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 September 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 November
10, 1998, was 257,872,934 (excluding treasury shares).
SERVICE CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information
Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheet -
September 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Nine Months Ended September 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 - 23
Part II Other Information 24
Signature 24
2
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands,
except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Revenues................... $712,520 $600,995 $2,101,594 $1,870,014
Costs and expenses......... (538,814) (449,223) (1,524,070) (1,366,907)
-------- -------- ---------- ----------
Gross profit............... 173,706 151,772 577,524 503,107
General and administrative
expenses.................. (15,422) (16,775) (49,681) (49,215)
-------- -------- ---------- ----------
Income from operations..... 158,284 134,997 527,843 453,892
Interest expense........... (47,816) (32,734) (125,990) (100,365)
Dividends on preferred
securities of SCI
Finance LLC............... - - - (4,382)
Other income............... 18,087 9,330 35,266 21,185
Gain on sale of investment. - - - 68,077
-------- -------- ---------- ----------
(29,729) (23,404) (90,724) (15,485)
-------- -------- ---------- ----------
Income before income taxes
and extraordinary loss.... 128,555 111,593 437,119 438,407
Provision for income taxes. (45,342) (38,869) (154,172) (155,735)
-------- -------- ---------- ----------
Income before
extraordinary loss........ 83,213 72,724 282,947 282,672
Extraordinary loss on early
extinguishment of
debt (net of income taxes
of $23,383)............... - - - (40,802)
-------- -------- ---------- ----------
Net income................. $ 83,213 $ 72,724 $ 282,947 $ 241,870
======== ======== ========== ==========
Earnings per share:
Basic:
Income before
extraordinary loss...... $ .32 $ .29 $ 1.11 $ 1.17
Extraordinary loss
on early extinguishment
of debt................. - - - (.17)
-------- -------- --------- ----------
Net income............... $ .32 $ .29 $ 1.11 $ 1.00
======== ======== ========= ==========
Diluted:
Income before
extraordinary loss...... $ .32 $ .28 $ 1.08 $ 1.11
Extraordinary loss on
early extinguishment
of debt................. - - - (.16)
-------- -------- --------- ----------
Net income............... $ .32 $ .28 $ 1.08 $ .95
======== ======== ========= ==========
Dividends per share........ $ .09 $ .08 $ .27 $ .23
======== ======== ========= ==========
Basic weighted average
number of shares.......... 257,380 251,634 255,673 243,256
======== ======== ========= ==========
Diluted weighted average
number of shares.......... 263,416 258,614 262,308 257,282
======== ======== ========= ==========
(See notes to consolidated financial statements)
3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
September 30,
1998 December 31,
(Dollars in thousands, except per share amounts) (Unaudited) 1997
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents......................... $ 116,980 $ 46,877
Receivables, net of allowances.................... 611,587 557,481
Inventories....................................... 183,039 172,169
Other............................................. 51,239 34,881
----------- -----------
Total current assets............................ 962,845 811,408
----------- -----------
Investments - insurance subsidiaries................. 1,275,234 574,728
Prearranged funeral contracts ....................... 2,455,649 2,610,632
Long-term receivables ............................... 1,237,827 981,121
Cemetery property, at cost........................... 1,907,117 1,636,859
Property, plant and equipment, at cost (net)......... 1,774,243 1,644,137
Deferred charges and other assets.................... 671,468 549,862
Names and reputations (net).......................... 1,769,592 1,498,116
----------- -----------
$12,053,975 $10,306,863
=========== ===========
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.......... $ 425,142 $ 425,631
Current maturities of long-term debt.............. 83,269 64,570
Income taxes ..................................... 147,706 45,241
----------- -----------
Total current liabilities....................... 656,117 535,442
----------- -----------
Long-term debt....................................... 3,365,982 2,634,699
Reserves and annuity benefits - insurance subsidiaries 1,221,478 570,366
Deferred prearranged funeral contract revenues ...... 2,458,898 2,592,991
Deferred income taxes................................. 741,470 701,221
Other liabilities .................................... 606,365 546,140
Stockholders' equity:
Common stock, $1 per share par value,
500,000,000 shares authorized,
257,820,737 and 252,923,784, respectively,
issued and outstanding............................. 257,821 252,924
Capital in excess of par value..................... 1,554,834 1,493,246
Retained earnings.................................. 1,196,893 983,353
Accumulated other comprehensive income............. (5,883) (3,519)
----------- -----------
Total stockholders' equity....................... 3,003,665 2,726,004
----------- -----------
$12,053,975 $10,306,863
=========== ===========
(See notes to consolidated financial statements)
4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................................. $ 282,947 $241,870
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 133,880 113,982
Provision for deferred income taxes..................... 26,762 33,033
Extraordinary loss on early extinguishment of debt,
net of income taxes.................................... - 40,802
Gains from dispositions (net)........................... (24,426) (83,303)
Change in assets and liabilities, net of effects
from acquisitions:
(Increase) in receivables............................. (162,353) (87,109)
(Increase) in other assets........................... (70,405) (7,795)
Increase in payables and other liabilities ........... 65,204 25,211
Other................................................. 4,329 11,210
--------- --------
Net cash provided by operating activities ................. 255,938 287,901
--------- --------
Cash flows from investing activities:
Capital expenditures.................................... (152,990) (163,294)
Change in prearranged funeral balances.................. 53,097 (41,551)
Purchases of securities - insurance subsidiaries........ (768,315) (825,010)
Sales of securities - insurance subsidiaries............ 759,477 818,136
Proceeds from sales of property and equipment........... 27,563 30,827
Acquisitions, net of cash acquired...................... (668,830) (306,148)
Loans issued by finance subsidiary...................... (115,527) (68,158)
Principal payments received on loans issued by
finance subsidiary..................................... 62,631 29,117
Proceeds from sale of equity investment................. - 147,739
Purchases of equity investments......................... (8,412) -
Other................................................... 9,788 (32,776)
--------- --------
Net cash (used in) investing activities.................... (801,518) (411,118)
--------- --------
Cash flows from financing activities:
Increase in borrowings under revolving credit agreements 257,226 73,291
Long-term debt issued................................... 500,000 650,000
Payments of long-term debt.............................. (61,433) (66,036)
Early extinguishment of long-term debt.................. - (449,998)
Dividends paid.......................................... (65,156) (50,998)
Bank overdrafts and other............................... (14,954) (15,059)
--------- --------
Net cash provided by financing activities.................. 615,683 141,200
--------- --------
Net increase in cash and cash equivalents.................. 70,103 17,983
Cash and cash equivalents at beginning of period........... 46,877 44,131
--------- --------
Cash and cash equivalents at September 30, 1998 and 1997... $ 116,980 $ 62,114
========= ========
Cash used for:
Interest................................................ $ 117,992 $ 98,663
========= ========
Taxes................................................... 87,746 101,604
========= ========
Non-cash investing and financing transactions:
Common stock issued in acquisitions..................... $ 47,757 $ 57,864
========= ========
Common stock issued under restricted stock plans........ 1,226 2,017
========= ========
Debt issued in acquisitions............................. - 9,656
========= ========
Debenture conversions to common stock................... 2,594 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 Accumulated
(Dollars in thousands, excess other
except per share Common of par Retained comprehensive
amounts) stock value earnings income Total
- --------------------------------------------------------------------------------
Balance at
December 31, 1997..... $252,924 $1,493,246 $ 983,353 $(3,519) $2,726,004
Comprehensive income:
Net income........... 282,947 282,947
Other comprehensive
income:
Foreign currency
translation......... (14,693)
Unrealized gain
on securities....... 12,329
----------
Total other
comprehensive income. (2,364) (2,364)
----------
Comprehensive income.. 280,583
Common stock issued:
Stock option
exercises and
stock grants....... 3,504 12,630 16,134
Acquisitions......... 1,208 46,549 47,757
Debenture conversions 185 2,409 2,594
Dividends on
common stock
($.27 per share)..... (69,407) (69,407)
-------- ---------- ---------- -------- ----------
Balance at
September 30, 1998... $257,821 $1,554,834 $1,196,893 $ (5,883) $3,003,665
======== ========== ========== ======== ==========
(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
September 30, 1998, the Company operated 3,370 funeral service locations, 430
cemeteries and 180 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 contain crematoria. There are 152
combination locations that contain a funeral service location within a company
owned cemetery.
The financial services segment represents a combination of the Company's
prearranged funeral marketing, funeral and cemetery trust administration,
investments, life insurance operations, and Provident Services, Inc., the
Company's finance subsidiary.
2. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements for the nine months
ended September 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 255 funeral service locations, 40 cemeteries and 14
crematoria during the nine months ended September 30, 1998 (226 funeral service
locations, 34 cemeteries and 13 crematoria during the nine months ended
September 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.
Effective July 17, 1998, the Company acquired American Memorial Life
Insurance Company (AML), the pre-need funeral services division of American
Annuity Group, for $164,000 in cash. AML offers a variety of pre-need and final
expense life insurance and annuity products to finance prearranged funerals. AML
is part of the Company's financial services segment.
7
The effect of acquisitions on the consolidated balance sheet at September 30,
was as follows:
1998 1997
- -------------------------------------------------------------------------------
Current assets...................................... $ 55,577 $ 15,072
Investments - insurance subsidiaries................ 622,379 -
Prearranged funeral contracts....................... 47,802 63,014
Long-term receivables............................... 74,690 18,020
Cemetery property................................... 163,680 218,901
Property, plant and equipment....................... 84,342 98,104
Deferred charges and other assets................... 138,391 9,077
Names and reputations............................... 350,099 129,023
Current liabilities................................. (65,588) (24,197)
Long-term debt...................................... (62,907) (19,439)
Reserves and annuity benefits -
insurance subsidiaries............................. (594,848) -
Deferred prearranged funeral contract revenues...... (45,870) (79,094)
Deferred income taxes and other liabilities......... (51,160) (70,059)
Stockholders' equity................................ (47,757) (52,274)
-------- --------
Cash used for acquisitions................... $668,830 $306,148
======== ========
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 placed in trust
accounts (pursuant to applicable law) or are used to pay premiums on life
insurance policies.
Unperformed price guaranteed prearranged funeral contracts 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. A corresponding credit is recorded to "Deferred prearranged
funeral contract revenues". Amounts paid by customers under prearranged funeral
contracts are recognized in funeral revenue at the time the funeral services are
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 incurred through
the sales of trust funded and third party insurance funded prearrangements.
These obtaining costs include sales commissions and certain other direct
marketing costs which are deferred and amortized over a period representing the
actuarially determined life of the prearranged contracts.
Prearranged funeral contracts may also be funded by insurance policies
written by the Company's two wholly-owned insurance subsidiaries. These
insurance subsidiaries follow generally accepted accounting principles for life
insurance companies. Funds collected are included in "Investments-insurance
subsidiaries," while actuarially computed insurance reserves and annuity benefit
liabilities are recorded in "Reserves and annuity benefits-insurance
subsidiaries." At September 30, 1998, approximately $443,000 of the reserves and
annuity benefits are associated with policies funding prearranged funerals at
non-Company owned funeral locations. Policy acquisition costs are deferred to
"Deferred charges and other assets" and amortized as prescribed by generally
accepted accounting principles for life insurance companies.
The total value of unperformed prearranged funerals at September 30, 1998 was
$3,395,916 ($3,163,357 at December 31, 1997).
8
5. Debt
Debt at September 30, 1998 and December 31, 1997, was as follows:
September 30, December 31,
1998 1997
--------------------------------
Bank revolving credit agreements and
commercial paper............................... $ 870,573 $ 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.............. 114,259 141,108
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... 47,379 45,673
Mortgage notes and other debt with maturities
through 2015................................... 177,493 184,981
Deferred loan costs............................. (10,818) (13,078)
---------- ----------
Total debt...................................... 3,449,251 2,699,269
Less current maturities......................... (83,269) (64,570)
---------- ----------
Total long-term debt....................... $3,365,982 $2,634,699
========== ==========
The Company's primary revolving credit agreement provides for borrowings up to
$1,000,000 and consists of two committed tranches - a 364-day tranche and a
5-year, multi-currency tranche - which are primarily used to support commercial
paper issuance and for general corporate needs.
The 364-day tranche allows for borrowings up to $300,000. This facility
expires June 25, 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 tranche 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 September 30,
1998, there was approximately $193,000 of revolving borrowings outstanding under
this facility at a weighted average interest rate of 6.15%
As of September 30, 1998, there was $536,000 of commercial paper outstanding
backed by the above two tranches at a weighted average interest rate of 5.73%.
On September 30, 1998, the Company entered into a $141,000 bank facility and
borrowed the full amount. This facility will mature November 13, 1998. On
October 13, 1998, the Company entered into a $250,000 bank facility. As of
November 9, 1998, $100,000 had been borrowed under this facility. This facility
will also mature on November 13, 1998. It is the Company's intention to
refinance these two facilities with commercial paper borrowings.
9
On November 3, 1998, the Company entered into a new revolving credit facility
in the amount of $800,000. This facility will be used primarily to support
commercial paper issuance, has a 364-day maturity, and expires November 2, 1999.
The fee for this facility is set at 0.09%. As of November 9, 1998, this facility
had no commercial paper borrowings drawn against it.
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. The Company
uses these revolving credit agreements primarily to finance the Company's
ongoing acquisition programs. From time to time, the Company raises debt
and/or equity in the public markets to refinance its revolving credit
facility balances. The timing of these public debt or equity offerings 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. Therefore, the Company has classified
these borrowings as long-term debt.
On October 29, 1998 the Securities and Exchange Commission declared the
Company's new $1,500,000 shelf registration effective. This registration
replaced a $1,000,000 shelf registration. As of November 9, 1998, the Company
had $1,500,000 of issuance capacity under the new shelf. The shelf allows for
issuance of debt, equity, and combinations of such instruments for use in
acquisitions and general corporate needs.
6. Derivatives
The Company enters into derivative transactions 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 borrowings
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 September 30, 1998, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding Provident debt) consists of
approximately 63% of fixed interest rate debt at a weighted average rate of
6.29%, and approximately 37% of floating interest rate debt at a weighted
average rate of 5.69%. Approximately $1,816,000 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 $2,082,000.
The net fair value of the Company's various swap agreements at September 30,
1998, was an asset of $131,000. 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
Nine Months
Ended September 30,
1998 1997
-------------------
3.88 4.35
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
Geographic segment information was as follows:
North Other Other
America France European Foreign
- --------------------------------------------------------------------------------
Revenues:
Three months ended September 30:
1998............................ $ 471,032 $147,970 $ 62,281 $ 31,237
1997............................ 400,698 120,718 51,579 28,000
Nine months ended September 30:
1998............................ $1,387,260 $446,063 $188,757 $ 79,514
1997............................ 1,229,212 403,194 162,931 74,677
Income from operations:
Three months ended September 30:
1998............................ $ 120,803 $ 21,324 $ 5,126 $ 11,031
1997............................ 107,912 8,684 7,556 10,845
Nine months ended September 30:
1998............................ $ 425,987 $ 52,206 $ 28,331 $ 21,319
1997............................ 360,797 37,084 32,211 23,800
Funeral services performed:
Three months ended September 30:
1998............................ 61,186 35,085 28,283 8,619
1997............................ 58,734 35,062 23,692 8,585
Nine months ended September 30:
1998............................ 196,363 111,182 85,819 22,690
1997............................ 187,899 111,548 76,451 22,133
Number of locations at
September 30:
1998............................ 1,837 1,200 782 161
1997............................ 1,664 1,093 679 148
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 Nine Months ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Income (numerator):
Income before extraordinary
item - basic................... $ 83,213 $ 72,724 $282,947 $282,672
After tax interest on
convertible debentures......... 392 348 1,162 4,264
-------- -------- -------- --------
Income before extraordinary
item - diluted................. $ 83,605 $ 73,072 $284,109 $286,936
- --------------------------------------------------------------------------------
Shares (denominator):
Shares - basic.................. 257,380 251,634 255,673 243,256
Stock options and warrants...... 3,959 4,860 4,515 4,753
Convertible debentures.......... 2,077 2,120 2,120 4,891
Convertible preferred securities
of SCI Finance LLC............. - - - 4,382
-------- ------- ------- -------
Shares - diluted................ 263,416 258,614 262,308 257,282
- --------------------------------------------------------------------------------
Earnings per share before
extraordinary item:
Basic.......................... $ .32 $ .29 $ 1.11 $ 1.17
Diluted........................ $ .32 $ .28 $ 1.08 $ 1.11
- --------------------------------------------------------------------------------
10.Other Matters
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 will occur through a
stock-for-stock transaction that will result in ECI shareholders receiving
common shares of the Company, and will be accounted for under the
pooling-of-interests method of accounting.
The transaction, subject to regulatory approval and an affirmative vote of
ECI shareholders, is 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 conducts funeral, cemetery and financial services operations in 18
countries. The Company's largest markets are North America and France, which
when combined, represent approximately 76% of the Company's total operating
locations, and 87% of the Company's consolidated revenue.
Nine Months Ended September 30, 1998
Compared to Nine Months Ended September 30, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
Nine Months Ended September 30, %
1998 1997 Increase Increase
---------------------------------------------------------
Revenues:
Funeral................$1,351,603 $1,269,346 $ 82,257 6.5%
Cemetery............... 636,138 538,153 97,985 18.2
Financial services..... 113,853 62,515 51,338 82.1
---------- ---------- --------
2,101,594 1,870,014 231,580 12.4
Costs and expenses:
Funeral................ 1,042,981 977,825 65,156 6.7
Cemetery............... 385,773 337,021 48,752 14.5
Financial services..... 95,316 52,061 43,255 83.0
---------- ---------- --------
1,524,070 1,366,907 157,163 11.5
Gross profit and margin
percentage:
Funeral................ 308,622 22.8% 291,521 23.0% 17,101 5.9
Cemetery............... 250,365 39.4 201,132 37.4 49,233 24.5
Financial services..... 18,537 16.3 10,454 16.7 8,083 77.3
---------- ---------- --------
$ 577,524 27.5% $ 503,107 26.9% $ 74,417 14.8%
========== ========== ========
13
FUNERAL
Funeral revenues were as follows:
Nine Months ended
September 30, Increase %Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------
North America....................$ 752,151 $ 720,467 $31,684 4.4 %
France .......................... 385,361 351,220 34,141 9.7
Other European................... 171,136 146,872 24,264 16.5
Other foreign.................... 42,955 50,787 (7,832) (15.4)
---------- ---------- -------
Total funeral revenues........$1,351,603 $1,269,346 $82,257 6.5
========== ========== =======
The $31,684 increase in revenues from North American operations was primarily
the result of a $34,788 increase in revenues from existing clusters partially
offset by reduced revenues from disposed operations. The number of funeral
services performed by existing clusters in North America increased 4.8% (192,800
compared to 183,924), while the average sales price remained stable ($3,830
compared to $3,834). Included in the existing cluster increase was $49,549 from
locations acquired since January 1, 1997 and a decrease of $14,761 from
locations acquired prior to January 1, 1997. The decline reported at locations
owned prior to January 1, 1997, reflects continued weakness in mortality rates
throughout many of the Company's service areas.
Revenues from French operations increased $34,141 due to additional revenue
from locations acquired since January 1, 1997 and increased monument revenues in
1998. These increases were partially offset by a $12,700 decrease in 1998
revenue due to an unfavorable change in the French to US currency exchange rates
and a slight decline in total funeral services performed.
The $24,264 increase in revenues from other European operations was primarily
the result of a 12.3% increase in the number of funeral services performed
(85,819 compared to 76,451). This volume increase reflects the effect of
continued growth through acquisition in Europe.
The decrease in revenues from other foreign operations is due primarily to a
17% decrease in the Australian to US currency exchange rates, partially offset
by a 2.5% increase in the number of funeral services performed (22,690 compared
to 22,133). The additional funeral services are due primarily to the Company's
acquisition in Argentina during fourth quarter 1997.
During the nine months ended September 30, 1998, the Company sold $420,349 of
prearranged funeral services compared to $425,029 for the same period in 1997.
Funeral gross margin was as follows:
Nine Months ended September 30,
% of % of Increase %Increase
1998 Revenue 1997 Revenue (decrease) (decrease)
----------------------------------------------------------
North America.... $231,706 30.8% $219,779 30.5% $11,927 5.4 %
France .......... 44,659 11.6 32,265 9.1 12,394 38.4
Other European... 22,457 13.1 25,533 17.4 (3,076) (12.0)
Other foreign.... 9,800 22.8 13,944 27.4 (4,144) (29.7)
-------- -------- -------
Total funeral
gross margin.... $308,622 22.8 $291,521 23.0 $17,101 5.9
======== ======== =======
The slight improvement in gross margin percentage in North America is due to
the increase in funeral revenues mentioned above.
The 1998 increase in French gross margin is primarily the result of an
increase in higher margin monument sales, as well as, continued efforts to
control costs.
Other European gross margin decreased in 1998 due primarily to increased
merchandising and promotional expenses incurred in the United Kingdom.
14
The decrease in gross margin from other foreign operations was primarily the
result of a 17% decrease in the Australian to US currency exchange rates.
CEMETERY
Cemetery revenues were as follows:
Nine Months ended
September 30, Increase %Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------
North America.................. $581,958 $498,202 $83,756 16.8%
Other European................. 17,621 16,059 1,562 9.7
Other foreign.................. 36,559 23,892 12,667 53.0
-------- -------- ------
Total cemetery revenues..... $636,138 $538,153 $97,985 18.2
======== ======== =======
The $83,756 increase in North American cemetery revenue is due primarily to a
$82,448 increase in revenues from existing clusters. Included in the existing
cluster increase was $56,200 from locations acquired since January 1, 1997.
The $12,667 increase in other foreign cemetery revenue is due to the 1998
contribution of the Company's cemetery operations in Argentina (acquired in late
1997 and early 1998), offset by a decrease in cemetery revenue from Australia.
The decrease in Australia is due primarily to an unfavorable change in the
Australian to US currency exchange rates.
Cemetery gross margin was as follows:
Nine Months ended September 30,
% of % of Increase %Increase
1998 Revenue 1997 Revenue (decrease) (decrease)
----------------------------------------------------------
North America...... $232,972 40.0% $184,592 37.1% $48,380 26.2%
Other European..... 5,874 33.3 6,678 41.6 (804) (12.0)
Other foreign...... 11,519 31.5 9,862 41.3 1,657 16.8
-------- -------- -------
Total cemetery
gross margin...... $250,365 39.4 $201,132 37.4 $49,233 24.5
======== ======== =======
The increase in gross margin from the Company's North America cemetery
operations is due primarily to additional revenue from locations acquired before
January 1, 1997, as well as, increased trust investment income and property
sales in 1998. The gross margin percentage benefited from increased trust
investment income and lower merchandise costs.
The decline in the other foreign gross margin percentage is due to the
acquisition of the Company's Argentina cemetery operations in late 1997 and
early 1998. These operations have a lower gross margin percentage than the
Company's Australian cemeteries.
FINANCIAL SERVICES
For segment reporting, financial services represents a combination of the
Company's existing finance subsidiary, Provident Services, Inc. (Provident), and
the Company's two insurance subsidiaries.
Financial services revenues were as follows:
Nine Months ended
September 30, Increase
1998 1997 (Decrease) %Increase
----------------------------------------------
Insurance:
North America...................$ 38,912 $ - $38,912
France.......................... 59,976 50,425 9,551 18.9%
-------- ------- -------
Total insurance................. 98,888 50,425 48,463 96.1
Provident........................ 14,965 12,090 2,875 23.8
-------- ------- -------
Total financial services
revenues........................$113,853 $62,515 $51,338 82.1
======== ======= =======
15
Financial services gross margin was as follows:
Nine Months ended September 30,
% of % of Increase
1998 Revenue 1997 Revenue (decrease) %Increase
----------------------------------------------------------
Insurance:
North America..... $ 3,853 9.9% $ - $ 3,853
France............ 7,547 12.6 4,819 9.6% 2,728 56.6%
-------- ------- -------
Total insurance... 11,400 11.5 4,819 9.6 6,581 136.6
Provident.......... 7,137 47.7 5,635 46.6 1,502 26.7
-------- ------- -------
Total financial
services gross
margin............ $ 18,537 16.3 $10,454 16.7 $ 8,083 77.3
======== =-===== =======
The increase in North American revenue and gross margin is due to the
acquisition of American Memorial Life Insurance Co. (AML) effective July 17,
1998 (see note 3).
Provident reported a gross profit of $7,137 for the nine months ended
September 30, 1998, compared to $5,635 for the same period in 1997. Provident's
average outstanding loan portfolio during the current period increased to
$218,475 compared to $179,378 in 1997, while the average interest rate spread
remained stable at 3.2%.
Other Income and Expenses
General and administrative expenses remained constant compared to the prior
year. Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.4% for the nine months ended September 30, 1998,
compared to 2.6% for the comparable period in 1997.
Interest expense, which excludes the amount incurred by Provident, increased
$25,625 or 25.5% period to period. The increased interest expense primarily
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
nine months ended September 30, 1998, compared to a 35.5% effective tax rate for
the comparable period in 1997. The decrease in the effective tax rate is due
primarily to lower tax rates on international operations in 1998 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 September 30, 1998
Compared to Three Months Ended September 30, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
Three Months Ended September 30, %
1998 1997 Increase Increase
---------------------------------------------------------
Revenues:
Funeral............... $432,814 $396,777 $ 36,037 9.1%
Cemetery............... 213,831 182,624 31,207 17.1
Financial services..... 65,875 21,594 44,281 205.1
-------- -------- --------
712,520 600,995 111,525 18.6
Costs and expenses:
Funeral................ 347,698 315,670 32,028 10.1
Cemetery............... 135,446 115,135 20,311 17.6
Financial services..... 55,670 18,418 37,252 202.3
-------- -------- --------
538,814 449,223 89,591 19.9
Gross profit and margin
percentage:
Funeral................ 85,116 19.7% 81,107 20.4% 4,009 4.9
Cemetery............... 78,385 36.7 67,489 37.0 10,896 16.1
Financial services..... 10,205 15.5 3,176 14.7 7,029 221.3
-------- -------- --------
$173,706 24.4% $151,772 25.3% $ 21,934 14.5 %
======== ======== ========
16
FUNERAL
Funeral revenues were as follows:
Three Months ended
September 30, Increase %Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------
North America.................... $234,880 $228,214 $ 6,666 2.9 %
France .......................... 126,049 102,916 23,133 22.5
Other European................... 56,431 46,476 9,955 21.4
Other foreign.................... 15,454 19,171 (3,717) (19.4)
-------- -------- -------
Total funeral revenues........... $432,814 $396,777 $36,037 9.1
======== ======== =======
North America funeral revenues increased $6,666 due primarily to a $8,662
increase from existing clusters. The number of funeral services performed
by existing clusters in North America increased 4.9% (59,537 compared
to 56,738), while the average sales price decreased slightly ($3,853
compared to $3,890). Included in the existing cluster increase was a $16,847
increase from locations acquired after January 1, 1997, while locations
acquired prior to January 1, 1997, decreased $8,185. The decline reported
at locations owned prior to January 1, 1997, reflects continued weakness
in mortality rates throughout many of the Company's service areas.
The $23,133 increase in revenues from French operations was the result of a
slight increase in funeral services performed, increased monument revenue and
a favorable change in the French to US currency exchange rates.
Revenues from other European operations increased $9,955 due primarily to a
19.4% increase in the number of funeral services performed (28,283 compared to
23,692). The additional other European funeral services are primarily the
result of the Company's acquisitions in Norway and Portugal during 1998.
Funeral gross margin was as follows:
Three Months ended September 30,
% of % of Increase %Increase
1998 Revenue 1997 Revenue (decrease) (decrease)
----------------------------------------------------------
North America...... $59,254 25.2% $61,893 27.1% $(2,639) (4.3)%
France ............ 17,609 13.9 7,651 7.4 9,958 130.2
Other European..... 3,573 6.3 5,049 10.8 (1,476) (29.2)
Other foreign...... 4,680 30.3 6,514 34.0 (1,834) (28.2)
------- ------- -------
Total funeral
gross margin...... $85,116 19.7 $81,107 20.4 $ 4,009 4.9
======= ======= =======
The North American gross margin decreased due to higher personnel and
facility costs. In addition, locations acquired after January 1, 1997
experienced a lower gross margin percentage than the Company's existing
locations. Typically, acquisitions will temporarily exhibit slightly lower gross
margins, at least until such time as the locations are fully assimilated into
the cluster management strategy.
The increase in French gross margin percentage is the result of higher
revenues reported above. The gross margin from other European operations
decreased due to increased merchandising and promotional expenses incurred in
the United Kingdom, partially offset by increased gross margin by the Company's
other European operations.
CEMETERY
Cemetery revenues were as follows:
Three Months ended
September 30, Increase
1998 1997 (Decrease) %Increase
----------------------------------------------
North America................. $192,199 $168,692 $23,507 13.9%
Other European................ 5,851 5,103 748 14.7
Other foreign................. 15,781 8,829 6,952 78.7
-------- -------- -------
Total cemetery revenues....... $213,831 $182,624 $31,207 17.1
======== ======== =======
17
The $23,507 increase in revenue from North American cemetery operations is
due to an $26,508 increase in revenues from existing clusters. Cemetery
locations acquired after January 1, 1997, contributed $24,283 of the increase in
revenue from existing clusters.
Cemetery revenue from other foreign operations increased $6,952 due to the
expansion into Argentina during fourth quarter 1997 and early 1998, offset by a
decrease in cemetery revenue from Australia. The decrease in Australia is due
primarily to a 18.5% unfavorable change in the Australian to US currency
exchange rates.
Cemetery gross margin was as follows:
Three Months ended September 30,
% of % of Increase %Increase
1998 Revenue 1997 Revenue (decrease) (decrease)
----------------------------------------------------------
North America...... $70,481 36.7% $60,822 36.1% $ 9,659 15.9 %
Other European..... 1,553 26.5 2,336 45.8 (783) (33.5)
Other foreign...... 6,351 40.2 4,331 49.0 2,020 46.6
-------- ------- -------
Total cemetery
gross margin...... $78,385 36.7 $67,489 37.0 $10,896 16.1
======== ======= =======
The North American gross margin increased due to the aforementioned increase
in revenue of 13.9%. The increase in other foreign is primarily due to the
contribution from the Company's acquisitions in Argentina in late 1997 and early
1998.
FINANCIAL SERVICES
Financial services revenues were as follows:
Three Months ended
September 30,
1998 1997 Increase %Increase
----------------------------------------------
Insurance:
North America................. $38,912 $ - $38,912
France........................ 21,658 17,210 4,448 25.8%
------- ------- -------
Total insurance............... 60,570 17,210 43,360 251.9
Provident...................... 5,305 4,384 921 21.0
------- ------- -------
Total financial
services revenues............. $65,875 $21,594 $44,281 205.1
======= ======= =======
The increase in North American revenue is due to the acquisition of AML
effective July 17, 1998 (see note 3).
Financial services gross margin was as follows:
Three Months ended September 30,
% of % of
1998 Revenue 1997 Revenue Increase %Increase
----------------------------------------------------------
Insurance:
North America...... $ 3,853 9.9% $ - $ 3,853
France............. 3,715 17.2 1,033 6.0% 2,682 259.6%
------- ------- -------
Total insurance.... 7,568 12.5 1,033 6.0 6,535 632.6
Provident........... 2,637 49.7 2,143 48.9 494 23.1
------- ------- -------
Total financial
services gross
margin............. $10,205 15.5 $ 3,176 14.7 $ 7,029 221.3
======= ======= =======
Provident reported a gross margin of $2,637 for the three months ended
September 30, 1998, compared to $2,143 for the same period in 1997. Provident's
average outstanding loan portfolio during the current period increased to
$229,408 compared to $191,040 for the comparable period in 1997, while the
average interest rate spread increased slightly to 3.3% compared to 3.2% in
1997.
18
Other Income and Expenses
General and administrative expenses declined 8.1% due to lower personnel costs
and professional fees.
Interest expense, which excludes the amount incurred by Provident, increased
$15,082 or 46.1% period to period. This increased interest expense primarily
reflects the Company's funding of acquisitions with debt.
Financial Condition and Liquidity at September 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 nine-month period ended September 30, 1998, the
Company acquired 255 funeral service locations, 40 cemeteries and 14 crematoria
(see Note 3). As of September 30, 1998, the Company has received signed letters
of intent to acquire an additional 117 funeral service locations, 15 cemeteries
and 2 crematoria for an aggregate purchase price of approximately $249,000.
Combined, these businesses are expected to produce approximately $334,000 in
annualized revenues, including $129,000 in North American operations and
$205,000 from operations outside North America. In addition, the Company
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. The merger with ECI will add approximately $252,000
in assumed debt.
At September 30, 1998, the Company had net working capital of $306,728 and
a current ratio of 1.47:1, 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 $255,938 for the nine months ended September 30, 1998, compared to $287,901
for the same period in 1997, a decrease of $31,963. This decrease results from
increased non-cash changes in the Company's working capital accounts (primarily
increased levels of cemetery sales which generate additional receivables),
partially offset by higher operating profits.
Cash flows from investing activities: Net cash used in investing activities was
$801,518 for the nine months ended September 30, 1998, compared to $411,118 for
the same period in 1997, an increase of $390,400. Cash used for acquisitions
increased by $362,682 while the level of capital expenditures remained
relatively unchanged during the nine months ended September 30, 1998, as the
Company continues to expand through both acquisitions of existing businesses and
through increased construction of funeral and cemetery facilities. Additionally,
in 1997, $147,339 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 $615,683 for the nine months ended September 30, 1998, compared to $141,200
for the same period in 1997, an increase of $474,483. The nine months ended
September 30, 1997 included a use of cash of $449,998 for the early
extinguishment of certain higher interest rate debt.
As of September 30, 1998, the Company's debt to capitalization ratio was
53.5% compared to 49.8% at December 31, 1997. The interest rate coverage ratio
for the nine months ended September 30, 1998 was 4.29:1, compared to 4.36:1
(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
19
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. As of
September 30, 1998, the Company's various revolving credit facilities and lines
of credit provide for aggregate borrowings of approximately $1,141,000 ($270,000
available at September 30, 1998). As of November 13, 1998, the Company's credit
facilities provided for an aggregate borrowings of $1,800,000 (see note 5). As
of October 29, 1998, the Company also had the ability to issue $1,500,000 in
securities registered with the Commission under a shelf registration. In
addition, 14,161,000 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 and annuity 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 contracts. 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 major
foreign markets. AML has been a provider of insurance and annuity products
used to fund Company prearranged funerals for several years. 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.
Other Matters:
Year 2000 issue
The Year 2000 issue, also known as "Y2K," refers to the inability of some
computer programs and microprocessors to correctly interpret the century from a
date in which the year is represented by only two digits (e.g., 98). As a
result, on January 1, 2000, computer systems used by companies throughout the
world may experience operating difficulties unless they are modified or upgraded
to properly process date related information. The Y2K issue can arise at any
point in a company's supply, manufacturing, processing, distribution, or
financial chains.
The Company has established Y2K Program Management Offices at its corporate
offices in Birmingham, England and Houston, Texas. These program offices, under
the direction of senior management, are responsible for overseeing the numerous
facets of the Company's Year 2000 Preparedness Project (the Project). The
Company has engaged an external consulting firm to assist in oversight of the
Project and various assessment activities associated with discovering the
seriousness of the Y2K issue
20
in the Pacific Rim and South America. Additionally, the Company is utilizing
internal personnel, contract project managers, programmers and testers, as well
as vendors, to identify Y2K issues, test and implement the chosen solutions.
In order to adequately address the Y2K issue, the Project has been divided
into the following categories: production systems, networks, desktops, user
developed applications, vendor supplied software, facilities &
telecommunications, and merchandise supply chain. The following phases are
common to all of these categories: inventory (includes determining criticality),
discovery to determine Y2K problems, analysis to determine corrective action,
correction, testing, and implementation. In addition to these activities,
promotion of Y2K awareness and development of contingency plans is part of the
Project plan.
State of Readiness:
The majority of the Company's internal Y2K exposure exists at the corporate
office locations where the accounting and processing of the Company's business
transactions takes place. Individual funeral homes and cemeteries are
substantially technology independent and thus face few Y2K risks from internal
systems.
Production systems: In 1998, in order to improve access to business
information through a common, integrated computing system across the company,
the Company began a worldwide computer systems replacement project utilizing
systems from Oracle Corp. (Oracle). While this project has begun at the
Company's European headquarters, global implementation will not be achieved
prior to the turn of the century. Therefore, all computer programs expected to
be replaced by Oracle are being made Y2K ready. The only exception to this is in
the United Kingdom where the implementation of Oracle is proceeding in order to
achieve Y2K readiness. In general, the Company's production systems have
progressed through the inventory, discovery, and analysis phases and are in
various stages of correction and testing. Production systems make up the
majority of the Company's "mission critical systems" and are expected to be Y2K
ready by mid-1999.
Networks: Inventory, discovery, and analysis of critical Networks has already
been completed in several of the Company's locations and these networks are in
various stages of correction and testing. Some non-critical networks exist at
individual operating locations and will be assessed and made Y2K ready as time
allows. Expectations are that all critical networks will be Y2K ready by
mid-1999.
Desktops: In an effort to ensure the continued operability of the Company's
many personal computers, testing is underway to determine the extent to which
the Y2K problem associated with desktops will affect the Company's ability to
conduct business. It is expected that the impact will be minimal; however,
contingency plans are already in place should upgrades or replacements be
required. These contingency plans allow for the Y2K readiness of the Company's
critical desktops to be achieved by mid-1999.
User developed applications: Although applications in this category are not
expected to be mission critical in nature, the Company is in the process of
conducting inventory at both headquarters locations and plans to have all
critical user developed applications ready by the end of the first quarter in
1999.
Vendor supplied software: It is the policy of the Company to query each
manufacturer of critical "off-the-shelf" software to ascertain the vendor's
statement regarding the Y2K readiness of their product(s). Once the vendor's
statement is obtained, upgrades, replacements and testing will be implemented to
minimize the risk of Y2K issues arising from the software. Although much of the
progress in this risk category is dependent on external vendors supplying Y2K
ready products in a timely fashion, the Company expects that all critical vendor
supplied software in use at the Company will be Y2K ready by mid-1999.
Facilities & telecommunications: The Company recognizes the potential for Y2K
issues to arise from embedded technology systems which may be in use at its
numerous facilities. Inventory, discovery, and analysis are underway at the
Company's headquarters and preparations are being made for the same to occur at
the Company's various operating locations. Upon
21
completion of these phases, upgrades and/or replacements are expected to be made
in time to achieve Y2K readiness by mid-1999.
Merchandise supply chain: Due to the Company's disparate locations and
methods of operation, assessing the Y2K readiness of the Company's merchandise
supply chain must occur at both the corporate level (for core merchandise supply
chain relationships) and the local level (for those relationships unique to a
location). Inventory and discovery are already underway at some of the Company's
locations. Assessment of corporate relationships is expected to begin prior to
the end of 1998 and be concluded, along with the establishment of contingency
plans, by mid-1999.
Costs:
The aggregate costs for the Company to achieve Y2K readiness are not expected to
exceed $25,000. These costs will be incurred over the three year period from
1998 through the year 2000, with the majority to be expended in 1999. All costs
associated with Y2K readiness will be funded from operating cash flows. The
Company's costs associated with Y2K readiness through September 30, 1998 are
estimated at $2,500.
Risks:
The majority of the Company's internal Y2K exposure exists at corporate
locations. The failure to correct a material Y2K problem at these locations
could result in an interruption of certain normal corporate business activities.
Such a failure would not, however, render the Company's various operating
locations unable to deliver goods and services. The Company believes that the
greatest risks arise from the uncertainty of the Y2K readiness of key third
party suppliers - both private businesses and government entities, especially in
the Company's international markets. The possible consequences of the Company or
its key third party suppliers not being Y2K ready by January 1, 2000 include
temporary location closings, delays in the delivery of goods and services,
delays in the receipt of goods and invoice and collection errors. Due to the
inherent nature of the Y2K problem, including the uncertainty of the Y2K
readiness of key third party suppliers, the Company's is unable at this time to
accurately determine whether Y2K related failures will have a material impact on
the business and results of operations of the Company. The Project is expected
to significantly reduce the Company's level of uncertainty and, through the use
of contingency planning, the possibility of significant interruptions in normal
operations should be reduced.
Contingency Plans:
Contingency planning is an integral part of Y2K preparedness. Because of the
many uncertainties that exist, it is part of the Project methodology that
contingency plans be established for critical systems in each of the categories
outlined above. The Company is continually developing contingency plans as new
risks are uncovered and will continue to plan and implement these plans through
all of 1999. The Company does not currently have comprehensive contingency plans
for Y2K failures experienced by key third party suppliers; however, as part of
the assessment of the corporate merchandise supply chain, these plans will be
established to combat the uncertainty that exists in this category. The Y2K
program offices plan to review all project contingency plans and advise senior
management in early 1999 of any significant shortcomings.
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
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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.
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SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the nine months
ended September 30, 1998 and 1997.
27.1 Financial data schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the three months ended
September 30, 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.
November 16, 1998
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
----------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
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