FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6402-1
--------------------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
Texas 74-1488375
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
1929 Allen Parkway, Houston, Texas 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
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 and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
The number of shares outstanding of the registrant's common stock as of August
10, 1998, was 257,260,158 (excluding treasury shares).
SERVICE CORPORATION INTERNATIONAL
INDEX
Page
Part I Financial Information
Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheet -
June 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 1998 6
Notes to the Consolidated Financial Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 21
PartII Other Information 22
Signature 22
2
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
(Dollars in thousands, June 30, June 30,
except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Revenues..................... $ 671,904 $ 601,141 $1,354,588 $1,239,590
Costs and expenses........... (484,214) (437,958) (950,770) (888,255)
--------- --------- ---------- ----------
Gross profit................. 187,690 163,183 403,818 351,335
General and administrative
expenses.................... (17,251) (15,812) (34,259) (32,440)
--------- --------- ---------- ----------
Income from operations....... 170,439 147,371 369,559 318,895
Interest expense............. (40,464) (33,093) (78,174) (67,631)
Dividends on preferred
securities of SCI
Finance LLC................. - (1,753) - (4,382)
Other income................. 10,528 8,765 17,179 11,855
Gain on sale of investment... - - - 68,077
--------- --------- ---------- ----------
(29,936) (26,081) (60,995) 7,919
--------- --------- ---------- ----------
Income before income taxes and
extraordinary loss.......... 140,503 121,290 308,564 326,814
Provision for income taxes... (49,555) (42,489) (108,830) (116,866)
--------- --------- ---------- ----------
Income before extraordinary
loss........................ 90,948 78,801 199,734 209,948
Extraordinary loss on early
extinguishment of
debt (net of income
taxes of $23,383)........... - - - (40,802)
--------- --------- ---------- ----------
Net income................... $ 90,948 $ 78,801 $ 199,734 $ 169,146
========= ========= ========== ==========
Earnings per share:
Basic:
Income before
extraordinary loss........ $ .36 $ .33 $ .78 $ .88
Extraordinary loss on early
extinguishment of debt.... - - - (.17)
--------- --------- ---------- ----------
Net income................. $ .36 $ .33 $ .78 $ .71
========= ========= ========== ==========
Diluted:
Income before
extraordinary loss........ $ .35 $ .31 $ .77 $ .83
Extraordinary loss on early
extinguishment of debt.... - - - (.16)
--------- --------- ---------- ----------
Net income................. $ .35 $ .31 $ .77 $ .67
========= ========= ========== ==========
Dividends per share.......... $ .09 $ .08 $ .18 $ .15
========= ========= ========== ==========
Basic weighted average
number of shares............ 255,004 240,872 254,820 239,068
========= ========= ========== ==========
Diluted weighted average
number of shares............ 261,740 257,695 261,754 256,616
========= ========= ========== ==========
(See notes to consolidated financial statements)
3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
June 30,
1998 December 31,
(Dollars in thousands, except per share amounts) (Unaudited) 1997
- -------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents.......................... $ 75,526 $ 46,877
Receivables, net of allowances..................... 580,011 557,481
Inventories........................................ 183,920 172,169
Other.............................................. 46,188 34,881
----------- -----------
Total current assets.............................. 885,645 811,408
----------- -----------
Investments - insurance subsidiary.................... 640,962 574,728
Prearranged funeral contracts ........................ 2,754,034 2,610,632
Long-term receivables ................................ 1,107,684 981,121
Cemetery property, at cost............................ 1,761,443 1,636,859
Property, plant and equipment, at cost (net).......... 1,718,685 1,644,137
Deferred charges and other assets..................... 670,281 549,862
Names and reputations (net)........................... 1,705,928 1,498,116
----------- -----------
$11,244,662 $10,306,863
=========== ===========
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities........... $ 368,256 $ 425,631
Current maturities of long-term debt............... 68,338 64,570
Income taxes ...................................... 88,612 45,241
----------- -----------
Total current liabilities......................... 525,206 535,442
----------- -----------
Long-term debt........................................ 3,077,286 2,634,699
Deferred income taxes................................. 732,650 701,221
Other liabilities .................................... 572,523 546,140
Deferred prearranged funeral contract revenues ....... 3,400,012 3,163,357
Stockholders' equity:
Common stock, $1 per share par value,
500,000,000 shares authorized,
257,186,137 and 252,923,784, respectively,
issued and outstanding............................ 257,186 252,924
Capital in excess of par value..................... 1,534,730 1,493,246
Retained earnings.................................. 1,136,891 983,353
Accumulated other comprehensive income............. 8,178 (3,519)
----------- -----------
Total stockholders' equity........................ 2,936,985 2,726,004
----------- -----------
$11,244,662 $10,306,863
=========== ===========
(See notes to consolidated financial statements)
4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income........................................... $ 199,734 $ 169,146
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization..................... 85,512 75,063
Provision for deferred income taxes............... 19,661 24,789
Extraordinary loss on early extinguishment of
debt, net of income taxes........................ - 40,802
Gains from dispositions (net)..................... (9,748) (76,645)
Change in assets and liabilities, net of effects
from acquisitions:
(Increase) in receivables........................ (116,546) (60,474)
(Increase) decrease in other assets.............. (24,285) 15,426
(Decrease) in payables and other liabilities .... (7,966) (27,036)
Other............................................ 7,541 11,232
----------- ----------
Net cash provided by operating activities ........... 153,903 172,303
----------- ----------
Cash flows from investing activities:
Capital expenditures.............................. (117,705) (118,163)
Change in prearranged funeral balances............ 44,737 (32,503)
Purchases of securities - insurance subsidiary.... (318,800) (589,778)
Sales of securities - insurance subsidiary........ 305,554 582,122
Proceeds from sales of property and equipment..... 16,663 11,585
Acquisitions, net of cash acquired................ (366,823) (190,692)
Loans issued by finance subsidiary................ (66,564) (50,638)
Principal payments received on loans by finance
subsidiary....................................... 48,882 5,418
Proceeds from sale of equity investment........... - 147,739
Purchases of equity investments................... (3,836) (20,360)
Other............................................. (7,205) (10,281)
----------- ----------
Net cash (used in) investing activities.............. (465,097) (265,551)
----------- ----------
Cash flows from financing activities:
(Decrease) in borrowings under revolving
credit agreements................................ (68,952) (37,349)
Long-term debt issued............................. 500,000 650,000
Payments of debt.................................. (32,722) (35,877)
Early extinguishment of debt...................... - (449,998)
Dividends paid.................................... (42,007) (32,136)
Bank overdrafts and other......................... (16,476) (13,966)
----------- ----------
Net cash provided by financing activities............ 339,843 80,674
----------- ----------
Net increase (decrease) in cash and cash equivalents. 28,649 (12,574)
Cash and cash equivalents at beginning of period..... 46,877 44,131
----------- ----------
Cash and cash equivalents at June 30, 1998 and 1997..$ 75,526 $ 31,557
=========== ==========
Cash used for:
Interest..........................................$ 86,047 $ 81,807
========== ==========
Taxes............................................. 74,155 74,769
========== ==========
Non-cash investing and financing transactions:
Common stock issued in acquisitions............... $ 28,896 $ 43,499
========== ==========
Debt issued in acquisitions....................... 19,060 4,771
========== ==========
Debenture conversions to common stock............. 2,238 5,127
========== ==========
Conversion of preferred securities of
SCI Finance LLC.................................. - 167,911
========== ==========
(See notes to consolidated financial statements)
5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Capital in Accum.
excess other
(Dollars in thousands, Common of par Retained compre.
except per share amounts) stock value earnings income Total
- --------------------------------------------------------------------------------
Balance at
December 31, 1997........$ 252,924 $1,493,246 $ 983,353 $(3,519) $2,726,004
Comprehensive income:
Net income.............. 199,734 199,734
Other comprehensive
income:
Foreign currency
translation............ 6,663
Unrealized gain on
securities............. 5,034
----------
Total other comprehensive
income................... 11,697 11,697
----------
Comprehensive income...... 211,431
Common stock issued:
Stock option exercises
and stock grants........ 3,409 11,203 14,612
Acquisitions............ 687 28,209 28,896
Debenture conversions... 166 2,072 2,238
Dividends on common stock
($.18 per share)......... (46,196) (46,196)
-------- ---------- ---------- ------- ----------
Balance at June 30, 1998.. $ 257,186 $1,534,730 $1,136,891 $ 8,178 $2,936,985
========= ========== =========== ======= ==========
(See notes to consolidated financial statements)
6
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. Nature of Operations
The Company is the largest provider of death care services in the world. At June
30, 1998, the Company operated 3,292 funeral service locations, 422 cemeteries
and 174 crematoria located in 18 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also contain crematoria. There are 152
combination locations that contain a funeral service location within a company
owned cemetery.
The Company's financial services operations consist of a finance subsidiary,
Provident Services, Inc. ("Provident"). Provident provides capital financing to
independent funeral home and cemetery operators. The Company recently announced
its intentions to combine management of its prearranged funeral marketing,
funeral and cemetery trust administration, investments, life insurance
operations (see note ten) and Provident into a reorganized financial services
segment.
2. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements for the six months
ended June 30, 1998 and 1997 include the accounts of Service Corporation
International and all majority-owned subsidiaries (the "Company") and are
unaudited but include all adjustments, consisting of normal recurring accruals
and any other adjustments which management considers necessary for a fair
presentation of the results for these periods. These financial statements have
been prepared consistent with the accounting policies described in the annual
report on Form 10-K filed with the Securities and Exchange Commission (the
"Commission") for the year ended December 31, 1997 and should be read in
conjunction therewith. Certain reclassifications have been made to the prior
period to conform to the current period presentation with no effect on
previously reported net income, financial condition and 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. As a result, actual results
could differ from these estimates.
3. Acquisitions
The Company acquired 167 funeral service locations, 31 cemeteries and 8
crematoria during the six months ended June 30, 1998 (136 funeral service
locations, 22 cemeteries and one crematory during the six months ended June 30,
1997). The consideration for these acquisitions consisted of combinations of
cash, common stock of the Company and issued or assumed debt. The operating
results of all of these acquisitions have been included since their respective
dates of acquisitions.
7
The effect of acquisitions on the consolidated balance sheet at June 30, was
as follows:
1998 1997
- ----------------------------------------------------------------------------
Current assets................................... $ 22,021 $ 8,180
Prearranged funeral contracts.................... 38,093 52,346
Long-term receivables............................ 23,820 11,881
Cemetery property................................ 81,306 179,829
Property, plant and equipment.................... 44,736 59,929
Deferred charges and other assets................ 84,587 14,604
Names and reputations............................ 237,915 70,507
Current liabilities.............................. (23,353) (23,977)
Long-term debt................................... (46,972) (19,612)
Deferred income taxes and other liabilities...... (29,083) (51,698)
Deferred prearranged funeral contract revenues... (35,836) (67,798)
Stockholders' equity............................. (30,411) (43,499)
--------- --------
Cash used for acquisitions................. $ 366,823 $190,692
========= ========
4. 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 (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers in North America, the United Kingdom and
Australia or the Company's French prearranged funeral service life insurance
subsidiary, "Auxia". Unperformed price guaranteed prearranged funeral contracts
are included in the consolidated balance sheet as "prearranged funeral
contracts" or, in the case of contracts funded by Auxia, "investments-insurance
subsidiary." A corresponding credit is recorded to "deferred prearranged funeral
contract revenues." Allowances for customer cancellations are provided at the
date of sale based on historical experience.
Amounts paid by the customer pursuant to the prearranged funeral contracts
are recognized in funeral revenue at the time the funeral is performed. Trust
earnings and increasing insurance benefits are accrued and deferred until the
service is performed at which time these funds are also recognized in funeral
revenues and are intended to cover future increases in the cost of providing a
price guaranteed funeral service. Included in deferred prearranged funeral
contract revenues are net obtaining costs, including sales commissions and
certain other direct marketing costs, applicable to prearranged funeral
contracts which are deferred and will be expensed over a period representing the
actuarially determined life of the prearranged contract.
The recognition of future funeral revenues is estimated to occur in the
following years:
1998 (remaining six months).............. $ 180,969
1999..................................... 279,228
2000..................................... 261,198
2001..................................... 246,066
2002..................................... 231,495
2003 and through 2007.................... 860,905
2008 and thereafter...................... 1,340,151
----------
$3,400,012
==========
8
5. Debt
Debt at June 30, 1998 and December 31, 1997, was as follows:
June 30, December 31,
1998 1997
--------------------------------
Bank revolving credit agreements and
commercial paper........................ $ 544,562 $ 588,539
6.375% notes due in 2000................. 150,000 150,000
6.75% notes due in 2001.................. 150,000 150,000
8.72% amortizing notes due in 2002....... 127,970 141,108
8.375% notes due in 2004................. 51,840 51,840
7.375% notes due in 2004................. 250,000 250,000
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 -
7.70% notes due in 2009.................. 200,000 200,000
6.95% amortizing notes due in 2010....... 57,178 58,859
Floating rate notes due in 2011
(putable in 1999)....................... 200,000 200,000
7.875% debentures due in 2013............ 55,627 55,627
7.0% notes due in 2015 (putable in 2002). 300,000 300,000
6.3% notes due in 2020 (putable in 2003). 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 - $45.69............ 47,735 45,673
Mortgage notes and other debt with
maturities through 2015................ 185,892 184,981
Deferred loan costs...................... (10,900) (13,078)
---------- ----------
Total debt............................... 3,145,624 2,699,269
---------- ----------
Less current maturities.................. (68,338) (64,570)
---------- ----------
Total long-term debt................ $3,077,286 $2,634,699
========== ==========
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consists of two committed facilities -- a 364-day facility and
a 5-year, multi-currency facility - which are primarily used to support
commercial paper issuance and for general corporate needs.
The 364-day facility allows for borrowings up to $300,000. This facility
expires June 26, 1999, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may be converted into a
two-year term loan at the Company's option. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of 0.08% is
paid quarterly on the total commitment amount.
The 5-year facility allows for borrowings up to $700,000, including $500,000
in various foreign currencies. This facility expires June 27, 2002. Interest
rates on this facility are based on various indices as determined by the
Company. In addition, a facility fee is paid quarterly on the total commitment
amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the
Company's senior debt ratings and is currently set at 0.08%. At June 30, 1998,
there was approximately $189,000 of revolving notes outstanding under this
facility at a weighted average interest rate of 6.45%.
As of June 30, 1998, there was approximately $356,000 of commercial paper
outstanding backed by the above two facilities at a weighted average interest
rate of 6.06%.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities are classified as long-term debt, since it is the
Company's intent to refinance such borrowings through long-term notes and/or
equity offerings.
9
The timing of any debt or equity offering is dependent on numerous factors
including market conditions, long and short term interest rates, the Company's
capitalization ratios and the outstanding balances under the revolving credit
facilities.
In March of 1998, the Company issued two senior note securities. The first
note issued was a $200,000, 10-year, non-callable security with a 6.5% coupon,
due in March of 2008. The second note was a $300,000, 22-year security due in
March of 2020. This security is subject to mandatory tender to a remarketing
agent in March of 2003 and in March of 2010. The coupon on this issue is 6.30%.
The proceeds of this offering were primarily used to repay existing debt
outstanding under the Company's revolving credit agreeements.
6. Derivatives
The Company enters into derivatives primarily in the form of interest rate swaps
to manage its mix of fixed and floating rate debt, and cross-currency interest
rate swaps in combination with local currency to substantially hedge the
Company's net investment in foreign assets. The Company has procedures in place
to monitor and control the use of derivatives and only enters into transactions
with a limited group of credit-worthy financial institutions. The Company does
not engage in derivative transactions for speculative or trading purposes, nor
is it a party to leveraged transactions.
At June 30, 1998, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding Provident debt) consists of
approximately 68% of fixed interest rate debt at a weighted average rate of
6.32% and approximately 32% of floating interest rate debt at a weighted average
rate of 5.85%. Approximately $1,692,000 of the Company's debt has been converted
from US dollar denominated debt to foreign currency denominated debt as the
result of cross-currency swaps. Including these swaps, foreign denominated debt
totals $1,949,000.
The net fair value of the Company's various swap agreements at June 30, 1998,
was an asset of $162,000. Fair values were obtained from counterparties to the
agreements and represent their estimate of the net amount the Company would
receive to terminate the swap agreements based upon the existing terms and
current market conditions.
7. Ratio of Earnings to Fixed Charges
Six Months
Ended June 30,
1998 1997
----------------
4.27 4.66
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus the
minority interest of majority-owned subsidiaries with fixed charges and plus
fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt costs,
dividends on preferred securities of SCI Finance LLC and one-third of rental
expense which the Company considers representative of the interest factor in the
rentals. The decrease in the Company's ratio of earnings to fixed charges is
primarily attributable to the 1997 gain on the sale of a Company investment.
10
8. Geographic Segment Information
The Company conducts funeral and cemetery operations in 18 countries and offers
financial services in the United States. Geographic segment information was as
follows:
United Other Other
States France European Foreign
- -------------------------------------------------------------------------------
Revenues:
Three months ended June 30:
1998......................... $ 422,945 $140,679 $ 62,762 $ 45,600
1997......................... 390,830 119,433 50,039 41,192
Six months ended June 30:
1998......................... $ 875,971 $263,607 $126,476 $ 88,996
1997......................... 794,112 253,047 111,352 82,036
Income from operations:
Three months ended June 30:
1998......................... $ 132,265 $ 18,426 $ 9,443 $ 10,305
1997......................... 115,627 12,907 7,957 10,880
Six months ended June 30:
1998......................... $ 294,379 $ 30,882 $ 23,205 $ 21,093
1997......................... 242,082 28,400 24,655 23,758
Funeral services performed:
Three months ended June 30:
1998......................... 57,030 37,321 28,206 12,849
1997......................... 56,271 34,899 22,987 12,238
Six months ended June 30:
1998......................... 123,099 76,097 57,536 26,149
1997......................... 118,235 76,486 52,759 24,478
Number of locations at June 30:
1998......................... 1,638 1,163 780 307
1997......................... 1,514 1,087 658 274
11
9. Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations are presented below:
Three Months ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Income (numerator):
Income before
extraordinary item - basic...$ 90,948 $ 78,801 $199,734 $209,948
After tax interest on
convertible debentures...... 399 1,838 770 3,916
-------- -------- -------- --------
Income before
extraordinary item - diluted.$ 91,347 $ 80,639 $200,504 $213,864
- --------------------------------------------------------------------------------
Shares (denominator):
Shares - basic.............. 255,004 240,872 254,820 239,068
Stock options and warrants 4,593 5,022 4,792 4,699
Convertible debentures...... 2,143 9,705 2,142 2,294
Convertible preferred
securities of SCI
Finance LLC................ - 2,096 - 10,555
-------- ------- -------- --------
Shares - diluted............ 261,740 257,695 261,754 256,616
- --------------------------------------------------------------------------------
Earnings per share before
extraordinary item:
Basic...................... $ .36 $ .33 $ .78 $ .88
Diluted.................... $ .35 $ .31 $ .77 $ .83
- --------------------------------------------------------------------------------
10.Subsequent Events
On July 17, 1998, the Company announced its plans to acquire the pre-need
funeral division of American Annuity Group Inc. (AAG) of Cincinnati, Ohio for
$164,000 in cash. AAG offers a variety of pre-need and final expense life
insurance and annuity products to finance prearranged funerals. AAG will become
part of the Company's new financial services segment.
On August 6, 1998, the Company announced that it has reached a definitive
agreement with Equity Corporation International (ECI) to form a business
combination between the two companies. ECI, the nation's fourth largest publicly
traded death care company, currently owns 326 funeral homes and 81 cemeteries in
35 U.S. states and one Canadian province. The combination would occur through a
stock-for-stock transaction that would result in ECI shareholders receiving
common shares of the Company with a value of approximately $578,000.
Both of the above transactions are subject to regulatory approval and, in the
case of ECI, an affirmative vote of ECI shareholders. Both transactions are
expected to close in the fourth quarter of 1998.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except average sales prices)
Overview:
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allow 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's acquisitions are primarily located within existing cluster areas or
create new cluster area opportunities. The Company has approximately 400
clusters, which range in size from two operations to 65 operations. There may be
more than one cluster in a given metropolitan area, depending upon the level and
degree of shared costs.
Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
Six Months Ended June 30, Percentage
1998 1997 Increase Increase
----------------------------------------------------
Revenues:
Funeral............. $ 922,621 $ 876,355 $ 46,266 5.3 %
Cemetery............ 422,307 355,529 66,778 18.8
Financial services.. 9,660 7,706 1,954 25.4
--------- ---------- -------
1,354,588 1,239,590 114,998 9.3
Costs and expenses:
Funeral............. 695,283 662,155 33,128 5.0
Cemetery............ 250,327 221,886 28,441 12.8
Financial services.. 5,160 4,214 946 22.4
--------- --------- --------
950,770 888,255 62,515 7.0
Gross profit and
margin percentage:
Funeral............. 227,338 24.6% 214,200 24.4% 13,138 6.1
Cemetery............ 171,980 40.7 133,643 37.6 38,337 28.7
Financial services.. 4,500 46.6 3,492 45.3 1,008 28.9
--------- --------- --------
$ 403,818 29.8% $ 351,335 28.3% $ 52,483 14.9 %
========= ========= ========
13
Funeral
Funeral revenues were as follows:
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States...............$481,859 $457,392 $24,467 5.3 %
France...................... 263,145 252,089 11,056 4.4
Other European.............. 98,623 98,354 269 0.3
Other foreign............... 53,709 57,045 (3,336) (5.8)
-------- -------- -------
897,336 864,880 32,456 3.8
New clusters:*
United States............... 3,916 1,416 2,500
Other European.............. 16,073 1,102 14,971
Other foreign............... 2,225 444 1,781
-------- -------- -------
22,214 2,962 19,252
Non-cluster and disposed
operations.................... 3,071 8,513 (5,442)
-------- -------- -------
Total funeral revenues......$922,621 $876,355 $46,266 5.3 %
======== ======== =======
The $32,456 increase in revenues from existing clusters was the result of a
3.2% higher average sales price ($3,320 compared to $3,218), combined with a
0.5% increase in the number of funeral services performed (270,251 compared to
268,776). Acquisitions since January 1, 1997, included in existing clusters,
contributed $48,932 to the existing cluster revenue increase, while locations
acquired before 1997 had a decline of $16,476 due primarily to fewer funeral
services performed. French funeral revenues increased $11,056 caused primarily
by an increase in the number of funeral services performed.
During the six months ended June 30, 1998, the Company sold $274,749 of
prearranged funeral services compared to $274,019 for the same period in 1997.
Funeral costs and expenses were as follows:
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States............. $300,962 $291,589 $ 9,373 3.2 %
France.................... 223,484 215,699 7,785 3.6
Other European............ 78,683 74,770 3,913 5.2
Other foreign............. 39,373 39,458 (85) (0.2)
-------- -------- --------
642,502 621,516 20,986 3.4
New clusters:*
United States............. 2,738 953 1,785
Other European............ 12,863 820 12,043
Other foreign............. 1,692 334 1,358
-------- -------- --------
17,293 2,107 15,186
Non-cluster and disposed
operations.................. 6,210 9,399 (3,189)
Administrative overhead...... 29,278 29,132 146 0.5
-------- -------- --------
Total funeral costs
and expense................ $695,283 $662,154 $ 33,129 5.0 %
======== ======== ========
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
14
The $20,986 increase in costs and expenses from existing clusters is primarily
the result of a period to period increase in the total number of funeral
services performed. Acquisitions since January 1, 1997, included in existing
clusters, reported $37,689 of increased costs, while existing locations acquired
before 1997 had a $16,703 cost decrease. The gross profit margin for existing
clusters increased to 28.4% in 1998, from 28.1% in 1997. Typically, acquisitions
will temporarily exhibit slightly lower gross profit margins than those
experienced by the Company's existing locations at least until such time as
these locations are assimilated into the Company's cluster management strategy.
The overall funeral gross profit margin percentage improved in 1998 to 24.6%,
compared to 24.4% in 1997. Contributing to this period to period improvement
were the Company's North American and French operations, offset by lower gross
profit margins from the Company's other foreign operations.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, decreased slightly to 3.2%, compared to 3.3% in 1997.
Cemetery
Cemetery revenues were as follows:
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States............ $369,331 $313,858 $55,473 17.7 %
Other European........... 10,093 10,888 (795) (7.3)
Other foreign............ 23,981 26,327 (2,346) (8.9)
-------- -------- -------
403,405 351,073 52,332 14.9
New clusters*............... 17,333 1,184 16,149
Non-cluster and disposed
operations................. 1,570 3,272 (1,702)
-------- -------- -------
Total cemetery revenues.. $422,308 $355,529 $66,779 18.8 %
======== ======== =======
Revenues from the existing clusters increased $52,332 in 1998. Included in
the existing cluster increase were $31,945 in increased revenues from cemeteries
acquired since the beginning of 1997. Locations acquired before 1997 increased
$20,387 due primarily to increased trust investment income.
Cemetery costs and expenses were as follows:
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States........... $193,976 $181,888 $12,088 6.6%
Other European.......... 6,075 5,849 226 3.9
Other foreign........... 13,732 13,527 205 1.5
-------- -------- -------
213,783 201,264 12,519 6.2
New clusters*.............. 12,468 1,126 11,342
Non-cluster and disposed
operations................ 2,401 2,422 (21)
Administrative overhead.... 21,675 17,074 4,601 26.9
-------- -------- -------
Total cemetery costs
and expenses............. $250,327 $221,886 $28,441 12.8%
======== ======== =======
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
15
Costs and expenses from existing clusters increased $12,519 due primarily to
an increase of $19,757 at cemeteries acquired since the beginning of 1997, while
locations acquired before 1997 had a decline of $7,238. The overall cemetery
gross profit margin percentage improved in 1998 to 40.7% from 37.6% in 1997.
This increase reflects a favorable product mix in sales of preneed cemetery
property and merchandise, increased trust investment income, as well as
continued cost control in all major expense categories primarily in the United
States. Administrative overhead costs have increased to 5.1% of revenues
compared to 4.8% during the six months ended June 30, 1998.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $4,500 for the six months ended June
30, 1998, compared to $3,492 for the same period in 1997. Provident's average
outstanding loan portfolio during the current period increased to $213,009
compared to $173,547 in 1997, while the average interest rate spread decreased
slightly to 3.1% compared to 3.2% in 1997.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.5% for the six months ended June 30, 1998, compared to
2.6% for the comparable period in 1997.
Interest expense, which excludes the amount incurred through financial
service operations, increased $10,543 or 15.6% period to period. The increased
interest expense reflects the Company's funding of acquisitions with debt.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a pre-tax gain of $68,077.
The provision for income taxes reflected a 35.3% effective tax rate for the
six months ended June 30, 1998, compared to a 35.8% effective tax rate for the
comparable period in 1997. The decrease in the effective tax rate is due
primarily to lower taxes from international operations and the 1997 tax impact
from the gain on sale of the Company's interest in ECI which was reflected at
the Company's higher domestic tax rate.
Three Months Ended June 30, 1998
Compared to Three Months Ended June 30, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
Three Months Ended June 30, Percentage
1998 1997 Increase Increase
----------------------------------------------------
Revenues:
Funeral............. $450,493 $419,284 $31,209 7.4 %
Cemetery............ 216,366 177,739 38,627 21.7
Financial services.. 5,045 4,118 927 22.5
-------- -------- -------
671,904 601,141 70,763 11.8
Costs and expenses:
Funeral............. 355,847 324,787 31,060 9.6
Cemetery............ 125,639 110,889 14,750 13.3
Financial services.. 2,728 2,282 446 19.5
-------- -------- -------
484,214 437,958 46,256 10.6
Gross profit and
margin percentage:
Funeral............. 94,646 21.0% 94,497 22.5% 149 0.2
Cemetery............ 90,727 41.9 66,850 37.6 23,877 35.7
Financial services.. 2,317 45.9 1,836 44.6 481 26.2
--------- -------- -------
$187,690 27.9% $163,183 27.1% $24,507 15.0 %
======== ======== =======
16
Funeral
Funeral revenues were as follows:
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States........... $223,982 $222,693 $ 1,289 0.6 %
France.................. 140,597 119,078 21,519 18.1
Other European.......... 46,882 43,861 3,021 6.9
Other foreign........... 26,033 28,709 (2,676) (9.3)
-------- -------- -------
437,494 414,341 23,153 5.6
New clusters:*
United States........... 1,281 889 392
Other European.......... 10,041 921 9,120
Other foreign........... 1,040 223 817
-------- -------- -------
12,362 2,033 10,329
Non-cluster and disposed
operations................ 637 2,910 (2,273)
-------- -------- -------
Total funeral revenues.. $450,493 $419,284 $31,209 7.4 %
======== ======== =======
The $23,153 increase in revenues from existing clusters was the result of a
2.9% increase in the number of funeral services performed (128,443 compared to
124,840), and a 2.6% higher average sales price ($3,406 compared to $3,319).
Acquisitions since January 1, 1997, included in existing clusters, contributed
$25,481 to the existing cluster revenue increase, while locations acquired
before 1997 had a decline of $2,328 due primarily to fewer funeral services
performed in April and May in the United States. French funeral revenues for the
quarter increased $21,519 due to a 5.6% increase in the number of funeral
services performed (36,840 compared to 34,899).
During the three months ended June 30, 1998, the Company sold $138,919 of
prearranged funeral services compared to $148,704 for the same period in 1997.
Funeral costs and expenses were as follows:
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States.......... $153,079 $147,301 $ 5,778 3.9 %
France................. 117,750 102,047 15,703 15.4
Other European......... 39,546 36,423 3,123 8.6
Other foreign.......... 19,809 20,221 (412) (2.0)
-------- -------- -------
330,184 305,992 24,192 7.9
New clusters:*
United States.......... 986 536 450
Other European......... 8,419 714 7,705
Other foreign.......... 889 160 729
-------- -------- -------
10,294 1,410 8,884
Non-cluster and disposed
operations............... 3,002 4,326 (1,324)
Administrative overhead... 12,367 13,059 (692) (5.3)
-------- -------- -------
Total funeral costs
and expenses.......... $355,847 $324,787 $31,060 9.6 %
======== ======== =======
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
17
The $24,192 increase in costs and expenses from existing clusters is primarily
the result of a period to period increase in the total number of funeral
services performed. Acquisitions since January 1, 1997, included in existing
clusters, reported $18,664 of increased costs, while costs from existing
locations acquired before 1997 increased $5,528. The gross profit margin for
existing clusters decreased to 24.5% in 1998 from 26.1% in 1997. This decrease
is primarily attributable to the Company's United States funeral operations, a
historically high margin market for the Company. This is due to the
aforementioned weakness in the United States funeral service volumes.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, decreased slightly to 2.7%, compared to 3.1% in 1997 due to
reclassifications of certain of these costs to the cemetery segment to better
reflect the cost of administrative support.
Cemetery
Cemetery revenues were as follows:
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States............ $188,929 $155,922 $33,007 21.2 %
Other European........... 4,976 5,079 (103) (2.0)
Other foreign............ 12,421 14,124 (1,703) (12.1)
-------- -------- -------
206,326 175,125 31,201 17.8
New clusters*............... 9,558 891 8,667
Non-cluster and disposed
operations................. 482 1,723 (1,241)
-------- -------- -------
Total cemetery revenues.. $216,366 $177,739 $38,627 21.7 %
======== ======== =======
Revenues from the existing clusters increased $31,201 in 1998. Included in
the existing cluster increase were $17,893 in increased revenues from cemeteries
acquired since the beginning of 1997, while revenues from existing cluster
locations owned before 1997 increased $13,308 due to increased sales of pre-need
and at-need property and merchandise as well as additional trust investment
income.
Cemetery costs and expenses were as follows:
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States............ $ 94,459 $ 91,148 $ 3,311 3.6 %
Other European........... 2,875 2,888 (13) (0.5)
Other foreign............ 7,031 6,955 76 1.1
-------- -------- -------
104,365 100,991 3,374 3.3
New clusters*............... 7,118 799 6,319
Non-cluster and disposed
operations................. 1,030 1,470 (440)
Administrative overhead..... 13,126 7,629 5,497 72.1
-------- -------- -------
Total cemetery costs
and expenses............ $125,639 $110,889 $14,750 13.3 %
======== ======== =======
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
18
Costs and expenses from existing clusters increased $3,374 due primarily to
an increase of $10,407 at cemeteries acquired since the beginning of 1997. The
overall cemetery gross profit margin percentage improved in 1998 to 41.9% from
37.6% in 1997. This increase reflects a favorable product mix in sales of
preneed cemetery property and merchandise, increased trust investment income, as
well as continued cost control in all major expense categories primarily in the
United States. Administrative overhead costs have increased to 6.1% of revenues
for the three months ended June 30, 1998, compared to 4.3% during the comparable
period in 1997 due to the aforementioned reclassifications discussed in the
funeral segment.
Financial Services
Provident reported a gross profit of $2,317 for the three months ended June 30,
1998, compared to $1,836 for the same period in 1997. Provident's average
outstanding loan portfolio during the current period increased to $220,062
compared to $181,709 for the comparable period in 1997, while the average
interest rate spread remained stable at 3.2% for the three months ended June 30,
1998 and 1997.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
remained stable at 2.6% for the three months ended June 30, 1998 and 1997.
Interest expense, which excludes the amount incurred through financial
service operations, increased $7,371 or 22.3% period to period. This increased
interest expense reflects the Company's funding of acquisitions with debt.
The provision for income taxes reflected a 35.3% effective tax rate for the
three months ended June 30, 1998, compared to a 35.0% effective tax rate for the
comparable period in 1997.
Financial Condition and Liquidity at June 30, 1998:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Securities and Exchange Commission (the "Commission"). The
Company believes cash from operations, additional funds available under its
revolving credit agreements, and proceeds from public and private offerings of
securities will be sufficient to continue its current acquisition program and
operating policies. For the three-month period ended June 30, 1998, the Company
acquired 45 funeral service locations and 7 cemeteries (see Note 3). In
addition, the Company has received signed letters of intent to acquire an
additional 138 funeral service locations, 29 cemeteries and 2 crematoria for an
aggregate purchase price of approximately $386,000 and has reached a definitive
agreement to merge with ECI (see note 10) which will add 326 funeral homes and
81 cemeteries in a stock for stock transaction valued at approximately $578,000.
These businesses are expected to produce approximately $449,000 in annualized
revenues, including $324,000 in North American operations and $125,000 from
operations outside North America.
At June 30, 1998, the Company had net working capital of $360,439 and a
current ratio of 1.69:1, compared to working capital of $275,966 and a current
ratio of 1.52:1 at December 31, 1997.
Sources And Uses of Cash
Cash flows from operating activities: Net cash provided by operating activities
was $153,903 for the six months ended June 30, 1998, compared to $172,303 for
the same period in 1997, a decrease of $18,400. This decrease results from a
combination of higher operating profits, offset by increased uses of cash
generated by changes in the Company's working capital accounts. Significant
reductions of operating cash include amounts receivable resulting from increased
sales of funeral services as well as increased sales of cemetery products and
merchandise.
Cash flows from investing activities: Net cash used in investing activities was
$465,097 for the six months ended June 30, 1998, compared to $265,551 for the
same period in 1997, an increase of $199,546. Cash used for acquisitions
increased by $176,131 while the level of capital expenditures remained unchanged
during the six months ended June 30, 1998, as the
19
Company continues to expand through both acquisitions of existing businesses and
through increased construction of funeral and cemetery facilities. Additionally,
in 1997 approximately $148,000 in cash was provided by the sale of the Company's
interest in ECI. Cash used relating to prearranged funeral activities decreased
due to the timing of cash payments to and withdrawals from trusts.
Cash flows from financing activities: Net cash provided by financing activities
was $339,843 for the six months ended June 30, 1998, compared to $80,674 for the
same period in 1997, an increase of $259,169. The six months ended June 30, 1997
included a use of cash of $449,998 for the early extinguishment of certain
higher interest rate debt.
As of June 30, 1998, the Company's debt to capitalization ratio was 51.7%
compared to 49.8% at December 31, 1997. The interest rate coverage ratio for the
six months ended June 30, 1998 was 4.72:1, compared to 4.42:1 (excluding the
gain on the sale of the Company's investment in ECI) for the same period in
1997. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash flow generated
and the low failure rate exhibited by these types of businesses. The Company
believes these acquired firms are capable of servicing the additional debt and
providing a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance its
future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. The Company's
various revolving credit facilities and lines of credit currently provide for
aggregate borrowings of approximately $1,000,000 of which approximately $455,000
was available under these facilities at June 30, 1998. The Company also had the
ability to issue $1,000,000 in securities registered with the Commission under a
shelf registration. In addition, 14,682,000 shares of common stock and a total
of $197,000 of guaranteed promissory notes and convertible debentures are
registered with the Commission under a separate shelf registration to be used
exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts and
the funds collected are generally held in trust or are used to purchase life
insurance or annuity contracts. The principal amount of each such prearranged
funeral contract will be received in cash by a Company funeral service location
at the time the funeral is performed. Earnings on trust funds and increasing
benefits under insurance funded contracts also increase the amount of cash to be
received upon performance of the funeral and are intended to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. During 1997, the Company completed a review of the
prearranged trust investment process which included an asset/liability study.
This has resulted in a new investment program which entails the consolidation of
multiple trustees, the use of institutional managers with differing investment
styles and consolidated performance monitoring and tracking. This new program
targets a real return in excess of the amount necessary to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. This is accomplished by allocating the portfolio mix to the
appropriate investments that more accurately match the anticipated maturity of
the policies. The Company anticipates an asset allocation of approximately 65%
equity and 35% fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are a
current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American funerals performed annually approximates
25% and is expected to grow, thereby making the total number of funerals
performed more predictable.
20
Other Matters:
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs to
correctly differentiate the century from a date in which the year is represented
by only two digits. A computer system which is not year 2000 compliant might not
be able to process certain data, or possibly could cause the entire computer
system to malfunction. The Company is aware of the issues pertaining to computer
software and microprocessor performance as they relate to the year 2000, and is
taking steps to minimize the possibility that operations will be significantly
disrupted by the manner in which Company computers process date codes. The
Company has established Year 2000 program offices in Houston and Europe to
organize and oversee the Company's Year 2000 preparedness efforts.
The Company's Year 2000 preparedness efforts have been divided into four general
categories: planning and assessment, correction, validation and testing, and
acceptance and deployment. All of the Company's major systems are being assessed
to determine Year 2000 compliance and all non-compliant systems will be repaired
or replaced. Most major systems have already been assessed and are at various
stages of correction, testing, and deployment. Efforts are underway to educate
appropriate Company personnel about the importance of the Year 2000 problem and
to mitigate potential problems at all levels of the organization. The Company is
currently seeking Year 2000 compliance assurances from third party service
providers with which it has significant business relationships.
As major systems are assessed, the Company will be able to prepare accurate cost
estimates for completing the Company's Year 2000 preparedness efforts. The
Company operates in a relatively low technology business environment that is not
dependent upon complex customer on-line processing to execute business
operations. The Company currently does not believe that any significant
disruptions to operations will occur as a result of the Year 2000 problem.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be converted on a timely basis, or that a
failure to successfully convert by another company, would not have a material
adverse effect on the Company.
Recent Accounting Standards
The Company will adopt Statement of Financial Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" for the year ended December 31,
2000. The Company is currently evaluating the impact of this standard, but does
not anticipate that it will have a material impact on the Company's financial
position, results of operations, or statement of cash flows.
Cautionary Statement on Forward-looking Statements
The statements contained in this filing on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements may be accompanied by
words such as "believe," "estimate," "expect," "anticipate," or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results to differ materially from those in
forward-looking statements include, among others, the following:
1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable security
values as well as currency and interest rate fluctuations).
2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
3) Changes in consumer demand for the Company's services caused by several
factors such as changes in local death rates, cremation rates, competitive
pressures and local economic conditions.
4) The Company's ability to identify and complete additional acquisitions on
terms that are favorable to the Company, to successfully integrate
acquisitions into the Company's business and to realize expected cost
savings in connection with such acquisitions. The Company's future results
may be materially impacted by changes in the level of acquisition
activity.
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.
21
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1998, the Company held its annual meeting of shareholders and
the shareholders elected two directors. The shares voting on the
director nominees were cast as follows:
Abstention or Broker
Nominee Votes For Votes Withheld Non-votes
B. D. Hunter 205,618,107 2,626,776 -0-
John W. Mecom, Jr. 205,699,268 2,545 -0-
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority
With respect to any proposal of a holder of the Company's
common stock to be submitted to the Company's shareholders at its next
annual meeting outside the processes of Rule 14a-8 promulgated under the
Securities Exchange Act of 1934, as amended, (that is, where a
shareholder has not sought inclusion of the proposal in the Company's
proxy statement), the proxies solicited by the Company's Board of
Directors for use at such annual meeting may confer discretionary
authority to the proxies named therein to vote on any such proposal,
unless the Company receives notice of such shareholder proposal by
February 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
3.1 Statement of Resolution Eliminating Series of Shares of Series C
Junior Participating Preferred Stock dated July 27, 1998.
3.2 Statement of Resolution Establishing Series of Shares of Series
D Junior Participating Preferred Stock dated July 27, 1998.
10.1 Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and Jerald L. Pullins.
12.1 Ratio of earnings to fixed charges for the six months ended
June 30, 1998 and 1997.
27.1 Financial data schedule.
(b)Reports on Form 8-K
During the quarter ended June 30, 1998, the Company filed a Form 8-K
dated May 14, 1998, reporting (i) under "Item 5. Other Events" the
preferred share purchase rights which the Company distributed as a
dividend on common stock of the Company on July 28, 1998, and (ii)
under "Item 7. Exhibits" the Rights Agreement dated May 14, 1998 and
the Company's press release dated May 14, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1998
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
---------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
22