................. 74,707 81,998 7,291 --
Debt................................... 59,058 60,783 1,725 --
Mortgage loans........................... 1,301 1,301 -- --
Real estate, net of accumulated
depreciation and amortization.......... 34,636 34,636 -- --
Policy loans............................. 18,763 18,763 -- --
---------- ---------- ------- -------
$1,176,365 $1,234,678 $63,514 $(5,201)
========== ========== ======= =======
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
--------------------------------------------
AMORTIZED UNREALIZED
COST MARKET VALUE GAINS LOSSES
--------- ------------ ------- -------
Debt securities:
Foreign government....................... $292,991 $296,320 $ 3,503 $ (174)
Corporate................................ 17,883 17,965 95 (13)
Equity securities.......................... 141,512 162,129 23,640 (3,023)
Mutual funds:
Money market/other....................... 13,945 14,153 208 --
Debt..................................... 53,276 53,276 -- --
Real estate, net of accumulated
depreciation and amortization............ 30,885 30,885 -- --
-------- -------- ------- -------
$550,492 $574,728 $27,446 $(3,210)
======== ======== ======= =======
The contractual maturities of debt securities as of December 31, 1998 were
as follows:
1998
--------------------
AMORTIZED MARKET
COST VALUE
--------- --------
Within one year............................................. $ 85,830 $ 85,316
After one year through five years........................... 325,388 329,249
After five years through ten years.......................... 309,189 315,457
After ten years............................................. 180,808 188,347
-------- --------
$901,215 $918,369
======== ========
Net investment income for the three years ended December 31, 1998 was as
follows:
1998 1997 1996
------- ------- -------
Debt securities......................................... $35,941 $14,247 $17,985
Equity securities....................................... 4,717 3,539 1,595
Other................................................... 2,066 -- --
------- ------- -------
Total investment income....................... 42,724 17,786 19,580
Investment expenses..................................... 4,131 3,053 870
------- ------- -------
Net investment income......................... $38,593 $14,733 $18,710
======= ======= =======
The gross realized gains and gross realized losses from sales of securities
for the three years ended December 31, 1998 were as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- --------------------------- ------------------------
GAIN LOSS NET GAIN LOSS NET GAIN LOSS NET
------- -------- ------- ------- ------- ------- ------- ---- -------
Debt securities...... $42,493 $(27,391) $15,102 $20,192 $(3,617) $16,575 $ 5,116 $-- $ 5,116
Equity securities.... 22,820 (14,635) 8,185 17,516 (3,755) 13,761 5,210 -- 5,210
------- -------- ------- ------- ------- ------- ------- --- -------
Realized gain
(loss)............. $65,313 $(42,026) $23,287 $37,708 $(7,372) $30,336 $10,326 $-- $10,326
======= ======== ======= ======= ======= ======= ======= === =======
The amount of net investment income and realized gain (loss) which are
allocable to policyholders but included above is $36,887, $19,015 and $30,740
for the three years ended December 31, 1998, respectively, and is included as
"Costs and expenses".
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in unrealized gain on investments for the three years ended
December 31, 1998 were as follows:
1998 1997 1996
------- ------- -------
Fixed income securities................................. $13,930 $ 3,744 $19,497
Equity securities....................................... 20,147 21,172 4,986
------- ------- -------
Change in unrealized gain on investments................ $34,077 $24,916 $24,483
======= ======= =======
Present Value of Future Profits -- Insurance Subsidiaries
An analysis of PVP is provided as follows:
DECEMBER 31,
-----------------
1998 1997
------- -------
Balance at beginning of year................................ $13,070 $13,957
Additions due to acquisitions............................... 36,630 --
Amortization, net of interest accrued....................... (4,518) (887)
------- -------
Balance at end of year...................................... $45,182 $13,070
======= =======
It is anticipated that PVP will be reduced by the following amounts in
future years:
1999........................................................ $ 6,451
2000........................................................ 6,079
2001........................................................ 5,447
2002........................................................ 4,636
2003........................................................ 3,633
Thereafter.................................................. 18,936
-------
$45,182
=======
Statutory Financial Information -- Insurance Subsidiaries
The Company's insurance companies are required to file financial statements
with state (for U.S. companies) or national (for the French company) insurance
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Certain statutory amounts were as follows
as of and for the year ended December 31, 1998:
UNITED STATES FRANCE
------------- -------
Capital and surplus......................................... $45,624 $73,014
Net income.................................................. 888 5,747
Under statutory regulations, AML must maintain certain minimum amounts of
statutory capital and statutory surplus. AML is also regulated by state
regulatory authorities as to amounts of dividends which can be paid without
prior approval of regulatory authorities.
Participating Life Insurance -- Insurance Subsidiaries
Participating policies represented approximately 33% and 100% of total life
insurance in force at December 31, 1998 and 1997, respectively. Participating
policies represented approximately 51% and 100% of premium income for 1998 and
1997, respectively. Dividends on participating policies amounted to $25,548 in
1998. The amount of dividends is determined through contract provision (within
French legal requirements)
40
42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for all life insurance policies issued by Auxia, the Company's French insurance
subsidiary, and by the contract provisions of policies issued by AML.
NOTE SIX
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, 1998 DECEMBER 31, 1997
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Debt securities:
Government............................... $204,277 $201,399 $169,823 $172,440
Corporate................................ 83,845 84,503 64,474 65,468
Equity securities.......................... 295,210 291,222 227,424 230,931
Money market/other......................... 79,232 79,284 53,330 53,254
-------- -------- -------- --------
$662,564 $656,408 $515,051 $522,093
======== ======== ======== ========
NOTE SEVEN
INCOME TAXES
The provision for income taxes includes United States income taxes,
determined on a consolidated return basis, foreign, state and local income
taxes.
Income before income taxes:
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
United States........................................ $419,450 $474,478 $309,431
Foreign.............................................. 99,077 105,495 104,450
-------- -------- --------
$518,527 $579,973 $413,881
======== ======== ========
Income tax expense (benefit) consisted of the following:
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Current:
United States...................................... $100,110 $157,450 $ 65,709
Foreign............................................ 10,881 7,022 14,158
State and local.................................... 9,086 21,737 11,814
-------- -------- --------
120,077 186,209 91,681
-------- -------- --------
Deferred:
United States...................................... 48,861 15,045 45,330
Foreign............................................ (697) 1,432 3,238
State and local.................................... 8,144 2,735 8,334
-------- -------- --------
56,308 19,212 56,902
-------- -------- --------
Total provision............................ $176,385 $205,421 $148,583
======== ======== ========
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company made income tax payments of approximately $126,000, $155,400,
and $99,400, for the three years ended December 31, 1998, respectively.
The differences between the U.S. federal statutory tax rate and the
Company's effective rate were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Computed tax provision at the applicable federal
statutory income tax rate.......................... $181,485 $202,991 $144,858
State and local taxes, net of federal income tax
benefits........................................... 11,199 15,906 13,097
Dividends received deduction and tax exempt
interest........................................... (1,178) (1,618) (2,108)
Amortization of names and reputations................ 6,423 5,622 4,765
Enacted tax rate change.............................. (2,218) (5,491) --
Foreign jurisdiction tax rate difference............. (18,576) (12,909) (11,849)
Other................................................ (750) 920 (180)
-------- -------- --------
Provision for income taxes................. $176,385 $205,421 $148,583
======== ======== ========
Total effective tax rate................... 34.0% 35.4% 35.9%
======== ======== ========
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,
-------------------
1998 1997
-------- --------
Receivables, principally due to sales of cemetery interment
rights and related products............................... $224,614 $186,900
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... 501,974 460,592
Property, plant and equipment, principally due to
depreciation and to purchase accounting adjustments....... 91,831 129,796
Other....................................................... 99,744 40,773
-------- --------
Deferred tax liabilities.................................... 918,163 818,061
-------- --------
Deferred revenue on prearranged funeral contracts,
principally due to earnings from trust funds.............. (27,270) (50,862)
Accrued liabilities......................................... (2,927) (24,768)
Carry-forwards and foreign tax credits...................... (36,789) (21,053)
-------- --------
Deferred tax assets......................................... (66,986) (96,683)
-------- --------
Valuation allowance......................................... 13,058 15,327
-------- --------
Net deferred income taxes................................... $864,235 $736,705
======== ========
During the three years ended December 31, 1998, tax expense resulting from
allocating certain tax benefits directly to capital in excess of par value
totaled $42,794, $3,799, and $2,410, 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, 1998 and 1997, United States income taxes had not been
provided on $333,890 and $252,369, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention to
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
permanently reinvest such earnings. Although it is not practicable to determine
the deferred tax liability on the unremitted earnings, credits for income taxes
paid by the company's foreign subsidiaries will be available to significantly
reduce any U.S. tax if these foreign earnings are remitted.
As of December 31, 1998 the Company has United States foreign tax credit
carry-forwards of $2,811 which will expire in the years 1999 through 2001.
Various subsidiaries have federal and state operating loss carry-forwards of
$50,197 with expiration dates through 2013. 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 decrease in the valuation
allowance is primarily attributable to foreign tax credits and indexation
benefit.
NOTE EIGHT
DEBT
Debt was as follows:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Bank revolving credit agreements and commercial paper....... $ 650,596 $ 616,589
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.......................... 114,259 141,108
8.375% notes due in 2004.................................... 51,840 51,840
7.375% notes due in 2004.................................... 250,000 250,000
6.0% notes due in 2005...................................... 600,000 --
7.2% notes due in 2006...................................... 150,000 150,000
6.875% notes due in 2007.................................... 150,000 150,000
6.5% notes due in 2008...................................... 200,000 --
7.7% notes due in 2009...................................... 200,000 200,000
6.95% amortizing notes due in 2010.......................... 55,691 58,859
Floating rate notes due in 2011 (putable in 1999)........... 200,000 200,000
7.875% debentures due in 2013............................... 55,627 55,627
7.0% notes due in 2015 (putable in 2002).................... 300,000 300,000
6.3% notes due in 2020 (putable in 2003).................... 300,000 --
Medium term notes, maturities through 2019, fixed average
interest rate of 9.32%.................................... 35,720 35,720
Convertible debentures, interest rates range from
4.75%-5.5%, due through 2008, conversion price ranges from
$11.25-$50.00............................................. 49,979 45,673
Mortgage and other notes payable with maturities through
2015...................................................... 216,833 156,931
Deferred loan costs......................................... (19,888) (13,078)
---------- ----------
Total debt.................................................. 3,860,657 2,699,269
Less current maturities..................................... (96,067) (64,570)
---------- ----------
Total long-term debt.............................. $3,764,590 $2,634,699
========== ==========
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consists of two committed tranches -- a 364-day tranche and a
5-year tranche -- which are utilized to support commercial paper issuance and
for general corporate needs.
The 364-day tranche allows for borrowings up to $300,000. This facility
expires June 25, 1999, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 0.08% is paid quarterly on the total commitment amount.
The 5-year tranche allows for borrowings up to $700,000, including $500,000
in various currencies. This facility expires June 27, 2002. Interest rates on
this facility are based on various indices as determined by the Company. In
addition, a facility fee is paid quarterly on the 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, 1998, approximately
$217,345 of revolving notes were outstanding under this facility at a weighted
average interest rate of 5.65%.
On November 3, 1998, the Company entered into an additional revolving
credit facility in the amount of $800,000. This facility is primarily intended
to support commercial paper issuance, has a 364-day maturity, and expires
November 2, 1999. A facility fee of 0.09% is paid quarterly on the total
commitment amount.
As of December 31, 1998, $433,251 of commercial paper was outstanding at a
weighted average interest rate of 6.68%, which was backed by the above
facilities. For the year ended December 31, 1998, the average outstanding
balance of commercial paper was $349,426 at a weighted average interest rate of
5.73%.
The commercial paper borrowings and revolving notes generally have
maturities ranging from one to ninety days.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
The Company primarily uses the revolving credit facilities, described
above, to finance the Company's ongoing acquisition programs. From time to time,
the Company raises debt or equity in the public markets to refinance balances
drawn on these facilities. 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. Since it is the Company's intent
to refinance borrowings under these facilities with long-term debt or equity,
the Company has classified such borrowings as long-term debt.
In March 1998, the Company issued two senior note securities. The first
note issued was a $200,000, 10-year, non-callable security with a 6.5% coupon
due in March 2008. The second note was a $300,000, 22-year security due in March
2020. This second note is subject to mandatory tender to a remarketing agent in
March 2003 and in March 2010. The coupon on this issue is presently 6.30%, but
may change when tendered and remarketed. The proceeds of this offering were
primarily used to repay existing debt outstanding under the Company's revolving
credit agreements.
The Company issued a senior note security in December 1998 in the amount of
$600,000. The note is a non-callable security with a 6.0% coupon that will
mature in December of 2005. The proceeds of this offering were primarily used to
repay existing debt outstanding under the Company's revolving credit agreements.
Approximately $27,595 of the Company's facilities and cemetery properties
were pledged as collateral for the mortgage notes at December 31, 1998.
At December 31, 1998, the Company had $21,728 in letters of credit
outstanding primarily to guarantee funding of certain insurance claims.
The aggregate principal payments on debt for the five years subsequent to
December 31, 1998, excluding amounts due to banks under revolving credit loan
agreements, are as follows: 1999-$96,067; 2000-$205,096; 2001-$203,694;
2002-$337,685; and 2003-$326,857.
44
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash interest payments for the three years ended December 31, 1998 totaled
$187,641, $162,521, and $150,961, respectively.
Approximately $2,112,526 of the Company's debt is denominated in foreign
currencies at December 31, 1998. Of this amount, $1,711,899 has been converted
from US dollars as a result of cross-currency swaps.
Similarly, the stated coupons described above have been substantially
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 Nine).
During the three months ended December 31, 1998, 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 Iowa Funeral Services, Inc...................... $6,900
NOTE NINE
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 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 only
enters into transactions 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 generally offset by a
corresponding movement in the earnings of the foreign operation.
45
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present information about the Company's derivatives:
DECEMBER 31, 1998
-------------------------------------------------------------------
WEIGHTED
AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET --------------
AMOUNT (LIABILITY) MATURITY RECEIVE PAY FAIR VALUE
---------- ------------ --------- ------- ---- ----------
Interest Rate Swaps:
US dollar fixed to US dollar floating............ $ 250,000 $ -- 1999-2001 7.35% 5.32% $ 7,931
US dollar fixed to US dollar floating............ 600,000 -- 2002-2003 6.24% 5.24% 15,093
US dollar fixed to US dollar floating............ 300,000 -- 2004-2006 7.02% 5.33% 25,082
US dollar fixed to US dollar floating............ 300,000 -- 2008-2009 6.61% 5.39% 24,552
US dollar floating to US dollar fixed............ 420,000 -- 2000-2001 5.22% 5.84% (5,751)
US dollar floating to US dollar fixed............ 380,000 -- 2003-2004 5.03% 5.54% (10,425)
Canadian dollar floating to Canadian dollar
fixed.......................................... 196,528 -- 2007-2008 5.23% 5.92% (18,873)
Australian dollar floating to Australian dollar
fixed.......................................... 39,670 -- 2006 4.75% 7.81% (5,981)
British pound floating to British pound fixed.... 289,819 -- 2008 6.04% 6.83% (32,083)
French franc floating to German mark floating.... 175,311 -- 2006 3.56% 3.84% (2,815)
German mark floating to French franc fixed....... 87,833 -- 2003 3.79% 5.66% (7,566)
Cross-Currency Interest Rate Swaps:
US dollar fixed to Canadian dollar floating...... 181,728 20,955 1999-2010 6.82% 5.58% 29,476
US dollar floating to Canadian dollar fixed...... 193,901 9,861 2003 5.22% 5.53% 8,163
US dollar floating to Australian dollar fixed.... 208,255 21,851 1999-2003 5.25% 6.14% 18,057
US dollar floating to Australian dollar
floating....................................... 59,196 7,931 2000-2003 5.22% 4.80% 7,217
US dollar fixed to British pound fixed........... 91,407 (7,238) 2002 8.72% 9.64% (7,636)
US dollar fixed to British pound floating........ 295,352 (19,129) 2002-2004 8.38% 6.59% 15,587
US dollar fixed to French franc fixed............ 300,000 36,678 2000-2007 6.29% 6.21% 22,465
US dollar fixed to French franc floating......... 150,000 15,654 2000-2007 6.90% 3.90% 26,956
US dollar floating to French franc fixed......... 117,833 (12,628) 2000 5.26% 4.23% (15,005)
US dollar fixed to German mark floating.......... 150,000 15,766 2003-2006 5.98% 3.48% 28,414
US dollar floating to Spanish peseta fixed....... 98,214 (5,899) 2003 5.26% 4.84% (11,106)
US dollar floating to Norwegian krone fixed...... 22,815 (64) 2003 5.26% 5.80% 72
Australian dollar fixed to US dollar floating.... 88,141 (15,079) 1999-2000 6.14% 5.30% (13,880)
---------- -------- --------
$4,996,003 $ 68,659 $ 97,944
========== ======== ========
DECEMBER 31, 1997
-------------------------------------------------------------------
WEIGHTED
AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET --------------
AMOUNT (LIABILITY) MATURITY RECEIVE PAY FAIR 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
========== ======== ========
46
48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company's consolidated debt totaled $3,860,657 at
a weighted average rate of 6.77%. After giving consideration to the interest
rate and cross-currency interest rate swaps, the weighted average rate of debt
(excluding $212,484 of Provident debt) was 6.16%.
At December 31, 1998, the Company's debt, including the derivative
instruments, consisted of approximately 74% of fixed interest rate debt at a
weighted average rate of 6.17% and approximately 26% of floating interest rate
debt at a weighted average rate of 6.15%. At December 31, 1997, the Company's
total debt consisted of approximately 44% of fixed interest rate debt at a
weighted average rate of 7.00% and approximately 56% of floating interest rate
debt at a weighted average rate of 5.50%. Approximately $2,112,526 and
$1,832,000 of the Company's debt consists of foreign-denominated debt at
December 31, 1998 and 1997, respectively.
Interest rate swap settlements are generally semi-annual and match the
coupons of the underlying debt or related intercompany loan payments on the
foreign operations being hedged. Additionally, as of December 31, 1998 and 1997,
$558,407 and $566,594, respectively, of the interest rate swaps contained
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:
either at maturity for nonamortizing swaps or according to defined amortization
tables. Maturities of notional amounts relating to derivative financial
instruments held on December 31, 1998, are as follows: 1999 -- $228,556;
2000 -- $710,879; 2001 -- $330,000; 2002 -- $535,016; 2003 -- $1,067,725; and
thereafter -- $2,123,827.
NOTE TEN
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
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 Six) without incurring excessive costs because
of the large number of individual contracts with varying terms. The investments
of the Company's insurance subsidiaries 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 potential 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, 1998 is an asset of $97,944
(see note nine). At December 31, 1997, the net fair value was an asset of
$126,717. The fair value 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, 1998 is
minimal (see Note Nine).
47
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of debt was as follows:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Bank revolving credit agreements and commercial paper....... $ 650,596 $ 616,589
6.375% notes due in 2000.................................... 151,598 150,285
6.75% notes due in 2001..................................... 153,196 151,755
8.72% amortizing notes due in 2002.......................... 123,344 150,266
8.375% notes due in 2004.................................... 58,093 57,055
7.375% notes due in 2004.................................... 266,397 260,725
6.0% notes due in 2005...................................... 596,618 --
7.2% notes due in 2006...................................... 159,900 155,730
6.875% notes due in 2007.................................... 157,774 152,265
6.5% notes due in 2008...................................... 204,842 --
7.7% notes due in 2009...................................... 222,220 214,980
6.95% amortizing notes due in 2010.......................... 60,392 60,336
Floating rate notes due in 2011 (putable in 1999)........... 200,000 200,000
7.875% debentures due in 2013............................... 62,885 61,001
7.0% notes due in 2015 (putable in 2002).................... 333,037 336,840
6.3% notes due in 2020 (putable in 2003).................... 302,826 --
Medium term notes, maturities through 2019, fixed average
interest rate of 9.32%.................................... 42,711 43,636
Convertible debentures, interest rates range from
4.75% - 5.5%, due through 2008, conversion price ranges
from $11.25 - $50.00...................................... 65,828 83,258
Mortgage and other notes payable with maturities through
2015...................................................... 218,863 138,379
---------- ----------
Total debt........................................ $4,031,120 $2,833,100
========== ==========
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
Company 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 $31,449 at December 31, 1998
($50,000 at December 31, 1997) to extend credit. Provident's total loans
receivable at December 31, 1998, were approximately $269,500 ($198,000 at
December 31, 1997). 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 funeral, cemetery and prearranged funeral receivables
due from customers is generally considered minimal because of the wide
dispersion of the customers served. Procedures are in effect to monitor the
creditworthiness of customers and bad debts have not been significant in
relation to the volume of revenues.
Customer payments on prearranged funeral contracts that are placed in state
regulated trusts or used to pay premiums on life insurance contracts issued by
third party insurance companies 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.
48
50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE ELEVEN
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
1999........................................................ $35,795
2000........................................................ 31,998
2001........................................................ 28,350
2002........................................................ 24,305
2003........................................................ 19,036
Thereafter.................................................. 86,886
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, 1998, rental expense was $69,196, $71,225, and $64,073,
respectively.
The Company has entered into management, consultative and noncompetition
agreements (generally for five to ten years) with certain officers of the
Company and former owners and key employees of businesses acquired. During the
three years ended December 31, 1998, $74,578, $68,667, and $55,688,
respectively, were charged to expense. At December 31, 1998, the maximum
estimated future commitment under all agreements with a remaining term in excess
of one year is $355,323, including $10,559 with certain officers of the Company.
Effective January 1, 1999, 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. In addition,
the contract provides for a one-year extension period in which the Company is
required to purchase any remaining commitment that exists at the end of the
original term. The agreement contains a total purchase commitment of $750,000
over the next six years (1999 -- $90,000; 2000 -- $105,000; 2001 -- $115,000;
2002 -- $130,000; 2003 -- $145,000; 2004 -- $165,000).
NOTE TWELVE
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 THIRTEEN
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, 1998. At December
31, 1998, 500,000,000 common shares of $1 par value were authorized, 259,201,104
shares were issued and outstanding (252,923,784 at December 31, 1997), net of
68,373 shares held, at cost, in treasury (66,373 at December 31, 1997).
During the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (FAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income. All prior periods presented have been restated
to conform to this new standard.
49
51
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, 1998 and 1997, 15,713,000 and
15,668,000, respectively, options had been granted to officers and key employees
of the Company which contain alternative vesting methods. Under the alternative
vesting methods, partial or full accelerated vesting will occur when the price
of Company common stock reaches pre-determined prices. If the pre-determined
stock prices are not met in the required time period, the options will fully
vest in periods ranging from eight to ten years from date of grant. At December
31, 1998 and 1997, 4,783,558 and 7,628,350 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, 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
---------- ------
Granted................................................. 2,953,553 36.66
Exercised............................................... (4,785,496) 13.50
Cancelled............................................... (102,992) 26.62
---------- ------
Outstanding at December 31, 1998.......................... 17,378,516 $25.48
========== ======
Exercisable at December 31, 1998.......................... 6,435,679 $17.23
========== ======
Exercisable at December 31, 1997.......................... 9,488,214 $14.07
========== ======
Exercisable at December 31, 1996.......................... 1,055,435 $11.01
========== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/98 CONTRACTUAL LIFE PRICE AT 12/31/98 PRICE
- -------------- ----------- ---------------- --------- ----------- ---------
$ 9.41 104,018 1.1 $ 9.41 104,018 $ 9.41
9.41 - 20.00 5,395,174 8.3 14.36 4,137,694 13.60
20.00 - 30.00 4,517,232 5.1 25.70 2,092,580 23.87
30.00 - 40.00 7,299,592 6.4 33.65 101,387 36.12
40.00 - 50.00 62,500 5.6 41.53 -- --
- ------------- ---------- --- ------ ---------- ------
$ 9.41 - 50.00 17,378,516 6.6 $25.48 6,435,679 $17.23
============= ========== === ====== ========== ======
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.
50
52
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 1996 Non-qualified Incentive Plan reserves 4,000,000 shares of
common stock for future awards of nonqualified stock options to employees who
are not officers of the Company. Under the Company's 1995 Stock Plan for
Non-Employee Directors, non-employee directors automatically receive yearly
awards of restricted stock through the year 2000. Each award is for 3,000 shares
of common stock and vests after one year of service.
For the three years ended December 31, 1998, 30,000, 73,000, and 49,600
shares of restricted stock were awarded at average fair values of $40.88, $33.35
and $25.76, 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 2008 unless extended.
If the Company had elected to recognize compensation cost for its option
plans based on the fair value at the grant dates for awards under those plans,
net income and earnings per share would have been changed to the pro forma
amounts indicated below:
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Net income:
As reported...................................... $342,142 $333,750 $265,298
Pro forma........................................ 318,057 315,733 252,929
Basic earnings per share:
As reported...................................... $ 1.34 $ 1.36 $ 1.13
Pro forma........................................ 1.24 1.30 1.07
Diluted earnings per share:
As reported...................................... $ 1.31 $ 1.31 $ 1.08
Pro forma........................................ 1.22 1.25 1.03
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 1998, 1997 and 1996, respectively: dividend
yield of 1%, 1%, and 1%, expected volatility of 28.3%, 26.6% and 25.3%, a risk
free interest rate of 5.5%, 6.5% and 6.8%; and an expected holding period of 7,
8, and 9 years.
NOTE FOURTEEN
RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all
United States employees, a supplemental retirement plan for certain current and
former key employees (SERP), a supplemental retirement plan for officers and
certain key employees (Senior SERP), and a retirement plan for non-employee
directors (Directors' Plan).
For the United States noncontributory 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 $12,575 and
$12,141 at December 31, 1998 and 1997, respectively ($4,956 at March 12, 1999).
51
53
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 funding status of the SERP,
Senior SERP, and Directors' Plan requires the Company to recognize an additional
liability in accordance with FAS No. 87, "Employers' Accounting for Pensions."
At December 31, 1998 and 1997, the additional minimum liability was $14,513 and
$14,101, respectively.
The Company's United Kingdom operation has a defined benefit pension plan.
The Company and employees contribute to the plan consistent with United Kingdom
funding requirements. Most other foreign employees are covered by various
foreign government mandated or defined contribution plans which are adequately
funded and are not considered 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.
The Company adopted FAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," during 1998. FAS No. 132 supersedes the
disclosure requirements in FAS No. 87. All prior periods presented have been
restated to conform to this new standard.
The components of net periodic benefit cost were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------- --------
Service cost -- benefits earned during the period..... $ 12,889 $ 9,806 $ 8,550
Interest cost on projected benefit obligation......... 10,732 10,033 9,400
Return on plan assets................................. (10,866) (7,991) (13,341)
Net amortization and deferral of gain................. 1,280 1,708 9,747
-------- ------- --------
$ 14,035 $13,556 $ 14,356
======== ======= ========
52
54
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Plans' funded status were as follows (funded plan based on valuations
as of September 30):
DECEMBER 31,
---------------------------------------------
1998 1997
--------------------- ---------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
-------- ---------- -------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year................................... $101,293 $ 39,840 $ 96,575 $ 40,281
Service cost............................. 11,984 905 6,593 1,015
Interest cost............................ 7,889 2,843 5,477 2,731
Plan amendments.......................... -- -- -- (930)
Actuarial (gain) loss.................... 3,659 2,055 739 (1,262)
Benefits paid............................ (12,366) (2,135) (8,091) (1,995)
-------- -------- -------- --------
Benefit obligation at end of year........ $112,459 $ 43,508 $101,293 $ 39,840
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year................................... $125,166 $ -- $103,435 $ --
Actual return on plan assets............. (488) -- 22,121 --
Employer contributions................... 80 2,135 7,701 1,995
Benefits paid............................ (12,366) (2,135) (8,091) (1,995)
-------- -------- -------- --------
Fair value of plan assets at end of
year................................... $112,392 $ -- $125,166 $ --
======== ======== ======== ========
Funded status of plan.................... $ (67) $(43,508) $ 23,873 $(39,840)
Fourth quarter contributions............. 8,873 -- -- --
Unrecognized actuarial (gain) loss....... 8,940 7,695 (5,539) 5,823
Unrecognized prior service cost.......... (1,314) 6,907 (1,674) 8,364
-------- -------- -------- --------
Prepaid (accrued) benefit cost........... $ 16,432 $(28,906) $ 16,660 $(25,653)
======== ======== ======== ========
The plans' weighted-average assumptions were as follows:
1998 1997
------------------- -------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------ ---------- ------ ----------
Discount rate used to determine obligations... 6.75% 6.75% 7.25% 7.25%
Assumed rate of compensation increase......... 5.5 5.5 5.5 5.5
Assumed rate of return on plan assets......... 9.0 -- 9.0 --
NOTE FIFTEEN
SEGMENT REPORTING
The Company adopted FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter of 1998. FAS No.
131 establishes standards for reporting information about operating segments and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the Company's chief decision making group. This group is comprised
of senior management who are responsible for the allocation of resources and
assessment of operating performance.
Because the Company's operations are product based and geographically
based, the Company's primary reportable operating segments presented below are
based on products or services and include funeral, cemetery, and insurance
operations. The Company's geographic segments include North America, France,
53
55
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other Europe and other Foreign. The Company conducts funeral operations in all
geographical regions, cemetery operations in all regions, except France, and
financial services operations in North America and France. See Note Two.
The Company's reportable segment information was as follows:
REPORTABLE
FUNERAL CEMETERY INSURANCE SEGMENTS
---------- ---------- ---------- -----------
Revenues from external customers:
1998.............................. $1,829,136 $ 846,601 $ 178,773 $ 2,854,510
1997.............................. 1,720,291 724,862 74,175 2,519,328
1996.............................. 1,656,736 612,421 67,799 2,336,956
Depreciation and amortization:
1998.............................. $ 152,396 $ 28,584 $ 4,947 $ 185,927
1997.............................. 123,652 21,611 3,707 148,970
1996.............................. 100,228 18,601 3,468 122,297
Income from operations:
1998.............................. $ 384,607 $ 306,161 $ 18,561 $ 709,329
1997.............................. 401,371 271,897 6,712 679,980
1996.............................. 374,190 214,721 6,651 595,562
Total assets:
1998.............................. $6,944,480 $4,012,685 $1,750,840 $12,708,005
1997.............................. 6,124,463 3,309,431 637,312 10,071,206
1996.............................. 5,379,608 2,638,775 676,646 8,695,029
Capital expenditures:
1998.............................. $ 590,065 $ 369,212 $ 2,029 $ 961,306
1997.............................. 487,802 404,100 592 892,494
1996.............................. 398,806 268,039 281 667,126
Operating locations at year end (unaudited):
1998.............................. 3,578 488 -- 4,066
1997.............................. 3,244 441 -- 3,685
1996.............................. 2,987 390 -- 3,377
54
56
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles certain reportable segment amounts to the
Company's corresponding consolidated amounts:
REPORTABLE
SEGMENTS PROVIDENT CORPORATE CONSOLIDATED
----------- --------- --------- ------------
Revenues from external customers:
1998................................ $ 2,854,510 $ 20,580 $ -- $ 2,875,090
1997................................ 2,519,328 16,537 -- 2,535,865
1996................................ 2,336,956 18,386 -- 2,355,342
Depreciation and amortization:
1998................................ $ 185,927 $ 7 $ 16,343 $ 202,277
1997................................ 148,970 5 8,575 157,550
1996................................ 122,297 9 7,513 129,819
Total assets:
1998................................ $12,708,005 $271,448 $286,705 $13,266,158
1997................................ 10,071,206 200,562 243,162 10,514,930
1996................................ 8,695,029 148,193 177,556 9,020,778
Capital expenditures (1):
1998................................ $ 961,306 $ 180 $ 21,253 $ 982,739
1997................................ 892,494 2 14,698 907,194
1996................................ 667,126 -- 11,582 678,708
- ---------------
(1) Consolidated capital expenditures include $729,515, $676,662 and $485,556
for the three years ended December 31, 1998, respectively, for purchases of
property, plant and equipment, cemetery property, and names and reputations
of acquired businesses.
The following table reconciles reportable segment income from operations
shown above to the Company's consolidated income before income taxes and
extraordinary loss:
1998 1997 1996
--------- -------- --------
Income from operations:
Reportable segments............................... $ 709,329 $679,980 $595,562
Provident income from operations.................. 9,441 7,632 8,890
General and administrative expenses............... (66,839) (66,781) (63,215)
--------- -------- --------
Consolidated income from operations................. 651,931 620,831 541,237
Interest expense.................................. (177,053) (136,720) (138,557)
Dividends on preferred securities of SCI Finance
LLC............................................ -- (4,382) (10,781)
Other income...................................... 43,649 100,244 21,982
--------- -------- --------
Income before income taxes and extraordinary loss... $ 518,527 $579,973 $413,881
========= ======== ========
55
57
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company geographic segment information was as follows:
NORTH OTHER OTHER
AMERICA FRANCE EUROPE FOREIGN TOTAL
---------- -------- ---------- -------- ----------
Revenues from external
customers:
1998...................... $1,877,294 $621,359 $ 266,678 $109,759 $2,875,090
1997...................... 1,658,398 554,648 225,087 97,732 2,535,865
1996...................... 1,468,936 600,341 184,943 101,122 2,355,342
Income from operations:
1998...................... $ 517,560 $ 71,499 $ 35,666 $ 27,206 $ 651,931
1997...................... 490,430 55,332 46,371 28,698 620,831
1996...................... 419,004 54,305 34,973 32,955 541,237
Long-lived assets:
1998...................... $4,846,151 $497,477 $1,060,405 $421,485 $6,825,518
1997...................... 3,979,614 440,744 902,554 196,656 5,519,568
1996...................... 3,229,800 450,864 874,868 181,006 4,736,538
Operating locations at year end
(unaudited):
1998...................... 1,843 1,214 840 169 4,066
1997...................... 1,720 1,101 712 152 3,685
1996...................... 1,551 1,056 631 139 3,377
Included in the North American figures above are the following United
States amounts:
1998 1997 1996
---------- ---------- ----------
Revenues from external customers................. $1,799,796 $1,586,910 $1,407,296
Income from operations........................... 500,865 468,822 400,924
Long-lived assets................................ 4,513,827 3,664,194 3,045,544
Operating locations at year end (unaudited)...... 1,686 1,574 1,441
56
58
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts was as follows:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Cash and cash equivalents:
Cash...................................................... $ 80,782 $ 41,264
Commercial paper and temporary investments................ 277,428 5,613
---------- ----------
$ 358,210 $ 46,877
========== ==========
Receivables and allowances:
Current:
Trade accounts......................................... $ 336,213 $ 312,931
Cemetery contracts..................................... 225,449 269,503
Loans and other........................................ 101,444 80,109
---------- ----------
663,106 662,543
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 53,292 52,597
Unearned finance charges............................... 44,262 52,465
---------- ----------
97,554 105,062
---------- ----------
$ 565,552 $ 557,481
========== ==========
Long-term:
Cemetery contracts..................................... $ 534,801 $ 387,566
Trusted cemetery merchandise sales..................... 613,917 486,139
Loans and other........................................ 360,776 207,687
---------- ----------
1,509,494 1,081,392
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 38,707 35,964
Unearned finance charges............................... 62,711 64,307
---------- ----------
101,418 100,271
---------- ----------
$1,408,076 $ 981,121
========== ==========
57
59
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rates on cemetery contracts and loans and other notes receivable
range from 3.2% to 15.7% at December 31, 1998 (1.5% to 19.0% at December 31,
1997). Included in long-term loans and other notes receivable at December 31,
1998, are $15,054 in notes with officers and employees of the Company ($16,049
at December 31, 1997), the majority of which are collateralized by real estate,
and $28,323 in notes with other related parties ($24,095 at December 31, 1997).
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Cemetery property:
Undeveloped land.......................................... $1,512,198 $1,234,321
Developed land, lawn crypts and mausoleums................ 523,699 402,538
---------- ----------
$2,035,897 $1,636,859
---------- ----------
Property, plant and equipment:
Land...................................................... $ 441,897 $ 422,877
Buildings and improvements................................ 1,304,426 1,152,235
Operating equipment....................................... 514,865 413,108
Leasehold improvements.................................... 52,613 46,853
---------- ----------
2,313,801 2,035,073
---------- ----------
Less: accumulated depreciation............................ (488,822) (390,936)
---------- ----------
$1,824,979 $1,644,137
========== ==========
Accounts payable and accrued liabilities:
Trade payables............................................ $ 111,518 $ 74,874
Dividends................................................. 24,333 18,975
Payroll................................................... 75,085 70,957
Interest.................................................. 44,414 31,665
Insurance................................................. 70,432 41,799
Bank overdraft............................................ 19,759 29,977
Other..................................................... 106,813 157,384
---------- ----------
$ 452,354 $ 425,631
========== ==========
NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- -------- -------
Common stock issued under restricted stock plans............ $ 1,196 $ 2,405 $ 1,278
Minimum liability under retirement plans.................... (535) (4,097) (2,235)
Debenture conversions to common stock....................... 2,594 6,417 1,240
Common stock issued in acquisitions......................... 97,124 83,173 15,823
Debt issued in acquisitions................................. 28,560 21,325 26,467
Conversion of preferred securities of SCI Finance LLC....... -- 167,911 --
58
60
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SEVENTEEN
EARNINGS PER SHARE
The basic and diluted per share computations for income before
extraordinary item were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (numerator):
Income before extraordinary item -- basic.......... $342,142 $374,552 $265,298
After tax interest on convertible debentures....... 1,368 4,611 8,031
-------- -------- --------
Income before extraordinary item -- diluted........ $343,510 $379,163 $273,329
======== ======== ========
Shares (denominator):
Shares -- basic.................................... 256,271 245,470 235,299
Stock options and warrants...................... 4,290 4,827 3,919
Convertible debentures.......................... 1,959 2,212 2,187
Convertible preferred securities of SCI Finance
LLC........................................... -- 5,272 11,465
-------- -------- --------
Shares -- diluted.................................. 262,520 257,781 252,870
======== ======== ========
Earnings per share before extraordinary item:
Basic.............................................. $ 1.34 $ 1.53 $ 1.13
Diluted............................................ $ 1.31 $ 1.47 $ 1.08
NOTE EIGHTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST* SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
Revenues:
1998................................. $698,844 $690,230 $712,520 $773,496 $2,875,090
1997................................. 652,690 616,329 600,995 665,851 2,535,865
Gross profit:
1998................................. 216,128 187,690 173,706 141,246 718,770
1997................................. 188,152 163,183 151,772 184,505 687,612
Net income:
1998................................. 108,786 90,948 83,213 59,195 342,142
1997................................. 90,345 78,801 72,724 91,880 333,750
Basic earnings per share:
1998................................. .43 .36 .32 .23 1.34
1997................................. .38 .33 .29 .36 1.36
Diluted earnings per share:
1998................................. .42 .35 .32 .23 1.31
1997................................. .36 .31 .28 .36 1.31
- ---------------
* 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.
59
61
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE NINETEEN
SUBSEQUENT EVENTS
In January 1999, a wholly-owned subsidiary of the Company acquired ECI. The
combination occurred through a stock-for-stock transaction in which ECI
stockholders received 15,500,824 shares of Company common stock, and was
accounted for under the purchase method of accounting.
Since January 26, 1999, several lawsuits have been commenced on behalf of
persons who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into ECI, (ii) purchased shares of
Company common stock during certain specified class periods or (iii) owned
employee stock options in ECI. As of March 24, 1999, 20 class action lawsuits
that had been originally filed in federal district court in Houston, Texas had
been consolidated into one action pending in that court, and one additional
class action lawsuit that had been originally filed in the federal district
court in Lufkin, Texas was still pending in that court. These lawsuits allege
violations of federal securities laws and name as defendants the Company and
certain of its officers and directors. As of the same date, two former state
court lawsuits, one of which was a class action, naming the Company as defendant
and alleging fraud and violations of Texas securities and common law had been
removed to the federal district court in Lufkin. The lawsuits generally refer to
the Company's January 26, 1999 public announcement that the Company's diluted
earnings per share for the fourth quarter of 1998 and for the year ended
December 31, 1998 would be lower than analyst expectations. The lawsuits seek,
among other things, to recover unspecified damages. Since the litigation is in
its very preliminary stages, no discovery has been taken, and the Company cannot
quantify its ultimate liability, if any, for the payment of damages in these
lawsuits. However, the Company believes that the allegations in the lawsuits do
not provide a basis for the recovery of damages.
60
62
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1998
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD
----------- ---------- ---------- ----------- ------------- ---------
(THOUSANDS)
Current --
Allowance for contract cancellations
and doubtful accounts:
Year ended December 31, 1998...... $52,597 $27,190 $2,327 $(28,822) $53,292
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
Due After One Year --
Allowance for contract cancellations
and doubtful accounts:
Year ended December 31, 1998...... $35,964 $ 3,650 $ (499) $ (408) $38,707
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
Deferred Tax Valuation Allowance:
Year ended December 31, 1998...... $15,327 $(2,269) $ -- $ -- $13,058
Year ended December 31, 1997...... 6,128 9,199 -- -- 15,327
Year ended December 31, 1996...... 8,729 (2,601) -- -- 6,128
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily acquisitions and dispositions of operations.
61
63
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 captions "Compensation Committee
Report on 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedule:
The financial statements and schedule are listed in the accompanying Index
to Financial Statements and Related Schedule on page 26 of this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 65-67 are
filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the Company filed a Form 8-K
dated December 11, 1998 reporting (i) under "Item 5. Other Events" certain
information regarding a registration statement relating to a public offering of
securities and (ii) under "Item 7. Financial Statements and Exhibits" certain
exhibits, including underwriting agreements, relating to the aforementioned
registration statement.
(c) Included in (a) above.
(d) Included in (a) above.
62
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Service Corporation International, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SERVICE CORPORATION INTERNATIONAL
By: /s/ JAMES M. SHELGER
------------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)
Dated: March 30, 1999
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, Chief March 30, 1999
- ----------------------------------------------------- Executive Officer and President
(R. L. Waltrip)
GEORGE R. CHAMPAGNE* Executive Vice President Chief March 30, 1999
- ----------------------------------------------------- Financial Officer (Principal
(George R. Champagne) Financial Officer)
/s/ WESLEY T. MCRAE North American Controller of March 30, 1999
- ----------------------------------------------------- SCI Management Corporation, a
(Wesley T. McRae) subsidiary of the Registrant
(Principal Accounting Officer)
ANTHONY L. COELHO* Director March 30, 1999
- -----------------------------------------------------
(Anthony L. Coelho)
JACK FINKELSTEIN* Director March 30, 1999
- -----------------------------------------------------
(Jack Finkelstein)
A. J. FOYT, JR.* Director March 30, 1999
- -----------------------------------------------------
(A. J. Foyt, Jr.)
JAMES H. GREER* Director March 30, 1999
- -----------------------------------------------------
(James H. Greer)
B. D. HUNTER* Director March 30, 1999
- -----------------------------------------------------
(B. D. Hunter)
JOHN W. MECOM, JR.* Director March 30, 1999
- -----------------------------------------------------
(John W. Mecom, Jr.)
CLIFTON H. MORRIS, JR.* Director March 30, 1999
- -----------------------------------------------------
(Clifton H. Morris, Jr.)
63
65
SIGNATURE TITLE DATE
--------- ----- ----
E. H. THORNTON, JR.* Director March 30, 1999
- -----------------------------------------------------
(E. H. Thornton, Jr.)
W. BLAIR WALTRIP* Director March 30, 1999
- -----------------------------------------------------
(W. Blair Waltrip)
EDWARD E. WILLIAMS* Director March 30, 1999
- -----------------------------------------------------
(Edward E. Williams)
*By /s/ JAMES M. SHELGER
- -----------------------------------------------------
(James M. Shelger, as Attorney-In-Fact
For each of the Persons indicated)
64
66
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 D Junior Participating Preferred Stock, dated July
27, 1998. (Incorporated by reference to Exhibit 3.2 to
Form 10-Q for the fiscal quarter ended June 30, 1998).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.7 to Form 10-K for the fiscal year ended December 31,
1991).
4.1 -- Rights Agreement dated as of May 14, 1998 between the
Company and Harris Trust and Savings Bank. (Incorporated
by reference to Exhibit 99.1 to Form 8-K dated May 14,
1998).
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 January 1, 1998, between SCI
Executive Services, Inc. and R.L. Waltrip.
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.
(Incorporated by reference to Exhibit 10.5 to Form 10-K
for the fiscal year ended December 31, 1997).
10.6 -- Separation and Release Agreement, dated March 15, 1999,
among the Company, SCI Executive Services, Inc. and L.
William Heiligbrodt.
10.7 -- Independent Contractor/Consultative Agreement, dated
March 15, 1999, between SCI Management Corporation and L.
William Heiligbrodt.
10.8 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and W. Blair Waltrip.
(Incorporated by reference to Exhibit 10.6 to Form 10-K
for the fiscal year ended December 31, 1997).
10.9 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and Jerald L. Pullins.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the fiscal quarter ended June 30, 1998).
10.10 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and George R. Champagne.
10.11 -- Form of Employment Agreement pertaining to officers
(other than the officers identified in the preceding
exhibits). (Incorporated by reference to Exhibit 10.9 to
Form 10-K for the fiscal year ended December 31, 1997).
65
67
EXHIBIT
NO. DESCRIPTION
------- -----------
10.12 -- 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).
10.13 -- 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).
10.14 -- Amendment to 1986 Stock Option Plan, dated November 13,
1997. (Incorporated by reference to Exhibit 10.12 to Form
10-K for the fiscal year ended December 31, 1997).
10.15 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.16 -- 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).
10.17 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 4.12 to Registration Statement
No. 333-00179 on Form S-8).
10.18 -- 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).
10.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997. (Incorporated by reference to
Exhibit 10.17 to Form 10-K for the fiscal year ended
December 31, 1997).
10.20 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.21 -- 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).
10.22 -- Amendment to 1995 Incentive Equity Plan, dated November
13, 1997. (Incorporated by reference to Exhibit 10.21 to
Form 10-K for the fiscal year ended December 31, 1997).
10.23 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated
by reference to Annex A to Proxy Statement dated April
17, 1995).
10.24 -- 1996 Incentive Plan. (Incorporated by reference to Annex
A to Proxy Statement dated April 15, 1996).
10.25 -- 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).
10.26 -- Amendment to 1996 Incentive Plan, dated November 13,
1997. (Incorporated by reference to Exhibit 10.25 to Form
10-K for the fiscal year ended December 31, 1997).
10.27 -- Split Dollar Life Insurance Plan. (Incorporated by
reference to Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 1995).
10.28 -- Supplemental Executive Retirement Plan for Senior
Officers (as Amended and Restated Effective as of January
1, 1998).
10.29 -- Deferred Compensation Plan. (Incorporated by reference to
Exhibit 10.31 to Form 10-K for the fiscal year ended
December 31, 1997).
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
66
68
EXHIBIT
NO. DESCRIPTION
------- -----------
23.1 -- Consent of Independent Accountants
(PricewaterhouseCoopers LLP).
24.1 -- Powers of Attorney.
27 -- Financial Data Schedules.
99.1 -- List of Pending Class Action Litigation.
In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.29.
Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as
exhibits to this report certain instruments with respect to long-term debt under
which the total amount of securities authorized thereunder does not exceed 10
per cent of the total assets of Registrant and its subsidiaries on a
consolidated basis. Registrant agrees to furnish a copy of any such instrument
to the Commission upon request.
67