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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $838,791,831 based upon a closing market price of $3.1250 on
March 24, 2000 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 24, 2000 was 272,064,618 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 2000
Annual Meeting of Shareholders (Part III)
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PART I
ITEM 1. BUSINESS.
Service Corporation International was incorporated in Texas on July 5,
1962. The term "Company" or "SCI" includes the registrant and its subsidiaries,
unless the context indicates otherwise.
The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 1999, the Company operated 3,823 funeral service
locations, 525 cemeteries, 198 crematoria and two insurance operations located
in 20 countries on five continents. The Company conducts funeral service
operations in all of the 20 countries mentioned above, cemetery operations in
North America, South America, Australia and certain countries within Europe, and
financial services operations in North America and France. As of December 31,
1999, the Company's largest markets were North America and France, which when
combined represent approximately 86% of the Company's consolidated revenues, 73%
of the Company's consolidated income from operations and 78% of the Company's
total operating locations. 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.
Historically, the Company's growth has been largely attributable to
acquiring funeral service locations and cemeteries. This resulted in the Company
creating the world's largest network of funeral service locations and
cemeteries. The Company believes this network forms the foundation of its
business plan going forward. During the mid-1990's, the market to acquire
funeral service locations and cemeteries became more competitive than ever
before and resulted in increasing prices which lowered returns on invested
capital. As a result, the Company suspended its acquisition program in 1999 and
is in transition from an acquisition company to an operating company.
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 geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales personnel.
Personnel costs, the largest operating expense for the Company, are the cost
components most beneficially affected by clustering. The sharing of employees,
as well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various 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, 1999, the
Company owned 200 funeral service location/cemetery combinations and operated 48
flower shops engaged principally in the design and sale of funeral floral
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arrangements. These flower shops provide floral arrangements to most 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 operations. At December 31, 1999, the total
value of the Company's unperformed prearranged funeral contracts was $4.287
billion, of which approximately $392 million is estimated to be fulfilled in
2000. 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, lots and lawn crypts) and certain merchandise,
including stone and bronze memorials, caskets 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 and services may be required by law to be paid
into trust until the merchandise is purchased or the service is provided on
behalf of the customer. 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 1999, the Company,
including acquired operations, performed approximately 13%, 28%, 13% and 24% 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, municipal or church affiliated 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.
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FINANCIAL SERVICES OPERATIONS
The financial services operations represent a combination of the Company's
insurance operations primarily related to the funding of prearranged funeral
contracts and a lending subsidiary, which previously provided capital financing
for independent funeral home and cemetery operations.
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 or AML). These insurance operations assist in funding
contracts written by Company owned or operated funeral service locations. For
additional information concerning the Company's financial services operations,
see "Financial Services" in Management's 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, the Company's lending subsidiary provided secured financing to
independent funeral home and cemetery operators. The majority of these loans
were made to clients seeking to finance funeral home or cemetery acquisitions.
Additionally, the lending subsidiary provided construction loans for funeral
home or cemetery improvement and expansion. Loan packages took traditional forms
of secured financing comparable to arrangements offered by leading commercial
banks. The loans were generally made at interest rates which float with the
prime lending rate. At December 31, 1999, the lending subsidiary had
approximately $247 million in loans outstanding ($191 million net of the
provision for loan losses and impairment charges) and approximately $47 million
of unfunded loan commitments. At December 31, 1998, the lending subsidiary had
approximately $270 million in loans outstanding and approximately $31 million of
unfunded loan commitments. The lending subsidiary obtained its funds primarily
from the Company's variable interest rate credit facilities. As part of its cost
rationalization programs initiated in 1999, the Company decided to indefinitely
suspend the operations of the lending subsidiary by selling a portion of the
loan portfolio and acquiring by deed in lieu of foreclosure the collateral
underlying certain other loans in its portfolio. For further discussion, see
"Financial Services" in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this Form 10-K and note
eighteen to the consolidated financial statements in Item 8 of this Form 10-K.
EMPLOYEES
At December 31, 1999, the Company employed 30,693 (18,341 in the United
States) persons on a full time basis and 11,326 (8,624 in the United States)
persons on a part time basis. Of the full time employees, 29,663 were in funeral
and cemetery operations, 311 were in financial services operations and 719 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, relations with employees are generally
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 the
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 had
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that ended municipal control of the French funeral
service business and allows 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.
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Cemeteries in France, however, are controlled by municipalities and religious
organizations, with third parties, including the Company, providing cemetery
merchandise such as markers and monuments to consumers.
ITEM 2. PROPERTIES.
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 other undivided one-half interest is owned by an unrelated
third party. The Company holds an option to acquire such interest for $2,000,000
in July 2005 and, at the option of the unrelated third party, is obligated to
make such acquisition. 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 office buildings located in
Houston, Texas containing a total of approximately 167,000 square feet of office
space.
At December 31, 1999, the Company owned approximately 76% of the real
estate and buildings of its 4,546 funeral service locations, cemeteries and
crematoria and two insurance locations and leased facilities in connection with
approximately 24% of such operations. In addition, the Company leased two
aircraft pursuant to cancelable leases. At December 31, 1999, the Company
operated 14,830 vehicles, of which 5,369 were owned and 9,461 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, 1999, the Company's 525 cemeteries contain a total of
approximately 35,901 acres, of which approximately 54% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition. Management believes
that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
The following discussion describes certain litigation as of March 28, 2000,
which was previously reported:
Civil Action H-99-280; In Re Service Corporation International; In the
United States District Court for the Southern District of Texas, Houston
Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before
Judge Lynn N. Hughes and includes all 21 class action lawsuits that were filed
in the Southern District of Texas and two class action lawsuits that were
originally brought in the United States District Court for the Eastern District
of Texas, Lufkin Division. The Consolidated Lawsuit names as defendants the
Company and three of the Company's current or former executive officers or
directors: Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne
(the Individual Defendants). The plaintiffs have filed a Consolidated Class
Action Complaint in the Consolidated Lawsuit alleging that defendants violated
federal securities laws by making materially false and misleading statements and
failing to disclose material information concerning the Company's prearranged
funeral business. The Consolidated Lawsuit seeks to recover an unspecified
amount of monetary damages. Since the litigation is in its preliminary stages,
no discovery has occurred, and the Company cannot quantify its ultimate
liability, if any, for the payment of damages. However, the Company believes
that the allegations in the Consolidated Lawsuit do not provide a basis for the
recovery of damages because the Company has made all required disclosures on a
timely basis. The Company and the Individual Defendants have filed an Answer to
the Consolidated Class Action Complaint, and the Company intends to aggressively
defend this lawsuit.
The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into Equity Corporation International
(ECI); (ii) purchased shares of Company common stock during the period from July
17, 1998 through January 26, 1999 (the Class Period); (iii) purchased Company
call options in the open market during the Class Period; (iv) sold Company put
options in the open market during the Class Period; (v) held employee stock
options in ECI; and (vi) held Company employee stock options granted during the
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Class Period. Excluded from the foregoing categories are the Individual
Defendants, the members of their immediate families and all other persons who
were directors or executive officers of the Company or its affiliated entities
at any time during the Class Period. Judge Hughes has certified the Consolidated
Lawsuit as a class action.
The Company and the Individual Defendants have filed a Motion to Dismiss
the Consolidated Lawsuit; the plaintiffs have filed their Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the
Individual Defendants have filed a Reply to Plaintiffs' Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit. The foregoing pleadings
will be considered by Judge Hughes in due course.
Copies of the complaint in the Consolidated Lawsuit and the pleadings that
have been filed in response thereto and that are referred to herein are filed as
exhibits to this Form 10-K.
9-99-CV58; Charles Fredrick v. Service Corporation International; In the
United States District Court for the Eastern District of Texas, Lufkin
Division. This additional securities fraud case has been brought against the
Company by a former shareholder of ECI alleging causes of action exclusively
under Texas statutory and common law. The Company has requested that the case be
transferred to the Southern District of Texas to be consolidated with the
Consolidated Lawsuit. The Plaintiff has requested that the case be remanded to
state court for further proceedings, and oral argument on the issue has been
scheduled for March 29, 2000.
Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation
International et al. On November 10, 1999, James P. Hunter, III and a related
family trust filed a lawsuit against the Company, the Individual Defendants, two
other officers, an employee of the Company and PricewaterhouseCoopers LLP, the
Company's independent accountants, in state District Court in Angelina County,
Texas (State Litigation). The plaintiffs allege, among other things, violations
of Texas securities law and statutory and common law fraud, and seek unspecified
compensatory and exemplary damages. Mr. Hunter was Chairman, President and Chief
Executive Officer of ECI at the time of its merger with a wholly owned
subsidiary of the Company. The Company and the other defendants filed an answer
in the State Litigation denying the plaintiffs' allegations. Since the
litigation is in its very preliminary stages, the Company cannot quantify its
ultimate liability, if any, for the payment of damages. However, the Company
believes that the allegations in the State Litigation, like those in the
Consolidated Lawsuit, do not provide a basis for the recovery of damages because
all required disclosures were made on a timely basis. The Company intends to
aggressively defend this litigation.
A copy of the Plaintiff's Original Petition in the State Litigation and the
Defendants' Original Answer in that proceeding are filed as exhibits to this
Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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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 24, 2000 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
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R. L. Waltrip........................ (69) Chairman of the Board and Chief 1962
Executive Officer
B. D. Hunter......................... (70) Vice Chairman of the Board 2000
Jerald L. Pullins.................... (58) President and Chief Operating Officer 1992
Jeffrey E. Curtiss................... (51) Senior Vice President and Chief 2000
Financial Officer
James M. Shelger..................... (50) Senior Vice President General Counsel 1987
and Secretary
T. Craig Benson...................... (38) Vice President Corporate Alliances 1990
and Marketing
J. Daniel Garrison................... (48) Vice President International 1998
Operations
W. Cardon Gerner..................... (45) Vice President Corporate Controller 1999
W. Mark Hamilton..................... (35) Vice President Prearranged Sales 1996
Frank T. Hundley..................... (40) Vice President Treasurer 2000
Lowell A. Kirkpatrick, Jr. .......... (41) Vice President Operational Management 1994
Systems
Stephen M. Mack...................... (48) Vice President Domestic Operations 1998
Thomas L. Ryan....................... (34) Vice President Operational Accounting 1999
and Analysis
Eric D. Tanzberger................... (31) Vice President Investor Relations and 2000
Assistant Corporate Controller
Stephen J. Uthoff.................... (48) Vice President Chief Information 2000
Officer
Vincent L. Visosky................... (52) Vice President Trust Administration 1989
Michael R. Webb...................... (42) Vice President Corporate Development 1998
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(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. From January 1992 until July 1999, Mr. Curtiss served
as Senior Vice President and Chief Financial Officer of Browning-Ferris
Industries, Inc., a waste services company.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Corporate
Controller. Before the acquisition, Mr. Gerner had been Senior Vice President
and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner
was a partner with Ernst & Young LLP.
Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
Prior thereto, Mr. Hundley served for more than five years in various capacities
at Banc of America Securities, LLC, its predecessors and affiliates, including
as Managing Director.
Mr. Hunter was appointed Vice Chairman of the Board in January 2000. Mr.
Hunter is the Chairman and Chief Executive Officer of Huntco, Inc., an
intermediate steel processor. Mr. Hunter has been a director
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of the Company since 1986 and also served as Vice Chairman of the Board of the
Company from September 1986 to May 1989.
Mr. Ryan joined the Company in June 1996 as Director of Financial
Reporting. Since then, Mr. Ryan has served as Director of Investor Relations and
Managing Director and Chief Financial Officer of International Operations. Mr.
Ryan was promoted to Vice President International Finance in February 1999 and
appointed Vice President Operational Accounting and Analysis in February 2000.
Prior to joining the Company, Mr. Ryan was a certified public accountant with
Coopers & Lybrand L.L.P. for more than five years.
Mr. Tanzberger joined the Company in August 1996 as Manager of Budgets &
Financial Analysis. Since then, Mr. Tanzberger has served as Vice President of
Operations/Western Division, Director of Investor Relations and Assistant
Corporate Controller. Mr. Tanzberger was promoted to Vice President Investor
Relations and Assistant Corporate Controller in January 2000. Prior to joining
the Company, Mr. Tanzberger was Assistant Corporate Controller at Kirby Marine
Transportation Corporation, an inland waterway barge and tanker company, from
January through August 1996. Prior thereto, he was a certified public accountant
with Coopers & Lybrand L.L.P. for more than five years.
Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President-Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.
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, 1999, there were 7,957 holders of record of
the Company's common stock.
Through October 1999, the Company had declared 106 consecutive quarterly
dividends on its common stock since it began paying dividends in 1974. For the
three years ended December 31, 1999, 1998 and 1997, dividends per share were
$.27, $.36 and $.30, respectively. In October 1999, the Company suspended
payment of regular quarterly cash dividends on its quarterly outstanding stock
in order to focus on improving cash flow and reducing existing debt.
The table below shows the Company's quarterly high and low common stock
prices for the three years ended December 31, 1999:
1999 1998 1997
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HIGH LOW HIGH LOW HIGH LOW
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First............................. $38.50 $14.25 $43.69 $35.69 $33.88 $26.88
Second............................ 21.19 13.31 44.63 38.94 36.00 29.63
Third............................. 18.88 10.56 45.88 31.88 35.75 29.81
Fourth............................ 10.31 6.44 39.25 29.81 38.00 27.88
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
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ITEM 6. SELECTED FINANCIAL DATA.
The table below shows the selected financial data of the Company for the
five years ended December 31, 1999:
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues................... $ 3,321,813 $ 2,875,090 $ 2,535,865 $2,355,342 $1,652,126
Income (loss) before
extraordinary gain
(loss)................... (34,297) 342,142 374,552 265,298 183,588
Net income (loss).......... (32,412) 342,142 333,750 265,298 183,588
Earnings per share:
Income (loss) before
extraordinary gain
(loss)
Basic................. (.13) 1.34 1.53 1.13 .92
Diluted............... (.13) 1.31 1.47 1.08 .86
Net income (loss)
Basic................. (.12) 1.34 1.36 1.13 .92
Diluted............... (.12) 1.31 1.31 1.08 .86
Dividends per share........ .27 .36 .30 .24 .22
Total assets............... 14,601,601 13,266,158 10,514,930 9,020,778 7,768,982
Long-term debt............. 3,636,067 3,764,590 2,634,699 2,048,737 1,712,464
Convertible preferred
securities of SCI Finance
LLC...................... -- -- -- 172,500 172,500
Stockholders' equity....... 3,495,273 3,154,102 2,726,004 2,235,317 1,975,345
Shares outstanding......... 272,064 259,201 252,924 236,193 234,542
Ratio of earnings to fixed
charges*................. 0.85 3.42 4.29 3.24 2.84
* For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary gain (loss) on early
extinguishment of debt, less undistributed income of equity investees which
are less than 50% owned, plus the minority interest of majority owned
subsidiaries with fixed charges and 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. The decrease in the
Company's ratio of earnings to fixed charges in 1999 compared to earlier
levels is primarily attributable to the $362,428 pretax restructuring and
nonrecurring charges recorded during the first and fourth quarters of 1999
(see note eighteen to the consolidated financial statements in Item 8 of this
Form 10-K) and increased interest expense related to additional indebtedness
primarily attributable to the merger with ECI. Without the above mentioned
restructuring and nonrecurring charges, the ratio of earnings to fixed charges
would have been 2.16 for the year ended 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES, PER SHARE DATA AND
RATIO AMOUNTS)
The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 1999, the Company operated 3,823 funeral service
locations, 525 cemeteries, 198 crematoria and two insurance operations located
in 20 countries on five continents. The Company conducts funeral service
operations in all of the 20 countries mentioned above, cemetery operations in
North America, South America, Australia and certain countries within Europe, and
financial services operations in North America and France. As of December 31,
1999, the Company's largest markets were North America and France, which when
combined represent approximately 86% of the Company's consolidated revenues, 73%
of the Company's consolidated income from operations and 78% of the Company's
total operating locations.
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The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales personnel.
Personnel costs, the largest operating expense for the Company, are the cost
components 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
acquiring funeral service locations and cemeteries. This resulted in the Company
creating the world's largest network of funeral service locations and
cemeteries. The Company believes this network forms the foundation of its
business plan going forward. During the mid-1990's, the market to acquire
funeral service locations and cemeteries became more competitive than ever
before and resulted in increasing prices which lowered returns on invested
capital. As a result, the Company suspended its acquisition program in 1999 and
is in transition from an acquisition company to an operating company.
This transition focuses on reducing overhead, streamlining operational
functions and processes, increasing cash flow, providing better returns on the
Company's invested capital and reducing the Company's debt. The transition to an
operating company will continue in 2000. The Company's primary goals in 2000 are
as follows:
- Continue to reduce overhead and streamline management structures.
- Improve business processes and information systems.
- Increase cash flow by continuing certain initiatives such as the
reduction of capital expenditures compared to historical levels, the
elimination of the Company's quarterly dividend, the suspension of the
acquisition program, the realignment of preneed cemetery and prearranged
funeral sales structures and other working capital initiatives.
- Continue the development of third party consumer financing programs.
- Continue the sale of certain assets and non-core businesses that are (i)
not meeting the Company's return on invested capital criteria and (ii)
can provide a better return to the Company from sales proceeds rather
than from future projected operating cash flows.
- Continue the reduction of the Company's debt levels to create a sound
capital structure for the Company and to reduce cash paid for interest
costs.
- Continue the implementation of the Company's long-term strategic revenue
and marketing initiatives intended to provide internal revenue growth
without the outlay of significant additional capital. Such initiatives
include implementation of Dignity(TM) Memorial Plan funeral packages and
the associated branding of many of the Company's or affiliated locations,
continued development of global affinity relationships and continued
growth in the sale of prearranged funeral contracts in all jurisdictions.
- Continue to improve customer satisfaction throughout the Company's global
network while monitoring such customer satisfaction through new client
family surveys tied to certain employees' compensation.
The Company believes the execution of the above initiatives will allow the
Company to maintain its position as the industry leader, as well as to provide
long-term value to our shareholders.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for
the years ended December 31, 1999, 1998 and 1997. For purposes of discussions
between the years 1999 and 1998, funeral homes, cemeteries and crematoria owned
and operated before January 1, 1998, are referred to as 1999 comparable
operations, and for discussions between the years 1998 and 1997, funeral homes,
cemeteries and crematoria owned and
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operated before January 1, 1997 are referred to as 1998 comparable operations.
Correspondingly, for discussions between the years 1999 and 1998, operations
acquired or opened after January 1, 1998, are referred to as 1999 acquired
operations and for discussions with respect to the years 1998 and 1997,
operations acquired or opened after January 1, 1997, are referred to as 1998
acquired operations.
The following table represents revenues and gross profit for the three
years ended December 31, 1999:
1999 1998 1997
----------- ----------- -----------
Revenues:
Funeral..................... $ 2,039,348 $ 1,829,136 $ 1,720,291
Cemetery.................... 947,852 846,601 724,862
Financial services.......... 334,613 199,353 90,712
----------- ----------- -----------
$ 3,321,813 $ 2,875,090 $ 2,535,865
=========== =========== ===========
Gross profit and margin
percentage:
Funeral..................... $ 366,494 18.0% $ 384,607 21.0% $ 401,371 23.3%
Cemetery.................... 247,719 26.1 306,161 36.2 271,897 37.5
Financial services.......... (454) (0.1) 28,002 14.0 14,344 15.8
----------- ---- ----------- ---- ----------- ----
$ 613,759 18.5% $ 718,770 25.0% $ 687,612 27.1%
=========== ==== =========== ==== =========== ====
The Company's results of operations for 1999 from a gross profit margin and
percentage standpoint were below 1998 and 1997 levels. The primary reason for
this was the difficult transition in 1999 to an operating company focused on
cash flow and returns on invested capital from a company previously focused in
1998 and 1997 on growth through acquisitions. More specifically, the results of
operations in 1999 were negatively affected by: (i) the reduction of net
cemetery trust earnings, (ii) a reduction in gains on sales of businesses, (iii)
a reduction of operating earnings related to the sale of excess undeveloped
cemetery property, (iv) the downward pressure on operating margins related to
the January 1999 acquisition of ECI which historically had lower volume
operations, (v) a delay in the realization of expected cost savings from cost
rationalization programs primarily related to finalization of labor negotiations
in the Company's funeral operations in France, (vi) inefficiencies in the
standardization of the Company's cemetery sales cost structure, (vii) the focus
on preneed sales of heritage cemetery property which generate higher commission
and have higher property costs and (viii) loan loss provisions related to
certain loans held by the Company's lending subsidiary.
In 1999, the Company realigned its management of geographic segments to
focus on total European operations. Although total amounts reported have not
changed, the Company has made certain reclassifications in all years in order to
reflect the results of these geographic segments.
Funeral
Funeral revenues for the three years ended December 31, 1999, were as
follows:
PERCENTAGE
PERCENTAGE INCREASE
1999 INCREASE 1998 (DECREASE) 1997
---------- ---------- ---------- ---------- ----------
North America.................... $1,183,829 17.5% $1,007,462 3.6% $ 972,670
European......................... 780,206 1.9 765,532 11.9 683,951
Other foreign.................... 75,313 34.1 56,142 (11.8) 63,670
---------- ---- ---------- ----- ----------
Total funeral
revenues............. $2,039,348 11.5% $1,829,136 6.3% $1,720,291
========== ==== ========== ===== ==========
The $176,367 increase in 1999 funeral revenues from North American
operations was primarily the result of the ECI acquisition with revenues from
comparable operations remaining relatively flat compared to 1998. The $34,792
increase in 1998 revenue over 1997 was primarily the result of a $60,044
increase in revenues from 1998 acquired locations offset by a $27,069 decrease
from 1998 comparable locations. The
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number of funeral services performed in 1999 comparable locations in North
America increased 0.7% over 1998 while the number of funeral services performed
in 1998 comparable locations in North America decreased 2.0% from 1997. The
increase in volume for 1999 comparable locations in North America were slightly
offset in 1999 by a 0.5% decrease in average sales prices while the 1998
comparable locations in North America also experienced a decrease in average
sales price of 0.8% compared to 1997. The comparable average sales prices in
North America for the years ended 1999, 1998 and 1997, respectively, were
$3,807, $3,827 and $3,859. The average sales price decreases have 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, which typically carry lower sales price
averages than traditional atneed funeral services. The sales average related to
prearranged funeral contracts turning atneed has historically been lower than
the current atneed sales average primarily due to the servicing of prearranged
contracts inherited by the Company through acquisitions. North America 1999
acquired locations performed 50,731 funeral services in 1999 and 6,650 in 1998,
while 1998 acquired locations in North America performed 28,864 funeral services
in 1998 and 11,663 in 1997.
Government data indicates the number of deaths in the United States has
increased over the last three years. The Center for Disease Control and
Prevention (CDC) tracks deaths in 122 cities (120 in 1997) across the United
States and in those cities total deaths have increased 0.81% in 1999 from 1998
and 0.39% in 1998 from 1997. The Company has comparable locations in 83 (73 in
1997) of those 122 cities and CDC statistics from these 83 cities indicate the
Company increased market share in those 83 cities during 1999 compared to 1998.
Revenues from the Company's European operations increased $14,674 in 1999
compared to 1998 and $81,581 in 1998 compared to 1997, primarily as a result of
acquisitions. These acquisitions were primarily in Spain, Norway and the
Netherlands in 1999 and France, Spain, Portugal, Norway and the Netherlands in
1998. Revenues from comparable locations decreased 2.7% in 1999 compared to 1998
due to decreases in the average sales price of approximately 2.0% while volumes
were relatively consistent with the prior year. Revenues from comparable
locations in 1998 increased 1.1% over 1997.
Revenues from Other foreign operations increased $19,171 in 1999 as a
result of acquisitions in Chile and Argentina and growth in comparable locations
in the Pacific Rim of 5.0% over 1998. While volume declined in the Pacific Rim
by 3.9%, the average sales price increased 9.2% partially as a result of
favorable exchange rate variances between the Australian dollar and the U.S.
dollar. Revenues from other foreign operations decreased $7,528 in 1998 from
1997 primarily due to a 15.4% decline in the Australian dollar versus the U.S.
dollar, partially offset by increased revenues from Argentinian acquisitions.
During the year ended December 31, 1999, the Company sold $578,263 of
prearranged funeral contracts compared to approximately $490,289 in 1998 and
$526,919 in 1997. The obligations are funded through both trust and insurance
backed contracts. Of those prearranged sales, approximately $364,737 in 1999 and
$197,317 in 1998 will be funded by Company insurance operations. The revenues
associated with 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 as a means of protecting current market share and sales mix, as well as
to expand market share in certain markets.
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Funeral gross profit and margin percentage for the three years ended
December 31, 1999, were as follows:
PERCENTAGE PERCENTAGE PERCENTAGE
1999 OF REVENUE 1998 OF REVENUE 1997 OF REVENUE
-------- ---------- -------- ---------- -------- ----------
North America.............. $274,199 23.2% $287,012 28.5% $297,586 30.6%
European................... 79,270 10.2 88,541 11.6 86,717 12.7
Other foreign.............. 13,025 17.3 9,054 16.1 17,068 26.8
-------- ---- -------- ---- -------- ----
Total funeral
gross profit... $366,494 18.0% $384,607 21.0% $401,371 23.3%
======== ==== ======== ==== ======== ====
The decreases in gross margin percentage in North America in 1999 and 1998
were due to increased costs and expenses of 26.3% and 6.7%, respectively, while
revenues increased 17.5% and 3.6%, respectively, as discussed above. The
increased costs and expenses were primarily due to higher costs at acquired
locations, specifically related to the Company's merger with ECI in January
1999. Typically, acquisitions will temporarily exhibit lower gross profit
margins than those experienced by the Company's comparable locations until these
locations have been fully assimilated into the Company's clusters. Further, the
gross margin percentage at ECI locations had been historically lower than the
Company's gross margin percentages and this has negatively affected the total
gross margin percentage in North America. Comparable locations experienced a
3.6% increase in operating expenses in 1999 compared to 1998 primarily related
to increases in promotional and advertising expenses as part of the transition
to an operating company from one previously focused on growth through
acquisitions. In 1998 such comparable costs were relatively flat as compared to
1997.
The decrease in European gross profit and margin percentage in 1999 was
primarily the result of less funeral services performed causing reduced profit
due to the Company's fixed cost structure, coupled with delays in labor
negotiations in France related to cost rationalization programs. The decrease in
European gross profit and margin percentage in 1998 was primarily the result of
a disproportionate increase in total costs and expenses of 13.7% primarily
related to acquisitions.
The decrease in Other foreign gross margin percentage in 1999 was primarily
due to increased costs and expenses in Australia coupled with the addition of
lower operating margin funeral businesses from the Chilean acquisitions,
partially offset by improved margins in Argentina. The decrease in Other foreign
gross profit and margin percentage in 1998 was primarily due to increased costs
and expenses in Australia and lower operating margins in Argentinean
acquisitions. In 1998, Australian costs and expenses increased approximately
6.0% more than the change in revenue.
Cemetery
Cemetery revenues for the three years ended December 31, 1999, were as
follows:
PERCENTAGE PERCENTAGE
1999 INCREASE 1998 INCREASE 1997
-------- ---------- -------- ---------- --------
North America........................ $816,695 6.3% $768,229 14.5% $671,112
European............................. 34,363 34.4 25,564 18.3 21,609
Other foreign........................ 96,794 83.3 52,808 64.3 32,141
-------- ---- -------- ---- --------
Total cemetery revenues.... $947,852 12.0% $846,601 16.8% $724,862
======== ==== ======== ==== ========
The increase of $48,466 in 1999 North American cemetery revenues was
primarily the result of the $82,345 increase in acquisitions as a result of the
January 1999 merger with ECI, partially offset by the decrease of net cemetery
trust earnings of 32.3% and a reduction of operating earnings related to the
sale of excess undeveloped cemetery property. Comparable atneed and preneed
revenue in 1999 remained stable compared to the prior year. The 1998 increase in
revenue from North American cemetery operations of $97,117 was primarily due to
an increase in revenue from acquisitions, increased trust earnings of 29.8% and
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increased revenue from sales of excess undeveloped cemetery property compared to
1997. Comparable preneed and atneed sales in 1998 were relatively flat as
compared to 1997.
The increases in revenue from European operations were the result of
acquisitions in the United Kingdom and Belgium in 1999 and in the United Kingdom
and the Netherlands in 1998.
The $43,986 increase in 1999 revenues from Other foreign operations was the
result of acquisitions in Chile, Argentina and Uruguay and a 13.7% increase in
revenue in Australian operations. The $20,667 increase in 1998 revenues was the
result of the inclusion of new Argentina operations for the full year offset by
a decline in Australia cemetery revenue.
Cemetery gross profit and margin percentage for the three years ended
December 31, 1999, were as follows:
PERCENTAGE PERCENTAGE PERCENTAGE
1999 OF REVENUE 1998 OF REVENUE 1997 OF REVENUE
-------- ---------- -------- ---------- -------- ----------
North America............... $205,040 25.1% $282,754 36.8% $251,993 37.5%
European.................... 10,823 31.5 7,936 31.0 8,275 38.3
Other foreign............... 31,856 32.9 15,471 29.3 11,629 36.2
-------- ---- -------- ---- -------- ----
Total cemetery
gross profit.... $247,719 26.1% $306,161 36.2% $271,897 37.5%
======== ==== ======== ==== ======== ====
North America 1999 cemetery gross profit declined $77,714 primarily due to
increased costs of 12.9% at 1999 comparable locations. These increased costs
were primarily the result of increases in property costs and commission expenses
related to the sale of heritage cemetery property sales initiatives. The
decrease in the North America cemetery gross profit margin percentage in 1999
was primarily the result of these increased costs coupled with the reductions in
net cemetery trust earnings and operating earnings related to the sale of excess
undeveloped cemetery property. The 1998 North America cemetery gross profit
increased $30,761 primarily due to the corresponding growth in revenue discussed
above. Costs of services at comparable locations remained flat in 1998 from 1997
and, while costs from acquired locations increased $43,509, these increases were
offset by increases in net cemetery trust earnings and operating earnings
related to sales of excess undeveloped cemetery property.
The increase of $2,887 in 1999 European gross profit was the result of
increases due to acquisitions in Belgium and the United Kingdom. The decrease in
the 1998 gross margin percentage was the result of increased costs in
anticipation of growth associated with comparable locations in the United
Kingdom.
The 1999 increase of $16,385 in Other foreign gross profit and the
corresponding increase in the margin percentage was the result of increases in
the gross profit and margin percentage from the Company's acquired South
American operations. The margin percentage in Argentina has improved to 24.0% in
1999 from 19.4% in 1998. The decline in Other foreign margin percentage in 1998
was due to the inclusion of a full year of cemetery operations in Argentina
during 1998 which reduced gross margin percentage when combined with the higher
margin Australian operations. Argentina has significantly lower gross margin
percentages than Chile or Australia; however, these margin percentages are in
line with the Company's expectations.
Financial Services
Financial services represents a combination of the Company's insurance
operations and a lending subsidiary.
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Financial services revenues for the three years ended December 31, 1999,
were as follows:
PERCENTAGE
INCREASE PERCENTAGE
1999 (DECREASE) 1998 INCREASE 1997
-------- ---------- -------- ---------- -------
Insurance:
North America.................. $244,506 198.8% $ 81,832 --% $ --
France......................... 69,349 (28.5) 96,941 30.7 74,175
-------- ----- -------- ----- -------
Total insurance............. 313,855 75.6 178,773 141.0 74,175
Lending subsidiary............... 20,758 0.8 20,580 24.4 16,537
-------- ----- -------- ----- -------
Total financial
services revenues.... $334,613 67.8% $199,353 119.8% $90,712
======== ===== ======== ===== =======
The increase in insurance revenues in 1999 and 1998 was due to the North
American acquisition of AML effective July 1998. Further, a portion of the
increase in revenue in 1999 is related to the Company's initiatives to fund a
higher percentage of prearranged funeral contracts through AML as opposed to
third party insurance or trust funded contracts. Insurance revenues from the
Company's French operations decreased due to decreased investment income related
to a repositioning of the investment portfolio. Although the average outstanding
loan portfolio associated with the lending subsidiary increased in 1999 from
1998, revenues remained relatively flat between the two years due to the
non-performing status of certain loans subsequent to September 30, 1999. Growth
from the lending subsidiary in 1998 is attributable to the increasing loan
portfolio. The average outstanding loan portfolio was $248,807 in 1999, $228,279
in 1998 and $182,375 in 1997.
Financial services gross profit and margin percentage for the three years
ended December 31, 1999, were as follows:
PERCENTAGE PERCENTAGE PERCENTAGE
1999 OF REVENUE 1998 OF REVENUE 1997 OF REVENUE
-------- ---------- ------- ---------- ------- ----------
Insurance:
North America.......... $ 16,084 6.6% $ 7,872 9.6% $ -- --%
France................. 12,929 18.6 10,689 11.0 6,712 9.0
-------- ------ ------- ---- ------- ----
Total insurance..... 29,013 9.2 18,561 10.4 6,712 9.0
Lending subsidiary....... (29,467) (141.9) 9,441 45.9 7,632 46.2
-------- ------ ------- ---- ------- ----
Total financial
services
gross profit
(loss)....... $ (454) (0.1)% $28,002 14.0% $14,344 15.8%
======== ====== ======= ==== ======= ====
The 1999 decrease in the North American insurance gross margin percentage
was the result of increased production. While revenue and gross profit have both
increased during this period of growth, benefits and expenses have also
increased, thereby reducing the gross margin percentage. Although French
insurance revenues in 1999 were negatively affected by decreased investment
income related to the repositioning of their investment portfolio, gross profit
was negatively impacted only slightly due to a corresponding reduction in
expense and the margin percentages were positively affected due to the lower
revenue used to calculate the margin percentage.
The Company's lending subsidiary reported a gross loss of $29,467 for the
year ended December 31, 1999, compared to gross profit of $9,441 and $7,632 for
the same periods in 1998 and 1997, respectively. As part of its cost
rationalization programs initiated in 1999, the Company decided to indefinitely
suspend the operations of the lending subsidiary by selling a portion of the
loan portfolio and acquiring by deed in lieu of foreclosure the collateral
underlying other certain loans in its portfolio. The Company recorded a
provision for loan losses of $38,608 in the fourth quarter of 1999 associated
with the lending subsidiary's loans that are not
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being held for sale. See note eighteen to the consolidated financial statements
in Item 8 of this Form 10-K for further discussion of these nonrecurring charges
related to the Company's lending subsidiary.
The lending subsidiary's gross profit was affected in 1999 by a decrease in
the average interest rate spread for the year, primarily as a result of the
non-performing status of certain loans discussed above. For the three years
ended December 31, 1999, the average interest rate spread was 2.48%, 3.14% and
3.18%, respectively.
Other Income and Expenses
The Company's general and administrative expenses increased in 1999 to
$82,585 compared to $66,839 in 1998 and $66,781 in 1997. Expressed as a
percentage of revenues, these expenses were 2.5%, 2.3% and 2.6% in 1999, 1998
and 1997, respectively. The increase in general and administrative expenses in
1999 compared to 1998 and 1997 levels is primarily related to non-recurring cost
items such as information technology costs related to the Company's year 2000
preparation and professional costs associated with process improvement
initiatives and implementation of EVA(R) based incentive compensation models.
Interest expense increased $61,142 or 34.5% in 1999 compared to 1998 and
increased $40,333 or 29.5% in 1998 compared to 1997. This increased interest
expense was primarily reflective of increased indebtedness assumed due to
acquisitions, specifically as it relates to the ECI merger in January 1999. The
average borrowings during 1999 were $4,131,833 compared to $3,340,708 in 1998
and $2,434,808 in 1997. The average interest rates for each of these years were
5.99%, 6.15% and 6.03% for 1999, 1998 and 1997, respectively. The Company
expects interest expense to increase to approximately $265,000 to $270,000 for
the year ended December 31, 2000, primarily as a result of the Company's lower
credit rating.
Other income primarily consists of gains and losses from the sales of
businesses that are disposed of for strategic or government mandated purposes.
In 1999, other income was $31,759 compared to $43,649 in 1998 and $100,244 in
1997. The fluctuation between $100,244 of other income in 1997 and $43,649 of
other income in 1998 reflects the gain on the sale in 1997 of the Company's
equity interest in ECI of $68,077.
The provision (benefit) for income taxes reflects a (9.0%) effective tax
rate for 1999, compared to a 34.0% effective tax rate in 1998 and a 35.4%
effective tax rate in 1997. The decrease in the effective tax rate was primarily
due to the nondeductible losses recorded in the fourth quarter of 1999 as a
result of the Company's 1999 restructuring charges. The 1998 reduction in the
effective tax rate is primarily due to a larger relative profit contribution
from international operations which are taxed at lower rates. Included in the
provisions for all years were tax benefits relating to enacted tax rate changes
in certain foreign tax jurisdictions.
FINANCIAL CONDITION AND LIQUIDITY
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 historically has been generated
through public and private offerings of debt and the issuance of equity
securities supplemented by the Company's revolving credit agreements.
During 1999, the Company's liquidity needs and capital funding requirements
changed as the Company transitioned away from an acquisition company to an
operating company focused on increasing cash flow, reducing overhead costs and
paying down debt. The Company developed a series of cash flow initiatives in
1999 related to ongoing operations of the Company, the sale of certain assets
and non-core businesses and sources of cash flow from providing third party
financing to consumers. These cash flow initiatives were developed in late 1999
and will not effect the Company's cash flow until 2000 and beyond.
Cash flow initiatives related to the ongoing operations of the Company
include: (i) the suspension of the acquisition program, (ii) the reduction of
capital expenditures compared to historical levels, (iii) the suspension of the
quarterly cash dividend, (iv) the obtaining of funds available from certain of
the Company's trusts more efficiently, and (v) the realignment of preneed
cemetery and prearranged funeral sales structures
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to become more cash flow positive. The Company believes the above cash flow
initiatives, coupled with other working capital initiatives, will produce
operating free cash flow on an after tax basis in the range of $100,000 to
$200,000 in 2000. The Company defines operating free cash flow as cash flow from
operating activities determined by generally accepted accounting principles,
less capital expenditures, dividends paid, the net effect of prearranged funeral
production and maturities. The operating free cash flow projections above do not
include approximately $75,000 of projected net cash outflow in 2000 associated
with the Company's 1999 first and fourth quarter restructuring and nonrecurring
charges.
The Company developed cash flow initiatives in 1999 to sell certain assets
and non-core businesses that are either not meeting the Company's criteria for
returns on invested capital or are more valuable to parties outside the Company.
The Company expects after tax proceeds of $200,000 to $300,000 from these sales
of non-core financial or operational assets in 2000.
In 2000, the above cash flow initiatives developed in 1999 are expected to
produce approximately $300,000 to $500,000 of funds available for reducing debt
on an after tax basis. This projection again does not include approximately
$75,000 of net cash outflows in 2000 associated with the Company's 1999
restructuring charges. These funds available for debt reduction also do not
include any possible effect on cash flows associated with the development of a
consumer financing program in North America for the Company's atneed funeral and
cemetery and preneed cemetery client families, which could improve or generate
cash flow for the Company and enhance the Company's ability to further pay down
debt.
The Company had total debt of $4,060,016 at December 31, 1999 versus
$3,860,657 at December 31, 1998. The largest component of this debt relates to
the Company's primary revolving credit agreements. The Company's primary
revolving credit agreements provide for borrowings up to $1,600,000 and consists
of two 364-day facilities and a five-year, multi-currency facility due in 2002.
One of the 364-day facilities permits borrowings up to $300,000 and the
outstanding balance at maturity (June 25, 2000) may be converted into a two-year
term loan at the Company's option. The second 364-day facility permits
borrowings up to $600,000 and expires November 1, 2000. As of December 31, 1999,
approximately $412,000 was available under these three facilities. These
facilities have financial compliance provisions that contain certain
restrictions, including a maximum debt-to-capitalization ratio of 60%, a minimum
interest coverage of 2.75, a minimum net worth requirement defined in the
facility agreements, and limitations on cash disbursements, subsidiary
borrowings, liens and guarantees. See note eight to the consolidated financial
statements in Item 8 of this Form 10-K for further information on the Company's
primary revolving credit facilities.
Historically, the Company has classified borrowings under these facilities
as long-term debt since it has been the Company's intent to refinance such
borrowings with long-term debt or equity. In 1999, however, the Company's
downgraded credit ratings, both short-term and long-term, have limited its
access to the capital markets. As such, borrowings (primarily commercial paper)
of approximately $179,704 backed by the $600,000 facility have been classified
as current maturities of long-term debt. As of December 31, 1999, the Company
had a total of $423,949 of current maturities of long-term debt. As mentioned
above, the Company believes it will generate funds available for reducing debt
on an after tax basis of $300,000 to $500,000 not including the projected net
cash outflow of $75,000 related to the Company's 1999 restructuring charges.
Based on these funds available, coupled with banking relationships that the
Company would characterize as positive, the Company believes it will meet all of
its financial obligations and requirements in 2000.
Sources and Uses of Cash
Cash Flows from Operating Activities: Net cash provided by operating
activities was $432,850 for the year ended December 31, 1999, compared to
$328,620 for the same period in 1998, an improvement of $104,230. Significant
components of cash flow provided by operating activities for the year ended
December 31, 1999 include: (1) net loss of $32,412 adjusted for normal non-cash
items such as $252,145 of depreciation and amortization, (2) restructuring and
nonrecurring charge provisions of $362,428, reduced by cash paid of $37,553
related to the charges, (3) an increase in receivables of $223,405 primarily
related to the sales of preneed cemetery products and services which are usually
financed on an installment basis in excess of twelve months and (4) an increase
in other liabilities of $138,448 primarily related to the non-cash add-back
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associated with the actuarially determined liability recorded by the Company's
insurance operations.
Cash Flows from Investing Activities: Net cash used in investing activities
was $423,982 for the year ended December 31, 1999, compared to $1,059,875 for
the same period in 1998, an improvement of $635,893. Significant components of
cash used in investing activities for the year ended December 31, 1999, include:
(1) capital expenditures of $216,208, (2) $120,573 of proceeds from the sales of
property and equipment, (3) $102,647 of cash used in acquisitions and (4)
$199,879 of purchases in excess of sales of securities associated with the
Company's insurance operations. One of the insurance operations had an
approximate $80,000 cash position at December 31, 1998, of which a significant
portion of the cash was used to purchase securities during 1999. The remaining
amount of cash used to purchase securities in excess of the sales of securities
represents the investment of net cash generated by insurance premiums received
from customers after payment of cash expenses which is included within net cash
provided by operating activities.
Cash Flows from Financing Activities: Net cash used in financing activities
was $266,756 for the year ended December 31, 1999, compared to net cash provided
by financing activities of $1,041,561 for the same period in 1998. The Company
issued approximately $1,100,000 of long-term debt in 1998, which is included in
the $1,041,561 amount above. Significant components of cash used in financing
activities for the year ended December 31, 1999, include: (1) increases in
borrowings of $504,279 from the Company's revolving credit facilities offset by
$365,936 for the early extinguishment of certain floating rate debt and ECI
convertible debentures, (2) payments of debt of $259,004 and (3) payments of
cash dividends of $96,779.
At December 31, 1999, the Company had a working capital deficit of $61,714
compared to working capital surplus of $578,755 as of December 31, 1998. The
working capital deficit of $61,714 is primarily a result of the current
liability of $89,812 at December 31, 1999 related to the Company's 1999
restructuring charges as well as related to $423,949 of current maturities of
long-term debt, of which $179,704 relates to the Company's revolving credit
facilities. As discussed earlier, certain balances outstanding on the Company's
revolving credit facilities cannot be classified as long-term at December 31,
1999, due to the Company's current lack of access to the capital markets.
As part of the Company's ongoing cash flow initiatives, the Company
terminated or assigned certain interest rate swaps and all cross-currency
interest rate swaps subsequent to year end and received approximately $110,658
in net pretax proceeds. These proceeds were primarily used to purchase certain
of the Company's bonds, of which approximately $59,000 of these bonds were due
in 2000.
The Company had a current ratio 0.94:1 at December 31, 1999, compared to a
current ratio of 1.92:1 at December 31, 1998. The Company had a cash balance of
$88,221 at December 31, 1999 compared to a cash balance of $358,210 at December
31, 1998. Approximately $160,000 of the December 31, 1998 cash balance was
contemplated to be used to repay ECI's revolving credit facility and AML had an
approximate $80,000 cash balance at December 31, 1998 which was used to purchase
securities in 1999. As of December 31, 1999, the Company's debt to
capitalization ratio was 53.7% compared to 55.0% at December 31, 1998. Excluding
the $362,428 of 1999 restructuring and nonrecurring charges, the interest
coverage ratio for the year ended December 31, 1999 was 2.30:1, compared to
3.72:1 for the same period of 1998. At December 31, 1999, the Company had the
ability to issue $900,000 in securities registered with the Securities and
Exchange Commission (the Commission) under a shelf registration. In addition,
12,865 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 acquisitions. The Company has suspended
its acquisition program and does not anticipate these acquisition shelf
registrations to be drawn upon in the near future.
PREARRANGED FUNERAL SERVICES
The Company sells prearranged funeral contracts in most of its service
markets, including its major foreign markets. The Company has a marketing
program to sell price guaranteed 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 will be received in cash by a Company funeral service
location at the time the funeral is performed. Earnings on trust funds and
17
19
increasing benefits under insurance and annuity funded contracts also increase
the amount of cash to be received upon performance of the funeral service.
Direct 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 general agency commissions earned
by the Company for sales of insurance products.
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 investments that match the anticipated maturity of the
contracts. The Company targets an asset allocation for prearranged funeral
trusts of approximately 60% equity, 30% fixed income and 10% alternative
investments. The Company's North American prearranged funeral trust portfolio
earned a return of 17.6%, 18.0% and 12.5% in 1999, 1998 and 1997, respectively
(including realized and unrealized gains and net of investment expenses).
AML, which was acquired by the Company in 1998, has been a provider of
insurance products used to fund Company prearranged funerals in North America
for several years. During 1999, the Company began a strategic initiative to fund
a higher percentage of its North American prearranged funeral sales through AML
as opposed to third party insurance or trust funded contracts. Auxia primarily
sells insurance and annuity products used to fund prearranged funerals to be
performed by the Company's French funeral service locations. Prearranged funeral
sales afford the Company the opportunity to protect both 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 funerals performed at comparable North
America funeral service locations approximates 28.9% in 1999 and 26.7% in 1998.
This percentage is expected to grow, thereby making the number of funerals
performed and related revenues, which will be recognized in future periods, more
predictable.
The total value of unperformed prearranged funeral contracts includes both
trust funded and insurance funded contracts and represents the original contract
value plus any accumulated trust earnings or increasing insurance benefits. The
total value of unperformed prearranged funeral contracts consists of two
components: (i) contracts funded by trust or third party insurance companies and
(ii) contracts funded by the Company's insurance operations. The value of
unperformed prearranged funeral contracts to be funded by trust or third party
insurance companies are included in Deferred prearranged funeral contract
revenues in the consolidated balance sheet. A portion of the value of
unperformed prearranged funeral contracts to be funded by the Company's
insurance operations is included as a component of Reserves and annuity
benefits -- insurance operations in the consolidated balance sheet and reflects
only the actuarially determined amounts to be funded in accordance with
generally accepted accounting principles for life insurance companies. The
remaining component of Reserves and annuity benefits -- insurance operations
represents the actuarially determined amounts to be funded for non-SCI
unperformed prearranged funeral contracts. As of December 31, 1999 and 1998, the
total value of unperformed prearranged funeral contracts was as follows
(assuming the Company's contracts only, at face value, plus accrued earnings or
increasing death benefits):
1999 1998
---------- ----------
Deferred prearranged funeral contract revenues.............. $3,186,081 $2,819,794
Contracts funded by the Company's insurance operations...... 1,101,371 932,056
---------- ----------
$4,287,452 $3,751,850
========== ==========
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The following table summarizes the changes in the total value of
unperformed prearranged funeral contracts for the years ended December 31:
1999 1998
---------- ----------
Beginning balance........................................... $3,751,850 $3,371,424
Net sales................................................. 578,263 490,289
Acquisitions/dispositions................................. 288,099 138,976
Realized earnings and increasing insurance benefits....... 128,251 129,484
Maturities................................................ (331,031) (274,107)
Change in cancellation reserve............................ (80,020) (16,608)
Effect of foreign currency and other...................... (47,960) (87,608)
---------- ----------
Ending balance.............................................. $4,287,452 $3,751,850
========== ==========
The increase in net sales was due to the Company's revenue initiative to
increase prearranged funeral sales. Acquisitions and dispositions has increased
primarily due to the merger with ECI in January 1999. The increase in the
cancellation reserve is due to adjustments made to better reflect the Company's
historical experience.
The recognition of the total value of unperformed prearranged funeral
revenues is estimated to occur in the subsequent years as follows:
2000.................................................... $ 392,110
2001.................................................... 361,880
2002.................................................... 294,126
2003.................................................... 299,799
2004.................................................... 270,186
2005 through 2008....................................... 1,027,623
2010 and thereafter..................................... 1,641,728
----------
$4,287,452
==========
CREMATIONS
In recent years there has been a steady growth trend in the number of
cremations in North America that have been chosen as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is much more stable. In 1999, 35.4% (34.6% in 1998) of all
families served by the Company's comparable North America funeral service
locations selected cremation, substantially more than the 25% 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 cremation rates
have been historically higher than the national average. Though a cremation
typically results in fewer sales dollars than a traditional funeral service, the
Company believes funeral service locations which are predominantly cremation
businesses typically have higher gross profit margin percentages than those
exhibited at traditional funeral service locations. The Company has expanded its
product alternatives in high cremation markets in North America which has
resulted in higher average sales. The Company continues to believe there are
markets in select areas within North America where products and services related
to the memorialization of cremated remains represent a source of revenue and
margin growth. Cremation memorialization has long been a tradition in Australia
and the United Kingdom. Based on industry studies, approximately 60-70% of all
dispositions in Australia and the United Kingdom were cremations. It is
estimated that approximately 17% of all dispositions in France are cremations.
The Company also operates the only nationally branded cremation society
with the largest membership in North America called National Cremation Society
(NCS). NCS currently operates in four high cremation states and has plans to
expand into nine additional high cremation states and Canadian provinces in
2000. NCS locations are predominately store-front locations with little capital
investment and have a prearranged
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backlog of approximately 43,000 contracts as of December 31, 1999. While the
average sale of NCS contracts is approximately $1,000 to $1,200, gross profit
margins are in the 40% to 45% range.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be implemented in the Company's
first quarter of 2001. 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 is
currently assessing the impact that adoption will have on its consolidated
financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101, as
amended, is required to be applied beginning with the Company's second quarter
of 2000. The Company, together with other members of the death care industry,
are currently discussing directly with the Commission the application of SAB No.
101. Final resolution of the discussions will not have an impact on the
Company's consolidated cash flows, but may have a material impact on the
Company's consolidated financial condition and on the manner in which the
Company records preneed sales activities.
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 previously reported, the Company developed and implemented a plan to
address the anticipated effects of Y2K issues related to the Company's
production systems, networks, desktops, user-developed applications,
vendor-supplied software, facilities and telecommunications and the supply
chain.
The Company established Y2K Program Offices at its corporate offices in
Houston, Texas and Birmingham, England. These program offices were responsible
for advising and monitoring the numerous facets of the Company's Y2K
preparations and for promoting Y2K awareness. In addition, the program offices
monitored the development of contingency plans that specified what would be done
if the Company or key third parties experienced disruptions to critical business
activities as a result of Y2K problems.
The Company's Y2K plan was completed in all material respects prior to the
anticipated Y2K failure dates. As of March 28, 2000, the Company has not
experienced any significant business disruptions or system failures as a result
of Y2K issues, nor is it aware of any Y2K issues that have affected its key
suppliers or other significant third parties to an extent significant to the
Company. However, Y2K compliance has many facets and potential consequences,
some of which may not be foreseeable or may not be realized until future
periods. Consequently, there can be no assurance that unforeseen circumstances
may not arise, or that the Company will not in the future identify equipment or
systems that are not Y2K-compliant. Because of this uncertainty, the Company's
contingency plans outline a course of action should a date-related problem occur
in the future.
The aggregate costs for the Company to achieve Y2K readiness were
approximately $33,715 of which $3,725 represents operating lease payments
related to desktops and servers that will be incurred from 2000-2002. All costs
associated with Y2K readiness are expected to be funded from cash flows from
operations. The Company's actual costs incurred associated with Y2K readiness
through December 31, 1999, were approximately $29,990, of which approximately
$10,433 has been expensed and approximately $19,557 has been capitalized. The
capitalized expenditures represent new hardware and new enterprise software that
introduced new functionality to the Company. All of the estimated remaining
$3,725 expenditures will be expensed over the course of the related lease term.
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22
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 many internal resources worked part-time on Y2K-related issues for which no
payroll or overhead costs are being reported.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be accompanied by words such
as "believe," "estimate," "project," "expect," "anticipate," or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however, many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors, which could cause actual results to differ materially from those in
forward-looking statements, include, among others, the following:
1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g. marketable security
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly but not limited to, the
Company's cemetery trust revenues, levels of interest expense; and changes
in the Company's specific credit relationships impacting the availability
of credit.
2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies.
3) Changes in consumer demand and/or pricing for the Company's
products and services caused by several factors, such as changes in local
death rates, cremation rates, competitive pressures and local economic
conditions.
4) The Company's ability to sell preneed heritage cemetery property
which is usually associated with new customers of the Company's cemeteries.
5) The Company's ability to successfully integrate prior acquisitions
into the Company's business and to realize expected cost savings in
connection with such acquisitions.
6) The Company's ability to successfully implement ongoing cost
reduction initiatives, as well as changes in domestic and international
economic, political and/or regulatory environments, which could negatively
effect the implementation of the Company's cost reduction initiatives.
7) The Company's ability to successfully realize the estimated
savings associated with the Company's cost reduction initiatives announced
in 1999.
8) The Company's ability to successfully implement certain strategic
revenue and marketing initiatives resulting in increased volume through its
existing facilities.
9) The Company's ability to successfully implement certain strategic
cash flow initiatives, including but not limited to the sale of non-core
assets, the previously announced funeral and cemetery consumer financing
program, which could improve or generate cash flow for the Company and
enhance the Company's ability to reduce debt.
10) The Company's ability to successfully exploit its substantial
purchasing power with certain of the Company's vendors.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information presented below should be read in conjunction with notes
nine and ten to the consolidated financial statements in Item 8 of this Form
10-K.
The Company 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
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.
Movements in interest rates that impact the fair value of the interest rate
swaps generally offset corresponding movements in the value of the underlying
debt being hedged. Likewise, movements in currency rates that impact swaps
generally offset corresponding movements in the value of the underlying foreign
assets being hedged. In addition, currency movements that impact foreign
interest expense due under the cross-currency interest rate swaps generally
offset corresponding movements in the earnings of the foreign operation.
At December 31, 1999, after giving consideration to the interest rate
swaps, the Company's total debt consisted of approximately 61% of fixed interest
rate debt at a weighted average rate of 6.36% and approximately 39% of floating
interest rate debt at a weighted average rate of 6.49%. At December 31, 1998,
the Company's total debt 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%. The Company's overall
sensitivity to floating interest rates is diversified in that approximately 28%
of the Company's floating rate exposure, as of December 31, 1999, is based in
eight markets other than the United States (47% at December 31, 1998).
In general, the Company has hedged 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. In addition, the Company does not have a
significant investment in foreign operations that are in highly inflationary
economies. Approximately 32% of the Company's net investment and 32% of its
income from operations are denominated in foreign currencies at December 31,
1999. Due to the cross-currency hedges described above, approximately 13% of the
Company's net assets and approximately 16% of the Company's income from
operations are subject to translation risk at December 31, 1999.
In January 2000, the Company materially modified its participation in
derivative transactions by terminating or assigning away certain interest rate
swaps and all cross-currency interest rate swaps as mentioned in note nine to
the consolidated financial statements in Item 8 of this Form 10-K, thereby
removing the Company's hedges of foreign exchange rate exposure and the
diversification of floating rate exposure mentioned above.
Marketable Equity and Debt Securities -- Price Risk
In connection with the Company's insurance operations, prearranged funeral
operations and preneed cemetery merchandise and services 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, 1999 and 1998, are
presented in notes four, five and six to the consolidated financial statements
in Item 8 of this Form 10-K.
Market-Rate Sensitive Instruments -- Interest Rate and Currency Risk
The Company's financial instruments that were subject to interest rate and
currency exchange rate risk at December 31, 1999, include 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, the adverse changes described below could
differ substantially from the hypothetical 10% impact. The analysis conducted
below excludes the assets of both the lending subsidiary and the Company's
insurance operations. Instead, these are referenced separately in tabular format
below.
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24
A sensitivity analysis of those instruments with variable interest rate
components was modeled to assess the impact that changing interest rates could
have on pretax earnings. The sensitivity analysis assumed an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pretax earnings, on an annual
basis, would have been negatively impacted by approximately $9,402 on December
31, 1999, and $5,657 on December 31, 1998. Had the Company terminated certain
interest rate swaps in December 1999, as discussed in note nine to the
consolidated financial statements in Item 8 of this Form 10-K, this same
sensitivity analysis indicates that the Company's pretax annual earnings would
have been negatively impacted by approximately $11,664 on December 31, 1999.
A similar model was used to assess the impact of changes in foreign
exchange rates on interest expense. At December 31, 1999, the Company's debt and
derivative exposure was primarily associated with the Euro, British pound,
Canadian dollar, Australian dollar, Chilean peso, Swiss franc, and Norwegian
krone. A 10% adverse change in the strength of the U.S. dollar would have
negatively impacted the Company's interest expense on an annual basis by
approximately $11,451 on December 31, 1999, and $12,229 on December 31, 1998.
Had the Company terminated the cross-currency interest rate swaps in December
1999, as discussed in note nine to the consolidated financial statements in Item
8 of this Form 10-K, this same sensitivity analysis indicates that the Company's
annual interest expense would have been negatively impacted by approximately
$2,176 on December 31, 1999.
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For certain assets associated with the Company's lending subsidiary and
insurance operations, the tables below present principal cash flows that exist
by maturity date and the related average interest rates:
AS OF DECEMBER 31, 1999:
2000 2001 2002 2003 2004 THEREAFTER FAIR VALUE
------- ------- ------- ------- ------- ---------- ----------
Lending subsidiary receivables......... $16,545 $32,601 $40,239 $55,553 $33,854 $32,234 $211,026
Average rate........................... 5.96% 7.68% 6.20% 9.15% 9.63% 8.59%
Insurance subsidiaries investments in
debt securities...................... 26,075 5,073 7,098 15,166 44,417 861,894 959,723
Average rate........................... 3.96% 5.92% 5.77% 5.81% 5.14% 6.51%
AS OF DECEMBER 31, 1998:
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
------- ------- ------- -------- ------- ---------- ----------
Lending subsidiary 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%
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 the
Company's insurance operations enhances the ability of the insurance companies
to provide security to their policyholders.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 26
Consolidated Statement of Operations for the three years
ended December 31, 1999................................... 27
Consolidated Balance Sheet as of December 31, 1999 and
1998...................................................... 28
Consolidated Statement of Cash Flows for the three years
ended December 31, 1999................................... 29
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1999............................. 30
Notes to Consolidated Financial Statements.................. 31
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 64
All other schedules have been omitted because the required information is
not applicable or because the information required is included in the
consolidated financial statements or the related notes thereto.
25
27
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, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 29, 2000
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................. $3,321,813 $2,875,090 $2,535,865
Costs and expenses....................................... (2,708,054) (2,156,320) (1,848,253)
---------- ---------- ----------
Gross profit............................................. 613,759 718,770 687,612
General and administrative expenses...................... (82,585) (66,839) (66,781)
Restructuring and nonrecurring charges................... (362,428) -- --
---------- ---------- ----------
Income from operations................................... 168,746 651,931 620,831
Interest expense......................................... (238,195) (177,053) (136,720)
Dividends on preferred securities of SCI Finance LLC..... -- -- (4,382)
Other income............................................. 31,759 43,649 100,244
---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain
(loss)................................................. (37,690) 518,527 579,973
(Provision) benefit for income taxes..................... 3,393 (176,385) (205,421)
---------- ---------- ----------
Income (loss) before extraordinary gain (loss)........... (34,297) 342,142 374,552
Extraordinary gain (loss) on early extinguishment of debt
(net of income taxes of $1,071 and $23,383)............ 1,885 -- (40,802)
---------- ---------- ----------
Net income (loss).............................. $ (32,412) $ 342,142 $ 333,750
========== ========== ==========
Earnings per share:
Basic:
Income (loss) before extraordinary gain (loss)......... $ (.13) $ 1.34 $ 1.53
Extraordinary gain (loss) on early extinguishment of
debt................................................ .01 -- (0.17)
---------- ---------- ----------
Net income (loss).............................. $ (.12) $ 1.34 $ 1.36
========== ========== ==========
Diluted:
Income (loss) before extraordinary gain (loss)......... $ (.13) $ 1.31 $ 1.47
Extraordinary gain (loss) on early extinguishment of
debt................................................ .01 -- (0.16)
---------- ---------- ----------
Net income (loss).............................. $ (.12) $ 1.31 $ 1.31
========== ========== ==========
Basic weighted average number of shares.................. 272,281 256,271 245,470
========== ========== ==========
Diluted weighted average number of shares................ 273,792 262,520 257,781
========== ========== ==========
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 88,221 $ 358,210
Receivables, net of allowances............................ 605,127 565,552
Inventories............................................... 190,343 189,070
Other..................................................... 112,460 96,248
----------- -----------
Total current assets.............................. 996,151 1,209,080
----------- -----------
Investments -- insurance operations......................... 1,318,635 1,234,678
Prearranged funeral contracts............................... 2,898,139 2,588,806
Long-term receivables....................................... 1,562,418 1,408,076
Cemetery property, at cost.................................. 2,182,410 2,035,897
Property, plant and equipment, at cost (net)................ 1,881,525 1,824,979
Deferred charges and other assets........................... 1,286,967 1,151,430
Names and reputations (net)................................. 2,475,356 1,813,212
----------- -----------
$14,601,601 $13,266,158
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 589,847 $ 452,354
Current maturities of long-term debt...................... 423,949 96,067
Income taxes.............................................. 44,069 81,904
----------- -----------
Total current liabilities......................... 1,057,865 630,325
----------- -----------
Long-term debt.............................................. 3,636,067 3,764,590
Reserves and annuity benefits -- insurance operations....... 1,313,328 1,207,169
Deferred prearranged funeral contract revenues.............. 3,186,081 2,819,794
Deferred income taxes....................................... 873,023 797,086
Other liabilities........................................... 1,039,964 893,092
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 272,064,618 and 259,201,104 issued and
outstanding net of 2,792,503 and 68,373 treasury shares
at par................................................. 272,064 259,201
Capital in excess of par value............................ 2,156,301 1,646,765
Retained earnings......................................... 1,126,898 1,232,758
Accumulated other comprehensive income (loss)............. (59,990) 15,378
----------- -----------
Total stockholders' equity........................ 3,495,273 3,154,102
----------- -----------
$14,601,601 $13,266,158
=========== ===========
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss).................................... $ (32,412) $ 342,142 $ 333,750
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 252,145 202,277 157,550
Provision (benefit) for deferred income taxes..... (46,071) 56,308 19,212
Restructuring and nonrecurring charges............ 362,428 -- --