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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $3,989,412,852 based upon a closing market price of $14.875 on
March 30, 1999 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.
The number of shares outstanding of the registrant's common stock as of
March 30, 1999 was 271,968,548 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1999
Annual Meeting of Shareholders (Part III)
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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, 1998, the Company operated 3,442 funeral service locations, 433
cemeteries and 191 crematoria located in 20 countries on five continents. The
Company conducts funeral operations in all of the business locales in which it
operates, cemetery operations in all regions except France, and financial
services operations in North America and France. For financial information about
the Company's reportable segments, see Note Fifteen to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company has continued to expand through the acquisition of funeral
service locations, cemeteries and crematoria, both domestically and
internationally. In 1998, the Company acquired 308 funeral service locations, 47
cemeteries, 18 crematoria, and two insurance companies. The Company has acquired
most of its present operations through acquisitions. For information regarding
acquisitions, see Note Three to the consolidated financial statements in Item 8
of this Form 10-K. Although the Company is continuing to make acquisitions, the
Company is curtailing its acquisition activity as discussed in the third
paragraph of Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K.
FUNERAL AND CEMETERY OPERATIONS
The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries and related businesses. The operations are
organized into a North American division covering the United States and Canada
and an international division responsible for all operations in Europe, the
Pacific Rim and South America. Each division is under the direction of
divisional executive management with substantial industry experience. Local
funeral service location and cemetery managers, under the direction of the
divisional management, receive support and resources from the Company's
headquarters in Houston, Texas and have substantial autonomy with respect to the
manner in which services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, including the
sharing of service personnel, vehicles, preparation services, clerical staff and
certain building facility costs.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses and generally continue to be
operated under the same name as before acquisition.
Funeral Service Locations. The funeral service locations provide all
professional services relating to funerals, including the use of funeral
facilities and motor vehicles. Funeral service locations sell caskets, coffins,
burial vaults, cremation receptacles, flowers and burial garments, and certain
funeral service locations also operate crematoria. At December 31, 1998, the
Company owned 156 funeral service location/cemetery combinations and operated 49
flower shops engaged principally in the design and sale of funeral floral
arrangements. These flower shops provide floral arrangements to some of the
Company's funeral homes and cemeteries.
In addition to selling its services and products to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets, including several foreign markets. Funeral prearrangement is a
means through which a customer contractually agrees to the terms of a funeral to
be performed in the future. The funds collected from prearranged funeral
contracts are placed in trust accounts (pursuant to applicable law) or are used
to pay premiums on life insurance policies from third party insurers or the
Company's wholly owned insurance subsidiaries. At December 31, 1998, the total
value of the Company's
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unperformed prearranged funeral contracts was $3.752 billion, of which
approximately $368 million is estimated to be fulfilled in 1999. For additional
information concerning prearranged funeral activities, see "Prearranged Funeral
Services" in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K and Note Four to the
consolidated financial statements in Item 8 of this Form 10-K.
The death rate tends to be somewhat higher in the winter months and the
Company's funeral service locations generally experience a higher volume of
business during those months.
Since 1984, the Company has operated under the Federal Trade Commission's
("FTC") comprehensive trade regulation rule for the funeral industry. The rule
contains minimum guidelines for funeral industry practices, requires extensive
price and other affirmative disclosures and imposes mandatory itemization of
funeral goods and services. From time to time in connection with acquisitions,
the Company has entered into consent orders with the FTC that have required the
Company to dispose of certain operations to proceed with acquisitions or have
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a materially adverse
effect on the Company's operations.
Cemeteries. The Company's cemeteries sell cemetery interment rights
(including mausoleum spaces and lawn crypts) and certain merchandise including
stone and bronze memorials and burial vaults. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries also operate crematoria.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise may be required by law to be paid into trust
until the merchandise is purchased on behalf of the customer. For additional
information regarding cemetery trust funds, see Notes Two and Six to the
consolidated financial statements in Item 8 of this Form 10-K.
Death Care Industry. The funeral industry is characterized by a large
number of locally owned, independent operations. The Company believes that based
on the total number of funeral services performed in 1998, the Company,
including companies acquired by it, performed approximately 11%, 28%, 14% and
25% of the funeral services in North America, France, the United Kingdom and
Australia, respectively.
To compete successfully, the Company's funeral service locations must
maintain competitive prices, attractive, well-maintained and conveniently
located facilities, a good reputation and high professional standards. In
addition, heritage and tradition can provide an established funeral home with
the opportunity for repeat business from client families. Furthermore, an
established firm can generate future volume and revenues by marketing
prearranged funeral services.
The cemetery industry is also characterized by a large number of locally
owned independent operations. The Company's cemetery properties compete with
other cemeteries in the same general area. To compete successfully, the
Company's cemeteries must maintain competitive prices, attractive and
well-maintained properties, a good reputation, an effective sales force and high
professional standards.
FINANCIAL SERVICES OPERATIONS
The financial services division represents a combination of the Company's
prearranged funeral and cemetery trust accounting and administration, investment
management, life insurance operations and the lending activities of Provident
Services, Inc., a wholly-owned subsidiary of the Company ("Provident").
The Company's insurance operations include ownership of a French life
insurance company (Auxia) and a U.S. life insurance company (American Memorial
Life Insurance Company). These wholly-owned subsidiaries assist in funding
contracts written by Company owned funeral service locations. For additional
information concerning the Company's financial services and insurance
operations, see Management's
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Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this Form 10-K and Notes Two, Four and Five to the consolidated financial
statements in Item 8 of this Form 10-K.
Since 1988, Provident has provided secured financing to independent funeral
home and cemetery operators. The majority of Provident's loans are made to
clients seeking to finance funeral home or cemetery acquisitions. Additionally,
Provident provides construction loans for funeral home or cemetery improvement
and expansion. Loan packages take traditional forms of secured financing
comparable to arrangements offered by leading commercial banks. Provident's
loans are generally made at interest rates which float with the prime lending
rate. At December 31, 1998, Provident had $270 million in loans outstanding and
$31 million of unfunded loan commitments. At December 31, 1997, Provident had
$198 million in loans outstanding and $50 million of unfunded loan commitments.
Provident obtains its funds primarily from the Company's variable interest rate
credit facilities.
EMPLOYEES
At December 31, 1998, the Company employed 27,618 (16,627 in the United
States) persons on a full time basis and 12,410 (9,148 in the United States)
persons on a part time basis. Of the full time employees, 26,567 were in the
funeral and cemetery operations, 397 were in financial services operations and
654 were in corporate services. All of the Company's eligible United States
employees who so elect are covered by the Company's group health and life
insurance plans. Eligible United States employees are participants in retirement
plans of the Company or various subsidiaries, while foreign employees are
covered by other Company defined or government mandated benefit plans. Although
labor disputes are experienced from time to time, in general relations with
employees are considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various U.S. federal, state and foreign statutes, ordinances
and regulations. The Company believes that it is in substantial compliance with
the significant provisions of such statutes, ordinances and regulations. See
discussion of FTC funeral industry trade regulation and consent orders in
"Funeral Service Locations" above.
The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry has
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments ("Municipal
Monopoly"), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
SCI's French operations ("Exclusive Municipal Authority"). Legislation has been
passed that will generally end municipal control of the French funeral service
business and will allow the public to choose their funeral service provider.
Under such legislation, the Exclusive Municipal Authority was abolished in
January 1996, and the Municipal Monopoly was eliminated in January 1998.
Cemeteries in France, however, are and will continue to be controlled by
municipalities and religious organizations, with third parties, such as SCI,
providing cemetery merchandise such as markers and monuments.
ITEM 2. PROPERTIES.
The Company's executive headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and its
parking garage. The property consists of approximately 1.3 acres, 250,000 square
feet of office space in the building and 160,000 square feet of parking space in
the garage. The Company leases all of the office space in the building pursuant
to a lease that expires June 30, 2005 providing for monthly rent of $43,000
through July 2000 and $59,000 thereafter. The Company pays all operating
expenses. One half of the rent is paid to the wholly owned subsidiary and the
other half is paid to the owners of the remaining undivided one-half interest.
The Company owns and utilizes two additional buildings located in Houston, Texas
containing a total of approximately 167,000 square feet of office space.
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At December 31, 1998, the Company owned the real estate and buildings of
3,187 of its funeral service and cemetery locations and leased facilities in
connection with 879 of such operations. In addition, the Company leased five
aircraft pursuant to cancelable leases. At December 31, 1998, the Company
operated 13,190 vehicles, of which 11,012 were owned and 2,178 were leased. For
additional information regarding leases, see Note Eleven to the consolidated
financial statements in Item 8 of this Form 10-K.
At December 31, 1998, the Company's 433 cemeteries contain a total of
approximately 31,186 acres, of which approximately 53% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition. Management believes
that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Since January 26, 1999, several lawsuits have been commenced on behalf of
persons who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into Equity Corporation International
("ECI"), (ii) purchased shares of Company common stock during certain specified
class periods or (iii) owned employee stock options in ECI. As of March 24,
1999, 20 class action lawsuits that had been originally filed in federal
district court in Houston had been consolidated into one action pending in that
court, and one additional class action lawsuit that had been originally filed in
the federal district court in Lufkin, Texas was still pending in that court.
These lawsuits allege violations of federal securities laws and name as
defendants the Company and certain of its officers and directors. As of the same
date, two former state court lawsuits, one of which was a class action, naming
the Company as defendant and alleging fraud and violations of Texas securities
and common law had been removed to the federal district court in Lufkin. The
lawsuits generally refer to the Company's January 26, 1999 public announcement
that the Company's diluted earnings per share for the fourth quarter of 1998 and
for the year ended December 31, 1998 would be lower than analyst expectations.
The lawsuits seek, among other things, to recover unspecified damages. Since the
litigation is in its very preliminary stages, no discovery has been taken, and
the Company cannot quantify its ultimate liability, if any, for the payment of
damages in these lawsuits. However, the Company believes that the allegations in
the lawsuits do not provide a basis for the recovery of damages because the
Company has made all the required disclosures on a timely basis. The Company is
seeking to transfer the lawsuits pending in Lufkin and consolidate them with the
action pending in federal district court in Houston. The Company intends to
aggressively defend the foregoing lawsuits. A list of (x) the styles of the
pending class action litigation matters, (y) the identities of the officers and
directors of SCI who have not been expressly excluded from the class
designations relating to former ECI stockholders and option holders and (z) the
identities of officers and directors of SCI who have been named as individual
defendants in certain pending litigation are set forth in Exhibit 99.1 to this
report, which Exhibit 99.1 is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 30, 1999 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
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R. L. Waltrip........................ (68) Chairman of the Board, Chief 1962
Executive Officer and President
George R. Champagne.................. (45) Executive Vice President Chief 1989
Financial Officer
John W. Morrow, Jr................... (63) Executive Vice President North 1989
American Operations
Jerald L. Pullins.................... (57) Executive Vice President 1992
International Operations
W. Blair Waltrip..................... (44) Executive Vice President 1980
Gregory L. Cauthen................... (41) Senior Vice President 1995
Glenn G. McMillen.................... (56) Senior Vice President Assistant to 1993
Chairman
Richard T. Sells..................... (59) Senior Vice President Preneed Sales 1987
James M. Shelger..................... (49) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner....................... (53) Senior Vice President Administration 1992
T. Craig Benson...................... (37) Vice President International 1990
Operations
J. Daniel Garrison................... (47) Vice President International 1998
Operations
W. Cardon Gerner..................... (44) Vice President Controller 1999
W. Mark Hamilton..................... (34) Vice President 1996
Lowell A. Kirkpatrick, Jr. .......... (40) Vice President Operations, Finance 1994
and Development
Stephen M. Mack...................... (47) Vice President Operations 1998
Todd A. Matherne..................... (44) Vice President Treasurer 1996
Thomas L. Ryan....................... (33) Vice President International Finance 1999
Vincent L. Visosky................... (51) Vice President 1989
Michael R. Webb...................... (41) Vice President International 1998
Corporate Development
Henry M. Nelly, III.................. (54) President -- Provident Services, 1989
Inc., a subsidiary of the Company
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(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Controller.
Before the acquisition, Mr. Gerner had been Senior Vice President and Chief
Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner was a
partner with Ernst & Young LLP.
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Mr. Matherne joined the Company in April 1995 as Managing Director Investor
Relations and was promoted in May 1996 to Vice President Investor Relations and
in February 1998 to Vice President Operations, Finance and Development. Prior
thereto, Mr. Matherne was Vice President and General Manager of Baker Hughes
Treatment Services, an environmental services business.
Mr. Ryan joined the Company in June 1996 as Director of Financial
Reporting. Since then, Mr. Ryan has served as Director of Investor Relations and
Managing Director and Chief Financial Officer of International Operations. Mr.
Ryan was promoted to Vice President International Finance in February 1999.
Prior to joining the Company, Mr. Ryan was a certified public accountant with
Coopers & Lybrand L.L.P. for more than five years.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary. W. Blair Waltrip is a son of
R.L. Waltrip.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 1998, there were 7,613 holders of record of
the Company's common stock.
The Company has declared 103 consecutive quarterly dividends on its common
stock since it began paying dividends in 1974. The dividend rate is currently
$.09 per share per quarter, or an indicated annual rate of $.36 per share. For
the three years ended December 31, 1998, dividends per share were $.36, $.30 and
$.24, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
YEARS ENDED DECEMBER 31,
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1998 1997 1996
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HIGH LOW HIGH LOW HIGH LOW
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First............................. $43.69 $35.69 $33.88 $26.88 $24.75 $19.44
Second............................ 44.63 38.94 36.00 29.63 30.13 24.13
Third............................. 45.88 31.88 35.75 29.81 29.44 27.63
Fourth............................ 39.25 29.81 38.00 27.88 30.75 26.50
On March 26, 1999, the closing price of the Company's common stock was
$14.75 per share.
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
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ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues......................... $2,875,090 $2,535,865 $2,355,342 $1,652,126 $1,117,175
Income before extraordinary
loss........................... 342,142 374,552 265,298 183,588 131,045
Net income....................... 342,142 333,750 265,298 183,588 131,045
Earnings per share:
Income before extraordinary
loss
Basic....................... 1.34 1.53 1.13 .92 .76
Diluted..................... 1.31 1.47 1.08 .86 .71
Net income
Basic....................... 1.34 1.36 1.13 .92 .76
Diluted..................... 1.31 1.31 1.08 .86 .71
Dividends per share.............. .36 .30 .24 .22 .21
Total assets..................... 13,266,158 10,514,930 9,020,778 7,768,982 5,196,690
Long-term debt................... 3,764,590 2,634,699 2,048,737 1,712,464 1,330,177
Convertible preferred securities
of SCI Finance LLC............. -- -- 172,500 172,500 172,500
Stockholders' equity............. 3,154,102 2,726,004 2,235,317 1,975,345 1,196,622
Shares outstanding............... 259,201 252,924 236,193 234,542 189,714
Ratio of earnings to fixed
charges*....................... 3.42 4.29 3.24 2.84 3.13
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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.
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Equity Corporation International
In January 1999, a wholly-owned subsidiary of the Company acquired ECI. The
combination occurred through a stock-for-stock transaction in which ECI
stockholders received approximately 15,500,584 shares of Company common stock.
Set forth below is certain summary financial information for ECI (Dollars
in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
Revenues............................................ $190,056 $135,073 $ 91,974
-------- -------- --------
Gross profit........................................ 51,003 37,660 26,137
-------- -------- --------
Net income.......................................... $ 16,247 $ 14,699 $ 10,326
-------- -------- --------
Current assets...................................... $ 61,692 $ 34,766 $ 29,558
Non-current assets.................................. 917,523 682,934 414,333
-------- -------- --------
Total assets........................................ $979,215 $717,700 $443,891
-------- -------- --------
Current liabilities................................. $ 31,019 $ 17,100 $ 10,379
Non-current liabilities............................. 690,722 474,068 256,048
-------- -------- --------
Total liabilities................................... $721,741 $491,168 $266,427
-------- -------- --------
Stockholders' equity................................ $257,474 $226,532 $177,464
-------- -------- --------
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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)
The Company is the largest provider of death care services in the world. At
December 31, 1998, the Company operated 3,442 funeral service locations, 433
cemeteries and 191 crematoria located in 20 countries on five continents. The
Company conducts funeral operations in all of its business locales, cemetery
operations in all regions except France, and financial services operations in
North America and France. As of December 31, 1998, the Company's largest markets
are North America and France, which when combined, represent approximately 87%
of the Company's consolidated revenue, 90% of consolidated income from
operations and 75% of the Company's total operating locations.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
Historically, the Company's growth has been largely attributable to
acquisitions. In light of prevailing market prices for available acquisition
candidates, the Company is curtailing its acquisition activity. Additionally,
because of the current size of the Company, it is becoming increasingly
difficult to support the historical earnings growth rate through acquisitions.
Therefore, the Company intends to focus its efforts on maximizing the
profitability of existing clusters of facilities rather than the historically
heavy emphasis on acquisitions. The Company, though, will continue to acquire
domestic and foreign facilities where operating strategies and pricing
considerations are properly aligned.
RESULTS OF OPERATIONS -- FOURTH QUARTER 1998 COMPARED TO FOURTH QUARTER 1997:
Funeral and cemetery revenues were $687,996 in the fourth quarter 1998,
compared to $637,654 in the prior year quarter, a 7.9% increase. Funeral and
cemetery gross margins were $131,781 in the fourth quarter 1998 compared to
$180,615 in the prior year quarter, a 27.0% decrease. The large decrease in the
funeral and cemetery gross margins contributed significantly to the consolidated
net income and diluted earnings per share declines, quarter over quarter, of
35.6% and 36.1%, respectively. A 40.5% increase in interest expense, quarter
over quarter, was primarily responsible for the remainder of the declines.
Though total funeral and cemetery revenues increased quarter over quarter, the
rate of growth was less than expected. At the same time, costs and expenses had
been structured for an expected higher level of sales. Major items contributing
to the earnings decline included:
- A 2.7% decline in funeral revenues, quarter over quarter, at locations
owned before October 1, 1997. This represented approximately $11,000 and
was caused by weak death rates and lower average sales prices. The lower
average sales prices were due to a changing profile in the sales mix
reflecting an increased proportion of performed funerals from lower
average prearranged sales and an increased proportion of lower average
cremations.
- Approximately $19,000, or 6.3%, in additional funeral costs incurred at
locations acquired before October 1, 1997 due to higher merchandise,
personnel, facility and public relations costs primarily in North America
and the United Kingdom.
- Weak operating performances by locations acquired after September 30,
1997.
- Approximately $10,000, or 10.4%, in increased cemetery costs for
locations acquired before October 1, 1997 due to higher merchandise,
maintenance and administrative expenses primarily in North America.
Revenues at these locations grew by approximately $1,000, or .9%.
- Increased overhead costs included in the funeral and cemetery gross
margins, partially due to an anticipated higher level of revenues,
increased approximately $13,000, or 60.1%.
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RESULTS OF OPERATIONS:
The operating results for the Company in 1998 compared to 1997 were below
expectations primarily as the result of disappointing fourth quarter funeral and
cemetery revenue and a cost structure that was geared toward a higher expected
level of revenue. These issues were discussed above and are discussed in more
detail below. Current expectations for the Company's 1999 outlook point to
continued pressure on operating margins as costs are expected to grow at a
faster percentage than revenues due primarily to the following issues. Revenue
growth is expected to continue to be negatively affected by potentially weak
death rates in several of the Company's major markets. In addition, cemetery
preneed sales are not expected to grow appreciably over 1998 levels due
primarily to continued sales staffing difficulties. The funeral business has a
high fixed cost structure (approximately 80%-90% of funeral costs) that does not
easily lend itself to reductions during periods of slower revenue growth. The
acquisition in January 1999 of Equity Corporation International (ECI),
previously the fourth largest death care company in North America, will exert
downward pressure on operating margins due to ECI's historically lower volume
operations.
Year ended 1998 compared to 1997
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------- INCREASE INCREASE
1998 1997 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral........................ $ 1,829,136 $ 1,720,291 $108,845 6.3%
Cemetery....................... 846,601 724,862 121,739 16.8
Financial services............. 199,353 90,712 108,641 119.8
----------- ----------- -------- -----
2,875,090 2,535,865 339,225 13.4
Costs and expenses:
Funeral........................ (1,444,529) (1,318,920) 125,609 9.5
Cemetery....................... (540,440) (452,965) 87,475 19.3
Financial services............. (171,351) (76,368) 94,983 124.4
----------- ----------- -------- -----
(2,156,320) (1,848,253) 308,067 16.7
Gross profit margin and
percentage:
Funeral........................ 384,607 21.0% 401,371 23.3% (16,764) (4.2)
Cemetery....................... 306,161 36.2 271,897 37.5 34,264 12.6
Financial services............. 28,002 14.0 14,344 15.8 13,658 95.2
----------- ---- ----------- ---- -------- -----
$ 718,770 25.0% $ 687,612 27.1% $ 31,158 4.5%
=========== ==== =========== ==== ======== =====
Funeral
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------- INCREASE INCREASE
1998 1997 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
North America.................... $ 1,006,654 $ 970,749 $ 35,905 3.7%
France........................... 524,418 480,473 43,945 9.1
Other European................... 241,114 203,479 37,635 18.5
Other foreign.................... 56,950 65,590 (8,640) (13.2)
----------- ----------- -------- -----
Total funeral
revenues............. $ 1,829,136 $ 1,720,291 $108,845 6.3%
=========== =========== ======== =====
The $35,905 increase in revenues from North American operations was
primarily the result of a $34,499 increase in revenues from existing clusters
(existing clusters represent geographic areas entered prior to January 1, 1997).
Included in the existing cluster increase was a $60,724 increase from locations
acquired since January 1, 1997, offset by a $26,225 decrease from locations
acquired prior to 1997. The number of funeral services performed by existing
clusters in North America increased 4.1% (259,071 compared to
10
12
248,781), while the average sales price decreased slightly by .5% ($3,817
compared to $3,836). The sales price decrease occurred because of continuing
changes in the Company's sales mix resulting from a higher proportion of
funerals from prearranged contracts being serviced and an increase in the number
of cremations performed both of which typically carry lower sales price averages
than traditional at need funeral services. The prearranged sales average has
been historically lower than the current at need sales average primarily due to
the servicing of older, lower average contracts typically sold by funeral homes
that have been acquired by the Company. In addition, the Company has lowered
sales prices in certain markets for competitive reasons. Locations included in
existing clusters, that were acquired since January 1, 1997 performed 25,999
funeral services compared to 10,378 in 1997, while locations acquired before
1997 performed 2.2% fewer funeral services in 1998 (233,072 compared to
238,403).
The increasing proportion of people over age 65 in the Company's primary
North American markets could increase demand for funeral services in the decades
to come. It is believed the Company currently performs approximately 11% of the
funeral services in North America.
Revenues from the Company's operations in France increased $43,945 in 1998
due primarily to acquisitions, since January 1, 1997, added to existing French
clusters. Also contributing to this increase was a 3.0% increase in average
sales prices and higher merchandise sales in 1998 at existing locations. The
total number of funeral services performed by the Company's French operations
during 1998 was 147,994, compared to 148,223 in 1997.
The $37,635 increase in revenues from other European operations is
primarily due to a 14.4% increase in the total number of funeral services
performed (117,776 compared to 102,985). Revenue from locations acquired since
January 1, 1997, increased $43,912 in 1998 ($57,514 compared to $13,602), while
volumes at these locations increased to 30,903 in 1998, compared to 7,140 in
1997. In 1998, the Company entered into new markets, including Norway and
expanded existing markets in Spain, Portugal and the Netherlands.
The decrease in revenues from other foreign operations is primarily due to
a 15.4% decline in the Australian to US currency exchange rates, offset by
increased revenues from a full year of operations in Argentina. The number of
funeral services performed by other foreign operations were 29,946 compared to
29,278 in 1997.
During the year ended December 31, 1998, the Company sold (net of
cancellations) approximately $490,000 of prearranged funeral services compared
to approximately $527,000 for the same period in 1997. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed. The Company
expects to continue the emphasis on selling prearranged funerals.
Funeral gross margins were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------- PERCENTAGE
% OF % OF INCREASE INCREASE
1998 REVENUE 1997 REVENUE (DECREASE) (DECREASE)
-------- ------- -------- ------- ---------- ----------
North America.............. $284,332 28.2% $297,586 30.7% $(13,254) (4.5)%
France..................... 60,810 11.6 48,620 10.1 12,190 25.1
Other European............. 27,731 11.5 38,097 18.7 (10,366) (27.2)
Other foreign.............. 11,734 20.6 17,068 26.0 (5,334) (31.3)
-------- ---- -------- ---- -------- -----
Total funeral
gross margin... $384,607 21.0% $401,371 23.3% $(16,764) (4.2)%
======== ==== ======== ==== ======== =====
The decrease in gross margin percentage in North America is due to an
increase in costs and expenses of 7.3% while revenues increased 3.7%, as
discussed above. The increased costs and expenses are primarily due to higher
costs at locations acquired since January 1, 1997. Typically, acquisitions will
temporarily exhibit slightly lower gross profit margins than those experienced
by the Company's existing locations at least until such time as these locations
are assimilated into the Company's cluster management strategy. Costs for
locations acquired prior to 1997 were flat with the prior year.
11
13
The France gross margin increase is attributable to a revenue increase of
9.1%, while the corresponding increase in costs and expenses were 7.4%. The
Company continues to improve its French sales and merchandising efforts while
implementing additional cost efficiencies.
Despite increased revenues, the other European gross margin percentage
decreased due to a disproportionate increase in costs and expenses of 29.0%
($213,383 compared to $165,381). The increased costs and expenses are primarily
related to additional costs in the United Kingdom and operating costs incurred
by acquisitions made throughout Europe during the year.
The decrease in other foreign gross margin percentage is primarily due to
the Company's Australian operations. Excluding a 15.4% decline in the Australian
to US currency exchange rates, Australian revenue declined approximately 1.6%,
while Australian costs and expenses increased approximately 6.0%.
Cemetery
Cemetery revenues were as follows:
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1998 1997 INCREASE INCREASE
-------- -------- -------- ----------
North America.............................. $768,228 $671,112 $ 97,116 14.5%
Other European............................. 25,565 21,609 3,956 18.3
Other foreign.............................. 52,808 32,141 20,667 64.3
-------- -------- -------- ----
Total cemetery revenues.......... $846,601 $724,862 $121,739 16.8%
======== ======== ======== ====
The $97,116 increase in revenues from North American cemetery operations is
primarily due to an increase of $95,153 from existing clusters. Included in the
existing cluster increase was $69,483 from locations acquired since January 1,
1997, while revenues from existing cluster locations acquired before 1997
increased $25,670. Factors contributing to the total increase were increases in
preneed and at need sales of property and merchandise ($66,629), higher
investment earnings on trusted amounts ($18,594) and increased revenue from
sales of excess property ($11,893).
The increase in revenues from other foreign operations is primarily due to
the inclusion of a full year of cemetery operations in Argentina $24,365, offset
by a $3,698 decrease in cemetery revenue in Australia.
Cemetery gross margins were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------- PERCENTAGE
% OF % OF INCREASE INCREASE
1998 REVENUE 1997 REVENUE (DECREASE) (DECREASE)
-------- ------- -------- ------- ---------- ----------
North America.............. $282,754 36.8% $251,993 37.5% $30,761 12.2%
Other European............. 7,936 31.0 8,275 38.3 (339) (4.1)
Other foreign.............. 15,471 29.3 11,629 36.2 3,842 33.0
-------- ---- -------- ---- ------- ----
Total cemetery
gross margin... $306,161 36.2% $271,897 37.5% $34,264 12.6%
======== ==== ======== ==== ======= ====
North American cemetery gross margin increased $30,761 in 1998, primarily
due to corresponding growth in revenue discussed above. The 1998 decrease in
cemetery gross margin percentage (36.8% compared to 37.5%) is due to higher
costs at locations acquired since January 1, 1997 and higher overhead costs.
Recently acquired cemeteries will usually have lower gross margins than the
Company's existing cemeteries until a formal selling program can be developed
and until operating costs can be more efficiently managed through the cluster
management approach. Costs at existing cemeteries were .3% higher in 1998 versus
1997.
The decrease in other foreign gross profit margin percentage is due to the
inclusion of a full year of cemetery operations in Argentina. The gross profit
margin percentage from operations in Argentina was approximately 19.4% in 1998,
compared to 39.2% for the Company's operations in Australia. The Argentina
12
14
gross margin is consistent with the Company's expectations. These operations
have historically produced lower gross margins than the Company's operations in
North America or Australia. Australia's gross profit margin percentages were
flat with 1997.
Financial Services
Financial services represents a combination of the Company's lending
subsidiary, Provident Services, Inc. (Provident), and the Company's wholly-owned
insurance subsidiaries.
Financial services revenues were as follows:
YEARS ENDED
DECEMBER 31,
------------------ PERCENTAGE
1998 1997 INCREASE INCREASE
-------- ------- -------- ----------
Insurance:
North America............................. $ 81,832 $ -- $ 81,832 --%
France.................................... 96,941 74,175 22,766 30.7
-------- ------- -------- -----
Total insurance........................... 178,773 74,175 104,598 141.0
Provident (North America)................... 20,580 16,537 4,043 24.4
-------- ------- -------- -----
Total financial services
revenues........................ $199,353 $90,712 $108,641 119.8%
======== ======= ======== =====
The 1998 increase in insurance revenues is due primarily to the North
American acquisition of American Memorial Life Insurance Company (AML) effective
July 1998. Insurance revenues from the Company's French operations increased due
to increased premium revenue and investment earnings due to increases in the
sales of prearranged funerals. Revenue from Provident increased as a result of a
corresponding increase in its average loan portfolio during 1998 ($228,279
compared to $182,375).
Financial services gross margins were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
% OF % OF PERCENTAGE
1998 REVENUE 1997 REVENUE INCREASE INCREASE
------- ------- ------- ------- -------- ----------
Insurance:
North America............... $ 7,872 9.6% $ -- --% $ 7,872 --%
France...................... 10,689 11.0 6,712 9.0 3,977 59.3
------- ---- ------- ---- ------- -----
Total insurance............. 18,561 10.4 6,712 9.0 11,849 176.5
Provident (North America)..... 9,441 45.9 7,632 46.2 1,809 23.7
------- ---- ------- ---- ------- -----
Total financial
services gross
margin............ $28,002 14.0% $14,344 15.8% $13,658 95.2%
======= ==== ======= ==== ======= =====
The increase in North American insurance gross margin is due to the
acquisition of AML as discussed above, while the increase in French insurance
gross margin is primarily due to increased revenues.
Provident reported a gross profit of $9,441 for the year ended December 31,
1998 compared to $7,632 for the same period in 1997. The increase in gross
profit is due to the increase in Provident's average outstanding loan portfolio,
partially offset by a decrease in the average interest rate spread (3.14% this
year compared to 3.18% last year).
Other Income and Expenses
The Company's general and administrative expenses remained stable in 1998
($66,839 compared to $66,781). Expressed as a percentage of revenues, these
expenses decreased slightly to 2.3% in 1998 compared to 2.6% in 1997.
Interest expense, which excludes the amount incurred by financial service
operations, increased $40,333 or 29.5% during 1998. The average borrowings
during 1998 were $3,340,708 compared to $2,434,808 in 1997,
13
15
primarily due to additional borrowings for acquisitions. The average interest
rate in 1998 was 6.15% compared to 6.03% in 1997.
Other income was $43,649 in 1998, compared to $100,244 in 1997. This
decrease reflects a gain on the sale of the Company's equity interest in ECI
($68,077) recorded in 1997 (see note nineteen to the consolidated financial
statements).
The provision for income taxes reflects a 34.0% effective tax rate for
1998, compared to a 35.4% effective tax rate in 1997. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations. Both years included tax benefits relating to enacted tax rate
changes in certain foreign tax jurisdictions.
RESULTS OF OPERATIONS:
Year Ended 1997 Compared to 1996
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
Revenues:
Funeral........................ $ 1,720,291 $ 1,656,736 $ 63,555 3.8%
Cemetery....................... 724,862 612,421 112,441 18.4
Financial services............. 90,712 86,185 4,527 5.3
----------- ----------- -------- ----
2,535,865 2,355,342 180,523 7.7
Costs and expenses:
Funeral........................ (1,318,920) (1,282,546) 36,374 2.8
Cemetery....................... (452,965) (397,700) 55,265 13.9
Financial services............. (76,368) (70,644) 5,724 8.1
----------- ----------- -------- ----
(1,848,253) (1,750,890) 97,363 5.6
Gross profit margin and
percentage:
Funeral........................ 401,371 23.3% 374,190 22.6% 27,181 7.3
Cemetery....................... 271,897 37.5 214,721 35.1 57,176 26.6
Financial services............. 14,344 15.8 15,541 18.0 (1,197) (7.7)
----------- ---- ----------- ---- -------- ----
$ 687,612 27.1% $ 604,452 25.7% $ 83,160 13.8%
=========== ==== =========== ==== ======== ====
Funeral
Funeral revenues were as follows:
YEAR ENDED DECEMBER 31, PERCENTAGE
----------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
North America........................... $ 970,749 $ 883,876 $ 86,873 9.8%
France.................................. 480,473 532,543 (52,070) (9.8)
Other European.......................... 203,479 169,660 33,819 19.9
Other foreign........................... 65,590 70,657 (5,067) (7.2)
---------- ---------- -------- ----
Total funeral revenues........ $1,720,291 $1,656,736 $ 63,555 3.8%
========== ========== ======== ====
The $86,873 increase in revenues from North American operations was
primarily the result of a $75,796 increase in revenues from existing clusters.
The number of funeral services performed by existing clusters in North America
increased 5.2% (245,633 compared to 233,383), while the average sales price
increased 3.3% ($3,833 compared to $3,710). Included in the existing cluster
increase was a $70,894 increase from locations acquired since January 1, 1996
and an increase of $4,902 from locations acquired prior to 1996. Locations
acquired since January 1, 1996 performed 30,418 funeral services during 1997
compared to 12,385 in 1996, while the average sales price increased 6.5% ($3,773
compared to $3,543). The increase from locations
14
16
acquired prior to 1996 is primarily due to a 3.3% higher average sales price
($3,842 compared to $3,720), offset by a 2.6% decrease in the number of funeral
services performed.
Revenues from French operations decreased $52,070 due to a 12.3% decline in
the French franc to US dollar currency exchange rate and a 1.4% decline in the
total funeral services performed (148,223 compared to 150,269). These declines
were partially offset by increased average sales prices (excluding the impact of
currency exchange rates discussed above).The $33,819 increase in revenues from
other European operations was primarily the result of an 11.3% increase in the
number of funeral services performed (102,985 compared to 92,491) as well as
improved average sales prices during 1997. This volume increase reflects a 5.9%
increase in volume reported by the Company's United Kingdom operations and the
effect of continued growth through acquisitions in Europe.
The decrease in revenues from other foreign operations is due primarily to
a 5.0% decline in the Australian to US currency exchange rate. The number of
funeral services performed by the Company's Australian operations declined 4.9%
in 1997, while average prices increased slightly (excluding the impact from
currency discussed above).
During the year ended December 31, 1997, the Company sold (net of
cancellations) approximately $527,000 of prearranged funeral services compared
to approximately $512,000 for the same period in 1996. These prearranged funeral
services are deferred and will be reflected in funeral revenues in the periods
that the funeral services are performed.
Funeral gross margins were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------------------------------- INCREASE INCREASE
1997 % OF REVENUE 1996 % OF REVENUE (DECREASE) (DECREASE)
-------- ------------ -------- ------------ ---------- ----------
North America.......... $297,586 30.7% $275,119 31.1% $22,467 8.2%
France................. 48,620 10.1 47,655 8.9 965 2.0
Other European......... 38,097 18.7 30,657 18.1 7,440 24.3
Other foreign.......... 17,068 26.0 20,759 29.4 (3,691) (17.8)
-------- ---- -------- ---- ------- -----
Total funeral
gross
margin..... $401,371 23.3% $374,190 22.6% $27,181 7.3%
======== ==== ======== ==== ======= =====
The slight decrease in gross margin percentage in North America is due to
lower margins reported by businesses acquired since January 1, 1996. Typically
acquisitions will temporarily exhibit slightly lower gross profit margins than
those experienced by the Company's existing locations until these locations are
assimilated into the Company's cluster management strategy. Margins at
businesses acquired before 1996 were virtually equal with the prior year.
The increase in other European gross margin percentage is primarily due to
improved results from the Company's United Kingdom operations in 1997, compared
to 1996.
The decrease in other foreign gross margin is primarily due to the decrease
in funeral revenues mentioned above and a 5.0% unfavorable change in the
Australian to US currency exchange rates.
Cemetery
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
---------- ---------- -------- ----------
North America............................ $671,112 $566,671 $104,441 18.4%
Other European........................... 21,609 15,285 6,324 41.4
Other foreign............................ 32,141 30,465 1,676 5.5
-------- -------- -------- ----
Total cemetery revenues........ $724,862 $612,421 $112,441 18.4%
======== ======== ======== ====
15
17
The $104,441 increase in North American cemetery revenue is due primarily
to a $93,858 increase in revenues from existing clusters. Included in the
existing cluster increase was $49,781 from locations acquired since January 1,
1996. Locations owned before January 1, 1996 contributed $44,077. Factors
contributing to the total increase included increased sales of preneed and at
need property and merchandise ($87,625), investment earnings on trusted amounts
($27,837), offset partially by fewer sales of excess property ($3,021).
The $6,324 increase in other European cemetery revenues is primarily due to
a $5,740 increase in revenues from locations acquired prior to 1996 in the
United Kingdom.
Cemetery gross margins were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------------------------------- INCREASE INCREASE
1997 % OF REVENUE 1996 % OF REVENUE (DECREASE) (DECREASE)
-------- ------------ -------- ------------ ---------- ----------
North America........... $251,993 37.5% $198,210 35.0% $53,783 27.1%
Other European.......... 8,275 38.3 4,315 28.2 3,960 91.8
Other foreign........... 11,629 36.2 12,196 40.0 (567) (4.6)
-------- ---- -------- ---- ------- ----
Total cemetery
gross
margin...... $271,897 37.5% $214,721 35.1% 57,176 26.6%
======== ==== ======== ==== ======= ====
The increase in gross margin from the Company's North American cemetery
operations is due to the increase in cemetery revenues from preneed and at need
cemetery sales, as well as increased trust investment income.
The increase in other European cemetery gross margin is due to the increase
in cemetery revenues as mentioned above at the Company's United Kingdom cemetery
locations.
Financial Services
Financial services revenues were as follows:
YEARS ENDED
DECEMBER 31, PERCENTAGE
----------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
------- ------- ---------- ----------
French insurance subsidiary..................... $74,175 $67,799 $6,376 9.4%
Provident (North America)....................... 16,537 18,386 (1,849) (10.1)
------- ------- ------ -----
Total financial services revenues..... $90,712 $86,185 $4,527 5.3%
======= ======= ====== =====
Financial services gross margins were as follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------------- INCREASE INCREASE
1997 % OF REVENUE 1996 % OF REVENUE (DECREASE) (DECREASE)
------- ------------ ------- ------------ ---------- ----------
French insurance
subsidiary............. $ 6,712 9.0% $ 6,651 9.8% $ 61 0.9%
Provident (North
America)............... 7,632 46.2 8,890 48.3 (1,258) (14.2)
------- ---- ------- ---- ------- -----
Total financial
services
gross
margin....... $14,344 15.8% $15,541 18.0% $(1,197) (7.7)%
======= ==== ======= ==== ======= =====
Provident's average outstanding loan portfolio during 1997 decreased to
$182,375 compared to $190,936 in 1996, and the average interest rate spread also
decreased to 3.18% compared to 3.64% in 1996.
Other Income and Expenses
General and administrative expenses increased by approximately $3,566 or
5.6% during 1997 primarily due to increases in personnel costs and technology
costs. Expressed as a percentage of revenues, these expenses were 2.6% in 1997
compared to 2.7% in 1996.
16
18
Interest expense, which excludes the amount incurred by financial service
operations, decreased $1,837 or 1.3% during 1997. The decreased interest expense
is primarily attributable to the Company's 1997 refinancing of certain long-term
debt and hedging programs, which lowered the Company's average interest rate to
6.03% in 1997, compared to 7.10% in 1996. The average borrowings during 1997
were $2,434,808, compared to $2,068,072 in 1996.
Other income was $100,244 in 1997, compared to $21,982 in 1996, an increase
of $78,262. This increase reflects a gain on the sale of the Company's equity
interest in ECI ($68,077) recorded in 1997.
The provision for income taxes reflected a 35.4% effective tax rate for
1997 as compared to a 35.9% effective tax rate in 1996.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1998:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional registered
securities. The Company believes cash from operations, additional funds
available under its revolving credit agreements, and proceeds from public and
private offerings of securities will be sufficient to continue its anticipated
acquisition program and policies.
At December 31, 1998, the Company had net working capital of $578,755 and a
current ratio of 1.92:1, compared to working capital of $275,966 and a current
ratio of 1.52:1 at December 31, 1997. The Company had a cash and cash
equivalents balance at December 31, 1998 of $358,210, compared to $46,877 at
December 31, 1997. Approximately, $160,000 of the December 31, 1998 cash balance
was contemplated to be used to repay ECI's revolving credit facility and other
cash needs. The Company purchased ECI in January 1999 (see "Other Matters" for
further information).
Revolving Credit Agreements
The Company has various revolving credit facilities and lines of credit
which currently provide for aggregate borrowings of approximately $1,800,000. At
Dec ember 31, 1998, approximately $1,149,000 was available under these
facilities. These facilities have financial compliance provisions that contain
certain restrictions on levels of net worth, debt, liens and guarantees (see
note eight to the consolidated financial statements for further information).
Sources and Uses of Cash
Cash Flows from Operating Activities: Net cash provided by operating
activities was $329,647 for the year ended December 31, 1998, compared to
$299,436 for the same period in 1997, an increase of $30,211. This increase was
primarily due to increases in net income and non-cash adjustments for
depreciation and amortization and deferred taxes, offset by growth in the
Company's receivables. The primary source of growth in the Company's receivables
is from increased sales of cemetery products and merchandise on a preneed basis.
Cash Flows from Investing Activities: Net cash used in investing activities
was $1,059,875 for the year ended December 31, 1998, compared to $633,444 for
the same period in 1997, an increase of $426,431. This increase was primarily
due to a $310,037 increase in cash used in acquisitions and $22,692 of increased
capital expenditures including new construction of facilities and major
improvements to existing properties. Cash used relating to prearranged funeral
activities includes amounts expended in the current year on prearranged
marketing efforts. The prior year included $147,700 in cash provided by the sale
of the Company's equity interest in ECI.
17
19
Cash Flows from Financing Activities: Net cash provided by financing
activities was $1,041,561 for the year ended December 31, 1998 compared to
$336,754 for the same period in 1997, an increase of $704,807. This increase is
mainly the result of two 1998 public issuances of long term notes totaling
$1,100,000, compared to a 1997 debt issuance for $650,000 and debt
extinguishment of approximately $450,000. Total cash provided by debt financing
activities was approximately $1,124,000 in 1998, compared to $413,043 in 1997.
As of December 31, 1998, the Company's debt to capitalization ratio was
55.0% compared to 49.8% at December 31, 1997. The interest rate coverage ratio
for the year ended December 31, 1998 was 3.72:1, compared to 4.43:1 for the same
period in 1997 (1997 ratio excludes the gain on the sale of the Company's
investment in ECI). Though the level of acquisition activity is expected to slow
from the 1998 level, the Company still believes that the acquisition of funeral
and cemetery operations funded with debt or Company common stock is a prudent
business strategy given the stable cash flow generated and the low failure rate
exhibited by these types of businesses. The Company believes these acquired
firms are capable of servicing the additional debt and providing a sufficient
return on the Company's investment.
The Company expects adequate sources of funds to be available to finance
its future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. At December
31, 1998, the Company had approximately $1,149,000 of available borrowings under
various revolving credit facilities and lines of credit. At December 31, 1998,
the Company had the ability to issue $900,000 in securities under a shelf
registration. In addition, 12,870,000 shares of common stock and a total of
$187,000 of guaranteed promissory notes and convertible debentures are
registered under a separate shelf registration to be used exclusively for future
acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts
and the funds collected are generally held in trust or are used to purchase life
insurance or annuity contracts. The amounts paid into trust funds or premiums
paid on insurance contracts on such prearranged funeral contracts will be
received in cash by a Company funeral service location at the time the funeral
is performed. Earnings on trust funds and increasing benefits under insurance
and annuity funded contracts also increase the amount of cash to be received
upon performance of the funeral.
The Company has an investment program which entails the ongoing
consolidation of multiple trustees, the use of institutional managers with
differing investment styles and consolidated performance monitoring and
tracking. This program targets a real return in excess of the amount necessary
to cover future increases in the cost of providing a price guaranteed funeral
service as well as any selling costs. This is accomplished by allocating the
portfolio mix to the appropriate investments that more accurately match the
anticipated maturity of the contracts. The Company anticipates an asset
allocation of approximately 65% equity and 35% fixed income. The Company's North
American prearranged trust portfolio earned a return of 18.0% in 1998 and 12.5%
in 1997 (including realized gains).
Marketing costs incurred with the sale of prearranged funeral contracts are
a current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products. The Company sells prearranged funerals in most
of its service markets including its major foreign markets. AML, which was
acquired by the Company in 1998, has been a provider of insurance and annuity
products used to fund Company prearranged funerals for several years. The
Company's French life insurance subsidiary primarily sells insurance products
used to fund prearranged funerals to be performed by the Company's French
funeral service locations. Prearranged funeral service sales afford the Company
the opportunity to both protect current market share and mix as well as expand
market share in certain markets. The Company believes this will stimulate future
revenue growth. Prearranged funeral services fulfilled as a percent of the total
North American funerals performed annually approximates 26.3% (25.1% in 1997)
and is expected to grow, thereby making the total number of funerals performed
more predictable, which will be recognized as funeral revenues in future
periods.
18
20
The total value of unperformed prearranged funeral contracts are trust
funded or insurance funded and represent the original contract value plus any
accumulated trust earnings or increasing insurance benefits. As of December 31,
1998 and 1997, unperformed prearranged funeral contracts are composed of the
following:
1998 1997
---------- ----------
Deferred prearranged funeral contract revenues.............. $2,819,794 $2,805,429
Contracts funded by company owned insurance subsidiaries.... 932,056 565,995
---------- ----------
$3,751,850 $3,371,424
========== ==========
The following table summarizes the changes in the total value of
unperformed prearranged funeral contracts.
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
Beginning balance........................................... $3,371,424 $2,876,778
Net sales................................................. 490,289 526,919
Acquisitions/dispositions................................. 138,976 102,346
Realized earnings and increasing insurance benefits....... 129,484 164,853
Maturities................................................ (274,107) (251,054)
Change in cancellation reserve............................ (16,608) (33,481)
Effect of foreign currency and other...................... (87,608) (14,937)
---------- ----------
Ending balance.............................................. $3,751,850 $3,371,424
========== ==========
The recognition of the total value of unperformed prearranged funeral
revenues is estimated to occur in the following years.
1999........................................................ $ 367,783
2000........................................................ 334,239
2001........................................................ 271,540
2002........................................................ 281,612
2003........................................................ 254,819
2004 through 2008........................................... 962,042
2009 and thereafter......................................... 1,279,815
----------
$3,751,850
==========
Cremations
In recent years there has been steady, gradual growth in the number of
cremations that have been chosen as an alternative to traditional methods of
disposal of human remains. In 1998, 34.5% (33.3% in 1997) of all families served
by the Company's North American funeral service locations selected the cremation
alternative, substantially more than the 20% national average according to
industry studies. The Company has a significant number of operating locations in
Florida and the west coast of North America where the cremation alternative
continues to gain acceptance. Based on industry studies, the Company believes
that cremations account for approximately 60-70% of all dispositions of human
remains in Australia and the United Kingdom. It is estimated that cremations
account for approximately 17% of all dispositions of human remains in France.
Though a cremation typically results in fewer sales dollars than a traditional
funeral service, the Company believes that funeral operations which are
predominantly cremation businesses typically have higher gross profit margin
percentages than those exhibited at traditional funeral operations. Cremation
memorialization has long been a tradition in the Australian and United Kingdom
markets. The Company has expanded its product alternatives in these markets
which has resulted in higher average sales. The Company has also established
markets in select areas within North America and believes that memorialization
of cremated remains represents a source of revenue and margin growth.
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Other Matters
In January, 1999, a wholly-owned subsidiary of the Company acquired ECI in
a stock for stock transaction valued at approximately $578,000 with assumed debt
of $252,000. ECI owned 326 funeral homes and 81 cemeteries in North America.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. Changes in the fair value of derivatives will be
recorded either in earnings or in other comprehensive income, based on the type
of risk for which the instrument is determined to be an effective hedge. Any
change in fair value of an instrument that is not designated as a hedge, or any
portion of a change in fair value of a hedging instrument that is deemed
ineffective, will be immediately recognized in earnings. The Company expects to
adopt the standard in the first quarter of fiscal year 2000 and is currently
assessing the impact that adoption will have on its consolidated financial
statements.
Several countries in which the Company operates will adopt usage of the
Euro in 1999. The Euro is a common currency being adopted by many of the
countries within the European community. The Company has established plans to
address operational and information system issues related to the Euro
conversion. The Company does not expect that the Euro conversion will have a
material adverse impact on the Company's consolidated financial position,
results of operations or cash flows.
The Company intends to repurchase the floating-rate notes, due 2011 and
putable in 1999, in the amount of $200,000. This debt instrument is expected to
be refinanced under the Company's commercial paper program before April 15,
1999. As of March 12, 1999, the Company estimates this repurchase will result in
an extraordinary charge of approximately $22,100 in 1999 ($14,300, net of tax).
In association with the review and analysis of its operating cost
structure, the Company anticipates recording a special charge to earnings in the
quarter ended March 31, 1999. Items being considered are: severance for employee
terminations; lease costs and asset write-offs for various offices and
operations to be closed; and costs related to construction projects that will
not be completed. The amount of the charge is expected to be between $80,000 and
$90,000 on a pre-tax basis.
Since January 26, 1999, several lawsuits have been commenced on behalf of
persons who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into ECI, (ii) purchased shares of
Company common stock during certain specified class periods or (iii) owned
employee stock options in ECI. As of March 24, 1999, 20 class action lawsuits
that had been originally filed in federal district court in Houston had been
consolidated into one action pending in that court, and one additional class
action lawsuit that had been originally filed in the federal district court in
Lufkin, Texas was still pending in that court. These lawsuits allege violations
of federal securities laws and name as defendants the Company and certain of its
officers and directors. As of the same date, two former state court lawsuits,
one of which was a class action, naming the Company as defendant and alleging
fraud and violations of Texas securities and common law had been removed to the
federal district court in Lufkin. The lawsuits generally refer to the Company's
January 26, 1999 public announcement that the Company's diluted earnings per
share for the fourth quarter of 1998 and for the year ended December 31, 1998
would be lower than analyst expectations. The lawsuits seek, among other things,
to recover unspecified damages. Since the litigation is in its very preliminary
stages, no discovery has been taken, and the Company cannot quantify its
ultimate liability, if any, for the payment of damages in these lawsuits.
However, the Company believes that the allegations in the lawsuits do not
provide a basis for the recovery of damages because the Company has made all the
required disclosures on a timely basis. The Company is seeking to transfer the
lawsuits pending in Lufkin and consolidate them with the action pending in
federal district court in Houston. The Company intends to aggressively defend
the foregoing litigation.
20
22
Year 2000 Issue
The Year 2000 issue, also known as "Y2K," refers to the inability of some
computer programs and computer-based microprocessors to correctly interpret the
century from a date in which the year is represented by only two digits (e.g.,
98). As a result, on or before January 1, 2000, computer systems used by
companies throughout the world may experience operating difficulties unless they
are modified or upgraded to properly process date related information. The Y2K
issue can arise at any point in a company's supply, manufacturing, processing,
distribution, or financial chains.
The Company has established Y2K Program Offices at its corporate offices in
Houston, Texas and Birmingham, England. These program offices, under the
direction of senior management, are responsible for advising and monitoring the
numerous facets of the Company's Y2K preparations. The Company has engaged an
external consulting firm to assist in oversight of the Company's Y2K
preparations and various assessment activities associated with discovering the
seriousness of the Y2K issue in the Pacific Rim and South America. Additionally,
the Company is utilizing internal personnel, contract project managers,
programmers and testers, as well as vendors, to identify Y2K issues, test and
implement the chosen solutions.
In order to adequately address the Y2K issue, efforts have been directed to
the following categories: production systems, networks, desktops, user developed
applications, vendor supplied software, facilities and telecommunications, and
the Company's supply chain. The following phases are common to all of these
categories: inventory and determination of criticality, discovery to determine
Y2K problems, analysis to determine corrective action, correction, testing, and
implementation. In addition to these activities, promotion of Y2K awareness and
development of contingency plans are part of the Company's Y2K preparation
effort.
STATE OF READINESS:
The majority of the Company's internal Y2K exposure exists at the corporate
office locations where the accounting and processing of the Company's business
transactions takes place. Individual operating locations (primarily funeral
homes and cemeteries) are substantially technology independent and thus face few
Y2K risks from internal systems.
Production systems: In 1998, in order to improve access to business
information through a common, integrated computing system across the company,
the Company began a worldwide computer systems replacement project utilizing
systems from Oracle Corporation (Oracle). While this project has begun at the
Company's Australian and European headquarters, global implementation will not
be achieved prior to the turn of the century. Therefore, all computer programs
expected to be replaced by Oracle are being made Y2K ready. The only exception
to this is in the United Kingdom where the implementation of Oracle is
proceeding in order to achieve Y2K readiness. In general, the Company's
production systems have progressed through the inventory, discovery, and
analysis phases and are in various stages of correction and testing. Production
systems make up the majority of the Company's "mission critical systems" and are
expected to be Y2K ready by mid-1999, with deployment completed by late-1999.
In many cases, deployment of the Y2K ready production systems to the
Company's many operating locations in North America will require new desktop
computers. At this point, it is the short time available for deployment, and not
the need for corrective action, that poses the largest risk to the Company. See
the section on Risks for more details.
Networks: Inventory, discovery and analysis of critical networks have been
completed at all of the Company's headquarter and regional locations and these
networks are in various stages of correction and testing. Accomplishing Y2K
readiness in this category has been complicated by Microsoft's recent change in
its position on the Y2K readiness of Windows NT 4.0, requiring customers to
install another software update to be considered fully Y2K compliant. Some
non-critical networks exist at individual operating locations and will be
assessed and made Y2K ready as time allows. Expectations are that all critical
networks will be Y2K ready by mid-1999.
Desktops: Testing has been conducted to determine the extent to which the
Y2K problem associated with desktops will affect the Company's ability to
conduct business. As none of the Company's critical
21
23
computer systems directly access date information from the desktop's real time
clock, it has been determined that very few desktops will pose a Y2K issue.
Coincidentally, as part of ongoing technology refresh programs and new
production systems' deployment, desktops are being upgraded, as needed, to
better meet the Company's business needs. As part of contingency planning,
personnel will be instructed on how to verify each desktop's date, and reset if
necessary, after January 1, 2000.
User developed applications: Inventory and discovery for items in this
category have been achieved. Very few critical applications were found to have
date dependencies. Those that do are being remediated and tested to ensure no
problems arise because of Y2K issues. Readiness should be achieved by mid-1999.
Vendor supplied software: It is the policy of the Company to query each
manufacturer of critical "off-the-shelf" software to ascertain the vendor's
statement regarding the Y2K readiness of their products. Once the vendor's
statement is obtained, upgrades, replacements and testing will be implemented to
minimize the risk of Y2K issues arising from the software. Accomplishing Y2K
readiness in this category is becoming increasingly challenging as vendors are
modifying previously stated positions on existing software, requiring customers
to install patches or upgrades to achieve full Y2K readiness. This has occurred
with at least three critical vendor supplied software packages the Company
currently uses. Given the moving target posed by the vendor's changing
statements, the Company has changed its expectations for critical items in this
category and plans to be using the latest vendor supplied patches and upgrades
by late-1999.
Facilities and telecommunications: The Company recognizes the potential for
Y2K issues to arise from embedded technology systems which may be in use at its
numerous facilities. Inventory, discovery and analysis are complete at the
Company's headquarters and most international operating locations. North
American operating locations are expected to complete these phases by mid-1999.
Telecommunications equipment has proven the most vulnerable, and plans are in
place to upgrade and/or replace equipment as necessary. Planning has begun to
obtain inventories from the remaining operating locations. All critical
facilities and telecommunication systems are expected to be Y2K ready by
late-1999.
Supply chain: Due to the Company's disparate locations and methods of
operation, assessing the Y2K readiness of the Company's supply chain must occur
at both the corporate level (for core supply chain relationships) and the local
level (for those relationships unique to a location). Inventory and discovery
have been completed at a number of operating locations and is ongoing at the
Company's headquarters. In general, responses to the Company's inquiries have
been less than informative, with many companies failing to respond. Planning has
begun to assign criticality to both corporate and local supply relationships and
additional efforts will be expended to ascertain the Y2K readiness of critical
suppliers. Contingency plans for critical suppliers are expected to be in place
by late-1999.
COSTS:
The aggregate costs for the Company to achieve Y2K readiness are not
expected to exceed $20,000 of which $4,800 represents lease payments which will
be incurred from 2000-2002. The $5,000 reduction from the September 30, 1998
estimate is primarily due to lower than anticipated Y2K issues in embedded
technology systems. All costs associated with Y2K readiness will be funded from
operating cash flows. The Company's actual costs incurred associated with Y2K
readiness through December 31, 1998 are estimated at $3,500.
In an effort to report material costs related to the Company's Y2K effort,
the Company has adopted a policy of capturing all costs of one thousand dollars
or more, all contractor expenses, and internal costs for dedicated resources
(those working exclusively on Y2K issues). As such the Company acknowledges that
there are many internal resources working part-time on Y2K-related issues for
which no payroll or overhead costs are being reported.
RISKS:
The majority of the Company's internal Y2K exposure exists at its corporate
offices where the Company's production systems operate. The failure to correct a
material Y2K problem at these locations could result in
22
24
an interruption of certain normal corporate business activities. Such a failure
would not, however, render the Company's various operating locations unable to
deliver goods and services.
The Company believes that the greatest risks continue to arise from the
uncertainty of the Y2K readiness of critical third party suppliers, both private
businesses and government entities, especially in the Company's international
markets. The possible consequences of critical third party suppliers not being
Y2K ready by January 1, 2000 could include temporary location closings, delays
in the delivery of goods and services, delays in the receipt of goods and
invoice and collection errors. Continued efforts by the Company to ascertain the
Y2K status of critical third party suppliers is expected to significantly reduce
the Company's level of uncertainty as the year 2000 approaches and, through the
use of contingency planning, the possibility of significant interruptions in
normal operations should be reduced.
At this time, the Company has no substantiated reason to believe that one
or more key third party suppliers will not be able to meet their obligations to
the Company after January 1, 2000; therefore, the Company believes that the
"most reasonably likely worst case scenario" would occur if deployment of the
Company's newly remediated proprietary funeral home financial system to all
North American locations was not completed by December 31, 1999. Such an
occurrence would not be materially disruptive to the Company. Contingencies for
this include modifying deployment schedules in late 1999 to ensure at least one
location is installed in each cluster and forwarding all transactions to be
input to the new system.
CONTINGENCY PLANS:
Because of the many uncertainties that exist, it is part of the Company's
Y2K preparation methodology that contingency plans be established for critical
systems in each of the categories outlined above. Contingency planning is
progressing at different stages at the Company's various locations. Contingency
plans for all critical production systems and plans for all individual operating
locations are expected to be in place by late-1999.
Quantitative and Qualitative Disclosures about Market Risk
The information presented below should be read in conjunction with Notes
Nine and Ten to the consolidated financial statements.
The Company uses derivatives primarily in the form of interest rate swaps
and cross-currency interest rate swaps in combination with local currency
borrowings in order to manage its mix of fixed and floating rate debt and to
substantially hedge the Company's net investment in foreign assets. The
derivative instruments held by the Company are for hedging purposes and are
neither leveraged nor speculative in nature. The company expects no material
change in these policies in the coming year.
Movements in currency rates that impact the swaps are generally offset by a
corresponding movement in the value of the underlying assets being hedged.
Movements in interest rates that impact the fair value of the interest rate
swaps are generally offset by a corresponding movement in the value of the
underlying debt being hedged. Similarly, currency movements that impact foreign
interest expense due under the cross-currency interest rate swaps are generally
offset by a corresponding movement in the earnings of the foreign operation.
At December 31, 1998, after giving effect to the interest rate swaps, the
Company's total debt consists of approximately 74% of fixed interest rate debt
at a weighted average rate of 6.17% and approximately 26% of floating interest
rate debt at a weighted average rate of 6.15%. At December 31, 1997, the
Company's total debt consisted of approximately 44% of fixed interest rate debt
at a weighted average rate of 7.00% and approximately 56% of floating interest
rate debt at a weighted average rate of 5.50%. The Company's overall sensitivity
to floating interest rates is diversified in that approximately 47% of the
Company's floating rate exposure, as of December 31, 1998, is based in eight
markets other than the United States.
In general, the Company hedges up to 100% of its net investment in foreign
assets when such investment is considered significant and when it is reasonably
cost efficient to do so. Approximately 33.1% of the Company's net investment and
23.2% of its operating income are denominated in foreign currencies. Due to the
cross-currency hedges described above, approximately 13.3% of the Company's net
assets and approximately 3.5% of the Company's operating earnings are subject to
translation risk.
23
25
Marketable Equity and Debt Securities -- Price Risk
In connection with insurance operations, prearranged funeral operations and
preneed cemetery merchandise sales, the Company owns investments in equity
securities and mutual funds which are sensitive to current market prices. Cost
and market values as of December 31, 1998 and 1997, are presented in notes four,
five and six to the consolidated financial statements.
Market-Rate Sensitive Instruments -- Interest Rate and Currency Risk
The Company's financial instruments that are subject to interest rate and
currency risk consist of debt instruments, U.S. dollar interest rate swaps, and
cross-currency interest rate swaps. The Company performs sensitivity analyses to
assess the impact of these risks on earnings. This analysis reflects the impact
of a hypothetical 10% adverse change in market rates. In actuality, market rate
volatility is dependent on many factors that are impossible to forecast.
Therefore, adverse changes described below could differ substantially from the
hypothetical 10% impact. The analysis conducted below does not include Provident
assets or those of the insurance subsidiary. Instead, these are referenced
separately in tabular format below.
A sensitivity analysis of those instruments with variable interest rate
components is modeled to assess the impact that changing interest rates could
have on pre-tax earnings. The sensitivity analysis assumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pre-tax earnings, on an annual
basis, would be negatively impacted by $5,657 on December 31, 1998, and $7,624
on December 31, 1997.
A similar model is used to assess the impact of changes in foreign
currencies on interest expense. The Company's debt and derivative exposure is
primarily associated with the French franc, British pound, Canadian dollar,
Australian dollar, Spanish peseta, and the Norwegian krone. A 10% adverse change
in the U.S. dollar against these currencies would have negatively impacted the
Company's pre-tax earnings, on an annual basis, by $12,229 on December 31, 1998
and $10,838 on December 31, 1997.
For certain assets, the tables below present principal cash flows that
exist by maturity date and the related average interest rates:
AS OF DECEMBER 31, 1998:
FAIR VALUE
1999 2000 2001 2002 2003 THEREAFTER ASSET/(LIABILITY)
------- ------- ------- -------- ------- ---------- -----------------
Provident receivables........... $33,007 $14,369 $44,501 $107,117 $27,238 $ 43,297 $269,529
Average rate.................... 7.70% 9.24% 8.54% 8.12% 8.97% 8.38%
Insurance subsidiaries
investments in debt
securities.................... 85,316 70,369 76,233 108,416 74,231 503,804 918,369
Average rate.................... 5.85% 5.38% 5.84% 5.42% 5.90% 4.93%
AS OF DECEMBER 31, 1997:
FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER ASSET/(LIABILITY)
------- ------- ------- ------- ------- ---------- -----------------
Provident receivables............ $15,922 $22,528 $21,264 $52,917 $58,218 $ 27,072 $197,921
Average rate..................... 9.34% 7.58% 9.99% 9.96% 8.48% 8.67%
Insurance subsidiaries
investments in debt
securities..................... 2,809 17,014 59,739 24,300 67,522 142,901 314,285
Average rate..................... 5.97% 5.97% 6.30% 6.82% 6.16% 6.16%
The unrealized gain on debt securities principally reflects changes in
interest rates. To reduce exposure to interest rate changes, portfolio
investments are selected so the weighted average duration of the investments
approximates the duration of associated policyholder liabilities. The insurance
companies are subject to reinvestment risk upon either sale or maturity of the
debt securities. Management believes that absence of any material amounts of
"high-yield" or "non-investment grade" investments in the portfolios of its
insurance subsidiaries enhances the ability of the insurance companies to
provide security to their policyholders.
24
26
Cautionary Statement on Forward-Looking Statements
The statements contained in this Annual Report that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements may be accompanied by
words such as "believe," "estimate," "expect," "anticipate," or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results to differ materially from those in
forward-looking statements include, among others, the following:
1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable security
values as well as currency and interest rate fluctuations).
2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
3) Changes in consumer demand for the Company's services caused by
several factors, such as changes in local death rates, cremation rates,
competitive pressures and local economic conditions.
4) The Company's ability to identify and complete additional
acquisitions on terms that are favorable to the Company, to successfully
integrate acquisitions into the Company's business and to realize expected
cost savings in connection with such acquisitions. The Company's future
results may be materially impacted by changes in the level of acquisition
activity.
5) The ability of the Company, or its critical third party suppliers,
to adequately complete Y2K preparation efforts.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Quantitative and Qualitative Disclosures About Market Risk" set forth
in Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K.
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27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 27
Consolidated Statement of Income for the three years ended
December 31, 1998......................................... 28
Consolidated Balance Sheet as of December 31, 1998 and
1997...................................................... 29
Consolidated Statement of Cash Flows for the three years
ended December 31, 1998................................... 30
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1998............................. 31
Notes to Consolidated Financial Statements.................. 32
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 61
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
26
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Service Corporation International
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Service Corporation International at December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 24, 1999
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29
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues........................................... $2,875,090 $2,535,865 $2,355,342
Costs and expenses................................. (2,156,320) (1,848,253) (1,750,890)
---------- ---------- ----------
Gross profit....................................... 718,770 687,612 604,452
General and administrative expenses................ (66,839) (66,781) (63,215)
---------- ---------- ----------
Income from operations............................. 651,931 620,831 541,237
Interest expense................................... (177,053) (136,720) (138,557)
Dividends on preferred securities of SCI Finance
LLC.............................................. -- (4,382) (10,781)
Other income....................................... 43,649 100,244 21,982
---------- ---------- ----------
(133,404) (40,858) (127,356)
---------- ---------- ----------
Income before income taxes and extraordinary
loss............................................. 518,527 579,973 413,881
Provision for income taxes......................... (176,385) (205,421) (148,583)
---------- ---------- ----------
Income before extraordinary loss................... 342,142 374,552 265,298
Extraordinary loss on early extinguishment of debt
(net of income taxes of $23,383)................. -- (40,802) --
---------- ---------- ----------
Net income......................................... $ 342,142 $ 333,750 $ 265,298
========== ========== ==========
Earnings per share:
Basic:
Income before extraordinary loss................. $ 1.34 $ 1.53 $ 1.13
Extraordinary loss on early extinguishment of
debt.......................................... -- (0.17) --
---------- ---------- ----------
Net income............................... $ 1.34 $ 1.36 $ 1.13
========== ========== ==========
Diluted:
Income before extraordinary loss................. $ 1.31 $ 1.47 $ 1.08
Extraordinary loss on early extinguishment of
debt.......................................... -- (0.16) --
---------- ---------- ----------
Net income............................... $ 1.31 $ 1.31 $ 1.08
========== ========== ==========
Basic weighted average number of shares............ 256,271