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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $10,632,528,700 based upon a closing market price of $42.50 on
March 26, 1998 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.
The number of shares outstanding of the registrant's common stock as of
March 26, 1998 was 255,840,952 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1998
Annual Meeting of Shareholders (Part III)
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PART I
ITEM 1. BUSINESS.
Service Corporation International was incorporated in Texas on July 5,
1962. The term "Company" or "SCI" includes the registrant and its subsidiaries,
unless the context indicates otherwise.
The Company is the largest provider of death care services in the world. At
December 31, 1997, the Company operated 3,127 funeral service locations, 392
cemeteries and 166 crematoria located in 17 countries on five continents. In
addition, the Company provides capital financing to independent funeral home and
cemetery operators.
The Company has continued to expand through the acquisition of funeral
service locations, cemeteries and crematoria, both domestically and
internationally. In 1997, the Company acquired 294 funeral service locations, 51
cemeteries and 19 crematoria. The Company has acquired most of its present
operations through acquisitions. For information regarding acquisitions, see
Note 3 to the consolidated financial statements in Item 8 of this Form 10-K.
For financial information about the Company's industry segments, including
the identifiable assets of the Company by industry segments, see Note 14 to the
consolidated financial statements in Item 8 of this Form 10-K.
FUNERAL AND CEMETERY OPERATIONS
The Funeral and Cemetery Operations consist of the Company's funeral
service locations, cemeteries and related businesses. The operations are
organized into two North American divisions covering the United States and
Canada and an international division responsible for all operations in Europe,
the Pacific Rim and South America. Each division is under the direction of
divisional executive management with substantial industry experience. Local
funeral service location and cemetery managers, under the direction of the
divisional management, receive support and resources from SCI's headquarters in
Houston, Texas and have substantial autonomy with respect to the manner in which
services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, including the
sharing of service personnel, vehicles, preparation services, clerical staff and
certain building facility costs.
Funeral Service Locations. The funeral service locations provide all
professional services relating to funerals, including the use of funeral
facilities and motor vehicles. Funeral service locations sell caskets, coffins,
burial vaults, cremation receptacles, flowers and burial garments, and certain
funeral service locations also operate crematoria. At December 31, 1997, the
Company owned 147 funeral service location/cemetery combinations and operated 54
flower shops engaged principally in the design and sale of funeral floral
arrangements. These flower shops provide floral arrangements to some of the
Company's funeral homes and cemeteries.
In addition to selling its services and products to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets, including foreign markets. Funeral prearrangement is a means
through which a customer contractually agrees to the terms of a funeral to be
performed in the future. The funds collected from prearranged funeral contracts
are generally held in trust, are used to purchase life insurance or annuity
contracts from third party insurers or, with respect to French contracts, are
held in the Company's French insurance subsidiary. This French insurance
subsidiary sells prearranged funeral insurance contracts primarily in connection
with the Company's French funeral service operations. Funds paid on prearranged
funerals may not be withdrawn until the funeral is performed or until
cancellation by the customer. At December 31, 1997, the Company's unfulfilled
prearranged funeral contracts, including accumulated trust fund earnings and
increased benefits on insurance products, amounted to $3.163 billion, of which
$274 million is estimated to be fulfilled in 1998. The unfulfilled prearranged
funeral
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contracts at December 31, 1996 were $2.726 billion. For additional information
concerning prearranged funeral activities, see Note 4 to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses and generally continue to be
operated under the same name as before acquisition.
The death rate tends to be somewhat higher in the winter months and the
Company's funeral service locations generally experience a higher volume of
business during those months.
Since 1984, the Company has operated under the Federal Trade Commission's
("FTC") comprehensive trade regulation rule for the funeral industry. The rule
contains minimum guidelines for funeral industry practices, requires extensive
price and other affirmative disclosures and imposes mandatory itemization of
funeral goods and services. From time to time in connection with acquisitions,
the Company has entered into consent orders with the FTC that have required the
Company to dispose of certain operations to proceed with acquisitions or have
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a materially adverse
effect on the Company's operations.
Cemeteries. The Company's cemeteries sell cemetery interment rights
(including mausoleum spaces and lawn crypts) and certain merchandise including
stone and bronze memorials and burial vaults. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries also operate crematoria.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise may be required by law to be paid into trust
until the merchandise is purchased on behalf of the customer. For additional
information regarding cemetery trust funds, see Notes 2 and 5 to the
consolidated financial statements in Item 8 of this Form 10-K.
Death Care Industry. The funeral industry is characterized by a large
number of locally owned, independent operations. The Company believes that based
on the total number of funeral services performed in 1997, the Company,
including companies acquired by it, performed approximately 10%, 28%, 14% and
25% of the funeral services in North America, France, the United Kingdom and
Australia, respectively.
To compete successfully, the Company's funeral service locations must
maintain competitive prices, attractive, well-maintained and conveniently
located facilities, a good reputation and high professional standards. In
addition, heritage and tradition can provide an established funeral home with
the opportunity for repeat business from client families. Furthermore, an
established firm can generate future volume and revenues by marketing
prearranged funeral services.
The cemetery industry is also characterized by a large number of locally
owned independent operations. The Company's cemetery properties compete with
other cemeteries in the same general area. To compete successfully, the
Company's cemeteries must maintain competitive prices, attractive and
well-maintained properties, a good reputation, an effective sales force and high
professional standards.
FINANCIAL SERVICES OPERATION
Since 1988, the Company's wholly owned subsidiary, Provident Services, Inc.
("Provident"), has provided secured financing to independent funeral home and
cemetery operators. The majority of Provident's loans are made to clients
seeking to finance funeral home or cemetery acquisitions. Additionally,
Provident provides construction loans for funeral home or cemetery improvement
and expansion. Loan packages take traditional forms of secured financing
comparable to arrangements offered by leading commercial banks. Provident's
loans are generally made at interest rates which float with the prime lending
rate.
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At December 31, 1997, Provident had $199 million in loans outstanding and
$50 million of unfunded loan commitments. At December 31, 1996, Provident had
$146 million in loans outstanding and $55 million of unfunded loan commitments.
Provident obtains its funds primarily from the Company's variable interest rate
bank borrowings.
Provident is in competition with banks and other lending institutions, many
of which have substantially greater resources than Provident. However, Provident
believes that its knowledge of the death care industry provides it with the
ability to make more accurate assessments of funeral home and cemetery loans,
thereby providing Provident a competitive advantage in making such loans.
EMPLOYEES
At December 31, 1997, the Company employed 24,072 (15,403 in the United
States) persons on a full time basis and 12,120 (8,421 in the United States)
persons on a part time basis. Of the full time employees, 23,430 were in the
Funeral and Cemetery Operations, eight were in Financial Services and 634 were
in corporate services. All of the Company's eligible United States employees who
so elect are covered by the Company's group health and life insurance plans, and
all eligible United States employees are participants in retirement plans of the
Company or various subsidiaries. Although labor disputes are experienced from
time to time, in general relations with employees are considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various federal, state, local and Australian, Canadian,
French, United Kingdom and other foreign statutes, ordinances and regulations.
The Company believes that it is in substantial compliance with the significant
provisions of such statutes, ordinances and regulations. See discussion of FTC
funeral industry trade regulation and consent orders in "Funeral Service
Locations" above.
The French funeral services industry is currently undergoing significant
regulatory change. Historically, the French funeral services industry has been
controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments ("Municipal
Monopoly"), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
SCI's French operations ("Exclusive Municipal Authority"). Legislation has been
passed that will generally end municipal control of the French funeral service
business and will allow the public to choose their funeral service provider.
Under such legislation, the Exclusive Municipal Authority was abolished in
January 1996, and the Municipal Monopoly was eliminated in January 1998.
Cemeteries in France, however, are and will continue to be controlled by
municipalities and religious organizations, with third parties, such as SCI,
providing cemetery merchandise such as markers and monuments.
ITEM 2. PROPERTIES.
The Company's executive headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and its
parking garage. The property consists of approximately 1.3 acres, 250,000 square
feet of office space in the building and 160,000 square feet of parking space in
the garage. The Company leases all of the office space in the building pursuant
to a lease that expires June 30, 2005 providing for monthly rent of $43,000
through July 2000 and $59,000 thereafter. The Company pays all operating
expenses. One half of the rent is paid to the wholly owned subsidiary and the
other half is paid to the owners of the remaining undivided one-half interest.
The Company owns and utilizes a three-story building at 1919 Allen Parkway,
Houston, Texas 77019 containing 43,000 square feet of office space.
At December 31, 1997, the Company owned the real estate and buildings of
2,552 of its funeral service and cemetery locations and leased facilities in
connection with 1,133 of such operations. In addition, the Company leased four
aircraft pursuant to cancelable leases. At December 31, 1997, the Company
operated 11,498 vehicles, of which 8,641 were owned and 2,857 were leased. For
additional information regarding leases, see Note 10 to the consolidated
financial statements in Item 8 of this Form 10-K.
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The Company's 392 cemeteries contain an aggregate of approximately 30,677
acres, of which approximately 54% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition. Management believes
that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is involved in legal proceedings, the Company does not
believe that any of the proceedings is material pursuant to the standards set
forth in Item 103 of Regulation S-K promulgated under the Securities Exchange
Act of 1934.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 26, 1998 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR
FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
------------ --- -------- ----------
R. L. Waltrip........................ (67) Chairman of the Board and Chief Executive 1962
Officer
L. William Heilbrodt................. (56) President and Chief Operating Officer 1988
W. Blair Waltrip..................... (43) Executive Vice President Operations 1980
Jerald L. Pullins.................... (56) Executive Vice President International 1992
Operations
John W. Morrow, Jr. ................. (62) Executive Vice President Special Services 1989
George R. Champagne.................. (44) Senior Vice President Chief Financial Officer 1989
Glenn G. McMillen.................... (55) Senior Vice President Operations 1993
Richard T. Sells..................... (58) Senior Vice President Preneed Sales 1987
James M. Shelger..................... (48) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner....................... (52) Senior Vice President Administration 1992
T. Craig Benson...................... (36) Vice President International Operations 1990
Gregory L. Cauthen................... (40) Vice President Treasurer 1995
J. Daniel Garrison................... (46) Vice President International Operations 1998
W. Mark Hamilton..................... (33) Vice President Prearranged Funeral Services 1996
Lowell A. Kirkpatrick, Jr. .......... (39) Vice President Operations, Finance and 1994
Development
Stephen M. Mack...................... (46) Vice President Corporate Operations 1998
Todd A. Matherne..................... (43) Vice President Operations, Finance 1996
and Development
Vincent L. Visosky................... (50) Vice President Operational Controller 1989
Michael R. Webb...................... (40) Vice President International Corporate 1998
Development
Henry M. Nelly, III.................. (53) President -- Provident Services, 1989
Inc., a subsidiary of the Company
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(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
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Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Matherne joined the Company in April 1995 as Managing Director Investor
Relations and was promoted in May 1996 to Vice President Investor Relations and
in February 1998 to Vice President Operations, Finance and Development. Prior
thereto, Mr. Matherne was Vice President and General Manager of Baker Hughes
Treatment Services, an environmental services business.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary. W. Blair Waltrip is a son of
R. L. Waltrip, T. Craig Benson is a son-in-law of R. L. Waltrip and T. Craig
Benson and W. Blair Waltrip are brothers-in-law.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 1997, there were 7,720 holders of record of
the Company's common stock.
The Company has declared 99 consecutive quarterly dividends on its common
stock since it began paying dividends in 1974. The dividend rate is currently
$.09 per share per quarter, or an indicated annual rate of $.36 per share. For
the three years ended December 31, 1997, dividends per share were $.30, $.24 and
$.22, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
First............................. $33.88 $26.88 $24.75 $19.44 $14.56 $13.13
Second............................ 36.00 29.63 30.13 24.13 15.81 13.44
Third............................. 35.75 29.81 29.44 27.63 19.75 15.19
Fourth............................ 38.00 27.88 30.75 26.50 22.00 18.81
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
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ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues........................ $ 2,468,402 $2,294,194 $1,652,126 $1,117,175 $ 899,178
Income before extraordinary loss
and cumulative effect of
change in accounting
principle..................... 374,552 265,298 183,588 131,045 103,092
Net income...................... 333,750 265,298 183,588 131,045 101,061
Earnings per share**:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle --
Basic.................... 1.53 1.13 .92 .76 .62
Diluted.................. 1.47 1.08 .86 .71 .59
Net income --
Basic.................... 1.36 1.13 .92 .76 .61
Diluted.................. 1.31 1.08 .86 .71 .58
Dividends per share............. .30 .24 .22 .21 .20
Total assets.................... 10,306,863 8,869,770 7,672,387 5,161,888 3,683,304
Long-term debt.................. 2,634,699 2,048,737 1,712,464 1,330,177 1,062,222
Convertible preferred securities
of SCI Finance LLC............ -- 172,500 172,500 172,500 --
Stockholders' equity............ 2,726,004 2,235,317 1,975,345 1,196,622 884,513
Shares outstanding.............. 252,924 236,193 234,542 189,714 169,718
Ratio of earnings to fixed
charges*...................... 4.29 3.24 2.84 3.13 3.19
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* For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus
the minority interest of majority-owned subsidiaries with fixed charges and
plus fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt
costs, dividends on preferred securities of SCI Finance LLC and one-third of
rental expense which the Company considers representative of the interest
factor in the rentals.
** Earnings per share amounts have been restated to reflect the December 1997
adoption of Statement of Financial Accounting Standards No. 128.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
A primary objective of the Company is to maximize shareholder value. To
accomplish this goal, one of the Company's strategies has been to provide
consistent growth in earnings per share. This growth strategy initiates with the
Company producing significant cash flow from its existing cluster operations,
then continues by using that cash to expand clusters through add-on
acquisitions, new construction, and improvements to existing locations. The
Company also expands its network through strategic acquisitions of larger,
multi-location death care companies, typically funding these transactions by
accessing the debt and equity markets when appropriate. All businesses are
continuously improved by further enhancing products, services and systems;
leveraging operating and overhead costs; strengthening buying power; and
expanding preneed sales.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established in and around
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allow the Company to more efficiently utilize
its operating facilities during fluctuations in the number of funeral services
and cemetery interments performed in a given period. The Company's acquisitions
are primarily located within existing cluster areas or create new cluster area
opportunities. The Company has approximately 400 clusters, which range in size
from two operations to 67 operations. There may be more than one cluster in a
given metropolitan area, depending upon the level and degree of shared costs.
RESULTS OF OPERATIONS:
Year ended 1997 compared to 1996
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral............. $ 1,727,003 $ 1,663,387 $ 63,616 3.8%
Cemetery............ 724,862 612,421 112,441 18.4
Financial
services......... 16,537 18,386 (1,849) (10.1)
----------- ----------- -------- -----
2,468,402 2,294,194 174,208 7.6
Costs and expenses:
Funeral............. (1,318,920) (1,282,546) 36,374 2.8
Cemetery............ (452,965) (397,700) 55,265 13.9
Financial
services......... (8,905) (9,496) (591) (6.2)
----------- ----------- -------- -----
(1,780,790) (1,689,742) 91,048 5.4
Gross profit margin
and percentage:
Funeral............. 408,083 23.6% 380,841 22.9% 27,242 7.2
Cemetery............ 271,897 37.5% 214,721 35.1% 57,176 26.6
Financial
services......... 7,632 46.2% 8,890 48.4% (1,258) (14.2)
----------- ----- ----------- ----- -------- -----
$ 687,612 27.9% $ 604,452 26.3% $ 83,160 13.8%
=========== ===== =========== ===== ======== =====
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Funeral
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Existing clusters:
United States......................... $ 892,451 $ 820,860 $ 71,591 8.7%
France................................ 485,264 537,079 (51,815) (9.6)
Other European........................ 186,238 162,830 23,408 14.4
Other foreign......................... 114,389 115,707 (1,318) (1.1)
---------- ---------- -------- ----
1,678,342 1,636,476 41,866 2.6
---------- ---------- -------- ----
New clusters:*
United States......................... 21,061 4,475 16,586
Other European........................ 16,378 2,847 13,531
Other foreign......................... 2,113 -- 2,113
---------- ---------- --------
39,552 7,322 32,230
---------- ---------- -------- ----
Total clusters........................ 1,717,894 1,643,798 74,096 4.5
Non-cluster and disposed operations..... 9,109 19,589 (10,480)
---------- ---------- -------- ----
Total funeral revenues........ $1,727,003 $1,663,387 $ 63,616 3.8%
========== ========== ======== ====
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* Represents new geographic cluster areas entered into since the beginning of
1996 for the period that those businesses were owned by the Company.
The $41,866 increase in revenues at existing clusters was the result of a
2.4% increase in the number of funeral services performed (515,733 compared to
503,476) and a slightly higher average sales price ($3,254 compared to $3,250).
Acquisitions since January 1, 1996, included in existing clusters, accounted for
$97,843 of the existing cluster revenue increase. Excluding a $68,138 decrease
in French revenue caused exclusively by a change in the US dollar / French franc
exchange rate, businesses owned before 1996 had a revenue increase of $12,161.
The death rate in the Company's primary markets has remained relatively
constant for several years and is expected to remain at this rate for at least
the near future; however, due to the increasing proportion of people over age 65
in the Company's primary markets, demand for funeral services could increase in
the decades to come. It is anticipated that the Company's near term revenue
growth will continue to be primarily generated from acquired operations (added
to existing clusters and the creation of new clusters) as well as from improved
merchandising of funeral services and products. The Company is the world's
largest in the funeral service industry and currently performs approximately
10%, 28%, 14% and 25% of the funeral services in North America, France, the
United Kingdom and Australia, respectively. The Company believes that there are
approximately 8,000 potential acquisition candidates in North America that meet
its current metropolitan acquisition criteria and numerous other candidates
outside of North America. The Company plans to continue to aggressively seek to
acquire these potential candidates.
During the year ended December 31, 1997, the Company sold (net of
cancellations) approximately $509,000 of prearranged funeral services compared
to approximately $512,000 for the same period in 1996. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed. The current
emphasis on sales of prearranged funerals is expected to continue.
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Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Existing clusters:
United States......................... $ 581,633 $ 528,918 $ 52,715 10.0%
France................................ 415,056 466,136 (51,080) (11.0)
Other European........................ 144,513 123,517 20,996 17.0
Other foreign......................... 78,944 76,816 2,128 2.8
---------- ---------- -------- -----
1,220,146 1,195,387 24,759 2.1
---------- ---------- -------- -----
New clusters:*
United States......................... 15,805 3,192 12,613
Other European........................ 13,770 2,438 11,332
Other foreign......................... 1,753 -- 1,753
---------- ---------- -------- -----
31,328 5,630 25,698
---------- ---------- -------- -----
Total clusters........................ 1,251,474 1,201,017 50,457 4.2
Non-cluster and disposed operations..... 12,730 19,209 (6,479)
Administrative overhead................. 54,716 62,320 (7,604) (12.2)
---------- ---------- -------- -----
Total funeral costs and
expenses.................... $1,318,920 $1,282,546 $ 36,374 2.8%
========== ========== ======== =====
The $24,759 increase in costs and expenses from existing clusters is
primarily the result of the period to period increase in the number of funeral
services performed. Acquisitions since January 1, 1996, included in existing
clusters, accounted for $73,762 of the existing cluster cost increase. Excluding
a $60,399 decrease in French costs caused exclusively by a change in the US
dollar/French franc exchange rate, businesses owned before 1996 had a cost
increase of $11,396. The gross profit margin before administrative overhead for
existing clusters increased to 27.3% in 1997 from 27.0% in 1996. Typically,
acquisitions will temporarily exhibit slightly lower gross profit margins than
those experienced by the Company's existing locations at least until such time
as these locations are assimilated into the Company's cluster management
strategy.
The overall funeral gross profit margin improved in 1997 to 23.6%, compared
to 22.9% in 1996. Contributing to this period to period improvement were the
Company's French operations which had a margin improvement to 11.0% from 9.8%.
This margin percentage is consistent with the Company's expectations for these
operations.
Administrative overhead costs expressed as a percentage of total funeral
revenues, decreased to 3.2%, compared to 3.7% in 1996.
Cemetery
Cemetery revenues were as follows:
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
-------- -------- ---------- ----------
Existing clusters:
United States............................ $637,136 $546,462 $ 90,674 16.6%
Other European........................... 21,010 15,271 5,739 37.6
Other foreign............................ 49,024 46,155 2,869 6.2
-------- -------- -------- -----
707,170 607,888 99,282 16.3
-------- -------- -------- -----
New clusters*.............................. 10,517 -- 10,517
-------- -------- -------- -----
Total clusters................... 717,687 607,888 109,799 18.1
Non-cluster and disposed operations........ 7,175 4,533 2,642 58.3
-------- -------- -------- -----
Total cemetery revenues.......... $724,862 $612,421 $112,441 18.4%
======== ======== ======== =====
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Revenues from existing clusters increased $99,282. Included in the existing
cluster increase were $49,935 in increased revenues from cemeteries acquired
since the beginning of 1996, while revenues from existing cluster locations
owned before 1996 increased $49,347 due primarily to increased preneed sales of
property and merchandise, higher average sales prices for these items and higher
investment earnings on trusted amounts. The Company plans to continue to
emphasize the selling of preneed cemetery property and merchandise by
maintaining an active and well-trained sales force. Additionally, future growth
through acquisitions is considered likely.
Cemetery costs and expenses were as follows:
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
-------- -------- ---------- ----------
Existing clusters:
United States............................ $365,437 $329,530 $35,907 10.9%
Other European........................... 12,378 9,571 2,807 29.3
Other foreign............................ 26,875 25,288 1,587 6.3
-------- -------- ------- ----
404,690 364,389 40,301 11.1
-------- -------- ------- ----
New clusters*.............................. 8,191 13 8,178
-------- -------- ------- ----
Total clusters................... 412,881 364,402 48,479 13.3
Non-cluster and disposed operations........ 4,681 3,913 768 19.6
Administrative overhead.................... 35,403 29,385 6,018 20.5
-------- -------- ------- ----
Total cemetery costs and
expenses....................... $452,965 $397,700 $55,265 13.9%
======== ======== ======= ====
Costs and expenses at existing clusters increased $40,301 due primarily to
an increase of $31,667 from cemeteries acquired since the beginning of 1996,
while costs from existing cluster cemeteries acquired before 1996 increased
$8,634. The overall cemetery gross profit margin increased to 37.5% in 1997 from
35.1% last year. This increase reflects strong growth in sales of preneed
cemetery property and merchandise as well as continued cost control in all major
expense categories. Administrative overhead costs have increased to 4.9% of
revenues this year compared to 4.8% last year. Acquisitions typically have lower
gross profit margins, at least until such time that they are assimilated into
the Company's cluster management strategy and preneed selling programs are fully
implemented.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported gross profit of $7,632 for the year ended December 31,
1997, compared to $8,890 for the same period in 1996. Provident's average
outstanding loan portfolio during the current year decreased to $182,375
compared to $190,936 in 1996, and the average interest rate spread also
decreased to 3.18% compared to 3.64% in 1996.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.7% in 1997 compared to 2.8% in 1996. These expenses
increased $3,566 or 5.6% during the year primarily from increased personnel
costs.
Interest expense, which excludes the amount incurred by financial service
operations, decreased $1,837 or 1.3% during the current year. The decreased
interest expense reflects an approximately 130 basis point decrease in average
interest rates on indebtedness offset by the Company's higher debt level in
1997. The decreased average interest rate is primarily attributable to the
Company's 1997 refinancing of certain long-term debt and hedging programs
associated with its international investments.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a before tax gain of $68,100.
Dividends on preferred securities of SCI Finance LLC were
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$4,382 in 1997 compared to $10,781 in 1996, a decrease of $6,399 or 59.4%. This
decrease is the result of the May 1997 redemption of all outstanding shares of
its convertible preferred securities of SCI Finance LLC.
The provision for income taxes reflects a 35.4% effective tax rate for 1997
as compared to a 35.9% effective tax rate in 1996. The decrease in the effective
tax rate is due primarily to lower taxes from international operations (1997
included a tax benefit relating to enacted tax rate changes in certain foreign
tax jurisdictions), partially offset by the tax impact from the gain on sale of
the Company's interest in ECI which is reflected at the Company's higher
domestic tax rate.
RESULTS OF OPERATIONS:
Year ended 1996 compared to 1995
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------- INCREASE INCREASE
1996 1995 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral............. $ 1,663,387 $ 1,166,247 $497,140 42.6%
Cemetery............ 612,421 463,754 148,667 32.1
Financial
services......... 18,386 22,125 (3,739) (16.9)
----------- ----------- -------- -----
2,294,194 1,652,126 642,068 38.9
Costs and expenses:
Funeral............. (1,282,546) (871,096) 411,450 47.2
Cemetery............ (397,700) (303,312) 94,388 31.1
Financial
services......... (9,496) (12,497) (3,001) (24.0)
----------- ----------- -------- -----
(1,689,742) (1,186,905) 502,837 42.4
Gross profit margin
and percentage:
Funeral............. 380,841 22.9% 295,151 25.3% 85,690 29.0
Cemetery............ 214,721 35.1% 160,442 34.6% 54,279 33.8
Financial
services......... 8,890 48.4% 9,628 43.5% (738) (7.7)
----------- ----- ----------- ----- -------- -----
$ 604,452 26.3% $ 465,221 28.2% $139,231 29.9%
=========== ===== =========== ===== ======== =====
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Funeral
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1996 1995 INCREASE INCREASE
----------- ----------- ---------- ----------
Existing clusters:
United States......................... $ 807,829 $ 730,053 $ 77,776 10.7%
Other European........................ 141,969 130,849 11,120 8.5
Other foreign......................... 99,951 87,044 12,907 14.8
---------- ---------- -------- ----
1,049,749 947,946 101,803 10.7
---------- ---------- -------- ----
New clusters:*
United States......................... 25,203 10,999 14,204
Other European........................ 27,691 6,980 20,711
Other foreign......................... 15,450 4,278 11,172
France................................ 537,079 190,091 346,988
---------- ---------- --------
605,423 212,348 393,075
---------- ---------- -------- ----
Total clusters................ 1,655,172 1,160,294 494,878 42.7
Non-cluster and disposed operations..... 8,215 5,953 2,262
---------- ---------- -------- ----
Total funeral revenues........ $1,663,387 $1,166,247 $497,140 42.6%
========== ========== ======== ====
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1995 for the period that those businesses were owned by the Company.
The $101,803 increase in revenues at existing clusters was primarily the
result of a 7.7% increase in North American funeral services performed at
existing cluster locations (226,822 compared to 210,611) and a 3.0% higher
average sales price ($3,745 compared to $3,635). Included in this increase were
$79,290 in increased revenues from locations acquired since the beginning of
1995. The remaining existing cluster revenue increase of $22,513 was contributed
by operations acquired before 1995. The 1995 results for France represent
approximately four months of Company ownership. The increase in Other European
new cluster revenue is primarily due to non-French European operations added in
August 1995.
During the year ended December 31, 1996, the Company sold (net of
cancellations) approximately $512,000 of prearranged funeral services compared
to approximately $367,000 for the same period in 1995. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed.
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Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1996 1995 INCREASE INCREASE
------------ ---------- -------- ----------
Existing clusters:
United States.......................... $ 520,864 $482,497 $ 38,367 8.0%
Other European......................... 104,176 101,327 2,849 2.8
Other foreign.......................... 65,549 57,650 7,899 13.7
---------- -------- -------- ----
690,589 641,474 49,115 7.7
---------- -------- -------- ----
New clusters:*
United States.......................... 18,431 8,148 10,283
Other European......................... 24,978 6,986 17,992
Other foreign.......................... 10,855 3,396 7,459
France................................. 466,136 165,778 300,358
---------- -------- --------
520,400 184,308 336,092
---------- -------- -------- ----
Total clusters................. 1,210,989 825,782 385,207 46.6
Non-cluster and disposed operations...... 9,237 7,582 1,655
Administrative overhead.................. 62,320 37,732 24,588 65.2
---------- -------- -------- ----
Total funeral costs and
expenses..................... $1,282,546 $871,096 $411,450 47.2%
========== ======== ======== ====
The total gross profit for existing clusters increased to $359,160 in 1996
from $306,472 in 1995, and the related gross profit percentage for existing
clusters increased to 34.2% from 32.3% in 1995. Acquisitions since the beginning
of 1995, included in existing clusters, accounted for $23,980 of the existing
gross profit increase. The gross profit margin for those funeral operations in
existing clusters that were acquired before 1995 increased to 35.0% in 1996 from
32.7% in 1995 due to the increased revenues discussed above without a
corresponding percentage increase in personnel and other operating costs.
Contributing to the overall funeral gross profit margin decline (22.9%
compared to 25.3% in 1995) was the Company's French operations. French
operations had an increased gross profit margin of 9.8% in 1996, compared to
9.4% in 1995, however 1996 reflects a full year's results compared to the four
months of ownership in 1995. The French margin is consistent with the Company's
expectations for these operations which have historically produced lower gross
margins than the Company's operations in North America and Australia.
Administrative overhead costs expressed as a percentage of revenues increased in
1996 to 3.7%, compared to 3.2% in 1995. This administrative overhead cost
increase was primarily attributable to the addition of the French operations as
well as the Company's realignment of its North American operating structure.
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Cemetery
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States......................... $506,330 $395,821 $110,509 27.9%
Other European........................ 13,978 11,307 2,671 23.6
Other foreign......................... 46,485 39,979 6,506 16.3
-------- -------- -------- ----
566,793 447,107 119,686 26.8
-------- -------- -------- ----
New clusters:*
United States......................... 41,221 12,972 28,249
Other European........................ 1,307 796 511
-------- -------- --------
42,528 13,768 28,760
-------- -------- -------- ----
Total clusters................ 609,321 460,875 148,446 32.2
Non-cluster and disposed operations..... 3,100 2,879 221
-------- -------- -------- ----
Total cemetery revenues....... $612,421 $463,754 $148,667 32.1%
======== ======== ======== ====
Revenues for existing clusters increased due to an increased volume of
sales and higher average sales prices for property and merchandise. Included in
the existing cluster increase were $82,470 in increased revenues from cemeteries
acquired since the beginning of 1995. This increase was primarily due to the
impact of reporting a full year's results from a large United States acquisition
in October 1995. A majority of these properties were additions to existing
clusters. The remaining existing cluster revenue increase of $37,216 was
contributed by operations acquired before 1995.
Cemetery costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States......................... $304,732 $246,790 $ 57,942 23.5%
Other European........................ 8,404 5,799 2,605 44.9
Other foreign......................... 25,322 20,227 5,095 25.2
-------- -------- -------- ----
338,458 272,816 65,642 24.1
-------- -------- -------- ----
New clusters:*
United States......................... 24,547 8,581 15,966
United Kingdom........................ 1,181 570 611
-------- -------- --------
25,728 9,151 16,577
-------- -------- -------- ----
Total clusters................ 364,186 281,967 82,219 29.2
Non-cluster and disposed operations..... 4,129 3,509 620
Administrative overhead................. 29,385 17,836 11,549 64.8
-------- -------- -------- ----
Total cemetery costs and
expenses.................... $397,700 $303,312 $ 94,388 31.1%
======== ======== ======== ====
Costs at existing clusters increased $65,642 due primarily to an increase
of $48,864 from cemeteries acquired since the beginning of 1995, while costs
from existing cluster cemeteries acquired before 1995 increased $16,796. The
overall cemetery gross profit margin increased to 35.1% in 1996 from 34.6% in
1995. This increase reflects strong growth in sales of preneed cemetery property
and merchandise as well as continued cost control in all major expense
categories. Administrative overhead costs have increased to 4.8% of revenues in
1996 compared to 3.8% in 1995. This administrative overhead cost increase was
primarily
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attributable to increased costs from additional infrastructure added in the
Company's United Kingdom operations as well as the Company's realignment of its
North American operating structure.
Financial Services
Provident increased its gross margin percentage to 48.4% from 43.5%. This
was primarily attributable to early termination fees associated with the payoff
of outstanding loans in August 1996, by two of Provident's largest customers.
These payoffs reduced the average outstanding loan portfolio during 1996 to
approximately $191,000 with an average interest rate spread of 3.6% compared to
approximately $206,000 and 3.7%, respectively, in 1995.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
were 2.8% in 1996 compared to 3.2% in 1995. These expenses increased by
approximately $9,600 or 17.9% during the year primarily due to the recognition
of $6,000 in costs relating to the Loewen transaction (see below) as well as
increases in personnel costs. On October 3, 1996, The Company filed a
registration statement with the Securities and Exchange Commission
("Commission") that offered to acquire the outstanding shares of Loewen Group
Inc. ("Loewen"), a publicly traded death care company, through an exchange
offer. On January 7, 1997, the Company announced that it had withdrawn its
exchange offer for Loewen.
Interest expense, which excludes the amount incurred by financial service
operations, increased $20,409 or 17.3% during 1996 primarily from incremental
borrowings incurred to fund the Company's acquisition program. The 1996 increase
is the result of an increase of approximately $296,875 in the Company's average
debt (excluding debt related to Provident) outstanding during the year ended
December 31, 1996, compared to 1995. The increased interest associated with the
higher debt level was offset by a slightly lower average interest rate for the
year.
The provision for income taxes reflected a 35.9% effective tax rate for
1996 as compared to a 37.6% effective tax rate in 1995. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1997:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Commission. The Company believes cash from operations,
additional funds available under its revolving credit agreements, proceeds from
public and private offerings of securities will be sufficient to continue its
current acquisition program and operating policies.
At December 31, 1997, the Company had net working capital of $275,966 and a
current ratio of 1.52:1, compared to working capital of $106,497 and a current
ratio of 1.18:1 at December 31, 1996.
Revolving Credit Agreements
The Company has various revolving credit facilities and lines of credit
which currently provide for aggregate borrowings of approximately $1,140,000. At
December 31, 1997, approximately $530,000 was available under these facilities.
These facilities have financial compliance provisions that contain certain
restrictions on levels of net worth, debt, liens and guarantees.
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17
Sources and Uses of Cash
Cash Flows from Operating Activities: Net cash provided by operating
activities was $299,436 for the year ended December 31, 1997, compared to
$209,857 for the same period in 1996, an increase of $89,579. This increase was
primarily due to improved operating results in 1997. Significant uses of
operating cash include an increase in net receivables resulting from increased
sales of funeral services and cemetery products and merchandise.
Cash Flows from Investing Activities: Net cash used in investing activities
was $633,444 for the year ended December 31, 1997, compared to $480,126 for the
same period in 1996, an increase of $153,318. This increase was primarily due to
a $130,411 increase in cash used in acquisitions and $37,380 of increased
capital expenditures including new construction of facilities and major
improvements to existing properties. Cash used for capital expenditures was
$230,532 during the year ended December 31, 1997. Additionally, the Company used
approximately $88,000 to increase its investment in existing equity investees,
while approximately $147,000 in cash was provided by the sale of the Company's
interest in ECI. Cash used relating to prearranged funeral activities decreased
due to the timing of cash payments to and withdrawals from trusts, offset by
increased cash outlays on prearranged marketing efforts.
Cash Flows from Financing Activities: Net cash provided by financing
activities was $336,754 for the year ended December 31, 1997, compared to
$256,916 for the same period in 1996, an increase of $79,838.
As of December 31, 1997, the Company's debt to capitalization ratio was
49.8% compared to 47.3% at December 31, 1996. The interest rate coverage ratio
for the year ended December 31, 1997 was 4.43:1 (excluding the gain on the sale
of the Company's investment in ECI), compared to 3.62:1 for the same period in
1996. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash flow generated
and the low failure rate exhibited by these types of businesses. The Company
believes these acquired firms are capable of servicing the additional debt and
providing a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance
its future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. At December
31, 1997, the Company had approximately $530,000 of available borrowings under
various revolving credit facilities and lines of credit. At December 31, 1997,
the Company had the ability to issue $550,000 in securities registered with the
Commission under a shelf registration (In March 1998, the company issued
$500,000 of long-term notes under the shelf to repay borrowings under the
company's credit facilities). In addition, 15,369,000 shares of common stock and
a total of $201,000 of guaranteed promissory notes and convertible debentures
are registered with the Commission under a separate shelf registration to be
used exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts
and the funds collected are generally held in trust or are used to purchase a
life insurance or annuity contract. The principal amount of these prearranged
funeral contracts will be received in cash by a Company funeral service location
at the time the funeral is performed. Earnings on trust funds and increasing
benefits under insurance funded contracts also increase the amount of cash to be
received upon performance of the funeral and are intended to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. During 1997, the Company completed a review of the
prearranged trust investment process which included an asset/liability study.
This has resulted in a new investment program which entails the consolidation of
multiple trustees, the use of institutional managers with differing investment
styles and consolidated performance monitoring and tracking. This new program
targets a real return in excess of the amount necessary to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. This is accomplished by allocating the portfolio mix to the
appropriate investments that more accurately match the anticipated
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maturity of the policies. The Company is currently reallocating the portfolio to
achieve a new asset allocation of approximately 65% equity and 35% fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are
a current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American funerals performed annually approximates
25% and is expected to grow, thereby making the total number of funerals
performed more predictable.
Cremations
In recent years there has been steady, gradual growth in the number of
cremations that have been chosen as an alternative to traditional methods of
disposal of human remains. In 1997, nearly 33% of all families served by the
Company's North American funeral service locations selected the cremation
alternative, substantially more than the 20% national average according to
industry studies. The Company has a significant number of operating locations in
Florida and the west coast of North America where the cremation alternative
continues to gain acceptance. Based on industry studies, the Company believes
that cremations account for approximately 60-70% of all dispositions of human
remains in Australia and the United Kingdom. It is estimated that cremations
account for approximately 12% of all dispositions of human remains in France.
Though a cremation typically results in fewer sales dollars than a traditional
funeral service, the Company believes that funeral operations which are
predominantly cremation businesses typically have higher gross profit margin
percentages than those exhibited at traditional funeral operations. Cremation
memorialization has long been a tradition in the Australian and United Kingdom
markets. The Company has expanded its product alternatives in these markets
which has resulted in higher average sales. The Company has also established
markets in select areas within North America and believes that memorialization
of cremated remains represents a source of revenue growth.
Other Matters
The Company will adopt Statement of Financial Accounting Standards ("FAS")
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits", FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", and FAS No. 130 "Reporting Comprehensive Income" for the year
ended December 31, 1998. FAS No. 132 revises disclosures about pension and other
postretirement benefit plans, FAS No. 131 revises standards for reporting
information about operating segments, and FAS No. 130 establishes standards for
reporting and display of comprehensive income. The adoption of these disclosure
standards will not have a material impact on the consolidated financial
statements.
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs
to correctly differentiate the century from a date in which the year is
represented by only two digits. A computer system which is not year 2000
compliant might not be able to process certain data or possibly cause the entire
computer system to malfunction. The Company is currently assessing any potential
impact that changing to the year 2000 will have on the computer programs that
operate within the Company or are used by major vendors or service providers.
Cautionary Statement on Forward-looking Statements
The statements contained in this Annual Report that are not historical
facts are forward-looking statements within the meaning of the private
Securities Litigation Reform Act of 1995. These statements may
17
19
be accompanied by words such as "believe," "estimate," "expect," "anticipate,"
or "predict," that convey the uncertainty of future events or outcomes. These
statements are based on assumptions that the Company believes are reasonable;
however many important factors could cause the Company's actual results in the
future to differ materially from the forward-looking statements made herein and
in any other documents or oral presentations made by, or on behalf of, the
Company. Important factors which could cause actual results to differ materially
from those in forward-looking statements include, among others, the following:
(1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable security
values as well as currency and interest rate fluctuations).
(2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
(3) Changes in consumer demand for the Company's services caused by
several factors such as changes in local death rates, cremation rates,
competitive pressures and local economic conditions.
(4) The Company's ability to identify and complete additional
acquisitions on terms that are favorable to the Company, to successfully
integrate acquisitions into the Company's business and to realize expected
cost savings in connection with such acquisitions. The Company's future
results may be materially impacted by changes in the level of acquisition
activity.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivatives primarily in the form of interest rate swaps
and cross-currency interest rate swaps in combination with local currency
borrowings in order to manage its mix of fixed and floating rate debt and to
substantially hedge the Company's net investment in foreign assets. Accordingly,
movements in currency rates that impact the swaps are generally offset by a
corresponding movement in the value of the underlying assets being hedged and
movements in interest rates that impact the fair value of the interest rate
swaps are generally offset by a corresponding movement in the value of the
underlying debt being hedged. Similarly, currency movements that impact foreign
interest expense due under the cross-currency interest rate swaps are generally
offset by a corresponding movement in the earnings of the foreign operation.
Fair values included herein have been determined based on market prices provided
by counterparties. The information presented below should be read in conjunction
with notes four, eight and nine to the consolidated financial statements.
In general, interest rates are managed such that 40% to 60% of the total
debt (excluding debt which offsets the Provident loan receivable portfolio) is
floating rate and thus is sensitive to interest rate fluctuations. After giving
effect to the interest rate swaps, the Company's total debt has been converted
into approximately $1,078,000 of fixed interest rate debt at a weighted average
rate of 7.0% and approximately $1,386,000 of floating interest rate debt at a
weighted average rate of 5.5%. At December 31, 1997, a one percent increase in
the various floating rate indices referenced in the debt and swaps (excluding
amounts borrowed to issue loans by Provident) would cause a $13,860 net increase
in interest expense. However, the Company's overall sensitivity to floating
interest rates is diversified in that approximately 40% of the Company's
floating rate exposure is based in four markets other than the United States.
In general, the Company hedges up to 100% of its net investment in foreign
assets when such investment is considered significant and when it is reasonably
cost efficient to do so. The death care industries in countries where the
Company has foreign operations are generally stable and have had predictable
cash flows. In addition, those countries have not had highly inflationary
economies. Approximately one-third of the Company's net assets and one-quarter
of its operating income are denominated in foreign currencies. Due to the
cross-currency hedges described above, approximately 6% of the Company's net
assets and approximately 8% of the Company's operating earnings are subject to
translation risk.
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Equity-Price Risk Management
In connection with prearranged funeral operations and preneed cemetery
merchandise sales, the Company owns investments in equity securities and mutual
funds which are sensitive to current market prices. Cost and market values as of
December 31, 1997 and 1996, are presented in notes four and five to the
consolidated financial statements.
Market-Rate Sensitive Instruments and Risk Management
The following discussion about the Company's risk-management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
The following table summarizes the financial instruments and derivative
instruments held by the Company at December 31, 1997, which are sensitive to
changes in interest rates, foreign exchange rates, and equity prices. The
Company uses interest rate swaps and cross-currency interest rate swaps to
manage these primary market exposures associated with underlying assets and
liabilities. The Company uses these instruments to reduce risk by essentially
creating offsetting market exposures. The instruments held by the Company are
not leveraged and are held for non-speculative purposes.
For certain assets and debt, the table below presents principal cash flows
that exist by maturity date and the related average interest rate. For swaps,
the table presents the notional amounts and expected interest rates that the
Company will receive and pay that exist by contractual dates. The notional
amount represents the foreign currency notional amount converted to US dollars
at an estimated future currency exchange rate, and is used to calculate the
contractual payments to be exchanged under the contract. The variable rates are
estimated based on implied forward rates in the yield curve.
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FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER ASSET/(LIABILITY)
-------- --------- --------- --------- --------- ----------- -----------------
ASSETS
- -----
Provident receivables....... $ 15,922 $ 22,528 $ 21,264 $ 52,917 $ 58,218 $ 27,072 $ 197,921
Average rate.............. 9.34% 7.58% 9.99% 9.96% 8.48% 8.67%
Auxia debt securities....... 2,809 17,014 59,739 24,300 67,522 142,901 314,285
Average rate.............. 5.97% 5.97% 6.30% 6.82% 6.16% 6.16%
LIABILITIES
- --------
Fixed rate debt............. (64,570) (62,192) (193,285) (196,661) (328,456) (1,050,596) (2,016,511)
Average rate.............. 7.78% 7.83% 6.80% 7.12% 7.09% 7.35%
Floating rate debt
Floating rate notes....... (200,000) (200,000)
Bank revolving credit and
commercial paper........ (416,139) (200,450) (616,589)
Average rate.............. 5.97% 5.19%
DERIVATIVE CONTRACTS
- -----------------
INTEREST RATE SWAPS
US fixed to US floating..... 950,000 950,000 950,000 800,000 500,000 500,000 30,951
Average receive rate...... 6.87% 6.87% 6.87% 6.93% 7.19% 7.19%
Average pay rate.......... 5.74% 5.78% 5.95% 5.99% 6.06% 6.15%
US floating to US fixed..... 200,000 200,000 200,000 200,000 200,000 200,000 783
Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06% 6.15%
Average pay rate.......... 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Foreign currency floating to
foreign currency fixed.... 341,475 263,721 264,514 265,116 267,067 82,858 (20,085)
Average receive rate...... 4.83% 5.03% 5.35% 5.55% 5.76% 6.51%
Average pay rate.......... 6.60% 6.80% 6.80% 6.80% 6.79% 6.90%
Foreign currency floating to
foreign currency
floating.................. 81,992 83,301 84,275 85,062 85,736 85,736 (1,479)
Average receive rate...... 3.84% 4.12% 4.61% 4.93% 5.23% 5.42%
Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66%
Foreign currency fixed to
foreign currency
floating.................. 82,325 83,639 84,617 85,408 86,084 86,084 3,036
Average receive rate...... 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%
Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66%
CROSS-CURRENCY INTEREST RATE
SWAPS
US fixed to foreign currency
fixed..................... 702,391 682,268 532,955 506,191 407,039 407,039 83,237
Average receive rate...... 7.49% 7.43% 7.59% 7.52% 7.92% 7.92%
Average pay rate.......... 7.38% 7.29% 7.29% 7.15% 7.61% 7.61%
US fixed to foreign currency
floating.................. 368,448 285,933 282,575 276,260 275,168 189,097 20,956
Average receive rate...... 6.69% 6.67% 6.63% 6.57% 6.54% 7.07%
Average pay rate.......... 4.81% 4.90% 5.18% 5.36% 5.58% 6.14%
US floating to foreign
currency fixed............ 247,037 227,430 (40,619)
Average receive rate...... 5.73% 5.77%
Average pay rate.......... 5.39% 5.26%
US floating to foreign
currency floating......... 56,429 56,658 26,866 26,750 26,488 49,937
Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06%
Average pay rate.......... 5.18% 5.50% 6.13% 6.36% 6.67%
20
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 22
Consolidated Statement of Income for the three years ended
December 31, 1997......................................... 23
Consolidated Balance Sheet as of December 31, 1997 and
1996...................................................... 24
Consolidated Statement of Cash Flows for the three years
ended December 31, 1997................................... 25
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1997............................. 26
Notes to Consolidated Financial Statements.................. 27
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 50
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
21
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of
Directors of Service Corporation International
We have audited the accompanying consolidated balance sheet of Service
Corporation International as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. We have also audited
the financial statement schedule for the three years ended December 31, 1997,
listed in the index at item 8 of this Form 10-K. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Service
Corporation International as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 18, 1998
22
24
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $ 2,468,402 $ 2,294,194 $ 1,652,126
Costs and expenses.................................. (1,780,790) (1,689,742) (1,186,905)
----------- ----------- -----------
Gross profit........................................ 687,612 604,452 465,221
General and administrative expenses................. (66,781) (63,215) (53,600)
----------- ----------- -----------
Income from operations.............................. 620,831 541,237 411,621
Interest expense.................................... (136,720) (138,557) (118,148)
Dividends on preferred securities of SCI Finance
LLC............................................... (4,382) (10,781) (10,781)
Other income........................................ 100,244 21,982 11,519
----------- ----------- -----------
(40,858) (127,356) (117,410)
----------- ----------- -----------
Income before income taxes and extraordinary loss... 579,973 413,881 294,211
Provision for income taxes.......................... (205,421) (148,583) (110,623)
----------- ----------- -----------
Income before extraordinary loss.................... 374,552 265,298 183,588
Extraordinary loss on early extinguishment of debt
(net of income taxes of $23,383).................. (40,802) -- --
----------- ----------- -----------
Net income.......................................... $ 333,750 $ 265,298 $ 183,588
=========== =========== ===========
Earnings per share:
Basic:
Income before extraordinary loss.................. $ 1.53 $ 1.13 $ .92
Extraordinary loss on early extinguishment of
debt........................................... (0.17) -- --
----------- ----------- -----------
Net income........................................ $ 1.36 $ 1.13 $ .92
=========== =========== ===========
Diluted:
Income before extraordinary loss.................. $ 1.47 $ 1.08 $ .86
Extraordinary loss on early extinguishment of
debt........................................... (0.16) -- --
----------- ----------- -----------
Net income........................................ $ 1.31 $ 1.08 $ .86
=========== =========== ===========
Basic weighted average number of shares............. 245,470 235,299 199,603
=========== =========== ===========
Diluted weighted average number of shares........... 257,781 252,870 229,967
=========== =========== ===========
(See notes to consolidated financial statements)
23
25
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46,877 $ 44,131
Receivables, net of allowances............................ 557,481 494,576
Inventories............................................... 172,169 139,019
Other..................................................... 34,881 36,314
----------- -----------
Total current assets.............................. 811,408 714,040
----------- -----------
Investments -- insurance subsidiary......................... 574,728 601,565
Prearranged funeral contracts............................... 2,610,632 2,159,348
Long-term receivables....................................... 981,121 809,287
Cemetery property, at cost.................................. 1,636,859 1,380,213
Property, plant and equipment, at cost (net)................ 1,644,137 1,457,075
Deferred charges and other assets........................... 549,862 371,608
Names and reputations (net)................................. 1,498,116 1,376,634
----------- -----------
$10,306,863 $ 8,869,770
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 425,631 $ 440,797
Current maturities of long-term debt...................... 64,570 113,876
Income taxes.............................................. 45,241 52,870
----------- -----------
Total current liabilities......................... 535,442 607,543
----------- -----------
Long-term debt.............................................. 2,634,699 2,048,737
Deferred income taxes....................................... 701,221 527,460
Other liabilities........................................... 546,140 552,443
Deferred prearranged funeral contract revenues.............. 3,163,357 2,725,770
Commitments and contingencies............................... -- --
Company obligated, mandatorily redeemable, convertible
preferred securities of SCI Finance LLC................... -- 172,500
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 252,923,784 and 236,193,427, respectively,
issued and outstanding................................. 252,924 236,193
Capital in excess of par value............................ 1,493,246 1,237,783
Retained earnings......................................... 983,353 728,108
Foreign currency translation adjustment................... (7,480) 22,315
Unrealized gain on securities available for sale, net of
tax.................................................... 3,961 10,918
----------- -----------
Total stockholders' equity........................ 2,726,004 2,235,317
----------- -----------
$10,306,863 $ 8,869,770
=========== ===========
(See notes to consolidated financial statements)
24
26
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income......................................... $ 333,750 $ 265,298 $ 183,588
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 157,550 129,819 92,541
Provision for deferred income taxes............. 19,212 56,902 45,164
Extraordinary loss on early extinguishment of
debt, net of income taxes..................... 40,802 -- --
Gains from dispositions (net)................... (89,252) (9,930) (1,024)
Change in assets and liabilities net of effects
from acquisitions:
(Increase) in receivables..................... (174,429) (167,338) (115,888)
(Increase) in other assets.................... (24,904) (36,781) (36,496)
Increase (decrease) in other liabilities...... 36,045 (26,365) 7,473
Other......................................... 662 (1,748) (3,860)
----------- ----------- ---------
Net cash provided by operating activities............ 299,436 209,857 171,498
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures............................... (230,532) (193,152) (125,231)
Changes in prearranged funeral balances............ (5,537) (51,485) (44,549)
Purchases of securities -- insurance subsidiary.... (1,407,588) (1,212,305) (86,014)
Sales of securities -- insurance subsidiary........ 1,383,934 1,177,499 49,769
Proceeds from sales of property and equipment...... 46,908 30,121 12,655
Acquisitions, net of cash acquired................. (409,731) (279,320) (693,627)
Loans issued by finance subsidiary................. (98,446) (86,858) (38,184)
Principal payments received on loans by finance
subsidiary...................................... 45,915 156,064 24,312
Proceeds from sale of equity investment............ 147,700 -- --
Purchases of equity investments.................... (87,643) (39,752) (16,076)
Other.............................................. (18,424) 19,062 (8,190)
----------- ----------- ---------
Net cash used in investing activities................ (633,444) (480,126) (925,135)
----------- ----------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving
credit agreements............................... 304,505 96,441 (453,959)
Long-term debt issued.............................. 650,000 300,000 862,848
Early extinguishment of debt....................... (449,998) -- --
Payments of debt................................... (91,464) (109,458) (135,960)
Common stock issued................................ -- -- 331,063
Dividends paid..................................... (69,888) (55,262) (43,676)
Bank overdrafts and other.......................... (6,401) 25,195 32,464
----------- ----------- ---------
Net cash provided by financing activities............ 336,754 256,916 592,780
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 2,746 (13,353) (160,857)
Cash and cash equivalents at beginning of period..... 44,131 57,484 218,341
----------- ----------- ---------
Cash and cash equivalents at end of period........... $ 46,877 $ 44,131 $ 57,484
=========== =========== =========
(See notes to consolidated financial statements)
25
27
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CAPITAL IN FOREIGN UNREALIZED
COMMON EXCESS OF RETAINED CURRENCY GAIN
STOCK PAR VALUE EARNINGS TRANSLATION ON SECURITIES
-------- ---------- -------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1994............... $189,714 $ 624,001 $381,509 $ 1,398 $ --
Add (deduct):
Net income............................... 183,588
Common stock issued:
Common stock offerings................ 18,350 312,713
Stock option exercises and stock
grants.............................. 696 5,792
Acquisitions.......................... 7,310 101,967
Debenture conversions................. 18,472 170,235
Dividends on common stock ($.22 per
share)................................ (46,535)
Foreign currency translation............. 349
Net change in unrealized gain on
securities............................ 5,786
-------- ---------- -------- ------- -------
Balance at December 31, 1995............... 234,542 1,214,708 518,562 1,747 5,786
Add (deduct):
Net income............................... 265,298
Common Stock issued:
Stock option exercises and stock
grants.............................. 723 6,940
Acquisitions.......................... 811 15,012 796
Debenture conversions................. 117 1,123
Dividends on common stock ($.24 per
share)................................ (56,548)
Foreign currency translation............. 20,568
Net change in unrealized gain on
securities............................ 5,132
-------- ---------- -------- ------- -------
Balance at December 31, 1996............... 236,193 1,237,783 728,108 22,315 10,918
Add (deduct):
Net income............................... 333,750
Common Stock issued:
Stock option exercises and stock
grants.............................. 820 9,296
Acquisitions.......................... 3,958 79,215 (3,832)
Debenture conversions................. 492 5,925
Conversion of convertible preferred
securities of SCI Finance LLC......... 11,461 161,027
Dividends on common stock ($.30 per
share)................................ (74,673)
Foreign currency translation............. (29,795)
Net change in unrealized gain on
securities............................ (6,957)
-------- ---------- -------- ------- -------
Balance at December 31, 1997............... $252,924 $1,493,246 $983,353 $(7,480) $ 3,961
======== ========== ======== ======= =======
(See notes to consolidated financial statements)
26
28
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world. At
December 31, 1997, the Company operated 3,127 funeral service locations, 392
cemeteries and 166 crematoria located in 17 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also operate crematoria.
The Company's financial services operations consist of a finance
subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital
financing to independent funeral home and cemetery operators.
NOTE TWO
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Service Corporation International and all majority-owned
subsidiaries (the "Company"). Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation with no effect on the
consolidated financial position, results of operations or cash flows.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories and Cemetery Property: Funeral merchandise and cemetery
property and merchandise, are stated at the lower of average cost or market.
Depreciation and Amortization: Depreciation of property, plant and
equipment is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property and plant are depreciated over
a period ranging from seven to 50 years, while equipment is depreciated over a
period from three to 20 years. For the three years ended December 31, 1997,
depreciation expense was $87,571, $74,854 and $52,828, respectively. Maintenance
and repairs are charged to expense whereas renewals and major replacements are
capitalized. Prepaid management, consultative and non-competition agreements,
primarily with former owners and key employees of businesses acquired are
amortized on a straight-line basis over the lives of the respective contracts.
Funeral Operations: Funeral revenue is recognized when the funeral service
is performed. The Company's trade receivables consist primarily of funeral
services already performed. An allowance for doubtful accounts has been provided
based on historical experience. The Company sells price guaranteed prearranged
funeral contracts through various programs providing for future funeral services
at prices prevailing when the agreement is signed. Revenues associated with
sales of prearranged funeral contracts (which include accumulated trust earnings
and increasing insurance benefits) are deferred until such time that the funeral
27
29
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
service is performed (see note four). The Company considers price guaranteed
prearranged funeral contracts to be investments made to retain and expand future
market share.
Cemetery Operations: All cemetery interment right sales, together with
associated merchandise, are recorded as income at the time contracts are signed.
Costs related to the sales of interment rights include property and other costs
related to cemetery development activities which are charged to operations using
the specific identification method. Allowances for customer cancellations are
provided at the date of sale based upon historical experience. Costs related to
merchandise are based on actual costs incurred or estimates of future costs
necessary to purchase the merchandise, including provisions for inflation when
required. Pursuant to state law, all or a portion of the proceeds from the sale
of cemetery merchandise may also be required to be paid into trust funds until
such merchandise is purchased by the Company for the customer. Merchandise funds
trusted at December 31, 1997 and 1996 were $515,051 and $390,534, respectively
(see note five). The Company recognizes realized trust income on these
merchandise trusts in current cemetery revenues as trust earnings accrue to
defray inflation costs recognized related to the unpurchased cemetery
merchandise. Additionally, a portion of the proceeds from the sale of cemetery
property is required by state law to be paid into perpetual care trust funds.
Earnings from these trusts are recognized in current cemetery revenues and are
intended to defray cemetery maintenance costs, which are expensed as incurred.
Perpetual care funds trusted at December 31, 1997 and 1996 were $371,984 and
$318,868, respectively, which approximates fair value. The principal of such
perpetual care trust funds generally cannot be withdrawn by the Company and
therefore is not included in the consolidated balance sheet. For the three years
ended December 31, 1997, the earnings recognized from all cemetery trusts were
$74,971, $51,601 and $33,795, respectively.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as a purchase are
included in "Names and reputations" and generally amortized on a straight line
basis over 40 years which, in the opinion of management, is not necessarily the
maximum period benefited. Fair values determined at the date of acquisition are
determined by management or independent appraisals. Many of the Company's
acquired funeral service locations have been providing high quality service to
client families for many years. Such loyalty often forms the basic valuation of
the funeral business. Additionally, the death care industry has historically
exhibited stable cash flows as well as a low failure rate. The Company monitors
the recoverability of names and reputations based on projections of future
undiscounted cash flows of the acquired businesses. The amortization charged
against income was $37,649, $33,836 and $25,226 for the three years ended
December 31, 1997, respectively. Accumulated amortization of names and
reputations as of December 31, 1997 and 1996 was $136,398 and $101,426,
respectively.
Derivatives: Amounts to be paid or received under interest rate swaps,
including the interest rate provisions of the cross-currency swaps, are recorded
on the accrual basis over the life of the swap agreements as an adjustment to
interest expense. The related net amounts payable to, or receivable from, the
counterparties are included in accrued liabilities or current receivables,
respectively. Gains and losses resulting from currency movements on the
cross-currency swaps that hedge the Company's net foreign investments are
reflected in stockholders' equity, with the related net amounts due to, or from,
the counterparties included in other liabilities, or other assets, respectively.
Net deferred gains and losses on early termination of interest rate swaps are
being amortized into interest expense over the remaining lives of the original
agreements ($394 net unamortized loss at December 31, 1997).
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
28
30
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THREE
ACQUISITIONS
The Company acquired certain funeral and cemetery operations both domestically
and internationally during the years ended December 31, 1997 and 1996. The
operating results of these acquisitions have been included since their
respective dates of acquisition. The following table is a summary of the
acquisitions made during the two years ended December 31, 1997:
1997 1996
-------- --------
Number acquired:
Funeral service locations................................. 294 210
Cemeteries................................................ 51 35
Crematoria................................................ 19 9
Purchase price.............................................. $643,000 $362,651
The purchase price in both years consisted primarily of combinations of
cash, Company common stock, issued and assumed debt.
The effect of the above acquisitions on the consolidated balance sheet at
December 31, was as follows:
1997 1996
--------- --------
Current assets.............................................. $ 38,569 $ 30,542
Prearranged funeral contracts............................... 86,452 61,994
Long-term receivables....................................... 31,522 (10,559)
Cemetery property........................................... 298,466 210,507
Property, plant and equipment............................... 162,992 93,482
Deferred charges and other assets........................... 13,417 (1,244)
Names and reputations....................................... 215,204 164,414
Current liabilities......................................... (67,464) (62,817)
Long-term debt.............................................. (63,307) (32,532)
Deferred income taxes and other liabilities................. (120,340) (85,635)
Deferred prearranged funeral contract revenues.............. (106,439) (72,213)
Stockholders' equity........................................ (79,341) (16,619)
--------- --------
Cash used for acquisitions........................ $ 409,731 $279,320
========= ========
NOTE FOUR
PREARRANGED FUNERAL ACCOUNTING
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreement is signed. Payments under these contracts are generally placed in
trust (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers in North America, the United Kingdom and
Australia or the Company's French prearranged funeral servic