<PAGE> 1
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, 1999
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 July
30, 1999 was 272,060,703 (excluding treasury shares).
<PAGE> 2
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheet -
June 30, 1999 (Unaudited) and December 31, 1998 4
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14 - 27
Part II. Other Information 28
Signature 29
</TABLE>
2
<PAGE> 3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share amounts) 1999 1998 1999 1998
- ---------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 830,236 $ 690,230 $ 1,734,292 $ 1,389,074
Costs and expenses ............................................. (650,651) (502,540) (1,335,836) (985,256)
----------- ----------- ----------- -----------
Gross profit ................................................... 179,585 187,690 398,456 403,818
General and administrative expenses ............................ (16,807) (17,251) (36,517) (34,259)
Restructuring charge ........................................... -- -- (89,884) --
----------- ----------- ----------- -----------
Income from operations ......................................... 162,778 170,439 272,055 369,559
Interest expense ............................................... (56,761) (40,464) (114,209) (78,174)
Other income ................................................... 12,780 10,528 27,368 17,179
----------- ----------- ----------- -----------
(43,981) (29,936) (86,841) (60,995)
Income before income taxes and extraordinary gain .............. 118,797 140,503 185,214 308,564
Provision for income taxes ..................................... (42,784) (49,555) (67,318) (108,830)
----------- ----------- ----------- -----------
Income before extraordinary gain ............................... 76,013 90,948 117,896 199,734
Extraordinary gain on early extinguishments of debt
(net of income taxes of $1,071) ............................... -- -- 1,885 --
----------- ----------- ----------- -----------
Net income ..................................................... $ 76,013 $ 90,948 $ 119,781 $ 199,734
=========== =========== =========== ===========
Earnings per share:
Basic:
Income before extraordinary gain ...................... $ .28 $ .36 $ .43 $ .78
Extraordinary gain on early extinguishments of debt ... -- -- .01 --
----------- ----------- ----------- -----------
Net income ............................................ $ .28 $ .36 $ .44 $ .78
=========== =========== =========== ===========
Diluted:
Income before extraordinary gain ...................... $ .28 $ .35 $ .43 $ .77
Extraordinary gain on early extinguishments of debt ... -- -- .01 --
----------- ----------- ----------- -----------
Net income ........................................... $ .28 $ .35 $ .44 $ .77
=========== =========== =========== ===========
Dividends per share ........................................... $ .09 $ .09 $ .18 $ .18
=========== =========== =========== ===========
Basic weighted average number of shares ....................... 272,013 255,004 272,502 254,820
=========== =========== =========== ===========
Diluted weighted average number of shares ..................... 274,587 261,740 275,012 261,754
=========== =========== =========== ===========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Dollars in thousands, except share amounts) (Unaudited) 1998
- ------------------------------------------- ----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 129,070 $ 358,210
Receivables, net of allowances ..................................... 590,605 565,552
Inventories ........................................................ 209,470 189,070
Other .............................................................. 87,531 96,248
------------ -----------
Total current assets ............................................. 1,016,676 1,209,080
------------ -----------
Investments - insurance subsidiaries .................................... 1,247,861 1,234,678
Prearranged funeral contracts ........................................... 2,994,456 2,588,806
Long-term receivables, net of allowances ................................ 1,549,318 1,408,076
Cemetery property, at cost .............................................. 2,198,262 2,035,897
Property, plant and equipment, at cost (net) ............................ 1,952,438 1,824,979
Deferred charges and other assets ....................................... 1,260,041 1,151,430
Names and reputations (net) ............................................. 2,446,779 1,813,212
------------ -----------
$ 14,665,831 $13,266,158
============ ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 553,893 $ 452,354
Current maturities of long-term debt ............................... 79,431 96,067
Income taxes ....................................................... 87,060 81,904
------------ -----------
Total current liabilities ........................................ 720,384 630,325
------------ -----------
Long-term debt .......................................................... 4,044,921 3,764,590
Reserves and annuity benefits - insurance subsidiaries .................. 1,211,984 1,207,169
Deferred prearranged funeral contract revenues .......................... 3,237,869 2,819,794
Deferred income taxes ................................................... 842,058 797,086
Other liabilities ....................................................... 910,655 893,092
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 272,060,122 and 259,201,104, issued and outstanding
(net of 2,796,999 and 68,373 treasury shares, at cost) ........... 272,060 259,201
Capital in excess of par value ..................................... 2,156,306 1,646,765
Retained earnings .................................................. 1,303,576 1,232,758
Accumulated other comprehensive income (loss) ...................... (33,982) 15,378
------------ -----------
Total stockholders' equity ....................................... 3,697,960 3,154,102
------------ -----------
$ 14,665,831 $13,266,158
============ ===========
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Dollars in thousands) 1999 1998
- --------------------- ---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $119,781 $199,734
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................................... 123,376 85,512
Provision for deferred income taxes ............................... 17,108 19,661
Restructuring charge .............................................. 89,884 --
Extraordinary gain on early extinguishments of debt,
net of income taxes ............................................. (1,885) --
Gains from dispositions (net) ..................................... (20,150) (9,748)
Realized gains on sales of investments ............................ (14,392) --
Realized losses on sales of investments ........................... 6,063 --
Change in assets and liabilities, net of effects
from acquisitions:
Increase in receivables ......................................... (114,316) (116,546)
Increase in other assets ........................................ (2,759) (24,285)
Increase (decrease) in payables and other liabilities ........... 16,412 (7,966)
Other ........................................................... 27 7,541
-------- --------
Net cash provided by operating activities .............................. 219,149 153,903
-------- --------
Cash flows from investing activities:
Capital expenditures .............................................. (116,861) (117,705)
Net effect of prearranged funeral production and
maturities ....................................................... (36,071) 44,737
Purchases of securities - insurance subsidiaries .................. (912,599) (318,800)
Sales of securities - insurance subsidiaries ...................... 790,742 305,554
Proceeds from sales of property and equipment ..................... 39,071 16,663
Acquisitions, net of cash acquired ................................ (66,026) (366,823)
Loans issued by lending subsidiary ................................ (41,674) (66,564)
Principal payments received on loans issued by
lending subsidiary ............................................... 56,073 48,882
Other ............................................................. (12,809) (11,041)
-------- --------
Net cash used in investing activities .................................. (300,154) (465,097)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in borrowings under revolving
credit agreements ................................................ 504,238 (68,952)
Proceeds from issuance of long-term debt .......................... -- 500,000
Payments of long-term debt ........................................ (203,611) (32,722)
Early extinguishments of long-term debt ........................... (365,936) --
Repurchase of common stock ........................................ (45,669) --
Dividends paid .................................................... (47,809) (42,007)
Bank overdrafts and other ......................................... 10,652 (16,476)
-------- --------
Net cash (used in) provided by financing activities .................... (148,135) 339,843
-------- --------
Net (decrease) increase in cash and cash equivalents ................... (229,140) 28,649
Cash and cash equivalents at beginning of period ....................... 358,210 46,877
-------- --------
Cash and cash equivalents at June 30, 1999 and 1998 .................... $129,070 $ 75,526
======== ========
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE> 6
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Capital in other
Common excess Retained comprehensive
(Dollars in thousands) stock of par value earnings income (loss) Total
- --------------------- --------- ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ................ $ 259,201 $ 1,646,765 $ 1,232,758 $ 15,378 $ 3,154,102
Comprehensive income:
Net income ............................... 119,781 119,781
Other comprehensive loss:
Foreign currency translation .......... (22,049)
Unrealized loss on securities ......... (27,311)
-----------
Total other comprehensive loss (49,360) (49,360)
-----------
Comprehensive income....................... 70,421
Common stock issued:
Acquisitions ............................. 15,506 550,366 565,872
Stock option exercises and stock grants .. 166 1,330 1,496
Debenture conversions .................... 44 657 701
Repurchase of common stock ................ (2,857) (42,812) (45,669)
Dividends on common stock ................. (48,963) (48,963)
--------- ----------- ----------- -------- -----------
Balance at June 30, 1999 .................... $ 272,060 $ 2,156,306 $ 1,303,576 $(33,982) $ 3,697,960
========= =========== =========== ======== ===========
</TABLE>
The Company's comprehensive income for the six months ended June 30, 1998 of
$211,431 consisted of net income of $199,734, a foreign currency translation
adjustment of $6,663, and an unrealized gain on securities of $5,034.
(See notes to consolidated financial statements)
6
<PAGE> 7
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. NATURE OF OPERATIONS
The Company is the largest provider of deathcare services in the world. At June
30, 1999, the Company operated 3,824 funeral service locations, 520 cemeteries
and 198 crematoria located in 20 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 atneed or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries contain crematoria. There are 167
combination locations that contain a funeral service location within a Company
cemetery.
The financial services division represents a combination of the Company's
insurance operations, prearranged funeral and cemetery trust administration,
investment management, and the lending activities of Provident Services, Inc.
("Provident"), which provides capital financing for independent funeral home and
cemetery operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements for the six months
ended June 30, 1999 and 1998 include the accounts of Service Corporation
International and all majority-owned subsidiaries (the "Company" or "SCI") 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 consolidated
financial statements have been prepared in a manner consistent with the
accounting policies described in the annual report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 1998 and
should be read in conjunction therewith. Operating results for interim periods
are not necessarily indicative of the results that may be expected for the
year. 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 or cash flows.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. As a result,
actual results could differ from these estimates.
3. ACQUISITIONS
In January 1999, a wholly owned subsidiary of the Company merged with Equity
Corporation International ("ECI") in a stock-for-stock transaction in which ECI
shareholders received 15,500,824 shares of Company common stock valued at
approximately $557,000 and approximately 1,200,000 options to purchase Company
common stock valued at approximately $8,628. At the time of the merger, ECI
owned 359 funeral service locations and 80 cemeteries in North America.
7
<PAGE> 8
Exclusive of the merger with ECI, the Company acquired 60 funeral service
locations, 11 cemeteries and 2 crematoria during the six months ended June 30,
1999 for an aggregate purchase price of approximately $77,800 (the Company
acquired 167 funeral service locations, 31 cemeteries and 8 crematoria during
the six months ended June 30, 1998 for an aggregate purchase price of
approximately $424,000). The consideration for these acquisitions consisted of
combinations of cash, common stock of the Company and issued debt. All
acquisitions have been accounted for under the purchase method of accounting,
therefore, the operating results of all of these acquisitions have been
included since their respective dates of acquisitions.
The effect of acquisitions, net of cash acquired, on the consolidated
balance sheet at June 30, was as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current assets ................................... $ 101,556 $ 22,021
Prearranged funeral contracts .................... 307,987 38,093
Long-term receivables ............................ 44,553 23,820
Cemetery property ................................ 193,050 81,306
Property, plant and equipment .................... 154,084 44,736
Deferred charges and other assets ................ 3,801 84,587
Names and reputations ............................ 685,163 237,915
Current liabilities .............................. (124,153) (23,353)
Long-term debt ................................... (335,333) (46,972)
Deferred prearranged funeral contract revenues ... (314,495) (29,083)
Deferred income taxes and other liabilities ...... (84,315) (35,836)
Stockholders' equity ............................. (565,872) (30,411)
--------- ---------
Cash used for acquisitions ............. $ 66,026 $ 366,823
========= =========
</TABLE>
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 contracts are signed. Payments under these contracts are placed in
trust accounts (pursuant to applicable law) or are used to pay premiums on life
insurance or annuity contracts.
Unperformed price guaranteed prearranged funeral contracts not funded
through Company owned insurance subsidiaries are included in the consolidated
balance sheet as "Prearranged funeral contracts." This balance represents
amounts due from trust accounts, customer receivables, or third party insurance
companies. A corresponding credit is recorded to "Deferred prearranged funeral
contract revenues." Amounts paid by a customer under a prearranged funeral
contract are recognized in funeral revenue at the time the funeral service is
performed. Trust earnings and increasing insurance benefits are accrued and
deferred until the services are performed, at which 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 as well as any
obtaining costs. Net obtaining costs incurred pursuant to the sales of trust
funded and third party insurance funded prearranged funeral contracts are
included in "Deferred charges and other assets" in the accompanying consolidated
balance sheet. These obtaining costs include sales commissions and certain
other direct costs which are deferred and amortized over a period representing
the actuarially estimated life of the prearranged contracts.
Prearranged funeral contracts may also be funded by insurance policies or
annuities written by the Company's wholly-owned insurance subsidiaries. These
insurance subsidiaries follow generally accepted accounting principles for life
insurance companies. Policy acquisition costs are deferred and included in
"Deferred charges and other assets" in the accompanying consolidated balance
sheet and amortized as prescribed by generally accepted accounting principles
for life insurance companies.
8
<PAGE> 9
The total value of unperformed prearranged funeral contracts includes
contracts that are trust funded or to be funded by third party insurance
companies ("Deferred prearranged funeral contract revenues"), or to be funded
by the Company's insurance subsidiaries. The total value represents the
original contract values plus any accumulated trust fund earnings or increasing
insurance benefits. The amount funded through the Company's insurance
subsidiaries differs from the "Reserves and annuity benefits - insurance
subsidiaries" amount in the accompanying consolidated balance sheet in that
"Reserves and annuity benefits - insurance subsidiaries" is an actuarially
determined amount relating to SCI and non-SCI business. As of June 30, 1999 and
December 31, 1998, unperformed prearranged funeral contracts are composed of
the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Deferred prearranged funeral contract revenues $3,237,869 $2,819,794
SCI contracts funded by Company owned insurance subsidiaries 978,945 932,056
---------- ----------
Total value of unperformed prearranged funeral contracts $4,216,814 $3,751,850
========== ==========
</TABLE>
5. DEBT
Debt at June 30, 1999 and December 31, 1998 was as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Bank revolving credit agreements and commercial paper $ 1,146,937 $ 650,596
Fixed rate notes, interest rates ranging from 6.0% - 9.3%, due 2000
through 2020 2,734,406 2,763,137
Convertible debentures 49,278 49,979
Mortgage notes and other debt 213,222 416,833
Deferred loan costs (19,491) (19,888)
----------- -----------
Total debt 4,124,352 3,860,657
Less current maturities (79,431) (96,067)
----------- -----------
Total long-term debt $ 4,044,921 $ 3,764,590
=========== ===========
</TABLE>
The Company's primary revolving credit agreements provide for borrowings
up to $1,800,000 and consist of three committed tranches - two 364-day
facilities and a 5-year, multi-currency tranche. These facilities are primarily
used to support commercial paper issuance and for general corporate needs.
One 364-day tranche allows for borrowings up to $300,000. This facility
expires June 25, 2000, 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, an annual facility fee of
0.125% is paid quarterly on the total commitment amount.
A second 364-day tranche allows for borrowings up to $800,000 and expires
November 2, 1999. An annual facility fee of 0.09% is paid quarterly on the
total commitment amount. Interest rates on this facility are based on various
indices as determined by the Company.
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 annual facility fee, which ranges from 0.07 to 0.15%, is
based on the Company's senior debt ratings and was 0.08% at June 30, 1999. Due
to the ratings changes on the Company's senior debt in July 1999, the facility
fee will increase to 0.10% at September 30, 1999. At
9
<PAGE> 10
June 30, 1999, approximately $254,029 of revolving borrowings was outstanding
under this facility with a weighted average interest rate of 4.84% ($217,345 at
December 31, 1998 with a weighted average interest rate of 5.65%).
As of June 30, 1999, $892,908 of commercial paper ($433,251 at December
31, 1998) was outstanding under the Company's $1,400,000 commercial paper
program, which was backed by the above facilities. The outstanding borrowings
at June 30, 1999, had a weighted average interest rate of 5.46% (6.68% at
December 31, 1998).
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees. The commercial paper borrowings and revolving notes generally have
maturities ranging from 1 to 180 days. Since it is the Company's intent to
refinance borrowings under these facilities with long-term debt or equity, the
Company has classified such borrowings as long-term debt.
In March 1999, the Company repurchased two issues of debt. On March 26,
the Company repurchased $200,000 of floating-rate notes, which were originally
due April 2011. These notes were to be remarketed in April 1999 as fixed-rate
notes, however, the Company chose to refinance with commercial paper to
maintain floating-rate exposure. The purchase price was $200,000 and a premium
of approximately $22,186, plus accrued interest, resulted in an extraordinary
after tax loss of $14,148. On March 31, the Company repurchased ECI convertible
debentures totaling $143,750, which were originally due December 2004. This
repurchase was effected by a change-of-control provision allowing the holders
to put the debentures back to the Company as a result of the merger with ECI.
The purchase price was $143,750 plus accrued interest and resulted in an
extraordinary gain of $25,141 ($16,033 net of tax) relating to the unamortized
premium reflecting the market valuation of the debentures at the date ECI
merged with the Company. These debentures were also refinanced with commercial
paper.
6. DERIVATIVES
The Company enters into derivative transactions primarily in the form of
interest rate swaps and cross-currency interest rate swaps in combination with
local currency borrowings to manage its mix of fixed and floating rate debt and
to substantially hedge the Company's net investments 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 creditworthy
financial institutions. The Company does not engage in derivative transactions
for speculative or trading purposes, nor is it a party to leveraged
derivatives.
At June 30, 1999, the Company's consolidated debt totaled $4,124,352
($3,860,657 at December 31, 1998) at a weighted average interest rate of 6.45%
(6.77% at December 31, 1998), excluding $194,168 of Provident debt. After
giving consideration to the interest rate and cross-currency interest rate
swaps, the weighted average rate of debt was 5.78%, (6.16% at December 31,
1998), excluding Provident debt.
Together, the Company's debt and derivative instruments at June 30, 1999
consisted of approximately 60% of fixed interest rate debt at a weighted
average rate of 6.22% and approximately 40% of floating interest rate debt at a
weighted average rate of 5.12%. Approximately $1,947,831 of the Company's
indebtedness was foreign-denominated after inclusion of the derivative
instruments.
The net fair value of the Company's various swap agreements at June 30,
1999, was an asset of $120,772 ($97,944 at December 31, 1998). Fair values were
obtained from the counterparties to the agreements and represent their estimate
of the amount the Company would pay or receive to terminate the swap agreements
based upon the existing terms and current market conditions.
10
<PAGE> 11
7. RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six months
ended June 30,
1999 1998
---- ----
<S> <C>
2.36 4.27
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary gain; (1) less
undistributed income of equity investees which are less than 50% owned, (2)
plus the minority interest of majority-owned subsidiaries with fixed charges
and (3) plus fixed charges (excluding capitalized interest). Fixed charges
consist of interest expense, whether capitalized or expensed, amortization of
debt costs, and one-third of rental expense which the Company considers
representative of the interest factor in the rentals. The decrease in the
Company's ratio of earnings to fixed charges in 1999 is partially attributable
to the $89,884 pre-tax restructuring charge recorded during the first quarter
of 1999 (see note 10). Without the restructuring charge, the ratio of earnings
to fixed charges would have been 3.03.
8. SEGMENT REPORTING
The Company's operations are service based and geographically based. The
Company's primary reportable operating segments presented below are based on
services and include funeral, cemetery, and insurance operations. The Company's
geographic segments include North America, France, other Europe and other
Foreign. The Company conducts funeral operations in all geographical regions,
cemetery operations in all regions except France, and insurance operations in
North America and France.
The Company's reportable segment information was as follows:
<TABLE>
<CAPTION>
Reportable
Funeral Cemetery Insurance Segments
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers:
Three months ended June 30,
1999 ......................................... $ 483,178 $257,168 $ 84,400 $ 824,746
1998 ......................................... 448,365 216,828 19,992 685,185
Six months ended June 30,
1999 ......................................... $1,057,819 $509,026 $156,196 $1,723,041
1998 ......................................... 918,327 422,769 38,318 1,379,414
---------- -------- -------- ----------
Income from operations:
Three months ended June 30,
1999 ......................................... $ 82,775 $ 84,021 $ 10,252 $ 177,048
1998 ......................................... 92,843 90,864 1,666 185,373
Six months ended June 30,
1999 ......................................... $ 213,795 $161,821 $ 17,553 $ 393,169
1998 ......................................... 223,369 172,117 3,832 399,318
---------- -------- -------- ----------
</TABLE>
11
<PAGE> 12
The following table reconciles reportable segment income from operations shown
above to the Company's consolidated income before income taxes and
extraordinary gain:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income from operations:
Reportable segments ................................. $ 177,048 $ 185,373 $ 393,169 $ 399,318
Other financial services income from operations ..... 2,537 2,317 5,287 4,500
General and administrative expenses ................. (16,807) (17,251) (36,517) (34,259)
Restructuring charge ................................ -- -- (89,884) --
--------- --------- --------- ---------
Income from operations ................................... 162,778 170,439 272,055 369,559
Interest expense .................................... (56,761) (40,464) (114,209) (78,174)
Other income ........................................ 12,780 10,528 27,368 17,179
--------- --------- --------- ---------
Income before income taxes and extraordinary gain ........ $ 118,797 $ 140,503 $ 185,214 $ 308,564
========= ========= ========= =========
</TABLE>
The Company's geographic segment information was as follows:
<TABLE>
<CAPTION>
North Other Other
America France Europe Foreign Total
----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues from external customers:
Three months ended June 30,
1999 ......................................... $ 574,257 $141,330 $ 72,133 $42,516 $ 830,236
1998 ......................................... 442,651 159,005 62,680 25,894 690,230
Six months ended June 30,
1999 ......................................... $1,186,575 $309,908 $160,865 $76,944 $1,734,292
1998 ......................................... 916,690 298,093 126,014 48,277 1,389,074
---------- -------- -------- ------- ----------
Income from operations before restructuring charge:
Three months ended June 30,
1999 ......................................... $ 129,511 $ 14,977 $ 6,155 $12,135 $ 162,778
1998 ......................................... 138,784 18,426 7,358 5,871 170,439
Six months ended June 30,
1999 ......................................... $ 285,176 $ 35,724 $ 22,333 $18,706 $ 361,939
1998 ......................................... 308,959 30,882 19,430 10,288 369,559
---------- -------- -------- ------- ----------
Income from operations:
Three months ended June 30,
1999 ......................................... $ 129,511 $ 14,977 $ 6,155 $12,135 $ 162,778
1998 ......................................... 138,784 18,426 7,358 5,871 170,439
Six months ended June 30,
1999 ......................................... $ 232,111 $ 14,857 $ 9,171 $15,916 $ 272,055
1998 ......................................... 308,959 30,882 19,430 10,288 369,559
---------- -------- -------- ------- ----------
Operating locations at June 30:
1999 ......................................... 2,298 1,233 826 185 4,542
1998 ......................................... 1,790 1,163 780 155 3,888
</TABLE>
12
<PAGE> 13
Included in the North America figures above are the following United States
amounts:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from external customers ................. $555,189 $422,945 $1,145,479 $875,971
Income from operations before restructuring charge 123,939 134,350 275,450 298,154
Income from operations ........................... 127,143 134,350 223,342 298,154
Operating locations .............................. -- -- 2,142 1,638
</TABLE>
9. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations are presented below:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (numerator):
Income before extraordinary gain - basic ....... $ 76,013 $ 90,948 $117,896 $199,734
After tax interest on convertible debentures ... 195 399 327 770
-------- -------- -------- --------
Income before extraordinary gain - diluted ..... $ 76,208 $ 91,347 $118,223 $200,504
Shares (denominator):
Shares - basic ................................. 272,013 255,004 272,502 254,820
Stock options and warrants .................. 1,127 4,593 1,210 4,792
Convertible debentures ...................... 1,447 2,143 1,300 2,142
-------- -------- -------- --------
Shares - diluted ............................... 274,587 261,740 275,012 261,754
Earnings per share before extraordinary gain:
Basic .......................................... $ .28 $ .36 $ .43 $ .78
Diluted ........................................ $ .28 $ .35 $ .43 $ .77
</TABLE>
10. RESTRUCTURING CHARGE
During the first quarter of 1999, the Company recorded a pre-tax restructuring
charge of $89,884, related to a cost rationalization program initiated in 1999.
The $89,884 charge relates to the following: (1) severance costs of $56,757; (2)
a charge of $19,123 for terminated projects representing costs associated with
certain construction projects that have been cancelled ($2,153) and costs
associated with acquisition due diligence which will no longer be pursued
($16,970); (3) a $7,245 charge for business and facility closures, primarily in
the Company's European operations; and (4) a remaining charge of $6,759
consisting of various other cost initiatives.
The $56,757 for severance costs is related to the termination of five
executive contractual relationships and the involuntary termination of
approximately 100 employees in North America (of which approximately 20 were
located in the corporate office), 600 employees in France, 85 employees in
other European operations and 10 employees in other foreign operations. The
positions terminated were both operational and administrative in nature and the
severance costs are expected to be paid out over the next 9 to 15 months. The
severance costs related to the executive contractual relationships will be paid
out according to the terms of the respective agreements and will extend through
2005.
At June 30, 1999 approximately $28,731 remained in accrued liabilities, of
which $27,183 related to severance costs and $1,548 related to cancellation
fees and remaining non-cancellable payments on operating leases. During the
three months ended June 30, 1999, the Company made payments totaling $7,103
relating to severance and $1,271 relating to cancellation fees and
non-cancellable leases.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE AMOUNTS)
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. The Company conducts funeral, cemetery and
financial services operations in 20 countries. The Company's largest markets
are North America and France, which when combined, represent approximately 78%
of the Company's total operating locations, and approximately 86% of the
Company's consolidated revenue.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
For the quarter ended June 30, 1999, the Company reported revenues of $830,236,
representing a 20.3% increase compared to $690,230 from the second quarter of
1998. Gross profits in the second quarter of 1999 decreased 4.3% to $179,585,
compared to $187,690 in 1998. For the three months ended June 30, 1999 the
Company reported net income of $76,013 and diluted earnings per share of $.28
($.28 basic). The Company reported net income of $90,948 and diluted earnings
per share of $.35 ($.36) for the comparable period in 1998.
THE FOLLOWING FACTORS CONTRIBUTED TO THE RESULTS FOR THE SECOND QUARTER OF
1999:
o Comparable funeral service volume for the Company's worldwide funeral
operations was 1.8% below comparable funeral service volume for the second
quarter of 1998. Comparable funeral service volume for North America in
the second quarter of 1999 was equivalent to the comparable funeral
service volume in the second quarter of 1998. Comparable funeral service
volume in the Company's France and United Kingdom funeral service
locations for the second quarter of 1999 was 2.3% and 5.6% , respectively,
below the second quarter of 1998.
o The average revenue per funeral service for all locations in North America
increased approximately 1.7% per funeral in the second quarter of 1999
when compared to the second quarter of 1998. On a comparable location
basis, the average revenue per funeral service in North America decreased
approximately 1.0% when compared to the second quarter of 1998. The
average revenue per funeral service from comparable locations in France
and the United Kingdom in the second quarter of 1999 increased .4% and
decreased 6.9%, respectively, compared to the second quarter of 1998,
partially reflecting negative foreign currency fluctuations.
o Foreign currency fluctuations negatively impacted revenues and operating
income for the second quarter of 1999 by $8,472 and $1,380, respectively,
compared to the rates in effect for the second quarter of 1998.
o Realized investment earnings and capital gains related to cemetery trust
funds were $20,622 in the second quarter of 1999 compared to $23,711 for
the same period of 1998.
o In the second quarter of 1999, total preneed cemetery revenues in North
America increased 8.2% to $129,879 compared to $120,032 reported for the
same period of 1998. Preneed and atneed cemetery revenues at comparable
locations in North America declined 3.0% compared to the same period of
1998.
14
<PAGE> 15
o The Company's consolidated gross margin was 21.6% (17.1% funeral, 32.7%
cemetery, 14.2% financial services) for the second quarter of 1999
compared to 27.2% (20.8% funeral, 41.9% cemetery, 15.9% financial
services) for the second quarter of 1998.
Information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Increase % Increase
1999 1998 (decrease) (decrease)
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Funeral........................... $ 483,178 $ 448,365 $ 34,813 7.8%
Cemetery.......................... 257,168 216,828 40,340 18.6
Financial services................ 89,890 25,037 64,853 259.0
----------- ------------- ----------
$ 830,236 $ 690,230 $ 140,006 20.3%
=========== ============= ==========
Gross profit and margin percentage:
Funeral........................... $ 82,775 17.1% $ 92,843 20.7% $ (10,068) (10.8)%
Cemetery.......................... 84,021 32.7 90,864 41.9 (6,843) (7.5)
Financial services................ 12,789 14.2 3,983 15.9 8,806 221.1
----------- ------------- ----------
$ 179,585 21.6% $ 187,690 27.2% $ (8,105) (4.3)%
=========== ============= ==========
</TABLE>
FUNERAL
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Increase % Increase
1999 1998 (decrease) (decrease)
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
North America................................... $ 284,540 $ 238,832 $ 45,708 19.1%
France ....................................... 116,994 139,013 (22,019) (15.8)
Other European.................................. 63,727 56,389 7,338 13.0
Other foreign................................... 17,917 14,131 3,786 26.8
------------ ------------ -----------
Total funeral revenues...................... $ 483,178 $ 448,365 $ 34,813 7.8%
============ ============ ===========
</TABLE>
The $45,708 increase in North American funeral revenue was the result of a
$46,941 increase in revenues from new locations (operating locations acquired
subsequent to January 1, 1998) and a $501 increase in revenues from comparable
locations (representing locations acquired before January 1, 1998), partially
offset by a $1,734 decrease in revenues primarily related to operations which
have been disposed. The number of funeral services performed at comparable
locations was 60,525 and 60,539, respectively, for the three months ended June
30, 1999 and 1998. The increase in revenues from new locations is primarily due
to the January 1999 merger with Equity Corporation International ("ECI").
The $22,019 decrease in French funeral revenue was primarily the result of
a $19,131 decrease, or 14.9%, in revenues from comparable locations. The number
of funeral services performed at comparable locations in 1999 decreased 2.3%
(33,238 in 1999 compared to 34,030 in 1998), which the Company believes is
primarily mortality driven since the Company's market share in France reflects
an increase over the first quarter of 1999. Additionally, the average French
franc to US dollar exchange rate weakened 3.1% during the second quarter in
1999 as compared to the second quarter in 1998.
The $7,338 increase in other European funeral revenue was the result of a
$1,225 increase, or 2.5%, in revenues from comparable locations and a $6,113
increase in revenues from new locations. The increase in revenue from new
locations
15
<PAGE> 16
reflects the Company's 1998 acquisitions growth in continental Europe. The
increase in revenues from comparable locations was primarily also due to the
Company's continental Europe locations, which had a higher average price per
funeral service ($1,707 in 1999 compared to $1,452 in 1998), partially offset
by a 4.6% decrease in the number of funeral services performed at these
locations in 1999.
The $3,786 increase in other foreign is primarily the result of a $3,424
increase in newly acquired operations in South America.
Funeral gross margin was as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 % of Revenue 1998 % of Revenue Decrease % Decrease
----------- ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
North America.......................... $ 61,813 21.7% $ 66,163 27.7% $ (4,350) (6.6)%
France .............................. 11,283 9.6 16,760 12.1 (5,477) (32.7)
Other European......................... 6,957 10.9 7,039 12.5 (82) (1.2)
Other foreign.......................... 2,722 15.2 2,881 20.4 (159) (5.5)
----------- ----------- ---------
Total funeral gross margin......... $ 82,775 17.1% $ 92,843 20.7% $ (10,068) (10.8)%
=========== =========== =========
</TABLE>
The decrease in North American funeral margin dollars and percentage was
primarily the result of increases in operating expenses, coupled with flat
volumes and no change in the average revenue per funeral service at comparable
locations. The decline in comparable funeral margin dollars was partially
offset by increased margin dollars contributed by new locations.
The decrease in French funeral margin dollars and percentage was primarily
the result of lower operating margins related to monument sales activities and
decreased funeral services performed which reduced profits due to the Company's
funeral fixed cost structure.
The decrease in other European gross margin percentage is primarily due to
a decrease in the gross margin percentage reported by the Company's United
Kingdom operations (resulting from fewer funeral services performed quarter
over quarter and the impact of strategic pricing initiatives during August
1998).
CEMETERY
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 1998 Increase % Increase
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North America................................... $ 224,163 $ 198,774 $ 25,389 12.8%
Other European.................................. 8,406 6,291 2,115 33.6
Other foreign................................... 24,599 11,763 12,836 109.1
---------- ----------- -----------
Total cemetery revenues..................... $ 257,168 $ 216,828 $ 40,340 18.6%
========== =========== ===========
</TABLE>
The $25,389 increase in North American cemetery revenue was primarily the
result of an $8,463 increase in revenues from comparable locations (which
consists of preneed and atneed sales and proceeds from the sale of undeveloped
cemetery property), a $21,384 increase in revenues from new locations,
partially offset by a $3,089 decrease in realized gains and income from
cemetery merchandise trust funds. The decrease in realized gains and income from
cemetery merchandise trust funds is consistent with the decrease in equity
returns experienced by the Company's investment portfolio and certain other
broad equity indices, and declines in interest rates over the comparable
periods.
The $2,115 increase in other European revenue is primarily due to a $1,734
increase in revenues from new locations.
16
<PAGE> 17
The $12,836 increase in other foreign cemetery revenue was primarily the
result of revenue increases from the Company's recently acquired South American
operations.
Cemetery gross margin was as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Increase % Increase
1999 % of Revenue 1998 % of Revenue (decrease) (decrease)
------------ ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
North America.......................... $ 72,429 32.3% $ 85,470 43.0% $ (13,041) (15.3)%
Other European......................... 2,179 25.9 2,404 38.2 (225) (9.4)
Other foreign.......................... 9,413 38.3 2,990 25.4 6,423 214.8
----------- ----------- ----------
Total cemetery gross margin........ $ 84,021 32.7% $ 90,864 41.9% $ (6,843) (7.5)%
=========== =========== ==========
</TABLE>
The decrease in North American cemetery margin dollars and percentage was
primarily the result of increased property and merchandise costs and selling
expense due to strategic changes in product mix, and reduced realized gains and
income from cemetery merchandise trust funds discussed above. The Company
believes the strategic change to increase the mix of heritage property sales
such as lots, lawn crypts, and mausoleums spaces will increase market share in
the future.
The $6,423 increase in other foreign cemetery margin dollars was primarily
the result of increases in margin dollars from the Company's recently acquired
South American operations.
FINANCIAL SERVICES
The financial services division represents a combination of the Company's
insurance operations, prearranged funeral and cemetery trust administration,
investment management, and the lending activities of Provident Services,
Inc. ("Provident").
Financial services revenues were as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 1998 Increase % Increase
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Insurance:
North America............................... $ 60,064 $ - $ 60,064
France...................................... 24,336 19,992 4,344 21.7%
---------- ----------- ----------
Total insurance............................. 84,400 19,992 64,408 322.2
Provident....................................... 5,490 5,045 445 8.8
---------- ----------- ----------
Total financial services revenues........... $ 89,890 $ 25,037 $ 64,853 259.0%
========== =========== ==========
</TABLE>
Financial services gross margin was as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 % of Revenue 1998 % of Revenue Increase % Increase
------------ ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Insurance:
North America............................ $ 6,557 10.9% $ - $ 6,557
France ................................. 3,695 15.2 1,666 8.3% 2,029 121.8%
----------- ----------- -----------
Total insurance.......................... 10,252 12.1 1,666 8.3 8,586 515.4
Provident................................. 2,537 46.2 2,317 45.9 220 9.5
----------- ----------- -----------
Total financial services gross margin.... $ 12,789 14.2% $ 3,983 15.9% $ 8,806 221.1%
=========== =========== ===========
</TABLE>
The increase in North American insurance revenue and gross margin is
primarily due to the acquisition of American Memorial Life Insurance Co.
effective July 1998.
The increase in French insurance revenue and gross margin is due to
increased production and increased investment income.
17
<PAGE> 18
Provident reported a gross margin of $2,537 for the three months ended
June 30, 1999, compared to $2,317 for the same period in 1998. Provident's
average outstanding loan portfolio during the current period increased to
$271,659 compared to $220,062 in 1998, however, the average interest rate
spread decreased to 2.46%, compared to 3.17% in 1998.
OTHER INCOME AND EXPENSES
General and administrative expenses decreased $444 to $16,807, compared to
$17,251 in the second quarter of 1998. The decrease was related to reduced
corporate expenses as a result of the restructuring in the first quarter of
1999, but was partially offset by increased professional fees and information
technology costs. Expressed as a percentage of revenues, general and
administrative expenses decreased to 2.0% for the three months ended June 30,
1999, compared to 2.5% for the comparable period in 1998.
Interest expense, which excludes the amount incurred by Provident,
increased $16,297 or 40.3% period to period. The increased interest expense
primarily reflects the Company's funding of acquisitions with debt.
The provision for income taxes reflected a 36.0% effective tax rate for
the three months ended June 30, 1999, compared to a 35.3% effective tax rate
for the comparable period in 1998. The increase in the effective tax rate is
due primarily to higher tax rates for the Company's recently acquired ECI
operations.
SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Increase % Increase
1999 1998 (decrease) (decrease)
----------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Funeral........................... $ 1,057,819 $ 918,327 $ 139,492 15.2%
Cemetery.......................... 509,026 422,769 86,257 20.4
Financial services................ 167,447 47,978 119,469 249.0
----------- ------------- ----------
$ 1,734,292 $ 1,389,074 $ 345,218 24.9%
=========== ============= ==========
Gross profit and margin percentage:
Funeral........................... $ 213,795 20.2% $ 223,369 24.3% $ (9,574) (4.3)%
Cemetery.......................... 161,821 31.8 172,117 40.7 (10,296) (6.0)
Financial services................ 22,840 13.6 8,332 17.4 14,508 174.1
----------- ------------- ----------
$ 398,456 23.0% $ 403,818 29.1% $ (5,362) (1.3)%
=========== ============= ==========
</TABLE>
18
<PAGE> 19
FUNERAL
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998 Increase % Increase
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North America................................... $ 617,738 $ 517,270 $ 100,468 19.4 %
France ....................................... 264,058 259,775 4,283 1.6
Other European.................................. 142,606 113,782 28,824 25.3
Other foreign................................... 33,417 27,500 5,917 21.5
------------ ------------ -----------
Total funeral revenues...................... $ 1,057,819 $ 918,327 $ 139,492 15.2%
============ ============ ===========
</TABLE>
The $100,468 increase in North American funeral revenue was the result of
a $103,575 increase in revenues from new locations (representing locations
acquired subsequent to January 1, 1998) and a $2,128 increase in revenues from
constructed facilities, partially offset by a $7,067 decrease in revenues
related to operations which have been disposed. The increase in revenue from
new locations is primarily due to the January 1999 merger with Equity
Corporation International ("ECI").
The $4,283 increase in French funeral revenue was the result of a slight
increase in the number of funerals performed in France (76,663 in 1999 compared
to 76,097 in 1998), and an increase in the average sales price in 1999 ($2,046
compared to $1,965).
The $28,824 increase in other European funeral revenue was the result of a
$7,388, or 7.0%, increase in revenues from comparable locations and a $21,946
increase in revenues from new locations. The growth in comparable revenue is
primarily due to a $6,191 increase in comparable revenue reported by the
Company's United Kingdom operations. The growth in revenues reported by new
locations is primarily the result of acquisitions in Continental Europe.
The $5,917 increase in other foreign funeral revenue was the result of a
$6,198 increase in revenues at new locations. The increase in revenues at new
locations was primarily due to an increase in the number of funerals performed
at the Company's South American locations.
Funeral gross margin was as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Increase % Increase
1999 % of Revenue 1998 % of Revenue (decrease) (decrease)
------------ ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
North America.......................... $ 160,169 25.9% $ 172,452 33.3% $ (12,283) (7.1)%
France .............................. 28,896 10.9 27,050 10.4 1,846 6.8
Other European......................... 19,750 13.8 18,747 16.5 1,003 5.4
Other foreign.......................... 4,980 14.9 5,120 18.6 (140) (2.7)
----------- ----------- ----------
Total funeral gross margin......... $ 213,795 20.2% $ 223,369 24.3% $ (9,574) (4.3)%
=========== =========== ==========
</TABLE>
The decrease in North American funeral margin dollars and percentage was
primarily the result of increases in operating expenses at both comparable and
new locations. Comparable locations experienced increases in operating
expenses, coupled with flat volumes and no change in the average revenue per
funeral service. The decline in comparable funeral margin dollars was partially
offset by new locations added in the January 1999 merger with Equity
Corporation International ("ECI").
19
<PAGE> 20
CEMETERY
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998 Increase % Increase
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North America................................... $ 447,240 $ 389,760 $ 57,480 14.7%
Other European.................................. 18,259 12,232 6,027 49.3
Other foreign................................... 43,527 20,777 22,750 109.5
---------- ----------- -----------
Total cemetery revenues........................ $ 509,026 $ 422,769 $ 86,257 20.4%
========== =========== ===========
</TABLE>
The $57,480 increase in North American cemetery revenue was the result of
a $28,743 increase in revenues from comparable locations (which consists of
preneed and atneed sales and proceeds from the sale of undeveloped cemetery
property) and a $43,891 increase in revenues from new locations. Partially
offsetting these increases was a $14,106 reduction in realized gains and,
income from cemetery merchandise trust funds.
Other European cemetery revenue increased $6,027 in 1999. This increase
reflects continued growth in continental Europe. Revenues from the Company's
Belgium and Netherlands operations increased to $3,284 in 1999, compared to
$426 in 1998, an increase of $2,858. In addition the Company's United Kingdom
revenue increased $3,037 in 1999, or 25.8% ($14,807 in 1999 compared to $11,770
in 1998).
The $22,750 increase in other foreign cemetery revenue was primarily the
result of revenue increases from the Company's recently acquired South America
operations.
Cemetery gross margin was as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Increase % Increase
1999 % of Revenue 1998 % of Revenue (decrease) (decrease)
------------ ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
North America.......................... $ 141,759 31.7% $ 162,491 41.7%
$ (20,732) (12.8)%
Other European......................... 6,336 34.7 4,458 36.4 1,878 42.1
Other foreign.......................... 13,726 31.5 5,168 24.9 8,558 165.6
----------- ----------- ----------
Total cemetery gross margin........ $ 161,821 31.8% $ 172,117 40.7% $ (10,296) (6.0)%
=========== =========== ==========
</TABLE>
The decrease in North American cemetery margin dollars and percentage was
primarily the result of a reduction in realized gains and income from cemetery
merchandise trust funds, and increases in merchandise costs and selling and
commission expenses.
20
<PAGE> 21
FINANCIAL SERVICES
The financial services division represents a combination of the Company's
insurance operations, prearranged funeral and cemetery trust administration,
investment management, and the lending activities of Provident Services,
Inc. ("Provident").
Financial services revenues were as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998 Increase % Increase
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Insurance:
North America............................ $ 110,346 $ - $ 110,346
France ................................. 45,850 38,318 7,532 19.7%
--------- ---------- ----------
Total insurance.......................... 156,196 38,318 117,878 307.6
Provident................................. 11,251 9,660 1,591 16.5
--------- ---------- ----------
Total financial services revenues........ $ 167,447 $ 47,978 $ 119,469 249.0%
========= ========== ==========
</TABLE>
Financial services gross margin was as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 % of Revenue 1998 % of Revenue Increase % Increase
------------ ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Insurance:
North America............................ $ 10,724 9.7% $ - $ 10,724
France ................................. 6,829 14.9 3,832 10.0% 2,997 78.2%
----------- ----------- -----------
Total insurance.......................... 17,553 11.2 3,832 10.0 13,721 358.1
Provident................................. 5,287 47.0 4,500 46.6 787 17.5
----------- ----------- -----------
Total financial services gross margin.... $ 22,840 13.6% $ 8,332 17.4% $ 14,508 174.1%
=========== =========== ===========
</TABLE>
The increase in North American insurance revenue and gross margin is
primarily due to the acquisition of American Memorial Life Insurance Co.
effective July 1998.
The increase in French insurance revenue and gross margin is due to
increased production and increased investment income.
Provident reported a gross margin of $5,287 for the six months ended June
30, 1999 compared to $4,500 for the same period in 1998. Provident's average
outstanding loan portfolio during the current period increased to $279,272
compared to $213,009 in 1998, however, the average interest rate spread
decreased to 2.66%, compared to 3.12% in 1998.
OTHER INCOME AND EXPENSES
General and administrative expenses increased $2,258 to $36,517, compared to
$34,259 in the six months ended June 30, 1998. The increase primarily relates
to increased professional expenses partially offset by lower salary costs.
Expressed as a percentage of revenues general and administrative expenses
decreased to 2.1% for the six months ended June 30, 1999, compared to 2.5% for
the comparable period in 1998.
Interest expense, which excludes the amount incurred by Provident,
increased $36,035 or 46.1% period to period. The increased interest expense
primarily reflects the Company's funding of acquisitions with debt.
The provision for income taxes reflected a 36.3% effective tax rate for
the six months ended June 30, 1999, compared to a 35.3% effective tax rate for
the comparable period in 1998. The increase in the effective tax rate is due
primarily to higher tax rates for the Company's recently acquired ECI
operations.
During the first quarter 1999, the Company recorded a pre-tax
restructuring charge of $89,884, related to a cost rationalization program
initiated in 1999. The $89,884 charge relates to the following: (1) severance
costs of $56,757 related to approximately 800 employees worldwide; (2) a charge
of $19,123 for terminated projects representing costs
21
<PAGE> 22
associated with certain construction projects that have been cancelled ($2,153)
and costs associated with acquisition due-diligence which will no longer be
pursued ($16,970); (3) a $7,245 charge for business and facility closures,
primarily in the Company's European operations; and (4) a remaining charge of
$6,759 consisting of various other cost initiatives.
At June 30, 1999 approximately $28,731 remained in accrued liabilities, of
which $27,183 related to severance costs and $1,548 related to cancellation
fees and remaining non-cancelable payments on operating leases. Payments of
these accrued liabilities will occur through 2005. The Company does not expect
these payments will have a significant effect on its liquidity or financial
position.
The effect of the above cost rationalization program, coupled with other
cost reduction initiatives, is expected to produce future annualized cost
savings of at least $60,000, on a pre-tax basis, primarily from the reduction
of personnel and facility costs.
FINANCIAL CONDITION AND LIQUIDITY AT JUNE 30, 1999:
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 anticipated acquisition program
and operating policies. Excluding the ECI transaction, for the six-month period
ended June 30, 1999, the Company acquired 60 funeral service locations, 11
cemeteries and 2 crematoria for an aggregate purchase price of approximately
$77,800. As of July 21, 1999, the Company has received signed letters of intent
to acquire an additional 31 funeral service locations, 4 cemeteries and 1
crematoria for an aggregate purchase price of approximately $25,297. Combined,
these businesses are expected to produce approximately $67,931 in annualized
revenues. Additionally, in January 1999, the Company merged with ECI in a
stock-for-stock transaction in which ECI shareholders received 15,500,824 shares
of Company common stock valued at approximately $557,000 and approximately
1,200,000 options to purchase Company common stock valued at approximately
$8,628. In connection with the merger, the Company assumed approximately
$310,000 of ECI indebtedness. The ECI merger added 359 funeral homes and 80
cemeteries.
At June 30, 1999, the Company had net working capital of $296,292 and a
current ratio of 1.41:1, compared to working capital of $578,755 and a current
ratio of 1.92:1 at December 31, 1998.
SOURCES AND USES OF CASH
Cash flows from operating activities: Net cash provided by operating activities
was $219,149 for the six months ended June 30, 1999, compared to $153,903 for
the same period in 1998, an increase of $65,246. Significant components of cash
flow provided by operating activities for the six months ended June 30, 1999
included: (1) net income adjusted for non-cash items, (2) the original $89,884
pre-tax restructuring provision (of which $28,731 remains at June 30, 1999 and
the decrease is reflected through the change in payables and other
liabilities), partially offset by (3) an increase in receivables of $114,316
primarily attributed to the sales of preneed cemetery products and services
($270,033 for the six months ended June 30, 1999) which are usually financed on
an installment basis in excess of 12 months.
Cash flows from investing activities: Net cash used in investing activities
was $300,154 for the six months ended June 30, 1999, compared to $465,097 for
the same period in 1998, a decrease in the use of cash of $164,943. Significant
components of cash used in investing activities for the six months ended June
30, 1999 included $116,861 in capital expenditures and $121,857 of purchases in
excess of sales of securities at the Company's insurance subsidiaries. One of
the subsidiaries had a significant cash position at December 31, 1998 and the
excess cash was used to purchase securities.
22
<PAGE> 23
Cash flows from financing activities: Net cash used in financing activities was
$148,135 for the six months ended June 30, 1999, compared to net cash provided
by financing activities of $339,843 for the same period in 1998, an increase in
the use of cash of $487,978. Significant components of cash used in financing
activities for the six months ended June 30, 1999 included $365,936 for the
early extinguishment of certain floating rate debt and the ECI convertible
debentures, as well as $160,254 to repay other debt assumed in connection with
the ECI merger.
As of June 30, 1999, the Company's debt to capitalization ratio was 52.7%
compared to 55.0% at December 31, 1998 (51.1% and 53.6%, respectively,
excluding Provident). The interest rate coverage ratio for the six months ended
June 30, 1999 was 3.29:1 (excluding the 1999 restructuring charge of $89,884),
compared to 4.72:1 for the same period in 1998. Though the level of acquisition
activity is expected to slow from the 1998 level, the Company still believes
that the acquisition of funeral, cemetery and financial services 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. As of June
30, 1999, the Company had approximately $653,000 of available borrowings under
its primary revolving credit agreements. As of June 30, 1999, the Company also
had the ability to issue $900,000 in securities registered with the Commission
under a shelf registration. In addition, 12,870,000 shares of common stock and
a total of $187,000 of guaranteed promissory notes and convertible debentures
are registered with the Commission under a separate shelf registration to be
used exclusively for future acquisitions.
PREARRANGED FUNERAL SERVICES
The Company sells price guaranteed prearranged funeral contracts and the funds
collected are generally held in trust or are used to purchase life insurance or
annuity contracts. The amounts paid into trust funds or premiums paid on
insurance contracts on such prearranged funeral contracts will be received in
cash by a Company funeral service location at the time the funeral is
performed. Earnings on trust funds and increasing benefits under insurance and
annuity-funded contracts also increase the amount of cash to be received upon
performance of the funeral.
The total value of unperformed prearranged funeral contracts includes
contracts that are trust funded or to be funded by third party insurance
companies, or funded by the Company's insurance subsidiaries. The total value
represents the original contract values plus any accumulated trust fund
earnings or increasing insurance benefits. At June 30, 1999, the total value of
unperformed prearranged funeral revenues expected to be recognized in future
periods was $4,216,814 which is a 12.4% increase over the December 31, 1998
balance of $3,751,850. The majority of the increase from December 31, 1998
relates to acquisitions. The remainder of the increase relates to additional
prearranged funeral contract sales, accumulated trust fund earnings and
increasing insurance benefits. Such increases are offset primarily by
maturities and unfavorable foreign currency fluctuations.
The Company's investment 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 obtaining costs. The investment
portfolio is allocated 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 on the trust funds
and primarily fixed income investments on insurance portfolios.
The sales of prearranged funeral contracts afford the Company the
opportunity to protect both current market share and mix as well as expand
market share in certain markets. The Company believes this will stimulate
future revenue growth. Prearranged funeral services fulfilled as a percent of
the total North American funerals performed was 27% for the six months ended
June 30, 1999 (26% for the six months ended June 30, 1998) and is expected to
grow, thereby making the total number of funerals performed more predictable.
23
<PAGE> 24
OTHER MATTERS:
Year 2000 Issue
The Year 2000 issue, also known as "Y2K," refers to the inability of some
computer programs and computer-based microprocessors to correctly interpret the
century from a date in which the year is represented by only two digits (e.g.,
98). As a result, on or before January 1, 2000, computer systems used by
companies throughout the world may experience operating difficulties unless
they are modified or upgraded to properly process date related information. The
Y2K issue can arise at any point in a company's supply, manufacturing,
processing, distribution, or financial chains.
The Company has established Y2K Program Offices at its corporate offices
in Houston, Texas and Birmingham, England. These program offices, under the
direction of senior management, are responsible for advising and monitoring the
numerous facets of the Company's Y2K preparations. The Company has engaged an
external consulting firm to assist in oversight of the Company's Y2K
preparations and various assessment activities associated with discovering the
seriousness of the Y2K issue in the Pacific Rim and South America.
Additionally, the Company is utilizing internal personnel, contract programmers
and testers, as well as other third party vendors, to identify Y2K issues, test
and implement the chosen solutions.
In order to adequately address the Y2K issue, efforts have been directed
to the following categories: production systems, networks, desktops, user
developed applications, vendor supplied software, facilities and
telecommunications, and the Company's supply chain. The following phases are
common to all of these categories: inventory and determination of criticality,
discovery to determine Y2K problems, analysis to determine corrective action,
correction, testing, and implementation. In addition to these activities,
promotion of Y2K awareness and development of contingency plans are part of the
Company's Y2K preparation effort.
State of Readiness
The majority of the Company's internal Y2K exposure exists at the corporate
office locations where the accounting and processing of the Company's business
transactions takes place. Individual operating locations (primarily funeral
homes and cemeteries) are substantially technology independent and thus face
few Y2K risks from internal systems.
Production systems: All of the Company's critical production systems have
been assessed for Y2K readiness. Seventy-five percent of systems identified as
needing corrective action have completed the correction and implementation
phases and are currently being tested for critical Y2K time periods. The
remaining systems are all nearing the end of correction and/or testing and will
be implemented in the fourth quarter of 1999.
Networks: All of the Company's critical computer networks have been
assessed for Y2K readiness. Upgrades and replacements are substantially
complete in North America and Australia. Critical networks for the Company's
European operations are in the process of being upgraded or consolidated with
the Company's North American infrastructure. Expectations are that all critical
networks will be Y2K ready in the fourth quarter of 1999.
Desktops: Testing has been conducted to determine the extent to which the
Y2K problem associated with desktops will affect the Company's ability to
conduct business. As none of the Company's critical computer systems directly
access date information from the desktop's real time clock, it has been
determined that very few desktops will pose a Y2K issue. Coincidentally, as
part of ongoing technology refresh programs and new production systems'
deployment, desktops are being upgraded, as needed, to better meet the
Company's business needs. As part of contingency planning, personnel will be
instructed on how to verify each desktop's date, and reset if necessary, after
January 1, 2000.
User developed applications: Inventory and discovery for items in this
category have been achieved. Very few critical applications were found to have
date dependencies. Those that have date dependencies are being tested to ensure
no problems arise because of Y2K issues. As these applications often work in
tandem with the Company's productions systems, final testing and implementation
will coincide with those systems.
Vendor supplied software: It is the policy of the Company to query each
manufacturer of critical "off-the-shelf" software to ascertain the vendor's
statement regarding the Y2K readiness of their products. Once the vendor's
statement is obtained,
24
<PAGE> 25
upgrades, replacements and testing will be implemented to minimize the risk of
Y2K issues arising from the software. Accomplishing Y2K readiness in this
category continues to be a challenge as vendors are modifying previously stated
positions on existing software, requiring customers to install patches or
upgrades to achieve full Y2K readiness. The Company continues to apply new
software patches from third party vendors as they are reported necessary, and
will do so until November when all systems will be frozen from further
modifications to prepare for the transition to the year 2000.
Facilities and telecommunications: The Company recognizes the potential
for Y2K issues to arise from embedded technology systems which may be in use at
its numerous facilities. Telecommunications equipment has proven the most
vulnerable, and plans are in place to upgrade and/or replace equipment as
necessary. Assessment and correction are complete at the Company's headquarters
and most international operating locations. North American operating locations
have begun inventory and assessment activities and are expected to have all
critical facilities and telecommunication systems Y2K ready in the fourth
quarter of 1999.
Supply chain: Due to the Company's disparate locations and methods of
operation, assessing the Y2K readiness of the Company's supply chain must occur
at both the corporate level (for core supply chain relationships) and the local
level (for those relationships unique to a location). Inventory and discovery
have been completed at a number of operating locations and is completed at the
Company's headquarters. Activities are now underway to assign criticality to
both corporate and local supply relationships and additional efforts are being
expended to ascertain the Y2K readiness of critical suppliers. Contingency
plans for critical suppliers are being formulated.
Costs
(Consistent with dollar representation in other parts of this filing, dollars
are represented in thousands.) The aggregate costs for the Company to achieve
Y2K readiness are not expected to exceed $20,000 of which $3,800 represents
lease payments which will be incurred from 2000-2002. All costs associated with
Y2K readiness are expected to be funded from operating cash flows. The
Company's actual costs incurred associated with Y2K readiness through June 30,
1999 are estimated at $11,300.
In an effort to report material costs related to the Company's Y2K effort,
the Company has adopted a policy of capturing all contractor expenses and
internal costs for dedicated resources (those working exclusively on Y2K
issues). As such, the Company acknowledges that there are many internal
resources working part-time on Y2K-related issues for which no payroll or
overhead costs are being reported.
Risks
The majority of the Company's internal Y2K exposure exists at its corporate
offices where the Company's production systems operate. The failure to correct
a material Y2K problem at these locations could result in an interruption of
certain normal corporate business activities. Such a failure would not,
however, render the Company's various operating locations unable to deliver
goods and services.
The Company believes that the greatest risks continue to arise from the
uncertainty of the Y2K readiness of critical third party suppliers, both
private businesses and government entities, especially in the Company's
international markets. The possible consequences of critical third party
suppliers not being Y2K ready by January 1, 2000 could include temporary
location closings, delays in the delivery of goods and services, delays in the
receipt of goods and invoice and collection errors. Continued efforts by the
Company to ascertain the Y2K status of critical third party suppliers is
expected to significantly reduce the Company's level of uncertainty as the year
2000 approaches and, through the use of contingency planning, the possibility
of significant interruptions in normal operations should be reduced.
At this time, the Company has no substantiated reason to believe that one
or more key third party suppliers will not be able to meet their obligations to
the Company after January 1, 2000; therefore, the Company believes that the
"most reasonably likely worst case scenario" would occur if deployment of the
Company's newly remediated proprietary funeral home POS/contract system being
installed at all North American locations was not completed by December 31,
1999. The
25
<PAGE> 26
Company's approach to deploying this new system calls for implementation in
those clusters which have the highest transaction volumes first. Using such a
plan, should deployment to all locations not be achieved by December 31, 1999,
such an occurrence would not be materially disruptive to the Company. Locations
not receiving the new system by the end of the year would forward transaction
information to a location with input capability.
Contingency Plans
Because of the many uncertainties that exist, it is part of the Company's Y2K
preparation methodology that contingency plans be established for critical
systems in each of the categories outlined above. Contingency planning is being
approached both from an IT perspective and from a business perspective. IT
plans encompass each critical system and will outline a course of action should
a date related problem occur. Business plans encompass each critical business
function and will outline a course of action should a supporting computer
system or infrastructure item not be available (i.e., electricity, phone
service, etc.). Although these plans are at different stages at the Company's
various locations; plans for all critical production systems and for all
individual operating locations are expected to be in place in the fourth
quarter of 1999.
In addition to contingency plans, the Company is in the process of
developing Transition Plans aimed at detailing operations immediately before
and after the date change to 2000. These plans include procedures for
establishing a Year 2000 Transition Command Center, backing-up critical files,
shutting down non-essential processing, staffing, and emergency communications
during the transition time period.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133."
SFAS No. 137 defers the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS No. 137 during
the first quarter of the year ended December 31, 2001.
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 of the Company to differ
materially from those in forward-looking statements include, among others, the
following:
1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable
security values, as well as currency and interest rate
fluctuations) that could negatively affect the Company,
especially the Company's anticipated cemetery trust revenues and
international operations.
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 into or expand in new markets.
3) Changes in consumer demand and/or pricing for the Company's
products and services caused by several factors, such as changes
in local death rates, cremation rates, competitive pressures and
local economic conditions.
26
<PAGE> 27
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 and
integration of these businesses subsequent to acquisition.
5) The Company's ability to successfully implement certain cost
initiatives, including the cost initiatives previously announced
during the first quarter of 1999, as well as changes in domestic
and international political and/or regulatory environments which
could negatively effect the implementation of the Company's cost
initiatives.
6) The Company's ability to increase volume through its facilities
via its strategic marketing and revenue initiatives.
7) The Company's ability to successfully leverage its substantial
purchasing power with certain vendors of the Company.
8) The ability of the Company, or its critical third-party
suppliers, to adequately complete "Y2K" preparation efforts.
"Y2K" refers to the inability of some computer programs and
computer-based microprocessors to correctly interpret the century
from a date in which the year is represented by only two digits.
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.
27
<PAGE> 28
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following discussion describes the class action lawsuits as of
August 6, 1999 which were previously reported in the Company's Form
10-K for the year ended December 31, 1998:
Civil Action H-99-0280; In Re Service Corporation International; In
the United States District Court for the Southern District of Texas,
Houston Division ("the Consolidated Lawsuit"). The Consolidated
Lawsuit is pending before Judge Lynn N. Hughes and includes all 21
class action lawsuits that were filed in the Southern District of
Texas and two class action lawsuits that were originally brought in
the United States District Court for the Eastern District of Texas,
Lufkin Division. The Consolidated Lawsuit currently alleges that
defendants violated federal securities laws by making materially false
and misleading statements and failing to disclose material information
concerning SCI's operations and financial results. The Consolidated
Lawsuit seeks to recover an unspecified amount of monetary damages.
Since the litigation is in its very preliminary stages, no discovery
has occurred, and the Company cannot quantify its ultimate liability,
if any, for the payment of damages. However, the Company believes that
the allegations in the Consolidated Lawsuit do not provide a basis for
the recovery of damages because the Company has made all required
disclosures on a timely basis. The Company intends to aggressively
defend the Consolidated Lawsuit.
9-99-CV58; Charles Fredrick v. Service Corporation International; In
the United States District Court for the Eastern District of Texas,
Lufkin Division. This additional securities fraud case has been
brought against the Company by a former shareholder of Equity
Corporation International ("ECI"), alleging causes of action
exclusively under Texas statutory and common law. The Company has
requested that the case be transferred to the Southern District of
Texas to be consolidated with the Consolidated Lawsuit.
Pending Motion in the Consolidated Lawsuit. An uncontested motion for
class certification, which is scheduled for hearing on August 17,
1999, indicates that the First Amended Complaint in the Consolidated
Lawsuit will be filed on behalf of all persons and entities who (i)
acquired shares of Company common stock in the merger of a wholly
owned subsidiary of Company into ECI; (ii) purchased shares of Company
common stock during the period July 17, 1998 through January 26, 1999
("the Class Period"); (iii) purchased Company call options in the open
market during the Class Period; (iv) sold Company put options in the
open market during the Class Period; (v) held employee stock options
in ECI; and (vi) held Company employee stock options granted during
the Class Period. Excluded from the foregoing categories are the
individual defendants referred to below, the members of their
immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any
time during the Class Period. The motion for class certification
indicates that the First Amended Complaint in the Consolidated Lawsuit
will name as defendants the Company and three of the Company's current
or former executive officers or directors: Robert L. Waltrip, L.
William Heiligbrodt and George R. Champagne.
28
<PAGE> 29
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 1999, the Company held its annual meeting of shareholders
and the shareholders elected four directors. The shares voting on the
director nominees were cast as follows:
<TABLE>
<CAPTION>
Abstentions or Broker
Nominee Votes For Votes Withheld Non-votes
------- --------- -------------- ---------
<S> <C> <C> <C>
Jack Finkelstein............................. 224,882,103 11,647,153 -0-
James H. Greer............................... 224,876,571 11,652,685 -0-
Clifton H. Morris, Jr........................ 225,023,707 11,505,549 -0-
W. Blair Waltrip............................. 224,789,614 11,739,642 -0-
</TABLE>
In addition, the shareholders approved the Company's Amended 1996
Incentive Plan which is described in the Company's proxy statement
dated April 13, 1999. The shares voting were cast as follows:
<TABLE>
<CAPTION>
Abstentions
Or Votes Broker
Proposal Votes For Votes Against Withheld Non-votes
-------- --------- ------------- -------- ---------
<S> <C> <C> <C> <C>
Amended 1996 Incentive Plan............... 181,076,178 54,416,094 1,036,979 5
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Agreement Appointing A Successor Rights Agent Under
Rights Agreement, dated June 1, 1999, by the Company,
Harris Trust and Savings Bank and The Bank of New York.
12.1 Ratio of earnings to fixed charges for the six months
ended June 30, 1999 and 1998.
27.1 Financial data schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended June
30, 1999.
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, 1999 SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
-----------------------------------
George R. Champagne
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.1 Agreement Appointing A Successor Rights Agent Under Rights
Agreement, dated June 1, 1999, by the Company, Harris Trust and
Savings Bank and The Bank of New York.
12.1 Ratio of earnings to fixed charges for the six months ended June
30, 1999 and 1998.
27.1 Financial data schedule.
</TABLE>
<PAGE> 1
AGREEMENT APPOINTING A SUCCESSOR Exhibit 4.1
RIGHTS AGENT UNDER RIGHTS AGREEMENT
AGREEMENT, dated as of June 1, 1999, among Service Corporation
International, a Texas corporation (the "Company"), Harris Trust and Savings
Bank ("Harris Trust") and The Bank of New York ("BNY").
The Company and Harris Trust have heretofore executed and entered
into the Rights Agreement, dated as of May 14, 1998 (the "Rights Agreement"),
under which Harris Trust is the Rights Agent. Pursuant to Section 21 of the
Rights Agreement, the Company may appoint a successor to the Rights Agent in
accordance with the provisions of Section 21 thereof. All acts and things
necessary to make this Agreement a valid agreement, enforceable according to
its terms, have been done and performed, and the execution and delivery of this
Agreement by the undersigned have been in all respects duly authorized by the
undersigned.
In consideration of the foregoing and the mutual agreements set
forth herein, the parties hereto agree as follows:
1. Effective as of June 1, 1999, Harris Trust resigns as Rights
Agent under the Rights Agreement and the Company appoints BNY
as the Rights Agent under the Rights Agreement.
2. Harris Trust and the Company each hereby waive any notice
required by Section 21 of the Rights Agreement.
3. BNY represents that it, together with its Texas subsidiaries
and affiliates, meets the requirements to be Rights Agent as
set forth in Section 21 of the Rights Agreement. BNY accepts
its appointment as Rights Agent under the Rights Agreement and
agrees to act as Rights Agent in accordance with the terms of
the Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and attested, all as of the date and year first above written.
<TABLE>
<CAPTION>
Attest: SERVICE CORPORATION INTERNATIONAL
<S> <C>
By: /s/ Curtis G. Briggs By: /s/ James M. Shelger
----------------------------------- ---------------------------------------------
Senior Vice President
Attest: HARRIS TRUST AND SAVINGS BANK
By: /s/ Lorraine Rodewald By: /s/ Ray G. Rosenbaum
------------------------------------ ----------------------------------------------
Vice President
Attest: THE BANK OF NEW YORK
By: /s/ Steven R. Myers By: /s/ James Dimino
------------------------------------ ----------------------------------------------
</TABLE>
<PAGE> 1
SERVICE CORPORATION INTERNATIONAL Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- ----------
(Thousands, except ratio amounts)
<S> <C> <C>
Pretax income from continuing operations ....................... $ 185,214 $ 308,564
Undistributed income of less than 50% owned equity investees ... (1,254) (3,027)
Minority interest in income of majority owned subsidiaries
with fixed charges ............................................ (878) 140
Add fixed charges as adjusted (from below) ..................... 132,911 91,402
--------- ---------
$ 315,993 $ 397,079
Fixed charges:
Interest expense:
Corporate ............................................. $ 114,846 $ 78,649
Financial services .................................... 5,922 4,772
Capitalized ........................................... 953 1,541
Amortization of debt costs .................................... (637) (475)
1/3 of rental expense ......................................... 12,780 8,456
--------- ---------
Fixed charges .................................................. 133,864 92,943
Less: Capitalized interest..................................... (953) (1,541)
--------- ---------
Fixed charges as adjusted ...................................... $ 132,911 $ 91,402
========= =========
Ratio (earnings divided by fixed charges) ...................... 2.36 4.27
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SERVICE CORPORATION INTERNATIONAL AS OF JUNE 30,
1999 AND THE RELATED STATEMENT OF INCOME FOR THE SIX MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 129,070
<SECURITIES> 1,221,749
<RECEIVABLES> 2,264,461
<ALLOWANCES> 124,538
<INVENTORY> 209,470
<CURRENT-ASSETS> 1,016,676
<PP&E> 2,513,655
<DEPRECIATION> 561,217
<TOTAL-ASSETS> 14,665,831
<CURRENT-LIABILITIES> 720,384
<BONDS> 4,044,921
0
0
<COMMON> 272,060
<OTHER-SE> 3,425,900
<TOTAL-LIABILITY-AND-EQUITY> 14,665,831
<SALES> 1,603,045
<TOTAL-REVENUES> 1,734,292
<CGS> 1,247,381
<TOTAL-COSTS> 1,335,836
<OTHER-EXPENSES> 208,934
<LOSS-PROVISION> 11,810
<INTEREST-EXPENSE> 120,131
<INCOME-PRETAX> 185,214
<INCOME-TAX> 67,318
<INCOME-CONTINUING> 117,896
<DISCONTINUED> 0
<EXTRAORDINARY> 1,885
<CHANGES> 0
<NET-INCOME> 119,781
<EPS-BASIC> .44
<EPS-DILUTED> .44
</TABLE>
