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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $1,041,281,874 based upon a closing market price of $3.80 on
March 22, 2001 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.
The number of shares outstanding of the registrant's common stock as of
March 22, 2001 was 278,001,053 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 2001
Annual Meeting of Shareholders (Part III)
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PART I
ITEM 1. BUSINESS.
(DOLLARS IN THOUSANDS)
Service Corporation International is the largest funeral and cemetery
company in the world. The term "Company" or "SCI" includes the registrant and
its subsidiaries, unless the context indicates otherwise. As of December 31,
2000, the Company operated 3,611 funeral service locations, 569 cemeteries and
200 crematoria located in 18 countries on five continents. The Company conducts
funeral service operations in all 18 countries and cemetery operations in all
countries in North America, South America, Australia and certain countries
within Europe. As of December 31, 2000, the Company's largest markets were North
America and France, which when combined represent approximately 84% of the
Company's consolidated revenues, 83% of consolidated operating income before
non-recurring items and 78% of the Company's total operating locations. For
financial information about the Company's reportable segments, see note fourteen
to the consolidated financial statements in Item 8 of this Form 10-K.
Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses which resulted in creating the world's
largest network of funeral service locations and cemeteries. The Company is now
focused on a series of growth initiatives designed to increase revenues
internally without significant outlays of capital. The Company's unparalleled
network of funeral service locations and cemeteries form the foundation for
these growth initiatives. The Company's network gives the Company the ability to
create a national brand name in the industry as well as the ability to enter
into affinity relationships to provide the Company's products and services to
organizations that require a national network of funeral service locations and
cemeteries. Along with these internal growth initiatives, the Company is focused
on increasing cash flow and reducing its outstanding debt. The Company is also
in the process of divesting certain funeral service locations and cemeteries in
North America that are not well aligned with the Company's long-term strategy
and is in discussions with various third parties concerning the possibility of
joint venturing certain of the Company's international operations. Proceeds from
divestitures or joint venturing programs will be used by the Company to further
reduce its debt.
The Company was incorporated in Texas in July of 1962. The Company's
principal corporate offices are located at 1929 Allen Parkway, Houston, Texas
77019 and its telephone number is (713) 522-5141.
FUNERAL AND CEMETERY OPERATIONS
The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries, crematoria and related businesses. The operations
are organized into a North American division covering the United States and
Canada and a European division responsible for all operations in Europe, and
other international operations managed in the Pacific Rim and South America.
Each division is under the direction of divisional executive management with
substantial industry experience. Local funeral service location and cemetery
managers, under the direction of the divisional management, receive support and
resources from the Company's headquarters in Houston, Texas and have substantial
autonomy with respect to the manner in which services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales activities.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various
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names because most operations were acquired as existing businesses. Some of the
Company's funeral service locations in its international operations operate
under certain brand names specific for a general area or country. In 2000, the
Company started branding its operations in North America under the name Dignity
Memorial(TM). While this process is intended to emphasize the Company's seamless
national network of funeral service locations and cemeteries in North America,
the original names associated with acquired operations with their inherent
goodwill and heritage will remain the same as before acquisition.
Funeral Service Locations. The Company's 3,611 funeral service locations
provide all professional services relating to funerals, including the use of
funeral facilities and motor vehicles. Funeral service locations sell caskets,
coffins, burial vaults, cremation receptacles, flowers and burial garments, and
other ancillary products and services. Certain funeral service locations also
operate crematoria. At December 31, 2000, the Company owned 193 funeral
service/cemetery combination locations and operated 55 flower shops engaged
principally in the design and sale of funeral floral arrangements. These flower
shops provide floral arrangements to some of the Company's funeral homes and
cemeteries. The number of deaths tends to be somewhat higher in the winter
months and the Company's funeral service locations generally experience a higher
volume of business during those months.
In addition to selling its services and products to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets, including its principal foreign markets. Funeral prearrangement
is a means through which a customer contractually agrees to the terms of a
funeral to be performed in the future. The funds collected from prearranged
funeral contracts are generally placed in trust accounts (pursuant to applicable
law) or are used to pay premiums on life insurance policies from third party
insurers. In certain situations pursuant to applicable laws, the Company will
post a surety bond as financial assurance in the amount of the preneed funeral
contract in lieu of placing certain funds in trust accounts or paying premiums
on life insurance policies. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in this Form 10-K for
further details on the Company's practice of posting such surety bonds. At
December 31, 2000, the total value of the Company's unperformed prearranged
funeral contracts was $4,537,669, of which approximately $396,000 is estimated
to be fulfilled in 2001. For additional information regarding prearranged
funeral activities, see notes two, three and five to the consolidated financial
statements in Item 8 of this Form 10-K.
Cemeteries. The Company's cemeteries sell interment rights associated with
cemetery property (including mausoleum spaces, lots and lawn crypts) and
cemetery merchandise including stone and bronze memorials, burial vaults,
caskets and cremation memorialization products. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries operate crematoria and certain cemeteries contain
gardens specifically for the purpose of memorialization associated with the
Company's cremation customers.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise and services may be required by law to be paid
into trust until the merchandise is purchased or the service is provided on
behalf of the customer. In certain situations pursuant to applicable laws, the
Company will post a surety bond as financial assurance for a certain amount of
the preneed cemetery contract in lieu of placing certain funds into trust
accounts. See the Financial Assurances section included in Financial Condition,
Liquidity and Capital Resources in this Form 10-K for further details on the
Company's practice of posting such surety bonds. For additional information
regarding cemetery preneed activities, see notes two, three and six to the
consolidated financial statements in Item 8 of this Form 10-K.
Combined Funeral Service Locations and Cemeteries. The Company currently
owns 193 funeral service/cemetery combination locations in North America in
which a funeral service location is physically located within one of the
Company's cemeteries. Combination locations allow certain facility, personnel
and equipment costs to be shared between the funeral service location and
cemetery and typically have a higher gross margin than if the funeral and
cemetery operations were operated separately. Combination locations also
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create synergies between funeral and cemetery sales forces and give consumers
added convenience to purchase both funeral and cemetery products and services at
a single location.
Death Care Industry. In North America and most international markets in
which the Company operates, the funeral and cemetery industry is characterized
by a large number of locally owned, independent operations. Since the Company's
inception in the 1960s, the Company has been focused on the acquisition and
consolidation of independent funeral homes and cemeteries in the very fragmented
death care industry. During the 1990s, the Company also expanded its operations
through consolidation in Europe, Australia and South America. During 1999, the
Company, as well as other consolidators in the death care industry,
significantly reduced the level of acquisition activity. The Company is now
focused on a series of growth initiatives designed to increase revenues
internally without significant outlay of capital. As part of its current
long-term strategy, the Company is in discussions with various third parties
concerning the possibility of joint venturing primarily the Company's
international operations and is also in the process of divesting certain funeral
service locations and cemeteries in North America.
To compete successfully, the Company's funeral service locations and
cemeteries must maintain good reputations and high professional standards in the
industry, as well as offer attractive products and services at competitive
prices. The Company believes it has an unparalleled network of funeral service
locations and cemeteries that offer high quality products and services at prices
that are competitive with independent funeral homes and cemeteries. Some of the
Company's funeral service locations in its international operations operate
under certain brand names specific for a general area or country. During 2000,
the Company began branding its network of funeral service locations in North
America under the Dignity Memorial(TM) brand name. A national brand name would
be new and unique to the death care industry in North America and would provide
many advantages to the Company discussed in more detail in Revenue Growth
Initiatives in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K.
In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is more stable. The west coast of the United States and the
states of Arizona and Florida have the highest concentration of cremation
consumers in North America. While cremations performed by the Company in North
America typically have higher gross profit margins than traditional funeral
services, cremations usually result in lower revenue and gross profit dollars to
the Company than traditional funeral services. In North America during 2000,
36.3% of all funeral services performed by the Company were cremation cases,
compared to 33.9% performed in 1999. The Company in 2000 continued to expand its
cremation memorialization products and cremation services in several North
American markets, which has resulted in higher average sales for cremation cases
compared to historical levels. The Company also continues to expand its
nationally branded cremation service locations called National Cremation
Service(R) (NCS). NCS currently operates in ten high cremation states and has
plans to expand into seven additional high cremation states. The Company
believes that the NCS consumer would not have chosen traditional funeral service
locations as an alternative to NCS, and therefore is considered an incremental
customer to the Company.
With the aging of the population in North America, the Company continues to
believe the death care industry possesses attractive characteristics, and the
Company is uniquely positioned with its unparalleled network of funeral service
locations and cemeteries to capture future market share with its current
initiatives.
DISCONTINUED OPERATIONS
The Company formerly owned insurance operations including ownership of a
French life insurance company (Auxia) and a U.S. life insurance company
(American Memorial Life Insurance Company or AMLIC). These insurance operations
assisted in the funding of contracts written by Company-owned or affiliated
funeral service locations. During 2000, the Company completed the sales of these
insurance operations. Accordingly, the consolidated financial statements in this
Form 10-K have been reclassified to reflect these operations as discontinued.
Operating results from Auxia have been included through August 31,
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2000 and the operating results from AMLIC have been included through September
30, 2000, the dates of disposition of the respective companies.
EMPLOYEES
At December 31, 2000, the Company employed 29,326 (17,232 in the United
States) persons on a full time basis and 10,690 (8,296 in the United States)
persons on a part time basis. Of the full time employees, 28,548 were in the
funeral and cemetery operations and 778 were in corporate or other overhead
activities and services. All of the Company's eligible United States employees
who so elect are covered by the Company's group health and life insurance plans.
Eligible United States employees are participants in retirement plans of the
Company or various subsidiaries, while foreign employees are covered by other
Company defined or government mandated benefit plans. Although labor disputes
are experienced from time to time, in general relations with employees are
considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various U.S. federal, state and foreign statutes, ordinances
and regulations. The Company believes that it is in substantial compliance with
the significant provisions of such statutes, ordinances and regulations. Since
1984, the Company has operated in the United States under the Federal Trade
Commission (FTC) comprehensive trade regulation rule for the funeral industry.
The rule contains minimum guidelines for funeral industry practices, requires
extensive price and other affirmative disclosures and imposes mandatory
itemization of funeral goods and services. From time to time in connection with
the Company's former strategy of growth through acquisitions, the Company has
entered into consent orders with the FTC that have required the Company to
dispose of certain operations to proceed with such acquisitions or have limited
the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a materially adverse
effect on the Company's operations.
The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry has
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that will generally end municipal control of the French
funeral service business and will allow free competition among funeral service
providers. Under such legislation, the Exclusive Municipal Authority was
abolished in January 1996, and the Municipal Monopoly was eliminated in January
1998. Cemeteries in France, however, are and will continue to be controlled by
municipalities and religious organizations, with third parties, including the
Company, providing cemetery merchandise such as markers and monuments to
consumers.
ITEM 2. PROPERTIES.
(DOLLARS IN THOUSANDS)
The Company's executive headquarters is located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and parking
garage. The other undivided one-half interest is owned by an unrelated third
party. The Company holds an option to acquire such interest for $2,000 in July
2005 and, at the option of the unrelated third party, is obligated to make such
acquisition. The property consists of approximately 127,000 square feet of
office space in the building and 185,000 square feet of parking space in the
parking garage. The Company leases all of the office space in the building
pursuant to a lease that expires June 30, 2005 providing for monthly rent of
$59. The Company pays all operating expenses. One half of the rent is paid to
the wholly owned subsidiary and the other half is paid to the owners of the
remaining undivided one-half interest. The Company owns and utilizes for
corporate activities two additional buildings located in Houston, Texas
containing a total of approximately 167,000 square feet of office space.
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At December 31, 2000, the Company owned approximately 63% of the real
estate and buildings of its 4,380 funeral service locations, cemeteries and
crematoria and leased facilities in connection with approximately 37% of such
operations. In addition, the Company leased two aircraft pursuant to cancelable
operating leases. At December 31, 2000, the Company operated 13,389 vehicles, of
which 3,633 were owned and 9,756 were leased. For additional information
regarding leases, see note eleven to the consolidated financial statements in
Item 8 of this Form 10-K.
At December 31, 2000, the Company's 569 cemeteries contain a total of
approximately 34,221 acres, of which approximately 49% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition and management of the
Company believes that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Previously Reported Litigation. The following discussion describes certain
litigation as of March 29, 2001, which was previously reported:
Civil Action H-99-0280; In Re Service Corporation International; In the
United States District Court for the Southern District of Texas, Houston
Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before
Judge Lynn N. Hughes and includes 21 class action lawsuits that were filed in
the United States District Court for the Southern District of Texas, two class
action lawsuits that were originally brought in the United States District Court
for the Eastern District of Texas, and a lawsuit brought in the United States
District Court for the Southern District of Texas by an individual who sold his
funeral home to SCI. The Consolidated Lawsuit names as defendants the Company
and three of the Company's current or former executive officers or directors:
Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne (the
Individual Defendants). The plaintiffs have filed a Consolidated Class Action
Complaint in the Consolidated Lawsuit alleging that defendants violated federal
securities laws by making materially false and misleading statements and failing
to disclose material information concerning the Company's prearranged funeral
business. The Consolidated Lawsuit seeks to recover an unspecified amount of
monetary damages. Since the litigation is in its preliminary stages and no
discovery has occurred, the Company cannot quantify its ultimate liability, if
any, for the payment of damages or predict the outcome of the litigation.
However, the Company moved to dismiss all of the allegations in the Consolidated
Lawsuit and believes that they do not provide a basis for the recovery of
damages because the Company made all required disclosures on a timely basis. The
Company and the Individual Defendants have also filed an Answer to the
Consolidated Class Action Complaint, and the Company intends to aggressively
defend this lawsuit.
The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of Company into Equity Corporation International (ECI);
(ii) purchased shares of Company common stock in the open market during the
period from July 17, 1998, through January 26, 1999 (the Class Period); (iii)
purchased Company call options in the open market during the Class Period; (iv)
sold Company put options in the open market during the Class Period; (v) held
employee stock options in ECI that became options to purchase Company common
stock pursuant to the merger; and (vi) held Company employee stock options to
purchase Company common stock under a stock plan during the Class Period.
Excluded from the foregoing categories are the Individual Defendants, the
members of their immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any time during
the Class Period. Judge Hughes has certified the Consolidated Lawsuit as a class
action. On May 10, 2000, Judge Hughes signed an order amending the class
definition to include James P. Hunter, III as a class member. Mr. Hunter was
Chairman, President and Chief Executive Officer of ECI at the time of its merger
with a wholly-owned subsidiary of the Company. Mr. Hunter and a related family
trust filed a separate lawsuit in state court in Angelina County, Texas, which
is discussed below.
The Company and the Individual Defendants have filed a Motion to Dismiss
the Consolidated Lawsuit; the plaintiffs have filed their Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the
Individual Defendants have filed a Reply to Plaintiffs' Opposition to
Defendants' Motion to
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Dismiss the Consolidated Lawsuit. The foregoing pleadings will be considered by
Judge Hughes in due course. A status conference is set for April 4, 2001.
Copies of the complaint in the Consolidated Lawsuit and the pleadings that
have been filed in response thereto and that are referred to herein are filed as
exhibits to this Annual Report on Form 10-K.
Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation
International et al; In the ________ Judicial District Court of Angelina County,
Texas. On November 10, 1999, James P. Hunter, III and a related family trust
filed a lawsuit against the Company, the Individual Defendants, two other
officers, an employee of the Company and PricewaterhouseCoopers LLP, the
Company's independent accountants, in state District Court in Angelina County,
Texas (Hunter Litigation). The plaintiffs allege, among other things, violations
of Texas securities law and statutory and common law fraud, and seek unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hunter Litigation denying the plaintiffs' allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hunter Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
On May 10, 2000, Judge Hughes entered an order in the Consolidated Lawsuit
in the federal district court staying the further prosecution of the Hunter
litigation in state court. Hunter and the related family trust appealed this
order, and the United States Court of Appeals for the Fifth Circuit lifted the
stay in an order of September 13, 2000. Following this appeal, Judge Hughes then
signed an order on October 5, 2000, prohibiting Mr. Hunter and the related
family trust from pursuing discovery in the Hunter Litigation. Judge Hughes
entered the order pursuant to the authority vested to him by the Securities
Litigation Uniform Standards Act of 1998. Hunter and the related family trust
filed a motion for a trial setting in the state district court.
A copy of the Plaintiff's Original Petition in the Hunter Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International; In
the ________ Judicial District Court of Angelina County, Texas (Fredrick
Litigation). This additional securities fraud case has been brought against the
Company by a former shareholder of ECI alleging causes of action exclusively
under Texas statutory and common law. The Company has filed an answer denying
plaintiff's allegations. Since the litigation is in its preliminary stages, the
Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Fredrick Litigation do not provide a basis for the
recovery of damages. The Company intends to vigorously defend this litigation.
New Litigation.
Cause No. 33701-01-01; Jack D. Rottman v. Service Corporation
International, et al; In the ________ Judicial District Court of Angelina
County, Texas. On December 28, 2000, Jack Rottman filed a lawsuit against the
Company, the Individual Defendants, two other officers, an employee of the
Company, and PricewaterhouseCoopers, L.L.P., the Company's independent
accountants, in state District Court in Angelina County, Texas (Rottman
Litigation). The plaintiff, a former officer of ECI, alleges, among other
things, violations of Texas securities law and statutory and common law fraud,
and seeks unspecified compensatory and exemplary damages. The Company and the
other defendants filed an answer in the Rottman Litigation denying the
plaintiff's allegations. Since the litigation is in its very preliminary stages,
the Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Rottman Litigation, like those in the Consolidated
Lawsuit, do not provide a basis for the recovery of damages because all required
disclosures were made on a timely basis. The Company intends to aggressively
defend this litigation.
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A copy of the Plaintiff's Original Petition in the Rottman Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
Cause No. 2000-63917; Jack T. Hammer v. Service Corporation International,
et al.; In the 165th Judicial District Court of Harris County, Texas. On
December 15, 2000, Jack T. Hammer filed a lawsuit against the Company, the
Individual Defendants, two other officers, an employee of the Company, and
PricewaterhouseCoopers, L.L.P., the Company's independent accountants, in state
District Court in Harris County, Texas (Hammer Litigation). The plaintiff, a
former director of ECI, alleges, among other things, violations of Texas
securities law and statutory and common law fraud, and seeks unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hammer Litigation denying the plaintiff's allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hammer Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
A copy of the Plaintiff's Original Petition in the Hammer Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 28, 2001 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
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R. L. Waltrip........................ (70) Chairman of the Board and Chief 1962
Executive Officer
B. D. Hunter......................... (71) Vice Chairman of the Board 1986
Jerald L. Pullins.................... (59) President and Chief Operating Officer 1992
Jeffrey E. Curtiss................... (52) Senior Vice President Chief Financial 2000
Officer
James M. Shelger..................... (51) Senior Vice President General Counsel 1987
and Secretary
J. Daniel Garrison................... (49) Vice President North American 1998
Cemetery Operations
W. Cardon Gerner..................... (46) Vice President Corporate Controller 1999
W. Mark Hamilton..................... (36) Vice President Prearranged Sales 1996
Frank T. Hundley..................... (41) Vice President Treasurer 2000
Lowell A. Kirkpatrick, Jr. .......... (42) Vice President Operational Management 1994
Systems
Stephen M. Mack...................... (49) Vice President North American Funeral 1998
Operations
Thomas L. Ryan....................... (35) Vice President International 1999
Operations
Eric D. Tanzberger................... (32) Vice President Investor Relations and 2000
Assistant Corporate Controller
Stephen J. Uthoff.................... (49) Vice President Chief Information 2000
Officer
Michael R. Webb...................... (43) Vice President Corporate Development 1998
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(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
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Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Hunter was appointed Vice Chairman of the Board in January 2000. Prior
thereto for more than five years, Mr. Hunter was the Chairman and Chief
Executive Officer of Huntco, Inc., an intermediate steel processor. Mr. Hunter
has been a director of the Company since 1986 and also served as Vice Chairman
of the Board of the Company from September 1986 to May 1989.
Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. From January 1992 until July 1999, Mr. Curtiss served
as Senior Vice President and Chief Financial Officer of Browning-Ferris
Industries, Inc., a waste services company.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Corporate
Controller. Before the acquisition, Mr. Gerner had been Senior Vice President
and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner
was a partner with Ernst & Young LLP.
Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
Prior thereto, Mr. Hundley served for more than five years in various capacities
at Banc of America Securities, LLC, its predecessors and affiliates, including
as Managing Director.
Mr. Ryan joined the Company in June 1996 as Director of Financial
Reporting. Since then, Mr. Ryan has served as Director of Investor Relations and
Managing Director and Chief Financial Officer of International Operations. Mr.
Ryan was promoted to Vice President International Finance in February 1999 and
appointed Vice President Operational Accounting and Analysis in February 2000
and became Vice President of International Operations in December 2000. Prior to
joining the Company, Mr. Ryan was a certified public accountant with Coopers &
Lybrand L.L.P. for more than five years.
Mr. Tanzberger joined the Company in August 1996 as Manager of Budgets &
Financial Analysis. Since then, Mr. Tanzberger has served as Vice President of
Operations/Western Division, Director of Investor Relations and Assistant
Corporate Controller. Mr. Tanzberger was promoted to Vice President Investor
Relations and Assistant Corporate Controller in January 2000. Prior to joining
the Company, Mr. Tanzberger was Assistant Corporate Controller at Kirby Marine
Transportation Corporation, an inland waterway barge and tanker company, from
January through August 1996. Prior thereto, he was a certified public accountant
with Coopers & Lybrand L.L.P. for more than five years.
Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President-Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.
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10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 2000, there were 7,457 holders of record of
the Company's common stock.
In October 1999, the Company suspended payment of regular quarterly cash
dividends on its outstanding common stock in order to focus on improving cash
flow and reducing existing debt. For the two years ended December 31, 1999 and
1998, dividends per share were $.27 and $.36, respectively.
The table below shows the Company's quarterly high and low common stock
prices for the three years ended December 31, 2000:
2000 1999 1998
------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ------ ------ ------ ------
First quarter....................... $7.00 $3.00 $38.50 $14.25 $43.69 $35.69
Second quarter...................... 5.44 2.81 21.19 13.31 44.63 38.94
Third quarter....................... 3.50 2.13 18.88 10.56 45.88 31.88
Fourth quarter...................... 2.56 1.69 10.31 6.44 39.25 29.81
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
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11
ITEM 6. SELECTED FINANCIAL DATA.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected consolidated financial data for the years December
31, 1996 through 2000 is derived from the Company's audited consolidated
financial statements. This data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes to the consolidated
financial statements included in Item 8 of this and previous year's Form 10-K.
In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101).
See note three to the consolidated financial statements in Item 8 of this Form
10-K for more details on the implementation of SAB No. 101. As a result of this
implementation, the Company has changed certain of its accounting policies
regarding the manner in which the Company records preneed sales activities. The
Company recorded a one time, non-cash charge of $909,315 as of January 1, 2000
representing the cumulative effect of this accounting change. The selected
consolidated financial data presented below for 2000 is reported after the
implementation of SAB No. 101 on January 1, 2000. The selected consolidated
statement of operations data presented below for 1999 and 1998 are reported on a
proforma basis as if the implementation of SAB No. 101 had occurred in those
years. The selected consolidated statement of operations data presented below
for 1997 and 1996 are reported on a historical basis, as it was impractical for
the Company to obtain the amounts on a proforma basis for these two years.
Further, results of operations from discontinued operations have been
reclassified for all periods presented to reflect these operations as
discontinued (see note four to the consolidated financial statements of Item 8
of this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
PROFORMA HISTORICAL
------------------------- -----------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
SELECTED CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue from continuing
operations.................... $ 2,564,730 $ 2,745,114 $ 2,354,822 $2,461,690 $2,287,543
Income (loss) from continuing
operations before
extraordinary gains and
cumulative effect of
accounting change............. (425,523) (210,668) 147,854 368,650 261,005
Net income (loss)................ (1,343,251) (191,856) 158,435 333,750 265,298
Earnings per share:
Income (loss) from continuing
operations before
extraordinary gains and
cumulative effect of
accounting change
Basic....................... (1.56) (.77) .58 1.51 1.11
Diluted..................... (1.56) (.77) .57 1.45 1.06
Net income (loss)
Basic....................... (4.93) (.70) .62 1.36 1.13
Diluted..................... (4.93) (.70) .61 1.31 1.08
Cash dividends per share...... -- .27 .36 .30 .24
SELECTED CONSOLIDATED BALANCE SHEET
DATA (HISTORICAL):
Total assets..................... 12,898,469 12,978,230 11,729,816 9,925,643 8,403,431
Long-term debt, less current
maturities.................... 3,114,515 3,636,067 3,764,590 2,634,699 2,048,737
Convertible preferred securities
of SCI Finance LLC............ -- -- -- -- 172,500
Stockholders' equity............. 1,975,821 3,495,273 3,154,102 2,726,004 2,235,317
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
INTRODUCTION
The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 2000, the Company operated 3,611 funeral service
locations, 569 cemeteries and 200 crematoria located in 18 countries on five
continents. The Company conducts funeral service operations in all 18 countries
and cemetery operations in North America, South America, Australia and certain
countries within Europe. As of December 31, 2000, the Company's largest markets
were North America and France, which when combined, represent approximately 84%
of the Company's consolidated revenues, 83% of consolidated income from
operations before non-recurring items and 78% of the Company's total operating
locations.
The funeral and cemetery operations are organized with a North America
division covering the United States and Canada, a European division responsible
for all operations in Europe and other international operations managed in the
Pacific Rim and South America. During 2000, the Company reorganized leadership
of its European operations to focus on stabilizing the Company's market share in
its European markets.
The majority of the Company's operations throughout the world are managed
in groups called clusters. Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual overhead costs by sharing
common resources such as operating personnel, preparation services, clerical
staff, limousines, hearses and preneed sales personnel. Personnel costs, the
largest of the operating expenses for the Company, are the cost components most
beneficially affected by clustering. The sharing of employees, as well as the
other costs mentioned, allow the Company to more efficiently utilize its
operating facilities. In the first quarter of 2000, the Company began the
process of implementing Central Processing Centers throughout North America in
order to further assist in the efficiencies of accounting and back-office
functions. Once implementation is complete, which is expected in 2001, these
Central Processing Centers will take further advantage of this clustering
concept in order to reduce personnel costs.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Both
funeral service locations and cemeteries can contain crematoria facilities. The
Company has approximately 197 combination facilities in which a funeral service
location is contained within a cemetery. The other services operations consist
of the Company's lending subsidiary, which previously provided capital financing
for independent funeral and cemetery operations. In 1999, the Company decided to
indefinitely suspend the operations of its lending subsidiary. On August 31,
2000, the Company sold a substantial portion of the loan portfolio of its
lending subsidiary. The operations of the lending subsidiary through August 31,
2000 have been included herein as other services. Subsequent to this sale date,
all activities on remaining loans will be recorded in other income in the
Company's consolidated statement of operations.
During 2000, the Company entered into definitive agreements to sell its
wholly owned insurance operations in France and the United States, thereby
discontinuing the operations of the Company's insurance segment and
reclassifying the financial statements in accordance with accounting principles
applicable to discontinued operations for all periods presented. In the third
quarter of 2000, the Company completed these transactions and recorded an after
tax loss of $43,733 associated with these disposals. The Company has entered
into marketing agreements with the purchasers, which became effective at the
closing of the transactions and are expected to produce more free cash flow for
the Company over the next several years than if the insurance operations were
owned by the Company. The marketing agreements with both the United States and
French insurance companies are also expected to provide enhanced opportunities
to sell prearranged funerals in the Company's worldwide funeral markets.
STRATEGIC INITIATIVES
Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses which resulted in creating the world's
largest network of funeral service locations and cemeteries.
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13
The Company believes this network forms the foundation of its growth initiatives
going forward. During the mid-1990s, the market to acquire funeral service
locations and cemeteries became extremely competitive which resulted in
increased acquisition prices and substantially reduced returns on invested
capital. In early 1999, the Company announced plans to significantly reduce the
level of its acquisition activity and pursue other means to create meaningful
growth from its existing operations. As a result, the Company's strategic plan
in 2000 was focused on reducing overhead costs, increasing cash flow and
reducing debt while at the same time developing key revenue initiatives designed
to drive future internal growth in the Company's core funeral and cemetery
operations without the outlay of significant capital. Management's current bonus
compensation plan is aligned with the execution of these elements of its
strategic plan.
Overhead Costs
The Company's overhead costs include corporate general and administrative
costs, regional field overhead costs and other home office costs related to
functions directly supporting field operations. As a result of the Company's
focus on overhead reduction, total overhead costs for the full year of 2000
decreased approximately 6.5% compared to the full year of 1999, excluding
overhead costs associated with the Company's trust administration functions. The
Company received substantial non-recurring receipts in 2000 from the collection
of amounts due to the Company from funeral and cemetery trust funds. To
accomplish the receipt of these funds, as well as to continue to provide normal
trust administration activities, the Company incurred approximately $11,700 more
costs in 2000 related to its trust administration functions compared to 1999. In
the first quarter of 2001, the Company outsourced its trust administration
functions to KPMG LLP which is expected to reduce future cash overhead costs
while at the same time continuing the timely collection of amounts due to the
Company from funeral and cemetery trust funds.
Operating Free Cash Flow
The Company's strategic plan in 2000 included the execution of several cash
flow initiatives that were designed to increase the Company's operating free
cash flow. The Company considers operating free cash flow to be cash funds that
can generally be used to reduce the Company's debt and is defined more
specifically in the Financial Condition, Liquidity and Capital Resources section
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company's total operating free cash flow for the year ended December
31, 2000 was $219,725, at the upper end of the Company's expected range of
$100,000 to $250,000. A summary of the Company's operating free cash flow is
shown below.
2001 OPERATING FREE
IMPROVEMENT IN CASH FLOW
1999 2000 2000 OVER 1999 RUN RATE TARGETS
-------- -------- -------------- -------------------
Total operating free cash
flow......................... $ (6,520) $219,725 $226,245 $200,000-$250,000
Recurring operating free cash
flow......................... $(88,720) $ 62,025 $150,745 $100,000-$150,000
The Company has improved total operating free cash flow by $226,245
primarily through the reduction of capital expenditures to maintenance levels
and the suspension of the Company's quarterly cash dividend. The Company also
executed several other cash initiatives in 2000 including the efficient
retrieval of funds due to the Company from certain funeral and cemetery trusts,
the realignment of preneed cemetery and prearranged funeral sales structures to
become more cash flow positive and the suspension of the Company's acquisition
program. The Company expects its total operating free cash flow (including
non-recurring receipts of funds) to be between the run rate targets of $200,000
to $250,000 by the end of 2001. Through March 15, 2001, the Company had already
received approximately $131,000 of non-recurring receipts of funds from certain
income tax refunds and from the collection of receivables from funeral and
cemetery trust funds.
Included in the Company's total operating free cash flow are receipts of
funds that are of a non-recurring nature totaling $157,700 for the full year of
2000 and $82,200 for the full year of 1999. These funds relate to the collection
of receivables due to the Company from funeral and cemetery trust funds.
Excluding these non-
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14
recurring receipts of funds, the Company's recurring operating free cash flow
was $62,025 in 2000 and a use of $88,720 in 1999. The Company continues to
implement existing and additional initiatives in 2001 to increase its recurring
operating free cash flow from 2000 levels. These cash flow initiatives are
categorized as revenue growth initiatives, working capital improvements, cost
reduction initiatives, asset redeployment and enhanced funeral and cemetery
trust administration and management. Revenue initiatives include such programs
as the Company's Dignity Memorial(TM) packaged funeral plans and the development
of affinity relationships. These initiatives are discussed in further detail in
the section Revenue Growth Initiatives included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations. Working capital
improvements include programs to accelerate customer collections and deliver
pre-sold merchandise to customers to satisfy trusting requirements. Cost
reduction initiatives include changes to the Company's employee benefit plans
and other overhead reductions primarily related to information technology costs.
The Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sale of its insurance subsidiaries and interest
savings as a result of proceeds received from divestitures completed in 2000 and
from proceeds to be received from the sale of certain North America funeral and
cemetery operations announced in January 2001. Enhanced cemetery and funeral
trust administration and management will allow the Company to increase operating
free cash flow by reducing processing times for trust claims and accelerate
trust distributions as well as the continuation of the Company's surety bond
program for additional financial assurance discussed in the Financial Assurances
section in Financial Condition, Liquidity and Capital Resources in this Form
10-K. The Company is currently in various stages of executing the above cash
flow initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow from $62,025 in 2000 to a run rate between $100,000 to $150,000 by the
end of 2001 and to a run rate between $200,000 to $250,000 by the end of 2002.
Long-Term Debt
The Company's total debt at December 31, 2000 was $3,291,297, which was
slightly below the Company's anticipated range of $3,300,000 to $3,600,000. The
Company's total debt balances are detailed below.
Peak debt at September 30, 1999................ $4,200,023
Debt at December 31, 1999...................... $4,060,016
Debt at December 31, 2000...................... $3,291,297
Target debt range at December 31, 2002......... $2,000,000-$2,500,000
The Company's debt reduction programs over the past fifteen months have
exceeded its expectations with its total debt being reduced by over $908,000 or
22% from the Company's peak debt level at September 30, 1999. The Company has
achieved this reduction of debt primarily through funds received from its total
operating free cash flow and the sale of certain assets and non-core businesses.
In 2000, the Company completed the sale of certain loans of its lending
subsidiary, the termination or assignment away of certain financial swap
agreements, the sale of its discontinued insurance operations and various other
asset sales. These transactions produced after tax cash proceeds of $489,369 in
2000 and, coupled with total operating free cash flow in 2000 were the primary
factors that allowed the Company to reduce its debt below its anticipated range
of $3,300,000 to $3,600,000 by the end of 2000.
The Company is continuing to sell certain non-strategic funeral and
cemetery operations in North America in 2001 that are not well aligned with the
Company's long-term strategy. The Company will also continue discussions with
various parties concerning the possibility of joint venturing primarily its
international operations. Alliances and joint ventures with strategic partners
could include groups that offer unique competitive advantages not previously
available to the Company, such as access to customer databases, marketing
services and prearrangement financing. Proceeds from any investments made by
strategic partners would be used by the Company to reduce its debt. With
substantial non-recurring receipt of funds expected in 2001, improvements in
recurring operating free cash flow described earlier, proceeds expected from
sales of
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certain non-strategic funeral and cemetery operations in North America and
proceeds from joint venture programs primarily with the Company's international
operations, the Company anticipates reducing its debt from the current level of
$3,291,297 to a range of $2,000,000 to $2,500,000 by the end of 2002.
Revenue Growth Initiatives
The Company has the largest network of funeral homes and cemeteries in the
world. The Company has unique opportunities to leverage this network by adding
new products and services, attracting new customers to its existing facilities
and to aggressively expand its current market share in its funeral and cemetery
markets. The Company plans to expand its market share and generate future
revenue growth through the execution of several initiatives without the outlay
of significant additional capital. Six of the Company's most important revenue
growth initiatives primarily being implemented in North America are listed
below.
- Creation of a seamless, national brand of funeral service locations under
the Dignity Memorial(TM) brand name.
- Implementation of Dignity Memorial(TM) funeral packages.
- Establishment of exclusive, national, branded affinity relationships with
employers, social, fraternal and charitable groups or institutions.
- Improvement of standards in customer service.
- Continued commitment to funeral and cemetery prearrangement.
- Expansion of cremation marketing, merchandising and services.
The development of the Dignity Memorial(TM) brand name is a unique
opportunity that the Company believes only it can pursue because of it size and
geographic diversity and creates the first national brand in the death care
industry for funeral service locations that will be recognized and portable on a
national basis. A national network with national portability of products and
services is important to the Company's current and prospective affinity
partners. The Dignity Memorial(TM) provider network will also be developed
through an affiliate program by offering non-SCI funeral service locations,
primarily in markets where the Company does not currently have coverage, the
opportunity to join the Dignity Memorial(TM) provider network and have access to
the Dignity Memorial(TM) branded products and services, prearranged funeral
funding services, merchandising expertise and Internet capabilities.
The Company is also in the process of implementing Dignity Memorial(TM)
branded funeral packages in North America which will be completed in 2001. The
Dignity Memorial(TM) funeral packages are designed to simplify customer decision
making and include new products and services which have traditionally not been
available through funeral service locations. Examples of these new products and
services include legal services, estate organizing and planning, grief
counseling and virtual family archiving services on the Internet. These new
products and services are designed to increase customer satisfaction while also
increasing funeral operating revenues and profitability.
The Company is continuing its efforts to execute agreements with affinity
partners on national, regional and local levels which provide exclusive, direct
access through mail or other agreed upon media to large groups of individuals
who meet the Company's ideal customer profile. The Company then tailors funeral
plans to suit the affinity partner's membership requirements. As an example, the
Company has begun implementation of specialized funeral plans through an
affinity relationship with the Veterans of Foreign Wars (VFW) and the VFW Ladies
Auxiliary in 2001, which includes VFW and branch of service logos, unique flag
and medal cases and specified services requested for VFW members.
Beginning in 1998 and completed in 2000, the Company implemented
comprehensive continuous customer surveys to provide valuable feedback from
consumers in order to enhance customer service and provide insight into consumer
preferences for additional products and services on a global basis. The Company
received responses from 48% of all families serviced in 2000 in North America
funeral service locations which indicated a high approval rating.
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The Company also remains committed to prearrangement programs with
consumers for funeral and cemetery products and services, which the Company
believes can increase future market share in its funeral service and cemetery
markets. At December 31, 2000, the Company had deferred preneed cemetery
contract revenues of $1,815,157 which will be recognized as revenues in future
periods. See note six to the consolidated financial statements in Item 8 of this
Form 10-K for further discussion of preneed cemetery sales activities. During
2000, the Company restructured its prearranged organization and compensation
plans to improve the cash flows from the Company's prearrangement activities. In
addition to funding approximately 75% of prearranged funeral contracts through
insurance sources creating general agency revenue and cash overrides, the
Company also introduced direct-to-consumer prearranged marketing in North
America in 2000 which opens a new marketing channel with consumers to expand the
scope of the Company's prearragement activities. The funds collected from
consumers for prearranged funeral contracts are generally placed in trust
accounts (pursuant to applicable law) or are used to pay premiums on life
insurance policies from third party insurers. At December 31, 2000, the Company
had deferred prearranged funeral contracts of $4,537,669. The recognition of
deferred prearranged funeral contract revenues is estimated to occur in the
following years as follows:
2001..................................................... $ 396,000
2002..................................................... 371,000
2003..................................................... 307,000
2004..................................................... 308,000
2005..................................................... 279,000
2006 through 2010........................................ 1,071,000
2011 and thereafter...................................... 1,805,669
----------
$4,537,669
==========
The Company also believes that there are significant opportunities
available to increase market share in the cremation segment of its markets
through more effective marketing of cremation products and services. While the
Company will continue to expand cremation memorialization products and services
at its traditional funeral service locations and cemeteries, the Company also
plans to expand the Company owned largest single provider of cremation services
in North America, National Cremation Service(R), from its existing base in ten
states into seven additional states by the end of 2002.
ACCOUNTING CHANGE
In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB No. 101)
which changes the Company's accounting policies regarding the manner in which
the Company records preneed sales activities. The implementation of SAB No. 101
had no effect on the consolidated cash flows of the Company. The accounting
change, which occurred as a result of the required implementation of SAB No.
101, has been treated as a change in accounting principle effective as of the
beginning of 2000. In general, the change requires the Company to recognize
preneed cemetery interment right revenue from constructed cemetery property when
at least 10% of the sales price is received in cash from the customer, defer all
preneed cemetery merchandise and service revenues and associated trust
investment earnings until the merchandise is delivered or the services are
performed, and to defer only obtaining costs that vary with and are primarily
related to the acquisition of new preneed cemetery and funeral business. For a
more detailed discussion of these changes, see note three to the consolidated
financial statements in Item 8 of this Form 10-K. The cumulative effect of these
changes resulted in an after tax charge of $909,315 or $3.34 per diluted share.
Generally, these changes will result in reduced cemetery revenues and
operating income and reduced funeral operating income in the near future. These
changes are due to the deferral of previously recognized preneed cemetery
merchandise, services and associated trust fund income until the merchandise is
delivered or the service is performed and recognizing as period costs certain
direct selling and marketing costs previously deferred associated with preneed
funeral activities.
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RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for
the years ended December 31, 2000, 1999 and 1998. As previously disclosed, the
Company implemented SAB No. 101 in 2000 which primarily changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. For purpose of the following discussion, 2000 financial
information is presented as reported with the implementation of SAB No. 101 at
the beginning of 2000, 1999 financial information is presented on a proforma
basis as if SAB No. 101 had been implemented during 1999 and an historical
basis, and 1998 financial information is presented as originally reported. All
comparisons in this results of operations section between 2000 and 1999 will be
discussed using proforma 1999 amounts. All comparisons in this results of
operations section between 1999 and 1998 will be discussed using historical 1999
amounts and information previously reported by the Company. The Company has
excluded the results of operations of its discontinued insurance operations from
the following discussions for years 2000, 1999 and 1998. During 2000, the
Company completed the sale of its discontinued insurance operations to third
parties. Results for the Company's continuing operations by geographic segment
are detailed in the following tables:
AS REPORTED
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,185,110 68.2% $659,295 96.1% $ 67,564 47.7% $1,911,969 74.5%
Cemetery.................. 540,410 31.1% 26,904 3.9% 73,953 52.3% 641,267 25.0%
Other Services............ 11,494 0.7% -- -- -- -- 11,494 0.5%
---------- ----- -------- ----- -------- ----- ---------- -----
$1,737,014 100.0% $686,199 100.0% $141,517 100.0% $2,564,730 100.0%
========== ===== ======== ===== ======== ===== ========== =====
Gross profit and margin
percentage:
Funeral................... $ 220,467 18.6% $ 38,509 5.8% $ 7,939 11.8% $ 266,915 14.0%
Cemetery.................. 41,558 7.7% 5,275 19.6% 11,599 15.7% 58,432 9.1%
Other Services............ 2,295 20.0% -- -- -- -- 2,295 20.0%
---------- ----- -------- ----- -------- ----- ---------- -----
$ 264,320 15.2% $ 43,784 6.4% $ 19,538 13.8% $ 327,642 12.8%
========== ===== ======== ===== ======== ===== ========== =====
PROFORMA
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,183,829 65.6% $769,014 96.5% $ 57,373 39.7% $2,010,216 73.2%
Cemetery.................. 598,852 33.2% 28,164 3.5% 87,124 60.3% 714,140 26.0%
Other Services............ 20,758 1.2% -- -- -- -- 20,758 0.8%
---------- ------ -------- ----- -------- ----- ---------- ------
$1,803,439 100.00% $797,178 100.0% $144,497 100.0% $2,745,114 100.0%
========== ====== ======== ===== ======== ===== ========== ======
Gross profit and margin
percentage:
Funeral................... $ 229,930 19.4% $ 55,737 7.2% $ 5,186 9.0% $ 290,853 14.5%
Cemetery.................. 40,472 6.8% 3,075 10.9% 23,842 27.4% 67,389 9.4%
Other Services............ (29,467) (141.9)% -- -- -- -- (29,467) (141.9)%
---------- ------ -------- ----- -------- ----- ---------- ------
$ 240,935 13.4% $ 58,812 7.4% $ 29,028 20.1% $ 328,775 12.0%
========== ====== ======== ===== ======== ===== ========== ======
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AS REPORTED
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,183,829 58.6% $780,206 95.8% $ 75,313 43.8% $2,039,348 67.8%
Cemetery.................. 816,695 40.4% 34,363 4.2% 96,794 56.2% 947,852 31.5%
Other Services............ 20,758 1.0% -- -- -- -- 20,758 0.7%
---------- ------ -------- ----- -------- ----- ---------- ------
$2,021,282 100.0% $814,569 100.0% $172,107 100.0% $3,007,958 100.0%
========== ====== ======== ===== ======== ===== ========== ======
Gross profit and margin
percentage:
Funeral................... $ 274,199 23.2% $ 79,270 10.2% $ 13,025 17.3% $ 366,494 18.0%
Cemetery.................. 205,040 25.1% 10,823 31.5% 31,856 32.9% 247,719 26.1%
Other Services............ (29,467) (141.9)% -- -- -- -- (29,467) (141.9)%
---------- ------ -------- ----- -------- ----- ---------- ------
$ 449,772 22.3% $ 90,093 11.1% $ 44,881 26.1% $ 584,746 19.4%
========== ====== ======== ===== ======== ===== ========== ======
AS REPORTED
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,007,462 56.1% $765,532 96.8% $ 56,142 51.5% $1,829,136 67.8%
Cemetery.................. 768,229 42.8% 25,564 3.2% 52,808 48.5% 846,601 31.4%
Other Services............ 20,580 1.1% -- -- -- -- 20,580 0.8%
---------- ----- -------- ----- -------- ----- ---------- -----
$1,796,271 100.0% $791,096 100.0% $108,950 100.0% $2,696,317 100.0%
========== ===== ======== ===== ======== ===== ========== =====
Gross profit and margin
percentage:
Funeral................... $ 287,012 28.5% $ 88,541 11.6% $ 9,054 16.1% $ 384,607 21.0%
Cemetery.................. 282,754 36.8% 7,936 31.0% 15,471 29.3% 306,161 36.2%
Other Services............ 9,441 45.9% -- -- -- -- 9,441 45.9%
---------- ----- -------- ----- -------- ----- ---------- -----
$ 579,207 32.2% $ 96,477 12.2% $ 24,525 22.5% $ 700,209 26.0%
========== ===== ======== ===== ======== ===== ========== =====
For the year ended December 31, 2000, the Company reported total revenues
from continuing operations of $2,564,730, representing a 6.6% decrease compared
to proforma total revenues for 1999 of $2,745,114. Gross profit from continuing
operations was relatively flat compared to the proforma results of 1999, while
the gross margin percentage increased slightly in 2000 to 12.8% compared to
12.0% from proforma 1999 results.
Funeral
Funeral revenues decreased from $2,010,216 in 1999 to $1,911,969 in 2000.
This decrease in funeral revenues was primarily attributable to a foreign
currency translation effect of approximately $100,000 negatively affecting
European funeral revenues in 2000 compared to 1999. The Company performed 6.0%
less funeral services in its European funeral service locations in 2000 compared
to 1999 as a result of a reduction in the number of deaths in Europe and from
losses in market share in the Company's French funeral service locations
primarily as a result of increased and new competition from the deregulation of
the funeral industry in France. For further information on the deregulation of
the funeral industry in France, see the section Regulation in Item 1 of this
Form 10-K. The Company reorganized its European management team in late 2000 to
try to stabilize its market share in France. The average revenue per funeral
service increased 0.8% in 2000 compared to 1999 in European funeral service
locations.
Funeral revenues in North America increased $1,281 in 2000 compared to
1999. North America funeral service locations performed 0.8% less funeral
services in 2000 compared to 1999 while the average revenue per funeral service
increased by 1.0% during 2000 from 1999 levels. In the fourth quarter of 2000,
the average revenue per funeral service in North America funeral service
locations increased 2.6% compared to the same
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period of 1999, an increase attributable to the Company's revenue growth
initiatives, such as the introduction of Dignity Memorial(TM) funeral packages
discussed earlier taking effect in the latter half of 2000.
Funeral gross profits decreased $23,938 in 2000 compared to 1999. While
funeral gross profits in North America decreased slightly in 2000 compared to
1999 as a result of less funeral services performed and inflationary cost
increases, most of the decrease in gross profits was attributable to funeral
gross profits decreasing $17,228 in European funeral service locations. The
primary reason for this decrease in funeral gross profits was a reduction in the
number of deaths in 2000 in Europe compared to 1999 as well as losses in market
share in French funeral service locations.
Funeral revenues increased by $210,212 in 1999 compared to 1998 primarily
as a result of acquisitions. Funeral revenues in North America funeral service
locations increased in 1999 compared to 1998 primarily as a result of the
Company's acquisition in January 1999 of Equity Corporation International (ECI),
formerly the fourth largest company in the death care industry. The Company also
acquired funeral service locations in Spain, Norway and the Netherlands in 1999
resulting in increased funeral revenues in European funeral service locations in
1999 compared to 1998. Funeral gross profits decreased by $18,113 in 1999
compared to 1998 primarily due to higher costs at acquired locations,
specifically related to the Company's merger with ECI in January 1999.
Typically, acquisitions will temporarily exhibit lower gross profit margins
until these locations have been fully assimilated into the Company's clusters.
Further, the gross margin percentage at ECI locations had been historically
lower than the Company's gross margin percentages and this has negatively
affected the total gross margin percentage in North America. The decrease in
European gross profit and margin percentage in 1999 was primarily the result of
less funeral services performed causing reduced profit due to the Company's
fixed cost structure, coupled with delays in labor negotiations in France
related to cost rationalization programs.
Cemetery
Cemetery revenues decreased from $714,140 in 1999 to $641,267 in 2000. This
decrease in cemetery revenues was primarily attributable to decreases in
revenues in North America cemetery operations. North America cemetery revenues
decreased $58,442 in 2000 compared to 1999 as a result of significant changes to
cemetery employee compensation plans which began to be implemented in late 1999.
The Company changed the cemetery employee compensation plans to increase cash
flow in this business segment which had the impact of adversely affecting
cemetery revenues in 2000.
Cemetery gross profits decreased from $67,389 in 1999 to $58,432 in 2000.
This decrease in cemetery gross profits was primarily attributable to higher
cancellation costs in cemetery operations in South America included in the
Company's other foreign cemetery segment. Cemetery gross profits in North
America increased by $1,086 in 2000 compared to 1999 as a result of the above
mentioned changes to cemetery employee compensation plans and other cost
measures in North America cemetery operations.
Cemetery revenues increased by $101,251 in 1999 compared to 1998 primarily
as a result of acquisitions. The increase of $48,466 in 1999 North America
cemetery revenues compared to 1998 was primarily the result of an increase in
revenues as a result of the Company's January 1999 merger with ECI, partially
offset by the decrease of net cemetery trust earnings and a reduction of
operating earnings related to the sale of excess undeveloped cemetery property.
The increases in revenue of $8,799 from European operations in 1999 compared to
1998 were the result of acquisitions in the United Kingdom and Belgium in 1999
and the $43,986 increase in 1999 revenues compared to 1998 from other foreign
operations was the result of acquisitions in Chile, Argentina and Uruguay.
Cemetery gross profits decreased by $58,442 in 1999 compared to 1998
primarily as a result of increased costs from North America cemetery operations.
These increased costs were primarily the result of increases in property costs
and commission expenses, prior to the implementation of the above mentioned
changes to cemetery employee compensation plans in late 1999, related to
heritage cemetery property sales initiatives coupled with reductions in net
cemetery trust earnings and operating earnings related to the sale of excess
undeveloped cemetery property. The 1999 increase of $16,385 in other foreign
gross profits was the result of
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increases in the gross margin percentage from the Company's acquired South
American operations. The gross margin percentage in Argentina improved to 24.0%
in 1999 from 19.4% in 1998.
Other Services
The Company's other services operations consist of the Company's lending
subsidiary, which previously provided capital financing for independent funeral
and cemetery operations. In 1999, the Company decided to indefinitely suspend
the operations of its lending subsidiary. On August 31, 2000, the Company sold a
substantial portion of the loan portfolio of its lending subsidiary. The
operations of the lending subsidiary through August 31, 2000 have been included
herein as other services. Subsequent to this sale date, all activities on
remaining loans have been recorded in other income in the Company's consolidated
statement of operations.
The Company acquired by deed in lieu of foreclosure the collateral
underlying certain loans in its portfolio. The Company recorded a provision for
loan losses of $38,608 in 1999 associated with the lending subsidiary's loans
that were not being held for sale. See note seventeen to the consolidated
financial statements in Item 8 of this Form 10-K for further discussion of these
non-recurring charges related to the Company's lending subsidiary.
Other Income and Expenses
The Company's general and administrative expenses decreased from $82,585 in
1999 to $79,932 in 2000. General and administrative expenses were higher in 1999
than 2000 primarily due to higher information technology costs in 1999 related
to year 2000 (Y2K) preparation, implementation of EVA(R) based incentive
compensation models and the Company's North America proprietary point of sale
systems that were placed into production in 1999. General and administrative
expenses were $66,839 in 1998 which were lower than 1999 levels due to the high
expenses in 1999 noted above.
Interest expense was $281,548 in 2000 compared to $238,185 in 1999 and
$177,053 in 1998. The increase in interest expense in 2000 over 1999 and 1998
levels reflects the high financing costs associated with the use of the
Company's credit facilities in 2000 rather than its commercial paper programs in
1999 and 1998, as well as overall interest rate increases. The Company has made
substantial progress in 2000 in reducing its debt and expects interest expense
to be in the range of $230,000 and $250,000 in 2001.
Other income was $34,636 in 2000 compared to $31,759 for 1999 and $43,649
in 1998. Other income primarily contains income from various notes receivable of
the Company's lending subsidiary subsequent to August 31, 2000 (see earlier
discussion of other services operations), equity from earnings of investments in
certain companies, gains and losses from the sales of businesses that are
disposed of for strategic or government mandated purposes and cash overrides
from prearranged funeral sales with the Company's formerly owned insurance
operations in North America and France (see discontinued operations discussions
in Item 1 of this Form 10-K).
Cremations
In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is more stable. The west coast of the United States and the
states of Arizona and Florida have the highest concentration of cremation
consumers in North America. While cremations performed by the Company in North
America typically have higher gross profit margins than traditional funeral
services, cremations usually result in lower revenue and gross profit dollars to
the Company than traditional funeral services. In North America during 2000,
36.3% of all funeral services performed by the Company were cremation cases,
compared to 33.9% performed in 1999. The Company in 2000 continued to expand its
cremation memorialization products and services in several North America markets
which has resulted in higher average sales for cremation cases compared to
historical levels. The Company also continues to expand its nationally branded
cremation service locations called National Cremation Service(R) (NCS). NCS
currently operates in ten high cremation states and has plans to continue to
expand into seven additional
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high cremation states. The Company believes that the NCS consumer would not have
chosen the Company's traditional funeral service locations as an alternative to
NCS, and therefore is considered an incremental customer to the Company.
Restructuring and Non-Recurring Charges
In 2000, the Company recorded several non-recurring items related to
extraordinary gains on early extinguishments of debt, net losses associated with
the sales of the Company's discontinued insurance operations, estimated losses
from the planned divestitures of certain North America funeral homes and
cemeteries, the reduction of the carrying value of an equity investment in North
America, a loss on the sale of a minority interest in the stock of the Company's
United Kingdom operations and certain changes to estimates in the Company's
restructuring and non-recurring charges recorded in 1999. The above
non-recurring items resulted in the Company incurring charges of $453,067 on a
pretax basis or $1.64 per diluted share in 2000. In 1999, the Company recorded
non-recurring items related to cost rationalization programs, a provision for
loan losses related to the Company's lending subsidiary and extraordinary gains
on early extinguishments of debt. These items resulted in the Company recording
net non-recurring charges of $398,080 on a pretax basis or $.98 per diluted
share in 1999. For further information detailing these non-recurring items
recorded in 2000 and 1999, see note seventeen to the consolidated financial
statements in Item 8 of this Form 10-K.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses which resulted in creating the world's
largest network of funeral service locations and cemeteries. Funding required
for the Company's acquisition program had historically been generated through
public and private offerings of debt and the issuance of equity securities
supplemented by the Company's revolving credit facilities and commercial paper.
In early 1999, the Company announced plans to significantly reduce the level of
its acquisition activity and pursue other means to create meaningful growth from
its existing operations. As a result, the Company's strategic plan in 2000 was
focused on reducing overhead costs, increasing cash flow and reducing its debt.
The Company executed several cash flow initiatives in 2000 related to ongoing
operations of the Company that were designed to increase the Company's operating
free cash flow. The Company also executed initiatives in 2000 resulting in cash
flows from the sale of certain assets and non-core businesses. The Company's
initiatives related to ongoing operations of the Company included the reduction
of capital expenditures to maintenance levels, the efficient retrieval of funds
due to the Company from certain funeral and cemetery trusts, the realignment of
preneed cemetery and prearranged funeral sales structures to become more cash
flow positive and the suspension of the Company's quarterly cash dividend and
acquisition program. During 2000, the Company also completed the sale of certain
loans of its lending subsidiary, terminated or assigned away certain financial
swap agreements, sold its discontinued insurance operations and sold various
other assets.
The reduction of capital expenditures to maintenance levels, suspension of
the Company's quarterly cash dividend and the implementation of other cash flow
initiatives and sales of assets and non-core businesses significantly improved
the Company's operating free cash flow and created substantial cash proceeds in
2000 which were used by the Company to reduce its debt. The Company defines
operating free cash flow as adjusted cash flow from operating activities, less
capital expenditures and dividends paid. Adjusted cash flow from operating
activities includes cash flow provided by operating activities as reflected in
the consolidated statement of cash flow adjusted to exclude (i) cash flow
provided by operating activities of the Company's discontinued insurance
operations, (ii) cash payments associated with the Company's non-recurring and
restructuring charges in 1999 and 2000 and (iii) other proceeds or payments
(included in cash flow provided by operating activities) which are of a
non-recurring operational nature. Generally, operating free cash flow is cash
funds that can be used to reduce the Company's debt.
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The following details the Company's execution during 2000 towards its goals
of increasing its operating free cash flow, as well as certain goals for 2001
and 2002.
TWELVE MONTHS YEAR 2000
ENDED BENCHMARKS 2001 2002
DECEMBER 31, 2000 ACHIEVED RUN RATE TARGETS RUN RATE TARGETS
----------------- ----------------- ----------------- -----------------
Operating free cash flow:
Consolidated cash flow provided by
operating activities.................. $ 368,240(1)
Amount pertaining to discontinued
insurance operations.................. (144,640)
Payments on restructuring charges....... 46,655
Effect of swap agreement terminations... 32,840
---------
Adjusted cash flow from operating
activities............................ 303,095
Capital expenditures.................... (83,370)
---------
TOTAL OPERATING FREE CASH FLOW............ $ 219,725 $100,000-$250,000 $200,000-$250,000 --
Less: Non-recurring receipts of funds... (157,700)
---------
RECURRING OPERATING FREE CASH FLOW........ $ 62,025 -- $100,000-$150,000 $200,000-$250,000
=========
Estimated after tax proceeds from sales of
assets and non-core businesses.......... $ 489,369 $200,000-$500,000 $200,000-$500,000 --
========= ================= ================= =================
TOTAL CASH FLOW AVAILABLE......... $ 709,094 $300,000-$750,000 $400,000-$750,000 --
========= ================= ================= =================
- ---------------
(1) The net effect of prearranged funeral production and maturities has been
reclassed from cash flows from investing activities to cash flows from
operating activities as discussed in note two to the consolidated financial
statements in Item 8 of this Form 10-K.
Included in the Company's total operating free cash flow in 2000 of
$219,725 are non-recurring receipts of funds totaling $157,700 relating to the
collection of receivables due to the Company from funeral and cemetery trust
funds. The Company continues to implement existing and additional initiatives in
2001 to increase its recurring operating free cash flow from 2000 levels. These
cash flow initiatives are categorized as (i) revenue growth initiatives, (ii)
working capital improvement, (iii) cost reduction initiatives, (iv) asset
redeployment, and (v) enhanced funeral and cemetery trust administration and
management. Revenue initiatives include such programs as the Company's Dignity
Memorial(TM) packaged funeral plans and the development of affinity
relationships. These initiatives are discussed in further detail in Revenue
Growth Initiatives included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Working capital improvements
include programs to accelerate customer collections and deliver pre-sold
merchandise to customers to satisfy trusting requirements. Cost reduction
initiatives include changes to the Company's employee benefit plans and other
overhead reductions primarily related to information technology costs. The
Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently, such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sales of its insurance operations and interest
savings as a result of proceeds received from divestitures completed in 2000 and
from proceeds to be received from the sale of certain North America funeral and
cemetery operations announced in January 2001. Enhanced cemetery and funeral
trust administration and management will allow the Company to increase operating
free cash flow by reducing processing times of trust claims and accelerate trust
distributions as well as the continuation of the Company's surety bond program
for additional financial assurance discussed in the Financial Assurances section
herein. The Company is currently in various stages of executing the above cash
flow initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow from $62,025 in 2000 to a run rate between $200,000 to $250,000 by the
end of 2002. The Company also expects recurring operating free cash flow to have
a run rate between $100,000 to $150,000 by the end of 2001 as a result of the
implementation of its current cash flow initiatives.
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The Company's total debt at December 31, 2000 was $3,291,297, which was
slightly below the Company's anticipated range of $3,300,000 to $3,600,000. The
Company's total debt balances are detailed below.
Peak debt at September 30, 1999............... $4,200,023
Debt at December 31, 1999..................... $4,060,016
Debt at December 31, 2000..................... $3,291,297
Target debt range at December 31, 2002........ $2,000,000 - $2,500,000
The Company's debt reduction programs over the past fifteen months have
exceeded its expectations with its total debt being reduced by over $908,000 or
22% from the Company's peak debt level at September 30, 1999. The Company has
achieved this reduction of debt primarily through funds received from its total
operating free cash flow and the sale of certain assets and non-core businesses,
both discussed earlier in this section. The Company is continuing to sell
certain funeral and cemetery operations in North America in 2001 that are not
well aligned with the Company's long-term strategy. The Company will also
continue discussions with various parties concerning the possibility of joint
venturing primarily its international operations. Alliances and joint ventures
with strategic partners could include groups that offer unique competitive
advantages not previously available to the Company, such as access to customer
databases, marketing services and prearrangement financing. Proceeds from any
investments made by strategic partners will be used by the Company to reduce its
debt. With substantial non-recurring receipt of funds expected in 2001,
improvements in recurring operating free cash flow described earlier, proceeds
expected from sales of certain funeral and cemetery operations in North America
and proceeds from joint venture programs with the Company's international
operations, the Company anticipates reducing its debt from the current level of
$3,291,297 to a range of $2,000,000 to $2,500,000 by the end of 2002.
At December 31, 2000, the Company had current maturities of long-term debt
of $176,782. The Company anticipates having funds available to eliminate these
current maturities in 2001 through recurring operating free cash flow, proceeds
from certain asset sales or joint venturing programs and other non-recurring
receipts of funds. Through March 15, 2001, the Company had already received
approximately $131,000 of non-recurring funds from certain income tax refunds
and from the collection of receivables from funeral and cemetery trust funds.
Of the Company's total long-term debt at December 31, 2000 of $3,114,515,
the largest component is related to the Company's primary credit agreements
maturing in June 2002. These credit agreements provide for borrowing up to
$988,287 as of December 31, 2000 and consist of two committed facilities -- a
2-year term loan and a 5-year, multi-currency revolving facility, both due in
June 2002. These credit agreements were amended effective November 2000.
Significant terms of the amendments include certain agreements made by the
Company to reduce commitment amounts on the credit facilities based upon net
cash proceeds generated from joint venture and asset sale transactions closed
after November 2000; changes to definitions and calculations of financial
covenants related to a maximum debt-to-capitalization ratio, a minimum interest
coverage ratio and a minimum net worth requirement; limits on the amount of
Company assets that could be joint ventured or sold; and certain restrictions on
future acquisition activity without lender approval. Under the terms of the
amended credit agreements, the covenants will continue to be calculated using
information without the implementation of SAB No. 101, until such time as the
Company negotiates revised covenant calculations under the credit agreements.
For further information on these credit facilities, see note eight to the
consolidated financial statements in Item 8 of this Form 10-K. As of March 26,
2001, the Company had $658,455 outstanding under these credit agreements which
provided for borrowings of up to $975,279 on this date. With non-recurring
receipts of funds expected in 2001 and 2002, improvements in recurring operating
free cash flow described earlier, proceeds expected from sales of certain
funeral and cemetery operations in North America and proceeds from joint venture
programs primarily with the Company's international operations, the Company
believes funds will be available to reduce these maturities due in 2002 allowing
for the refinancing of remaining balances outstanding, if any.
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EBITDA
The Company reported EBITDA before non-recurring items for the years ended
December 31, 2000 and 1999 of $532,453 and $586,273, respectively. EBITDA
included continuing and discontinued operations for both periods and is
calculated by adding depreciation and amortization expense and interest expense
to the Company's pretax earnings after excluding non-recurring items defined in
the section Restructuring and Non-Recurring Charges in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Financial Assurances
In support of the Company's operations, the Company has entered into
arrangements with certain insurance companies whereby such insurance companies
agree to issue surety bonds on behalf of the Company, as financial assurance
and/or as required by existing state and local regulations. The surety bonds are
used for various business purposes; however, the majority of the surety bonds
issued and outstanding have been issued to support the Company's prearranged
funeral and preneed cemetery activities. The underlying obligations that such
surety bonds insure are appropriately recorded on the Company's consolidated
balance sheet as Deferred prearranged funeral contract revenues and Deferred
preneed cemetery contract revenues (see notes five and six to the consolidated
financial statements in Item 8 of this Form 10-K for further details regarding
the Company's prearranged funeral and preneed cemetery activities). The total
surety bonds outstanding as of December 31, 2000 and 1999 were $215,350 and
$182,322, respectively.
Sources and Uses of Cash
Net cash provided by operating activities was $368,240 in 2000 compared to
$393,610 in 1999. Included in these totals is $144,640 and $141,650 of net cash
provided by discontinued operations for 2000 and 1999, respectively. From
continuing operations, net cash provided by operating activities was $223,600 in
2000 compared to $251,960 in 1999. The Company received non-recurring receipts
of funds of $157,700 and $82,200 in 2000 and 1999, respectively, relating to the
collection of receivables from certain funeral and cemetery trust funds which
are included in net cash provided by continuing operations. Excluding these non-
recurring receipts of funds, net cash provided by continuing operations
decreased by approximately $104,000 in 2000 compared to 1999 primarily as a
result of decreases in the gross profits of the Company's core funeral and
cemetery operations in 2000 compared to 1999, increases in cash interest paid as
well as from increases in other assets in 2000 related to federal income tax
refunds to be received in 2001.
Net cash provided by investing activities from continuing and discontinued
operations was $193,068 in 2000 compared to net cash used in investing
activities of $384,742 in 1999. Included in these totals are $122,966 and
$197,587 of net cash used in investing activities by discontinued operations in
2000 and 1999, respectively. The Company limited its capital expenditures to
maintenance levels in 2000 resulting in a reduction of cash used for capital
expenditures of $123,761 in 2000 compared to 1999. The Company also received in
2000 substantial proceeds from sales of assets and non-core businesses which are
included in net cash provided by investing activities in 2000.
Net cash used in financing activities was $564,463 in 2000 compared to
$266,756 in 1999. The Company used substantial proceeds from sales of assets and
non-core businesses and from operating free cash flow to make substantial
reductions to its debt in 2000 which is reflected in the Company's financing
activities.
OTHER MATTERS
Subsequent to December 31, 2000, the Company adopted Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities: An Amendment of FASB Statement 133," in accordance
with the extension provided for in SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." In accordance with these Standards, the Company will
recognize a charge to income, net of applicable taxes, of approximately $7,500
in the first quarter of 2001. These statements establish accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or
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liabilities in the statement of financial position and measurement of those
instruments at fair value. Changes in the fair value of derivatives will be
recorded either in earnings or in other comprehensive income, based on the type
of risk for which the instrument is determined to be an effective hedge. Any
change in fair value of an instrument that is not designated as a hedge, or any
portion of a change in fair value of a hedging instrument that is deemed
ineffective, will be immediately recognized in earnings.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be accompanied by words such
as "believe," "estimate," "project," "expect," "anticipate" or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however, many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results of the Company to differ materially
from those in forward-looking statements include, among others, the following:
1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g. marketable security
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly but not limited to, levels of
interest expense and negative currency translation effects.
2) Changes in credit relationships impacting the availability of
credit and the general availability of credit in the marketplace.
3) The Company's ability to successfully implement and complete its
strategic plan as defined in this Form 10-K, including the interest of
third parties to enter into and consummate alliances and joint ventures
with the Company.
4) The Company's ability to generate expected proceeds from the sale
of certain funeral and cemetery operations and to implement plans to
improve recurring operating free cash flow.
5) Changes in consumer demand and/or pricing for the Company's
products and services caused by several factors, such as changes in local
death rates, cremation rates, competitive pressures and local economic
conditions.
6) The Company's ability to successfully implement ongoing cost
reduction initiatives, as well as changes in domestic and international
economic, political and/or regulatory environments, which could negatively
effect the implementation of the Company's cost reduction initiatives.
7) The Company's ability to successfully implement certain strategic
revenue and marketing initiatives resulting in increased volume through its
existing facilities.
8) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies.
9) The Company's ability to successfully exploit its substantial
purchasing power with certain of the Company's vendors.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information presented below should be read in conjunction with notes
nine and ten to the consolidated financial statements in Item 8 of this Form
10-K.
The Company historically used derivatives primarily in the form of interest
rate swaps and cross-currency interest rate swaps in combination with local
currency borrowings in order to manage its mix of fixed and floating rate debt
and to hedge the Company's net investment in foreign assets. The derivative
instruments held by the Company were for hedging purposes and were neither
leveraged nor speculative in nature.
In 2000, the Company eliminated its participation in derivative
transactions by terminating or assigning away all foreign currency and interest
rate swaps as mentioned in note nine to the consolidated financial statements in
Item 8 of this Form 10-K, thereby removing the Company's hedges of foreign
exchange rate and interest rate exposure and the diversification of floating
rate exposure mentioned above.
At December 31, 2000, the Company's total debt consisted of approximately
76% of fixed interest rate debt at a weighted average rate of 6.81% and
approximately 24% of floating interest rate debt at a weighted average rate of
7.94%. At December 31, 1999, after giving consideration to the interest rate
swaps, the Company's total debt consisted of approximately 61% of fixed interest
rate debt at a weighted average rate of 6.36% and approximately 39% of floating
interest rate debt at a weighted average rate of 6.49%. Approximately 35% of the
Company's floating rate exposure, as of December 31, 2000, is based in eight
markets other than the United States (28% at December 31, 1999).
The Company does not have a significant investment in foreign operations
that are in highly inflationary economies. Approximately 24% of the Company's
net investment and 26% of its operating income are denominated in foreign
currencies at December 31, 2000.
Marketable Equity and Debt Securities -- Price Risk
In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise sales, the affiliated funeral and cemetery trust funds own
investments in equity securities and mutual funds which are sensitive to current
market prices. Cost and market values as of December 31, 2000 and 1999, are
presented in notes five and six to the consolidated financial statements in Item
8 of this Form 10-K.
Market-Rate Sensitive Instruments -- Interest Rate and Currency Risk
At December 31, 2000, the Company's debt instruments were subject to
interest rate and currency exchange rate risk. The Company performs sensitivity
analyses to assess the impact of these risks on earnings. This analysis reflects
the impact of a hypothetical 10% adverse change in market rates. In actuality,
market rate volatility is dependent on many factors that are impossible to
forecast. Therefore, the adverse changes described below could differ
substantially from the hypothetical 10% impact.
A sensitivity analysis of those instruments with variable interest rate
components was modeled to assess the impact that changing interest rates could
have on pretax earnings. The sensitivity analysis assumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pretax earnings, on an annual
basis, would be negatively impacted by approximately $6,301 on December 31,
2000, and $9,402 on December 31, 1999.
A similar model was used to assess the impact of changes in foreign
currencies on interest expense. At December 31, 2000, the Company's debt
exposure was primarily associated with the British pound, Canadian dollar and
Australian dollar. A 10% adverse change in the strength of the U.S. dollar
against these currencies would have negatively impacted the Company's interest
expense, on an annual basis, by approximately $1,998 on December 31, 2000, and
$11,451 on December 31, 1999.
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27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 27
Consolidated Statement of Operations for the three years
ended December 31, 2000................................... 28
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... 29
Consolidated Statement of Cash Flows for the three years
ended December 31, 2000................................... 30
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2000............................. 31
Notes to Consolidated Financial Statements.................. 32
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 64
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
26
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Service Corporation International
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Service Corporation International at December 31, 2000 and 1999, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with a