<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 SEPTEMBER 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------- ---------
COMMISSION FILE NUMBER 1-6402-1
----------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the registrant's common stock as of November
9, 2000 was 274,857,121 (excluding treasury shares).
<PAGE> 2
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 2000 and 1999 3
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 2000 6
Notes to Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28 - 29
Part II. Other Information
Item 1. Legal Proceedings 29 - 30
Item 6. Exhibits and Reports on Form 8-K 30 - 31
Signature 31
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share amounts) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues .............................................................. $ 659,861 $ 708,191 $ 2,127,711 $ 2,286,287
Costs and expenses .................................................... (547,650) (584,437) (1,704,510) (1,781,630)
----------- ----------- ----------- -----------
Gross profit .......................................................... 112,211 123,754 423,201 504,657
General and administrative expenses ................................... (20,185) (19,322) (60,031) (55,839)
Restructuring and non-recurring charges ............................... -- -- (13,281) (89,884)
----------- ----------- ----------- -----------
Operating income ...................................................... 92,026 104,432 349,889 358,934
Interest expense ...................................................... (73,256) (59,404) (216,370) (173,604)
Other income (expense) ................................................ 6,155 (334) 17,398 27,034
----------- ----------- ----------- -----------
(67,101) (59,738) (198,972) (146,570)
----------- ----------- ----------- -----------
Income from continuing operations before income taxes
and extraordinary gains ............................................ 24,925 44,694 150,917 212,364
Provision for income taxes ............................................ (9,839) (15,343) (54,949) (75,477)
----------- ----------- ----------- -----------
Net income from continuing operations before extraordinary gains ...... 15,086 29,351 95,968 136,887
Income from discontinued operations before extraordinary gains
(net of income taxes of $3,257, $2,188, $10,825 and $9,371,
respectively)....................................................... 4,953 2,703 15,716 13,064
Loss on disposal of discontinued operations (net of income taxes of
$73,839) ........................................................... (43,733) -- (43,733) --
Extraordinary gains on early extinguishments of debt (net of income
taxes of $12,630 and $1,071, respectively) ......................... -- -- 21,973 1,885
----------- ----------- ----------- -----------
Net (loss) income ..................................................... $ (23,694) $ 32,054 $ 89,924 $ 151,836
=========== =========== =========== ===========
Earnings per share:
Basic:
Income from continuing operations before extraordinary
gains...................................................... $ .05 $ .11 $ .35 $ .50
Income from discontinued operations before extraordinary
Gains...................................................... .02 .01 .06 .05
Loss on disposal of discontinued operations .................. (.16) -- (.16) --
Extraordinary gains on early extinguishments of debt ......... -- -- .08 .01
----------- ----------- ----------- -----------
Net (loss) income ............................................ $ (.09) $ .12 $ .33 $ .56
=========== =========== =========== ===========
Diluted:
Income from continuing operations before extraordinary
gains...................................................... $ .05 $ .11 $ .35 $ .50
Income from discontinued operations before extraordinary
Gains...................................................... .02 .01 .06 .05
Loss on disposal of discontinued operations .................. (.16) -- (.16) --
Extraordinary gains on early extinguishments of debt ......... -- -- .08 .01
----------- ----------- ----------- -----------
Net (loss) income ............................................ $ (.09) $ .12 $ .33 $ .56
=========== =========== =========== ===========
Basic weighted average number of shares ............................... 272,210 272,060 272,122 272,354
=========== =========== =========== ===========
Diluted weighted average number of shares ............................. 272,252 273,079 272,617 274,368
=========== =========== =========== ===========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except share amounts) 2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 38,655 $ 57,814
Receivables, net of allowances .............................................. 508,228 585,269
Inventories ................................................................. 184,110 190,343
Net assets of discontinued operations ....................................... -- 208,851
Other ....................................................................... 76,408 101,220
------------ ------------
Total current assets ................................................... 807,401 1,143,497
------------ ------------
Prearranged funeral contracts .................................................... 4,022,883 2,898,139
Long-term receivables, net of allowances ......................................... 1,538,854 1,532,225
Cemetery property, at cost ....................................................... 2,135,586 2,182,410
Property, plant and equipment, at cost (net) ..................................... 1,781,560 1,879,979
Deferred charges and other assets ................................................ 836,556 907,513
Names and reputations (net) ...................................................... 2,295,861 2,434,467
------------ ------------
$ 13,418,701 $ 12,978,230
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................................... $ 505,940 $ 576,751
Current maturities of long-term debt ........................................ 245,531 423,949
Income taxes ................................................................ 111,723 40,080
------------ ------------
Total current liabilities .............................................. 863,194 1,040,780
------------ ------------
Long-term debt ................................................................... 3,085,851 3,636,067
Deferred prearranged funeral contract revenues ................................... 4,418,575 3,186,081
Deferred income taxes ............................................................ 895,526 864,780
Other liabilities ................................................................ 712,430 755,249
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
272,291,303 and 272,064,618, issued and outstanding, respectively
(net of 2,565,818 and 2,792,508 treasury shares, at par, respectively) .... 272,291 272,064
Capital in excess of par value .............................................. 2,156,567 2,156,301
Retained earnings ........................................................... 1,216,822 1,126,898
Accumulated other comprehensive loss ........................................ (202,555) (59,990)
------------ ------------
Total stockholders' equity ............................................. 3,443,125 3,495,273
------------ ------------
$ 13,418,701 $ 12,978,230
============ ============
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
(Dollars in thousands) 2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................................ $ 89,924 $ 151,836
Adjustments to reconcile net income to net cash provided by continuing operations:
Net income from discontinued operations .............................................. (15,716) (13,064)
Depreciation and amortization ........................................................ 180,566 182,229
Provision for deferred income taxes .................................................. 29,352 17,354
Restructuring and non-recurring charges .............................................. 13,281 89,884
Payments on restructuring charges .................................................... (41,020) (33,437)
Net effect of interest rate component of swap terminations ........................... (32,840) --
Extraordinary gains on early extinguishments of debt, net of income taxes ............ (21,973) (1,885)
Loss on disposal of discontinued operations, net of tax .............................. 43,733 --
Gains from dispositions (net) ........................................................ (5,759) (15,969)
Change in other assets and liabilities, net of effects from acquisitions:
Increase in receivables ............................................................ (58,467) (177,003)
(Increase) decrease in other assets ............................................... (35,892) 11,841
(Decrease) increase in payables and other liabilities .............................. (22,430) 34,487
Other .............................................................................. (7,811) (4,484)
--------- ---------
Net cash provided by continuing operations ............................................. 114,948 241,789
Net cash provided by discontinued operations ........................................... 147,033 91,244
--------- ---------
Net cash provided by operating activities ................................................. 261,981 333,033
Cash flows from investing activities:
Capital expenditures ................................................................. (58,392) (157,413)
Net effect of prearranged funeral production and maturities .......................... 46,861 (74,641)
Proceeds from sale of discontinued operations ........................................ 278,025 --
Proceeds from sales of property and equipment ........................................ 38,623 67,125
Acquisitions, net of cash acquired ................................................... 800 (74,064)
Proceeds from sale of loans by lending subsidiary .................................... 84,803 --
Loans issued by lending subsidiary ................................................... (5,104) (67,429)
Principal payments received on loans issued by lending subsidiary .................... 21,649 91,190
Deposit of restricted funds .......................................................... (32,155) --
Other ................................................................................ 158 (17,116)
--------- ---------
Net cash provided by (used in) investing activities of continuing operations ........... 375,268 (232,348)
Net cash used in investing activities of discontinued operations ....................... (122,966) (145,716)
--------- ---------
Net cash provided by (used in) investing activities ....................................... 252,302 (378,064)
Cash flows from financing activities:
Net (decrease) increase in borrowings under revolving credit agreements .............. (427,540) 611,074
Payments of long-term debt ........................................................... (44,324) (228,142)
Early extinguishments of long-term debt .............................................. (194,097) (365,936)
Net effect of cross-currency component of swap terminations .......................... 143,498 --
Repurchase of common stock ........................................................... -- (45,750)
Dividends paid ....................................................................... -- (72,294)
Bank overdrafts and other ............................................................ (1,601) (258)
--------- ---------
Net cash used in financing activities of continuing operations ............................ (524,064) (101,306)
Effect of foreign currency ................................................................ (2,759) (6,036)
--------- ---------
Net decrease in cash and cash equivalents ................................................. (12,540) (152,373)
Adjust for change in cash and cash equivalents associated with discontinued operations .... (6,619) 57,236
Cash and cash equivalents of continuing operations at beginning of period ................. 57,814 269,143
--------- ---------
Cash and cash equivalents of continuing operations at end of period ....................... $ 38,655 $ 174,006
========= =========
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE> 6
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Capital in other
Common excess Retained comprehensive
(Dollars in thousands) stock of par value earnings loss Total
--------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999................ $ 272,064 $ 2,156,301 $ 1,126,898 $ (59,990) $ 3,495,273
Comprehensive income:
Net income............................... 89,924 89,924
Other comprehensive loss:
Foreign currency translation............. (180,831) (180,831)
Unrealized loss on securities............ (4,792) (4,792)
Reclassification adjustment for
realized loss on securities........... 27,014 27,014
Reclassification adjustment for realized
loss on foreign currency translation.. 16,044 16,044
-----------
Total other comprehensive loss........... (142,565)
-----------
Comprehensive loss....................... (52,641)
Common stock issued:
Acquisitions............................. 61 186 247
Stock grants............................. 33 100 133
Contribution to employee 401(K) ......... 140 199 339
Repurchase and acquisition of
common stock............................. (7) (219) (226)
--------- ----------- ----------- ---------- -----------
Balance at September 30, 2000............... $ 272,291 $ 2,156,567 $ 1,216,822 $ (202,555) $ 3,443,125
========= =========== =========== ========== ===========
</TABLE>
The Company's comprehensive income for the nine months ended September 30, 1999,
of $105,139 consisted of net income of $151,836, a foreign currency translation
loss of $18,727, and an unrealized loss on securities of $27,970.
(See notes to consolidated financial statements)
6
<PAGE> 7
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AMOUNTS AND NUMBER OF LOCATIONS)
1. NATURE OF OPERATIONS
Service Corporation International (the Company or SCI) is the largest provider
of funeral and cemetery services in the world. At September 30, 2000, the
Company operated 3,755 funeral service locations, 575 cemeteries and 203
crematoria located in 20 countries on five continents.
The Company's funeral service locations and cemetery operations consist of
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 locations, and certain funeral service
locations contain crematoria. The Company sells prearranged funeral services
whereby a customer contractually agrees to the terms of a funeral to be
performed in the future. The Company's cemeteries provide cemetery interment
rights (including mausoleum spaces, lots, and lawn crypts) and sell cemetery
related merchandise. Cemetery items are sold on an atneed or preneed basis.
Company personnel at cemeteries perform interment services and provide
management and maintenance of cemetery grounds. Certain cemeteries contain
crematoria. The Company has approximately 197 combination facilities in which a
funeral service location is contained within a cemetery.
During the third quarter of 2000, the Company sold both of its wholly-owned
insurance operations, thereby discontinuing the operations of the Company's
insurance segment (see note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements for the three and
nine months ended September 30, 2000 and 1999 include the accounts of the
Company and all majority-owned subsidiaries 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 (the Commission) for
the year ended December 31, 1999, and should be read in conjunction therewith.
The accompanying year-end consolidated balance sheet was derived from audited
financial statements but does not include all disclosures required by accounting
principles generally accepted in the United States. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for the full year period. Certain reclassifications have been made to
the prior periods to conform to the current period presentation with no effect
on previously reported net income, financial condition or cash flows. The
Company has reclassified certain amounts in the consolidated financial
statements and accompanying notes to the consolidated financial statements to
reflect the effect of discontinued operations on all periods and segments
presented.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
may affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
may affect the reported amounts of revenues and expenses during the reporting
period. As a result, actual results could differ from these estimates.
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. 133, as well as SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133," on January 1, 2001. The Company currently estimates that the
adoption of SFAS No. 133 will result in a charge to income, net of applicable
taxes, in the range of $20,000 to $30,000. This amount will be classified as a
cumulative effect of a change in accounting principle. This initial charge
primarily relates to the recognition of deferred charges from interest rate
gains and losses realized or to be realized in the termination or assignment
away of swap
7
<PAGE> 8
agreements. Under currently existing standards, these charges are amortized into
interest expense over the term of the swap agreements, whereas the new standards
require recognition as the derivative gains and losses are incurred.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101, as
amended, is required to be implemented in the Company's fourth quarter of 2000.
The Company, together with other members of the death care industry, is
continuing its discussions regarding the implementation of SAB No. 101 directly
with the staff of the Commission. Final resolution of the discussions will not
have an impact on the Company's consolidated cash flows, nor compliance with the
Company's existing credit agreements, but will likely have a material impact on
the Company's consolidated financial statements and on the manner in which the
Company records preneed sales activities. The deferral of income that might
occur as a result of implementing SAB No. 101 will be recognized in the
consolidated statement of income in future periods.
3. PREARRANGED FUNERAL ACTIVITIES
The Company sells price guaranteed prearranged funeral contracts through various
programs providing for future funeral services at prices prevailing when the
agreements are signed. Payments under these contracts are placed into trust
accounts (pursuant to applicable law) or are used to pay premiums on life
insurance or annuity contracts.
Unperformed price guaranteed prearranged funeral contracts may be funded by
insurance policies or annuities written by third party insurance companies or
trust contracts and are included in the consolidated balance sheet as
prearranged funeral contracts. This balance represents amounts due from trust
funds, customer receivables, or third party insurance companies. A corresponding
credit is recorded to deferred prearranged funeral contract revenues. Funeral
revenue is recognized on prearranged funeral contracts at the time the funeral
services are performed.
Trust earnings and increasing insurance benefits are accrued and deferred
until the funeral services are performed, at which time the funds are also
recognized in funeral revenues. Such amounts are intended to cover future
increases in the cost of providing a price guaranteed funeral service.
Net obtaining costs incurred pursuant to the sales of trust funded and
third party insurance funded prearranged funeral contracts are included in
deferred charges and other assets in the consolidated balance sheet. These
obtaining costs include sales commissions and certain other direct costs, which
are deferred and amortized over 20 years, a period representing the estimated
life of the prearranged funeral contracts.
Prior to the third quarter of 2000, the total value of unperformed
prearranged funeral contracts consisted of two components: (i) contracts funded
by trust or third party insurance companies (which were included in deferred
prearranged funeral contract revenues in the accompanying consolidated balance
sheets), and (ii) contracts funded by the Company's discontinued insurance
operations (which were not included in deferred prearranged funeral contract
revenues in the accompanying consolidated balance sheets). Upon disposal of the
Company's discontinued insurance operations, the Company recorded the value of
those contracts to be funded by the discontinued insurance operations consistent
with contracts funded by third party insurance companies. Had the value of the
unperformed prearranged funeral contracts from the discontinued insurance
operations been recorded at December 31, 1999, the total amount of deferred
prearranged funeral contract revenues would have been $4,287,452.
8
<PAGE> 9
4. DEBT
Debt at September 30, 2000 and December 31, 1999 was as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Bank revolving credit agreements and commercial paper ................... $ 749,382 $ 1,179,704
6.375% notes due 2000 ................................................... 70,710 150,000
6.75% notes due 2001 .................................................... 123,000 150,000
8.72% amortizing notes due 2002 ......................................... 47,519 71,174
8.375% notes due 2004 ................................................... 51,840 51,840
7.375% notes due 2004 ................................................... 250,000 250,000
6.0% notes due 2005 ..................................................... 591,550 600,000
7.2% notes due 2006 ..................................................... 150,000 150,000
6.875% notes due 2007 ................................................... 150,000 150,000
6.5% notes due 2008 ..................................................... 200,000 200,000
7.7% notes due 2009 ..................................................... 200,000 200,000
6.95% amortizing notes due 2010 ......................................... 50,062 52,557
7.875% debentures due 2013 .............................................. 55,627 55,627
7.0% notes due 2015 (putable 2002) ...................................... 186,040 300,000
6.3% notes due 2020 (putable 2003) ...................................... 300,000 300,000
Medium-term notes, maturities through 2019, fixed average interest
rate of 9.32% ........................................................ 35,720 35,720
Convertible debentures, maturities through 2008, fixed interest rates
from 4.75% to 5.5%, conversion prices from $11.25 to $50.00 .......... 49,213 49,213
Mortgage notes and other debt, maturities through 2050 .................. 87,448 136,368
Deferred loan costs ..................................................... (16,729) (22,187)
----------- -----------
Total debt ......................................................... 3,331,382 4,060,016
Less current maturities ................................................. (245,531) (423,949)
----------- -----------
Total long-term debt .................................................... $ 3,085,851 $ 3,636,067
=========== ===========
</TABLE>
As of September 30, 2000, the Company's primary revolving credit agreements
provided for borrowings up to $1,600,000 and consisted of three committed
facilities -- a short term facility, a 2-year term loan and a 5-year,
multi-currency facility. These facilities are primarily used for general
corporate purposes.
The short term facility which allowed for borrowings up to $600,000,
expired in October 2000 with no borrowings outstanding. A 5-year, multi-currency
facility allows for borrowings up to $700,000, including $500,000 in various
foreign currencies and expires in June 2002. Finally, a third facility in the
amount of $300,000 was converted into a 2-year term loan, in accordance with the
terms of the agreement, and will mature in June 2002. The borrowings under the
$700,000 facility have maturities ranging from 1 to 180 days.
Interest rates for these facilities are based on various indices as
determined by the Company. For each facility, a fee is paid quarterly on the
total commitment amount ranging from 0.25% to 0.50% based on the Company's
senior debt ratings. The facility fee was 0.50% at September 30, 2000 and 0.25%
at December 31, 1999. Furthermore, these credit facilities have financial
compliance provisions, as defined in the credit agreements filed as an exhibit
to the Company's 1999 Form 10-K, including a maximum debt-to-capitalization
ratio of 60%, a minimum EBITDA to interest expense ratio of 2.75, a minimum net
worth requirement defined in the credit agreements, and limitations on cash
distributions, subsidiary borrowings, liens and guarantees.
At September 30, 2000, $749,382 was outstanding under the $700,000 facility
and $300,000 term loan with a weighted average interest rate of 7.93% ($870,545
at December 31, 1999, with a weighted average interest rate of 6.97%). Of these
borrowings, approximately $269,383 was denominated in various foreign currencies
under the 5-year facility at September 30, 2000 ($295,545 at December 31, 1999).
9
<PAGE> 10
The Company's commercial paper program is backed by the above facilities;
however, the Company's downgraded credit ratings have rendered it unable to
access the commercial paper market. At September 30, 2000, all previously issued
commercial paper had matured. Commercial paper outstanding at December 31, 1999
was $309,159 with a weighted average interest rate of 6.58%.
The Company has $32,155 deposited in restricted accounts as security for
various credit instruments, which is included in the accompanying consolidated
balance sheet as deferred charges and other assets at September 30, 2000.
Approximately $19,677 was related to two embedded options associated with the
Company's 6.30% notes due 2020 (putable 2003). The remaining $12,478 was used to
secure various other obligations. As of November 10, 2000, the balance deposited
in restricted accounts was $45,517, of which $21,039 was related to the two
options previously mentioned.
During the nine months ended September 30, 2000, the Company repurchased
certain bonds in the open market with an aggregate face value of $228,700 as
follows: $79,290 of the 6.375% notes due 2000, $27,000 of the 6.75% notes due
2001, $113,960 of the 7.00% notes due 2015, putable in 2002; and $8,450 of the
6.00% notes due 2005. The repurchase resulted in extraordinary gains on early
extinguishments of debt totaling $21,973 (net of tax of $12,630).
Subsequent to September 30, 2000, in accordance with the stated maturity,
the Company retired the 6.375% senior notes in the amount of $70,710 by
refinancing the indebtedness under its existing credit facility.
5. DERIVATIVES
The Company has historically entered into various derivative financial
instruments, which are primarily interest rate and cross-currency swap
agreements, with high quality financial institutions to hedge potential
exposures in interest rate and foreign exchange rate changes. The Company uses
local currency borrowings in conjunction with these swap agreements to hedge the
Company's net investment in foreign assets and to manage its mix of fixed and
floating rate debt. The Company has procedures in place to monitor and control
the use of derivatives and only enters into transactions with a limited group of
creditworthy financial institutions. The Company does not engage in derivative
transactions for speculative or trading purposes, nor is it a party to leveraged
derivatives.
During the first quarter of 2000, the Company materially modified its
participation in derivative transactions by terminating or assigning away
certain interest rate swaps and all cross-currency interest rate swaps, thereby
removing the Company's hedges of foreign exchange rate exposure. A total
notional value of $2,860,327 was eliminated in this process. The net proceeds
from these terminations and assignments totaled $110,658, which was primarily
used to extinguish debt. These proceeds have been classified according to the
following components: $21,849 was due to the Company as accrued interest
receivable, $143,498 resulted from foreign exchange rate gains, and $54,689
resulted from interest rate losses. The amount associated with the foreign
exchange rate gains reduced the corresponding amount due from counterparties
recorded in deferred charges and other assets. The amount associated with the
interest rate losses will be amortized into interest expense over the remaining
term of the swap agreements and $9,034 has been amortized into interest expense
through September 30, 2000.
The Company's debt outstanding at September 30, 2000 had a weighted average
interest rate of 7.06% compared to a weighted average interest rate of 6.83% at
December 31, 1999. After giving consideration to the Company's remaining
interest rate swap agreements, the weighted average interest rate at September
30, 2000 was 7.06% compared to 6.41% at December 31, 1999. The financial
instruments associated with the 7.06% weighted average interest rate at
September 30, 2000 consisted of approximately 48% of fixed interest rate debt at
a weighted average interest rate of 6.89% and approximately 52% of floating
interest rate debt at a weighted average interest rate of 7.23%.
The fair market value of the Company's remaining swap agreements at
September 30, 2000 represented a net asset of $1,789 (a net asset of $122,581 at
December 31, 1999). This change was primarily due to the above-mentioned
termination or assigning away of certain interest rate swaps and all
cross-currency interest rate swaps during the first quarter of 2000. 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.
6. RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine months
ended September 30,
2000 1999
---- ----
<S> <C> <C>
1.60 2.04
</TABLE>
10
<PAGE> 11
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and
extraordinary gains; (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 is
attributable to the increase in interest expense.
7. SEGMENT REPORTING
Due to the Company's operations being product or service based and
geographically based, the Company's primary reportable operating segments
presented below are based on products or services and include funeral and
cemetery operations. The Company's geographic segments include North America,
Europe and Other foreign. The Company conducts funeral and cemetery operations
in all geographical regions.
The Company has excluded the effects of its discontinued insurance
operations from all periods and segments. The Company's reportable segment
information from continuing operations was as follows:
<TABLE>
<CAPTION>
Reportable
Funeral Cemetery Segments
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers:
Three months ended September 30,
2000 .............................. $ 452,135 $ 204,843 $ 656,978
1999 .............................. 469,138 233,837 702,975
Nine months ended September 30,
2000 .............................. $1,456,038 $ 660,179 $2,116,217
1999 .............................. 1,526,957 742,863 2,269,820
---------- ---------- ----------
Gross profit:
Three months ended September 30,
2000 .............................. $ 64,988 $ 46,602 $ 111,590
1999 .............................. 64,736 56,549 121,285
Nine months ended September 30,
2000 .............................. $ 246,552 $ 174,354 $ 420,906
1999 .............................. 278,531 218,370 496,901
---------- ---------- ----------
</TABLE>
The following table reconciles reportable segment gross profit to the Company's
consolidated income from continuing operations before income taxes and
extraordinary gains:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross profit from reportable segments .............. $ 111,590 $ 121,285 $ 420,906 $ 496,901
Lending subsidiary income from operations ..... 621 2,469 2,295 7,756
General and administrative expenses ........... (20,185) (19,322) (60,031) (55,839)
Restructuring and non-recurring charges
(see note 9) ............................. -- -- (13,281) (89,884)
--------- --------- --------- ---------
Operating income ................................... 92,026 104,432 349,889 358,934
Interest expense .............................. (73,256) (59,404) (216,370) (173,604)
Other income (expense) ........................ 6,155 (334) 17,398 27,034
--------- --------- --------- ---------
Income from continuing operations before income
taxes and extraordinary gains ................. $ 24,925 $ 44,694 $ 150,917 $ 212,364
========= ========= ========= =========
</TABLE>
11
<PAGE> 12
The Company's geographic segment information from continuing operations was as
follows:
<TABLE>
<CAPTION>
North Other
America Europe foreign Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers:
Three months ended September 30,
2000 ............................................................... $ 459,475 $ 155,615 $ 44,771 $ 659,861
1999 ............................................................... 474,734 183,921 49,536 708,191
Nine months ended September 30,
2000 ............................................................... $1,459,452 $ 537,942 $ 130,317 $2,127,711
1999 ............................................................... 1,550,963 608,844 126,480 2,286,287
---------- ---------- ---------- ----------
Operating income before restructuring and non-recurring charges (see note 9):
Three months ended September 30,
2000 ............................................................... $ 72,047 $ 7,249 $ 12,730 $ 92,026
1999 ............................................................... 79,879 9,536 15,017 104,432
Nine months ended September 30,
2000 ............................................................... $ 283,647 $ 46,733 $ 32,790 $ 363,170
1999 ............................................................... 354,330 60,765 33,723 448,818
---------- ---------- ---------- ----------
Operating income:
Three months ended September 30,
2000 ............................................................... $ 72,047 $ 7,249 $ 12,730 $ 92,026
1999 ............................................................... 79,879 9,536 15,017 104,432
Nine months ended September 30,
2000 ............................................................... $ 270,192 $ 46,907 $ 32,790 $ 349,889
1999 ............................................................... 301,265 26,736 30,933 358,934
---------- ---------- ---------- ----------
Depreciation and amortization from continuing operations:
Three months ended September 30,
2000 ............................................................... $ 43,311 $ 10,862 $ 3,384 $ 57,557
1999 ............................................................... 43,120 14,349 2,720 60,189
Nine months ended September 30,
2000 ............................................................... $ 130,233 $ 39,746 $ 10,587 $ 180,566
1999 ............................................................... 123,300 49,998 8,931 182,229
---------- ---------- ---------- ----------
Operating locations at September 30:
2000 ............................................................... 2,332 2,016 185 4,533
1999 ............................................................... 2,292 2,071 182 4,545
---------- ---------- ---------- ----------
</TABLE>
Included in the North America figures above are the following United States
amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers ............................ $ 439,492 $ 455,443 $1,395,632 $1,490,576
Operating income before restructuring and non-recurring
charges .................................................. $ 68,988 $ 76,727 $ 270,922 $ 341,452
Operating income ............................................ $ 68,988 $ 76,727 $ 257,467 $ 289,344
Depreciation and amortization from continuing operations .... $ 41,388 $ 41,925 $ 124,477 $ 117,788
Operating locations ......................................... 2,178 2,141
---------- ---------- ---------- ----------
</TABLE>
12
<PAGE> 13
Included in the European figures above are the following French amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external customers ............................ $ 93,859 $114,248 $320,956 $378,306
Operating income before restructuring and non-recurring
charges .................................................. $ 4,308 $ 4,950 $ 20,034 $ 33,845
Operating income ............................................ $ 4,308 $ 4,950 $ 20,034 $ 12,978
Depreciation and amortization from continuing operations .... $ 3,623 $ 5,417 $ 14,703 $ 25,426
Operating locations ......................................... 1,226 1,236
-------- -------- -------- --------
</TABLE>
8. 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 Nine months ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (numerator):
Income from continuing operations before
extraordinary gains -- basic .............................. $ 15,086 $ 29,351 $ 95,968 $136,887
After tax interest on convertible debentures .............. -- 82 190 408
-------- -------- -------- --------
Income from continuing operations before
extraordinary gains -- diluted ............................ $ 15,086 $ 29,433 $ 96,158 $137,295
-------- -------- -------- --------
Shares (denominator):
Shares -- basic ........................................... 272,210 272,060 272,122 272,354
Stock options and warrants ........................... 42 267 30 897
Convertible debentures ............................... -- 752 465 1,117
-------- -------- -------- --------
Shares -- diluted ......................................... 272,252 273,079 272,617 274,368
-------- -------- -------- --------
Earnings per share from continuing operations before
extraordinary gains:
Basic ..................................................... $ .05 $ .11 $ .35 $ .50
Diluted ................................................... $ .05 $ .11 $ .35 $ .50
-------- -------- -------- --------
</TABLE>
9. RESTRUCTURING AND NON-RECURRING CHARGES
The Company recorded restructuring and nonrecurring charges in the first quarter
(First Quarter Charge) and the fourth quarter (Fourth Quarter Charge) of 1999.
In the second quarter of 2000, the Company made a change in estimate for certain
items originally included in the Fourth Quarter Charge. These changes primarily
related to increasing the provision for asset impairment by $22,250 to further
write down to estimated fair value the loans made by the Company's lending
subsidiary which were held for sale, offset by a reduction in the provision of
$11,229 for funeral home and cemetery properties previously written down to
their fair value, which are no longer being held for sale.
The First Quarter Charge totaled $89,884 relating to a cost rationalization
program initiated in 1999 and consisted of the following: (1) severance costs of
$56,757; (2) a charge of $19,123 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 800 employees throughout the
Company's global operations. The remaining 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. The remaining severance
related to the 800 employees is expected to be paid out in 2000.
13
<PAGE> 14
The Fourth Quarter Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The Fourth Quarter Charge consisted of the following: (1)
severance costs of $150,675; (2) asset impairment of $73,728 associated with
assets held for sale which were written down to estimated fair value; (3) asset
impairment of $18,245 associated with loans made by the Company's lending
subsidiary held for sale which were written down to estimated fair value; (4)
$12,719 of informational technology costs associated with projects that will no
longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease
obligations related to facility closures; and (6) $10,623 of various other
items.
The $150,675 of severance costs is related to the involuntary termination
of 1,141 employees throughout the Company's global operations, including eight
executive officers of the Company. Included in this total are 316 individuals
that were former owners of independent funeral homes and cemeteries that were
purchased by the Company and represent approximately $92,180 of the $150,675 of
severance costs. Such individuals will continue to be paid by the Company
pursuant to the terms of their contracts, the majority of which will be paid by
2007. The remaining severance costs are expected to be paid out through 2001.
The severance costs associated with the executive officers will be paid in
accordance with the terms of the respective agreements and will extend through
2005.
The utilization of the First Quarter Charge and the Fourth Quarter Charge was as
follows:
<TABLE>
<CAPTION>
Utilization for nine
months ended September 30, 2000 Balance at
Original Balance at Changes in ------------------------------- September 30,
Charge amount December 31, 1999 Estimate Cash Non-cash 2000
------------- ----------------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter Charge ..... $ 89,884 $ 25,245 $ -- $ (8,212) $ (9,818) $ 7,215
Fourth Quarter Charge .... 272,544 135,944 13,281 (32,808) (25,579) 90,838
-------- -------- -------- -------- -------- --------
Total .............. $362,428 $161,189 $ 13,281 $(41,020) $(35,397) $ 98,053
======== ======== ======== ======== ======== ========
</TABLE>
Of the remaining total restructuring charge balance of $98,053,
approximately $5,156 and $89,242 relate to severance costs for the First Quarter
Charge and the Fourth Quarter Charge, respectively. Further of the $98,053,
approximately $41,361 is included in Accounts Payable and Accrued Liabilities
and $56,692 is included in Other Liabilities in the accompanying consolidated
balance sheet.
10. DISCONTINUED OPERATIONS
In the third quarter of 2000, the Company completed the sales of its wholly
owned insurance operations. The financial statements have been reclassified to
reflect these operations as discontinued. The operating results from Auxia have
been included through August 31, 2000 and the operating results from AMLIC have
been included through September 30, 2000. The net assets of discontinued
operations prior to the date of sale were segregated on the balance sheet and
the components have been detailed below.
Summary operating results of discontinued operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 91,427 $ 68,654 $ 295,062 $ 224,850
Cost and expenses ................................ (83,217) (63,763) (268,521) (202,415)
--------- --------- --------- ---------
Operating income from discontinued operations .... 8,210 4,891 26,541 22,435
Provision for income taxes ....................... (3,257) (2,188) (10,825) (9,371)
--------- --------- --------- ---------
Income from discontinued operations .............. $ 4,953 $ 2,703 $ 15,716 $ 13,064
========= ========= ========= =========
</TABLE>
14
<PAGE> 15
Net assets of discontinued operations:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Assets:
Cash and cash equivalents ............................... $ 30,407
Receivables, net of allowances .......................... 19,858
Other current assets .................................... 11,240
Investments -- insurance operations ..................... 1,318,635
Long-term receivables ................................... 30,193
Property, plant and equipment, at cost (net) ............ 1,546
Deferred charges and other assets ....................... 379,454
Names and reputations (net) ............................. 40,889
----------
Total assets ..................................... $1,832,222
----------
Liabilities:
Accounts payable and accrued liabilities ................ $ 13,096
Income taxes payable .................................... 3,989
Reserves and annuity benefits -- insurance operations ... 1,313,328
Deferred income taxes ................................... 8,243
Other liabilities ....................................... 284,715
----------
Total liabilities ............................... $1,623,371
----------
Net assets of discontinued operations .......................... $ 208,851
----------
</TABLE>
11. EMPLOYEE SAVINGS PLANS
In the third quarter of 2000, the Company began sponsoring an employee savings
plan that qualifies under Section 401(k) of the Internal Revenue Code. Under the
plan, participating U.S. employees may defer a portion of their pretax and/or
after tax income in accordance with specified guidelines. The Company matches a
percentage of the employee contributions up to a certain limit through stock
contributions. The total value of Company matched stock contributions in the
third quarter 2000 was $339.
12. SUBSEQUENT EVENTS
In October 2000, the Company sold a 21% minority interest in the stock of its
United Kingdom subsidiary to certain executives of these operations. These
operations are primarily capitalized by (pound)265,000 of Eurobond debentures
issued in 1995 after the acquisition of the United Kingdom operations by the
Company. At September 30, 2000, the Company's carrying value of the operations,
considering the effects of foreign currency, was approximately $264,000. As a
result of the sale of the minority interest in the stock of the operations, the
Company expects to incur a pretax loss of approximately $55,000 which will be
recognized in the fourth quarter of 2000. The loss created by this transaction
will contribute to offsetting taxes paid on gains by the Company from asset sale
transactions.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT AVERAGE SALES PRICES, PER SHARE AMOUNTS,
NUMBER OF FUNERAL SERVICES PERFORMED AND NUMBER OF LOCATIONS)
OVERVIEW:
The Company is the largest provider of death care services in the world
conducting funeral services and cemetery operations in 20 countries on five
continents. 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 84% of the Company's total revenues.
The funeral and cemetery operations are organized into a North American
division covering the United States and Canada, a European division responsible
for all operations in Europe, and other operations managed in the Pacific Rim
and South America. Subsequent to the third quarter of 2000, the Company
reorganized leadership of its European operations by establishing an Office of
the Chairman-Europe. The immediate goal of the Office of the Chairman-Europe is
to determine the appropriate management structure for these European operations
in order to enhance its long-term value of the Company.
The majority of the Company's operations throughout the world are managed
in groups called clusters. Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual overhead costs by sharing
common resources such as operating personnel, preparation services, clerical
staff, limousines, hearses and preneed sales personnel. Personnel costs, the
largest of the operating expenses for the Company, are the cost components 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. In the first quarter of 2000, the Company began the
process of implementing Central Processing Centers throughout North America in
order to further assist in the efficiencies of accounting and back-office
functions. Once implementation is complete, these Central Processing Centers
will take further advantage of this clustering concept in order to reduce
personnel costs.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Both
funeral service locations and cemeteries can contain crematoria facilities. The
Company has approximately 197 combination facilities in which a funeral service
location is contained within a cemetery. The other services operations consist
of the Company's lending subsidiary, which previously provided capital financing
for independent funeral and cemetery operations. In 1999, the Company decided to
indefinitely suspend the operations of its lending subsidiary. On August 31,
2000, the Company sold a substantial portion of the loan portfolio of its
lending subsidiary. Subsequent to this date, all activities on remaining loans
will be recorded through other income and interest expense and not as a
component of gross profit on the Company's consolidated statement of operations.
In August of 2000, the Company announced additional phases of the Company's
current business strategy, which will redefine the Company's approach to a
number of its existing business activities and improve financial stability for
the Company's future.
Initial Phase
The initial phase of the Company's strategic plan begun in early 1999 was
designed to reduce overhead, increase cash flow and pay down debt. The reduction
of overhead was initially addressed through a cost rationalization program,
which restructured the Company's operating clusters into more efficient
operating units and resulted in two separate restructuring charges recorded in
1999 totaling $362,400. The expected cost savings associated with the cost
rationalization program is proceeding within the Company's original expectations
in North America. At the present time, the expected cost savings associated with
the Company's funeral operations in France are approximately six months behind
the Company's original expectations. The Office of the Chairman-Europe is
currently determining the revised timeframe of expected cost savings from the
cost rationalization program in France. The delays of expected savings in France
are primarily related to the unforeseen effects of new laws in France, including
a mandatory 35 hour work week and the requirement of hospitals over a certain
size to perform certain mortuary services themselves.
The Company's initiative to increase cash flow included the suspension of
the quarterly cash dividend, the suspension of the acquisition program, a
reduction of capital expenditures below historical levels, the realignment of
preneed cemetery and prearranged funeral sales commission structures and the
efficient retrieval of funds due to the Company from certain funeral and
cemetery trusts. The Company has expectations of generating operating free cash
flow, as defined in Financial Condition, Liquidity and Capital Resources in this
Form 10-Q, for full-year 2000 in the range of $100 million to $250 million. For
the nine months ended
16
<PAGE> 17
September 30, 2000, the Company's operating free cash flow was $177,277,
compared to negative operating free cash flow of $29,122 for the nine months
ended September 30, 1999. The Company has achieved this improvement of over $200
million in operating free cash flow through the cash flow initiatives listed
above, despite trends of increasing cash interest payments made by the Company.
Included in the operating free cash flow of $177,277 above is $103,332 of funds
received from certain funeral and cemetery trusts. A portion of these funds were
received as a result of collecting receivables due to the Company from these
trust funds related to prearranged funeral contracts that became atneed funeral
services performed by the Company. The remaining portion was related to the
distribution of trust fund income to the Company by the trust funds under the
applicable state laws. Approximately $96,582 of the $103,332 of trust funds
received in 2000 are considered non-recurring receipts of funds.
The Company has executed sales of certain non-core assets during 2000 and
will continue the process of selling other non-core assets. The Company
completed the sale of certain loans of its lending subsidiary (included in other
services operations), the termination or assigning away of certain interest rate
swaps and all cross-currency interest rate swaps, and the sale of its wholly
owned insurance operations, American Memorial Life Insurance Company (AMLIC) and
Auxia. The sale of AMLIC, Auxia and certain loans of the Company's lending
subsidiary were completed in the third quarter of 2000 and produced after tax
cash proceeds of approximately $340,000. As a result of the sale of AMLIC and
Auxia, these operations are reported as discontinued operations and the
financial statements have been reclassified for all periods presented. These
transactions align SCI with very strong partners: Fortis, Inc. with AMLIC, and
Mederic Assurances of France and Zurich France with Auxia. The Company has
entered into marketing agreements with these strategic partners which are
related to future performance and projected to produce more free cash flow for
the Company than if the insurance operations were owned by the Company. The
marketing agreements with both the AMLIC and Auxia transactions are also
expected to provide enhanced opportunities to sell prearranged funerals in the
Company's worldwide funeral markets.
The overhead reductions, cash flow enhancing initiatives and non-core asset
sales associated with the initial phase of the Company's strategic plan were
designed to pay down the Company's debt due in 2000. The initial phase of the
Company's strategic plan has increased operating free cash by over $200,000 in
the nine months ended September 30, 2000, compared to the same period of 1999.
Non-core asset sales and swap terminations in 2000 have produced after tax cash
proceeds totaling approximately $455,000. With the combination of this operating
free cash flow and non-core asset sales, the Company has retired all of its debt
maturing in 2000. At September 30, 2000, the Company's debt was $3,331,382, a
reduction of over $868,000 or 21% compared to the Company's debt balance at
September 30, 1999. The Company's debt balance at September 30, 2000, is already
at the bottom of its year-end 2000 targeted debt range of $3,300,000 to
$3,600,000.
Second Phase
The second phase of the Company's strategic plan, which is presently being
initiated, is to define the Company's operations by demographic, market and
geographic segments and restructure these operations through alliances and joint
ventures with strategic partners that the Company believes would add value to
the businesses. Strategic partners could invest in and provide other benefits to
the joint ventures, which would include funeral home and cemetery properties
owned by or affiliated with the Company. Proceeds from any investments made by
strategic partners would be used by the Company to substantially reduce or
eliminate amounts currently outstanding on its credit facilities due in 2002 or
other indebtedness. Strategic partners could include companies or other groups
that could offer unique competitive advantages not previously available to the
Company, such as access to customer databases, marketing or telemarketing
services and prearrangement financing. This strategic alliance and joint venture
program may possess benefits similar to the Company's ongoing affinity program,
which aligns the core operations of the Company with third parties and could
enhance future internal growth and incremental cash flows. The Company is
currently in discussion with multiple parties concerning the possibility of
joint venturing certain international operations.
Third Phase
The third phase of the Company's strategic plan continues the focus on
internal growth within the Company's existing core businesses. Central to this
strategy is the continued execution of agreements with affinity partners which
provide exclusive, direct access by the Company to large groups of individuals
who meet the Company's ideal customer profile. Existing affinity relationships
include insurance companies, charitable organizations, corporations and
social/fraternal groups internationally and within North America with whom the
Company is currently in various stages of discussion, contract negotiations,
market testing or program
17
<PAGE> 18
execution. Marketing to affinity group customers will be either through the
Company's existing funeral and cemetery network, direct to consumer or through
e-commerce marketing initiatives.
The third phase also includes the continued development and implementation
of the Dignity Memorial(TM) Plan funeral packages and the Dignity Memorial(TM)
brand name. The Dignity Memorial(TM) Plan funeral packages are designed to
simplify decision-making on the part of the customer and include new products
and services which are providing greater customer satisfaction while allowing
the opportunity to increase funeral operating revenues and profitability. It is
anticipated that Dignity Memorial(TM) Plan funeral packages will be offered in
approximately 25% of the Company's North America operations by the end of 2000
with complete rollout anticipated in late 2001. Additionally, the Company plans
to develop a seamless, global, brand recognized network of funeral service
providers under the Dignity Memorial(TM) brand name to provide funeral products
and services, which would be recognized and portable on a worldwide basis. The
Dignity Memorial(TM) provider network will be developed through a program of
offering non-SCI funeral homes, primarily in markets where the Company does not
currently have coverage, the opportunity to participate in the network and have
access to the Company's affinity partners, Dignity Memorial(TM) products and
services, prearranged funeral funding sources, merchandising expertise and
Internet capabilities.
The Dignity Memorial(TM) provider network will have the advantage of being
accessible to consumers through the Internet site DignityMemorial.com. When
fully implemented, this Internet site will give consumers the ability to locate
Dignity Memorial(TM) providers throughout a worldwide network and offer
consumers high value, consumer friendly packages of funeral products and
services that will be portable throughout the network. Additionally,
DignityMemorial.com will participate as the exclusive death care provider in a
much broader Internet portal, Besthalf.com, which is also being developed by the
Company and provides a comprehensive array of products and services targeting
the global senior citizen market. This participating relationship would give the
Dignity Memorial(TM) consumer access to a much larger and broader range of
products and services on Besthalf.com through other participating companies and
organizations. Other participants in Besthalf.com could include nursing homes,
assisted living companies, rehabilitation hospitals, insurance companies,
pharmaceutical companies and numerous other organizations marketing to the
global senior citizen market.
RESULTS OF OPERATIONS:
The following is a discussion of the Company's results of operations for the
three and nine months ended September 30, 2000 and 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
For the quarter ended September 30, 2000, the Company reported revenues from
continuing operations of $659,861, representing a 6.8% decrease compared to
$708,191 for the third quarter of 1999. Gross profit from continuing operations
in the third quarter of 2000 decreased 9.3% to $112,211 compared to $123,754 in
the same period of 1999, while the gross margin percentage decreased slightly to
17.0% for the third quarter of 2000 compared to 17.5% in the same period of
1999. For the three months ended September 30, 2000, the Company reported
earnings from continuing and discontinued operations before non-recurring items
(defined as net losses on the sale of discontinued operations) of $20,039, a net
loss of $23,694, diluted earnings per share from continuing and discontinued
operations before non-recurring items of $.07 ($.07 basic) and diluted loss per
share of $.09 ($.09 basic). The Company reported net income of $32,054 and
diluted earnings per share of $.12 ($.12 basic) for the third quarter of 1999.
In the third quarter of 2000, the Company completed the sale of its
discontinued insurance operations and recorded net after tax losses of $43,733
on the sales of those operations.
18
<PAGE> 19
The Company has excluded the results of operations of its discontinued
operations. Results for the Company's continuing operations by geographic
segment were as follows:
<TABLE>
<CAPTION>
Three months ended September 30, 2000
---------------------------------------------------------------------------------
North % of % of Other % of % of
America revenue Europe revenue Foreign revenue Total revenue
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Funeral .......................... $282,225 61.4% $148,161 95.2% $ 21,749 48.6% $452,135 68.5%
Cemetery ......................... 174,367 38.0% 7,454 4.8% 23,022 51.4% 204,843 31.1%
Other Services ................... 2,883 0.6% -- -- -- -- 2,883 0.4%
-------- ----- -------- ----- -------- ----- -------- -----
$459,475 100.0% $155,615 100.0% $ 44,771 100.0% $659,861 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Gross profit and margin percentage
Funeral .......................... $ 53,952 19.1% $ 5,992 4.0% $ 5,044 23.2% $ 64,988 14.4%
Cemetery ......................... 36,523 20.9% 2,393 32.1% 7,686 33.4% 46,602 22.8%
Other Services ................... 621 21.5% -- -- -- -- 621 21.5%
-------- ----- -------- ----- -------- ----- -------- -----
$ 91,096 19.8% $ 8,385 5.4% $ 12,730 28.4% $112,211 17.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1999
---------------------------------------------------------------------------------
North % of % of Other % of % of
America revenue Europe revenue Foreign revenue Total revenue
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Funeral.......................... $270,199 56.9% $176,169 95.8% $ 22,770 46.0% $469,138 66.3%
Cemetery......................... 199,319 42.0% 7,752 4.2% 26,766 54.0% 233,837 33.0%
Other Services................... 5,216 1.1% -- -- - -- 5,216 0.7%
-------- ----- -------- ----- -------- ----- -------- -----
$474,734 100.0% $183,921 100.0% $ 49,536 100.0% $708,191 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Gross profit and margin percentage
Funeral.......................... $ 50,212 18.6% $ 9,462 5.4% $ 5,062 22.2% $ 64,736 13.8%
Cemetery......................... 44,909 22.5% 1,685 21.7% 9,955 37.2% 56,549 24.2%
Other Services................... 2,469 47.3% -- -- -- -- 2,469 47.3%
-------- ----- -------- ----- -------- ----- -------- -----
$ 97,590 20.6% $ 11,147 6.1% $ 15,017 30.3% $123,754 17.5%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
FUNERAL
The decrease in funeral segment revenues and gross profit in the third
quarter of 2000 was primarily the result of decreases in the number of deaths in
the European segment and foreign currency translation. The number of deaths in
the Company's funeral markets declined in 2000 compared to 1999 and, as a
result, total funeral services performed by the Company's worldwide funeral
service locations were 3.5% below total funeral services performed in the third
quarter of 1999. The negative effect of foreign currency translations was
approximately $26,021 on funeral revenues and $1,696 on funeral gross profits,
primarily related to the weakening of the Euro relative to the U.S. dollar.
North America funeral revenues and gross profit increased primarily as a
result of the increase in volume during the quarter. In the third quarter of
2000, total case volume increased approximately 1.2% to 71,080 compared to
70,248 in the third quarter of 1999 and the average revenue per funeral service
increased 1.0% to $3,883 from $3,845 in the third quarter of 1999. Of the total
mix of
19
<PAGE> 20
funeral services performed in the third quarter of 2000, 27.8% were previously
prearranged funeral contracts compared to 27.4% in the third quarter of 1999,
while 36.8% of total funeral services performed in the third quarter of 2000
were cremation services compared to 33.9% for the same period of 1999. The
average revenue per funeral service from prearranged funeral contracts becoming
atneed increased 1.4% to $3,606 in the third quarter of 2000 compared to the
same period in 1999. Of the total cremation cases in the third quarter of 2000,
approximately 64% were cremations with memorialization services versus immediate
cremation cases, while approximately 52% of the total cremation cases in the
third quarter of 1999 were cremations with memorialization services. Cremations
with memorialization services have a higher average revenue per case of $2,300
compared to immediate cremations which average $1,300 per case. This change in
the mix of cremations, as well as the increase in average revenue per funeral
associated with prearranged funeral contracts becoming atneed, has helped to
offset decreases in the total average revenue per funeral caused by the general
trend in the total sales mix from traditional funerals to cremations.
While the decrease in European funeral revenue and gross profit is
primarily due to the decrease in the number of deaths experienced across Europe
coupled with a slight decrease in market share over this period, this decline
was further emphasized by the weakening of the Euro relative to the U.S. dollar.
Total European funeral services performed in the third quarter of 2000 were
58,218, a decline of 8.7% compared to 63,756 in the same period of 1999.
Funeral revenues for the Company's Other Foreign operations declined
slightly to $21,749 in the third quarter of 2000 compared to $22,770 in the
third quarter of 1999 while gross profit remained stable. The decrease is the
result of lower volume quarter-over-quarter in the Company's Australian
operations. The gross profit and margin percentage has remained stable as a
result of integrating acquisitions into the Company's existing structure.
Revenue remained stable in all other jurisdictions as a result of increased
averages in the price per funeral service.
CEMETERY
Cemetery revenues declined 12.4% to $204,843 and cemetery gross profit
declined 17.6% to $46,602 in the third quarter of 2000 compared to the third
quarter of 1999. These decreases were primarily a result of anticipated
decreases in realized investment earnings and capital gains related to cemetery
trust funds and decreases in the results of core North American cemetery
operations. Realized investment earnings and capital gains for the third quarter
of 2000 were $15,508 compared to $20,285 in the third quarter of 1999.
The North America cemetery revenue and gross profit decrease from the third
quarter of 1999 is primarily the result of the above mentioned investment
earnings and capital gains, significant changes in 2000 to cemetery compensation
plans, as well as a higher mix of cemetery heritage property sales. Cemetery
heritage property sales have a lower gross margin than sales of cemetery
merchandise and services.
The increase in European gross profit and margin percentage is the result
of cost reduction strategies in the United Kingdom in 2000.
Other Foreign revenue and gross profit decreased primarily as a result of
the negative effect of foreign currency in Chile and Australia.
OTHER SERVICES
As part of the cost rationalization programs initiated in 1999, the Company
decided, except for existing commitments, to indefinitely suspend the operations
of its lending subsidiary, to sell a portion of the loan portfolio, and to
acquire by deed in lieu of foreclosure the collateral underlying loans
previously on non-accrual status which were written down in the fourth quarter
of 1999. As a result, in the third quarter of 2000, the Company sold a
substantial portion of the loan portfolio of its lending subsidiary. The
operations of the lending subsidiary through the date of the sale, August 31,
2000, have been included herein as Other Services. Subsequent to the sale, all
activity on remaining loans are included below Operating Income in the
consolidated statement of operations.
OTHER INCOME AND EXPENSES
In the third quarter of 2000 general and administrative expenses increased
$863 to $20,185 compared to the third quarter of 1999. The increase was related
to continued increases in information technology costs associated with moving
the Company's North American proprietary point of sale systems into production
and reinforcing the Company's existing infrastructure, as well as the roll-out
of Central Processing Centers in the Company's realigned operating clusters.
Expressed as a percentage of revenues, general and
20
<PAGE> 21
administrative expenses were 3.1% for the three months ended September 30, 2000,
compared to 2.7% for the comparable period in 1999.
Interest expense increased $13,852 or 23.3% to $73,256 in the third quarter
of 2000 compared to the same period of 1999. The increased interest expense in
the third quarter of 2000 primarily reflects the higher financing costs
associated with the use of the Company's credit facilities rather than its
commercial paper program and interest rate increases compared to the third
quarter of 1999. In the third quarter of 2000, the average outstanding debt was
$3,633,782 with an average interest rate of 8.20% compared to the average
outstanding debt in the third quarter of 1999 of $4,154,503 with an average
interest rate of 5.65%.
Other income primarily consists of gains and losses from the sales of
businesses that are disposed of for strategic or government mandated purposes.
The provision for income taxes on continuing operations reflected a 39.5%
effective tax rate for the three months ended September 30, 2000, compared to a
34.3% effective tax rate for the comparable period in 1999. The increase in the
effective rate reflects an adjustment to the year-to-date tax rate from 35.8% in
the second quarter of 2000 to 36.4% in the third quarter of 2000 subsequent to
the sales of the Company's insurance operations and the shift in the Company's
operating results. North America has a higher effective tax rate and as North
America contributes more income from continuing operations over international
jurisdictions, the rate will increase.
DISCONTINUED OPERATIONS
In the second quarter of 2000, the Company entered into definitive
agreements to sell its wholly owned insurance operations in France and the
United States, thereby discontinuing the operations of the Company's insurance
segment and reclassifying the financial statements in accordance with accounting
principles applicable to discontinued operations for all periods presented. In
the third quarter of 2000, the Company completed these transactions and
recognized pretax gains of $30,106 and associated tax provisions of $73,839 (of
which only $24,801 is currently payable) resulting in an after tax loss of
$43,733 associated with these disposals. The unusual relationship between the
pretax gains and tax provisions is attributable to differences in book and tax
bases of the discontinued operations, the effects of realizing Accumulated Other
Comprehensive Losses of $43,058 with no corresponding benefit, as well as the
adverse effect of being taxed on the Auxia gain at both the United States and
foreign jurisdictions without corresponding tax benefit from United States
foreign tax credits. Accumulated Other Comprehensive Losses attributable to
Auxia and AMLIC are required to be recorded through the consolidated statement
of operations at the time of sale and relate to net unrealized losses on
securities and foreign currency translation previously reported as a separate
component of stockholders' equity.
The Company has entered into marketing agreements with the purchasers,
which became effective at the closing of the transactions and are expected to
produce more free cash flow for the Company over the next several years than if
the insurance operations were owned by the Company. The marketing agreements
with both the United States and French insurance companies are also expected to
provide enhanced opportunities to sell prearranged funerals in the Company's
worldwide funeral markets.
Revenues from discontinued operations increased 33.2% to $91,427, while
gross profit increased 67.9% to $8,210 for the three months ended September 30,
2000. This increase in revenues is due to the initiative to fund prearranged
funeral contracts, whenever possible, through AMLIC and Auxia. The increase in
gross profit is the result of increased costs from information technology and
overhead costs related to the insurance companies in the third quarter of 1999
which did not reoccur in the third quarter of 2000.
21
<PAGE> 22
NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
----------------------------------------------------------------------------------
North % of % of Other % of % of
America revenue Europe revenue Foreign revenue Total revenue
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Funeral .......................... $ 884,674 60.6% $ 512,449 95.3% $ 58,915 45.2% $1,456,038 68.4%
Cemetery ......................... 563,284 38.6% 25,493 4.7% 71,402 54.8% 660,179 31.0%
Other Services ................... 11,494 0.8% -- -- -- -- 11,494 0.6%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$1,459,452 100.0% $ 537,942 100.0% $ 130,317 100.0% $2,127,711 100.0%
========== ===== ========== ===== ========== ===== ========== =====
Gross profit and margin percentage
Funeral .......................... $ 196,145 22.2% $ 40,337 7.9% $ 10,070 17.1% $ 246,552 16.9%
Cemetery ......................... 142,376 25.3% 9,258 36.3% 22,720 31.8% 174,354 26.4%
Other Services ................... 2,295 20.0% -- -- -- -- 2,295 20.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 340,816 23.4% $ 49,595 9.2% $ 32,790 25.2% $ 423,201 19.9%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
----------------------------------------------------------------------------------
North % of % of Other % of % of
America revenue Europe revenue Foreign revenue Total revenue
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Funeral .......................... $ 887,937 57.2% $ 582,833 95.7% $ 56,187 44.4% $1,526,957 66.8%
Cemetery ......................... 646,559 41.7% 26,011 4.3% 70,293 55.6% 742,863 32.5%
Other Services ................... 16,467 1.1% -- -- -- -- 16,467 0.7%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$1,550,963 100.0% $ 608,844 100.0% $ 126,480 100.0% $2,286,287 100.0%
========== ===== ========== ===== ========== ===== ========== =====
Gross profit and margin percentage
Funeral .......................... $ 210,381 23.7% $ 58,108 10.0% $ 10,042 17.9% $ 278,531 18.2%
Cemetery ......................... 186,668 28.9% 8,021 30.8% 23,681 33.7% 218,370 29.4%
Other Services ................... 7,756 47.1% -- -- -- -- 7,756 47.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 404,805 26.1% $ 66,129 10.9% $ 33,723 26.7% $ 504,657 22.1%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
FUNERAL
For the nine months ended September 30, 2000, funeral revenues were
$1,456,038 and gross profit was $246,552, a decrease of 4.6% and 11.5%,
respectively, compared to the same period in 1999. The decrease in revenue is
primarily attributed to a decrease in the number of deaths and the negative
effect of foreign currency translation.
The decrease in North America revenues narrowed with a year-to-date decline
of 0.4%, with total North America revenue for the period ending September 30,
2000, of $884,674. The decline is due to the year-to-date case volume decline of
0.7% to 227,754 primarily offset by an increase in the average revenue per
funeral service ($3,884 in the nine months of 2000 from $3,869 in the nine
months of 1999).
22
<PAGE> 23
The decrease in European funeral revenues is primarily due to the decrease
in the number of deaths in 2000 compared to 1999. The number of European funeral
services performed declined 5.0% in the nine months ending September 30, 2000 to
200,454, with the majority of the shortfall occurring in the second and third
quarters. Further, the negative effect of foreign currency translation has
impacted revenue by approximately $76,398 and gross profit by $7,124. This
negative effect is the result of the Euro weakening relative to the U.S. dollar
throughout 2000.
The increase in Other Foreign revenues and gross profit is the result of an
increase in growth in South America. Although the number of funeral services
performed by the Company declined slightly, by 0.1% year-to-date, revenue growth
remained positive.
CEMETERY
Cemetery revenues declined 11.1% to $660,179 while cemetery gross profit
decreased 20.2% to $174,354 in the nine months of 2000 compared to 1999. The
decrease in cemetery revenues and gross profit during this period is related to
(a) lower total North America preneed cemetery sales due to changes in the
cemetery sales compensation plans, (b) lower atneed volume due to lower death
rates, (c) anticipated decreases in realized investment earnings and capital
gains related to cemetery trust funds, and (d) anticipated reduction in sales of
excess undeveloped cemetery property.
The majority of cemetery results is related to North America cemetery
revenues and gross profit, which decreased 12.9% to $563,284 and 23.7% to
$142,376, respectively. The lower preneed sales were the combined result of the
initial negative impact from changes in cemetery sales compensation plans and
the expected decline from strong sales in the first quarter of 1999. The Company
has changed cemetery compensation plans to align its sales management
compensation with gross profits of the cemetery sales instead of being revenue
based only. Cemetery trust income from realized investment earnings and capital
gains was $43,624 in the nine months of 2000 compared to $59,109 in the same
period of 1999. These earnings have a direct impact on the gross profit
associated with the cemetery segment. Sales of excess undeveloped cemetery
property had an impact of $4,596 on gross profit in the nine months of 2000
compared to $13,581 in the same period of 1999.
Other Foreign revenue increases relate to increased sales in South America
resulting from the maturing of the Company's operational, sales and marketing
initiatives implemented, as well as increased preneed sales in Australia. The
increase in sales is slightly offset by the negative effect of foreign currency
translation in those foreign jurisdictions in the third quarter. The decrease in
gross profit in the nine months of 2000 is also attributable to the negative
effect of foreign currency.
OTHER SERVICES
Revenue and gross profit for the Company's other services has declined due
to the decision to indefinitely suspend the operations of its lending
subsidiary, to sell a portion of the loan portfolio, and to acquire by deed in
lieu of foreclosure the collateral underlying non-accrual loans previously
written down in the fourth quarter of 1999. As a result, in the third quarter of
2000, the Company sold a substantial portion of the loan portfolio of its
lending subsidiary. The operations of the lending subsidiary through the date of
sale, August 31, 2000, have been included herein as Other Services. Subsequent
to the sale, all transactions from remaining loans are included below Operating
Income in the consolidated statement of operations.
OTHER INCOME AND EXPENSES
General and administrative expenses increased $4,192 to $60,031 in the nine
months ended September 30, 2000, compared to the same period in 1999. The
increase primarily relates to increased information technology and
infrastructure costs associated with moving the Company's North America
proprietary point of sale systems into production, as well as the initial
roll-out of Central Processing Centers in the Company's realigned operating
clusters. Expressed as a percentage of revenues, general and administrative
expenses were 2.8% in the nine months of 2000 compared to 2.4% for the same
period in 1999.
Interest expense increased $42,766 or 24.6% to $216,370 in the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
The increased interest expense for the nine months ended September 30, 2000
reflects the higher financing costs associated with the use of the Company's
credit facilities rather than its commercial paper program and interest rate
increases compared to the nine months ended September 30, 1999. For the nine
months ended September 30, 2000, the average outstanding debt was $3,782,427
with an average interest rate of 7.63% compared to the average outstanding debt
for the nine months ended September 30, 1999 of $4,167,687 with an average
interest rate of 5.55%.
Other income primarily consists of gains and losses from the sales of
businesses that are disposed of for strategic or government
23
<PAGE> 24
mandated purposes.
The provision for income taxes reflected a 36.4% effective tax rate for the
nine months ended September 30, 2000 compared to a 35.5% effective rate for the
comparable period in 1999. The increase in the effective tax rate is the result
of selling the Company's discontinued insurance operations and a greater
percentage of the Company's operating results being contributed by North
America, which carries a higher effective tax rate than the Company's
international jurisdictions.
DISCONTINUED OPERATIONS
In the second quarter of 2000, the Company entered into definitive
agreements to sell its wholly owned insurance operations in France and the
United States, thereby discontinuing the operations of the Company's insurance
segment and reclassifying the financial statements in accordance with accounting
principles applicable to discontinued operations for all periods presented. In
the third quarter of 2000, the Company completed these transactions and
recognized pretax gains of $30,106 and associated tax provisions of $73,839 (of
which only $24,801 is currently payable) resulting in an after tax loss of
$43,733 associated with these disposals. The unusual relationship between the
pretax gains and tax provisions is attributable to differences in book and tax
bases of the discontinued operations, the effects of realizing Accumulated Other
Comprehensive Losses of $43,058 with no corresponding benefit, as well as the
adverse effect of being taxed on the Auxia gain at both the United States and
foreign jurisdictions without corresponding tax benefit from United States
foreign tax credits. Accumulated Other Comprehensive Losses attributable to
Auxia and AMLIC are required to be recorded through the consolidated statement
of operations at the time of sale and relate to net unrealized losses on
securities and foreign currency translation previously reported as a separate
component of stockholders' equity.
Revenues from discontinued operations increased 31.2% to $295,062 and gross
profit increased 18.3% to $26,541 for the nine months ended September 30, 2000.
This increase in revenues is due to the initiative to fund prearranged funeral
contracts, whenever possible, through the Company owned insurance operations.
While having the effect of increasing revenues, this initiative also initially
increases the actuarially determined benefits and expenses more than revenues,
having the effect of reducing the gross margin percentage. The increase in gross
profit is the result of increased costs from information technology and overhead
costs related to the insurance operations in the third quarter of 1999 which did
not reoccur in the third quarter of 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 2000
GENERAL
Historically, the Company had 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 had historically been generated
through public and private offerings of debt and the issuance of equity
securities supplemented by the Company's revolving credit agreements and
commercial paper.
The Company's liquidity needs and capital funding requirements have changed
as the Company has transitioned away from an acquisition company to an operating
company focusing on increasing cash flow, reducing overhead costs and paying
down debt. The Company has developed a series of cash flow initiatives related
to ongoing operations of the Company and the sale of certain assets and non-core
businesses. The implementation of these initiatives in 2000 has greatly improved
the Company's cash flows and ability to reduce its debt.
Cash flow initiatives related to the ongoing operations of the Company
include: (i) suspension of the acquisition program; (ii) reduction of capital
expenditures compared to historical levels; (iii) suspension of the quarterly
cash dividend; (iv) more efficient retrieval of funds due to the Company from
certain funeral and cemetery trusts; and (v) realignment of preneed cemetery and
prearranged funeral sales structures to become more cash flow positive. For the
nine months ended September 30, 2000, the Company has reported Operating Free
Cash Flow, as defined below, of $177,277, already within the expected year-end
2000 range of $100,000 to $250,000. Included in the $177,277 of Operating Free
Cash Flow is $96,582 of non-recurring funds received from certain funeral and
cemetery trusts. A portion of these funds was received as a result of collecting
receivables due to the Company from those trust funds related to prearranged
funeral contracts that became atneed funeral services performed by the Company.
The remaining portion was related to the distribution of trust fund income due
to the Company by the trust funds under the applicable state laws. The Company
defines Operating Free Cash Flow as adjusted cash flow from operating
activities, less capital expenditures, dividends paid, and the net effect of
prearranged funeral production and maturities. Adjusted cash flow from operating
activities includes cash flow provided by operating activities as reflected in
the consolidated statement of cash flow adjusted to exclude (i) cash flow
provided by
24
<PAGE> 25
operating activities of the Company's discontinued insurance operations, (ii)
cash payments associated with the Company's first and fourth quarter
restructuring charges, and (iii) other proceeds or payments (included in cash
flow provided by operating activities) which are of a non-recurring operational
nature.
The Company also developed cash flow initiatives to sell certain assets and
non-core businesses that are either not meeting the Company's criteria for
returns on invested capital or are more strategically valuable to parties
outside the Company. In 2000, the Company completed the sale of certain loans of
its lending subsidiary, the termination or assignment away of certain financial
swap agreements, the sale of AMLIC and Auxia and various other non-core asset
sales. The above transactions have produced after tax cash proceeds of $455,098
in 2000. The Company's year-end 2000 targeted range of after tax sales proceeds
from the sale of non-core assets is $200,000 to $500,000.
The above initiatives are expected to produce approximately $300,000 to
$750,000 of total funds in 2000 available for reducing debt on an after tax
basis. This projection does not include net cash outflows in 2000 associated
with the Company's 1999 restructuring charges (expected to be between $65,000 to
$75,000 for the year).
The Company's year-to-date progress towards its 2000 cash flow benchmarks is
calculated below:
<TABLE>
<CAPTION>
Nine months ended Revised Year 2000
September 30, 2000 Benchmarks
------------------ --------------------
<S> <C> <C>
Consolidated cash flow provided by operating activities ........ $ 261,981
Amount pertaining to discontinued insurance operations ......... (147,033)
Payments on restructuring charges .............................. 41,020
Effect of swap agreement terminations .......................... 32,840
---------
Adjusted cash flow from operating activities ............ 188,808
Capital expenditures ........................................... (58,392)
Dividends paid ................................................. --
Net effect of prearranged funeral production and maturities .... 46,861
---------
Operating Free Cash Flow ................................. 177,277 $100,000 to $250,000
Estimated after tax proceeds from sales of non-core assets ..... 455,098 $200,000 to $500,000
--------- --------------------
Cash flow available ............................................ $ 632,375 $300,000 to $750,000
========= ====================
</TABLE>
The Company's objective is to reduce total debt to a target level of
between $3,300,000 and $3,600,000 by the end of 2000. At September 30, 2000 the
Company had total debt outstanding of $3,331,382, compared to $4,060,016 at
December 31, 1999.
The largest component of this debt relates to the Company's primary
revolving credit agreements consisting of three credit facilities that provide
for borrowings up to $1,600,000. First, a short term facility allowed for
borrowings up to $600,000 which expired October 30, 2000 with no borrowings
outstanding. Next, a five-year, multi-currency facility allowed for borrowings
up to $700,000 including $500,000 in various foreign currencies and expires June
27, 2002. Finally, a third facility in the amount of $300,000 was converted into
a two-year term loan, in accordance with the terms of the agreement, and will
mature June 2002. These facilities have financial compliance provisions, as
defined in the credit agreements and filed as an exhibit to the Company's 1999
Form 10-K, including a maximum debt-to-capitalization ratio of 60%, a minimum
EBITDA to interest expense ratio of 2.75, a minimum net worth requirement
defined in the credit agreements, and limitations on cash distributions,
subsidiary borrowings, liens and guarantees. Additionally, the credit agreements
contain provisions whereby in the event the Company is required to change
accounting principles currently utilized, the Company has the option of (i)
agreeing to an amendment to the credit agreements which shall have the same
economic effect of the original financial compliance provisions after taking
into account the required change in accounting principles or (ii) perform the
calculations of the financial compliance provisions in accordance with
accounting principles utilized before the required change. As of September 30,
2000 the Company is in compliance with the financial compliance provisions and
has approximately $250,000 available under the $700,000 facility. The Company
further expects to be in compliance with these provisions through the remainder
of 2000.
25
<PAGE> 26
As of September 30, 2000, the Company had a total of $245,531 in current
maturities of long-term debt. The Company plans to retire these current
maturities of long-term debt from a combination of operating free cash flow,
proceeds from further sales of non-core assets and available credit under the
Company's $700,000 facility discussed above. The Company is also considering a
new secured credit facility. It is anticipated that this credit facility would
be approximately $200,000 in size and be secured by the Company's receivables.
SOURCES AND USES OF CASH
Cash flows from operating activities: Net cash provided by operating activities
of continuing operations was $114,948 for the nine months ended September 30,
2000, compared to $241,789 for the same period in 1999, a decrease of $126,841.
Significant components of cash flow provided by operating activities for the
nine months ended September 30, 2000 included net income of $89,924 adjusted for
net income from discontinued operations of $15,716, the loss on disposal of
discontinued operations of $43,733, the net effect of the interest rate
component of the swap terminations totaling $32,840, depreciation and
amortization of $180,566, an increase in receivables of $58,467, and cash paid
related to restructuring charges of $41,020. The Company's decision to terminate
certain interest rate swaps and all cross-currency swaps generated cash proceeds
of $110,658 and consists of three components (see note 5 to the consolidated
financial statements in Item 1 of this Form 10-Q). The collection of accrued
interest receivable of $21,849 offset by the interest rate losses of $54,689
have been classified as part of cash flows from operating activities, while the
foreign exchange rate gains of $143,498 have been classified as part of cash
flows from financing activities (see below). The receivables increase primarily
results from sales of preneed cemetery products and services, which are usually
financed on an installment basis in excess of twelve months, and undistributed
cemetery trust fund income. The increase in receivables is substantially less
than the increase in receivables for the nine months ended September 30, 1999.
The Company has several ongoing initiatives in place, including incentive
compensation plans and more efficient collection of receivables for funeral and
cemetery trust funds, to reduce the negative cash effect associated with the
Company's funeral and cemetery receivables.
Cash flows from investing activities: Net cash provided by investing
activities of continuing operations was $375,268 for the nine months ended
September 30, 2000, compared to a use of cash of $232,348 for the same period in
1999, an increase of cash of $607,616. Significant components of cash provided
by investing activities for the nine months ended September 30, 2000 included
proceeds from the sale of discontinued operations of $278,025, the sale of loans
by the lending subsidiary of $84,803, and from sales of property and equipment
of $38,623; $46,861 net cash provided from the net effect of prearranged funeral
production and maturities; offset by $58,392 in capital expenditures. The net
effect of prearranged funeral production and maturities line item consists
primarily of several items: (1) the effect of originating sales and maturities
of trust funded prearranged funeral contacts, (2) the effect of net obtaining
costs incurred pursuant to the sales of prearranged funeral contracts and (3)
the receipt of funds due to the Company from certain funeral trusts. The
increase in the net effect of prearranged funeral production and maturities line
item relates to the distribution of trust fund income of approximately $77,900
to the Company by funeral trust funds, under applicable state laws, offset by
additions to net obtaining costs incurred during the period of $55,034 and the
higher increase in maturities over origination related to trust funded
prearranged funeral sales.
Cash flows from financing activities: Net cash used in financing activities
of continuing operations was $524,064 for the nine months ended September 30,
2000, compared to $101,306 for the same period in 1999, an increase of $422,758.
The significant component of cash used in financing activities for the nine
months ended September 30, 2000 was $427,540 payments on revolving credit
agreements, $194,097 for the repurchase of certain bonds in the open market
offset by cash provided by the net effect of the cross-currency component of the
swap terminations totaling $143,498. The bonds had an aggregate face value of
$228,700 and the repurchase resulted in an extraordinary gain on early
extinguishment of debt.
Adjusted for discontinued operations at September 30, 2000, the Company had
a working capital deficit of $55,793 and a current ratio of 0.94:1, compared to
net working capital of $102,717 and a current ratio of 1.10:1 at December 31,
1999. The net working capital deficit in 2000 is primarily a result of the
current liability related to the Company's 1999 restructuring charges.
As of September 30, 2000, the Company's debt to capitalization ratio was
49.2% compared to 53.7% at December 31, 1999. The Company also had the ability
to issue $900,000 in securities registered with the Commission under a shelf
registration. Due to the Company's senior debt rating downgrade and current lack
of access to the capital markets, it is unlikely the shelf registration will be
utilized in the near future. In addition, 12,804 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
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acquisitions. The Company has suspended its acquisition program and does not
anticipate its acquisition shelf registration to be drawn upon in the near
future.
PREARRANGED FUNERAL ACTIVITIES
The Company sells prearranged funeral contracts in most of its service markets,
including its major foreign markets. The Company has a marketing program to sell
price guaranteed prearranged funeral contracts at prices prevailing when the
contracts are signed. Payments under these contracts are placed into trust funds
or are used to pay premiums on life insurance or annuity contracts. Earnings on
trust funds and increasing insurance benefits are accrued and deferred until
funeral services are performed, at which time, all funds are recognized in
funeral revenue. Direct costs incurred with a sale of prearranged funeral
contracts are a current use of cash which is partially offset with cash
retained, pursuant to state laws, from amounts trusted and certain general
agency commissions earned by the Company for sales of insurance products.
The total value of unperformed prearranged funeral contracts includes both
trust funded and insurance funded contracts and represents the original contract
value plus any accumulated trust fund earnings or increasing insurance benefits.
Prior to the third quarter of 2000, the total value of unperformed prearranged
funeral contracts consisted of two components: (i) contracts funded by trust or
third party insurance companies (which were included in deferred prearranged
funeral contract revenues in the accompanying consolidated balance sheets), and
(ii) contracts funded by the Company's discontinued insurance operations (which
were not included in deferred prearranged funeral contract revenues in the
accompanying consolidated balance sheets). Upon disposal of the Company's
discontinued insurance operations, the Company recorded the value of those
contracts to be funded by the discontinued insurance operations consistent with
contracts funded by third party insurance companies. The total value of
unperformed prearranged funeral revenues expected to be recognized in future
periods was $4,418,575 at September 30, 2000 and $4,287,452 at December 31,
1999. The increase in the value is attributable to an increase of 9.4% related
to prearranged funeral contract sales and 3.3% related to accumulated trust fund
earnings and increasing insurance benefits. Such increases are offset primarily
by maturities, of approximately 6.1%, as well as unfavorable foreign currency
fluctuations of 2.9%.
The Company's investment program targets a real return in excess of the
amount necessary to cover future increases in the cost of providing price
guaranteed funeral services as well as any selling costs. This is accomplished
by allocating the portfolio mix to investments that match the anticipated
maturity of the contracts.
The sales of prearranged funeral contracts afford the Company the
opportunity to protect both current market share as well as expand market share
in certain markets. On a comparable basis, prearranged funeral services
fulfilled as a percent of North American funerals performed was 28.0% and 27.2%
for the nine months ended September 30, 2000 and 1999, respectively, and is
expected to increase over time.
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. 133 as well
as SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities: An Amendment of FASB Statement No. 133," on January 1, 2001.
The Company currently estimates that the adoption of SFAS No. 133 will result in
a charge to income, net of applicable taxes, in the range of $20,000 to $30,000.
This amount will be classified as a cumulative effect of a change in accounting
principle. This initial charge primarily relates to the recognition of deferred
charges from interest rate gains and losses realized or to be realized in the
termination or assignment away of swap agreements. Under currently existing
standards, these charges are amortized into interest expense over the term of
the swap agreements, whereas the new standards require recognition as the
derivative gains and losses are incurred.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101, as
amended, is required to be implemented in the Company's fourth quarter of 2000.
The Company, together with other members of the death care industry, is
continuing its discussions regarding the implementation of SAB No. 101 directly
with the staff of the Commission. Final resolution of the discussions will not
have an impact on the Company's consolidated cash flows nor compliance with the
Company's existing credit agreements, but will likely have a material impact on
the Company's consolidated financial statements and on the manner in which the
Company records preneed sales activities. The deferral of income
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<PAGE> 28
that might occur as a result of implementing SAB No. 101 will be recognized in
the consolidated statement of income in future periods.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this quarterly report 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", "project", "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, particularly but not limited to, levels
of interest expense and negative currency translation effects.
2) Changes in credit relationships impacting the availability of credit
and the general availability of credit in the marketplace.
3) The Company's ability to successfully implement and complete all three
phases of its strategic plan as defined in this Form 10-Q, including
the interest of third parties to enter into and consummate alliances
and joint ventures with the Company, and the successful implementation
of its Internet initiatives.
4) 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.
5) The Company's ability to sell preneed heritage cemetery property which
is usually associated with new customers of the Company's cemeteries.
6) The Company's ability to successfully implement ongoing cost reduction
initiatives, as well as changes in domestic and international economic,
political and/or regulatory environments, which could negatively effect
the implementation of the Company's cost reduction initiatives.
7) The Company's ability to successfully realize the estimated savings
associated with the Company's cost reduction initiatives.
8) The Company's ability to successfully implement certain strategic
revenue and marketing initiatives resulting in increased volume through
its existing facilities.
9) The Company's ability to successfully implement certain strategic cash
flow initiatives, including but not limited to the sale of non-core
assets and the previously announced funeral and cemetery consumer
financing program, which could improve or generate cash flow for the
Company and enhance the Company's ability to reduce debt.
10) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and
accounting policies.
11) The Company's ability to successfully exploit its substantial
purchasing power with certain of the Company's vendors.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to certain market risks, see
Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the
Company's Form 10-K for the year ended December 31, 1999. Except as noted below,
there have been no material changes to the disclosure on this matter made in
such Form 10-K.
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During the first quarter of 2000, the Company materially modified its
participation in derivative transactions by terminating or assigning away
certain interest rate swaps and all cross-currency interest rate swaps as
mentioned in note five to the consolidated financial statements in Item 1 of
this Form 10-Q, thereby removing the Company's hedges of foreign exchange rate
exposure and reducing the Company's diversification of floating interest rate
exposure. As a result, 10% of the Company's total debt at September 30, 2000 was
based in foreign markets versus 52% at December 31, 1999. In addition, at
September 30, 2000, 16% of the Company's floating interest rate debt and 3% of
the Company's fixed interest rate debt was based in foreign markets compared to
28% and 67%, respectively, at December 31, 1999. Approximately 27% of the
Company's total investment and 29% of its income from operations are denominated
in foreign currencies at September 30, 2000, versus 32% at December 31, 1999,
for both the Company's total investment and income from operations. Due to
foreign local borrowings, approximately 23% of the Company's net assets and
approximately 20% of the Company's income from operations are subject to
translation risk at September 30, 2000 versus 13% and 16%, respectively, at
December 31, 1999.
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Previously Reported Litigation. The following discussion describes
certain litigation as of November 13, 2000, which was previously
reported:
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 21 class action
lawsuits that were filed in the United States District Court for the
Southern District of Texas, two class action lawsuits that were
originally brought in the United States District Court for the Eastern
District of Texas, and a lawsuit brought in the United States District
Court for the Southern District of Texas by an individual who sold his
funeral home to SCI. The Consolidated Lawsuit names as defendants the
Company and three of the Company's current or former executive officers
or directors: Robert L. Waltrip, L. William Heiligbrodt and George R.
Champagne (the Individual Defendants). The plaintiffs have filed a
Consolidated Class Action Complaint in the Consolidated Lawsuit
alleging that defendants violated federal securities laws by making
materially false and misleading statements and failing to disclose
material information concerning the Company's prearranged funeral
business. The Consolidated Lawsuit seeks to recover an unspecified
amount of monetary damages. Since the litigation is in its preliminary
stages, 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 and the
Individual Defendants have filed an Answer to the Consolidated Class
Action Complaint, and the Company intends to aggressively defend this
lawsuit.
The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger
of a wholly owned subsidiary of Company into Equity Corporation
International (ECI); (ii) purchased shares of Company common stock in
the open market during the period from July 17, 1998, through January
26, 1999 (the Class Period); (iii) purchased Company call options in
the open market during the Class Period; (iv) sold Company put options
in the open market during the Class Period; (v) held employee stock
options in ECI that became options to purchase Company common stock
pursuant to the merger; and (vi) held Company employee stock options to
purchase Company common stock under a stock plan during the Class
Period. Excluded from the foregoing categories are the Individual
Defendants, the members of their immediate families and all other
persons who were directors or executive officers of the Company or its
affiliated entities at any time during the Class Period. Judge Hughes
has certified the Consolidated Lawsuit as a class action. On May 10,
2000, Judge Hughes signed an order amending the class definition to
include James P. Hunter, III as a class member. Mr. Hunter was
Chairman, President and Chief Executive Officer of ECI at the time of
its merger with a wholly-owned subsidiary of the Company.
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The Company and the Individual Defendants have filed a Motion to
Dismiss the Consolidated Lawsuit; the plaintiffs have filed their
Opposition to Defendants' Motion to Dismiss the Consolidated Lawsuit;
and the Company and the Individual Defendants have filed a Reply to
Plaintiffs' Opposition to Defendants' Motion to Dismiss the
Consolidated Lawsuit. The foregoing pleadings will be considered by
Judge Hughes in due course.
Copies of the complaint in the Consolidated Lawsuit and the pleadings
that have been filed in response thereto and that are referred to
herein are filed as exhibits to this Quarterly Report on Form 10-Q.
Cause No. 32548-99-11, James P. Hunter, III et al v. Service
Corporation International et al; In the __________________ Judicial
District Court of Angelina County, Texas. On November 10, 1999, James
P. Hunter, III and a related family trust filed a lawsuit against the
Company, the Individual Defendants, two other officers, an employee of
the Company and PricewaterhouseCoopers LLP, the Company's independent
accountants, in state District Court in Angelina County, Texas (Hunter
Litigation). The plaintiffs allege, among other things, violations of
Texas securities law and statutory and common law fraud, and seek
unspecified compensatory and exemplary damages. The Company and the
other defendants filed an answer in the Hunter Litigation denying the
plaintiffs' allegations. Since the litigation is in its very
preliminary stages, the Company cannot quantify its ultimate liability,
if any, for the payment of damages. However, the Company believes that
the allegations in the Hunter Litigation, like those in the
Consolidated Lawsuit, do not provide a basis for the recovery of
damages because all required disclosures were made in a timely basis.
The Company intends to aggressively defend this litigation. On October
5, 2000, Judge Hughes, the judge handling the Consolidated Lawsuit,
signed an order prohibiting Mr. Hunter and the related family trust
from pursuing discovery in the Hunter Litigation. Judge Hughes entered
the order at the request of the Company and pursuant to the authority
vested to him by the Securities Litigation Uniform Standards Act of
1998.
A copy of the Plaintiff's Original Petition in the Hunter Litigation
and the Defendants' original answer in that proceeding are filed as
exhibits to this Quarterly Report on Form 10-Q.
Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International;
In the ________ Judicial District Court of Angelina County, Texas
(Fredrick Litigation). This additional securities fraud case has been
brought against the Company by a former shareholder of ECI alleging
causes of action exclusively under Texas statutory and common law. The
Company has filed an answer denying plaintiff's allegations. Since the
litigation is in its preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages. However,
the Company believes that the allegations in the Fredrick Litigation do
not provide a basis for the recovery of damages because all required
disclosures were made in a timely basis. The Company intends to
aggressively defend this litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the nine months ended
September 30, 2000 and 1999.
27.1 Financial data schedule.
99.1 Consolidated Class Action Complaint filed September 3, 1999
in Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.1 to
Form 10-Q for the fiscal quarter ended September 30, 1999.)
99.2 Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In Re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q for
the fiscal quarter ended September 30, 1999.)
99.3 Defendants' Motion to Dismiss the Consolidated Class Action
Complaint filed October 8, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q for
the fiscal quarter ended September 30, 1999.)
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99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the
Consolidated Class Action Complaint filed November 5, 1999
in Civil Action No. H-99- 280, In Re Service Corporation
International. (Incorporated by reference to Exhibit 99.4 to
Form 10-Q for the fiscal quarter ended September 30, 1999.)
99.5 Defendants' Reply to Plaintiffs' Opposition to Defendants'
Motion to Dismiss the Consolidated Class Action Complaint
filed November 24, 1999 in Civil Action No. H-99-280, In re
Service Corporation International. (Incorporated by
reference to Exhibit 99.12 to Form 10-K for the fiscal year
ended December 31, 1999.)
99.6 Plaintiff's Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James P.
Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers, LLP; in the
__________ Judicial District Court of Angelina County,
Texas. (Incorporated by reference to Exhibit 99.5 to Form
10-Q for the fiscal quarter ended September 30, 1999.)
99.7 Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.6. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal year
ended December 31, 1999.)
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, the Company filed two
reports on Form 8-K. The Form 8-K dated July 11, 2000 reported (i)
under "Item 5. Other Events" the Company's announcement of an
agreement to sell its French insurance operations and second
quarter earnings estimates and (ii) "Item 7. Financial Statements
and Exhibits" the exhibit comprised of the Company's press release
dated July 10, 2000. The Form 8-K dated July 27, 2000 reported (i)
under "Item 5. Other Events" the Company's announcement of the
signing of a definitive agreement to sell its wholly owned
insurance company, American Memorial Life Insurance Company, and
(ii) under "Item 7. Financial Statements and Exhibits" the exhibit
comprised of the Company's press release dated July 27, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2000 SERVICE CORPORATION INTERNATIONAL
By: /s/ Jeffrey E. Curtiss
-----------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
12.1 Ratio of earnings to fixed charges for the nine months ended
September 30, 2000 and 1999.
27.1 Financial data schedule.
</TABLE>
