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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, 19992000
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. Employeremployer
incorporation or organization) identification no.)
incorporation or organization)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to sectionSection 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $838,791,831$1,041,281,874 based upon a closing market price of $3.1250$3.80 on
March 24, 200022, 2001 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.
The number of shares outstanding of the registrant's common stock as of
March 24, 200022, 2001 was 272,064,618278,001,053 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 20002001
Annual Meeting of Shareholders (Part III)
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PART I
ITEM 1. BUSINESS.
(DOLLARS IN THOUSANDS)
Service Corporation International was incorporatedis the largest funeral and cemetery
company in Texas on July 5,
1962.the world. The term "Company" or "SCI" includes the registrant and
its subsidiaries, unless the context indicates otherwise. The Company is the largest provider of funeral and cemetery services in the
world. As of December 31,
1999,2000, the Company operated 3,8233,611 funeral service locations, 525569 cemeteries 198and
200 crematoria and two insurance operations located in 2018 countries on five continents. The Company conducts
funeral service operations in all of the 2018 countries mentioned above,and cemetery operations in all
countries in North America, South America, Australia and certain countries
within Europe, and
financial services operations in North America and France.Europe. As of December 31, 1999,2000, the Company's largest markets were North
America and France, which when combined represent approximately 86%84% of the
Company's consolidated revenues, 73%83% of the Company's consolidated operating income from operationsbefore
non-recurring items and 78% of the Company's total operating locations. For
financial information about the Company's reportable segments, see note fifteenfourteen
to the consolidated financial statements in Item 8 of this Form 10-K.
Historically, the Company's growth has been largely attributable to
acquiring funeral service locations and cemeteries. Thiscemetery businesses which resulted in the Company creating the world's
largest network of funeral service locations and cemeteries. The Company believes thisis now
focused on a series of growth initiatives designed to increase revenues
internally without significant outlays of capital. The Company's unparalleled
network forms the foundation of its
business plan going forward. During the mid-1990's, the market to acquire funeral service locations and cemeteries became more competitive than ever
before and resulted in increasing prices which lowered returns on invested
capital. As a result,form the foundation for
these growth initiatives. The Company's network gives the Company suspendedthe ability to
create a national brand name in the industry as well as the ability to enter
into affinity relationships to provide the Company's products and services to
organizations that require a national network of funeral service locations and
cemeteries. Along with these internal growth initiatives, the Company is focused
on increasing cash flow and reducing its acquisition programoutstanding debt. The Company is also
in 1999the process of divesting certain funeral service locations and cemeteries in
North America that are not well aligned with the Company's long-term strategy
and is in transitiondiscussions with various third parties concerning the possibility of
joint venturing certain of the Company's international operations. Proceeds from
an acquisition companydivestitures or joint venturing programs will be used by the Company to an operating company.further
reduce its debt.
The Company was incorporated in Texas in July of 1962. The Company's
principal corporate offices are located at 1929 Allen Parkway, Houston, Texas
77019 and its telephone number is (713) 522-5141.
FUNERAL AND CEMETERY OPERATIONS
The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries, crematoria and related businesses. The operations
are organized into a North American division covering the United States and
Canada and an internationala European division responsible for all operations in Europe, and
other international operations managed in the Pacific Rim and South America.
Each division is under the direction of divisional executive management with
substantial industry experience. Local funeral service location and cemetery
managers, under the direction of the divisional management, receive support and
resources from the Company's headquarters in Houston, Texas and have substantial
autonomy with respect to the manner in which services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales personnel.activities.
Personnel costs, the largest operating expense for the Company, areis the cost
componentscomponent most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various
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names because most operations were acquired as existing businesses and generally continue to be
operatedbusinesses. Some of the
Company's funeral service locations in its international operations operate
under certain brand names specific for a general area or country. In 2000, the
Company started branding its operations in North America under the name Dignity
Memorial(TM). While this process is intended to emphasize the Company's seamless
national network of funeral service locations and cemeteries in North America,
the original names associated with acquired operations with their inherent
goodwill and heritage will remain the same name as before acquisition.
Funeral Service Locations. The Company's 3,611 funeral service locations
provide all professional services relating to funerals, including the use of
funeral facilities and motor vehicles. Funeral service locations sell caskets,
coffins, burial vaults, cremation receptacles, flowers and burial garments, and
certainother ancillary products and services. Certain funeral service locations also
operate crematoria. At December 31, 1999,2000, the Company owned 200193 funeral
service location/service/cemetery combinationscombination locations and operated 4855 flower shops engaged
principally in the design and sale of funeral floral 3
arrangements. These flower
shops provide floral arrangements to mostsome of the Company's funeral homes and
cemeteries. The number of deaths tends to be somewhat higher in the winter
months and the Company's funeral service locations generally experience a higher
volume of business during those months.
In addition to selling its services and products to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets, including severalits principal foreign markets. Funeral prearrangement
is a means through which a customer contractually agrees to the terms of a
funeral to be performed in the future. The funds collected from prearranged
funeral contracts are generally placed in trust accounts (pursuant to applicable
law) or are used to pay premiums on life insurance policies from third party
insurersinsurers. In certain situations pursuant to applicable laws, the Company will
post a surety bond as financial assurance in the amount of the preneed funeral
contract in lieu of placing certain funds in trust accounts or paying premiums
on life insurance policies. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in this Form 10-K for
further details on the Company's wholly owned insurance operations.practice of posting such surety bonds. At
December 31, 1999,2000, the total value of the Company's unperformed prearranged
funeral contracts was $4.287
billion,$4,537,669, of which approximately $392 million$396,000 is estimated
to be fulfilled in 2000.2001. For additional information concerningregarding prearranged
funeral activities, see "Prearranged Funeral Services" in Management's Discussionnotes two, three and Analysis of
Financial Condition and Results of Operations in Item 7 of this Form 10-K and
note fourfive 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 associated with
cemetery property (including mausoleum spaces, lots and lawn crypts) and
certaincemetery merchandise including stone and bronze memorials, burial vaults,
caskets and burial vaults.cremation memorialization products. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries also operate crematoria.crematoria and certain cemeteries contain
gardens specifically for the purpose of memorialization associated with the
Company's cremation customers.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise and services may be required by law to be paid
into trust until the merchandise is purchased or the service is provided on
behalf of the customer. In certain situations pursuant to applicable laws, the
Company will post a surety bond as financial assurance for a certain amount of
the preneed cemetery contract in lieu of placing certain funds into trust
accounts. See the Financial Assurances section included in Financial Condition,
Liquidity and Capital Resources in this Form 10-K for further details on the
Company's practice of posting such surety bonds. For additional information
regarding cemetery trust
funds,preneed activities, see notes two, three and six to the
consolidated financial statements in Item 8 of this Form 10-K.
Combined Funeral Service Locations and Cemeteries. The Company currently
owns 193 funeral service/cemetery combination locations in North America in
which a funeral service location is physically located within one of the
Company's cemeteries. Combination locations allow certain facility, personnel
and equipment costs to be shared between the funeral service location and
cemetery and typically have a higher gross margin than if the funeral and
cemetery operations were operated separately. Combination locations also
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create synergies between funeral and cemetery sales forces and give consumers
added convenience to purchase both funeral and cemetery products and services at
a single location.
Death Care Industry. TheIn North America and most international markets in
which the Company operates, the funeral and cemetery industry is characterized
by a large number of locally owned, independent operations. TheSince the Company's
inception in the 1960s, the Company believes that, basedhas been focused on the total numberacquisition and
consolidation of independent funeral services performedhomes and cemeteries in the very fragmented
death care industry. During the 1990s, the Company also expanded its operations
through consolidation in Europe, Australia and South America. During 1999, the
Company, including acquiredas well as other consolidators in the death care industry,
significantly reduced the level of acquisition activity. The Company is now
focused on a series of growth initiatives designed to increase revenues
internally without significant outlay of capital. As part of its current
long-term strategy, the Company is in discussions with various third parties
concerning the possibility of joint venturing primarily the Company's
international operations performed approximately 13%, 28%, 13% and 24%is also in the process of thedivesting certain funeral
servicesservice locations and cemeteries in North America, France, the United Kingdom and Australia,
respectively.America.
To compete successfully, the Company's funeral service locations and
cemeteries must maintain competitive prices, attractive, well-maintained and conveniently
located facilities, a good reputationreputations and high professional standards. In
addition, heritage and tradition can provide an established funeral home with
the opportunity for repeat business from client families. Furthermore, an
established firm can generate future volume and revenues by marketing
prearranged funeral services.
The cemetery industry is also characterized by a large number of locally
owned, independent, municipal or church affiliated operations. The Company's
cemetery properties compete with other cemeteriesstandards in the
same general area. To
compete successfully, the Company'sindustry, as well as offer attractive products and services at competitive
prices. The Company believes it has an unparalleled network of funeral service
locations and cemeteries must maintainthat offer high quality products and services at prices
that are competitive prices,
attractivewith independent funeral homes and well-maintained properties, a good reputation, an effective sales
force and high professional standards.
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FINANCIAL SERVICES OPERATIONS
The financial services operations represent a combinationcemeteries. Some of the
Company's funeral service locations in its international operations operate
under certain brand names specific for a general area or country. During 2000,
the Company began branding its network of funeral service locations in North
America under the Dignity Memorial(TM) brand name. A national brand name would
be new and unique to the death care industry in North America and would provide
many advantages to the Company discussed in more detail in Revenue Growth
Initiatives in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K.
In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is more stable. The west coast of the United States and the
states of Arizona and Florida have the highest concentration of cremation
consumers in North America. While cremations performed by the Company in North
America typically have higher gross profit margins than traditional funeral
services, cremations usually result in lower revenue and gross profit dollars to
the Company than traditional funeral services. In North America during 2000,
36.3% of all funeral services performed by the Company were cremation cases,
compared to 33.9% performed in 1999. The Company in 2000 continued to expand its
cremation memorialization products and cremation services in several North
American markets, which has resulted in higher average sales for cremation cases
compared to historical levels. The Company also continues to expand its
nationally branded cremation service locations called National Cremation
Service(R) (NCS). NCS currently operates in ten high cremation states and has
plans to expand into seven additional high cremation states. The Company
believes that the NCS consumer would not have chosen traditional funeral service
locations as an alternative to NCS, and therefore is considered an incremental
customer to the Company.
With the aging of the population in North America, the Company continues to
believe the death care industry possesses attractive characteristics, and the
Company is uniquely positioned with its unparalleled network of funeral service
locations and cemeteries to capture future market share with its current
initiatives.
DISCONTINUED OPERATIONS
The Company formerly owned insurance operations primarily related to the funding of prearranged funeral
contracts and a lending subsidiary, which previously provided capital financing
for independent funeral home and cemetery operations.
The Company's insurance operations includeincluding ownership of a
French life insurance company (Auxia) and a U.S. life insurance company
(American Memorial Life Insurance Company or AML)AMLIC). These insurance operations
assistassisted in the funding of contracts written by Company ownedCompany-owned or operatedaffiliated
funeral service locations. For
additional information concerningDuring 2000, the Company's financial services operations,
see "Financial Services" in Management's Discussion and AnalysisCompany completed the sales of Financial
Condition and Results of Operations in Item 7 of this Form 10-K and notes two,
four and five tothese
insurance operations. Accordingly, the consolidated financial statements in Item 8 of this Form
10-K.
Since 1988, the Company's lending subsidiary provided secured financing to
independent funeral home and cemetery operators. The majority of these loans
were made to clients seeking to finance funeral home or cemetery acquisitions.
Additionally, the lending subsidiary provided construction loans for funeral
home or cemetery improvement and expansion. Loan packages took traditional forms
of secured financing comparable to arrangements offered by leading commercial
banks. The loans were generally made at interest rates which float with the
prime lending rate. At December 31, 1999, the lending subsidiary had
approximately $247 million in loans outstanding ($191 million net of the
provision for loan losses and impairment charges) and approximately $47 million
of unfunded loan commitments. At December 31, 1998, the lending subsidiary had
approximately $270 million in loans outstanding and approximately $31 million of
unfunded loan commitments. The lending subsidiary obtained its funds primarily
from the Company's variable interest rate credit facilities. As part of its cost
rationalization programs initiated in 1999, the Company decided to indefinitely
suspend the operations of the lending subsidiary by selling a portion of the
loan portfolio and acquiring by deed in lieu of foreclosure the collateral
underlying certain other loans in its portfolio. For further discussion, see
"Financial Services" in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
Form 10-K have been reclassified to reflect these operations as discontinued.
Operating results from Auxia have been included through August 31,
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2000 and note
eighteen to the consolidated financial statements in Item 8operating results from AMLIC have been included through September
30, 2000, the dates of this Form 10-K.disposition of the respective companies.
EMPLOYEES
At December 31, 1999,2000, the Company employed 30,693 (18,34129,326 (17,232 in the United
States) persons on a full time basis and 11,326 (8,62410,690 (8,296 in the United States)
persons on a part time basis. Of the full time employees, 29,66328,548 were in the
funeral and cemetery operations 311and 778 were in financial services operationscorporate or other overhead
activities and 719 were
in corporate services. All of the Company's eligible United States employees
who so elect are covered by the Company's group health and life insurance plans.
Eligible United States employees are participants in retirement plans of the
Company or various subsidiaries, while foreign employees are covered by other
Company defined or government mandated benefit plans. Although labor disputes
are experienced from time to time, in general relations with employees are generally
considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various U.S. federal, state and foreign statutes, ordinances
and regulations. The Company believes that it is in substantial compliance with
the significant provisions of such statutes, ordinances and regulations. SeeSince
1984, the discussion of FTCCompany has operated in the United States under the Federal Trade
Commission (FTC) comprehensive trade regulation rule for the funeral industry.
The rule contains minimum guidelines for funeral industry practices, requires
extensive price and other affirmative disclosures and imposes mandatory
itemization of funeral goods and services. From time to time in connection with
the Company's former strategy of growth through acquisitions, the Company has
entered into consent orders with the FTC that have required the Company to
dispose of certain operations to proceed with such acquisitions or have limited
the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders in
"Funeral Service Locations" above.have not had a materially adverse
effect on the Company's operations.
The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry hadhas
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that endedwill generally end municipal control of the French
funeral service business and allows the public to choose theirwill allow free competition among funeral service
provider.providers. Under such legislation, the Exclusive Municipal Authority was
abolished in January 1996, and the Municipal Monopoly was eliminated in January
1998. 3
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Cemeteries in France, however, are and will continue to be controlled by
municipalities and religious organizations, with third parties, including the
Company, providing cemetery merchandise such as markers and monuments to
consumers.
ITEM 2. PROPERTIES.
(DOLLARS IN THOUSANDS)
The Company's executive headquarters areis located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and its
parking
garage. The other undivided one-half interest is owned by an unrelated third
party. The Company holds an option to acquire such interest for $2,000,000$2,000 in July
2005 and, at the option of the unrelated third party, is obligated to make such
acquisition. The property consists of approximately 1.3 acres, 250,000127,000 square feet of
office space in the building and 160,000185,000 square feet of parking space in the
parking garage. The Company leases all of the office space in the building
pursuant to a lease that expires June 30, 2005 providing for monthly rent of
$43,000 through July 2000 and $59,000 thereafter.$59. The Company pays all operating expenses. One half of the rent is paid to
the wholly owned subsidiary and the other half is paid to the owners of the
remaining undivided one-half interest. The Company owns and utilizes for
corporate activities two additional office buildings located in Houston, Texas
containing a total of approximately 167,000 square feet of office space.
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At December 31, 1999,2000, the Company owned approximately 76%63% of the real
estate and buildings of its 4,5464,380 funeral service locations, cemeteries and
crematoria and two insurance locations and leased facilities in connection with approximately 24%37% of such
operations. In addition, the Company leased two aircraft pursuant to cancelable
operating leases. At December 31, 1999,2000, the Company operated 14,83013,389 vehicles, of
which 5,3693,633 were owned and 9,4619,756 were leased. For additional information
regarding leases, see note eleven to the consolidated financial statements in
Item 8 of this Form 10-K.
At December 31, 1999,2000, the Company's 525569 cemeteries contain a total of
approximately 35,90134,221 acres, of which approximately 54%49% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition. Managementcondition and management of the
Company believes that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Previously Reported Litigation. The following discussion describes certain
litigation as of March 28, 2000,29, 2001, which was previously reported:
Civil Action H-99-280;H-99-0280; In Re Service Corporation International; In the
United States District Court for the Southern District of Texas, Houston
Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before
Judge Lynn N. Hughes and includes all 21 class action lawsuits that were filed in
the United States District Court for the Southern District of Texas, and two class
action lawsuits that were originally brought in the United States District Court
for the Eastern District of Texas, Lufkin Division.and a lawsuit brought in the United States
District Court for the Southern District of Texas by an individual who sold his
funeral home to SCI. The Consolidated Lawsuit names as defendants the Company
and three of the Company's current or former executive officers or directors:
Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne (the
Individual Defendants). The plaintiffs have filed a Consolidated Class Action
Complaint in the Consolidated Lawsuit alleging that defendants violated federal
securities laws by making materially false and misleading statements and failing
to disclose material information concerning the Company's prearranged funeral
business. The Consolidated Lawsuit seeks to recover an unspecified amount of
monetary damages. Since the litigation is in its preliminary stages and no
discovery has occurred, and the Company cannot quantify its ultimate liability, if
any, for the payment of damages.damages or predict the outcome of the litigation.
However, the Company believes
thatmoved to dismiss all of the allegations in the Consolidated
Lawsuit and believes that they do not provide a basis for the recovery of
damages because the Company has made all required disclosures on a timely basis. The
Company and the Individual Defendants have also filed an Answer to the
Consolidated Class Action Complaint, and the Company intends to aggressively
defend this lawsuit.
The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of the Company into Equity Corporation International (ECI);
(ii) purchased shares of Company common stock in the open market during the
period from July 17, 1998, through January 26, 1999 (the Class Period); (iii)
purchased Company call options in the open market during the Class Period; (iv)
sold Company put options in the open market during the Class Period; (v) held
employee stock options in ECI;ECI that became options to purchase Company common
stock pursuant to the merger; and (vi) held Company employee stock options grantedto
purchase Company common stock under a stock plan during the
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Excluded from the foregoing categories are the Individual Defendants, the
members of their immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any time during
the Class Period. Judge Hughes has certified the Consolidated Lawsuit as a class
action. On May 10, 2000, Judge Hughes signed an order amending the class
definition to include James P. Hunter, III as a class member. Mr. Hunter was
Chairman, President and Chief Executive Officer of ECI at the time of its merger
with a wholly-owned subsidiary of the Company. Mr. Hunter and a related family
trust filed a separate lawsuit in state court in Angelina County, Texas, which
is discussed below.
The Company and the Individual Defendants have filed a Motion to Dismiss
the Consolidated Lawsuit; the plaintiffs have filed their Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the
Individual Defendants have filed a Reply to Plaintiffs' Opposition to
Defendants' Motion to
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Dismiss the Consolidated Lawsuit. The foregoing pleadings will be considered by
Judge Hughes in due course. A status conference is set for April 4, 2001.
Copies of the complaint in the Consolidated Lawsuit and the pleadings that
have been filed in response thereto and that are referred to herein are filed as
exhibits to this Annual Report on Form 10-K.
9-99-CV58; Charles Fredrick v. Service Corporation International; In the
United States District Court for the Eastern District of Texas, Lufkin
Division. This additional securities fraud case has been brought against the
Company by a former shareholder of ECI alleging causes of action exclusively
under Texas statutory and common law. The Company has requested that the case be
transferred to the Southern District of Texas to be consolidated with the
Consolidated Lawsuit. The Plaintiff has requested that the case be remanded to
state court for further proceedings, and oral argument on the issue has been
scheduled for March 29, 2000.
Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation
International et al.al; In the ________ Judicial District Court of Angelina County,
Texas. On November 10, 1999, James P. Hunter, III and a related family trust
filed a lawsuit against the Company, the Individual Defendants, two other
officers, an employee of the Company and PricewaterhouseCoopers LLP, the
Company's independent accountants, in state District Court in Angelina County,
Texas (State(Hunter Litigation). The plaintiffs allege, among other things, violations
of Texas securities law and statutory and common law fraud, and seek unspecified
compensatory and exemplary damages. Mr. Hunter was Chairman, President and Chief
Executive Officer of ECI at the time of its merger with a wholly owned
subsidiary of the Company. The Company and the other defendants filed
an answer in the StateHunter Litigation denying the plaintiffs' allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages.damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the StateHunter Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
On May 10, 2000, Judge Hughes entered an order in the Consolidated Lawsuit
in the federal district court staying the further prosecution of the Hunter
litigation in state court. Hunter and the related family trust appealed this
order, and the United States Court of Appeals for the Fifth Circuit lifted the
stay in an order of September 13, 2000. Following this appeal, Judge Hughes then
signed an order on October 5, 2000, prohibiting Mr. Hunter and the related
family trust from pursuing discovery in the Hunter Litigation. Judge Hughes
entered the order pursuant to the authority vested to him by the Securities
Litigation Uniform Standards Act of 1998. Hunter and the related family trust
filed a motion for a trial setting in the state district court.
A copy of the Plaintiff's Original Petition in the Hunter Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International; In
the ________ Judicial District Court of Angelina County, Texas (Fredrick
Litigation). This additional securities fraud case has been brought against the
Company by a former shareholder of ECI alleging causes of action exclusively
under Texas statutory and common law. The Company has filed an answer denying
plaintiff's allegations. Since the litigation is in its preliminary stages, the
Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Fredrick Litigation do not provide a basis for the
recovery of damages. The Company intends to vigorously defend this litigation.
New Litigation.
Cause No. 33701-01-01; Jack D. Rottman v. Service Corporation
International, et al; In the ________ Judicial District Court of Angelina
County, Texas. On December 28, 2000, Jack Rottman filed a lawsuit against the
Company, the Individual Defendants, two other officers, an employee of the
Company, and PricewaterhouseCoopers, L.L.P., the Company's independent
accountants, in state District Court in Angelina County, Texas (Rottman
Litigation). The plaintiff, a former officer of ECI, alleges, among other
things, violations of Texas securities law and statutory and common law fraud,
and seeks unspecified compensatory and exemplary damages. The Company and the
other defendants filed an answer in the Rottman Litigation denying the
plaintiff's allegations. Since the litigation is in its very preliminary stages,
the Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Rottman Litigation, like those in the Consolidated
Lawsuit, do not provide a basis for the recovery of damages because all required
disclosures were made on a timely basis. The Company intends to aggressively
defend this litigation.
6
8
A copy of the Plaintiff's Original Petition in the Rottman Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
Cause No. 2000-63917; Jack T. Hammer v. Service Corporation International,
et al.; In the 165th Judicial District Court of Harris County, Texas. On
December 15, 2000, Jack T. Hammer filed a lawsuit against the Company, the
Individual Defendants, two other officers, an employee of the Company, and
PricewaterhouseCoopers, L.L.P., the Company's independent accountants, in state
District Court in Harris County, Texas (Hammer Litigation). The plaintiff, a
former director of ECI, alleges, among other things, violations of Texas
securities law and statutory and common law fraud, and seeks unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hammer Litigation denying the plaintiff's allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hammer Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
A copy of the Plaintiff's Original Petition in the StateHammer Litigation and
the Defendants' Original Answeroriginal answer in that proceeding are filed as exhibits to this
Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
5
7
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 24, 200028, 2001 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
------------ ---- -------- ----------
R. L. Waltrip........................ (69)(70) Chairman of the Board and Chief 1962
Executive Officer
B. D. Hunter......................... (70)(71) Vice Chairman of the Board 20001986
Jerald L. Pullins.................... (58)(59) President and Chief Operating Officer 1992
Jeffrey E. Curtiss................... (51)(52) Senior Vice President and Chief Financial 2000
Financial
Officer
James M. Shelger..................... (50)(51) Senior Vice President General Counsel 1987
and Secretary
T. Craig Benson...................... (38) Vice President Corporate Alliances 1990
and Marketing
J. Daniel Garrison................... (48)(49) Vice President InternationalNorth American 1998
Cemetery Operations
W. Cardon Gerner..................... (45)(46) Vice President Corporate Controller 1999
W. Mark Hamilton..................... (35)(36) Vice President Prearranged Sales 1996
Frank T. Hundley..................... (40)(41) Vice President Treasurer 2000
Lowell A. Kirkpatrick, Jr. .......... (41)(42) Vice President Operational Management 1994
Systems
Stephen M. Mack...................... (48)(49) Vice President DomesticNorth American Funeral 1998
Operations 1998
Thomas L. Ryan....................... (34)(35) Vice President Operational AccountingInternational 1999
and AnalysisOperations
Eric D. Tanzberger................... (31)(32) Vice President Investor Relations and 2000
Assistant Corporate Controller
Stephen J. Uthoff.................... (48)(49) Vice President Chief Information 2000
Officer
Vincent L. Visosky................... (52) Vice President Trust Administration 1989
Michael R. Webb...................... (42)(43) Vice President Corporate Development 1998
- ---------------
(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.
7
9
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Hunter was appointed Vice Chairman of the Board in January 2000. Prior
thereto for more than five years, Mr. Hunter was the Chairman and Chief
Executive Officer of Huntco, Inc., an intermediate steel processor. Mr. Hunter
has been a director of the Company since 1986 and also served as Vice Chairman
of the Board of the Company from September 1986 to May 1989.
Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. From January 1992 until July 1999, Mr. Curtiss served
as Senior Vice President and Chief Financial Officer of Browning-Ferris
Industries, Inc., a waste services company.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Corporate
Controller. Before the acquisition, Mr. Gerner had been Senior Vice President
and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner
was a partner with Ernst & Young LLP.
Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
Prior thereto, Mr. Hundley served for more than five years in various capacities
at Banc of America Securities, LLC, its predecessors and affiliates, including
as Managing Director.
Mr. Hunter was appointed Vice Chairman of the Board in January 2000. Mr.
Hunter is the Chairman and Chief Executive Officer of Huntco, Inc., an
intermediate steel processor. Mr. Hunter has been a director
6
8
of the Company since 1986 and also served as Vice Chairman of the Board of the
Company from September 1986 to May 1989.
Mr. Ryan joined the Company in June 1996 as Director of Financial
Reporting. Since then, Mr. Ryan has served as Director of Investor Relations and
Managing Director and Chief Financial Officer of International Operations. Mr.
Ryan was promoted to Vice President International Finance in February 1999 and
appointed Vice President Operational Accounting and Analysis in February 2000
and became Vice President of International Operations in December 2000. Prior to
joining the Company, Mr. Ryan was a certified public accountant with Coopers &
Lybrand L.L.P. for more than five years.
Mr. Tanzberger joined the Company in August 1996 as Manager of Budgets &
Financial Analysis. Since then, Mr. Tanzberger has served as Vice President of
Operations/Western Division, Director of Investor Relations and Assistant
Corporate Controller. Mr. Tanzberger was promoted to Vice President Investor
Relations and Assistant Corporate Controller in January 2000. Prior to joining
the Company, Mr. Tanzberger was Assistant Corporate Controller at Kirby Marine
Transportation Corporation, an inland waterway barge and tanker company, from
January through August 1996. Prior thereto, he was a certified public accountant
with Coopers & Lybrand L.L.P. for more than five years.
Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President-Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.
8
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 1999,2000, there were 7,9577,457 holders of record of
the Company's common stock.
Through October 1999, the Company had declared 106 consecutive quarterly
dividends on its common stock since it began paying dividends in 1974. For the
three years ended December 31, 1999, 1998 and 1997, dividends per share were
$.27, $.36 and $.30, respectively.
In October 1999, the Company suspended payment of regular quarterly cash
dividends on its quarterly outstanding common stock in order to focus on improving cash
flow and reducing existing debt. For the two years ended December 31, 1999 and
1998, dividends per share were $.27 and $.36, respectively.
The table below shows the Company's quarterly high and low common stock
prices for the three years ended December 31, 1999:2000:
2000 1999 1998
1997
---------------------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ----------- ----- ------ ------ ------ ------
First.............................First quarter....................... $7.00 $3.00 $38.50 $14.25 $43.69 $35.69
$33.88 $26.88
Second............................Second quarter...................... 5.44 2.81 21.19 13.31 44.63 38.94
36.00 29.63
Third.............................Third quarter....................... 3.50 2.13 18.88 10.56 45.88 31.88
35.75 29.81
Fourth............................Fourth quarter...................... 2.56 1.69 10.31 6.44 39.25 29.81 38.00 27.88
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
79
911
ITEM 6. SELECTED FINANCIAL DATA.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The table below shows thefollowing selected consolidated financial data for the years December
31, 1996 through 2000 is derived from the Company's audited consolidated
financial statements. This data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes to the consolidated
financial statements included in Item 8 of this and previous year's Form 10-K.
In the fourth quarter of 2000, the Company for the
five years ended December 31, 1999:
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues................... $ 3,321,813 $ 2,875,090 $ 2,535,865 $2,355,342 $1,652,126
Income (loss) before
extraordinary gain
(loss)................... (34,297) 342,142 374,552 265,298 183,588
Net income (loss).......... (32,412) 342,142 333,750 265,298 183,588
Earnings per share:
Income (loss) before
extraordinary gain
(loss)
Basic................. (.13) 1.34 1.53 1.13 .92
Diluted............... (.13) 1.31 1.47 1.08 .86
Net income (loss)
Basic................. (.12) 1.34 1.36 1.13 .92
Diluted............... (.12) 1.31 1.31 1.08 .86
Dividends per share........ .27 .36 .30 .24 .22
Total assets............... 14,601,601 13,266,158 10,514,930 9,020,778 7,768,982
Long-term debt............. 3,636,067 3,764,590 2,634,699 2,048,737 1,712,464
Convertible preferred
securities of SCI Finance
LLC...................... -- -- -- 172,500 172,500
Stockholders' equity....... 3,495,273 3,154,102 2,726,004 2,235,317 1,975,345
Shares outstanding......... 272,064 259,201 252,924 236,193 234,542
Ratio of earnings to fixed
charges*................. 0.85 3.42 4.29 3.24 2.84
* For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary gain (loss) on early
extinguishment of debt, less undistributed income of equity investees which
are less than 50% owned, plus the minority interest of majority owned
subsidiaries with fixed charges and fixed charges (excluding capitalized
interest)implemented Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101).
Fixed charges consist of interest expense, whether capitalized or
expensed, amortization of debt costs, dividends on preferred securities of SCI
Finance LLC and one-third of rental expense which the Company considers
representative of the interest factor in the rentals. The decrease in the
Company's ratio of earnings to fixed charges in 1999 compared to earlier
levels is primarily attributable to the $362,428 pretax restructuring and
nonrecurring charges recorded during the first and fourth quarters of 1999
(seeSee note eighteenthree to the consolidated financial statements in Item 8 of this Form
10-K)10-K for more details on the implementation of SAB No. 101. As a result of this
implementation, the Company has changed certain of its accounting policies
regarding the manner in which the Company records preneed sales activities. The
Company recorded a one time, non-cash charge of $909,315 as of January 1, 2000
representing the cumulative effect of this accounting change. The selected
consolidated financial data presented below for 2000 is reported after the
implementation of SAB No. 101 on January 1, 2000. The selected consolidated
statement of operations data presented below for 1999 and increased interest expense related1998 are reported on a
proforma basis as if the implementation of SAB No. 101 had occurred in those
years. The selected consolidated statement of operations data presented below
for 1997 and 1996 are reported on a historical basis, as it was impractical for
the Company to additional indebtedness
primarily attributableobtain the amounts on a proforma basis for these two years.
Further, results of operations from discontinued operations have been
reclassified for all periods presented to reflect these operations as
discontinued (see note four to the merger with ECI. Without the above mentioned
restructuring and nonrecurring charges, the ratioconsolidated financial statements of earnings to fixed charges
would have been 2.16 for the year ended 1999.Item 8
of this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
PROFORMA HISTORICAL
------------------------- -----------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
SELECTED CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue from continuing
operations.................... $ 2,564,730 $ 2,745,114 $ 2,354,822 $2,461,690 $2,287,543
Income (loss) from continuing
operations before
extraordinary gains and
cumulative effect of
accounting change............. (425,523) (210,668) 147,854 368,650 261,005
Net income (loss)................ (1,343,251) (191,856) 158,435 333,750 265,298
Earnings per share:
Income (loss) from continuing
operations before
extraordinary gains and
cumulative effect of
accounting change
Basic....................... (1.56) (.77) .58 1.51 1.11
Diluted..................... (1.56) (.77) .57 1.45 1.06
Net income (loss)
Basic....................... (4.93) (.70) .62 1.36 1.13
Diluted..................... (4.93) (.70) .61 1.31 1.08
Cash dividends per share...... -- .27 .36 .30 .24
SELECTED CONSOLIDATED BALANCE SHEET
DATA (HISTORICAL):
Total assets..................... 12,898,469 12,978,230 11,729,816 9,925,643 8,403,431
Long-term debt, less current
maturities.................... 3,114,515 3,636,067 3,764,590 2,634,699 2,048,737
Convertible preferred securities
of SCI Finance LLC............ -- -- -- -- 172,500
Stockholders' equity............. 1,975,821 3,495,273 3,154,102 2,726,004 2,235,317
10
12
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 AND
RATIO AMOUNTS)DATA)
INTRODUCTION
The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 1999,2000, the Company operated 3,8233,611 funeral service
locations, 525569 cemeteries 198and 200 crematoria and two insurance operations located in 2018 countries on five
continents. The Company conducts funeral service operations in all of the 2018 countries
mentioned above,and cemetery operations in North America, South America, Australia and certain
countries within Europe, and
financial services operations in North America and France.Europe. As of December 31, 1999,2000, the Company's largest markets
were North America and France, which when combined, represent approximately 86%84%
of the Company's consolidated revenues, 73%83% of the Company's consolidated income from
operations before non-recurring items and 78% of the Company's total operating
locations.
8
10The funeral and cemetery operations are organized with a North America
division covering the United States and Canada, a European division responsible
for all operations in Europe and other international operations managed in the
Pacific Rim and South America. During 2000, the Company reorganized leadership
of its European operations to focus on stabilizing the Company's market share in
its European markets.
The majority of the Company's funeral service locations and cemeteriesoperations throughout the world are managed
in groups called clusters. Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual overhead costs by sharing
common resources such as operating personnel, preparation services, clerical
and accounting staff, limousines, hearses and preneed sales personnel. Personnel costs, the
largest of the operating expenseexpenses for the Company, are the cost components most
beneficially affected by clustering. The sharing of employees, as well as the
other costs mentioned, allowsallow the Company to more efficiently utilize its
operating facilities duefacilities. In the first quarter of 2000, the Company began the
process of implementing Central Processing Centers throughout North America in
order to the traditional fluctuationfurther assist in the numberefficiencies of accounting and back-office
functions. Once implementation is complete, which is expected in 2001, these
Central Processing Centers will take further advantage of this clustering
concept in order to reduce personnel costs.
The funeral servicesservice locations and cemetery interments performedoperations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Both
funeral service locations and cemeteries can contain crematoria facilities. The
Company has approximately 197 combination facilities in which a given period.funeral service
location is contained within a cemetery. The other services operations consist
of the Company's lending subsidiary, which previously provided capital financing
for independent funeral and cemetery operations. In 1999, the Company decided to
indefinitely suspend the operations of its lending subsidiary. On August 31,
2000, the Company sold a substantial portion of the loan portfolio of its
lending subsidiary. The operations of the lending subsidiary through August 31,
2000 have been included herein as other services. Subsequent to this sale date,
all activities on remaining loans will be recorded in other income in the
Company's consolidated statement of operations.
During 2000, the Company entered into definitive agreements to sell its
wholly owned insurance operations in France and the United States, thereby
discontinuing the operations of the Company's insurance segment and
reclassifying the financial statements in accordance with accounting principles
applicable to discontinued operations for all periods presented. In the third
quarter of 2000, the Company completed these transactions and recorded an after
tax loss of $43,733 associated with these disposals. The Company has entered
into marketing agreements with the purchasers, which became effective at the
closing of the transactions and are expected to produce more free cash flow for
the Company over the next several years than if the insurance operations were
owned by the Company. The marketing agreements with both the United States and
French insurance companies are also expected to provide enhanced opportunities
to sell prearranged funerals in the Company's worldwide funeral markets.
STRATEGIC INITIATIVES
Historically, the Company's growth has been largely attributable to
acquiring funeral service locations and cemeteries. Thiscemetery businesses which resulted in the Company creating the world's
largest network of funeral service locations and cemeteries.
11
13
The Company believes this network forms the foundation of its business plangrowth initiatives
going forward. During the mid-1990's,mid-1990s, the market to acquire funeral service
locations and cemeteries became moreextremely competitive than ever
before andwhich resulted in
increasingincreased acquisition prices which loweredand substantially reduced returns on invested
capital. In early 1999, the Company announced plans to significantly reduce the
level of its acquisition activity and pursue other means to create meaningful
growth from its existing operations. As a result, the Company suspended its acquisition programCompany's strategic plan
in 1999 and
is in transition from an acquisition company to an operating company.
This transition focuses2000 was focused on reducing overhead streamlining operational
functions and processes,costs, increasing cash flow providing better returns onand
reducing debt while at the same time developing key revenue initiatives designed
to drive future internal growth in the Company's invested capitalcore funeral and reducingcemetery
operations without the outlay of significant capital. Management's current bonus
compensation plan is aligned with the execution of these elements of its
strategic plan.
Overhead Costs
The Company's overhead costs include corporate general and administrative
costs, regional field overhead costs and other home office costs related to
functions directly supporting field operations. As a result of the Company's
debt.focus on overhead reduction, total overhead costs for the full year of 2000
decreased approximately 6.5% compared to the full year of 1999, excluding
overhead costs associated with the Company's trust administration functions. The
transitionCompany received substantial non-recurring receipts in 2000 from the collection
of amounts due to an
operating company willthe Company from funeral and cemetery trust funds. To
accomplish the receipt of these funds, as well as to continue to provide normal
trust administration activities, the Company incurred approximately $11,700 more
costs in 2000.2000 related to its trust administration functions compared to 1999. In
the first quarter of 2001, the Company outsourced its trust administration
functions to KPMG LLP which is expected to reduce future cash overhead costs
while at the same time continuing the timely collection of amounts due to the
Company from funeral and cemetery trust funds.
Operating Free Cash Flow
The Company's primary goalsstrategic plan in 2000 are
as follows:
- Continueincluded the execution of several cash
flow initiatives that were designed to increase the Company's operating free
cash flow. The Company considers operating free cash flow to be cash funds that
can generally be used to reduce overheadthe Company's debt and streamline management structures.
- Improve business processesis defined more
specifically in the Financial Condition, Liquidity and information systems.
- IncreaseCapital Resources section
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company's total operating free cash flow for the year ended December
31, 2000 was $219,725, at the upper end of the Company's expected range of
$100,000 to $250,000. A summary of the Company's operating free cash flow is
shown below.
2001 OPERATING FREE
IMPROVEMENT IN CASH FLOW
1999 2000 2000 OVER 1999 RUN RATE TARGETS
-------- -------- -------------- -------------------
Total operating free cash
flow......................... $ (6,520) $219,725 $226,245 $200,000-$250,000
Recurring operating free cash
flow......................... $(88,720) $ 62,025 $150,745 $100,000-$150,000
The Company has improved total operating free cash flow by continuing certain initiatives such as$226,245
primarily through the reduction of capital expenditures compared to historicalmaintenance levels
and the eliminationsuspension of the Company's quarterly dividend,cash dividend. The Company also
executed several other cash initiatives in 2000 including the suspensionefficient
retrieval of funds due to the acquisition program,Company from certain funeral and cemetery trusts,
the realignment of preneed cemetery and prearranged funeral sales structures to
become more cash flow positive and otherthe suspension of the Company's acquisition
program. The Company expects its total operating free cash flow (including
non-recurring receipts of funds) to be between the run rate targets of $200,000
to $250,000 by the end of 2001. Through March 15, 2001, the Company had already
received approximately $131,000 of non-recurring receipts of funds from certain
income tax refunds and from the collection of receivables from funeral and
cemetery trust funds.
Included in the Company's total operating free cash flow are receipts of
funds that are of a non-recurring nature totaling $157,700 for the full year of
2000 and $82,200 for the full year of 1999. These funds relate to the collection
of receivables due to the Company from funeral and cemetery trust funds.
Excluding these non-
12
14
recurring receipts of funds, the Company's recurring operating free cash flow
was $62,025 in 2000 and a use of $88,720 in 1999. The Company continues to
implement existing and additional initiatives in 2001 to increase its recurring
operating free cash flow from 2000 levels. These cash flow initiatives are
categorized as revenue growth initiatives, working capital initiatives.
- Continueimprovements, cost
reduction initiatives, asset redeployment and enhanced funeral and cemetery
trust administration and management. Revenue initiatives include such programs
as the Company's Dignity Memorial(TM) packaged funeral plans and the development
of third party consumer financing programs.
- Continueaffinity relationships. These initiatives are discussed in further detail in
the section Revenue Growth Initiatives included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations. Working capital
improvements include programs to accelerate customer collections and deliver
pre-sold merchandise to customers to satisfy trusting requirements. Cost
reduction initiatives include changes to the Company's employee benefit plans
and other overhead reductions primarily related to information technology costs.
The Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sale of its insurance subsidiaries and interest
savings as a result of proceeds received from divestitures completed in 2000 and
from proceeds to be received from the sale of certain North America funeral and
cemetery operations announced in January 2001. Enhanced cemetery and funeral
trust administration and management will allow the Company to increase operating
free cash flow by reducing processing times for trust claims and accelerate
trust distributions as well as the continuation of the Company's surety bond
program for additional financial assurance discussed in the Financial Assurances
section in Financial Condition, Liquidity and Capital Resources in this Form
10-K. The Company is currently in various stages of executing the above cash
flow initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow from $62,025 in 2000 to a run rate between $100,000 to $150,000 by the
end of 2001 and to a run rate between $200,000 to $250,000 by the end of 2002.
Long-Term Debt
The Company's total debt at December 31, 2000 was $3,291,297, which was
slightly below the Company's anticipated range of $3,300,000 to $3,600,000. The
Company's total debt balances are detailed below.
Peak debt at September 30, 1999................ $4,200,023
Debt at December 31, 1999...................... $4,060,016
Debt at December 31, 2000...................... $3,291,297
Target debt range at December 31, 2002......... $2,000,000-$2,500,000
The Company's debt reduction programs over the past fifteen months have
exceeded its expectations with its total debt being reduced by over $908,000 or
22% from the Company's peak debt level at September 30, 1999. The Company has
achieved this reduction of debt primarily through funds received from its total
operating free cash flow and the sale of certain assets and non-core businessesbusinesses.
In 2000, the Company completed the sale of certain loans of its lending
subsidiary, the termination or assignment away of certain financial swap
agreements, the sale of its discontinued insurance operations and various other
asset sales. These transactions produced after tax cash proceeds of $489,369 in
2000 and, coupled with total operating free cash flow in 2000 were the primary
factors that allowed the Company to reduce its debt below its anticipated range
of $3,300,000 to $3,600,000 by the end of 2000.
The Company is continuing to sell certain non-strategic funeral and
cemetery operations in North America in 2001 that are (i)
not meetingwell aligned with the
Company's return on invested capital criterialong-term strategy. The Company will also continue discussions with
various parties concerning the possibility of joint venturing primarily its
international operations. Alliances and (ii)
can provide a better returnjoint ventures with strategic partners
could include groups that offer unique competitive advantages not previously
available to the Company, such as access to customer databases, marketing
services and prearrangement financing. Proceeds from any investments made by
strategic partners would be used by the Company to reduce its debt. With
substantial non-recurring receipt of funds expected in 2001, improvements in
recurring operating free cash flow described earlier, proceeds expected from
sales of
13
15
certain non-strategic funeral and cemetery operations in North America and
proceeds rather
than from future projected operating cash flows.
- Continue the reduction ofjoint venture programs primarily with the Company's debt levels to create a sound
capital structure forinternational
operations, the Company anticipates reducing its debt from the current level of
$3,291,297 to a range of $2,000,000 to $2,500,000 by the end of 2002.
Revenue Growth Initiatives
The Company has the largest network of funeral homes and cemeteries in the
world. The Company has unique opportunities to leverage this network by adding
new products and services, attracting new customers to its existing facilities
and to reduce cash paid for interest
costs.
- Continueaggressively expand its current market share in its funeral and cemetery
markets. The Company plans to expand its market share and generate future
revenue growth through the implementationexecution of the Company's long-term strategic revenue
and marketingseveral initiatives intended to provide internal revenue growth without the outlay
of significant additional capital. Such initiatives
include implementation of Dignity(TM) Memorial Plan funeral packages and
the associated branding of manySix of the Company's most important revenue
growth initiatives primarily being implemented in North America are listed
below.
- Creation of a seamless, national brand of funeral service locations under
the Dignity Memorial(TM) brand name.
- Implementation of Dignity Memorial(TM) funeral packages.
- Establishment of exclusive, national, branded affinity relationships with
employers, social, fraternal and charitable groups or affiliated locations,
continuedinstitutions.
- Improvement of standards in customer service.
- Continued commitment to funeral and cemetery prearrangement.
- Expansion of cremation marketing, merchandising and services.
The development of global affinity relationshipsthe Dignity Memorial(TM) brand name is a unique
opportunity that the Company believes only it can pursue because of it size and
continued
growthgeographic diversity and creates the first national brand in the saledeath care
industry for funeral service locations that will be recognized and portable on a
national basis. A national network with national portability of products and
services is important to the Company's current and prospective affinity
partners. The Dignity Memorial(TM) provider network will also be developed
through an affiliate program by offering non-SCI funeral service locations,
primarily in markets where the Company does not currently have coverage, the
opportunity to join the Dignity Memorial(TM) provider network and have access to
the Dignity Memorial(TM) branded products and services, prearranged funeral
funding services, merchandising expertise and Internet capabilities.
The Company is also in the process of implementing Dignity Memorial(TM)
branded funeral packages in North America which will be completed in 2001. The
Dignity Memorial(TM) funeral packages are designed to simplify customer decision
making and include new products and services which have traditionally not been
available through funeral service locations. Examples of these new products and
services include legal services, estate organizing and planning, grief
counseling and virtual family archiving services on the Internet. These new
products and services are designed to increase customer satisfaction while also
increasing funeral operating revenues and profitability.
The Company is continuing its efforts to execute agreements with affinity
partners on national, regional and local levels which provide exclusive, direct
access through mail or other agreed upon media to large groups of individuals
who meet the Company's ideal customer profile. The Company then tailors funeral
plans to suit the affinity partner's membership requirements. As an example, the
Company has begun implementation of specialized funeral plans through an
affinity relationship with the Veterans of Foreign Wars (VFW) and the VFW Ladies
Auxiliary in 2001, which includes VFW and branch of service logos, unique flag
and medal cases and specified services requested for VFW members.
Beginning in 1998 and completed in 2000, the Company implemented
comprehensive continuous customer surveys to provide valuable feedback from
consumers in order to enhance customer service and provide insight into consumer
preferences for additional products and services on a global basis. The Company
received responses from 48% of all families serviced in 2000 in North America
funeral service locations which indicated a high approval rating.
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16
The Company also remains committed to prearrangement programs with
consumers for funeral and cemetery products and services, which the Company
believes can increase future market share in its funeral service and cemetery
markets. At December 31, 2000, the Company had deferred preneed cemetery
contract revenues of $1,815,157 which will be recognized as revenues in future
periods. See note six to the consolidated financial statements in Item 8 of this
Form 10-K for further discussion of preneed cemetery sales activities. During
2000, the Company restructured its prearranged organization and compensation
plans to improve the cash flows from the Company's prearrangement activities. In
addition to funding approximately 75% of prearranged funeral contracts through
insurance sources creating general agency revenue and cash overrides, the
Company also introduced direct-to-consumer prearranged marketing in all jurisdictions.
- ContinueNorth
America in 2000 which opens a new marketing channel with consumers to improve customer satisfaction throughoutexpand the
scope of the Company's global
network while monitoring such customer satisfaction through new client
family surveys tiedprearragement activities. The funds collected from
consumers for prearranged funeral contracts are generally placed in trust
accounts (pursuant to certain employees' compensation.applicable law) or are used to pay premiums on life
insurance policies from third party insurers. At December 31, 2000, the Company
had deferred prearranged funeral contracts of $4,537,669. The recognition of
deferred prearranged funeral contract revenues is estimated to occur in the
following years as follows:
2001..................................................... $ 396,000
2002..................................................... 371,000
2003..................................................... 307,000
2004..................................................... 308,000
2005..................................................... 279,000
2006 through 2010........................................ 1,071,000
2011 and thereafter...................................... 1,805,669
----------
$4,537,669
==========
The Company also believes that there are significant opportunities
available to increase market share in the executioncremation segment of its markets
through more effective marketing of cremation products and services. While the
Company will continue to expand cremation memorialization products and services
at its traditional funeral service locations and cemeteries, the Company also
plans to expand the Company owned largest single provider of cremation services
in North America, National Cremation Service(R), from its existing base in ten
states into seven additional states by the end of 2002.
ACCOUNTING CHANGE
In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB No. 101)
which changes the Company's accounting policies regarding the manner in which
the Company records preneed sales activities. The implementation of SAB No. 101
had no effect on the consolidated cash flows of the above initiatives will allowCompany. The accounting
change, which occurred as a result of the required implementation of SAB No.
101, has been treated as a change in accounting principle effective as of the
beginning of 2000. In general, the change requires the Company to maintain its positionrecognize
preneed cemetery interment right revenue from constructed cemetery property when
at least 10% of the sales price is received in cash from the customer, defer all
preneed cemetery merchandise and service revenues and associated trust
investment earnings until the merchandise is delivered or the services are
performed, and to defer only obtaining costs that vary with and are primarily
related to the acquisition of new preneed cemetery and funeral business. For a
more detailed discussion of these changes, see note three to the consolidated
financial statements in Item 8 of this Form 10-K. The cumulative effect of these
changes resulted in an after tax charge of $909,315 or $3.34 per diluted share.
Generally, these changes will result in reduced cemetery revenues and
operating income and reduced funeral operating income in the near future. These
changes are due to the deferral of previously recognized preneed cemetery
merchandise, services and associated trust fund income until the merchandise is
delivered or the service is performed and recognizing as the industry leader, as well as to provide
long-term value to our shareholders.period costs certain
direct selling and marketing costs previously deferred associated with preneed
funeral activities.
15
17
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for
the years ended December 31, 2000, 1999 and 1998. As previously disclosed, the
Company implemented SAB No. 101 in 2000 which primarily changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. For purpose of the following discussion, 2000 financial
information is presented as reported with the implementation of SAB No. 101 at
the beginning of 2000, 1999 financial information is presented on a proforma
basis as if SAB No. 101 had been implemented during 1999 and an historical
basis, and 1998 financial information is presented as originally reported. All
comparisons in this results of operations section between 2000 and 1997. For purposes1999 will be
discussed using proforma 1999 amounts. All comparisons in this results of
discussionsoperations section between the years 1999 and 1998 funeral homes, cemeterieswill be discussed using historical 1999
amounts and crematoria owned
and operated before January 1, 1998, are referred to as 1999 comparableinformation previously reported by the Company. The Company has
excluded the results of operations andof its discontinued insurance operations from
the following discussions for discussions between the years 1998 and 1997, funeral homes,
cemeteries and crematoria owned and
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11
operated before January 1, 1997 are referred to as 1998 comparable operations.
Correspondingly, for discussions between the years2000, 1999 and 1998,1998. During 2000, the
Company completed the sale of its discontinued insurance operations acquired or opened after January 1, 1998, are referred to as 1999 acquired
operations and for discussions with respect to the years 1998 and 1997,
operations acquired or opened after January 1, 1997, are referred to as 1998
acquired operations.
The following table represents revenues and gross profitthird
parties. Results for the three
years ended December 31, 1999:Company's continuing operations by geographic segment
are detailed in the following tables:
1999 1998 1997
----------- ----------- -----------AS REPORTED
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral.....................Funeral................... $1,185,110 68.2% $659,295 96.1% $ 2,039,348 $ 1,829,136 $ 1,720,291
Cemetery.................... 947,852 846,601 724,862
Financial services.......... 334,613 199,353 90,712
----------- ----------- -----------
$ 3,321,813 $ 2,875,090 $ 2,535,865
=========== =========== ===========67,564 47.7% $1,911,969 74.5%
Cemetery.................. 540,410 31.1% 26,904 3.9% 73,953 52.3% 641,267 25.0%
Other Services............ 11,494 0.7% -- -- -- -- 11,494 0.5%
---------- ----- -------- ----- -------- ----- ---------- -----
$1,737,014 100.0% $686,199 100.0% $141,517 100.0% $2,564,730 100.0%
========== ===== ======== ===== ======== ===== ========== =====
Gross profit and margin
percentage:
Funeral.....................Funeral................... $ 366,494 18.0%220,467 18.6% $ 384,607 21.0%38,509 5.8% $ 401,371 23.3%
Cemetery.................... 247,719 26.1 306,161 36.2 271,897 37.5
Financial services.......... (454) (0.1) 28,002 14.0 14,344 15.8
----------- ---- ----------- ---- ----------- ----7,939 11.8% $ 613,759 18.5%266,915 14.0%
Cemetery.................. 41,558 7.7% 5,275 19.6% 11,599 15.7% 58,432 9.1%
Other Services............ 2,295 20.0% -- -- -- -- 2,295 20.0%
---------- ----- -------- ----- -------- ----- ---------- -----
$ 718,770 25.0%264,320 15.2% $ 687,612 27.1%
=========== ==== =========== ==== =========== ====43,784 6.4% $ 19,538 13.8% $ 327,642 12.8%
========== ===== ======== ===== ======== ===== ========== =====
The Company's results of operations for 1999 from a gross profit margin and
percentage standpoint were below 1998 and 1997 levels. The primary reason for
this was the difficult transition in 1999 to an operating company focused on
cash flow and returns on invested capital from a company previously focused in
1998 and 1997 on growth through acquisitions. More specifically, the results of
operations in 1999 were negatively affected by: (i) the reduction of net
cemetery trust earnings, (ii) a reduction in gains on sales of businesses, (iii)
a reduction of operating earnings related to the sale of excess undeveloped
cemetery property, (iv) the downward pressure on operating margins related to
the January 1999 acquisition of ECI which historically had lower volume
operations, (v) a delay in the realization of expected cost savings from cost
rationalization programs primarily related to finalization of labor negotiations
in the Company's funeral operations in France, (vi) inefficiencies in the
standardization of the Company's cemetery sales cost structure, (vii) the focus
on preneed sales of heritage cemetery property which generate higher commission
and have higher property costs and (viii) loan loss provisions related to
certain loans held by the Company's lending subsidiary.
In 1999, the Company realigned its management of geographic segments to
focus on total European operations. Although total amounts reported have not
changed, the Company has made certain reclassifications in all years in order to
reflect the results of these geographic segments.
Funeral
Funeral revenues for the three years ended December 31, 1999, were as
follows:
PERCENTAGE
PERCENTAGE INCREASEPROFORMA
YEAR ENDED DECEMBER 31, 1999
INCREASE 1998 (DECREASE) 1997-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- ---------- ---------- -----------------
North America....................
Revenues:
Funeral................... $1,183,829 17.5%65.6% $769,014 96.5% $ 57,373 39.7% $2,010,216 73.2%
Cemetery.................. 598,852 33.2% 28,164 3.5% 87,124 60.3% 714,140 26.0%
Other Services............ 20,758 1.2% -- -- -- -- 20,758 0.8%
---------- ------ -------- ----- -------- ----- ---------- ------
$1,803,439 100.00% $797,178 100.0% $144,497 100.0% $2,745,114 100.0%
========== ====== ======== ===== ======== ===== ========== ======
Gross profit and margin
percentage:
Funeral................... $ 229,930 19.4% $ 55,737 7.2% $ 5,186 9.0% $ 290,853 14.5%
Cemetery.................. 40,472 6.8% 3,075 10.9% 23,842 27.4% 67,389 9.4%
Other Services............ (29,467) (141.9)% -- -- -- -- (29,467) (141.9)%
---------- ------ -------- ----- -------- ----- ---------- ------
$ 240,935 13.4% $ 58,812 7.4% $ 29,028 20.1% $ 328,775 12.0%
========== ====== ======== ===== ======== ===== ========== ======
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18
AS REPORTED
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,183,829 58.6% $780,206 95.8% $ 75,313 43.8% $2,039,348 67.8%
Cemetery.................. 816,695 40.4% 34,363 4.2% 96,794 56.2% 947,852 31.5%
Other Services............ 20,758 1.0% -- -- -- -- 20,758 0.7%
---------- ------ -------- ----- -------- ----- ---------- ------
$2,021,282 100.0% $814,569 100.0% $172,107 100.0% $3,007,958 100.0%
========== ====== ======== ===== ======== ===== ========== ======
Gross profit and margin
percentage:
Funeral................... $ 274,199 23.2% $ 79,270 10.2% $ 13,025 17.3% $ 366,494 18.0%
Cemetery.................. 205,040 25.1% 10,823 31.5% 31,856 32.9% 247,719 26.1%
Other Services............ (29,467) (141.9)% -- -- -- -- (29,467) (141.9)%
---------- ------ -------- ----- -------- ----- ---------- ------
$ 449,772 22.3% $ 90,093 11.1% $ 44,881 26.1% $ 584,746 19.4%
========== ====== ======== ===== ======== ===== ========== ======
AS REPORTED
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------- ------- -------- ------- -------- ------- ---------- -------
Revenues:
Funeral................... $1,007,462 3.6%56.1% $765,532 96.8% $ 972,670
European......................... 780,206 1.9 765,532 11.9 683,95156,142 51.5% $1,829,136 67.8%
Cemetery.................. 768,229 42.8% 25,564 3.2% 52,808 48.5% 846,601 31.4%
Other foreign.................... 75,313 34.1 56,142 (11.8) 63,670
---------- ----Services............ 20,580 1.1% -- -- -- -- 20,580 0.8%
---------- ----- -------- ----- -------- ----- ---------- Total funeral
revenues............. $2,039,348 11.5% $1,829,136 6.3% $1,720,291
========== ====-----
$1,796,271 100.0% $791,096 100.0% $108,950 100.0% $2,696,317 100.0%
========== ===== ======== ===== ======== ===== ========== =====
Gross profit and margin
percentage:
Funeral................... $ 287,012 28.5% $ 88,541 11.6% $ 9,054 16.1% $ 384,607 21.0%
Cemetery.................. 282,754 36.8% 7,936 31.0% 15,471 29.3% 306,161 36.2%
Other Services............ 9,441 45.9% -- -- -- -- 9,441 45.9%
---------- ----- -------- ----- -------- ----- ---------- -----
$ 579,207 32.2% $ 96,477 12.2% $ 24,525 22.5% $ 700,209 26.0%
========== ===== ======== ===== ======== ===== ========== =====
The $176,367 increase in 1999 funeralFor the year ended December 31, 2000, the Company reported total revenues
from North Americancontinuing operations was primarily the result of the ECI acquisition with$2,564,730, representing a 6.6% decrease compared
to proforma total revenues for 1999 of $2,745,114. Gross profit from comparablecontinuing
operations remainingwas relatively flat compared to 1998. The $34,792
increasethe proforma results of 1999, while
the gross margin percentage increased slightly in 1998 revenue over 19972000 to 12.8% compared to
12.0% from proforma 1999 results.
Funeral
Funeral revenues decreased from $2,010,216 in 1999 to $1,911,969 in 2000.
This decrease in funeral revenues was primarily theattributable to a foreign
currency translation effect of approximately $100,000 negatively affecting
European funeral revenues in 2000 compared to 1999. The Company performed 6.0%
less funeral services in its European funeral service locations in 2000 compared
to 1999 as a result of a $60,044
increasereduction in revenues from 1998 acquired locations offset by a $27,069 decrease
from 1998 comparable locations. The
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12
number of funeral services performed in 1999 comparable locations in North
America increased 0.7% over 1998 while the number of funeral services performed
in 1998 comparable locations in North America decreased 2.0% from 1997. The
increase in volume for 1999 comparable locations in North America were slightly
offset in 1999 by a 0.5% decrease in average sales prices while the 1998
comparable locations in North America also experienced a decrease in average
sales price of 0.8% compared to 1997. The comparable average sales prices in
North America for the years ended 1999, 1998 and 1997, respectively, were
$3,807, $3,827 and $3,859. The average sales price decreases have occurred
because of continuing changes in the Company's sales mix resulting from a higher
proportion of funerals from prearranged contracts being serviced and an increase
in the number of cremations performed, which typically carry lower sales price
averages than traditional atneed funeral services. The sales average related to
prearranged funeral contracts turning atneed has historically been lower than
the current atneed sales average primarily due to the servicing of prearranged
contracts inherited by the Company through acquisitions. North America 1999
acquired locations performed 50,731 funeral services in 1999 and 6,650 in 1998,
while 1998 acquired locations in North America performed 28,864 funeral services
in 1998 and 11,663 in 1997.
Government data indicates the number of deaths in the United States has
increased over the last three years. The Center for Disease ControlEurope and Prevention (CDC) tracks deathsfrom
losses in 122 cities (120 in 1997) across the United
States and in those cities total deaths have increased 0.81% in 1999 from 1998
and 0.39% in 1998 from 1997. The Company has comparable locations in 83 (73 in
1997) of those 122 cities and CDC statistics from these 83 cities indicate the
Company increased market share in those 83 cities during 1999the Company's French funeral service locations
primarily as a result of increased and new competition from the deregulation of
the funeral industry in France. For further information on the deregulation of
the funeral industry in France, see the section Regulation in Item 1 of this
Form 10-K. The Company reorganized its European management team in late 2000 to
try to stabilize its market share in France. The average revenue per funeral
service increased 0.8% in 2000 compared to 1998.
Revenues1999 in European funeral service
locations.
Funeral revenues in North America increased $1,281 in 2000 compared to
1999. North America funeral service locations performed 0.8% less funeral
services in 2000 compared to 1999 while the average revenue per funeral service
increased by 1.0% during 2000 from 1999 levels. In the fourth quarter of 2000,
the average revenue per funeral service in North America funeral service
locations increased 2.6% compared to the same
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19
period of 1999, an increase attributable to the Company's revenue growth
initiatives, such as the introduction of Dignity Memorial(TM) funeral packages
discussed earlier taking effect in the latter half of 2000.
Funeral gross profits decreased $23,938 in 2000 compared to 1999. While
funeral gross profits in North America decreased slightly in 2000 compared to
1999 as a result of less funeral services performed and inflationary cost
increases, most of the decrease in gross profits was attributable to funeral
gross profits decreasing $17,228 in European operationsfuneral service locations. The
primary reason for this decrease in funeral gross profits was a reduction in the
number of deaths in 2000 in Europe compared to 1999 as well as losses in market
share in French funeral service locations.
Funeral revenues increased $14,674by $210,212 in 1999 compared to 1998 and $81,581 in 1998 compared to 1997, primarily
as a result of acquisitions. These acquisitions wereFuneral revenues in North America funeral service
locations increased in 1999 compared to 1998 primarily as a result of the
Company's acquisition in January 1999 of Equity Corporation International (ECI),
formerly the fourth largest company in the death care industry. The Company also
acquired funeral service locations in Spain, Norway and the Netherlands in 1999
and France, Spain, Portugal, Norway and the Netherlandsresulting in 1998. Revenues from comparableincreased funeral revenues in European funeral service locations decreased 2.7% in
1999 compared to 1998
due to decreases in the average sales price of approximately 2.0% while volumes
were relatively consistent with the prior year. Revenues from comparable
locations in 1998 increased 1.1% over 1997.
Revenues from Other foreign operations increased $19,1711998. Funeral gross profits decreased by $18,113 in 1999
as a
result of acquisitions in Chile and Argentina and growth in comparable locations
in the Pacific Rim of 5.0% over 1998. While volume declined in the Pacific Rim
by 3.9%, the average sales price increased 9.2% partially as a result of
favorable exchange rate variances between the Australian dollar and the U.S.
dollar. Revenues from other foreign operations decreased $7,528 in 1998 from
1997 primarily due to a 15.4% decline in the Australian dollar versus the U.S.
dollar, partially offset by increased revenues from Argentinian acquisitions.
During the year ended December 31, 1999, the Company sold $578,263 of
prearranged funeral contracts compared to approximately $490,289 in 1998 and
$526,919 in 1997. The obligations are funded through both trust and insurance
backed contracts. Of those prearranged sales, approximately $364,737 in 1999 and
$197,317 in 1998 will be funded by Company insurance operations. The revenues
associated with these prearranged funeral services are deferred and will be
reflected in funeral revenues in the periods that the funeral services are
performed. The Company expects to continue the emphasis on selling prearranged
funerals as a means of protecting current market share and sales mix, as well as
to expand market share in certain markets.
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13
Funeral gross profit and margin percentage for the three years ended
December 31, 1999, were as follows:
PERCENTAGE PERCENTAGE PERCENTAGE
1999 OF REVENUE 1998 OF REVENUE 1997 OF REVENUE
-------- ---------- -------- ---------- -------- ----------
North America.............. $274,199 23.2% $287,012 28.5% $297,586 30.6%
European................... 79,270 10.2 88,541 11.6 86,717 12.7
Other foreign.............. 13,025 17.3 9,054 16.1 17,068 26.8
-------- ---- -------- ---- -------- ----
Total funeral
gross profit... $366,494 18.0% $384,607 21.0% $401,371 23.3%
======== ==== ======== ==== ======== ====
The decreases in gross margin percentage in North America in 1999 and 1998
were due to increased costs and expenses of 26.3% and 6.7%, respectively, while
revenues increased 17.5% and 3.6%, respectively, as discussed above. The
increased costs and expenses were primarily due to higher costs at acquired locations,
specifically related to the Company's merger with ECI in January 1999.
Typically, acquisitions will temporarily exhibit lower gross profit margins than those experienced by the Company's comparable locations
until these locations have been fully assimilated into the Company's clusters.
Further, the gross margin percentage at ECI locations had been historically
lower than the Company's gross margin percentages and this has negatively
affected the total gross margin percentage in North America. Comparable locations experienced a
3.6% increase in operating expenses in 1999 compared to 1998 primarily related
to increases in promotional and advertising expenses as part of the transition
to an operating company from one previously focused on growth through
acquisitions. In 1998 such comparable costs were relatively flat as compared to
1997. The decrease in
European gross profit and margin percentage in 1999 was primarily the result of
less funeral services performed causing reduced profit due to the Company's
fixed cost structure, coupled with delays in labor negotiations in France
related to cost rationalization programs.
The decrease in
European gross profit and margin percentage in 1998 was primarily the result of
a disproportionate increase in total costs and expenses of 13.7% primarily
related to acquisitions.
The decrease in Other foreign gross margin percentage in 1999 was primarily
due to increased costs and expenses in Australia coupled with the addition of
lower operating margin funeral businesses from the Chilean acquisitions,
partially offset by improved margins in Argentina. The decrease in Other foreign
gross profit and margin percentage in 1998 was primarily due to increased costs
and expenses in Australia and lower operating margins in Argentinean
acquisitions. In 1998, Australian costs and expenses increased approximately
6.0% more than the change in revenue.
Cemetery
Cemetery revenues fordecreased from $714,140 in 1999 to $641,267 in 2000. This
decrease in cemetery revenues was primarily attributable to decreases in
revenues in North America cemetery operations. North America cemetery revenues
decreased $58,442 in 2000 compared to 1999 as a result of significant changes to
cemetery employee compensation plans which began to be implemented in late 1999.
The Company changed the three years ended December 31,cemetery employee compensation plans to increase cash
flow in this business segment which had the impact of adversely affecting
cemetery revenues in 2000.
Cemetery gross profits decreased from $67,389 in 1999 wereto $58,432 in 2000.
This decrease in cemetery gross profits was primarily attributable to higher
cancellation costs in cemetery operations in South America included in the
Company's other foreign cemetery segment. Cemetery gross profits in North
America increased by $1,086 in 2000 compared to 1999 as follows:
PERCENTAGE PERCENTAGE
1999 INCREASE 1998 INCREASE 1997
-------- ---------- -------- ---------- --------
North America........................ $816,695 6.3% $768,229 14.5% $671,112
European............................. 34,363 34.4 25,564 18.3 21,609
Other foreign........................ 96,794 83.3 52,808 64.3 32,141
-------- ---- -------- ---- --------
Total cemetery revenues.... $947,852 12.0% $846,601 16.8% $724,862
======== ==== ======== ==== ========
a result of the above
mentioned changes to cemetery employee compensation plans and other cost
measures in North America cemetery operations.
Cemetery revenues increased by $101,251 in 1999 compared to 1998 primarily
as a result of acquisitions. The increase of $48,466 in 1999 North AmericanAmerica
cemetery revenues compared to 1998 was primarily the result of the $82,345an increase in
acquisitionsrevenues as a result of the Company's January 1999 merger with ECI, partially
offset by the decrease of net cemetery trust earnings of 32.3% and a reduction of
operating earnings related to the sale of excess undeveloped cemetery property.
Comparable atneed and preneed
revenue in 1999 remained stable compared to the prior year. The 1998 increase in
revenue from North American cemetery operations of $97,117 was primarily due to
an increase in revenue from acquisitions, increased trust earnings of 29.8% and
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14
increased revenue from sales of excess undeveloped cemetery property compared to
1997. Comparable preneed and atneed sales in 1998 were relatively flat as
compared to 1997.
The increases in revenue of $8,799 from European operations in 1999 compared to
1998 were the result of acquisitions in the United Kingdom and Belgium in 1999
and in the United Kingdom
and the Netherlands in 1998.
The $43,986 increase in 1999 revenues compared to 1998 from Otherother foreign
operations was the result of acquisitions in Chile, Argentina and Uruguay andUruguay.
Cemetery gross profits decreased by $58,442 in 1999 compared to 1998
primarily as a 13.7% increase in
revenue in Australian operations. The $20,667 increase in 1998 revenues was the result of the inclusion of new Argentina operations for the full year offset by
a decline in Australia cemetery revenue.
Cemetery gross profit and margin percentage for the three years ended
December 31, 1999, were as follows:
PERCENTAGE PERCENTAGE PERCENTAGE
1999 OF REVENUE 1998 OF REVENUE 1997 OF REVENUE
-------- ---------- -------- ---------- -------- ----------
North America............... $205,040 25.1% $282,754 36.8% $251,993 37.5%
European.................... 10,823 31.5 7,936 31.0 8,275 38.3
Other foreign............... 31,856 32.9 15,471 29.3 11,629 36.2
-------- ---- -------- ---- -------- ----
Total cemetery
gross profit.... $247,719 26.1% $306,161 36.2% $271,897 37.5%
======== ==== ======== ==== ======== ====
increased costs from North America 1999 cemetery gross profit declined $77,714 primarily due to
increased costs of 12.9% at 1999 comparable locations.operations.
These increased costs were primarily the result of increases in property costs
and commission expenses, relatedprior to the saleimplementation of the above mentioned
changes to cemetery employee compensation plans in late 1999, related to
heritage cemetery property sales initiatives. The
decrease in the North America cemetery gross profit margin percentage in 1999
was primarily the result of these increased costsinitiatives coupled with the reductions in net
cemetery trust earnings and operating earnings related to the sale of excess
undeveloped cemetery property. The 1998 North America cemetery gross profit
increased $30,761 primarily due to the corresponding growth in revenue discussed
above. Costs of services at comparable locations remained flat in 1998 from 1997
and, while costs from acquired locations increased $43,509, these increases were
offset by increases in net cemetery trust earnings and operating earnings
related to sales of excess undeveloped cemetery property.
The increase of $2,887 in 1999 European gross profit was the result of
increases due to acquisitions in Belgium and the United Kingdom. The decrease in
the 1998 gross margin percentage was the result of increased costs in
anticipation of growth associated with comparable locations in the United
Kingdom.
The 1999 increase of $16,385 in Otherother foreign
gross profit and the
corresponding increase in the margin percentageprofits was the result of
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20
increases in the gross profit and margin percentage from the Company's acquired South
American operations. The gross margin percentage in Argentina has improved to 24.0%
in 1999 from 19.4% in 1998.
Other Services
The decline in Other foreign margin percentage in 1998
was due to the inclusion of a full year of cemeteryCompany's other services operations in Argentina
during 1998 which reduced gross margin percentage when combined with the higher
margin Australian operations. Argentina has significantly lower gross margin
percentages than Chile or Australia; however, these margin percentages are in
line with the Company's expectations.
Financial Services
Financial services represents a combinationconsist of the Company's insurance
operations and a lending subsidiary.
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15
Financial services revenues for the three years ended December 31, 1999,
were as follows:
PERCENTAGE
INCREASE PERCENTAGE
1999 (DECREASE) 1998 INCREASE 1997
-------- ---------- -------- ---------- -------
Insurance:
North America.................. $244,506 198.8% $ 81,832 --% $ --
France......................... 69,349 (28.5) 96,941 30.7 74,175
-------- ----- -------- ----- -------
Total insurance............. 313,855 75.6 178,773 141.0 74,175
Lending subsidiary............... 20,758 0.8 20,580 24.4 16,537
-------- ----- -------- ----- -------
Total financial
services revenues.... $334,613 67.8% $199,353 119.8% $90,712
======== ===== ======== ===== =======
The increase in insurance revenues in 1999 and 1998 was due to the North
American acquisition of AML effective July 1998. Further, a portion of the
increase in revenue in 1999 is related to the Company's initiatives to fund a
higher percentage of prearranged funeral contracts through AML as opposed to
third party insurance or trust funded contracts. Insurance revenues from the
Company's French operations decreased due to decreased investment income related
to a repositioning of the investment portfolio. Although the average outstanding
loan portfolio associated with the lending
subsidiary, increased in 1999 from
1998, revenues remained relatively flat between the two years due to the
non-performing status of certain loans subsequent to September 30, 1999. Growth
from the lending subsidiary in 1998 is attributable to the increasing loan
portfolio. The average outstanding loan portfolio was $248,807 in 1999, $228,279
in 1998which previously provided capital financing for independent funeral
and $182,375 in 1997.
Financial services gross profit and margin percentage for the three years
ended December 31, 1999, were as follows:
PERCENTAGE PERCENTAGE PERCENTAGE
1999 OF REVENUE 1998 OF REVENUE 1997 OF REVENUE
-------- ---------- ------- ---------- ------- ----------
Insurance:
North America.......... $ 16,084 6.6% $ 7,872 9.6% $ -- --%
France................. 12,929 18.6 10,689 11.0 6,712 9.0
-------- ------ ------- ---- ------- ----
Total insurance..... 29,013 9.2 18,561 10.4 6,712 9.0
Lending subsidiary....... (29,467) (141.9) 9,441 45.9 7,632 46.2
-------- ------ ------- ---- ------- ----
Total financial
services
gross profit
(loss)....... $ (454) (0.1)% $28,002 14.0% $14,344 15.8%
======== ====== ======= ==== ======= ====
The 1999 decrease in the North American insurance gross margin percentage
was the result of increased production. While revenue and gross profit have both
increased during this period of growth, benefits and expenses have also
increased, thereby reducing the gross margin percentage. Although French
insurance revenues in 1999 were negatively affected by decreased investment
income related to the repositioning of their investment portfolio, gross profit
was negatively impacted only slightly due to a corresponding reduction in
expense and the margin percentages were positively affected due to the lower
revenue used to calculate the margin percentage.
The Company's lending subsidiary reported a gross loss of $29,467 for the
year ended December 31, 1999, compared to gross profit of $9,441 and $7,632 for
the same periods in 1998 and 1997, respectively. As part of its cost
rationalization programs initiated incemetery operations. In 1999, the Company decided to indefinitely suspend
the operations of its lending subsidiary. On August 31, 2000, the lending subsidiary by sellingCompany sold a
substantial portion of the loan portfolio and acquiringof its lending subsidiary. The
operations of the lending subsidiary through August 31, 2000 have been included
herein as other services. Subsequent to this sale date, all activities on
remaining loans have been recorded in other income in the Company's consolidated
statement of operations.
The Company acquired by deed in lieu of foreclosure the collateral
underlying other certain loans in its portfolio. The Company recorded a provision for
loan losses of $38,608 in the fourth quarter of 1999 associated with the lending subsidiary's loans
that arewere not
14
16 being held for sale. See note eighteenseventeen to the consolidated
financial statements in Item 8 of this Form 10-K for further discussion of these
nonrecurringnon-recurring charges related to the Company's lending subsidiary.
The lending subsidiary's gross profit was affected in 1999 by a decrease in
the average interest rate spread for the year, primarily as a result of the
non-performing status of certain loans discussed above. For the three years
ended December 31, 1999, the average interest rate spread was 2.48%, 3.14% and
3.18%, respectively.
Other Income and Expenses
The Company's general and administrative expenses increaseddecreased from $82,585 in
1999 to $82,585 compared to $66,839$79,932 in 1998 and $66,781 in 1997. Expressed as a
percentage of revenues, these expenses were 2.5%, 2.3% and 2.6% in 1999, 1998
and 1997, respectively. The increase in general2000. General and administrative expenses were higher in 1999
comparedthan 2000 primarily due to 1998 and 1997 levels is primarily related to non-recurring cost
items such ashigher information technology costs in 1999 related
to the Company's year 2000 (Y2K) preparation, and professional costs associated with process improvement
initiatives and implementation of EVA(R) based incentive
compensation models.models and the Company's North America proprietary point of sale
systems that were placed into production in 1999. General and administrative
expenses were $66,839 in 1998 which were lower than 1999 levels due to the high
expenses in 1999 noted above.
Interest expense increased $61,142 or 34.5%was $281,548 in 2000 compared to $238,185 in 1999 compared to 1998 and
increased $40,333 or 29.5%$177,053 in 1998 compared to 1997. This increased1998. The increase in interest expense was primarily reflectivein 2000 over 1999 and 1998
levels reflects the high financing costs associated with the use of increased indebtedness assumed due to
acquisitions, specificallythe
Company's credit facilities in 2000 rather than its commercial paper programs in
1999 and 1998, as it relates to the ECI mergerwell as overall interest rate increases. The Company has made
substantial progress in January 1999. The
average borrowings during 1999 were $4,131,833 compared to $3,340,7082000 in 1998reducing its debt and $2,434,808 in 1997. The average interest rates for each of these years were
5.99%, 6.15% and 6.03% for 1999, 1998 and 1997, respectively. The Company expects interest expense
to increasebe in the range of $230,000 and $250,000 in 2001.
Other income was $34,636 in 2000 compared to approximately $265,000 to $270,000$31,759 for the year ended December 31, 2000,1999 and $43,649
in 1998. Other income primarily as a resultcontains income from various notes receivable of
the Company's lower
credit rating.
Other income primarily consistslending subsidiary subsequent to August 31, 2000 (see earlier
discussion of other services operations), equity from earnings of investments in
certain companies, gains and losses from the sales of businesses that are
disposed of for strategic or government mandated purposes.purposes and cash overrides
from prearranged funeral sales with the Company's formerly owned insurance
operations in North America and France (see discontinued operations discussions
in Item 1 of this Form 10-K).
Cremations
In 1999, other income was $31,759the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is more stable. The west coast of the United States and the
states of Arizona and Florida have the highest concentration of cremation
consumers in North America. While cremations performed by the Company in North
America typically have higher gross profit margins than traditional funeral
services, cremations usually result in lower revenue and gross profit dollars to
the Company than traditional funeral services. In North America during 2000,
36.3% of all funeral services performed by the Company were cremation cases,
compared to $43,64933.9% performed in 19981999. The Company in 2000 continued to expand its
cremation memorialization products and $100,244services in 1997.several North America markets
which has resulted in higher average sales for cremation cases compared to
historical levels. The fluctuation between $100,244Company also continues to expand its nationally branded
cremation service locations called National Cremation Service(R) (NCS). NCS
currently operates in ten high cremation states and has plans to continue to
expand into seven additional
19
21
high cremation states. The Company believes that the NCS consumer would not have
chosen the Company's traditional funeral service locations as an alternative to
NCS, and therefore is considered an incremental customer to the Company.
Restructuring and Non-Recurring Charges
In 2000, the Company recorded several non-recurring items related to
extraordinary gains on early extinguishments of other incomedebt, net losses associated with
the sales of the Company's discontinued insurance operations, estimated losses
from the planned divestitures of certain North America funeral homes and
cemeteries, the reduction of the carrying value of an equity investment in 1997 and $43,649 of
other income in 1998 reflects the gainNorth
America, a loss on the sale of a minority interest in 1997the stock of the Company's
equity interest in ECI of $68,077.
The provision (benefit) for income taxes reflects a (9.0%) effective tax
rate for 1999, comparedUnited Kingdom operations and certain changes to a 34.0% effective tax rate in 1998 and a 35.4%
effective tax rate in 1997. The decreaseestimates in the effective tax rate was primarily
dueCompany's
restructuring and non-recurring charges recorded in 1999. The above
non-recurring items resulted in the Company incurring charges of $453,067 on a
pretax basis or $1.64 per diluted share in 2000. In 1999, the Company recorded
non-recurring items related to cost rationalization programs, a provision for
loan losses related to the nondeductible lossesCompany's lending subsidiary and extraordinary gains
on early extinguishments of debt. These items resulted in the Company recording
net non-recurring charges of $398,080 on a pretax basis or $.98 per diluted
share in 1999. For further information detailing these non-recurring items
recorded in 2000 and 1999, see note seventeen to the fourth quarterconsolidated financial
statements in Item 8 of 1999 as a
result of the Company's 1999 restructuring charges. The 1998 reduction in the
effective tax rate is primarily due to a larger relative profit contribution
from international operations which are taxed at lower rates. Included in the
provisions for all years were tax benefits relating to enacted tax rate changes
in certain foreign tax jurisdictions.this Form 10-K.
FINANCIAL CONDITION, LIQUIDITY AND LIQUIDITYCAPITAL RESOURCES
General
Historically, the CompanyCompany's growth has funded its working capital needsbeen largely attributable to
acquiring funeral and capital
expenditures primarily through cash provided by operating activitiescemetery businesses which resulted in creating the world's
largest network of funeral service locations and borrowings under bank revolving credit agreements and commercial paper.cemeteries. Funding required
for the Company's acquisition program had historically has been generated through
public and private offerings of debt and the issuance of equity securities
supplemented by the Company's revolving credit agreements.
Duringfacilities and commercial paper.
In early 1999, the Company announced plans to significantly reduce the level of
its acquisition activity and pursue other means to create meaningful growth from
its existing operations. As a result, the Company's liquidity needs and capital funding requirements
changed as the Company transitioned away from an acquisition company to an
operating companystrategic plan in 2000 was
focused on reducing overhead costs, increasing cash flow and reducing overhead costs and
paying downits debt.
The Company developed a series ofexecuted several cash flow initiatives in 19992000 related to ongoing
operations of the Company that were designed to increase the Company's operating
free cash flow. The Company also executed initiatives in 2000 resulting in cash
flows from the sale of certain assets and non-core businesses and sources of cash flow from providing third party
financing to consumers. These cash flow initiatives were developed in late 1999
and will not effect thebusinesses. The Company's cash flow until 2000 and beyond.
Cash flow
initiatives related to the ongoing operations of the Company include: (i) the suspension of the acquisition program, (ii)included the reduction
of capital expenditures compared to historicalmaintenance levels, (iii) the suspension of the
quarterly cash dividend, (iv) the obtainingefficient retrieval of funds
availabledue to the Company from certain of
the Company'sfuneral and cemetery trusts, more efficiently, and (v) the realignment of
preneed cemetery and prearranged funeral sales structures 15
17
to become more cash
flow positive.positive and the suspension of the Company's quarterly cash dividend and
acquisition program. During 2000, the Company also completed the sale of certain
loans of its lending subsidiary, terminated or assigned away certain financial
swap agreements, sold its discontinued insurance operations and sold various
other assets.
The Company believesreduction of capital expenditures to maintenance levels, suspension of
the aboveCompany's quarterly cash dividend and the implementation of other cash flow
initiatives coupled with other working capital initiatives, will produceand sales of assets and non-core businesses significantly improved
the Company's operating free cash flow on an after tax basisand created substantial cash proceeds in
2000 which were used by the range of $100,000Company to $200,000 in 2000.reduce its debt. The Company defines
operating free cash flow as adjusted cash flow from operating activities, determined by generally accepted accounting principles,
less
capital expenditures and dividends paid,paid. Adjusted cash flow from operating
activities includes cash flow provided by operating activities as reflected in
the consolidated statement of cash flow adjusted to exclude (i) cash flow
provided by operating activities of the Company's discontinued insurance
operations, (ii) cash payments associated with the Company's non-recurring and
restructuring charges in 1999 and 2000 and (iii) other proceeds or payments
(included in cash flow provided by operating activities) which are of a
non-recurring operational nature. Generally, operating free cash flow is cash
funds that can be used to reduce the Company's debt.
20
22
The following details the Company's execution during 2000 towards its goals
of increasing its operating free cash flow, as well as certain goals for 2001
and 2002.
TWELVE MONTHS YEAR 2000
ENDED BENCHMARKS 2001 2002
DECEMBER 31, 2000 ACHIEVED RUN RATE TARGETS RUN RATE TARGETS
----------------- ----------------- ----------------- -----------------
Operating free cash flow:
Consolidated cash flow provided by
operating activities.................. $ 368,240(1)
Amount pertaining to discontinued
insurance operations.................. (144,640)
Payments on restructuring charges....... 46,655
Effect of swap agreement terminations... 32,840
---------
Adjusted cash flow from operating
activities............................ 303,095
Capital expenditures.................... (83,370)
---------
TOTAL OPERATING FREE CASH FLOW............ $ 219,725 $100,000-$250,000 $200,000-$250,000 --
Less: Non-recurring receipts of funds... (157,700)
---------
RECURRING OPERATING FREE CASH FLOW........ $ 62,025 -- $100,000-$150,000 $200,000-$250,000
=========
Estimated after tax proceeds from sales of
assets and non-core businesses.......... $ 489,369 $200,000-$500,000 $200,000-$500,000 --
========= ================= ================= =================
TOTAL CASH FLOW AVAILABLE......... $ 709,094 $300,000-$750,000 $400,000-$750,000 --
========= ================= ================= =================
- ---------------
(1) The net effect of prearranged funeral production and maturities. Thematurities has been
reclassed from cash flows from investing activities to cash flows from
operating activities as discussed in note two to the consolidated financial
statements in Item 8 of this Form 10-K.
Included in the Company's total operating free cash flow projections above do not
include approximately $75,000 of projected net cash outflow in 2000 associated
withof
$219,725 are non-recurring receipts of funds totaling $157,700 relating to the
Company's 1999 firstcollection of receivables due to the Company from funeral and fourth quarter restructuring and nonrecurring
charges.cemetery trust
funds. The Company developedcontinues to implement existing and additional initiatives in
2001 to increase its recurring operating free cash flow from 2000 levels. These
cash flow initiatives are categorized as (i) revenue growth initiatives, (ii)
working capital improvement, (iii) cost reduction initiatives, (iv) asset
redeployment, and (v) enhanced funeral and cemetery trust administration and
management. Revenue initiatives include such programs as the Company's Dignity
Memorial(TM) packaged funeral plans and the development of affinity
relationships. These initiatives are discussed in 1999further detail in Revenue
Growth Initiatives included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Working capital improvements
include programs to sellaccelerate customer collections and deliver pre-sold
merchandise to customers to satisfy trusting requirements. Cost reduction
initiatives include changes to the Company's employee benefit plans and other
overhead reductions primarily related to information technology costs. The
Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently, such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sales of its insurance operations and interest
savings as a result of proceeds received from divestitures completed in 2000 and
from proceeds to be received from the sale of certain North America funeral and
cemetery operations announced in January 2001. Enhanced cemetery and funeral
trust administration and management will allow the Company to increase operating
free cash flow by reducing processing times of trust claims and accelerate trust
distributions as well as the continuation of the Company's surety bond program
for additional financial assurance discussed in the Financial Assurances section
herein. The Company is currently in various stages of executing the above cash
flow initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow from $62,025 in 2000 to a run rate between $200,000 to $250,000 by the
end of 2002. The Company also expects recurring operating free cash flow to have
a run rate between $100,000 to $150,000 by the end of 2001 as a result of the
implementation of its current cash flow initiatives.
21
23
The Company's total debt at December 31, 2000 was $3,291,297, which was
slightly below the Company's anticipated range of $3,300,000 to $3,600,000. The
Company's total debt balances are detailed below.
Peak debt at September 30, 1999............... $4,200,023
Debt at December 31, 1999..................... $4,060,016
Debt at December 31, 2000..................... $3,291,297
Target debt range at December 31, 2002........ $2,000,000 - $2,500,000
The Company's debt reduction programs over the past fifteen months have
exceeded its expectations with its total debt being reduced by over $908,000 or
22% from the Company's peak debt level at September 30, 1999. The Company has
achieved this reduction of debt primarily through funds received from its total
operating free cash flow and the sale of certain assets and non-core businesses,
both discussed earlier in this section. The Company is continuing to sell
certain funeral and cemetery operations in North America in 2001 that are either not
meeting the Company's criteria for
returns on invested capital or are more valuable to parties outside the Company.
The Company expects after tax proceeds of $200,000 to $300,000 from these sales
of non-core financial or operational assets in 2000.
In 2000, the above cash flow initiatives developed in 1999 are expected to
produce approximately $300,000 to $500,000 of funds available for reducing debt
on an after tax basis. This projection again does not include approximately
$75,000 of net cash outflows in 2000 associatedwell aligned with the Company's 1999
restructuring charges. Theselong-term strategy. The Company will also
continue discussions with various parties concerning the possibility of joint
venturing primarily its international operations. Alliances and joint ventures
with strategic partners could include groups that offer unique competitive
advantages not previously available to the Company, such as access to customer
databases, marketing services and prearrangement financing. Proceeds from any
investments made by strategic partners will be used by the Company to reduce its
debt. With substantial non-recurring receipt of funds available for debt reduction also do not
include any possible effect onexpected in 2001,
improvements in recurring operating free cash flows associated with the developmentflow described earlier, proceeds
expected from sales of a
consumer financing programcertain funeral and cemetery operations in North America
forand proceeds from joint venture programs with the Company's atneedinternational
operations, the Company anticipates reducing its debt from the current level of
$3,291,297 to a range of $2,000,000 to $2,500,000 by the end of 2002.
At December 31, 2000, the Company had current maturities of long-term debt
of $176,782. The Company anticipates having funds available to eliminate these
current maturities in 2001 through recurring operating free cash flow, proceeds
from certain asset sales or joint venturing programs and other non-recurring
receipts of funds. Through March 15, 2001, the Company had already received
approximately $131,000 of non-recurring funds from certain income tax refunds
and from the collection of receivables from funeral and cemetery and preneed cemetery client families, which could improve or generate
cash flow for the Company and enhancetrust funds.
Of the Company's ability to further pay down
debt.
The Company had total long-term debt of $4,060,016 at December 31, 1999 versus
$3,860,657 at December 31, 1998. The2000 of $3,114,515,
the largest component of this debt relatesis related to the Company's primary revolving credit agreements. The Company's primary
revolvingagreements
maturing in June 2002. These credit agreements provide for borrowingsborrowing up to
$1,600,000 and consists
of two 364-day facilities and a five-year, multi-currency facility due in 2002.
One of the 364-day facilities permits borrowings up to $300,000 and the
outstanding balance at maturity (June 25, 2000) may be converted into a two-year
term loan at the Company's option. The second 364-day facility permits
borrowings up to $600,000 and expires November 1, 2000. As$988,287 as of December 31, 1999,
approximately $412,000 was available under these three facilities.2000 and consist of two committed facilities -- a
2-year term loan and a 5-year, multi-currency revolving facility, both due in
June 2002. These credit agreements were amended effective November 2000.
Significant terms of the amendments include certain agreements made by the
Company to reduce commitment amounts on the credit facilities havebased upon net
cash proceeds generated from joint venture and asset sale transactions closed
after November 2000; changes to definitions and calculations of financial
compliance provisions that contain certain
restrictions, includingcovenants related to a maximum debt-to-capitalization ratio, of 60%, a minimum interest
coverage of 2.75,ratio and a minimum net worth requirementrequirement; limits on the amount of
Company assets that could be joint ventured or sold; and certain restrictions on
future acquisition activity without lender approval. Under the terms of the
amended credit agreements, the covenants will continue to be calculated using
information without the implementation of SAB No. 101, until such time as the
Company negotiates revised covenant calculations under the credit agreements.
For further information on these credit facilities, see note eight to the
consolidated financial statements in Item 8 of this Form 10-K. As of March 26,
2001, the Company had $658,455 outstanding under these credit agreements which
provided for borrowings of up to $975,279 on this date. With non-recurring
receipts of funds expected in 2001 and 2002, improvements in recurring operating
free cash flow described earlier, proceeds expected from sales of certain
funeral and cemetery operations in North America and proceeds from joint venture
programs primarily with the Company's international operations, the Company
believes funds will be available to reduce these maturities due in 2002 allowing
for the refinancing of remaining balances outstanding, if any.
22
24
EBITDA
The Company reported EBITDA before non-recurring items for the years ended
December 31, 2000 and 1999 of $532,453 and $586,273, respectively. EBITDA
included continuing and discontinued operations for both periods and is
calculated by adding depreciation and amortization expense and interest expense
to the Company's pretax earnings after excluding non-recurring items defined in
the facility agreements,section Restructuring and limitationsNon-Recurring Charges in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Financial Assurances
In support of the Company's operations, the Company has entered into
arrangements with certain insurance companies whereby such insurance companies
agree to issue surety bonds on cash disbursements, subsidiary
borrowings, liensbehalf of the Company, as financial assurance
and/or as required by existing state and guarantees. See note eightlocal regulations. The surety bonds are
used for various business purposes; however, the majority of the surety bonds
issued and outstanding have been issued to support the Company's prearranged
funeral and preneed cemetery activities. The underlying obligations that such
surety bonds insure are appropriately recorded on the Company's consolidated
balance sheet as Deferred prearranged funeral contract revenues and Deferred
preneed cemetery contract revenues (see notes five and six to the consolidated
financial statements in Item 8 of this Form 10-K for further information ondetails regarding
the Company's primary revolving credit facilities.
Historically, the Company has classified borrowings under these facilitiesprearranged funeral and preneed cemetery activities). The total
surety bonds outstanding as long-term debt since it has been the Company's intent to refinance such
borrowings with long-term debt or equity. In 1999, however, the Company's
downgraded credit ratings, both short-term and long-term, have limited its
access to the capital markets. As such, borrowings (primarily commercial paper)
of approximately $179,704 backed by the $600,000 facility have been classified
as current maturities of long-term debt. As of December 31, 2000 and 1999 the Company
had a total of $423,949 of current maturities of long-term debt. As mentioned
above, the Company believes it will generate funds available for reducing debt
on an after tax basis of $300,000 to $500,000 not including the projected net
cash outflow of $75,000 related to the Company's 1999 restructuring charges.
Based on these funds available, coupled with banking relationships that the
Company would characterize as positive, the Company believes it will meet all of
its financial obligationswere $215,350 and
requirements in 2000.$182,322, respectively.
Sources and Uses of Cash
Cash Flows from Operating Activities:
Net cash provided by operating activities was $432,850 for the year ended December 31, 1999,$368,240 in 2000 compared to
$328,620$393,610 in 1999. Included in these totals is $144,640 and $141,650 of net cash
provided by discontinued operations for the same period in 1998, an improvement of $104,230. Significant
components of2000 and 1999, respectively. From
continuing operations, net cash flow provided by operating activities forwas $223,600 in
2000 compared to $251,960 in 1999. The Company received non-recurring receipts
of funds of $157,700 and $82,200 in 2000 and 1999, respectively, relating to the
year ended
December 31,collection of receivables from certain funeral and cemetery trust funds which
are included in net cash provided by continuing operations. Excluding these non-
recurring receipts of funds, net cash provided by continuing operations
decreased by approximately $104,000 in 2000 compared to 1999 include: (1) net lossprimarily as a
result of $32,412 adjusted for normal non-cash
items suchdecreases in the gross profits of the Company's core funeral and
cemetery operations in 2000 compared to 1999, increases in cash interest paid as
$252,145 of depreciation and amortization, (2) restructuring and
nonrecurring charge provisions of $362,428, reduced by cash paid of $37,553well as from increases in other assets in 2000 related to the charges, (3) an increasefederal income tax
refunds to be received in receivables of $223,405 primarily
related2001.
Net cash provided by investing activities from continuing and discontinued
operations was $193,068 in 2000 compared to the sales of preneed cemetery products and services which are usually
financed on an installment basis in excess of twelve months and (4) an increase
in other liabilities of $138,448 primarily related to the non-cash add-back
16
18
associated with the actuarially determined liability recorded by the Company's
insurance operations.
Cash Flows from Investing Activities: Netnet cash used in investing
activities was $423,982 for the year ended December 31, 1999, compared to $1,059,875 for
the same periodof $384,742 in 1998, an improvement1999. Included in these totals are $122,966 and
$197,587 of $635,893. Significant components ofnet cash used in investing activities for the year ended December 31,by discontinued operations in
2000 and 1999, include:
(1)respectively. The Company limited its capital expenditures to
maintenance levels in 2000 resulting in a reduction of cash used for capital
expenditures of $216,208, (2) $120,573 of$123,761 in 2000 compared to 1999. The Company also received in
2000 substantial proceeds from the sales of propertyassets and equipment, (3) $102,647 of cash usednon-core businesses which are
included in acquisitions and (4)
$199,879 of purchases in excess of sales of securities associated with the
Company's insurance operations. One of the insurance operations had an
approximate $80,000 cash position at December 31, 1998, of which a significant
portion of the cash was used to purchase securities during 1999. The remaining
amount of cash used to purchase securities in excess of the sales of securities
represents the investment of net cash generated by insurance premiums received
from customers after payment of cash expenses which is included within net cash provided by operating activities.
Cash Flows from Financing Activities:investing activities in 2000.
Net cash used in financing activities was $564,463 in 2000 compared to
$266,756 forin 1999. The Company used substantial proceeds from sales of assets and
non-core businesses and from operating free cash flow to make substantial
reductions to its debt in 2000 which is reflected in the year endedCompany's financing
activities.
OTHER MATTERS
Subsequent to December 31, 1999, compared to net cash provided
by financing activities of $1,041,561 for the same period in 1998. The Company
issued approximately $1,100,000 of long-term debt in 1998, which is included in
the $1,041,561 amount above. Significant components of cash used in financing
activities for the year ended December 31, 1999, include: (1) increases in
borrowings of $504,279 from the Company's revolving credit facilities offset by
$365,936 for the early extinguishment of certain floating rate debt and ECI
convertible debentures, (2) payments of debt of $259,004 and (3) payments of
cash dividends of $96,779.
At December 31, 1999,2000, the Company had a working capital deficit of $61,714
compared to working capital surplus of $578,755 as of December 31, 1998. The
working capital deficit of $61,714 is primarily a result of the current
liability of $89,812 at December 31, 1999 related to the Company's 1999
restructuring charges as well as related to $423,949 of current maturities of
long-term debt, of which $179,704 relates to the Company's revolving credit
facilities. As discussed earlier, certain balances outstanding on the Company's
revolving credit facilities cannot be classified as long-term at December 31,
1999, due to the Company's current lack of access to the capital markets.
As part of the Company's ongoing cash flow initiatives, the Company
terminated or assigned certain interest rate swaps and all cross-currency
interest rate swaps subsequent to year end and received approximately $110,658
in net pretax proceeds. These proceeds were primarily used to purchase certain
of the Company's bonds, of which approximately $59,000 of these bonds were due
in 2000.
The Company had a current ratio 0.94:1 at December 31, 1999, compared to a
current ratio of 1.92:1 at December 31, 1998. The Company had a cash balance of
$88,221 at December 31, 1999 compared to a cash balance of $358,210 at December
31, 1998. Approximately $160,000 of the December 31, 1998 cash balance was
contemplated to be used to repay ECI's revolving credit facility and AML had an
approximate $80,000 cash balance at December 31, 1998 which was used to purchase
securities in 1999. As of December 31, 1999, the Company's debt to
capitalization ratio was 53.7% compared to 55.0% at December 31, 1998. Excluding
the $362,428 of 1999 restructuring and nonrecurring charges, the interest
coverage ratio for the year ended December 31, 1999 was 2.30:1, compared to
3.72:1 for the same period of 1998. At December 31, 1999, the Company had the
ability to issue $900,000 in securities registered with the Securities and
Exchange Commission (the Commission) under a shelf registration. In addition,
12,865 shares of common stock and a total of $187,000 of guaranteed promissory
notes and convertible debentures are registered under a separate shelf
registration to be used exclusively for acquisitions. The Company has suspended
its acquisition program and does not anticipate these acquisition shelf
registrations to be drawn upon in the near future.
PREARRANGED FUNERAL SERVICES
The Company sells prearranged funeral contracts in most of its service
markets, including its major foreign markets. The Company has a marketing
program to sell price guaranteed prearranged funeral contracts and the funds
collected are generally held in trust or are used to purchase life insurance or
annuity contracts. The amounts paid into trust funds or premiums paid on
insurance contracts will be received in cash by a Company funeral service
location at the time the funeral is performed. Earnings on trust funds and
17
19
increasing benefits under insurance and annuity funded contracts also increase
the amount of cash to be received upon performance of the funeral service.
Direct costs incurred with the sale of prearranged funeral contracts are a
current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain general agency commissions earned
by the Company for sales of insurance products.
The Company has an investment program which entails the ongoing
consolidation of multiple trustees, the use of institutional managers with
differing investment styles and consolidated performance monitoring and
tracking. This program targets a real return in excess of the amount necessary
to cover future increases in the cost of providing a price guaranteed funeral
service as well as any selling costs. This is accomplished by allocating the
portfolio mix to investments that match the anticipated maturity of the
contracts. The Company targets an asset allocation for prearranged funeral
trusts of approximately 60% equity, 30% fixed income and 10% alternative
investments. The Company's North American prearranged funeral trust portfolio
earned a return of 17.6%, 18.0% and 12.5% in 1999, 1998 and 1997, respectively
(including realized and unrealized gains and net of investment expenses).
AML, which was acquired by the Company in 1998, has been a provider of
insurance products used to fund Company prearranged funerals in North America
for several years. During 1999, the Company began a strategic initiative to fund
a higher percentage of its North American prearranged funeral sales through AML
as opposed to third party insurance or trust funded contracts. Auxia primarily
sells insurance and annuity products used to fund prearranged funerals to be
performed by the Company's French funeral service locations. Prearranged funeral
sales afford the Company the opportunity to protect both current market share
and mix as well as expand market share in certain markets. The Company believes
this will stimulate future revenue growth. Prearranged funeral services
fulfilled as a percent of the total funerals performed at comparable North
America funeral service locations approximates 28.9% in 1999 and 26.7% in 1998.
This percentage is expected to grow, thereby making the number of funerals
performed and related revenues, which will be recognized in future periods, more
predictable.
The total value of unperformed prearranged funeral contracts includes both
trust funded and insurance funded contracts and represents the original contract
value plus any accumulated trust earnings or increasing insurance benefits. The
total value of unperformed prearranged funeral contracts consists of two
components: (i) contracts funded by trust or third party insurance companies and
(ii) contracts funded by the Company's insurance operations. The value of
unperformed prearranged funeral contracts to be funded by trust or third party
insurance companies are included in Deferred prearranged funeral contract
revenues in the consolidated balance sheet. A portion of the value of
unperformed prearranged funeral contracts to be funded by the Company's
insurance operations is included as a component of Reserves and annuity
benefits -- insurance operations in the consolidated balance sheet and reflects
only the actuarially determined amounts to be funded in accordance with
generally accepted accounting principles for life insurance companies. The
remaining component of Reserves and annuity benefits -- insurance operations
represents the actuarially determined amounts to be funded for non-SCI
unperformed prearranged funeral contracts. As of December 31, 1999 and 1998, the
total value of unperformed prearranged funeral contracts was as follows
(assuming the Company's contracts only, at face value, plus accrued earnings or
increasing death benefits):
1999 1998
---------- ----------
Deferred prearranged funeral contract revenues.............. $3,186,081 $2,819,794
Contracts funded by the Company's insurance operations...... 1,101,371 932,056
---------- ----------
$4,287,452 $3,751,850
========== ==========
18
20
The following table summarizes the changes in the total value of
unperformed prearranged funeral contracts for the years ended December 31:
1999 1998
---------- ----------
Beginning balance........................................... $3,751,850 $3,371,424
Net sales................................................. 578,263 490,289
Acquisitions/dispositions................................. 288,099 138,976
Realized earnings and increasing insurance benefits....... 128,251 129,484
Maturities................................................ (331,031) (274,107)
Change in cancellation reserve............................ (80,020) (16,608)
Effect of foreign currency and other...................... (47,960) (87,608)
---------- ----------
Ending balance.............................................. $4,287,452 $3,751,850
========== ==========
The increase in net sales was due to the Company's revenue initiative to
increase prearranged funeral sales. Acquisitions and dispositions has increased
primarily due to the merger with ECI in January 1999. The increase in the
cancellation reserve is due to adjustments made to better reflect the Company's
historical experience.
The recognition of the total value of unperformed prearranged funeral
revenues is estimated to occur in the subsequent years as follows:
2000.................................................... $ 392,110
2001.................................................... 361,880
2002.................................................... 294,126
2003.................................................... 299,799
2004.................................................... 270,186
2005 through 2008....................................... 1,027,623
2010 and thereafter..................................... 1,641,728
----------
$4,287,452
==========
CREMATIONS
In recent years there has been a steady growth trend in the number of
cremations in North America that have been chosen as an alternative to
traditional funeral service dispositions. Outside of North America, the
cremation rate is much more stable. In 1999, 35.4% (34.6% in 1998) of all
families served by the Company's comparable North America funeral service
locations selected cremation, substantially more than the 25% national average
according to industry studies. The Company has a significant number of operating
locations in Florida and the west coast of North America where cremation rates
have been historically higher than the national average. Though a cremation
typically results in fewer sales dollars than a traditional funeral service, the
Company believes funeral service locations which are predominantly cremation
businesses typically have higher gross profit margin percentages than those
exhibited at traditional funeral service locations. The Company has expanded its
product alternatives in high cremation markets in North America which has
resulted in higher average sales. The Company continues to believe there are
markets in select areas within North America where products and services related
to the memorialization of cremated remains represent a source of revenue and
margin growth. Cremation memorialization has long been a tradition in Australia
and the United Kingdom. Based on industry studies, approximately 60-70% of all
dispositions in Australia and the United Kingdom were cremations. It is
estimated that approximately 17% of all dispositions in France are cremations.
The Company also operates the only nationally branded cremation society
with the largest membership in North America called National Cremation Society
(NCS). NCS currently operates in four high cremation states and has plans to
expand into nine additional high cremation states and Canadian provinces in
2000. NCS locations are predominately store-front locations with little capital
investment and have a prearranged
19
21
backlog of approximately 43,000 contracts as of December 31, 1999. While the
average sale of NCS contracts is approximately $1,000 to $1,200, gross profit
margins are in the 40% to 45% range.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issuedadopted Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities: An Amendment of FASB Statement 133," in accordance
with the extension provided for in SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." which is requiredIn accordance with these Standards, the Company will
recognize a charge to be implementedincome, net of applicable taxes, of approximately $7,500
in the Company's first quarter of 2001. This statement establishesThese statements establish accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or
23
25
liabilities in the statement of financial position and measurement of those
instruments at fair value. Changes in the fair value of derivatives will be
recorded either in earnings or in other comprehensive income, based on the type
of risk for which the instrument is determined to be an effective hedge. Any
change in fair value of an instrument that is not designated as a hedge, or any
portion of a change in fair value of a hedging instrument that is deemed
ineffective, will be immediately recognized in earnings.
The Company is
currently assessing the impact that adoption will have on its consolidated
financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101, as
amended, is required to be applied beginning with the Company's second quarter
of 2000. The Company, together with other members of the death care industry,
are currently discussing directly with the Commission the application of SAB No.
101. Final resolution of the discussions will not have an impact on the
Company's consolidated cash flows, but may have a material impact on the
Company's consolidated financial condition and on the manner in which the
Company records preneed sales activities.
YEAR 2000 ISSUE
The Year 2000 issue, also known as "Y2K," refers to the inability of some
computer programs and computer-based microprocessors to correctly interpret the
century from a date in which the year is represented by only two digits (e.g.,
98). As previously reported, the Company developed and implemented a plan to
address the anticipated effects of Y2K issues related to the Company's
production systems, networks, desktops, user-developed applications,
vendor-supplied software, facilities and telecommunications and the supply
chain.
The Company established Y2K Program Offices at its corporate offices in
Houston, Texas and Birmingham, England. These program offices were responsible
for advising and monitoring the numerous facets of the Company's Y2K
preparations and for promoting Y2K awareness. In addition, the program offices
monitored the development of contingency plans that specified what would be done
if the Company or key third parties experienced disruptions to critical business
activities as a result of Y2K problems.
The Company's Y2K plan was completed in all material respects prior to the
anticipated Y2K failure dates. As of March 28, 2000, the Company has not
experienced any significant business disruptions or system failures as a result
of Y2K issues, nor is it aware of any Y2K issues that have affected its key
suppliers or other significant third parties to an extent significant to the
Company. However, Y2K compliance has many facets and potential consequences,
some of which may not be foreseeable or may not be realized until future
periods. Consequently, there can be no assurance that unforeseen circumstances
may not arise, or that the Company will not in the future identify equipment or
systems that are not Y2K-compliant. Because of this uncertainty, the Company's
contingency plans outline a course of action should a date-related problem occur
in the future.
The aggregate costs for the Company to achieve Y2K readiness were
approximately $33,715 of which $3,725 represents operating lease payments
related to desktops and servers that will be incurred from 2000-2002. All costs
associated with Y2K readiness are expected to be funded from cash flows from
operations. The Company's actual costs incurred associated with Y2K readiness
through December 31, 1999, were approximately $29,990, of which approximately
$10,433 has been expensed and approximately $19,557 has been capitalized. The
capitalized expenditures represent new hardware and new enterprise software that
introduced new functionality to the Company. All of the estimated remaining
$3,725 expenditures will be expensed over the course of the related lease term.
20
22
In an effort to report material costs related to the Company's Y2K effort,
the Company has adopted a policy of capturing all costs of one thousand dollars
or more, all contractor expenses, and internal costs for dedicated resources
(those working exclusively on Y2K issues). As such, the Company acknowledges
that many internal resources worked part-time on Y2K-related issues for which no
payroll or overhead costs are being reported.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be accompanied by words such
as "believe," "estimate," "project," "expect," "anticipate,""anticipate" or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however, many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results of the Company to differ materially
from those in forward-looking statements include, among others, the following:
1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g. marketable security
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly but not limited to, the
Company's cemetery trust revenues, levels of
interest expense;expense and changesnegative currency translation effects.
2) Changes in the Company's specific credit relationships impacting the availability of
credit.
2) Changescredit and the general availability of credit in domesticthe marketplace.
3) The Company's ability to successfully implement and international political and/or regulatory
environmentscomplete its
strategic plan as defined in whichthis Form 10-K, including the Company operates, including taxinterest of
third parties to enter into and accounting
policies.
3)consummate alliances and joint ventures
with the Company.
4) The Company's ability to generate expected proceeds from the sale
of certain funeral and cemetery operations and to implement plans to
improve recurring operating free cash flow.
5) Changes in consumer demand and/or pricing for the Company's
products and services caused by several factors, such as changes in local
death rates, cremation rates, competitive pressures and local economic
conditions.
4) The Company's ability to sell preneed heritage cemetery property
which is usually associated with new customers of the Company's cemeteries.
5) The Company's ability to successfully integrate prior acquisitions
into the Company's business and to realize expected cost savings in
connection with such acquisitions.
6) The Company's ability to successfully implement ongoing cost
reduction initiatives, as well as changes in domestic and international
economic, political and/or regulatory environments, which could negatively
effect the implementation of the Company's cost reduction initiatives.
7) The Company's ability to successfully realize the estimated
savings associated with the Company's cost reduction initiatives announced
in 1999.
8) The Company's ability to successfully implement certain strategic
revenue and marketing initiatives resulting in increased volume through its
existing facilities.
9) The Company's ability to successfully implement certain strategic
cash flow initiatives, including but not limited to the sale of non-core
assets, the previously announced funeral8) Changes in domestic and cemetery consumer financing
program,international political and/or regulatory
environments in which could improve or generate cash flow for the Company operates, including tax and enhance the Company's ability to reduce debt.
10)accounting
policies.
9) The Company's ability to successfully exploit its substantial
purchasing power with certain of the Company's vendors.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
2124
2326
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information presented below should be read in conjunction with notes
nine and ten to the consolidated financial statements in Item 8 of this Form
10-K.
The Company useshistorically used derivatives primarily in the form of interest
rate swaps and cross-currency interest rate swaps in combination with local
currency borrowings in order to manage its mix of fixed and floating rate debt
and to hedge the Company's net investment in foreign assets. The derivative
instruments held by the Company arewere for hedging purposes and arewere neither
leveraged nor speculative in nature.
MovementsIn 2000, the Company eliminated its participation in interest rates that impact the fair value of thederivative
transactions by terminating or assigning away all foreign currency and interest
rate swaps generally offset corresponding movementsas mentioned in note nine to the valueconsolidated financial statements in
Item 8 of this Form 10-K, thereby removing the underlying
debt being hedged. Likewise, movements in currency rates that impact swaps
generally offset corresponding movements in the valueCompany's hedges of the underlying foreign
assets being hedged. In addition, currency movements that impact foreign
interest expense due under the cross-currencyexchange rate and interest rate swaps generally
offset corresponding movements inexposure and the earningsdiversification of floating
rate exposure mentioned above.
At December 31, 2000, the foreign operation.Company's total debt consisted of approximately
76% of fixed interest rate debt at a weighted average rate of 6.81% and
approximately 24% of floating interest rate debt at a weighted average rate of
7.94%. At December 31, 1999, after giving consideration to the interest rate
swaps, the Company's total debt consisted of approximately 61% of fixed interest
rate debt at a weighted average rate of 6.36% and approximately 39% of floating
interest rate debt at a weighted average rate of 6.49%. At December 31, 1998,
the Company's total debt consisted of approximately 74% of fixed interest rate
debt at a weighted average rate of 6.17% and approximately 26% of floating
interest rate debt at a weighted average rate of 6.15%. The Company's overall
sensitivity to floating interest rates is diversified in that approximately 28%Approximately 35% of the
Company's floating rate exposure, as of December 31, 1999,2000, is based in eight
markets other than the United States (47%(28% at December 31, 1998)1999).
In general, the Company has hedged up to 100% of its net investment in
foreign assets when such investment is considered significant and when it is
reasonably cost efficient to do so. In addition, theThe Company does not have a significant investment in foreign operations
that are in highly inflationary economies. Approximately 32%24% of the Company's
net investment and 32%26% of its operating income from operations are denominated in foreign
currencies at December 31, 1999. Due to the cross-currency hedges described above, approximately 13% of the
Company's net assets and approximately 16% of the Company's income from
operations are subject to translation risk at December 31, 1999.
In January 2000, the Company materially modified its participation in
derivative transactions by terminating or assigning away certain interest rate
swaps and all cross-currency interest rate swaps as mentioned in note nine to
the consolidated financial statements in Item 8 of this Form 10-K, thereby
removing the Company's hedges of foreign exchange rate exposure and the
diversification of floating rate exposure mentioned above.2000.
Marketable Equity and Debt Securities -- Price Risk
In connection with the Company's insurance operations, prearranged funeral operations and preneed
cemetery merchandise and services sales, the Company ownsaffiliated funeral and cemetery trust funds own
investments in equity securities and mutual funds which are sensitive to current
market prices. Cost and market values as of December 31, 19992000 and 1998,1999, are
presented in notes four, five and six to the consolidated financial statements in Item
8 of this Form 10-K.
Market-Rate Sensitive Instruments -- Interest Rate and Currency Risk
TheAt December 31, 2000, the Company's financialdebt instruments that were subject to
interest rate and currency exchange rate risk at December 31, 1999, include debt instruments, U.S.
dollar interest rate swaps, and cross-currency interest rate swaps.risk. The Company performs sensitivity
analyses to assess the impact of these risks on earnings. This analysis reflects
the impact of a hypothetical 10% adverse change in market rates. In actuality,
market rate volatility is dependent on many factors that are impossible to
forecast. Therefore, the adverse changes described below could differ
substantially from the hypothetical 10% impact.
The analysis conducted
below excludes the assets of both the lending subsidiary and the Company's
insurance operations. Instead, these are referenced separately in tabular format
below.
22
24
A sensitivity analysis of those instruments with variable interest rate
components was modeled to assess the impact that changing interest rates could
have on pretax earnings. The sensitivity analysis assumedassumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pretax earnings, on an annual
basis, would have beenbe negatively impacted by approximately $9,402$6,301 on December 31,
1999,2000, and $5,657 on December 31, 1998. Had the Company terminated certain
interest rate swaps in December 1999, as discussed in note nine to the
consolidated financial statements in Item 8 of this Form 10-K, this same
sensitivity analysis indicates that the Company's pretax annual earnings would
have been negatively impacted by approximately $11,664$9,402 on December 31, 1999.
A similar model was used to assess the impact of changes in foreign
exchange ratescurrencies on interest expense. At December 31, 1999,2000, the Company's debt and
derivative
exposure was primarily associated with the Euro, British pound, Canadian dollar and
Australian dollar, Chilean peso, Swiss franc, and Norwegian
krone.dollar. A 10% adverse change in the strength of the U.S. dollar
against these currencies would have negatively impacted the Company's interest
expense, on an annual basis, by approximately $1,998 on December 31, 2000, and
$11,451 on December 31, 1999, and $12,229 on December 31, 1998.
Had the Company terminated the cross-currency interest rate swaps in December
1999, as discussed in note nine to the consolidated financial statements in Item
8 of this Form 10-K, this same sensitivity analysis indicates that the Company's
annual interest expense would have been negatively impacted by approximately
$2,176 on December 31, 1999.
2325
25
For certain assets associated with the Company's lending subsidiary and
insurance operations, the tables below present principal cash flows that exist
by maturity date and the related average interest rates:
AS OF DECEMBER 31, 1999:
2000 2001 2002 2003 2004 THEREAFTER FAIR VALUE
------- ------- ------- ------- ------- ---------- ----------
Lending subsidiary receivables......... $16,545 $32,601 $40,239 $55,553 $33,854 $32,234 $211,026
Average rate........................... 5.96% 7.68% 6.20% 9.15% 9.63% 8.59%
Insurance subsidiaries investments in
debt securities...................... 26,075 5,073 7,098 15,166 44,417 861,894 959,723
Average rate........................... 3.96% 5.92% 5.77% 5.81% 5.14% 6.51%
AS OF DECEMBER 31, 1998:
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
------- ------- ------- -------- ------- ---------- ----------
Lending subsidiary receivables........ $33,007 $14,369 $44,501 $107,117 $27,238 $43,297 $269,529
Average rate.......................... 7.70% 9.24% 8.54% 8.12% 8.97% 8.38%
Insurance subsidiaries investments in
debt securities..................... 85,316 70,369 76,233 108,416 74,231 503,804 918,369
Average rate.......................... 5.85% 5.38% 5.84% 5.42% 5.90% 4.93%
To reduce exposure to interest rate changes, portfolio investments are
selected so the weighted average duration of the investments approximates the
duration of associated policyholder liabilities. The insurance companies are
subject to reinvestment risk upon either sale or maturity of the debt
securities. Management believes that absence of any material amounts of
"high-yield" or "non-investment grade" investments in the portfolios of the
Company's insurance operations enhances the ability of the insurance companies
to provide security to their policyholders.
24
2627
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants........................... 2627
Consolidated Statement of Operations for the three years
ended December 31, 1999................................... 272000................................... 28
Consolidated Balance Sheet as of December 31, 19992000 and
1998...................................................... 281999...................................................... 29
Consolidated Statement of Cash Flows for the three years
ended December 31, 1999................................... 292000................................... 30
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1999............................. 302000............................. 31
Notes to Consolidated Financial Statements.................. 3132
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 64
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
2526
2728
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, 19992000 and 1998,1999, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 19992000 in conformity with accounting principles
generally accepted in the United States.States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion. As
discussed in note three to the opinion expressed
above.consolidated financial statements, the Company
changed its method of accounting for preneed sales activities.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2000
262001
27
2829
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2000 1999 1998
1997
---------- ---------- ----------
(AMOUNTS----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................. $3,321,813 $2,875,090 $2,535,865Revenues................................................ $ 2,564,730 $ 3,007,958 $ 2,696,317
Costs and expenses....................................... (2,708,054) (2,156,320) (1,848,253)
---------- ---------- ----------expenses...................................... (2,237,088) (2,423,212) (1,996,108)
----------- ----------- -----------
Gross profit............................................. 613,759 718,770 687,612profit............................................ 327,642 584,746 700,209
General and administrative expenses......................expenses..................... (79,932) (82,585) (66,839)
(66,781)
Restructuring and nonrecurring charges...................non-recurring charges................. (461,072) (362,428) --
--
---------- ---------- ----------
Income from operations................................... 168,746 651,931 620,831----------- ----------- -----------
Operating income (loss)................................. (213,362) 139,733 633,370
Interest expense......................................... (238,195)expense........................................ (281,548) (238,185) (177,053)
(136,720)
DividendsOther income............................................ 34,636 31,759 43,649
Loss on preferred securitiessale of SCI Finance LLC.....investment.............................. (56,704) -- --
(4,382)
Other income............................................. 31,759 43,649 100,244
---------- ---------- --------------------- ----------- -----------
Income (loss) from continuing operations before income
taxes, extraordinary gains and extraordinary gain
(loss)................................................. (37,690) 518,527 579,973cumulative effect of
accounting change..................................... (516,978) (66,693) 499,966
(Provision) benefit for income taxes..................... 3,393 (176,385) (205,421)
---------- ---------- ----------taxes.................... 91,455 15,469 (168,405)
----------- ----------- -----------
Income (loss) from continuing operations before
extraordinary gain (loss)gains and cumulative effect of
accounting change..................................... (425,523) (51,224) 331,561
Income from discontinued operations (net of income taxes
of $6,543, $12,076 and $7,980 respectively)........... (34,297) 342,142 374,55213,347 16,927 10,581
Loss on disposals of discontinued operations (net of
income taxes of $73,839).............................. (43,733) -- --
Extraordinary gain (loss)gains on early extinguishmentextinguishments of debt
(net of income taxes of $1,071$12,630 and $23,383)............$1,071)........... 21,973 1,885 --
(40,802)
---------- ---------- ----------Cumulative effect of accounting change (net of income
taxes of $552,491).................................... (909,315) -- --
----------- ----------- -----------
Net income (loss).............................. $(1,343,251) $ (32,412) $ 342,142
$ 333,750
========== ========== ===================== =========== ===========
Earnings per share:
Basic:
Income (loss) from continuing operations before
extraordinary gain (loss).........gains and cumulative effect of
accounting change................................... $ (.13)(1.56) $ 1.34(.19) $ 1.531.30
Income from discontinued operations................... .05 .06 .04
Loss from disposals of discontinued operations........ (.16) -- --
Extraordinary gain (loss)gains on early extinguishmentextinguishments of
debt................................................ .08 .01 --
(0.17)
---------- ---------- ----------Cumulative effect of accounting change................ (3.34) -- --
----------- ----------- -----------
Net income (loss).............................. $ (4.93) $ (.12) $ 1.34
$ 1.36
========== ========== ===================== =========== ===========
Diluted:
Income (loss) from continuing operations before
extraordinary gain (loss).........gains and cumulative effect of
accounting change................................... $ (.13)(1.56) $ 1.31(.19) $ 1.471.27
Income from discontinued operations................... .05 .06 .04
Loss from disposals of discontinued operations........ (.16) -- --
Extraordinary gain (loss)gains on early extinguishmentextinguishments of
debt................................................ .08 .01 --
(0.16)
---------- ---------- ----------Cumulative effect of accounting change................ (3.34) -- --
----------- ----------- -----------
Net income (loss).............................. $ (4.93) $ (.12) $ 1.31
$ 1.31
========== ========== ===================== =========== ===========
Basic weighted average number of shares..................shares................. 272,172 272,281 256,271
245,470
========== ========== ===================== =========== ===========
Diluted weighted average number of shares................shares............... 272,544 273,792 262,520
257,781
========== ========== ===================== =========== ===========
(See notes to consolidated financial statements)
2728
2930
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------------
2000 1999 1998
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 88,22147,909 $ 358,21057,814
Receivables, net of allowances............................ 605,127 565,552449,989 585,269
Inventories............................................... 170,056 190,343
189,070Net assets of discontinued operations..................... -- 208,851
Other..................................................... 112,460 96,248239,345 101,220
----------- -----------
Total current assets.............................. 996,151 1,209,080907,299 1,143,497
----------- -----------
Investments -- insurance operations......................... 1,318,635 1,234,678
Prearranged funeral contracts............................... 4,080,367 2,898,139 2,588,806
Long-term receivables....................................... 1,562,418 1,408,0761,329,375 1,532,225
Cemetery property, at cost.................................. 2,026,484 2,182,410 2,035,897
Property, plant and equipment, at cost (net)................ 1,881,525 1,824,9791,675,263 1,879,979
Deferred charges and other assets........................... 1,286,967 1,151,430717,170 907,513
Names and reputations (net)................................. 2,475,356 1,813,2122,162,511 2,434,467
----------- -----------
$14,601,601 $13,266,158$12,898,469 $12,978,230
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 589,847501,355 $ 452,354576,751
Current maturities of long-term debt...................... 176,782 423,949 96,067
Income taxes.............................................. 44,069 81,9046,143 40,080
----------- -----------
Total current liabilities......................... 1,057,865 630,325684,280 1,040,780
----------- -----------
Long-term debt.............................................. 3,114,515 3,636,067 3,764,590
Reserves and annuity benefits -- insurance operations....... 1,313,328 1,207,169
Deferred prearranged funeral contract revenues.............. 4,537,669 3,186,081
2,819,794Deferred preneed cemetery contract revenues................. 1,815,157 --
Deferred income taxes....................................... 873,023 797,086503,292 864,780
Other liabilities........................................... 1,039,964 893,092267,735 755,249
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 272,064,618272,507,010 and 259,201,104272,064,618 issued and
outstanding net(net of 2,792,5032,502,190 and 68,3732,792,503 treasury
shares at par.................................................par)......................................... 272,507 272,064 259,201
Capital in excess of par value............................ 2,156,824 2,156,301
1,646,765
Retained earnings.........................................earnings (deficit)............................... (216,353) 1,126,898 1,232,758
Accumulated other comprehensive income (loss).............loss...................... (237,157) (59,990) 15,378
----------- -----------
Total stockholders' equity........................ 1,975,821 3,495,273 3,154,102
----------- -----------
$14,601,601 $13,266,158
=========== ===========
(See notes to consolidated financial statements)
28
30
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss).................................... $ (32,412) $ 342,142 $ 333,750
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 252,145 202,277 157,550
Provision (benefit) for deferred income taxes..... (46,071) 56,308 19,212
Restructuring and nonrecurring charges............ 362,428 -- --
Cash paid related to restructuring and
nonrecurring charges............................ (37,553) -- --
Extraordinary (gain) loss on early extinguishment
of debt, net of income taxes.................... (1,885) -- 40,802
Gains from dispositions (net)..................... (19,752) (30,627) (89,252)
Provision for loan losses......................... 38,608 -- --
Realized gains on sale of investments............. (33,675) (65,313) --
Realized losses on sale of investments............ 32,465 42,026 --
Change in assets and liabilities net of effects
from acquisitions:
Increase in receivables......................... (223,405) (228,325) (174,429)
Increase in other assets........................ (3,416) (71,824) (24,904)
Increase in other liabilities................... 138,448 86,501 36,045
Other........................................... 6,925 (4,545) 3,160
----------- ----------- -----------
Net cash provided by operating activities.............. 432,850 328,620 301,934
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................. (211,481) (253,224) (230,532)
Net effect of prearranged funeral production and
maturities........................................ (39,239) (35,521) (5,537)
Purchases of securities -- insurance operations...... (1,916,015) (1,225,955) (1,407,588)
Sales of securities -- insurance operations.......... 1,716,136 1,200,334 1,383,934
Proceeds from sales of property and equipment........ 115,846 43,793 46,908
Acquisitions, net of cash acquired................... (102,647) (719,768) (409,731)
Loans issued by lending subsidiary................... (76,110) (142,017) (98,446)
Principal payments received on loans by lending
subsidiary........................................ 97,569 70,178 45,915
Proceeds from sale of equity investment.............. -- -- 147,700
Purchases of equity investments...................... (1,400) (6,968) (87,643)
Other................................................ (6,641) 9,273 (18,424)
----------- ----------- -----------
Net cash used in investing activities.................. (423,982) (1,059,875) (633,444)
----------- ----------- -----------
Cash flows from financing activities:
Increase in borrowings under revolving credit
agreements........................................ 504,279 100,294 304,505
Long-term debt issued................................ -- 1,100,000 650,000
Early extinguishment of debt......................... (365,935) -- (449,998)
Payments of debt..................................... (259,004) (76,329) (91,464)
Repurchase of common stock........................... (45,750) -- --
Dividends paid....................................... (96,779) (88,360) (69,888)
Bank overdrafts and other............................ (3,567) 5,956 (6,401)
----------- ----------- -----------
Net cash (used in) provided by financing activities.... (266,756) 1,041,561 336,754
----------- ----------- -----------
Effect of foreign currency............................. (12,101) 1,027 (2,498)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents... (269,989) 311,333 2,746
Cash and cash equivalents at beginning of year......... 358,210 46,877 44,131
----------- ----------- -----------
Cash and cash equivalents at end of year............... $ 88,221 $ 358,210 $ 46,877
===========$12,898,469 $12,978,230
=========== ===========
(See notes to consolidated financial statements)
29
31
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
----------- --------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,343,251) $ (32,412) $ 342,142
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net income from discontinued operations, net of tax..... (13,347) (16,927) (10,581)
Extraordinary gains on early extinguishments of debt,
net of tax............................................ (21,973) (1,885) --
Loss on disposals of discontinued operations, net of
tax................................................... 43,733 -- --
Cumulative effect of accounting change, net of tax...... 909,315 -- --
Depreciation and amortization........................... 224,031 246,090 197,330
Provision (benefit) for deferred income taxes........... 45,039 (57,263) 50,517
Restructuring and non-recurring charges................. 461,072 362,428 --
Payments on restructuring charges....................... (46,655) (37,553) --
Net effect of interest rate component of swap
terminations.......................................... (32,840) -- --
Loss on sale of investment.............................. 56,704 -- --
Gains from dispositions (net)........................... (17,180) (19,752) (30,627)
Provision for loan impairment........................... -- 38,608 --
Change in assets and liabilities net of effects from
acquisitions:
Decrease (increase) in receivables.................... 191,137 (219,680) (224,525)
(Increase) decrease in other assets................... (265,504) 28,893 (81,896)
Decrease in other liabilities......................... (109,975) (6,621) (17,464)
Other................................................. 30,775 7,273 (7,710)
Net effect of prearranged funeral production and
maturities............................................ 112,519 (39,239) (35,522)
----------- --------- -----------
Net cash provided by continuing operations.................. 223,600 251,960 181,664
Net cash provided by discontinued operations................ 144,640 141,650 111,435
----------- --------- -----------
Net cash provided by operating activities................... 368,240 393,610 293,099
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (83,370) (207,131) (251,825)
Proceeds from sales of discontinued operations............ 278,025 -- --
Proceeds from sales of property and equipment............. 92,593 115,846 42,844
Acquisitions, net of cash acquired........................ (1,907) (102,647) (709,972)
Loans issued by lending subsidiary........................ (5,104) (76,110) (142,017)
Proceeds from sales of loans by lending subsidiary........ 84,803 -- --
Principal payments received on loans by lending
subsidiary.............................................. 21,649 97,569 70,178
Deposits of restricted cash............................... (68,753) -- --
Purchases of equity investments........................... -- (1,400) (6,968)
Other..................................................... (1,902) (13,282) 6,047
----------- --------- -----------
Net cash provided by (used in) continuing operations........ 316,034 (187,155) (991,713)
Net cash used in discontinued operations.................... (122,966) (197,587) (32,641)
----------- --------- -----------
Net cash provided by (used in) investing activities......... 193,068 (384,742) (1,024,354)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under revolving
credit agreements....................................... (395,096) 504,279 100,294
Payments of debt.......................................... (126,342) (259,004) (76,329)
Long-term debt issued..................................... -- -- 1,100,000
Early extinguishments of debt............................. (194,097) (365,936) --
Net effect of cross-currency component of swap
terminations............................................ 143,498 -- --
Repurchase of common stock................................ -- (45,750) --
Dividends paid............................................ -- (96,779) (88,360)
Bank overdrafts and other................................. 7,574 (3,566) 5,956
----------- --------- -----------
Net cash (used in) provided by financing activities......... (564,463) (266,756) 1,041,561
Effect of foreign currency.................................. (131) (12,101) 1,027
----------- --------- -----------
Net (decrease) increase in cash and cash equivalents........ (3,286) (269,989) 311,333
Adjust for change in cash and cash equivalents associated
with discontinued operations.............................. (6,619) 58,660 (89,067)
Cash and cash equivalents of continuing operations at
beginning of period....................................... 57,814 269,143 46,877
----------- --------- -----------
Cash and cash equivalents of continuing operations at end of
period.................................................... $ 47,909 $ 57,814 $ 269,143
=========== ========= ===========
(See notes to consolidated financial statements)
30
32
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED
CAPITAL IN RETAINED OTHER
COMMON EXCESS OF RETAINEDEARNINGS COMPREHENSIVE
STOCK PAR VALUE EARNINGS(DEFICIT) INCOME (LOSS) TOTAL
-------- ---------- --------------------- ------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1996.......................... $236,193 $1,237,7831997........................ $252,924 $1,493,246 $ 728,108983,353 $ 33,233 $2,235,317
Comprehensive income:
Net income.......................................... 333,750 333,750
Other comprehensive loss:
Foreign currency translation........................ (29,795) (29,795)
Unrealized loss on securities, net.................. (6,957) (6,957)
----------
Total other comprehensive loss................ (36,752)
----------
Comprehensive income.................................. 296,998
Common Stock issued:
Stock option exercises and stock grants............. 820 9,296 10,116
Acquisitions........................................ 3,958 79,215 (3,832) 79,341
Debenture conversions............................... 492 5,925 6,417
Conversion of convertible preferred securities of
SCI Finance LLC................................... 11,461 161,027 172,488
Dividends on common stock ($.30 per share)............ (74,673) (74,673)
-------- ---------- ---------- -------- ----------
Balance at December 31, 1997.......................... 252,924 1,493,246 983,353 (3,519) $ 2,726,004
Comprehensive income:
Net income..........................................income........................................ 342,142 342,142
Other comprehensive income:
Foreign currency translation........................translation...................... 8,748 8,748
Unrealized gain on securities, net..................net................ 10,149 10,149
---------------------
Total other comprehensive income..............income............ 18,897
---------------------
Comprehensive income..................................income................................ 361,039
Common Stock issued:
Stock option exercises and stock grants.............grants........... 3,593 56,485 60,078
Acquisitions........................................Acquisitions...................................... 2,499 94,625 97,124
Debenture conversions...............................conversions............................. 185 2,409 2,594
Dividends on common stock ($.36 per share)...................... (92,737) (92,737)
-------- ---------- ---------- -------- --------------------- --------- -----------
Balance at December 31, 1998..........................1998........................ 259,201 1,646,765 1,232,758 15,378 3,154,102
Comprehensive loss:
Net loss............................................loss.......................................... (32,412) (32,412)
Other comprehensive loss:
Foreign currency translation........................translation...................... (39,036) (39,036)
Unrealized loss on securities, net..................net................ (36,332) (36,332)
---------------------
Total other comprehensive loss................loss.............. (75,368)
---------------------
Comprehensive loss....................................loss.................................. (107,780)
Common Stock issued:
Stock option exercises and stock grants.............grants........... 170 1,382 1,552
Acquisitions........................................Acquisitions...................................... 15,506 550,325 565,831
Debenture conversions...............................conversions............................. 48 718 766
Repurchase of common stock............................stock.......................... (2,861) (42,889) (45,750)
Dividends on common stock ($.27 per share)...................... (73,448) (73,448)
-------- ---------- ---------- -------- --------------------- --------- -----------
Balance at December 31, 1999.......................... $272,064 $2,156,301 $1,126,898 $(59,990) $3,495,2731999........................ 272,064 2,156,301 1,126,898 (59,990) 3,495,273
Comprehensive loss:
Net loss.......................................... (1,343,251) (1,343,251)
Other comprehensive loss:
Foreign currency translation...................... (202,709) (202,709)
Unrealized loss on securities, net................ (4,792) (4,792)
Minimum pension liability adjustment, net......... (12,724) (12,724)
Reclassification adjustment for realized loss on
securities...................................... 27,014 27,014
Reclassification adjustment for realized loss on
foreign currency translation.................... 16,044 16,044
-----------
Total other comprehensive loss.............. (177,167)
-----------
Comprehensive loss.................................. (1,520,418)
Common Stock issued:
Stock option exercises and stock grants........... 33 100 133
Acquisitions...................................... 61 186 247
Contribution to employee 401(k)................... 356 456 812
Repurchase of common stock.......................... (7) (219) (226)
-------- ---------- ----------- --------- -----------
Balance at December 31, 2000........................ $272,507 $2,156,824 $ (216,353) $(237,157) $ 1,975,821
======== ========== ========== ======== ===================== ========= ===========
(See notes to consolidated financial statements)
3031
3233
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world
through its funeral service cemetery and financial servicescemetery operations. At December 31, 1999,2000, the
Company operated 3,8233,611 funeral service locations, 525569 cemeteries 198and 200
crematoria and two insurance operations located in 2018 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces, lots and lawn
crypts) and sell cemetery related merchandise. Cemetery items are sold on an
atneed or preneed basis. Company personnel at cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries also operate crematoria. There are 200193 combination locations that
contain a funeral service location within a Company owned cemetery.
The financial services operations represent a combination of the Company's
insurance operations primarily related to the funding of prearranged funeral
contracts and a lending subsidiary which previously provided capital financing
for independent funeral home and cemetery operations.
NOTE TWO
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Service Corporation International and all majority-owned
subsidiaries (the Company). Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation with no effect on the
consolidated financial position, results of operations or cash flows.
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories and Cemetery Property: Funeral merchandise and cemetery burial
property and merchandise are stated at the lower of average cost or market.
DepreciationProperty, Plant and Amortization: Depreciation of property,Equipment, net: Property, plant and equipment is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property and plant are
depreciated over
a period ranging from seven to fifty years, equipment is depreciated over a
period from five to twenty years and leasehold improvements are depreciated over
a range of five to fifty years. For the three years ended December 31, 1999,
depreciation expense was $127,974, $115,195, and $87,571, respectively.recorded at cost. Maintenance and repairs are charged to expense whereas
renewals and major replacements are capitalized. 31
33
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prepaid management, consultativeCosts of property sold or
retired and non-competition agreements, primarily
with former ownersthe related accumulated depreciation are removed from the
consolidated balance sheet; resulting gains and key employeeslosses are included in the
consolidated statement of businesses acquired, are amortized on a
straight-line basis over the lives (generally from five to ten years) of the
respective contracts. Amortization expense associated with these agreements for
the three years ended December 31, 1999, 1998 and 1997 was $26,659, $25,403 and
$19,233, respectively. Net obtaining costs incurred pursuant to the sales of
trust funded and third party insurance funded prearranged funeral contracts are
deferred and amortized over 20 years, a period representing the estimated life
of the prearranged funeral contracts. Amortization associated with these net
obtaining costs for the three years ended December 31, 1999, 1998 and 1997 were
$21,904, $12,930 and $11,198, respectively. Other miscellaneous amortization for
the three years ended December 31, 1999, 1998 and 1997 was $8,233, $3,399 and
$1,899, respectively.operations.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as purchases are
included in Names and reputations and generally amortized on a straight line
basis over 40 years which, in the opinion of management, is not necessarily the
maximum period benefited. Fair values determined at the date of acquisition are
determined by management or independent appraisals. Many of the Company's
acquired funeral service locations have been providing high quality service to
client families for many years. Such loyalty often forms the basic valuation of
the funeral
32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
business. Additionally, the death care industry has historically exhibited
stable cash flows. The Company monitors the recoverability of names and
reputations based on projections of future undiscounted cash flows of the
acquired businesses. For the three years ended December 31, 1999, 1998 and 1997,
amortization expense was $67,375, $45,350, and $37,649, respectively.
Accumulated amortization of names and reputations from
continuing operations as of December 31, 2000 and 1999 was $311,826 and
$246,285, respectively.
Depreciation and Amortization: Depreciation of property, plant and
equipment is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property and plant are depreciated over
a period ranging from seven to fifty years, equipment is depreciated over a
period from five to twenty years and leasehold improvements are depreciated over
a range of five to fifty years. For the years ended December 31, 2000,
depreciation expense from continuing operations was $109,995, $130,121 and
$114,431, respectively.
For the years ended December 31, 2000, 1999 and 1998 amortization expense
of names and reputations from continuing operations was $65,541, $66,367 and
$44,566, respectively.
Prepaid management, consultative and non-competition agreements, primarily
with former owners and key employees of businesses acquired, are amortized on a
straight-line basis over the lives (generally from five to ten years) of the
respective contracts. Amortization expense associated with these agreements for
the years ended December 31, 2000, 1999 and 1998 was $247,933$21,527, $26,659 and
$179,803,$25,403, respectively.
Net obtaining costs incurred pursuant to the sales of trust funded and
third party insurance funded prearranged funeral contracts are deferred and
amortized over 20 years, a period representing the estimated life of the
prearranged funeral. In connection with the change in accounting associated with
Staff Accounting Bulletin No. 101 (SAB No. 101) (see note three to the
consolidated financial statements), the Company wrote off certain previously
deferred net obtaining costs. Amortization associated with net obtaining costs
for the years ended December 31, 2000, 1999 and 1998 were $7,116, $21,904 and
$12,930, respectively.
Other miscellaneous amortization from continuing operations for the years
ended December 31, 2000, 1999 and 1998 was $19,852, $1,039 and $0, respectively.
Foreign Currency Translation: All assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at exchange rates in
effect as of the end of the reporting period. Revenue and expense items are
translated at the average exchange rates for the reporting period. The resulting
translation adjustments are included in stockholders' equity as a component of
accumulated other comprehensive income (loss) in the consolidated statement of
stockholders' equity.
With respect to transactions denominated in currencies other than the
functional currencies of the Company's operations, both realized and unrealized
currency gains and losses associated with these transactions are recorded
through the consolidated statement of operations.
Funeral Operations: Funeral revenue is recognized when the funeral service
is performed. The Company's trade receivables consist primarily of funeral
services already performed. An allowance for doubtful accounts has been provided
based on historical experience. The Company sells price guaranteed prearranged
funeral contracts through various programs providing for future funeral services
at prices prevailing when the agreements are signed. Revenues associated with
sales of prearranged funeral contracts (which include accumulated trust earnings
and increasing insurance benefits) are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements).
In 2000, the net effect of prearranged funeral production and maturities
has been reclassified from cash flows from investing activities to cash flows
from operating activities. While cash flows related to these price guaranteed
prearranged funeral contracts have characteristics of both cash flows from
operating and investing activities, the predominant characteristics are those of
cash flows from operating activities. For comparative purposes, the
reclassification was made to the 1999 and 1998 consolidated statement of cash
flows.
33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cemetery Operations: AllSales of atneed cemetery interment rights,
merchandise and services are recognized when the service is performed or
merchandise delivered. Preneed cemetery interment right sales of constructed
cemetery burial property are deferred until a minimum percentage of the sales
price has been collected. Revenues related to the preneed sale of unconstructed
cemetery burial property will be deferred until such property is constructed and
a minimum percentage of the sales price has been collected. Further, the Company
defers certain direct obtaining costs associated with these sales which are
expensed as revenue is recognized (see notes three and six to the consolidated
financial statements). Prior to the change in accounting related to SAB No. 101,
all cemetery interment right sales, together with associated merchandise and
services, arewere recorded as income at the time contracts are signed.
Costs related to the sales of interment rights include property and other
costs related to cemetery development activities, and are charged to operations
using the specific identification method. Costs related to merchandise and
services are based on actual costs incurred or estimates of future costs
necessary, including provisions for inflation when required.
Allowances for customer cancellations are provided at the date of sale
based upon historical experience. Pursuant to state law, all or a portion of the
proceeds from cemetery merchandise or services sold on a preneed basis may be
required to be paid into trust funds. Merchandise and services funds trusted at
December 31, 2000 and 1999 were $942,896 and 1998 were $822,829, and $662,564, respectively (see note
six to the consolidated financial statements).respectively. The Company
recognizesdefers realized trust income oninvestment earnings related to these merchandise and services
trusts in current cemetery
revenues as trust earnings accrue to defray inflation costs recognized related
tountil the associated merchandise andis delivered or services that have not yet been provided. Additionally, aare performed.
A portion of the proceeds from the sale of cemetery property is required by
state law to be paid into perpetual care trust funds. Earnings from these trusts
are recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs, which are expensed as incurred. Perpetual 32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
care funds trusted
at December 31, 2000 and 1999 were $516,885 and 1998 were $519,538, and $418,109,
respectively, (see note six to the consolidated financial statements).respectively. The
principal of such perpetual care trust funds generally cannot be withdrawn by
the Company and therefore is not included in the consolidated balance sheet. Insurance Operations: The Company accounts for its two life insurance
operations under generally accepted accounting principles for life insurance
companies.
For traditional and participating life products, premiums are recognized as
revenue when due from policyholders. Benefits and acquisition expenses are
recognized as a constant percentage of earned premiums. Computations of life
insurance reserves are based on anticipated investment yields (primarily 3.0%
for the French insurance company and 5.8% for the U.S. insurance companies),
mortality, surrenders, and provisions for unfavorable deviations.
For annuity products, premiums are recorded in a policyholder account which
is recorded to Reserves and annuity benefits -- insurance operations. Amounts
assessed against the policyholder account for contract expenses and mortality
coverage are recorded as revenue in proportion to estimated gross profits of the
annuity contracts.
To the extent recoverable, certain costs incurred related to the
acquisition of new business are deferred. Such costs consist primarily of
commissions, underwriting, policy issuance and direct marketing. Such expenses
are referred to as deferred policy acquisition costs (DPAC). DPAC related to
different products is amortized at a constant percentage over the life of the
book of contracts as follows: over the expected premium paying period for
traditional life insurance; based on the present value of the estimated gross
margin amounts, with interest at the percentage used to calculate the assumed
investment yield, for participating life insurance; and based on the present
value of estimated gross profit amounts, with interest at the rate of interest
that accrues to the policyholder balances, for annuities. DPAC is included as
part of Deferred charges and other assets in the consolidated balance sheet.
Also included as part of Deferred charges and other assets is the present
value of future profits (PVP) on business in force of acquired insurance
companies. Such amount represents the portion of costs to acquire such companies
that is allocated to the value of the right to receive future cash flows from
insurance contracts existing at the date of acquisition. PVP is amortized as
follows: over the expected premium paying period for traditional life insurance;
and over the estimated remaining life for annuities and participating life
insurance.
Investment income, net of investment expenses, and realized gains and
losses related to Investments -- insurance operations are included within
Revenues (seeSee
note fivesix to the consolidated financial statements). Debt
securities and marketable equity securities are classified as available-for-sale
and are carried at quoted market value, if readily marketable, or at
management's estimated fair value, if not readily marketable. The change in the
unrealized gain or loss, net of deferred income tax, is recorded as a component
of other comprehensive income (loss) in the consolidated statement of
stockholders' equity. Realized gains and losses on investment transactions are
determined on the specific identification basis. When a decline in the value of
a specific investment is considered to be other than temporary, a provision for
impairment is charged to earnings and the carrying value of the investment is
reduced. Premiums and discounts on fixed debt securities are amortized over
their expected average lives using the interest method. Mortgage loans and real
estate are generally carried at amortized cost. Policy loans are stated at the
aggregate unpaid balance.statements regarding preneed cemetery
activity.
Derivatives: Amounts to be paid or received under interest rate swaps,
including the interest rate provisions of the cross-currency swaps, are recorded
on the accrual basis over the life of the swap agreements as an adjustment to
interest expense. The related net amounts payable to, or receivable from, the
counterparties are included in accrued liabilities or current receivables,
respectively. Gains and losses resulting from currency movements on the
cross-currency swaps that hedge the Company's net foreign investments are
reflected as a part of foreign currency translation in other comprehensive income (loss) in the consolidated statement of
stockholders' equity, with the related net amounts due to, or from, the
counterparties included in 33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Otherother liabilities, or Deferred charges and other assets, respectively. Net
deferred gains and losses on early termination of interest rate swaps are
amortized into interest expense over the remaining lives of the original
agreements.
Recent Accounting Pronouncements: In June 1998,1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." which is
requiredSFAS No. 137 defers the effective
date of SFAS No. 133 to be implemented infiscal years beginning after June 15, 2000. The Company
will adopt SFAS No. 133, as well as SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133," effective January 1, 2001. In accordance with these
Standards, the Company's first quarterCompany will recognize a charge to income, net of 2001.applicable
taxes, of approximately $7,500. 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 derivativesamount 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 designatedclassified as a hedge, or any portioncumulative
effect of a change in fair valueaccounting principle. This initial charge primarily
relates to the recognition of a hedging instrument that is deemed ineffective, will be
immediately recognizednet deferred charges from interest rate gains and
losses realized in earnings. The Company isthe termination or assignment away of swap agreements. These
charges are currently assessingbeing amortized into interest expense over the impact that adoption will have on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission (the Commission)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101, as amended, is required to be applied
beginning with the Company's second quarter of 2000. The Company, together with
other membersterms of
the death care industry,swap agreements, whereas the new standards require recognition as the
derivative gains and losses are currently discussing directly with
the Commission the application of SAB No. 101. Final resolution of the
discussions will not have an impact on the Company's consolidated cash flows,
but may have a material impact on the Company's consolidated financial condition
and on the manner in which the Company records preneed sales activities.
NOTE THREE
ACQUISITIONS
In January 1999, a wholly owned subsidiary of the Company merged with ECI
in a stock-for-stock transaction in which ECI shareholders received
approximately 15,501 shares of Company common stock valued at approximately
$557,000 and approximately 1,200 options to purchase Company common stock valued
at approximately $8,628. At the time of the merger, ECI owned 359 funeral
service locations and 80 cemeteries in North America.
The Company also acquired certain other funeral, cemetery, crematoria and
insurance operations both domestically and internationally during the years
ended December 31, 1999 and 1998. The following table is a summary of all the
acquisitions made during the two years ended December 31:
1999 1998
-------- --------
Number acquired (unaudited):
Funeral service locations................................. 434 308
Cemeteries................................................ 95 47
Crematoria................................................ 9 18
Insurance operations...................................... -- 2
Purchase price.............................................. $658,500 $784,000
The consideration for these acquisitions consisted of combinations of cash,
Company common stock and issued debt. All acquisitions have been accounted for
under the purchase method of accounting; therefore, operating results of these
acquisitions have been included since their respective dates of acquisitions.incurred.
34
36
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THREE
ACCOUNTING CHANGE
In 2000, the Company implemented Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB No. 101) which changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. The implementation of SAB No. 101 had no effect on the
consolidated cash flows of the Company. As a result of the required change, the
Company's preneed sales activities are affected as follows:
- Preneed sales of cemetery interment rights (cemetery burial
property) -- revenue and all costs associated with the sales of preneed
cemetery interment rights are recognized in accordance with the retail
land sales provisions of Statement of Financial Accounting Standards No.
66 "Accounting for the Sales of Real Estate" (FAS No. 66). Under FAS No.
66, recognition of revenue and associated costs from constructed cemetery
property must be deferred until a minimum percentage of the sales price
has been collected. Revenues related to the preneed sale of unconstructed
cemetery property will be deferred until such property is constructed and
meets the criteria of FAS No. 66 described above. Previously, the preneed
interment rights revenue and associated costs were recognized at the time
the contract was signed with the customer.
- Preneed sales of cemetery merchandise (primarily markers and
vaults) -- revenue and all costs associated with the sales of preneed
cemetery merchandise are deferred until the merchandise is delivered.
Previously, the preneed cemetery merchandise revenue and associated costs
were recognized at the time the contract was signed with the customer.
- Preneed sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) -- revenue and all
costs associated with the sales of preneed cemetery services are deferred
until the services are performed. Previously, the revenue and associated
costs were recognized at the time the contract was signed with the
customer.
- Prearranged funeral and preneed cemetery customer obtaining
costs -- costs incurred related to obtaining new preneed cemetery and
prearranged funeral business are accounted for under the provisions of
Statement of Financial Accounting Standards No. 60 "Accounting and
Reporting by Insurance Enterprises" (FAS No. 60). Under FAS No. 60,
obtaining costs, which include only costs that vary with and are
primarily related to the acquisition of new preneed cemetery and
prearranged funeral business, are deferred. Previously, with respect to
the prearranged funeral business, deferred obtaining costs included
variable and fixed direct obtaining costs as well as direct marketing
costs. With respect to the preneed cemetery business, obtaining costs
were previously expensed as incurred.
- Cemetery merchandise and services trust investment earnings -- investment
earnings generated by assets included in merchandise and services trusts
are deferred until the associated merchandise is delivered or services
performed. Previously, the trust earnings were recognized as earned in
the trust.
35
37
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The change in the Company's accounting policies resulting from
implementation of SAB No. 101 has been treated as a change in accounting
principle effective as of January 1, 2000. The cumulative effect of the
above acquisitions on the consolidated balance sheet ataccounting change through December 31, was as follows:1999 resulted in a charge to net income
of $909,315 (net of a $552,491 tax benefit), or $3.34 per diluted share recorded
on January 1, 2000. The following table shows the unaudited proforma effects of
retroactive application using the newly adopted accounting policies compared to
historical results for the years ended December 31, 1999 and 1998.
1999 1998
----------------------- -----------------------
PROFORMA HISTORICAL PROFORMA HISTORICAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues from continuing
operations......................... $2,745,114 $3,007,958 $2,354,822 $2,696,317
Income (loss) from continuing
operations before extraordinary
gains.............................. $ (210,668) $ (51,224) $ 147,854 $ 331,561
Net income (loss).................... (191,856) (32,412) 158,435 342,142
Basic earnings per share:
Income (loss) from continuing
operations before extraordinary
gains........................... $ (.77) $ (.19) $ .58 $ 1.30
Net income (loss).................. (.70) (.12) .62 1.34
Diluted earnings per share:
Income (loss) from continuing
operations before extraordinary
gains........................... $ (.77) $ (.19) $ .57 $ 1.27
Net income......................... (.70) (.12) .61 1.31
NOTE FOUR
DISCONTINUED OPERATIONS
In the third quarter of 2000, the Company completed the sales of its wholly
owned insurance operations, Auxia and American Memorial Life Insurance Company
(AMLIC). The financial statements have been reclassified to reflect these
operations as discontinued. The operating results for Auxia have been included
through August 31, 2000 and the operating results for AMLIC have been included
through September 30, 2000, the dates of disposition of the respective
companies. The net assets of these discontinued operations prior to the dates of
disposition were segregated on the balance sheet and the components have been
detailed below.
Summary operating results of discontinued operations:
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Current assets..............................................
Revenues.......................................... $ 112,803295,062 $ 52,339
Investments -- insurance operations......................... -- 622,379
Prearranged funeral contracts............................... 316,150 51,990313,855 $ 178,773
Cost and expenses................................. (275,172) (284,852) (160,212)
--------- --------- ---------
Income from discontinued operations before income
taxes........................................... 19,890 29,003 18,561
Provision for income taxes........................ (6,543) (12,076) (7,980)
--------- --------- ---------
Income from discontinued operations............... $ 13,347 $ 16,927 $ 10,581
========= ========= =========
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of discontinued operations:
DECEMBER 31,
1999
------------
Assets:
Cash and cash equivalents................................. $ 30,407
Receivables, net of allowances............................ 19,858
Other current assets...................................... 11,240
Investments............................................... 1,318,635
Long-term receivables....................................... 38,203 91,299
Cemetery property........................................... 202,164 266,591receivables..................................... 30,193
Property, plant and equipment............................... 175,114 108,152equipment, at cost (net).............. 1,546
Deferred charges and other assets........................... 1,869 422,299assets......................... 379,454
Names and reputations....................................... 782,651 354,772
Current liabilities......................................... (127,887) (84,562)
Long-term debt.............................................. (338,308) (53,609)
Deferred incomereputations (net)............................... 40,889
----------
Total assets...................................... $1,832,222
==========
Liabilities:
Accounts payable and accrued liabilities.................. $ 13,096
Income taxes and other liabilities................. (171,330) (365,692)payable...................................... 3,989
Reserves and annuity benefits -- insurance operations....... -- (594,848)benefits............................. 1,313,328
Deferred prearranged funeral contract revenues.............. (322,951) (54,218)
Stockholders' equity........................................ (565,831) (97,124)
--------- ---------
Cash used for acquisitions........................income taxes..................................... 8,243
Other liabilities......................................... 284,715
----------
Total liabilities................................. $1,623,371
----------
Net assets of discontinued operations....................... $ 102,647 $ 719,768
========= =========208,851
==========
NOTE FOURFIVE
PREARRANGED FUNERAL ACTIVITIES
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreements are signed. Payments under these contracts are generally placed
in trust accounts (pursuant to applicable law) or are used to pay premiums on
life insurance or annuity contracts.
Unperformed price guaranteed prearrangedThe balance in Prearranged funeral contracts that are not
funded through Company insurance operations are included in the consolidated
balance sheet as Prearranged funeral contracts. This balance represents amounts due from
trust funds, customer receivables or third party insurance companies.companies related to
unperformed, price guaranteed prearranged funeral contracts. A corresponding
credit is recorded to Deferred prearranged funeral contract revenues.
Previously, this amount excluded prearranged funeral contracts funded through
the Company's discontinued insurance operations. However, upon disposal of these
operations in the third quarter of 2000, the amounts associated with those
contracts to be funded by the Company's discontinued insurance operations were
recorded consistent with contracts funded by other third party insurance
companies.
Funeral revenue is recognized on prearranged funeral contracts at the time
the funeral service is performed. Trust earnings and increasing insurance
benefits are accrued and deferred until the services are performed, at which
timetimes these funds are also recognized in funeral revenues. Such amounts are
intended to cover future increases in the cost of providing a price guaranteed
funeral service. Net obtaining costs incurred pursuant to the sales of trust
funded and third party insurance funded prearrangements are included in Deferred
charges and other assets. These obtaining costs, which include sales commissions
and certain other direct costs whichthat vary with and are primarily related to the
acquisition of new prearranged funeral business, are deferred and amortized over
20 years, a period representing the estimated life of the prearranged funeral
contracts. The aggregate net costs deferred as of December 31, 2000 and 1999
were $137,412 and 1998 were $345,383, and
$263,429, respectively.
Prearranged funeral contracts may also be funded by insurance policies
written by the Company's insurance operations. Policy acquisition costs incurred
by the Company's insurance operations are deferred as part of Deferred charges
and other assets and amortized as prescribed by generally accepted accounting
principles for life insurance companiesrespectively (see note twothree to the consolidated
financial statements).
The aggregate net costs deferred as of December 31, 1999
and 1998 were $44,091 and $13,832, respectively.
3537
3739
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prearranged Funeral Contracts
As previously mentioned, the balance in prearranged funeral contracts
represents amounts due from trust funds, customer receivables or third party
insurance companies related to unperformed, price guaranteed prearranged funeral
contracts. The components of prearranged funeral contracts in the consolidated
balance sheet, as well as the total value of unperformed prearranged funeral
contracts, at December 31 areis as follows:
2000 1999 1998
---------- ----------
Trusts:
Receivables from trusts...................................Trust assets.............................................. $1,355,545 $1,405,273 $1,173,905
Receivables from customers................................ 249,763 290,997 280,005
Allowance for cancellation................................ (143,408) (148,523) (115,206)
---------- ----------
Net trust related assets.......................... 1,461,900 1,547,747 1,338,704
Third Party Insurance:
Receivables from third party insurance companies.......... 2,825,991 1,463,029 1,349,674
Allowance for cancellation................................ (207,524) (112,637) (99,572)
---------- ----------
Net third party insurance related assets.......... 2,618,467 1,350,392 1,250,102
---------- ----------
Prearranged funeral contracts............................... $2,898,139 $2,588,8064,080,367 2,898,139
Discontinued insurance operations:
Receivables from discontinued insurance companies......... -- 1,164,331
Allowance for cancellation................................ -- (62,960)
---------- ----------
Net discontinued insurance related assets......... -- 1,101,371
---------- ----------
Total value of prearranged funeral contracts................ $4,080,367 $3,999,510
========== ==========
The allowance for cancellation is based on historical experience and is
equivalent to approximately 9.0%8.6% of the total balance at December 31, 19992000 and
8.3%9.0% of prearranged funeral contracts at December 31, 1998.1999. Accumulated earnings
from trust funds and increasing insurance benefits of third party insurance
companies have been included to the extent that they have been accrued through
December 31, 19992000 and 1998,1999, respectively. The cumulative trust funded total has
been reduced by allowable cash withdrawals for trust earnings and amounts
retained by the Company pursuant to various state laws.
The activity in prearranged funeral contracts for the years ended December
31 is as follows:
2000 1999 1998
---------- ----------
Beginning balance........................................... $2,898,139 $2,588,806 $2,628,104
Net sales................................................. 238,823 216,754
285,931
Acquisitions/dispositions.................................Acquisitions (dispositions)............................... (87,747) 267,754 142,808
Realized earnings and increasing insurance benefits for
third party insurance companies........................ 141,823 113,902
105,866
Maturities................................................ (336,495) (199,693) (196,960)
Change in cancellation reserve............................ 2,294 (46,382)
(6,848)
1998 reclassificationReclassification of Companydiscontinued insurance operations..... 1,223,157 --
(232,209)Cumulative effect of accounting change.................... 59,326 --
Distributed earnings, effect of foreign currency and
other.................................................. (58,953) (43,002) (137,886)
---------- ----------
Ending balance.............................................. $4,080,367 $2,898,139 $2,588,806
========== ==========
The cost and market value associated withof the assets held in the trust funds underlying
the Company's prearranged funeral contracts at December 31 are as follows:detailed below.
In addition to these assets held in trust funds, the
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has net receivables due from third party insurance companies of
$2,618,467 and $1,350,392 at December 31, 2000 and 1999, respectively.
2000 1999 1998
----------------------- -----------------------
COST MARKET COST MARKET
---------- ---------- ---------- ----------
DebtCash and cash equivalents............ $ 146,258 $ 147,412 $ 234,614 $ 231,299
Fixed Income Securities:
U.S. Treasury...................... 81,711 81,785 117,827 108,898
Foreign government................. 157,704 165,977 137,983 141,778
Corporate.......................... 29,371 29,158 14,686 15,363
Mortgage-backed.................... 123,478 121,773 125,186 117,308
Asset-backed....................... 83,234 83,424 10,277 10,178
Municipal.......................... 3,606 3,662 9,724 9,498
Other.............................. 6,926 6,928 64 51
Equity securities:
Government......................... $ 420,219 $ 407,450 $ 323,831 $ 356,853
Corporate.......................... 123,406 118,783 103,835 106,190
Equity securities.................... 656,161 775,691 503,821 554,256
Money market/other................... 205,487 208,155 242,418 228,085Preferred stock.................... 185 153 -- --
Common stock....................... 453,890 470,576 452,767 564,758
Mutual funds:
Equity............................. 108,204 102,214 138,615 148,789
Fixed income....................... 75,398 76,440 97,862 93,837
Private equity and other............. 85,580 101,623 65,668 68,322
---------- ---------- ---------- ----------
Prearranged funeral trust assets..... $1,355,545 $1,391,125 $1,405,273 $1,510,079 $1,173,905 $1,245,384
========== ========== ========== ==========
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Prearranged Funeral Contract Revenues
Deferred prearranged funeral contract revenues represents the original
contract price, trust earnings and increasing insurance benefits on unperformed
funeral contracts generally funded by trust or third party insurance companies.
The total value ofamounts associated with unperformed prearranged funeral contracts
consists of two components: (i) contracts funded by trust or third party
insurance companies and (ii) contracts funded by the Company's discontinued
insurance operations. The valueUpon disposal of the Company's discontinued insurance
operations, the Company recorded the amounts associated with unperformed
prearranged funeral
contracts to be funded by trust orthese discontinued operations consistent with
contracts funded by other third party insurance companies are included in Deferred prearranged funeral contract revenues in the
consolidated balance sheet. A portion of the value of unperformed prearranged
funeral contracts to be funded by the Company's insurance operations is included
as a component of Reserves and annuity benefitscompanies.
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- insurance operations in the
consolidated balance sheet and reflects only the actuarially determined amounts
to be funded in accordance with generally accepted accounting principles for
life insurance subsidiaries. The remaining component of Reserves and annuity
benefits -- insurance operations represents the actuarially determined amounts
to be funded for non-SCI unperformed prearranged funeral contracts.(CONTINUED)
The following table summarizes for the years ended December 31 the activity
in deferred prearranged funeral contract revenues as well as reflectsreflecting the
Company'stotal value of unperformed prearranged funeral contracts to be funded through the
Company's life insurance operations as if they were valued at original contract
values plus increasing insurance benefits:contracts.
2000 1999 1998
---------- ----------
Beginning balance -- Deferred prearranged funeral contract
revenues.................................................. $3,186,081 $2,819,794 $2,805,429
Net sales................................................. 246,164 213,526 292,972
Acquisitions/dispositions................................. (83,513) 272,295 138,422
Realized earnings and increasing insurance benefits from
third party insurance companies........................ 143,710 113,705
106,353
Maturities................................................ (270,097) (227,871) (192,817)
Change in cancellation reserve............................ 2,293 (46,381)
(6,848)
1998 reclassificationReclassification of Companydiscontinued insurance operations..... 1,223,157 --
(232,209)Cumulative effect of accounting change.................... 94,975 --
Effect of foreign currency and other...................... (5,101) 41,013 (91,508)
---------- ----------
Ending balance -- Deferred prearranged funeral contract
revenues.................................................. 4,537,669 3,186,081 2,819,794
---------- ----------
Unperformed contracts funded by Companydiscontinued insurance
operations................................................ -- 1,101,371 932,056
---------- ----------
Total value of unperformed prearranged funeral contracts.... $4,537,669 $4,287,452 $3,751,850
========== ==========
NOTE FIVE
INSURANCE OPERATIONS
The Company acquired AML effective July, 1998. In addition,SIX
PRENEED CEMETERY ACTIVITIES
Pursuant to the implementation of SAB No. 101 in 2000, the Company has
owned a French life insurance company (Auxia) since 1995.changed
it accounting policies regarding the manner in which the Company records preneed
sales activities. As discussed in detail in note three to the consolidated
financial statements, the Company is now deferring revenues associated with
certain preneed cemetery sales activities until cemetery burial property is
constructed and meets the criteria of FAS No. 66, merchandise is delivered or
services are performed. As of January 1, 2000, the Company had deferred preneed
contract cemetery revenue of $1,639,606, net of cancellation reserve of
$182,207. The primary purpose of
these life insurance operations is to assistfollowing table summarizes the activity during 2000 in funding the Company's
prearranged funeral program.
37
39
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments
As part of the Company's funding of prearranged funeral contracts, the
Company's life insurance operations invest in securities which are classified as
"available-for-sale." The cost, market value and unrealized gains and losses
related to investments at December 31 were as follows:deferred
preneed cemetery contract revenues.
1999
---------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST MARKET VALUE GAINS LOSSES
---------- ------------ ----------2000
----------
Debt securities:
U.S. treasury......................... $ 29,054 $ 27,528 $ -- $ (1,526)
U.S. stateBalance as of January 1, 2000 from cumulative effect of
accounting change......................................... $1,639,606
Net sales................................................. 406,483
Acquisitions (dispositions) and political
subdivisions....................... 76,726 70,930 30 (5,826)
French government..................... 87,893 85,938 261 (2,216)
Other foreign government (primarily
European).......................... 63,503 62,394 155 (1,264)
Corporate............................. 571,560 534,110 676 (38,126)
Mortgage-backed....................... 126,825 121,714 313 (5,424)
Asset-backed.......................... 55,583 53,455 132 (2,260)
Redeemable preferred stock............ 4,028 3,654 22 (396)
Equity securities:
Nonredeemable preferred stock......... 1,040 870 -- (170)
Common stock.......................... 65,587 113,004 47,689 (272)
Mutual funds:
Equity................................ 96,621 136,243 39,622 --
Debt.................................. 54,515 57,166 2,651 --
Mortgage loans.......................... 914 914 -- --
Real estate, net of accumulated
depreciationother..................... 1,317
Realized earnings on merchandise and amortization......... 32,547 32,547 -- --
Policy loans............................ 18,168 18,168 -- --
---------- ---------- ------- --------
$1,284,564 $1,318,635 $91,551 $(57,480)
========== ========== ======= ========
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998
---------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST MARKET VALUE GAINS LOSSES
---------- ------------ ---------- ----------
Debt securities:
U.S. treasury......................... $ 8,841 $ 9,137 $ 296 $ --
French government..................... 241,033 251,187 10,545 (391)
Other foreign government (primarily
European).......................... 131,151 132,876 1,725 --
Corporate............................. 338,181 341,191 5,895 (2,885)
Mortgage-backed....................... 145,790 147,254 1,757 (293)
Asset-backed.......................... 32,340 32,925 704 (119)
Redeemable preferred stock............ 3,879 3,799 4 (84)
Equity securities:
Nonredeemable preferred stock......... 1,246 1,335 89 --
Common stock.......................... 85,439 117,493 33,483 (1,429)
Mutual funds:
Equity................................ 74,707 81,998 7,291 --
Debt.................................. 59,058 60,783 1,725 --
Mortgage loans.......................... 1,301 1,301 -- --
Real estate, net of accumulated
depreciation and amortization......... 34,636 34,636 -- --
Policy loans............................ 18,763 18,763 -- --
---------- ---------- ------- -------
$1,176,365 $1,234,678 $63,514 $(5,201)
========== ========== ======= =======
The contractual maturities of debt securities as of December 31, 1999 were
as follows:
AMORTIZED MARKET
COST VALUE
---------- --------
Within one year............................................. $ 26,312 $ 26,075
After one year through five years........................... 73,187 71,752
After five years through ten years.......................... 357,929 343,986
After ten years............................................. 375,336 342,740
---------- --------
Subtotal.......................................... 832,764 784,553
Mortgage and asset-backed securities........................ 182,408 175,170
---------- --------
$1,015,172 $959,723
========== ========
Net investment income for the years ended December 31 was as follows:
1999 1998 1997
------- ------- -------
Debt securities......................................... $57,322 $35,941 $14,247
Equity securities....................................... 1,749 4,717 3,539
Other................................................... 5,510 2,066 --
------- ------- -------
Total investment income....................... 64,581 42,724 17,786
Investment expenses..................................... (5,344) (4,131) (3,053)
------- ------- -------
Net investment income......................... $59,237 $38,593 $14,733
======= ======= =======
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The gross realized gains and gross realized losses from sales of securities
for the years ended December 31 were as follows:
1999 1998 1997
----------------------------- ---------------------------- ---------------------------
GAIN LOSS NET GAIN LOSS NET GAIN LOSS NET
------- -------- -------- ------- -------- ------- ------- ------- -------
Debt securities...... $11,651 $(31,746) $(20,095) $42,493 $(27,391) $15,102 $20,192 $(3,617) $16,575
Equity securities.... 22,024 (719) 21,305 22,820 (14,635) 8,185 17,516 (3,755) 13,761
------- -------- -------- ------- -------- ------- ------- ------- -------
Realized gain
(loss)............. $33,675 $(32,465) $ 1,210 $65,313 $(42,026) $23,287 $37,708 $(7,372) $30,336
======= ======== ======== ======= ======== ======= ======= ======= =======
The amount of net investment income and realized gain (loss) which are
allocable to policyholders but included above is $12,412, $21,800 and $19,015
for the three years ended December 31, 1999, 1998 and 1997, respectively, and
are included in Costs and expenses in the consolidated statement of operations.
Changes in unrealized gain/loss on investments for the years ended December
31 were as follows:
1999 1998 1997
-------- ------- -------
Fixed income securities................................ $(72,646) $13,930 $ 3,744
Equity securities...................................... 48,404 20,147 21,172
-------- ------- -------services trust
funds.................................................. 25,939
Maturities................................................ (240,118)
Change in unrealized gain (loss) on investments........ $(24,242) $34,077 $24,916
======== ======= =======cancellation reserve............................ (18,070)
----------
Balance as of December 31, 2000............................. $1,815,157
==========
Present Value of Future Profits
An analysis of PVP for the years ended December 31 is provided as follows:
1999 1998
------- -------
Balance at beginning of year................................ $45,182 $12,222
Additions due to acquisitions............................... 945 36,630
Amortization, net of interest accrued....................... (5,785) (4,476)
Effect of foreign currency.................................. (1,630) 806
------- -------
Balance at end of year...................................... $38,712 $45,182
======= =======
It is anticipated that PVP will be reduced by the following amounts in
future years:
2000...................................................... $ 5,122
2001...................................................... 4,596
2002...................................................... 3,582
2003...................................................... 3,117
2004...................................................... 2,302
Thereafter................................................ 19,993
-------
$38,712
=======
Statutory Financial Information
The Company's insurance operations are required to file financial
statements with state (for U.S. companies) or national (for the French company)
insurance regulatory authorities prepared on an
40
42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting basis prescribed or permitted by such authorities (statutory basis).
Certain statutory amounts were as follows as of and for the year ended December
31, 1999:
UNITED STATES FRANCE
------------- -------
Capital and surplus......................................... $61,539 $63,606
Net income.................................................. 8,107 7,226
Under statutory regulations, AML must maintain certain minimum amounts of
statutory capital and statutory surplus. AML is also regulated by state
regulatory authorities as to amounts of dividends which can be paid without
prior approval of regulatory authorities. In 2000, AML can distribute dividends
to the Company of up to $5,904 without prior approval.
Participating Life Insurance
Participating policies represented approximately 29% and 33% of total life
insurance in force at December 31, 1999 and 1998, respectively. Participating
policies represented approximately 22% and 51% of premium income for 1999 and
1998, respectively. Dividends on participating policies amounted to $7,790 in
1999 and $25,548 in 1998. The amount of dividends is determined through contract
provision (within French legal requirements) for all life insurance policies
issued by Auxia and by the contract provisions of any participating policies
issued by AML.
NOTE SIX
CEMETERY TRUST FUNDS
Merchandise and Services Trusts
Amounts paid into cemetery merchandise and services trusts are included in
long-term receivables, at cost. The cost and market values associated with the
assets held in the cemetery merchandise and services trust funds underlying the
Company's long-term receivables at December 31 were as follows:
2000 1999 1998
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
DebtCash and cash equivalents.................. $ 77,376 $ 77,408 $160,246 $160,738
Fixed Income Securities:
U.S. Treasury............................ 131,095 135,304 105,413 98,430
Foreign government....................... 9,308 9,349 9,272 9,275
Corporate................................ 15,946 16,318 13,091 11,197
Mortgage-backed.......................... 147,782 149,658 145,758 140,760
Asset-backed............................. 85,947 89,427 560 545
Municipal................................ 109 114 114 111
Other.................................... 4,717 4,643 356 305
Equity securities:
Government............................... $267,357 $255,494 $204,277 $201,399
Corporate................................ 87,422 82,357 83,845 84,503
Equity securities.......................... 357,451 362,747 295,210 291,222
Money market/other......................... 110,599 111,463 79,232 79,284Preferred stock.......................... 129 101 -- --
Common stock............................. 268,510 261,720 215,695 220,071
Mutual funds:
Equity................................... 105,330 94,827 99,165 100,463
Fixed income............................. 64,207 64,515 57,367 53,648
Private equity and other................... 32,440 31,169 15,792 16,518
-------- -------- -------- --------
Preneed cemetery merchandise and services
trust assets............................. $942,896 $934,553 $822,829 $812,061 $662,564 $656,408
======== ======== ======== ========
As a result of implementing SAB No. 101 (see note three to the consolidated
financial statements), all realized investment earnings for the year ended
December 31, 2000 related to these cemetery merchandise and services trust funds
are deferred until the associated merchandise is delivered or service is
performed. Prior to 2000, the realized investment earnings were recognized as
earned in the trusts. For the year ended December 31, 2000, realized investment
earnings related to these cemetery merchandise and service trust funds that were
deferred amounted to $25,939. The realized investment earnings recognized in the
consolidated statement of operations related to these cemetery merchandise and
services trust funds were $19,947, $39,930 $69,466 and $49,305$69,466 for the three years ended
December 31, 2000, 1999 and 1998, and 1997, respectively.
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Perpetual Care Trusts
The cost and market values associated with the assets held in perpetual
care trust funds at December 31 were as follows:
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999 1998
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
DebtCash and cash equivalents.................. $ 42,690 $ 43,074 $ 48,582 $ 50,478
Fixed Income Securities:
U.S. Treasury............................ 60,153 62,818 39,567 39,202
Foreign government....................... 17,387 19,542 19,269 18,493
Corporate................................ 56,992 58,469 39,096 39,520
Mortgage-backed.......................... 84,204 84,767 69,734 70,970
Asset-backed............................. 29,519 31,064 7,667 7,982
Municipal................................ 89 162 244 260
Other.................................... 1,804 3,169 113 47
Equity securities:
Government............................... $ 75,040 $ 67,011 $ 33,530 $ 33,473
Corporate................................ 266,325 254,926 230,798 233,599
Equity securities.......................... 98,820 105,856 134,555 126,853
Money market/other......................... 79,353 79,865 19,226 19,206Preferred stock.......................... -- -- -- --
Common stock............................. 50,602 59,228 12,994 23,813
Mutual funds:
Equity................................... 50,909 47,675 103,454 83,403
Fixed income............................. 91,690 84,317 148,742 141,859
Private equity and other................... 30,846 31,989 30,076 31,631
-------- -------- -------- --------
Perpetual care trust assets................ $516,885 $526,274 $519,538 $507,658 $418,109 $413,131
======== ======== ======== ========
Realized investment earnings from these perpetual care trust funds are
recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs, which are expensed as incurred. The realized investment
earnings related to these perpetual care trust funds were $26,660, $25,950 $27,814 and
$25,666$27,814 for the three years ended December 31, 2000, 1999 1998 and 1997,1998, respectively.
NOTE SEVEN
INCOME TAXES
The provision or benefit for income taxes includes United States federal
income taxes, determined on a consolidated return basis, foreign, state and
local income taxes.
Income (loss) from continuing operations before income taxes, extraordinary
gains and extraordinary gain (loss) related to
the early extinguishmentcumulative effect of debtan accounting change for the years ended December
31 is as follows:
2000 1999 1998
1997
----------------- -------- --------
United States........................................ $(61,230) $419,450 $474,478
Foreign.............................................. 23,540 99,077 105,495States....................................... $(474,256) $(77,304) $411,578
Foreign............................................. (42,722) 10,611 88,388
--------- -------- --------
--------
$(37,690) $518,527 $579,973
========$(516,978) $(66,693) $499,966
========= ======== ========
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax provision (benefit) for the years ended December 31 consisted of
the following:
2000 1999 1998
1997
----------------- -------- --------
Current:
United States......................................States..................................... $(149,465) $ 24,194 $100,110 $157,450
Foreign............................................23,155 $ 97,929
Foreign........................................... 12,436 13,141 10,881
7,022
State and local.................................... 5,343 9,086 21,737local................................... 535 5,498 9,078
--------- -------- --------
--------
42,678 120,077 186,209
--------(136,494) 41,794 117,888
--------- -------- --------
Deferred:
United States...................................... (17,670) 48,861 15,045
Foreign............................................ (24,670) (697) 1,432States..................................... 47,923 (22,460) 48,261
Foreign........................................... (13,717) (30,928) (5,871)
State and local.................................... (3,731) 8,144 2,735local................................... 10,833 (3,875) 8,127
--------- -------- --------
--------
(46,071) 56,308 19,212
--------45,039 (57,263) 50,517
--------- -------- --------
Total provision (benefit)................................... $ (3,393) $176,385 $205,421
========(91,455) $(15,469) $168,405
========= ======== ========
The Company made income tax payments on continuing operations of
approximately $30,300,$56,007, $24,500 and $126,000, excluding income tax refunds of
$35,032, $8,488 and $155,400,$9,538, for the three years ended December 31, 2000, 1999 and
1998, and 1997,
respectively.
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate for the years ended December 31 were as follows:
2000 1999 1998
1997
----------------- -------- --------
Computed tax provision (benefit) at the applicable
federal statutory income tax rate................. $(13,191) $181,485 $202,991rate............... $(180,942) $(23,343) $174,988
State and local taxes, net of federal income tax
benefits.......................................... 1,048 11,199 15,906benefits........................................ 7,389 1,055 11,183
Dividends received deduction and tax exempt
interest..........................................interest........................................ (2,005) (210) (1,178) (1,618)
Amortization of names and reputations...............reputations............. 11,485 11,844 6,423 5,622
Enacted tax rate change.............................change........................... -- -- (2,218) (5,491)
Foreign jurisdiction tax rate difference............ (15,166) (18,576) (12,909)difference.......... (14,472) (16,899) (19,612)
Write down of names and reputations.................assets.............................. 92,155 11,528 (260)
1,319
Nondeductible expenses.............................. 2,315 1,718 1,301
Other............................................... (1,561) (2,208) (1,700)
--------Other............................................. (5,065) 556 (921)
--------- -------- --------
Provision (benefit) for income taxes......taxes.... $ (3,393) $176,385 $205,421
========(91,455) $(15,469) $168,405
========= ======== ========
Total effective tax rate.................. (9.0)rate................ (17.7)% 34.0% 35.4%
========(23.2)% 33.7%
========= ======== ========
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted marginal tax rates. The tax effects of temporary differences and
carry-forwards that give rise to significant portions of deferred tax assets and
liabilities as of December 31 consisted of the following:
2000 1999
1998--------- ---------- --------
Receivables, principally due to sales of cemetery interment
rights and related products............................... $ -- $ 279,153 $224,614
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... 549,555 541,063 501,974
Property, plant and equipment and investments, principally
due to depreciation and to purchase accounting
adjustments....... 78,496 91,831adjustments............................................... 118,433 78,650
Other....................................................... 141,203 99,744142,320 130,943
--------- ---------- --------
Deferred tax liabilities.................................. 1,039,915 918,163810,308 1,029,809
--------- ----------
--------Receivables, principally due to sales of cemetery interment
rights and related products............................... (163,952) --
Deferred revenue on prearranged funeral and cemetery
contracts, principally due to earnings from trust funds.............. (46,051) (27,270)funds... (133,620) (21,987)
Accrued liabilities......................................... (93,443) (2,927)
Carry-forwards(93,381) (98,434)
Loss and foreign tax credits......................credit carry-forwards.................. (72,424) (73,851)
(36,789)--------- ---------- --------
Deferred tax assets....................................... (213,345) (66,986)(463,377) (194,272)
--------- ---------- --------
Valuation allowance......................................... 69,199 27,278
13,058--------- ---------- --------
Net deferred income taxes................................. $ 853,848 $864,235416,130 $ 862,815
========= ========== ========
During the three years ended December 31, 1999, 1998 and 1997, taxTax expense resulting from allocating certain tax benefits directly to
capital in excess of par value totaled $113, $42,794 at December 31, 1998 and $3,799, respectively.was
insignificant at December 31, 1999 and 2000.
Current refundable income taxes and foreign current deferred tax assets are
included in Other current assets, long-term deferred tax assets associated with
AML are included in
Deferred charges and other assets, with current taxes payable and current
deferred tax liabilities being reflected as Income taxes inon the consolidated
balance sheet.
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 19992000 and 1998,1999, United States income taxes had not been
provided on $397,443$264,379 and $333,890,$309,000, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention to permanently reinvest
such earnings. Although it is not practicable to determine the deferred tax
liability on the unremitted earnings, credits for income taxes paid by the Company's foreign
subsidiaries will be available to significantly reduce any U.S. tax if these
foreign earnings are remitted.
As of December 31, 19992000 the Company had United States foreignrecorded a charge to reduce the
carrying value of a Canadian equity investment. A deferred tax credit
carry-forwards of $2,800 which will expire in the years 2000 through 2001.asset and
valuation allowance has been established related to this charge. Various
subsidiaries have international, federal and state operating loss carry-forwards
of $431,696$470,295 with expiration dates through 2014.2018. The Company believes that some
uncertainty exists with respect to future realization of these tax credit and loss
carry-forwards, therefore a valuation allowance has been established for the
carry-forwards not expected to be realized. The increase in the valuation
allowance is primarily attributable to netthe charge to reduce the carrying value
of the Canadian equity investment.
44
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating losses.loss carry-forwards will expire as follows:
2001..................................................... $ 3,585
2002..................................................... 4,578
2003..................................................... 15,375
2004..................................................... 20,062
2005..................................................... 83,237
Thereafter............................................... 343,458
--------
Total.......................................... $470,295
========
NOTE EIGHT
DEBT
Debt as of December 31 was as follows:
2000 1999 1998
---------- ----------
Bank revolving credit agreements and commercial paper.......paper................. $ 789,750 $1,179,704 $ 650,596
6.375% notes due in 2000.................................... 150,000-- 150,000
6.75% notes due in 2001..................................... 150,000123,000 150,000
8.72% amortizing notes due in 2002.......................... 39,149 71,174 114,259
8.375% notes due in 2004.................................... 51,840 51,840
7.375% notes due in 2004.................................... 250,000 250,000
6.0% notes due in 2005...................................... 600,000591,550 600,000
7.2% notes due in 2006...................................... 150,000 150,000
6.875% notes due in 2007.................................... 150,000 150,000
6.5% notes due in 2008...................................... 200,000 200,000
7.7% notes due in 2009...................................... 200,000 200,000
6.95% amortizing notes due in 2010.......................... 49,202 52,557 55,691
Floating rate notes due in 2011 (putable in 1999)........... -- 200,000
7.875% debentures due in 2013............................... 55,627 55,627
7.0% notes due in 2015 (putable in 2002).................... 300,000186,040 300,000
6.3% notes due in 2020 (putable in 2003).................... 300,000 300,000
Medium term notes, maturities through 2019, fixed average
interest rate of 9.32%.................................... 35,720 35,720
Convertible debentures, interest rates range from
4.75%-5.5%, due through 2008, conversion price ranges from
$11.25-$50.00............................................. 49,213 49,97949,213
Mortgage and other notes payable with maturities through
2050...................................................... 86,219 136,368 216,833
Deferred loan costs......................................... (16,013) (22,187) (19,888)
---------- ----------
Total debt..................................................debt........................................ 3,291,297 4,060,016 3,860,657
Less current maturities..................................... (176,782) (423,949) (96,067)
---------- ----------
Total long-term debt.............................. $3,114,515 $3,636,067 $3,764,590
========== ==========
The Company's primary revolving credit agreements, as amended, provide for borrowings
up to $1,600,000$988,287 and consistsconsisted of threetwo committed facilities -- two 364-day
facilitiesa 2-year term loan
and a 5-year, multi-currency revolving facility. These credit facilities are primarily
usedwere
amended in November 2000. Significant terms of the amendments include certain
agreements made by the Company to supportreduce commitment amounts on the previous issuancecredit
facilities based upon net cash proceeds generated from joint venture and asset
sale transactions closed after November 2000; changes to definitions and
calculations of commercial paperfinancial covenants related to a maximum debt-to-capitalization
ratio, a minimum interest coverage ratio and for general
corporate purposes.
44a minimum net worth requirement;
limits on the amount of Company assets that could be joint ventured or sold; and
certain restrictions on future acquisition activity without lender
45
4647
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
One 364-dayapproval. Under the terms of the amended credit agreements, the covenants will
continue to be calculated using information without the implementation of SAB
No. 101, until such time as the Company negotiates revised covenant calculations
under the credit agreements. These facilities are primarily used for general
corporate purposes.
The commitment for the 2-year term loan, originally $300,000, had been
reduced to $296,486 at December 31, 2000. The commitment for the 5-year,
multi-currency revolving facility, which expires June 25, 2000, allowsoriginally $700,000, was $691,801 at December
31, 2000. This 5-year facility also includes provisions for borrowings up to
$300,000 and contains provisions that permit the Company to convert the
outstanding balance into a two-year term loan upon maturity. The second 364-day
facility allows for borrowings up to $600,000 and expires November 1, 2000. The
5-year, multi-currency facility permits borrowings up to $700,000, including
$500,000 in various foreign currencies, and expirescurrencies. Both facilities mature in June 27, 2002.
Interest rates for these facilities are based on various indices as determined
by the Company.
For eachA facility a quarterly fee is paid quarterly on the total commitment amount rangingfor each facility.
The fee ranges from 0.25% to 0.50% depending on the Company's senior debt
ratings. ThisThe fee for each facility was 0.50% and 0.25% at December 31, 2000 and 1999,
however, the fees were increased to 0.50% in January 2000 as a result of the
Company's senior debt rating downgrade. Additionally, these credit facilities
have financial compliance provisions, including a maximum debt-to-
capitalization ratio of 60%, a minimum interest coverage ratio of 2.75, a
minimum net worth requirement defined in the facility agreements, and
limitations on cash distributions, subsidiary borrowings, liens and guarantees.respectively.
Approximately $870,545$789,750 was outstanding under the above facilities at
December 31, 1999,2000, with a weighted average rate of 6.97%7.95% ($217,345870,545 at December
31, 1998,1999, with a weighted average interest rate of 5.65%6.97%). Approximately
$295,545 ofOf these borrowings,
approximately $271,263 was denominated in various foreign currencies under the
5-year facility at December 31, 19992000 ($217,345295,545 at December 31, 1998)1999).
The Company's commercial paper program is backed by the above facilities.facilities;
however, the Company's downgraded credit ratings have rendered it unable to
access the commercial paper market. At December 31, 1999, $309,159 of2000, all previously issued
commercial paper had matured. Commercial paper outstanding at December 31, 1999,
was outstanding$309,159 with a weighted average interest rate of 6.58% ($433,251 with.
The Company's outstanding debt at December 31, 2000 had a weighted average
interest rate of 6.68% at December 31, 1998). The commercial paper borrowings
and revolving notes generally have maturities ranging from 17.08%, compared to 180 days.
Historically, the Company has classified borrowings under these facilities
as long-term debt since it has been the Company's intent to refinance such
borrowings with long-term debt or equity. In 1999, however, the Company's
downgraded credit ratings, both short-term and long-term, have limited its
access to the capital markets. As a result, borrowings of $179,704 which are
either funded or backed by the credit facilities which are in excess of
$1,000,000 have been classified as current6.83% at December 31, 1999. In March 1999, the Company repurchased two issues of debt. On March 26,
1999, the Company repurchased the $200,000 floating-rate notes, which were
originally due April 2011. These notes were to be remarketed in April 1999 as
fixed-rate notes. The Company chosewas
not a party to refinance with commercial paperany swap agreements at December 31, 2000; however, at December
31, 1999, after giving consideration to maintain floating-rate exposure.outstanding swap agreements, the
weighted average interest rate was 6.41%.
The purchase price was $200,000 plus accrued
interest and a premiumCompany's debt at December 31, 2000, consisted of approximately $22,185 resulting in an extraordinary
loss24% of
$14,148, netfloating interest rate debt at 7.94% and approximately 76% of tax. On March 31, 1999, the Company repurchased $143,750
ECI convertible debentures, which were originally due December 2004. This
repurchase was effected byfixed interest
rate debt at a change-of-control clause allowing the holders to
put the bonds back to the Company after the acquisitionweighted average interest rate of ECI. The purchase
price was $143,750 plus accrued interest and resulted in an extraordinary gain
of $16,033 net of tax relating to the unamortized premium reflecting the market
valuation of the debentures at the date ECI merged with the Company. These
debentures were refinanced with commercial paper.6.81%. At December 31, 1999,
the Company's debt and derivative instruments, excluding the lending
subsidiary's debt, consisted of approximately $29,86939% of floating interest rate debt
at a weighted average rate of 6.49% and approximately 61% of fixed interest rate
debt at a weighted average rate of 6.36%.
During the year ended December 31, 2000, the Company repurchased certain
bonds in the open market with an aggregate face value of $228,700 as follows:
$79,290 of the 6.375% notes due 2000; $27,000 of the 6.75% notes due 2001;
$113,960 of the 7.00% notes due 2015, putable in 2002; and $8,450 of the 6.00%
notes due 2005. The repurchase resulted in extraordinary gains on early
extinguishment of debt totaling $21,973 (net of tax of $12,630).
In accordance with the stated maturity, October 2, 2000, the Company
retired the 6.375% senior notes, in the amount of $70,710, by refinancing the
indebtedness under its existing credit facilities. On October 30, 2000, the
Company had a short-term credit facility, in the amount of $600,000, which
expired with no borrowings outstanding.
The Company had $68,753 in restricted cash recorded in Deferred charges and
other assets on the consolidated balance sheet as security for various credit
instruments at December 31, 2000. Approximately $30,208 was related to two
embedded options associated with the Company's 6.30% senior notes due 2020
(putable 2003). The remaining $38,545 was used to secure various other
obligations. The total balance deposited in restricted accounts at March 26,
2001, was $102,493 of which $29,969 was related to the two options previously
mentioned.
46
48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approximately $22,983 of assets were pledged as collateral for
the mortgage and other notes payable.
The stated coupons described in the above table have been substantially
modified through the use of interest rate and cross-currency interest rate swaps
used in the management of interest rates within defined targets for fixed and
floating interest rate exposure. Approximately $1,521,743 of the Company's debt
was converted from U.S. dollars using cross-currency interest rate swaps,
resulting in approximately $1,931,119 of debt being denominated in foreign
currencies at December 31, 1999 (see note nine to the consolidated financial
statements).
45
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash interest payments for the three years ended December 31, 1999,2000, totaled
$244,638, $237,682 and $165,788, respectively. Included in net cash interest
paid of $244,638 in 2000 is $16,673 of funds received related to the termination
and $141,572, respectively.assigning away of certain financial swap agreements, resulting in gross cash
interest paid in 2000 of $261,311.
The aggregate maturities on debt for the five years subsequent to December
31, 1999,2000, are as follows: 2000 -- $423,949; 2001 -- $196,543;$176,782; 2002 -- $1,316,573;$995,814; 2003 -- $323,865;$325,367;
2004 -- $322,405.
Subsequent to year end, the Company repurchased certain bonds in the open
market with a face value aggregating $94,400 as follows: $58,950 of the 6.375%
notes due 2000, $27,000 of the 6.75% notes due 2001 and $8,450 of the 6.00%
notes due 2005. Funds used to repurchase the debt were obtained from terminating
certain swap agreements (see note nine to the consolidated financial
statements). The repurchase resulted in an extraordinary gain on early
extinguishment of debt totaling $10,200 on a pretax basis.$321,178; 2005 -- $621,456.
NOTE NINE
DERIVATIVES
Historically, the Company entered into various derivative instruments,
which were primarily interest rate and cross-currency swap agreements, to hedge
potential exposures in the interest rate and foreign exchange rate markets. The
Company enters into derivative transactions primarilyused these swap agreements to hedge the Company's net investment in
the form of
interest rate swapsforeign assets and cross-currency interest rate swaps in combination with
local currency borrowings to manage its mix of fixed and floating rate debt and
to hedge the Company's net investments in foreign assets.debt. The
Company has procedures in place to monitor and control the use of derivatives and only
enters into transactions with a limited group of creditworthy financial
institutions. The Company does not engage in derivative transactions for
speculative or trading purposes,purpose, nor is it a party to leveraged derivatives.
In general, cross-currency swaps convert U.S. dollar debt intoDuring the respective foreign currencyfirst quarter of the Company's various foreign operations. Such
cross-currency swaps are used in combination with local currency borrowings to
substantially hedge the Company's net investment in foreign operations. The
cross-currency swaps have generally included interest rate provisions to enable
the Company to additionally hedge a portion of the earnings of its foreign
operations. Accordingly, movements in currency rates that impact the swap
generally offset a corresponding movement in the value of the underlying assets
being hedged. Similarly, currency movements that impact foreign expense due
under the cross-currency interest rate swaps generally offset a corresponding
movement in the earnings of the foreign operation.
46
48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present information at December 31 about the Company's
derivatives:
1999
-------------------------------------------------------------------
WEIGHTED
AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET --------------
AMOUNT (LIABILITY) MATURITY RECEIVE PAY FAIR VALUE
---------- ------------ --------- ------- ---- ----------
Interest Rate Swaps:
US dollar fixed to US dollar floating...................... $ 300,000 $ -- 2001-2002 6.40% 6.13% $ (2,361)
US dollar fixed to US dollar floating...................... 550,000 -- 2003-2004 6.49% 6.15% (6,776)
US dollar fixed to US dollar floating...................... 350,000 -- 2006-2009 6.60% 6.03% (17,237)
US dollar floating to US dollar fixed...................... 240,000 -- 2000, 6.21% 5.83% 378
Canadian dollar floating to Canadian dollar fixed.......... 209,043 -- 2007-2008 5.05% 6.27% (6,333)
Australian dollar floating to Australian dollar fixed...... 42,686 -- 2006 5.93% 7.81% (1,019)
British pound floating to British pound fixed.............. 282,521 -- 2008 6.21% 6.83% (3,609)
French franc floating to German mark floating.............. 151,252 -- 2006 3.27% 3.50% (2,058)
German mark floating to French franc fixed................. 75,780 -- 2003 3.32% 5.66% (2,726)
Cross-Currency Interest Rate Swaps:
US dollar fixed to Canadian dollar floating................ 100,000 6,267 2010 6.95% 5.65% 947
US dollar floating to Canadian dollar fixed................ 193,901 (1,860) 2003 6.12% 5.53% 4,128
US dollar floating to Australian dollar fixed.............. 184,841 5,749 2000-2003 6.18% 6.09% 9,792
US dollar floating to Australian dollar floating........... 59,196 4,033 2000-2003 6.18% 5.92% 4,180
US dollar fixed to British pound fixed..................... 63,763 (3,585) 2002 8.72% 9.64% (4,117)
US dollar fixed to British pound floating.................. 293,754 (11,216) 2002-2004 8.38% 6.57% (1,204)
US dollar fixed to French franc fixed...................... 300,000 72,815 2000-2007 6.29% 6.21% 66,124
US dollar fixed to French franc floating................... 150,000 34,091 2000-2007 6.90% 3.56% 35,323
US dollar floating to French franc fixed................... 117,833 5,276 2000 6.11% 4.23% 5,293
US dollar fixed to German mark floating.................... 150,000 34,188 2003-2006 5.98% 2.94% 41,780
US dollar floating to Spanish peseta fixed................. 98,214 8,416 2003 6.11% 4.84% 8,200
US dollar floating to Norwegian krone fixed................ 22,815 1,267 2003 6.11% 5.80% 1,678
Australian dollar fixed to US dollar floating.............. 64,728 (7,595) 2000 5.97% 6.18% (7,802)
---------- -------- --------
$4,000,327 $147,846 $122,581
========== ======== ========
1998
-------------------------------------------------------------------
WEIGHTED
AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET --------------
AMOUNT (LIABILITY) MATURITY RECEIVE PAY FAIR VALUE
---------- ------------ --------- ------- ---- ----------
Interest Rate Swaps:
US dollar fixed to US dollar floating...................... $ 250,000 $ -- 1999-2001 7.35% 5.32% $ 7,931
US dollar fixed to US dollar floating...................... 600,000 -- 2002-2003 6.24% 5.24% 15,093
US dollar fixed to US dollar floating...................... 300,000 -- 2004-2006 7.02% 5.33% 25,082
US dollar fixed to US dollar floating...................... 300,000 -- 2008-2009 6.61% 5.39% 24,552
US dollar floating to US dollar fixed...................... 420,000 -- 2000-2001 5.22% 5.84% (5,751)
US dollar floating to US dollar fixed...................... 380,000 -- 2003-2004 5.03% 5.54% (10,425)
Canadian dollar floating to Canadian dollar fixed.......... 196,528 -- 2007-2008 5.23% 5.92% (18,873)
Australian dollar floating to Australian dollar fixed...... 39,670 -- 2006 4.75% 7.81% (5,981)
British pound floating to British pound fixed.............. 289,819 -- 2008 6.04% 6.83% (32,083)
French franc floating to German mark floating.............. 175,311 -- 2006 3.56% 3.84% (2,815)
German mark floating to French franc fixed................. 87,833 -- 2003 3.79% 5.66% (7,566)
Cross-Currency Interest Rate Swaps:
US dollar fixed to Canadian dollar floating................ 181,728 20,955 1999-2010 6.82% 5.58% 29,476
US dollar floating to Canadian dollar fixed................ 193,901 9,861 2003 5.22% 5.53% 8,163
US dollar floating to Australian dollar fixed.............. 208,255 21,851 1999-2003 5.25% 6.14% 18,057
US dollar floating to Australian dollar floating........... 59,196 7,931 2000-2003 5.22% 4.80% 7,217
US dollar fixed to British pound fixed..................... 91,407 (7,238) 2002 8.72% 9.64% (7,636)
US dollar fixed to British pound floating.................. 295,352 (19,129) 2002-2004 8.38% 6.59% 15,587
US dollar fixed to French franc fixed...................... 300,000 36,678 2000-2007 6.29% 6.21% 22,465
US dollar fixed to French franc floating................... 150,000 15,654 2000-2007 6.90% 3.90% 26,956
US dollar floating to French franc fixed................... 117,833 (12,628) 2000 5.26% 4.23% (15,005)
US dollar fixed to German mark floating.................... 150,000 15,766 2003-2006 5.98% 3.48% 28,414
US dollar floating to Spanish peseta fixed................. 98,214 (5,899) 2003 5.26% 4.84% (11,106)
US dollar floating to Norwegian krone fixed................ 22,815 (64) 2003 5.26% 5.80% 72
Australian dollar fixed to US dollar floating.............. 88,141 (15,079) 1999-2000 6.14% 5.30% (13,880)
---------- -------- --------
$4,996,003 $ 68,659 $ 97,944
========== ======== ========
47
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's consolidated debt totaled $4,060,016 at a weighted average
rate of 6.83% at December 31, 1999, ($3,860,657 at a weighted average rate of
6.77% at December 31, 1998) excluding $188,123 of the lending subsidiary's debt.
After giving consideration to the interest rate and cross-currency interest rate
swaps, the weighted average rate of debt was 6.41% at December 31, 1999, and
6.16% at December 31, 1998, excluding the lending subsidiary's debt.
At December 31, 1999, the Company's debt and derivative instruments,
excluding the lending subsidiary's debt, consisted of approximately 61% of fixed
interest rate debt at a weighted average rate of 6.36% and approximately 39% of
floating interest rate debt at a weighted average rate of 6.49%. At December 31,
1998, the Company's total debt consisted of approximately 74% of fixed interest
rate debt at a weighted average rate of 6.17% and approximately 26% of floating
interest rate debt at a weighted average rate of 6.15%.
Approximately $1,931,119 and $2,112,526 of the Company's indebtedness was
denominated in foreign currencies after consideration of the derivative
instruments at December 31, 1999 and 1998, respectively. Interest rate swap
settlements are generally semi-annual and match the payment dates of the
underlying debt or related intercompany loans for the foreign operations being
hedged. The notional amounts of the cross-currency swaps are exchangeable in
accordance with the terms of the swap agreements: either at maturity for
non-amortizing swaps or according to defined amortization tables.
As of December 31, 1999 and 1998, $115,311 and $558,407, respectively, of
the interest rate swaps contained provisions that either terminate the swap or
convert the rate paid to a new index if certain interest rate conditions are
met. Maturities of notional amounts relating to derivative financial instruments
held on December 31, 1999, are as follows: 2000 -- $710,879; 2001 -- $150,000;
2002 -- $355,775; 2003 -- $875,671; 2004 -- $522,500; and
thereafter -- $1,385,502.
Subsequent to year end, the Company materially modified its
participation in derivative transactions by terminating or assigning away
certain interest rate swaps and all cross-currency interest rate swaps, noted in the tables, thereby
removing the Company's hedges of foreign exchange rate exposure. A total
notional value of $2,860,327 was eliminated in this process. The net proceeds
from these terminations and assignments totaled approximately $110,658, which was primarily
used to extinguish debt. These proceeds arehave been classified according to the
following components: approximately $21,849 was due to the Company as accrued interest
receivable, approximately $143,498 resulted from foreign exchange rate gains and approximately $54,689
resulted from interest rate losses.
The amount associated with the foreign exchange rate gains reduced the
corresponding amount due from counter partiescounterparties recorded in Deferred charges and
other assets. The amount associated with the interest rate losses will behas been
amortized into interest expense over the remaining term of the swap agreements
and will have a net effect of approximately $12,368 duringagreements.
Approximately $11,331 has been amortized into interest expense for the year
ended December 31, 2000.
The Company was not a party to any swap agreements at December 31, 2000
(representing a net asset of $122,581 at December 31, 1999), after having
terminated or assigned away all interest rate and cross-currency swaps during
the year then ended. Fair values were obtained from the counterparties to the
agreements and represent their estimate of the amount the Company would pay or
receive to terminate the swap agreements based upon the existing terms and
current market conditions.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities: An Amendment of FASB Statement 133," in accordance
with the extension provided for in SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." In accordance with these standards, the Company will
recognize a charge to income, net of applicable taxes, of approximately $7,500.
NOTE TEN
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
47
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents, trade receivables and accounts payable approximate fair values due
to the short-term maturities of these instruments. It is not practicable to
estimate the fair value of receivables due on cemetery contracts or prearranged
funeral contracts (other than prearranged funeral trust funds and cemetery
merchandise trust funds, and prearranged
funeral trust funds, see notes fourfive and six to the consolidated financial
statements) without incurring excessive costs because of the large number of
individual contracts with varying terms. The investments of the Company's
insurance subsidiaries are reported at fair value in the consolidated balance
sheet. Due to the decision by the Company to indefinitely suspend the operations
of the lending subsidiary, impairment charges have been recorded to reduceIn prior years, the carrying value of
certain loans to theirour lending subsidiary's receivables approximated fair value. Additionally, a provision
for loan
48
50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses has been recorded against certain other loans (see note eighteen tovalue, as the consolidated financial statements).
The Company has entered into various derivative financial instruments
(primarily swap agreements) with major financial institutions to hedge potential
exposures to interest rate and foreign exchange rate fluctuations. Fair values
were obtained from counterparties to the agreements, representing their
estimatesmajority of
the amountloan portfolio carries market rates of interest. In August 2000, the Company
would pay or receive to terminate each swap
agreement based upon existing terms and current market conditions. The net fair
valuesold the majority of the Company's various swap agreements was an assetassets of $122,581 and
$97,944its lending subsidiary. The remaining loan
portfolio at December 31, 1999 and 1998, respectively (see2000, had a net book value of $34,305 ($191,373 at
December 31, 1999). In addition, the Company had $10,494 in outstanding undrawn
commitments at December 31, 2000 ($46,885 at December 31, 1999). See note nine
to the consolidated financial statements). The fair value ofstatements regarding the Company's swap
agreements may vary substantially with changes in interest and currency exchange
rates. The Company's credit exposure is limited to the sum of the fair value of
positions that have become favorable to the Company and any accrued interest
receivable due from counterparties. Potential credit exposure is dependent upon
the maximum adverse impact of interest and currency movement. Such potential
credit exposure is minimized by selection of counterparties from a limited group
of high quality institutions and inclusion of certain contract provisions.
Management believes that any credit exposure with respect to its favorable
positions at December 31, 1999 is minimal (see note nine to the consolidatedderivative
financial statements).instruments.
The fair market value of the Company's debt at December 31 was as follows:
2000 1999 1998
---------- ----------
Bank revolving credit agreements and commercial paper.......paper................. $ 631,800 $1,179,704 $ 650,596
6.375% notes due in 2000.................................... -- 140,550 151,598
6.75% notes due in 2001..................................... 117,465 133,050 153,196
8.72% amortizing notes due in 2002.......................... 28,506 70,944 123,344
8.375% notes due in 2004.................................... 32,918 42,872 58,093
7.375% notes due in 2004.................................... 157,500 203,500 266,397
6.0% notes due in 2005...................................... 343,360 441,600 596,618
7.2% notes due in 2006...................................... 86,250 114,300 159,900
6.875% notes due in 2007.................................... 85,500 107,400 157,774
6.5% notes due in 2008...................................... 112,000 137,200 204,842
7.7% notes due in 2009...................................... 110,000 143,400 222,220
6.95% amortizing notes due in 2010.......................... 27,061 38,104 60,392
Floating rate notes due in 2011 (putable in 1999)........... -- 200,000
7.875% debentures due in 2013............................... 51,230 32,152 62,885
7.0% notes due in 2015 (putable in 2002).................... 137,640 254,100 333,037
6.3% notes due in 2020 (putable in 2003).................... 204,000 244,800 302,826
Medium term notes, maturities through 2019, fixed average
interest rate of 9.32%.................................... 20,299 24,152 42,711
Convertible debentures...................................... 28,578 59,672 65,828
Mortgage notes and other debt............................... 86,219 136,368 218,863
---------- ----------
Total debt........................................ $2,260,326 $3,503,868 $4,031,120
========== ==========
The fair value of the fixed rate long-term borrowings was estimated by
discounting the future cash flows, including interest payments, using rates
currently available for debt of similar terms and maturity, based on the
Company's credit standing and other market factors. The carryingmarket value of
convertible securities has been estimated based on the respective shares of
Company common stock into which such securities may be converted. The carryingCompany
has historically reported the market value of the Company's revolvingits bank credit agreements approximate fairat book
value because the rates onsince such agreements arehave variable interest rates. However, at December
31, 2000, the fair market value of these credit agreements is less than book
value based on currentupon existing market conditions.
49
51
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)pricing and terms for comparable bank credit
agreements.
The Company grants credit in the normal course of business, and the credit
risk with respect to these funeral, cemetery and prearranged funeral receivables
due from customers is generally considered minimal because of the wide
dispersion of the customers served. Procedures are in effect to monitor the
creditworthiness of customers, and bad debts have not been significant in
relation to the volume of revenues.
48
50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Customer payments on prearranged funeral contracts that are placed into
state regulated trusts, or used to pay premiums on life insurance contracts or
bonded generally do not subject the Company to collection risk. Insurance funded
contracts are subject to supervision by state insurance departments and are
protected in the majority of states by insurance guaranty acts.
The Company's lending subsidiary is a party to financial instruments with
potential credit risk. The financial instruments result from loans made in the
normal course of business to meet the financing needs of borrowers who are
principally independent funeral home and cemetery operators. These financial
instruments also include loan commitments of approximately $46,885 at December
31, 1999 ($31,449 at December 31, 1998) to extend credit. The face value of the
lending subsidiary's total loans receivable at December 31, 1999 was
approximately $246,818 ($191,373 net of the provision for loan losses and
impairment charges) and $269,529 at December 31, 1998. The lending subsidiary
evaluates each borrower's creditworthiness, and the amount loaned and collateral
obtained, if any, is determined by this evaluation (see note eighteen to the
consolidated financial statements).
NOTE ELEVEN
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
2000......................................................2001...................................................... $ 57,112
2001...................................................... 50,45960,678
2002...................................................... 43,22551,893
2003...................................................... 29,47940,287
2004...................................................... 22,53234,060
2005...................................................... 25,078
Thereafter................................................ 96,61583,614
--------
Subtotal........................................ 299,422295,610
Less:
Subleases............................................... (2,306)(851)
--------
Total........................................... $297,116$294,759
========
The majority of these operating leases contain one of the following
options: (a) purchase the property at the fair value at date of exercise, (b)
purchase the property for a value determined at the inception of the lease or
(c) renew for the fair rental value at the end of the primary term of the lease.
Some of the equipment leases contain residual value exposures. Rental expense
was $94,629, $88,437 $69,196, and $71,225$69,196 for the three years ended December 31, 2000, 1999 1998 and
1997,1998, respectively.
The Company has entered into management, consultative and noncompetition
agreements (generally for five to ten years) with certain officers and employees
of the Company and former owners of businesses acquired. During the three years ended
December 31, 2000, 1999 and 1998, $75,141, $104,650 and 1997, respectively, $104,650, $74,578 and
$68,667 werewas charged to
expense.expense, respectively. At December 31, 1999,2000, the maximum estimated future
commitment under all agreements with a remaining term in excess of one year is
$182,122,$243,612, including $7,518$5,329 with certain officers of the Company. In December
1999, the Company modified several of the above agreements as part of a restructuring plancost
rationalization program (see note eighteenseventeen to the consolidated financial
statements).
50
52
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a minimum purchase agreement with a major casket
manufacturer for its North American operations with an original commitment of
$750,000 over six years. The agreement contains provisions to increase the
minimum annual purchases for normal price increases and for the maintenance of
product quality.increases. In addition, the contract
provides for a one-year extension period in which the Company is required to
purchase any remaining commitment that exists at the end of the original term.
The remaining commitment over the next fivefour years is $660,000 (2000 -- $105,000; 2001$555,000 (2001 -- $115,000;
2002 -- $130,000; 2003 -- $145,000; 2004 -- $165,000).
The Company had $30,042 in unsecured letters of credit outstanding at
December 31, 1999. These letters of credit are primarily to guarantee funding of
certain insurance claims and a Company-sponsored retirement plan.
Subsequent to year end, the Company was required to place cash on deposit
in restricted accounts at financial institutions as security for various credit
instruments. The first restricted account is related to two embedded options
associated with the Company's 6.30% senior notes (see note eight to the
consolidated financial statements). The second restricted account is related to
a letter of credit. The combined value of these restricted investments was
$18,707 at March 15, 2000.
NOTE TWELVE
CONVERTIBLE PREFERRED SECURITIES OF SCI FINANCE LLC
During 1997, the Company redeemed all the outstanding shares of its
convertible preferred shares into 11,178,522 shares of Company common stock and
cash.
NOTE THIRTEEN
STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock, $1
per share par value. No shares were issued as of December 31, 1999.2000. At December
31, 1999,2000, 500,000,000 common shares of $1 par value were authorized, 272,064,618272,507,010
shares were issued and outstanding (259,201,104(272,064,618 at December 31, 1998)1999), net of
2,792,5032,502,190 shares held, at cost,par, in treasury (68,373(2,792,503 at December 31, 1998)1999).
49
51
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the rights holders to purchase certain securities of the Company or the
acquiring company. The rights, which are redeemable by the Company for $.01 per
right, expire in July 2008 unless extended.
The Company has benefit plans whereby shares of the Company's common stock
may be issued pursuant to the exercise of stock options granted to officers and
key employees. The Company's Amended 1996 Incentive Plan reserves 24,000,000
shares of common stock for outstanding and future awards of stock options, restricted stock and
other stock based awards to officers and key employees of the Company. The
Company's 1996 NonqualifiedNon-qualified Incentive Plan reserves 6,700,000 shares of common
stock for outstanding and future awards of nonqualified stock options to employees who are not
officers of the Company. Under the Company's 1995 Stock Plan for Non-Employee
Directors, non-employee directors automatically receive yearly awards of
restricted stock through the year 2000. Each award is for 3,000 shares of common
stock and vests after one year of service.
The plans allow for options to be granted as either non-qualified or
incentive stock options. The options are granted with an exercise price equal to
the then current market price of the Company's common stock. The options are
generally exercisable at a rate of 33 1/3% each year unless, at the discretion
of the Company's Compensation Committee of the Board of Directors, alternative
vesting methods are allowed. At December 31, 19992000 and 1998,1999, 15,713,000 options
had been granted to officers and key employees of the Company which contain
alternative vesting methods. Under the alternative vesting methods, partial or
full accelerated vesting will occur when the price of Company common stock
reaches pre-determined prices. If the pre-determined stock prices are not met in
the required time period, the options will fully vest in periods ranging 51
53
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from
eight to ten years from date of grant. At December 31, 2000 and 1999, 11,187,894
and 1998,
16,903,290 and 4,783,558 shares, respectively, were reserved for future option grants
under all stock option plans.
The following tables set forth certain stock option information:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at December 31, 1996........................... 13,049,269 $15.091997.......................... 19,313,451 $20.81
---------- ------
Granted.................................................. 7,144,150 30.37
Exercised................................................ (775,716) 12.51
Cancelled................................................ (104,252) 22.85
---------- ------
Outstanding at December 31, 1997........................... 19,313,451 20.81
---------- ------
Granted..................................................Granted................................................. 2,953,553 36.66
Exercised................................................Exercised............................................... (4,785,496) 13.50
Cancelled................................................Cancelled............................................... (102,992) 26.62
---------- ------
Outstanding at December 31, 1998...........................1998.......................... 17,378,516 25.48
---------- ------
Granted..................................................Granted................................................. 5,080,339 17.06
Assumed..................................................Assumed................................................. 1,199,273 23.65
Exercised................................................Exercised............................................... (73,181) 14.74
Cancelled................................................Cancelled............................................... (3,691,837) 24.94
---------- ------
Outstanding at December 31, 1999...........................1999.......................... 19,893,110 $23.3623.36
---------- ------
Granted................................................. 7,288,650 4.89
Exercised............................................... -- --
Cancelled............................................... (1,887,967) 24.92
---------- ------
Outstanding at December 31, 2000.......................... 25,293,793 $17.92
========== ======
Exercisable at December 31, 1999...........................2000.......................... 12,262,434 $21.45
========== ======
Exercisable at December 31, 1999.......................... 8,575,226 $20.42
========== ======
Exercisable at December 31, 1998...........................1998.......................... 6,435,679 $17.23
========== ======
Exercisable at December 31, 1997........................... 9,488,214 $14.07
========== ======
50
52
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------------------------------------------------- -----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICE AT 12/31/99DECEMBER 31, 2000 CONTRACTUAL LIFE PRICE AT 12/31/99DECEMBER 31, 2000 PRICE
- -------------- ---------------------------- ---------------- --------- ---------------------------- ---------
$ 0.00 -- 9.41 91,684 0.17,137,200 6.2 $ 9.41 91,6844.90 -- $ 9.41--
9.41 -- 20.00 9,651,896 6.7 15.83 4,676,675 14.499,306,162 5.1 15.84 6,976,216 15.46
20.00 -- 30.00 3,866,367 4.1 25.77 2,618,480 24.763,406,824 2.4 25.62 2,994,279 25.34
30.00 -- 40.00 6,220,663 5.5 33.57 1,180,226 34.985,412,941 4.1 33.69 2,276,609 34.55
40.00 -- 50.00 62,500 4.6 41.53 8,16130,666 2.8 41.75 15,330 41.96
---------- --- ------ ------------------- ------
$ 9.410.00 -- 50.00 19,893,110 5.8 $23.36 8,575,226 $20.4225,293,793 4.8 $17.92 12,262,434 $21.45
========== === ====== =================== ======
For the three years ended December 31, 2000, 1999 30,000,and 1998, respectively, 33,000,
30,000, and 73,00030,000 shares of restricted stock were awarded at average fair
values of $4.03, $19.06 and $40.88, and $33.35, respectively.
The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the rights holders to purchase certain securities of the Company or the
acquiring company. The rights, which are redeemable by the Company for $.01 per
right, expire in July 2008 unless extended.
52
54
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had elected to recognize compensation cost for its option
plans based on the fair value at the grant dates for awards under those plans,
net income (loss) and earnings (loss) per share would have been changed for the
years ended December 31 to the pro forma amounts indicated below:
2000 1999 1998
1997
------------------- -------- --------
Net income (loss):
As reported...................................... $(1,343,251) $(32,412) $342,142
$333,750
Pro forma........................................ (1,367,986) (64,015) 318,057
315,733
Basic earnings (loss) per share:
As reported...................................... $ (4.93) $ (.12) $ 1.34
$ 1.36
Pro forma........................................ (5.03) (.23) 1.24
1.30
Diluted earnings (loss) per share:
As reported...................................... $ (.12)(4.93) $ 1.31(.12) $ 1.31
Pro forma........................................ (5.02) (.23) 1.22 1.25
The fair value of the Company's stock options used to compute pro forma net
income (loss) and earnings (loss) per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 2000, 1999 1998 and 1997,1998, respectively:
dividend yield of 0%, 1%0%, and 1%;, expected volatility of 41.6%57.2%, 28.3%41.6% and 26.6%;28.3%,
a risk free interest rate of 5.5%6.7%, 5.5% and 6.5%5.5%; and an expected holding period
of 7 7, and 8years for all three years.
51
53
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's components of other comprehensive income (loss) at December
31 are as follows:
ACCUMULATED
FOREIGN CURRENCY UNREALIZED GAIN MINIMUM OTHER
TRANSLATION (LOSSES) ON PENSION LIABILITY COMPREHENSIVE
ADJUSTMENT SECURITIES ADJUSTMENT INCOME (LOSS)
---------------- --------------- ----------------- -------------
Balance at December 31,
1997........................ $ (7,480) $ 3,961 $ -- $ (3,519)
Activity in 1998............ 8,748 10,149 -- 18,897
--------- -------- -------- ---------
Balance at December 31,
1998........................ 1,268 14,110 -- 15,378
Activity in 1999............ (39,036) (36,332) -- (75,368)
--------- -------- -------- ---------
Balance at December 31,
1999........................ (37,768) (22,222) -- (59,990)
Activity in 2000............ (202,709) (4,792) (12,724) (220,225)
Reclassification adjustment
for sales of discontinued
operations............... 16,044 27,014 -- 43,058
--------- -------- -------- ---------
Balance at December 31,
2000........................ $(224,433) $ -- $(12,724) $(237,157)
========= ======== ======== =========
NOTE FOURTEENTHIRTEEN
RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all
United States employees, a supplemental retirement plan for certain current and
former key employees (SERP), a supplemental retirement plan for officers and
certain key employees (Senior SERP), and a retirement plan for non-employee
directors (Directors' Plan). ForIn 2000, the Company also established a 401(k)
employee savings plan.
Effective December 31, 2000, the Company curtailed its United States
noncontributory, defined pension plan and its supplemental retirement plans for
certain current and former key employees, officers and non-employee directors.
This curtailment occurred subsequent to the valuation of the plans; therefore,
the impact of the curtailment will not be recognized until the first quarter of
2001 and is not expected to be material.
Retirement benefits for the United States noncontributory pension plan retirement benefits are generally based
on years of service and compensation. The Company annually
contributes to the pension planThis contribution is an actuarially
determined amount consistent with the funding requirements of the Employee
Retirement Income Security Act of 1974. Assets of the pension plan consist
primarily of bank money market funds, fixed income investments and marketable
equity securities. The marketable equity securities include shares of Company
common stock with a value of $2,292$578 and $12,575$2,292 at December 31, 19992000 and 1998,1999,
respectively.
Retirement benefits under the SERP are based on years of service and
average monthly compensation, reduced by benefits under the pension plan and
Social Security. The Senior SERP provides retirement benefits based on years of
service and position. The Directors' Plan will provideprovides for an annual benefit to
directors following their retirement, based on a vesting schedule. The Company
purchased various life insurance policies on the participants in the SERP,
Senior SERP and Directors' Plan with the intent to use the proceeds or any cash
value buildup from such policies to assist in funding, at least to the extent of
such assets, the plans' funding requirements.
The funding status of the SERP,
Senior SERP, and Directors' Plan requires the Company to recognize an additional
liability in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
At December 31, 1999 and 1998, the additional minimum liability was $9,999 and
$14,513, respectively.
The Company's United Kingdom operation has a defined benefit pension plan.
The Company and employees contribute to the plan consistent with United Kingdom
funding requirements. Most other foreign employees are covered by various
foreign government mandated or defined contribution plans which are adequately
funded and are not considered materialsignificant to the financial condition or results
of operations of the
53
55
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company. The plans' liabilities and their related costs are
computed in accordance with the laws of the individual countries and appropriate
actuarial practices.
52
54
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net periodic benefit cost for the years ended December 31
were as follows:
2000 1999 1998
1997
------- ------- --------------- -------- --------
Service cost -- benefits earned during the period....... $16,378 $14,595 $10,837period.... $ 15,941 $ 16,378 $ 14,595
Interest cost on projected benefit obligation...........obligation........ 14,965 12,962 13,039 12,144
Return on plan assets...................................assets................................ (13,688) (13,576) (14,035)
(12,359)
Settlement charge.......................................charge.................................... -- 1,073 -- --
Amortization of unrecognized transition asset...........asset........ (440) (469) (481) (475)
Amortization of prior service cost......................cost................... 1,126 1,115 1,106
1,096
Recognized net loss.....................................(gain) loss........................... (449) 390 215
2,333
------- ------- -------
$17,873 $14,439 $13,576
======= ======= =======-------- -------- --------
$ 17,455 $ 17,873 $ 14,439
======== ======== ========
The Plans' funded status at December 31 were as follows (funded plan based(based on
valuations as of September 30):
2000 1999
1998
--------------------- ---------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
-------- ---------- --------
----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................................... $150,320 $ 43,508 $129,974 $ 39,840year..................... $193,415 $193,828
Service cost............................. 15,613 765 13,690 905cost................................................ 15,941 16,378
Contributions paid by participants.......participants.......................... 1,392 1,373
-- 1,182 --
Interest cost............................ 10,441 2,521 10,196 2,843cost............................................... 14,965 12,962
Plan amendments..........................amendments............................................. 132 157 -- 177 --
Actuarial (gain) loss.................... (5,578) (1,795) 9,051 2,055loss....................................... 775 (7,373)
Benefits paid............................ (14,464) (8,493) (14,123) (2,135)paid............................................... (24,507) (22,957)
Effect of foreign currency...............currency.................................. (3,136) (953) -- 173 --
-------- --------
-------- --------
Benefit obligation at end of year........ $156,909 $ 36,506 $150,320 $ 43,508
======== ========year........................... $198,977 $193,415
======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year................................... $151,381 $ -- $160,115 $ --year.............. $158,892 $151,380
Actual return on plan assets.............assets................................ 2,910 9,766
-- 1,451 --
Employer contributions................... 11,816 8,493 2,555 2,135contributions...................................... 17,788 20,309
Contributions paid by participants.......participants.......................... 1,392 1,373
-- 1,182 --
Benefits paid............................ (14,464) (8,493) (14,123) (2,135)paid............................................... (24,507) (22,957)
Effect of foreign currency............... (980) -- 201 --
-------- --------currency.................................. (3,709) (979)
-------- --------
Fair value of plan assets at end of year...................................year.................... $152,766 $158,892 $ -- $151,381 $ --
======== ========
======== ========
Funded status of plan.................... $ 1,983 $(36,506) $ 1,061 $(43,508)plan....................................... $(46,211) $(34,523)
Fourth quarter contributions.............contributions................................ 3,870 474 -- 9,538 --
Unrecognized actuarial loss.............. 11,107 4,621 13,162 7,695loss................................. 27,001 15,728
Unrecognized prior service cost.......... (495) 5,451 (984) 6,907cost............................. 3,932 4,956
Unrecognized net transition asset........asset........................... (1,759) (2,346) -- (2,884) --
Effect of foreign currency...............currency.................................. 21 (3)
-- 2-------- --------
Net amount recognized....................................... $(13,146) $(15,714)
======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET:
Prepaid benefit cost........................................ $ 6,370 $ 10,719
Accrued benefit liability................................... (42,885) (31,884)
Intangible asset............................................ 3,995 5,451
Accumulated other comprehensive income...................... 19,374 --
-------- --------
-------- --------
Prepaid (accrued) benefit cost........... $ 10,720 $(26,434) $ 19,895 $(28,906)
======== ========Net amount recognized....................................... $(13,146) $(15,714)
======== ========
5453
5655
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plans' weighted-average assumptions were as follows:
2000 1999
1998
------------------- -------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------ ---------- ------ -------------- ----
Discount rate used to determine obligations... 7.43% 7.75% 6.56% 6.75%obligations................. 7.64% 7.49%
Assumed rate of compensation increase.........increase....................... 4.86 4.91 5.50 5.06 5.50
Assumed rate of return on plan assets.........assets....................... 8.93 8.94 -- 8.94 --
During 2000, the Company established an employee savings plan that
qualifies under section 401(k) of the Internal Revenue Code for the exclusive
benefit of their United States employees. Under the plan, participating
employees may defer a portion of their pretax and/or after tax income in
accordance with specified guidelines up to a maximum of 15%. The Company then
matches a percentage of the employee contributions through contributions of the
Company's common stock. For 2000, the Company match was 25% up to the first 6%
of employee contributions. The total value of Company matched common stock
contributions in 2000 was $812. Subsequent to year end, the Company increased
its employer match for the 401(k) plan based on years of service to a range of
75% to 135% up to the first 6% of deferred contributions.
NOTE FIFTEENFOURTEEN
SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief decision making group. This group is comprised of senior
management who are responsible for the allocation of resources and assessment of
operating performance.
Because theThe Company's operations are product based and geographically based the Company'sand
primary reportable operating segments presented below are
based on products or services and include funeral cemetery, and
insurancecemetery operations. The Company's geographic segments include North America,
Europe and other foreign.Other Foreign. The Company conducts funeral and cemetery operations
in all geographical regionsregions. In 2000, the Company completed sales of its wholly
owned insurance operations. As such, these operations have been reclassified and
insurancereported as discontinued operations in North America and Europe (see note twofour to the consolidated financial
statements).
5554
5756
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's reportable segment information is as follows:
REPORTABLE
FUNERAL CEMETERY INSURANCE SEGMENTS
----------
---------- ---------- -----------
Revenues from external customers:
1999.............................. $2,039,3482000.......................................... $1,911,969 $ 641,267 $ 2,553,236
1999.......................................... 2,039,348 947,852 $ 313,855 $ 3,301,055
1998..............................2,987,200
1998.......................................... 1,829,136 846,601 178,773 2,854,510
1997.............................. 1,720,291 724,862 74,175 2,519,3282,675,737
Depreciation and amortization:
1999..............................2000.......................................... $ 157,174 $ 40,162 $ 197,336
1999.......................................... 174,150 $ 56,725 $ 6,055 $ 236,930
1998..............................230,875
1998.......................................... 152,396 28,584 4,947 185,927
1997.............................. 123,652 21,611 3,707 148,970
Income from operations:
1999..............................180,980
Operating income:
2000.......................................... $ 266,915 $ 58,432 $ 325,347
1999.......................................... 366,494 $ 247,719 $ 29,013 $ 643,226
1998..............................614,213
1998.......................................... 384,607 306,161 18,561 709,329
1997.............................. 401,371 271,897 6,712 679,980690,768
Total assets:
1999.............................. $7,546,186 $4,661,780 $1,834,957 $14,042,923
1998..............................2000.......................................... $7,865,099 $4,464,622 $12,329,721
1999.......................................... 7,546,186 4,661,780 12,207,966
1998.......................................... 6,944,480 4,012,685 1,750,840 12,708,005
1997.............................. 6,124,463 3,309,431 637,312 10,071,20610,957,165
Capital expenditures (1):
1999..............................expenditures:
2000.......................................... $ 40,660 $ 43,943 $ 84,603
1999.......................................... 905,790 $ 432,083 $ 4,350 $ 1,342,223
1998..............................1,337,873
1998.......................................... 590,065 369,212 2,029 961,306
1997.............................. 487,802 404,100 592 892,494959,277
Operating locations at year end (unaudited):
1999..............................2000.......................................... 3,751 629 4,380
1999.......................................... 3,961 585 -- 4,546
1998..............................1998.......................................... 3,578 488 -- 4,066
1997.............................. 3,244 441 -- 3,685
- ---------------
(1) Capital expenditures include $1,159,929, $729,515 and $676,662 for the three
years ended December 31, 1999, 1998 and 1997, respectively, for purchases of
property, plant and equipment, cemetery property, and names and reputations
of acquired businesses.
5655
5857
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles certain reportable segment amounts to the
Company's corresponding consolidated amounts:
REPORTABLE LENDING
SEGMENTS SUBSIDIARY CORPORATE CONSOLIDATED
----------- ---------- --------- ------------
Revenues from external customers:
1999................................2000................................ $ 3,301,0552,553,236 $ 20,75811,494 $ -- $ 3,321,8132,564,730
1999................................ 2,987,200 20,758 -- 3,007,958
1998................................ 2,854,5102,675,737 20,580 -- 2,875,090
1997................................ 2,519,328 16,537 -- 2,535,8652,696,317
Depreciation and amortization:
1999................................2000................................ $ 236,930197,336 $ -- $ 26,695 $ 224,031
1999................................ 230,875 -- 15,215 $ 252,145246,090
1998................................ 185,927180,980 7 16,343 202,277
1997................................ 148,970 5 8,575 157,550197,330
Total assets:assets(1):
2000................................ $12,329,721 $ 40,120 $528,628 $12,898,469
1999................................ $14,042,923 $193,784 $364,894 $14,601,60112,207,966 193,784 576,480 12,978,230
1998................................ 12,708,00510,957,165 271,448 286,705 13,266,158
1997................................ 10,071,206 200,562 243,162 10,514,930501,203 11,729,816
Capital expenditures (1)expenditures(2):
1999................................2000................................ $ 1,342,22384,603 $ -- $ 13,192 $ 97,795
1999................................ 1,337,873 -- 29,187 $ 1,371,4101,367,060
1998................................ 961,306959,277 180 21,253 982,739
1997................................ 892,494 2 14,698 907,194980,710
- ---------------
(1) CapitalTotal assets includes the net assets of discontinued operations as a
component of corporate assets.
(2) Consolidated capital expenditures include $14,425, $1,159,929 $729,515 and $676,662$728,885
for the three years ended December 31, 2000, 1999 1998 and 1997,1998, respectively, for
purchases of property, plant and equipment, cemetery property, and names and
reputations of acquired businesses. The 2000 amount above is related to the
Company acquiring by deed in lieu of foreclosure the collateral underlying
certain loans from the Company's lending subsidiary. Excluding these capital
expenditures related to acquired businesses which are included in
Acquisitions, net of cash acquired in the Cash flows from investing
activities in the consolidated statement of cash flows, the Company had
consolidated capital expenditures of $83,370, $207,131 and $251,825 for the
years ended December 31, 2000, 1999 and 1998, respectively.
The following table reconciles operating income from reportable segment income (loss) from
operations shown abovesegments to
the Company's consolidated income (loss) from continuing operations before
income taxes, extraordinary gains and extraordinary items:cumulative effect of accounting change:
2000 1999 1998 1997
--------- --------- ---------
Income from operations:Operating Income:
Reportable segments............................. $ 643,226325,347 $ 709,329614,213 $ 679,980690,768
Lending subsidiary operating income (loss) from
operations......................................... 2,295 (29,467) 9,441 7,632
General and administrative expenses............. (79,932) (82,585) (66,839)
(66,781)
Restructuring charges...........................and non-recurring charges......... (461,072) (362,428) --
--------- --------- ---------
ConsolidatedOperating income (loss) from operations............... 168,746 651,931 620,831continuing
operations...................................... (213,362) 139,733 633,370
Interest expense................................ (238,195)(281,548) (238,185) (177,053) (136,720)
Dividends on preferred securities of SCI Finance
LLC.......................................... -- -- (4,382)
Other income.................................... 34,636 31,759 43,649
100,244Loss on sale of investment...................... (56,704) -- --
--------- --------- ---------
Income (loss) from continuing operations before
income taxes, extraordinary gains and extraordinary items.............................cumulative
effect of accounting change..................... $(516,978) $ (37,690)(66,693) $ 518,527 $ 579,973499,966
========= ========= =========
56
58
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, the Company realigned its management of geographic segments to
focus on total European operations. Although total amounts reported have not
changed, the Company has made certain reclassifications in all years in order to
properly reflect the results of these geographic segments.
57
59
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company geographic segment information was as follows:
NORTH OTHER
AMERICA EUROPE FOREIGN TOTAL
---------- ---------- -------- ----------
Revenues from external customers:
1999.................................. $2,265,7882000................................ $1,737,014 $ 883,918 $172,107 $3,321,813
1998.................................. 1,878,103 888,037686,199 $141,517 $2,564,730
1999................................ 2,021,282 814,569 172,107 3,007,958
1998................................ 1,796,271 791,096 108,950 2,875,090
1997.................................. 1,660,319 779,735 95,811 2,535,865
Income from operations:
1999..................................2,696,317
Operating income (loss)(1):
2000................................ $ 112,605(251,705) $ 27,12419,823 $ 18,520 $ (213,362)
1999................................ 96,521 14,195 29,017 $ 168,746
1998.................................. 529,158 107,165139,733
1998................................ 521,286 96,476 15,608 651,931
1997.................................. 492,945 101,703 26,183 620,831633,370
Long-lived assets:
1999.................................. $5,816,477 $1,453,547 $556,234 $7,826,258
1998.................................. 4,846,151 1,557,8822000................................ $4,905,990 $1,154,260 $521,178 $6,581,428
1999................................ 5,407,022 1,441,113 556,234 7,404,369
1998................................ 4,495,546 1,541,384 421,485 6,825,518
1997.................................. 3,979,614 1,343,298 196,656 5,519,5686,458,415
Operating locations at year end
(unaudited):
1999..................................2000................................ 2,256 1,942 182 4,380
1999................................ 2,291 2,071 184 4,546
1998..................................1998................................ 1,843 2,054 169 4,066
1997.................................. 1,720 1,813 152 3,685
Income from operations- ---------------
(1) Operating income (loss) includes $461,072 and $362,428 in restructuring
and nonrecurring
charges in December 31, 2000 and 1999, of whichrespectively. In 2000 and 1999,
respectively, $439,632 and $279,078 relates to North America, $20,424 and
$75,898 relates to Europe and $1,016 and $7,452 relates to other foreign.Other Foreign.
Included in the North American figures above are the following United
States amounts:
2000 1999 1998 1997
---------- ---------- ----------
Revenues from external customers................. $2,185,146 $1,800,605 $1,588,831
Income from operations........................... 98,018 512,463 471,337$1,657,553 $1,940,640 $1,718,773
Operating income (loss).......................... $ (168,655) $ 81,934 $ 504,591
Long-lived assets................................ 5,450,461 4,513,827 3,664,194$4,648,778 $5,041,006 $4,163,222
Operating locations at year end (unaudited)...... 2,092 2,137 1,686 1,574
Included in the European figures above are the following French amounts:
2000 1999 1998
1997
-------- ------------------ --------
Revenues from external customers.................... $574,979customers.................. $415,615 $505,630 $524,418
Operating income (loss)........................... $ 621,359 $554,648
Income from operations.............................. 11,069 71,499 55,3329,391 $ (1,860) $ 60,810
Long-lived assets................................... 480,966 497,477 440,744assets................................. $344,369 $468,532 $480,979
Operating locations at year end (unaudited)................ 1,169 1,236 1,214 1,101
5857
6059
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEENFIFTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts was as follows:
DECEMBER 31,
-----------------------
2000 1999 1998
---------- ----------
Cash and cash equivalents:
Cash...................................................... $ 43,42236,309 $ 80,78232,116
Commercial paper and temporary investments................ 44,799 277,42811,600 25,698
---------- ----------
$ 88,22147,909 $ 358,21057,814
========== ==========
Receivables and allowances:
Current:
Trade accounts......................................... $ 329,104276,747 $ 336,213329,104
Cemetery contracts..................................... 255,815 294,893 225,449
Loans and other........................................ 93,368 101,444other notes receivable....................... 23,486 73,510
---------- ----------
717,365 663,106556,048 697,507
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 64,852 77,080 53,292
Unearned finance charges............................... 41,207 35,158 44,262
---------- ----------
106,059 112,238 97,554
---------- ----------
$ 605,127449,989 $ 565,552585,269
========== ==========
Long-term:
Cemetery contracts..................................... $ 591,489653,975 $ 534,801591,489
Trusted cemetery merchandise sales..................... 886,270 800,306 613,917
Loans and other........................................ 355,517 360,776other notes receivable....................... 149,200 325,324
---------- ----------
1,747,312 1,509,4941,689,445 1,717,119
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 272,865 97,285 38,707
Unearned finance charges............................... 87,205 87,609 62,711
---------- ----------
360,070 184,894 101,418
---------- ----------
$1,562,418 $1,408,076$1,329,375 $1,532,225
========== ==========
5958
6160
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rates on cemetery contracts and loans and other notes receivable
range from 7.0%3.5% to 14.5% at December 31, 1999 (3.2%2000 (7.0% to 15.7%14.5% at December 31,
1998)1999). Included in long-term loans and other notes receivable at December 31,
1999,2000, are $10,392$445 in notes with officers, employees and former employees of the
Company ($15,05410,392 at December 31, 1998)1999), the majority of which are collateralized
by real estate, and $19,796$4,786 in notes with other related parties ($28,32319,796 at
December 31, 1998)1999).
DECEMBER 31,
-----------------------
2000 1999 1998
---------- ----------
Cemetery property:
Undeveloped land.......................................... $1,840,772 $1,913,904 $1,512,198
Developed land, lawn crypts and mausoleums................ 185,712 268,506 523,699
---------- ----------
$2,026,484 $2,182,410 $2,035,897
========== ==========
Property, plant and equipment:
Land...................................................... $ 446,668353,144 $ 441,897446,668
Buildings and improvements................................ 1,401,996 1,408,424 1,304,426
Operating equipment....................................... 552,162 514,865484,569 547,594
Leasehold improvements.................................... 59,937 61,237 52,613
---------- ----------
2,468,491 2,313,8012,299,646 2,463,923
Less: accumulated depreciation............................ (586,966) (488,822)(624,383) (583,944)
---------- ----------
$1,881,525 $1,824,979$1,675,263 $1,879,979
========== ==========
Accounts payable and accrued liabilities:
Trade payables............................................ $ 103,24291,834 $ 111,518
Dividends................................................. -- 24,333102,204
Payroll................................................... 95,633 75,08592,416 95,222
Interest.................................................. 54,471 61,881
44,414
Insurance................................................. 50,358 46,940 70,432
Bank overdraft............................................ 30,924 24,566
19,759
Restructuring reserve.....................................charge balance.............................. 47,803 89,812
--
Other..................................................... 167,773 106,813133,549 156,126
---------- ----------
$ 589,847501,355 $ 452,354576,751
========== ==========
NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
1997
-------- ------ -------- -------
Common stock issued under restricted stock plans............plans...... $ 133 $ 410 $1,196 $ 2,4051,196
Minimum liability under retirement plans....................plans.............. (12,724) -- (535) (4,097)
Debenture conversions to common stock.......................stock................. -- 766 2,594 6,417
Common stock issued in acquisitions.........................acquisitions................... 247 565,831 97,124 83,173
Debt issued in acquisitions................................. -- 28,560 21,325
Conversion of preferred securities of SCI Finance LLC.......acquisitions........................... -- -- 167,91128,560
6059
6261
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SEVENTEENSIXTEEN
EARNINGS PER SHARE
The basic and diluted per share computations for income (loss) from
continuing operations before extraordinary itemgains and cumulative effect of
accounting change were for the years ended December 31 as follows:
2000 1999 1998
1997------------ ----------- -----------
-----------
(THOUSANDS,(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Income (numerator):
Income (loss) from continuing operations before
extraordinary itemsgains and cumulative effect of
accounting change -- basic.................................. $(34,297) $342,142 $374,552basic..................... $(425,523) $(51,224) $331,561
After tax interest on convertible debentures.......debentures...... 190 408 1,368
4,611
----------------- -------- --------
Income (loss) from continuing operations before
extraordinary itemgains and cumulative effect of
accounting change -- diluted................................. $(33,889) $343,510 $379,163
========diluted................... $(425,333) $(50,816) $332,929
========= ======== ========
Shares (denominator):
Shares -- basic....................................basic................................... 272,172 272,281 256,271 245,470
Stock options and warrants......................warrants........................ 23 673 4,290
4,827
Convertible debentures..........................debentures............................ 349 838 1,959
2,212
Convertible preferred securities of SCI Finance
LLC........................................... -- -- 5,272
----------------- -------- --------
Shares -- diluted..................................diluted................................. 272,544 273,792 262,520
257,781
================= ======== ========
Earnings (loss) per share from continuing operations
before extraordinary items:
Basic..............................................gains and cumulative effect
of accounting change:
Basic............................................. $ (.13)(1.56) $ 1.34(.19) $ 1.53
Diluted............................................1.30
Diluted........................................... $ (.13)(1.56) $ 1.31(.19) $ 1.471.27
The computation of diluted earnings per share excludes outstanding stock
options with exercise prices greater than the average market price of the
Company's common stock for the year, because the inclusion of such options would
be antidilutive. The number of antidilutive options that were excluded from
diluted earnings per share and could potentially dilute basic earnings per share
in the future were 25,271, 19,220 and 13,089 shares in 2000, 1999 and 1998,
respectively. In addition, diluted earnings per share excludes 1,717, 1,232 and
128 shares in 2000, 1999 and 1998, respectively, that are issuable upon
conversion of the Company's convertible debentures because the inclusion of such
shares would be antidilutive.
NOTE EIGHTEEN
NONRECURRINGSEVENTEEN
RESTRUCTURING AND NON-RECURRING CHARGES
The Company recorded restructuring and nonrecurringnon-recurring charges in the first
quarter of 1999 (First Quarter 1999 Charge), the fourth quarter of 1999 (Fourth
Quarter 1999 Charge) and the fourth quarter of 2000 (Fourth Quarter 2000
Charge) of. Additionally, the Company established reserves in 1999 as well as established a provision for loan losses (Loan Provision) in the
fourth quarter of 1999 related to certainon loans
previously made by the Company's lending subsidiary.subsidiary (Impaired Loans), and in
2000 adjusted estimates for certain items originally included in the Fourth
Quarter 1999 Charge.
The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999 and consisted of the following: (1)
severance costs of $56,757; (2) a charge of $19,123 forof which $2,153 related to
terminated projects representing costs associated with certain construction
projects that have been cancelled ($2,153)
and $16,970 related to costs associated with
acquisition due diligence which will no longer be
pursued ($16,970);60
62
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursued; (3) a $7,245 charge for business and facility closures, primarily in
the Company's European operations; and (4) a remaining charge of $6,759
consisting of various other cost initiatives.
The $56,757 for severance costs is related to the termination of five
executive contractual relationships and the involuntary termination of
approximately 100 employees in North America (of which approximately 20 were
located in the corporate office), 600 employees in France, 85 employees in other
European operations and 10 employees in other foreign operations. The positions
terminated were both operational and administrative in nature and the remaining
severance costs are expected to be paid out in 2000.nature. The severance
costs related to the executive contractual relationships will be paid out
according to the terms of the respective agreements and will extend through
2005.
At December 31, 1999, approximately $25,245 remained in the reserve
associated with the First Quarter Charge, of which $22,782 related to severance
costs and $2,463 related to cancellation fees and remaining non-cancellable
payments on operating leases.
The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The Fourth Quarter 1999 Charge consisted of the
61
63
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) following: (1)
severance costs of $150,675; (2) asset impairment of $73,728 associated with
assets held for sale which were written down to estimated fair value; (3) asset
impairment of $18,245 associated with loans made by the Company's lending
subsidiary held for sale which were written down to estimated fair value; (4)
$12,719 of informational technology costs associated with projects that will no
longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease
obligations related to facility closures; and (6) $10,623 of various other
items.
The $150,675 of severance costs is related to the involuntary termination
of 1,141 employees of the Company. Included in this total are 715 employees in
the Company's international operations, 385 employees in North America, 33
employees in the Company's corporate home office and 8 executive officers of the
Company. Of the 715 employees in the Company's international operations, 290 are
additional involuntary terminations in France pursuant to the Company's First
Quarter Charge. In the North America total, 316 individuals were former owners
of independent funeral homes and cemeteries that were purchased by the Company
and represent approximately $92,180 of the $150,675 of severance costs. These
individuals were under employment, consultant and/or covenant-not-to-compete
contractual agreements and have been relieved from their obligations or
restrictions under their agreements. Such individuals will continue to be paid
by the Company pursuant to such contractual terms, the majority of which will be
paid by 2007. The other positions terminated were both operational and
administrative in nature and the severance costs are expected to be paid out
over the next 24 months.through 2001. The severance costs associated with the executive officers will be
paid in accordance with the terms of the respective agreements and will extend
through 2005.
The $73,728 of charges related to assets held for sale consistconsists of
approximately $59,655 in the Company's North American operations, approximately
$11,645 in the Company's international operations and approximately $2,428 of
corporate assets. The $59,655 of charges in North America include approximately
50 funeral homes or cemeteries and approximately 45 individual parcels of
undeveloped cemetery property or excess land that are held for sale and being
reduced to their estimated fair values. The Company believes it is a prudent
strategy to hold these underperforming assets for sale and redeploy the proceeds
from such sales to reduce debt.
The asset impairment associated with the lending subsidiary's loans
represents the estimated amount necessary to sell 205 loans with a facefair value of
$176,272. The Company has decided, except for existing commitments, to indefinitely
suspend the operations of its lending subsidiary and to sell a portion of the
lending subsidiary.
At December 31, 1999, approximately $135,944 remainedloan portfolio in 2000. In connection with selling the reserve
associated withportfolio of loans
discussed above, the Fourth Quarter Charge,Company was also relieved of which $126,816 relatedall but $10,494 of loan
commitments to severance costs and $9,128 related to other restructuring costs.
Of the $161,189 of reserves remaining at December 31, 1999 relatingextend credit (see note ten to the First Quarter and Fourth Quarter Charges, $89,812 is includedconsolidated financial
statements).
The Impaired Loans charge in Accounts
Payable and Accrued Liabilities and $71,377 is included in Other Liabilities in
the Consolidated Balance Sheet based on the expected timing of payment.
The Loan Provision1999 totaled $38,608 and relatesrelated to certain loans and accrued
interest receivable of $1,408 not
being held for sale by the Company's lending subsidiary. The face value of the
47 loans subject to the reserve was $61,315 at December 31, 1999. SinceIn 2000, the
loans associated with the Loan Provision are collateral dependent
and acquiring the collateralCompany acquired by deed in lieu of foreclosure is probable,the collateral underlying
61
63
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these loans previously on non-accrual status. Subsequent to acquiring those
locations, the Company sold the majority of these locations during the year.
In the second quarter of 2000, the Company made a change in estimate for
certain items originally included in the Fourth Quarter 1999 Charge. These
changes primarily related to increasing the provision was determinedfor asset impairment by
comparing$22,250 to further write down to estimated fair value the loans made by the
Company's baseslending subsidiary which were held for sale, offset by a reduction in
the loansprovision of $11,229 for funeral home and cemetery properties previously
written down to their fair value, which were no longer being held for sale.
The Fourth Quarter 2000 Charge totaled $447,791 and related to planned
divestitures as a result of a North American facility review, the reduction of
the carrying value of an equity investment in North America and certain
additional changes to estimates in the Company's restructuring and non-recurring
charges recorded in 1999. Of the total Fourth Quarter 2000 Charge, $351,159 of
charges related to the fairplanned divestitures of 230 funeral service locations
anticipated to be sold as funeral businesses, 174 funeral service locations
anticipated to be sold as real estate and 105 cemeteries; $83,256 of charges to
reduce the carrying value of the underlying collateral. Interest income recognized from theseCompany's equity investment in Arbor Memorial
Services Inc.; and $13,376 of net charges as a result of changes in estimates to
the Company's 1999 charges. The changes primarily consisted of $5,739 to further
write down to estimate fair value certain remaining loans duringmade by the year ended December 31, 1999 totaled $3,618Company's
lending subsidiary, $12,000 to write down to fair value assets held in the
Company's European operations, offset by a reduction of which payment$4,363 in previously
estimated severance costs in the Company's International operations.
The utilization of $2,210the restructuring charges was received duringas follows:
UTILIZATION FOR TWELVE
MONTHS ENDED
ADDITIONS OR DECEMBER 31, 2000
ORIGINAL BALANCE AT ADJUSTMENTS ---------------------- BALANCE AT
CHARGE AMOUNT DECEMBER 31, 1999 DURING 2000 CASH NON-CASH DECEMBER 31, 2000
------------- ----------------- ------------ --------- ---------- -----------------
First Quarter 1999 Charge...... $ 89,884 $ 25,245 $ -- $ 8,300 $ 10,735 $ 6,210
Fourth Quarter 1999 Charge..... 272,544 135,944 26,657 38,355 37,287 86,959
Fourth Quarter 2000 Charge..... 434,415 -- 434,415 -- 434,415 --
-------- -------- -------- ------- -------- -------
$796,843 $161,189 $461,072 $46,655 $482,437 $93,169
======== ======== ======== ======= ======== =======
Of the year and $1,408 wasremaining total restructuring charge balance, approximately $91,608
relates to severance costs. Further of the $93,169 remaining reserves, $47,803
is included in Accounts Payable and Accrued Liabilities and $45,366 is included
in Other Liabilities in the reserve. NoConsolidated Balance Sheet based on the expected
timing of payment.
In October 2000, the Company executed the sale of a 21% minority interest
income has beenin the stock of the Company's United Kingdom operations. As a result, the
Company recorded subsequent to September 30, 1999 related to
these loans.a loss on the sale of investment of $56,704 on a pretax basis
in 2000.
62
64
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE NINETEENEIGHTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR
--------- -------- -------- -------- -------- ------------------- -----------
Revenues:
1999......................... $904,056 $830,236 $776,845 $810,676 $3,321,813
1998......................... 698,844 690,230 712,520 773,496 2,875,0902000........................... $ 683,493 $636,545 $615,703 $ 628,989 $ 2,564,730
Proforma 1999.................. 660,454 2,745,114
1999........................... 832,260 745,836 708,191 721,671 3,007,958
Gross profit:
1999......................... 218,871 179,585 128,645 86,658 613,759
1998......................... 216,128 187,690 173,706 141,246 718,770
Net income2000........................... 117,065 72,068 71,862 66,647 327,642
Proforma 1999.................. 17,528 328,775
1999........................... 211,570 169,333 123,754 80,089 584,746
Income (loss) from continuing
operations before extraordinary
gain:
1999......................... 41,883 76,013 32,055 (184,248) (34,297)
1998......................... 108,786 90,948 83,213 59,195 342,142gains and cumulative effect of
accounting change:
2000........................... 20,937 (16,443) (10,846) (419,171) (425,523)
Proforma 1999.................. (227,178) (210,668)
1999........................... 37,607 69,923 29,351 (188,105) (51,224)
Net income (loss):
1999.........................2000........................... (876,641) 4,556 (49,626) (421,540) (1,343,251)
Proforma 1999.................. (223,317) (191,856)
1999........................... 43,768 76,013 32,055 (184,248) (32,412)
1998......................... 108,786 90,948 83,213 59,195 342,142
Basic earnings (loss) per share
from continuing operations
before extraordinary gain:
1999......................... .15 .28 .12 (.68) (.13)
1998......................... .43 .36 .32 .23 (1.34)gains and
cumulative effect of accounting
change:
2000........................... .08 (.06) (.04) (1.54) (1.56)
Proforma 1999.................. (.83) (.77)
1999........................... .13 .26 .11 (.69) (.19)
Diluted earnings (loss) per share
from continuing operations
before extraordinary gain:
1999......................... .15 .28 .12 (.68) (.13)
1998......................... .42 .35 .32 .23 1.31gains and
cumulative effect of accounting
change:
2000........................... .08 (.06) (.04) (1.54) (1.56)
Proforma 1999.................. (.83) (.77)
1999........................... .13 .26 .11 (.69) (.19)
Gross profit includes a provision for loan lossesimpairment of $38,608 in the
fourth quarter of 1999 related to loans held by the Company's lending
subsidiary. Net
incomeIncome (loss) from continuing operations before extraordinary gaingains
and cumulative effect of accounting change includes restructuring and nonrecurring charges of
$89,884 in the first quarter of 1999 and $272,544 in the fourth quarter of 1999.1999,
$447,791 in the fourth quarter of 2000, and changes in estimates to the fourth
quarter 1999 charge of $13,281 in the second quarter of 2000 and $13,376 in the
fourth quarter of 2000.
63
65
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 19992000
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD
- ----------- ---------- ---------- ----------- ------------- -------------------
(IN THOUSANDS)
Current --
Allowance for contract
cancellations and doubtful
accounts:
Year Endedended December 31, 1999..... $53,292 $22,585 $11,498 $(10,295)2000.... $77,080 $20,005 $(18,558) $(13,675) $ 64,852
Year Endedended December 31, 1998.....1999.... 53,292 22,585 11,498 (10,295) 77,080
Year ended December 31, 1998.... 52,597 27,190 2,327 (28,822) 53,292
Year Ended December 31, 1997..... 45,155 23,400 5,333 (21,291) 52,597
Due After One Year --
Allowance for contract
cancellations and doubtful
accounts:
Year Endedended December 31, 1999..... $38,707 $47,418 $11,1692000.... $97,285 $19,885 $159,705 $ (9) $97,285(4,010) $272,865
Year Endedended December 31, 1998.....1999.... 38,707 47,418 11,169 (9) 97,285
Year ended December 31, 1998.... 35,964 3,650 (499) (408) 38,707
Year Ended December 31, 1997..... 29,951 6,202 1,123 (1,312) 35,964
Deferred Tax Valuation Allowance:
Year Endedended December 31, 1999..... $13,058 $14,2202000.... $27,278 $41,921 $ -- $ -- $27,278$ 69,199
Year Endedended December 31, 1998.....1999.... 13,058 14,220 -- -- 27,278
Year ended December 31, 1998.... 15,327 (2,269) -- -- 13,058
Year Ended December 31, 1997..... 6,128 9,199 -- -- 15,327
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily cumulative effect of accounting change and acquisitions and
dispositions of operations.
64
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
64
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by PART III (Items 10, 11, 12 and 13) has been
omitted as the Company intends to file with the Commission not later than 120
days after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement (i) with
respect to Item 10 under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance",Compliance," (ii) with respect to Items 11 and 13
under the captions "Certain Information with Respect to Officers and Directors",Directors,"
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" and (iii) with respect to Item 12 under the caption "Voting
Securities and Principal Holders." The information as specified in the preceding
sentence is incorporated herein by reference. Notwithstandingreference; provided however, notwithstanding
anything set forth in this Form 10-K, the information under the captions
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" in such Proxy Statement, and the information in the first two paragraphs
under the caption "Audit Committee Report" in such Proxy Statement, are not
incorporated by reference into this Form 10-K.
The information regarding the Company's executive officers called for by
Item 401 of Regulation S-K has been included in PART I of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedule:
The financial statements and schedule are listed in the accompanying Index
to Financial Statements and Related Schedule on page 2526 of this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 68-7168-72 are
filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999,2000, the Company filed a Form 8-K
dated November 23, 1999December 4, 2000 reporting (i) under "Item 5. Other Events" (i) that George
R. Champagne, Executive Vice President and Chief Financial Officer, was leaving
the Company, (ii) that the Company formed a special committeeCompany's
announcement of the Boardcompletion of Directorsan amendment to expedite cost reduction, cash flow enhancementits bank credit facility
agreements, and debt reduction
initiatives, and (iii) certain factors which may adversely impact results for
2000. The Form 8-K also reported(ii) under "Item 7. Financial Statements and Exhibits" the
exhibits comprised of the Company's press releases
relatingrelease dated December 4, 2000 and two
amendments to the matters described in the preceding sentence.Company's bank credit facility agreements.
(c) Included in (a) above.
(d) Included in (a) above.
65
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Service Corporation International, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SERVICE CORPORATION INTERNATIONAL
By: /s/ JAMES M. SHELGER
-----------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)
Dated: March 30, 20002001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
R. L./s/ R.L. WALTRIP* Chairman of the Board and March 30, 20002001
- ----------------------------------------------------- Chief Executive Officer
(R. L.(R.L. Waltrip)
/s/ JEFFREY E. CURTISS* Senior Vice President Chief March 30, 20002001
- ----------------------------------------------------- Financial Officer (Principal
(Jeffrey E. Curtiss) Financial Officer)
/s/ W. CARDON GERNER Vice President Corporate March 30, 20002001
- ----------------------------------------------------- Controller (Principal
(W. Cardon Gerner) Accounting Officer)
/s/ ANTHONY L. COELHO* Director March 30, 20002001
- -----------------------------------------------------
(Anthony L. Coelho)
/s/ JACK FINKELSTEIN* Director March 30, 20002001
- -----------------------------------------------------
(Jack Finkelstein)
A. J./s/ A.J. FOYT, JR.* Director March 30, 20002001
- -----------------------------------------------------
(A. J.(A.J. Foyt, Jr.)
/s/ JAMES H. GREER* Director March 30, 20002001
- -----------------------------------------------------
(James H. Greer)
B. D./s/ B.D. HUNTER* Director March 30, 20002001
- -----------------------------------------------------
(B. D.(B.D. Hunter)
/s/ VICTOR L. LUND* Director March 30, 2001
- -----------------------------------------------------
(Victor L. Lund)
66
68
SIGNATURE TITLE DATE
--------- ----- ----
VICTOR L. LUND* Director March 30, 2000
- -----------------------------------------------------
(Victor L. Lund)/s/ JOHN W. MECOM, JR.* Director March 30, 20002001
- -----------------------------------------------------
(John W. Mecom, Jr.)
/s/ CLIFTON H. MORRIS, JR.* Director March 30, 20002001
- -----------------------------------------------------
(Clifton H. Morris, Jr.)
E. H./s/ E.H. THORNTON, JR.* Director March 30, 20002001
- -----------------------------------------------------
(E. H.(E.H. Thornton, Jr.)
/s/ W. BLAIR WALTRIP* Director March 30, 20002001
- -----------------------------------------------------
(W. Blair Waltrip)
/s/ EDWARD E. WILLIAMS* Director March 30, 20002001
- -----------------------------------------------------
(Edward E. Williams)
*By: /s/ JAMES M. SHELGER
-----------------------------------------------
(James M. Shelger, as Attorney-In-Fact
For each of the Persons indicated)
67
69
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Registration Statement No.
333-10867 on Form S-3).
3.2 -- Articles of Amendment to Restated Articles of
Incorporation. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended September 30,
1996).
3.3 -- Statement of Resolution Establishing Series of Shares of
Series D Junior Participating Preferred Stock, dated July
27, 1998. (Incorporated by reference to Exhibit 3.2 to
Form 10-Q for the fiscal quarter ended June 30, 1998).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.1 to Form 10-Q for the fiscal quarter ended September
30, 1999).
4.1 -- Rights Agreement dated as of May 14, 1998 between the
Company and Harris Trust and Savings Bank. (Incorporated
by reference to Exhibit 99.1 to Form 8-K dated May 14,
1998).
4.2 -- Agreement Appointing a Successor Rights Agent Under
Rights Agreement, dated June 1, 1999, by the Company,
Harris Trust and Savings Bank and The Bank of New York.
(Incorporated by reference to Exhibit 4.1 to Form 10-Q
for the fiscal quarter ended June 30, 1999).
10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated
by reference to Exhibit 10.1 to Form 10-K for the fiscal
year ended December 31, 1991).
10.2 -- Form of First Amendment to Retirement Plan For
Non-Employee Directors
10.3 -- Agreement dated May 14, 1992 between the Company, R. L.
Waltrip and related parties relating to life insurance.
(Incorporated by reference to Exhibit 10.4 to Form 10-K
for the fiscal year ended December 31, 1992).
10.310.4 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and R.L. Waltrip. (Incorporated
by reference to Exhibit 10.3 to Form 10-K for the fiscal
year ended December 31, 1998).
10.410.5 -- Non-Competition Agreement and Amendment to Employment
Agreement, dated November 11, 1991, among the Company, R.
L. Waltrip and Claire Waltrip. (Incorporated by reference
to Exhibit 10.9 to Form 10-K for the fiscal year ended
December 31, 1992).
10.510.6 -- Employment Agreement, dated January 1, 1999, between SCI
Executive Services, Inc. and W. Blair Waltrip.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q
for the fiscal quarter ended March 31, 1999).
10.610.7 -- Separation and Release Agreement, dated January 18, 2000,
among the Company, SCI Executive Services, Inc. and W.
Blair Waltrip. 10.7(Incorporated by reference to Exhibit 10.6
to Form 10-K for the fiscal year ended December 31,
1999).
10.8 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and Jerald L. Pullins.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the fiscal quarter ended June 30, 1998).
10.8 -- Employment Agreement, dated March 10, 1999, between SCI
Executive Services, Inc. and George R. Champagne.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the fiscal quarter ended March 31, 1999).
10.9 -- Separation and Release Agreement, dated November 18,
1999, among the Company, Executive Services, Inc. and
George R. Champagne.
68
70
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10 -- Independent Contractor/Consultative Agreement, dated
November 18, 1999, between SCI Management Corporation and
George R. Champagne.
10.11 -- Employment Agreement, dated February 11, 1999, between
SCI Executive Services, Inc. and John W. Morrow, Jr.
10.12 -- Separation and Release Agreement, dated January 21, 2000,
among the Company, SCI Executive Services, Inc. and John
W. Morrow, Jr.
10.13 -- Employment Agreement, dated January 1, 1999, between SCI
Executive Services, Inc. and James M. Shelger.
10.14(Incorporated by reference to Exhibit 10.13 to Form 10-K
for the fiscal year ended December 31, 1999).
68
70
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10 -- Employment and Non-Competition Agreement, dated February
28, 2001, between SCI Executive Services, Inc. and B. D.
Hunter.
10.11 -- Employment and Non-Competition Agreement, dated February
28, 2001, between SCI Executive Services, Inc. and
Jeffrey E. Curtiss.
10.12 -- Form of Employment Agreement pertaining to officers
(other than the officers identified in the preceding
exhibits).
(Incorporated by reference to Exhibit 10.9 to
Form 10-K for the fiscal year ended December 31, 1997).
10.1510.13 -- Form of 1986 Stock Option Plan. (Incorporated by
reference to Exhibit 10.21 to Form 10-K for the fiscal
year ended December 31, 1991).
10.1610.14 -- Amendment to 1986 Stock Option Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.11 to Form
10-K for the fiscal year ended December 31, 1996).
10.1710.15 -- Amendment to 1986 Stock Option Plan, dated November 13,
1997. (Incorporated by reference to Exhibit 10.12 to Form
10-K for the fiscal year ended December 31, 1997).
10.1810.16 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.1910.17 -- First Amendment to Amended 1987 Stock Plan. (Incorporated
by reference to Exhibit 10.23 to Form 10-K for the fiscal
year ended December 31, 1993).
10.2010.18 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 4.12 to Registration Statement
No. 333-00179 on Form S-8).
10.2110.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated February 12, 1997. (Incorporated by reference to
Exhibit 10.15 to Form 10-K for the fiscal year ended
December 31, 1996).
10.2210.20 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997. (Incorporated by reference to
Exhibit 10.17 to Form 10-K for the fiscal year ended
December 31, 1997).
10.2310.21 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.2410.22 -- Amendment to 1995 Incentive Equity Plan, dated February
12, 1997. (Incorporated by reference to Exhibit 10.18 to
Form 10-K for the fiscal year ended December 31, 1996).
10.2510.23 -- Amendment to 1995 Incentive Equity Plan, dated November
13, 1997. (Incorporated by reference to Exhibit 10.21 to
Form 10-K for the fiscal year ended December 31, 1997).
10.2610.24 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated
by reference to Annex A to Proxy Statement dated April
17, 1995).
10.2710.25 -- Amended 1996 Incentive Plan. (Incorporated by reference
to Annex A to Proxy Statement dated April 13, 1999).
10.2810.26 -- Split Dollar Life Insurance Plan. (Incorporated by
reference to Exhibit 10.36 to Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 1995).
69
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.29Form 10-K for the fiscal
year ended December 31, 1995).
10.27 -- Supplemental Executive Retirement Plan for Senior
Officers (as Amended and Restated Effective as of January
1, 1998). (Incorporated by reference to Exhibit 10.28 to
Form 10-K for the fiscal year ended December 31, 1998).
10.3010.28 -- Form of First Amendment to Supplemental Executive
Retirement Plan for Senior Officers.
69
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.29 -- Deferred Compensation Plan. (Incorporated by reference to
Exhibit 10.31 to Form 10-K for the fiscal year ended
December 31, 1997).
10.3110.30 -- Amendment No. 5 to Service Corporation International
Employee Stock Purchase Plan. 10.32 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and L. William Heiligbrodt.
(Incorporated by reference
to Exhibit 10.510.31 to Form 10-K for the fiscal year ended
December 31, 1997)1999).
10.3310.31 -- Separation and Release Agreement, dated March 15, 1999,
among the Company,Form of First Amendment to SCI Executive Services, Inc. and L.
William Heiligbrodt. (Incorporated by reference to
Exhibit 10.6 to Form 10-K for the fiscal year ended
December 31, 1998).
10.34 -- Independent Contractor/Consultative Agreement, dated
March 15, 1999, between SCI Management Corporation and L.
William Heiligbrodt. (Incorporated by reference to
Exhibit 10.7 to Form 10-K for the fiscal year ended
December 31, 1998).401(k) Retirement Savings
Plan.
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Accountants
(PricewaterhouseCoopers LLP).
24.1 -- Powers of Attorney.
27.1 -- Financial Data Schedule.
99.1 -- Competitive Advance and Revolving Credit Facility
Agreement (Facility A), dated June 27, 1997, among the
Company, The Chase Manhattan Bank ("Chase") as
administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.1 to Form 10-K for the fiscal year ended
December 31, 1999).
99.2 -- Agreement and First Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
June 26, 1998, among the Company, Chase as administrative
agent and the banks and other financial institutions
named therein. (Incorporated by reference to Exhibit 99.2
to Form 10-K for the fiscal year ended December 31,
1999).
99.3 -- Agreement and Second Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
June 25, 1999, among the Company, Chase as administrative
agent and the banks and other financial institutions
named therein. (Incorporated by reference to Exhibit 99.3
to Form 10-K for the fiscal year ended December 31,
1999).
99.4 -- Agreement and Third Amendment to Competitive Advance and
Revolving Credit Facility Agreement ((Facility(Facility A), dated
November 2, 1999, among the Company, Chase as
administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.4 to Form 10-K for the fiscal year ended
December 31, 1999).
99.5 -- Agreement and Fourth Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility A), dated
November 14, 2000, among the Company, Chase as
administrative agent and the banks and other financial
institutions named therein. (Incorporated by reference to
Exhibit 99.2 to Form 8-K dated December 4, 2000).
99.6 -- Competitive Advance and Revolving Credit Facility
Agreement (Facility B), dated June 27, 1997, among the
Company, subsidiaries of the Company named therein, Chase
as administrative agent and the banks and other financial
institutions named therein. 99.6(Incorporated by reference to
Exhibit 99.5 to Form 10-K for the fiscal year ended
December 31, 1999).
99.7 -- Agreement and First Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility B), dated
November 2, 1999, among the Company, subsidiaries of the
Company named therein, Chase as administrative agent and
the banks and other financial institutions named therein.
99.7 -- Credit Agreement, dated November 2, 1999, among(Incorporated by reference to Exhibit 99.6 to Form 10-K
for the Company, Chase as administrative agent and the banks and
other financial institutions named therein.fiscal year ended December 31, 1999).
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.8 -- Agreement and Second Amendment to Competitive Advance and
Revolving Credit Facility Agreement (Facility B), dated
November 14, 2000, among the Company, subsidiaries of the
Company named therein, Chase as administrative agent and
the banks and other financial institutions named therein.
(Incorporated by reference to Exhibit 99.3 to Form 8-K
dated December 4, 2000).
99.9 -- Consolidated Class Action Complaint filed September 3,
1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to
Exhibit 99.1 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.999.10 -- Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.1099.11 -- Defendants' Motion to Dismiss the Consolidated Class
Action Complaint filed October 8, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.1199.12 -- Plaintiffs' Opposition to Defendants' Motion to Dismiss
the Consolidated Class Action Complaint filed November 5,
1999 in Civil Action No. H-99-280, In Re Service
Corporation International. (Incorporated by reference to
Exhibit 99.4 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.1299.13 -- Defendants' Reply to Plaintiffs' Opposition to
Defendants' Motion to Dismiss the Consolidated Class
Action Complaint filed November 24, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
99.13(Incorporated by reference to Exhibit 99.12 to Form 10-K
for the fiscal year ended December 31, 1999).
99.14 -- Plaintiffs' Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James P.
Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PriceWaterhouse Coopers,PriceWaterhouseCoopers, L.L.P.; in
the Judicial District Court of Angelina County, Texas.
(Incorporated by reference to Exhibit 99.5 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.1499.15 -- Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.13.99.14. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal
year ended December 31, 1999).
99.16 -- Plaintiff's Original Petition filed December 28, 2000 in
Cause No. 33701-01-01, Jack D. Rottman v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers,
L.L.P.; in the ____ Judicial District Court of Angelina
County, Texas.
99.17 -- Defendants' Motion to Transfer Venue and Original Answer
in response to the Original Petition referred to in
Exhibit 99.16.
99.18 -- Plaintiff's Original Petition filed December 15, 2000, in
Cause No. 2000-63917, Jack T. Hammer v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers,
L.L.P.; in the 165th Judicial District Court of Harris
County, Texas.
99.19 -- Defendants' Original Answer to the Original Petition
referred to in Exhibit 99.18.
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In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.34.10.31.
Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as
exhibits to this report certain instruments with respect to long-term debt under
which the total amount of securities authorized thereunder does not exceed 10
percent of the total assets of Registrant and its subsidiaries on a consolidated
basis. Registrant agrees to furnish a copy of any such instrument to the
Commission upon request.
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CORPORATE INFORMATION
CORPORATE OFFICES
Service Corporation International maintains corporate offices located at
1929 Allen Parkway, Houston, Texas 77019. The telephone number is 713/522-5141.
Additional information can be found at our web site: www.sci-corp.com.
Requests
Written requests for financial information, including the Annual Report on
Form 10-K as filed with the Securities and Exchange Commission, should be
directed to Investor Relations, P.O. Box 130548, Houston, Texas 77219-0548.
TRANSFER AGENT AND REGISTRAR
THE BANK OF NEW YORK
1-800-524-4458
ADDRESS SHAREHOLDER INQUIRIES TO: SEND CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO:
Shareholder Relations Department -- 11E Receive and Deliver Department -- 11W
P.O. Box 11258 P. O. Box 11002
Church Street Station Church Street Station
New York, NY 10286 New York, NY 10286
E-Mail Address: The Bank of New York's Stock Transfer Website:
Shareowner-svcs@bankofny.com http://stock.bankofny.com
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