<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
incorporation or organization) identification number)
1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days.
YES X NO
----- -----
The number of shares outstanding of the registrant's common stock as of August
10, 2000 was 272,203,513 (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 Income -
Three and Six Months Ended June 30, 2000 and 1999 3
Consolidated Balance Sheet -
June 30, 2000 and December 31, 1999 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 2000 6
Notes to Consolidated Financial Statements 7 - 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 - 30
Part II. Other Information
Item 1. Legal Proceedings 30 - 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
Signature 32
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except share and per share amounts) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ..................................................... $ 702,100 $ 745,836 $ 1,467,850 $ 1,578,096
Costs and expenses ........................................... (575,888) (576,503) (1,156,860) (1,197,193)
----------- ----------- ----------- -----------
Gross profit ................................................. 126,212 169,333 310,990 380,903
General and administrative expenses .......................... (19,733) (16,807) (39,847) (36,517)
Restructuring and non-recurring charges ...................... (13,281) -- (13,281) (89,884)
----------- ----------- ----------- -----------
Operating income from continuing operations .................. 93,198 152,526 257,862 254,502
Interest expense ............................................. (73,565) (56,761) (143,114) (114,209)
Other income ................................................. 7,727 12,780 11,242 27,368
----------- ----------- ----------- -----------
(65,838) (43,981) (131,872) (86,841)
----------- ----------- ----------- -----------
Income from continuing operations before income taxes
and extraordinary gains ................................. 27,360 108,545 125,990 167,661
Provision for income taxes ................................... (9,567) (38,622) (45,109) (60,131)
----------- ----------- ----------- -----------
Net income from continuing operations before
extraordinary gains ..................................... 17,793 69,923 80,881 107,530
Income from discontinued operations before extraordinary gains
(net of income taxes of $3,885, $4,162, $7,568 and
$7,187, respectively).................................... 5,611 6,090 10,764 10,366
Extraordinary gains on early extinguishments of debt (net of
income taxes of $8,845, $0, $12,630 and $1,071,
respectively)............................................ 15,388 -- 21,973 1,885
----------- ----------- ----------- -----------
Net income ................................................... $ 38,792 $ 76,013 $ 113,618 $ 119,781
=========== =========== =========== ===========
Earnings per share:
Basic:
Income from continuing operations before
extraordinary gains .............................. $ .07 $ .26 $ .30 $ .39
Income from discontinued operations before
extraordinary gains .............................. .02 .02 .04 .04
Extraordinary gains on early extinguishments of debt .05 -- .08 .01
----------- ----------- ----------- -----------
Net income .......................................... $ .14 $ .28 $ .42 $ .44
=========== =========== =========== ===========
Diluted:
Income from continuing operations before
extraordinary gains .............................. $ .07 $ .26 $ .30 $ .39
Income from discontinued operations before
extraordinary gains .............................. .02 .02 .04 .04
Extraordinary gains on early extinguishments of debt .05 -- .08 .01
----------- ----------- ----------- -----------
Net income .......................................... $ .14 $ .28 $ .42 $ .44
=========== =========== =========== ===========
Basic weighted average number of shares ...................... 272,093 272,013 272,078 272,502
=========== =========== =========== ===========
Diluted weighted average number of shares .................... 272,097 274,587 272,801 275,012
=========== =========== =========== ===========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except share amounts) 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 48,303 $ 57,814
Receivables, net of allowances ..................................... 527,311 585,269
Inventories ........................................................ 191,595 190,343
Net assets of discontinued operations .............................. 197,462 208,851
Other .............................................................. 84,128 101,220
------------ ------------
Total current assets ............................................. 1,048,799 1,143,497
------------ ------------
Prearranged funeral contracts ........................................... 2,824,653 2,898,139
Long-term receivables, net of allowances ................................ 1,585,773 1,532,225
Cemetery property, at cost .............................................. 2,162,228 2,182,410
Property, plant and equipment, at cost (net) ............................ 1,818,903 1,879,979
Deferred charges and other assets ....................................... 827,579 907,513
Names and reputations (net) ............................................. 2,342,801 2,434,467
------------ ------------
$ 12,610,736 $ 12,978,230
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 510,179 $ 576,751
Current maturities of long-term debt ............................... 466,571 423,949
Income taxes ....................................................... 104,212 40,080
------------ ------------
Total current liabilities ........................................ 1,080,962 1,040,780
------------ ------------
Long-term debt .......................................................... 3,290,486 3,636,067
Deferred prearranged funeral contract revenues .......................... 3,194,423 3,186,081
Deferred income taxes ................................................... 819,766 864,780
Other liabilities ....................................................... 725,744 755,249
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
272,151,281 and 272,064,618, issued and outstanding
(net of 2,705,840 and 2,792,503 treasury shares, at par) ......... 272,151 272,064
Capital in excess of par value ..................................... 2,156,368 2,156,301
Retained earnings .................................................. 1,240,516 1,126,898
Accumulated other comprehensive loss ............................... (169,680) (59,990)
------------ ------------
Total stockholders' equity .................................... 3,499,355 3,495,273
------------ ------------
$ 12,610,736 $ 12,978,230
============ ============
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 113,618 $ 119,781
Adjustments to reconcile net income to net cash provided by continuing operations:
Net income from discontinued operations ..................................... (10,764) (10,366)
Depreciation and amortization ............................................... 123,009 122,040
Provision for deferred income taxes ......................................... 20,283 17,108
Restructuring and non-recurring charges ..................................... 13,281 89,884
Payments on restructuring charges ........................................... (36,242) (29,574)
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)
Gains from dispositions (net) ............................................... (5,625) (20,150)
Change in other assets and liabilities, net of effects from acquisitions:
Increase in receivables ................................................... (52,982) (113,645)
(Increase) decrease in other assets ....................................... (17,912) 18,689
Decrease in payables and other liabilities ................................ (17,545) (22,395)
Other ..................................................................... (8,002) 11,140
--------- ---------
Net cash provided by continuing operations .................................... 66,306 180,627
Net cash provided by discontinued operations .................................. 92,269 47,772
--------- ---------
Net cash provided by operating activities ........................................ 158,575 228,399
Cash flows from investing activities:
Capital expenditures ........................................................ (39,502) (113,836)
Net effect of prearranged funeral production and maturities ................. 36,480 (36,071)
Proceeds from sales of property and equipment ............................... 28,302 39,071
Acquisitions, net of cash acquired .......................................... 800 (66,026)
Loans issued by lending subsidiary .......................................... (3,083) (41,674)
Principal payments received on loans issued by lending subsidiary ........... 20,758 56,073
Deposit of restricted funds ................................................. (27,550) --
Other ....................................................................... (298) (19,440)
--------- ---------
Net cash provided by (used in) continuing operations .......................... 15,907 (181,903)
Net cash used in discontinued operations ...................................... (82,022) (118,251)
--------- ---------
Net cash used in investing activities ............................................ (66,115) (300,154)
Cash flows from financing activities:
Net increase in borrowings under revolving credit agreements ................ 4,571 504,238
Payments of long-term debt .................................................. (63,876) (203,611)
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 .................................................. -- (45,669)
Dividends paid .............................................................. -- (47,809)
Bank overdrafts and other ................................................... 2,745 10,652
--------- ---------
Net cash used in financing activities of continuing operations ................... (107,159) (148,135)
Effect of foreign currency ....................................................... (1,842) (9,250)
--------- ---------
Net decrease in cash and cash equivalents ........................................ (16,541) (229,140)
Adjust for change in cash and cash equivalents used by discontinued operations ... 7,030 72,796
Cash and cash equivalents at beginning of period from continuing operations ...... 57,814 269,143
--------- ---------
Cash and cash equivalents of continuing operations at June 30, 2000 and 1999 ..... $ 48,303 $ 112,799
========= =========
</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> <C> <C>
Balance at December 31, 1999 $ 272,064 $2,156,301 $1,126,898 $ (59,990) $3,495,273
Comprehensive income:
Net income.............................. 113,618 113,618
Other comprehensive loss:
Foreign currency translation............. (106,403) (106,403)
Unrealized loss on securities............ (3,287) (3,287)
----------
Total other comprehensive loss........... (109,690)
----------
Comprehensive income.................... 3,928
Common stock issued:
Acquisitions.......................... 61 186 247
Stock grants.......................... 33 100 133
Repurchase and acquisition of
common stock......................... (7) (219) (226)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 2000 ................... $ 272,151 $2,156,368 $1,240,516 $ (169,680) $3,499,355
========== ========== ========== ========== ==========
</TABLE>
The Company's comprehensive income for the six months ended June 30, 1999, of
$70,421 consisted of net income of $119,781, a foreign currency translation
adjustment of $(22,049), and an unrealized loss on securities of $(27,311).
(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 June 30, 2000, the Company
operated 3,809 funeral service locations, 581 cemeteries and 201 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.
In July 2000, the Company entered into definitive agreements to sell 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
six months ended June 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
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 period 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 effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
may effect 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 on January 1, 2001.
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, are
currently discussing the implementation of SAB No. 101 directly with the
7
<PAGE> 8
staff of the Commission. Final resolution of the discussions will not have an
impact on the Company's consolidated cash flows, or 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 currently by the Company's discontinued
insurance operations, third party insurance companies or trust contracts.
Contracts not funded through the Company's discontinued insurance operations are
currently 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.
The total value of unperformed prearranged funeral contracts consists of
two components: (i) contracts funded by trust or third party insurance
companies, and (ii) contracts currently funded by the Company's discontinued
insurance operations. The total value represents the original contract values
plus any accumulated trust fund earnings or increasing insurance benefits. The
value of unperformed prearranged funeral contracts to be funded by trust or
third party insurance companies are included in deferred prearranged funeral
contract revenues in the consolidated balance sheet. In accordance with
generally accepted accounting principles for life insurance companies, the
current value of the actuarially determined portion of the unperformed
prearranged funeral contracts to be funded by the Company's discontinued
insurance operations is recorded in reserves and annuity benefits - insurance
operations as shown in note 10 to the consolidated financial statements. The
remaining component of reserves and annuity benefits - insurance operations
represents the actuarially determined amounts to be funded for non-SCI
unperformed prearranged funeral contracts. The total value of all SCI
unperformed prearranged funeral contracts is shown below on a proforma basis as
if the contracts funded through the Company's discontinued insurance operations
were valued at original contract values plus increasing insurance benefits.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Deferred prearranged funeral contract revenues................................ $3,194,423 $3,186,081
SCI contracts funded by Company's discontinued insurance operations........... 1,209,613 1,101,371
---------- ----------
Total value of unperformed prearranged funeral contracts...................... $4,404,036 $4,287,452
========== ==========
</TABLE>
When the Company's insurance companies are disposed of, the total value of
contracts to be funded by these discontinued insurance operations ($1,209,613 at
June 30, 2000) will be recorded on the accompanying balance sheet consistent
with contracts funded by third party insurance companies as discussed above.
8
<PAGE> 9
4. DEBT
Debt at June 30, 2000 and December 31, 1999 was as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Bank revolving credit agreements and commercial paper................... $1,167,325 $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......................................... 55,862 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......................................... 50,908 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.................. 87,452 136,368
Deferred loan costs..................................................... (18,190) (22,187)
---------- ----------
Total debt......................................................... 3,757,057 4,060,016
Less current maturities................................................. (466,571) (423,949)
---------- ----------
Total long-term debt.................................................... $3,290,486 $3,636,067
========== ==========
</TABLE>
As of June 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 allows for borrowings up to $600,000 and expires
October 30, 2000. A 5-year, multi-currency facility allows 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
2-year term loan, in accordance with the terms of the agreement, and will mature
June 25, 2002. The borrowings under these credit facilities generally 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 June 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 June 30, 2000, $1,167,325 was outstanding under the above facilities
with a weighted average interest rate of 7.93% ($870,545 at December 31, 1999,
with a weighted average interest rate of 6.97%). Approximately $270,326 of these
borrowings was denominated in various foreign currencies under the 5-year
facility at June 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 June 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 $27,550 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 June 30, 2000.
Approximately $14,106 was related to two embedded options associated with the
Company's 6.30% notes due 2020 (putable 2003). The remaining $13,444 was used to
secure various other obligations.
During the six months ended June 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 $15,388 (net of tax of $8,845) and $21,973 (net
of tax of $12,630) for the three and six months ended June 30, 2000,
respectively.
5. DERIVATIVES
The Company has 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 and foreign
exchange rates 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 $6,751 has been amortized into interest expense
through June 30, 2000.
Excluding $166,020 of borrowings related to the Company's previous lending
activities, the Company's debt outstanding at June 30, 2000 had a weighted
average interest rate of 7.11% 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
June 30, 2000 was 7.10% compared to 6.41% at December 31, 1999. The financial
instruments associated with the 7.10% weighted average interest rate at June 30,
2000 consisted of approximately 45% of fixed interest rate debt at a weighted
average interest rate of 6.88% and approximately 55% of floating interest rate
debt at a weighted average interest rate of 7.28%.
The fair market value of the Company's remaining swap agreements at June
30, 2000 was a net liability of $11,192 (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.
10
<PAGE> 11
6. RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six months
ended June 30,
2000 1999
---------------------
<S> <C> <C>
1.76 2.23
</TABLE>
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 June 30,
2000................................................. $ 461,338 $236,485 $ 697,823
1999................................................. 483,178 257,168 740,346
Six months ended June 30,
2000................................................. $1,003,903 $455,336 $1,459,239
1999................................................. 1,057,819 509,026 1,566,845
---------------------------------------------------------------------------------------------------------------------
Gross profit:
Three months ended June 30,
2000................................................. $ 57,930 $ 67,368 $ 125,298
1999................................................. 82,775 84,021 166,796
Six months ended June 30,
2000................................................. $ 181,564 $127,752 $ 309,316
1999................................................. 213,795 161,821 375,616
---------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross profit from reportable segments ................. $ 125,298 $ 166,796 $ 309,316 $ 375,616
Lending subsidiary income from operations......... 914 2,537 1,674 5,287
General and administrative expenses .............. (19,733) (16,807) (39,847) (36,517)
Restructuring and non-recurring charges
(see note 9) ................................ (13,281) -- (13,281) (89,884)
--------- --------- --------- ---------
Operating income from continuing operations ........... 93,198 152,526 257,862 254,502
Interest expense ................................. (73,565) (56,761) (143,114) (114,209)
Other income ..................................... 7,727 12,780 11,242 27,368
--------- --------- --------- ---------
Income from continuing operations before income
taxes and extraordinary gains .................... $ 27,360 $ 108,545 $ 125,990 $ 167,661
========= ========= ========= =========
</TABLE>
12
<PAGE> 13
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 June 30,
2000 ...................................................... $ 484,987 $ 170,444 $ 46,669 $ 702,100
1999 ...................................................... 514,193 189,127 42,516 745,836
Six months ended June 30,
2000 ...................................................... $ 999,977 $ 382,327 $ 85,546 $1,467,850
1999 ...................................................... 1,076,229 424,923 76,944 1,578,096
------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations before restructuring
and non-recurring charges (see note 9):
Three months ended June 30,
2000 ...................................................... $ 89,944 $ 3,745 $ 12,790 $ 106,479
1999 ...................................................... 121,528 18,863 12,135 152,526
Six months ended June 30,
2000 ...................................................... $ 211,600 $ 39,483 $ 20,060 $ 271,143
1999 ...................................................... 274,451 51,229 18,706 344,386
------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations:
Three months ended June 30,
2000 ...................................................... $ 76,489 $ 3,919 $ 12,790 $ 93,198
1999 ...................................................... 121,528 18,863 12,135 152,526
Six months ended June 30,
2000 ...................................................... $ 198,145 $ 39,657 $ 20,060 $ 257,862
1999 ...................................................... 221,386 17,200 15,916 254,502
------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization from continuing operations:
Three months ended June 30,
2000 ...................................................... $ 44,492 $ 14,281 $ 3,684 $ 62,457
1999 ...................................................... 39,071 22,957 4,262 66,290
Six months ended June 30,
2000 ...................................................... $ 86,922 $ 28,884 $ 7,203 $ 123,009
1999 ...................................................... 80,180 35,649 6,211 122,040
------------------------------------------------------------------------------------------------------------------------
Operating locations at June 30:
2000 ...................................................... 2,339 2,063 189 4,591
1999 ...................................................... 2,298 2,059 185 4,542
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the North America figures above are the following United States
amounts:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .............................. $ 464,011 $ 495,125 $ 956,140 $1,035,133
Operating income from continuing operations before
restructuring and non-recurring charges .................. $ 86,026 $ 118,360 $ 201,934 $ 264,725
Operating income from continuing operations ................... $ 72,571 $ 118,360 $ 188,479 $ 212,617
Depreciation and amortization from continuing operations ...... $ 42,581 $ 37,599 $ 83,089 $ 75,863
Operating locations ........................................... -- -- 2,185 2,142
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
Included in the European figures above are the following French amounts:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .............................. $ 103,911 $ 116,994 $ 227,097 $ 264,058
Operating income (loss) from continuing operations before
restructuring and non-recurring charges .................. $ (934) $ 11,282 $ 15,726 $ 28,895
Operating income (loss) from continuing operations ............ $ (934) $ 11,282 $ 15,726 $ 8,028
Depreciation and amortization from continuing operations ...... $ 5,761 $ 14,977 $ 11,080 $ 20,009
Operating locations ........................................... -- -- 1,238 1,233
--------------------------------------------------------------------------------------------------------------------
</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 Six months ended
June 30, June 30,
-------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (numerator):
Income from continuing operations before
extraordinary gains - basic ........................................ $ 17,793 $ 69,923 $ 80,881 $107,530
After tax interest on convertible debentures ....................... -- 195 190 327
-------- -------- -------- --------
Income from continuing operations before
extraordinary gains - diluted ...................................... $ 17,793 $ 70,118 $ 81,071 $107,857
-------------------------------------------------------------------------------------------------------------------------
Shares (denominator):
Shares - basic ..................................................... 272,093 272,013 272,078 272,502
Stock options and warrants .................................... 4 1,127 25 1,210
Convertible debentures ........................................ -- 1,447 698 1,300
-------- -------- -------- --------
Shares - diluted ................................................... 272,097 274,587 272,801 275,012
-------------------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations before extraordinary gains:
Basic .............................................................. $ .07 $ .26 $ .30 $ .39
Diluted ............................................................ $ .07 $ .26 $ .30 $ .39
-------------------------------------------------------------------------------------------------------------------------
</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 are 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
14
<PAGE> 15
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.
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 six
Months ended June 30, 2000
Original Balance at Changes in -------------------------- Balance at
Charge amount December 31, 1999 Estimate Cash Non-cash June 30, 2000
------------- ----------------- -------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter Charge... $ 89,884 $ 25,245 $ -- $ (6,939) $ (9,699) $ 8,607
Fourth Quarter Charge.. 272,544 135,944 13,281 (29,303) (16,389) 103,533
--------- --------- ------- --------- -------- --------
Total............ $ 362,428 $ 161,189 $13,281 $ (36,242) $(26,088) $112,140
========= ========= ======= ========= ======== ========
</TABLE>
Of the remaining total restructuring accrual balance of $112,140,
approximately $6,544 and $97,100 relate to severance costs for the First Quarter
Charge and the Fourth Quarter Charge, respectively. Further of the $112,140,
approximately $51,763 is included in accounts payable and accrued liabilities
and $60,377 is included in other liabilities in the accompanying consolidated
balance sheet.
10. DISCONTINUED OPERATIONS
In July 2000, the Company reached definitive agreements to sell the net assets
of its wholly owned insurance operations. The financial statements have been
reclassified to reflect these operations as discontinued.
Summary operating results of discontinued operations:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 99,919 $ 84,400 $ 203,636 $ 156,196
Cost and expenses ........................... (90,423) (74,148) (185,304) (138,643)
--------- --------- --------- ---------
Operating income from discontinued
operations................................... 9,496 10,252 18,332 17,553
Provision for income taxes .................. (3,885) (4,162) (7,568) (7,187)
--------- --------- --------- ---------
Income from discontinued operations ......... $ 5,611 $ 6,090 $ 10,764 $ 10,366
========= ========= ========= =========
</TABLE>
15
<PAGE> 16
Net assets of discontinued operations:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents ........................ $ 23,377 $ 30,407
Receivables, net of allowances ................... 19,597 19,858
Other current assets ............................. 14,651 11,240
Investments - insurance operations ............... 1,374,805 1,318,635
Long-term receivables ............................ 27,573 30,193
Property, plant and equipment, at cost (net)...... 2,309 1,546
Deferred charges and other assets ................ 403,005 379,454
Names and reputations (net) ...................... 40,363 40,889
---------- ----------
Total assets .............................. $1,905,680 $1,832,222
-----------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued liabilities ......... $ 25,964 $ 13,096
Income taxes payable ............................. 3,892 3,989
Reserves and annuity benefits - insurance
operations ..................................... 1,381,067 1,313,328
Deferred income taxes ............................ 5,541 8,243
Other liabilities ................................ 291,754 284,715
---------- ----------
Total liabilities ........................ $1,708,218 $1,623,371
-----------------------------------------------------------------------------------------------
Net assets of discontinued operations ................... $ 197,462 $ 208,851
-----------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
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 the Company also has operations managed in the
Pacific Rim and South America. The majority of these operations 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 initiated the
implementation of Central Processing Centers throughout North America in order
to further assist in the efficiencies of accounting and back-office functions.
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 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 Company's initiative to increase cash flow included
the suspension of the quarterly cash dividend, the suspension of the acquisition
program, realignment of preneed cemetery and prearranged funeral sales
commission structures, increased efforts to expedite the receipt of funds due to
the Company from certain funeral and cemetery trusts and the sale of certain
non-core assets and businesses.
The Company has executed sales of certain non-core financial assets during
2000 and will continue the process of selling other non-core assets. The Company
intends to complete the sale of certain loans of its lending subsidiary
(included in other services operations) in 2000 and has signed definitive
agreements to sell its wholly owned insurance operations, American Memorial Life
Insurance Company (AMLIC) and Auxia, which are both expected to close by October
31, 2000, subject to customary regulatory and other closing conditions. As a
result, these operations are reported as discontinued operations and the
financial statements have been reclassified for all periods presented. The AMLIC
and Auxia transactions are expected to produce approximately $230,000 of after
tax proceeds to be used to reduce the Company's debt outstanding. 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 will
become effective upon closing of the AMLIC and Auxia transactions, and 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. Under
the performance based ten year marketing agreement in conjunction with the AMLIC
transaction, and based on the
17
<PAGE> 18
Company's sales forecasts, the net present value of future overrides associated
with the AMLIC marketing agreement is expected to exceed $200,000. 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 and cash flow enhancing initiatives 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 flow and will allow the Company, coupled with
the closing of the AMLIC and Auxia transactions and other non-core asset sales
expected to close before the end of October 2000, to retire all of its debt
maturing in 2000. The Company's total debt at June 30, 2000 was $3,757,057,
which is before the receipt of estimated proceeds associated with the sale of
AMLIC and Auxia, and down from a previous high balance of approximately
$4,200,000 at September 30, 1999. The June 30, 2000 debt balance is already
within the Company's initial year-end 2000 targeted range of $3,600,000 to
$3,800,000.
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. 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 is 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.
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 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 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 could be
available as early as the fall of 2000, and would provide 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
18
<PAGE> 19
nursing homes, assisted living companies, rehabilitation hospitals, insurance
companies, pharmaceutical companies and numerous other organizations marketing
to the global senior citizen market.
Earnings Outlook for Remainder of 2000
The Company had reported expectations of earnings per share for full-year
2000 in the range of $.65 to $.75 per diluted share and EBITDA of approximately
$800,000, both before non-recurring items defined as extraordinary gains on
early extinguishments of debt and restructuring and non-recurring charges. The
most important factor in the determination of the Company's earnings is the
number of deaths during a certain period in the Company's North America,
European and other international funeral markets. Due to the high fixed cost
structure inherent in the funeral industry, the number of funeral services
performed can create large swings in the revenues, gross margin percentages and
gross profits of the Company's funeral segment. Since the suspension of the
Company's acquisition program in 1999, the Company's funeral segment revenues
are almost entirely comprised of comparable funeral service locations, resulting
in funeral segment gross profits affected primarily by market share and number
of deaths in their respective markets. Primarily beginning in the third quarter
of 1999, the Company has experienced the trend of fewer number of deaths in its
worldwide funeral operating markets. Through June 2000, the Company believes the
number of deaths in 2000 has decreased approximately 1.6% in North America and
over 3.0% in Europe compared to the same period of 1999, respectively. The
Company does not believe it will achieve its previously disclosed earnings
guidance and with limited future visibility and insight into accurately
predicting the number of deaths for the remainder of 2000, the Company is not
comfortable disclosing revised earnings per share and EBITDA guidance for the
full-year 2000 at this time. Furthermore, the Company believes if this negative
trend in the number of deaths continues, the Company's underlying fixed cost
structure and personnel needs would have to be adjusted accordingly.
RESULTS OF OPERATIONS:
The following is a discussion of the Company's results of operations for the
three and six months ended June 30, 2000 and 1999.
THREE MONTHS ENDED JUNE 30, 2000
COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
For the quarter ended June 30, 2000, the Company reported revenues from
continuing operations of $702,100, representing a 5.9% decrease compared to
$745,836 for the second quarter of 1999. Gross profit in the second quarter of
2000 decreased 25.5% to $126,212 compared to $169,333 in the same period of
1999, while the gross margin percentage decreased to 18.0% for the second
quarter of 2000 compared to 22.7% in the same period of 1999. For the three
months ended June 30, 2000 the Company reported earnings before non-recurring
items (defined as extraordinary gains on early extinguishments of debt and
restructuring and non-recurring charges) of $31,837, net income of $38,792,
diluted earnings per share before non-recurring items of $.12 ($.12 basic) and
diluted earnings per share of $.14 ($.14 basic). The Company reported net
income of $76,013 and diluted earnings per share of $.28 ($.28 basic) for the
second quarter of 1999.
In the second quarter of 2000, the Company made changes in estimates of its
fourth quarter 1999 restructuring charge, increasing the charge by $13,281. The
Company also recorded gains from the early extinguishments of debt in the amount
of $15,388, net of tax in the second quarter of 2000. No such charges or
extraordinary gains were recorded in the second quarter of 1999.
19
<PAGE> 20
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 June 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 ..................... $279,090 57.5% $162,649 95.4% $ 19,599 42.0% $461,338 65.7%
Cemetery .................... 201,620 41.6% 7,795 4.6% 27,070 58.0% 236,485 33.7%
Other Services .............. 4,277 0.9% -- -- -- -- 4,277 0.6%
--------------------------------------------------------------------------------------------
$484,987 100.0% $170,444 100.0% $ 46,669 100.0% $702,100 100.0%
============================================================================================
Gross profit and margin percentage
Funeral ..................... $ 52,474 18.8% $ 2,306 1.4% $ 3,150 16.1% $ 57,930 12.6%
Cemetery .................... 55,387 27.5% 2,341 30.0% 9,640 35.6% 67,368 28.5%
Other Services .............. 914 21.4% -- -- -- -- 914 21.4%
--------------------------------------------------------------------------------------------
$108,775 22.4% $ 4,647 2.7% $ 12,790 27.4% $126,212 18.0%
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 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 ..................... $284,540 55.3% $180,721 95.6% $ 17,917 42.1% $483,178 64.8%
Cemetery .................... 224,163 43.6% 8,406 4.4% 24,599 57.9% 257,168 34.5%
Other Services .............. 5,490 1.1% -- -- -- -- 5,490 0.7%
--------------------------------------------------------------------------------------------
$514,193 100.0% $189,127 100.0% $ 42,516 100.0% $745,836 100.0%
============================================================================================
Gross profit and margin percentage
Funeral ..................... $ 62,791 22.1% $ 17,262 9.6% $ 2,722 15.2% $ 82,775 17.1%
Cemetery .................... 72,429 32.3% 2,179 25.9% 9,413 38.3% 84,021 32.7%
Other Services .............. 2,537 46.2% -- -- -- -- 2,537 46.2%
--------------------------------------------------------------------------------------------
$137,757 26.8% $ 19,441 10.3% $ 12,135 28.5% $169,333 22.7%
============================================================================================
</TABLE>
FUNERAL
The decrease in funeral segment revenues and gross profit and margin
percentage in the second quarter of 2000 was primarily the result of decreases
in the number of deaths 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 3.9% below total funeral services performed in the second
quarter of 1999. Due to the high fixed cost structure inherent in the funeral
industry, the number of funeral services performed can create significant swings
in the results of operations during a reporting period. The negative effect of
foreign currency translations was approximately $26,155 on funeral revenues and
$1,334 on funeral gross profits, primarily related to the devaluing of the Euro
relative to the U.S. dollar.
North America funeral revenues and gross profit declined primarily as a
result of a reduced number of deaths. In the second quarter of 2000, total
volume declined approximately 1.6% compared to the second quarter of 1999. While
the average revenue per
20
<PAGE> 21
funeral service increased 1.3% over the first quarter of 2000 to $3,871,
compared to the second quarter of 1999, the average remained relatively
unchanged. Of the total mix of funeral services performed in the second quarter
of 2000, 27.8% were previously prearranged funeral contracts compared to 27.1%
in the second quarter of 1999, while 36.8% of total funeral services performed
in the second quarter of 2000 were cremation services compared to 33.5% for the
same period of 1999. The average revenue per funeral service from prearranged
funeral contracts becoming atneed increased 2.5% to $3,652 in the second quarter
of 2000 compared to the same period in 1999. Of the total cremation cases in the
second quarter of 2000, approximately 63% were cremations with memorialization
services versus immediate cremation cases, while approximately 52% of the total
cremation cases in the second quarter of 1999 were cremations with
memorialization services. Cremations with memorialization services have a higher
average revenue per case compared to immediate cremations. This change in the
mix of cremations, as well as the increase in average revenue per funeral
associated with prearranged funeral contracts becoming atneed, 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.
European funeral services performed in the second quarter of 2000 declined 6.5%
compared to the same period of 1999.
Funeral revenues and gross profit increased in the second quarter of 2000
compared to the same period of 1999 for the Company's Other Foreign operations.
The increase is the result of strong sales in the Company's South American
operations. The gross profit and margin percentage has improved 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 8.0% to $236,485 and cemetery gross profit
declined 19.8% to $67,368 in the second quarter of 2000 compared to the second
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 sales of excess undeveloped cemetery property. Realized
investment earnings and capital gains for the second quarter of 2000 were
$15,568 compared to $20,622 in the second quarter of 1999. Sales of excess
undeveloped cemetery property had an impact of $4,363 on the gross profit in the
second quarter of 2000 compared to $11,454 in the same quarter of 1999.
The North America cemetery revenue and gross profit decrease from the
second quarter of 1999 is primarily the result of the above mentioned factors
coupled with lower atneed cemetery sales. The decline in the number of deaths in
the second quarter of 2000 compared to the second quarter of 1999 had a similar
negative impact on atneed cemetery sales as it did on atneed funeral sales.
European cemetery revenue and gross profit also declined because of the
decrease in atneed cemetery sales as a result of a lower number of deaths in the
second quarter of 2000 compared to the second quarter of 1999, while Other
Foreign revenue and gross profit increased as a result of strong preneed
cemetery sales in 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. The Company is in the process of selling a portion of
the loan portfolio and has acquired by deed in lieu of foreclosure the
collateral underlying loans previously on non-accrual status which were written
down as part of the Loan Provision in the fourth quarter of 1999. As a result,
the revenues and gross profit were adversely affected in the second quarter of
2000 compared to the second quarter of 1999. The average outstanding loan
portfolio was $162,156 in the second quarter of 2000 compared to $271,659 in the
same period of 1999 and the average interest rate spread was 2.8% and 2.5%,
respectively, over the same periods.
RESTRUCTURING AND NON-RECURRING CHARGES
In the second quarter of 2000, the Company made changes in estimates of
certain items originally included in the Company's fourth quarter 1999
restructuring charge of $272,544, which resulted in an additional impairment
provision of $13,281. The change in estimates
21
<PAGE> 22
primarily related to an increase in the provision for asset impairment of
$22,250 associated with loans made by the Company's lending subsidiary, which
are held for sale, offset by a reduction in the provision of $11,229 associated
with funeral homes and cemetery properties previously written down and held for
sale that are no longer being held for sale by the Company.
OTHER INCOME AND EXPENSES
In the second quarter of 2000 general and administrative expenses increased
$2,926 to $19,733 compared to the second quarter of 1999. The increase was
related to anticipated 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. Expressed as a
percentage of revenues, general and administrative expenses were 2.8% for the
three months ended June 30, 2000, compared to 2.3% for the comparable period in
1999.
Interest expense increased $16,804 or 29.6% to $73,565 in the second
quarter of 2000 compared to the same period of 1999. The increased interest
expense in the second 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 second
quarter of 1999. In the second quarter of 2000, the average outstanding debt was
$3,841,978 with an average interest rate of 7.66% compared to the average
outstanding debt in the second quarter of 1999 of $4,137,253 with an average
interest rate of 6.09%.
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 35.0%
effective tax rate for the three months ended June 30, 2000, compared to a 35.6%
effective tax rate for the comparable period in 1999.
DISCONTINUED OPERATIONS
In July 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. As such, the
Company has reclassified the financial statements in accordance with accounting
principles applicable to discontinued operations for all periods presented. The
Company has entered into marketing agreements with the purchasers, which will
become effective at the closing of the transactions, and are related to future
performance and are expected 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 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 18.4% to $99,919, while
gross profit decreased 7.4% to $9,496 for the three months ended June 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.
22
<PAGE> 23
SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Six months ended June 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 ........................ $ 602,449 60.2% $ 364,288 95.3% $ 37,166 43.4% $1,003,903 68.4%
Cemetery ....................... 388,917 38.9% 18,039 4.7% 48,380 56.6% 455,336 31.0%
Other Services ................. 8,611 0.9% -- -- -- -- 8,611 0.6%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 999,977 100.0% $ 382,327 100.0% $ 85,546 100.0% $1,467,850 100.0%
========== ===== ========== ===== ========== ===== ========== =====
Gross profit and margin percentage
Funeral ........................ $ 142,194 23.6% $ 34,344 9.4% $ 5,026 13.5% $ 181,564 18.1%
Cemetery ....................... 105,852 27.2% 6,866 38.1% 15,034 31.1% 127,752 28.1%
Other Services ................. 1,674 19.4% -- -- -- -- 1,674 19.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 249,720 25.0% $ 41,210 10.8% $ 20,060 23.4% $ 310,990 21.2%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 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 ........................ $ 617,738 57.4% $ 406,664 95.7% $ 33,417 43.4% $1,057,819 67.0%
Cemetery ....................... 447,240 41.6% 18,259 4.3% 43,527 56.6% 509,026 32.3%
Other Services ................. 11,251 1.0% -- -- -- -- 11,251 0.7%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$1,076,229 100.0% $ 424,923 100.0% $ 76,944 100.0% $1,578,096 100.0%
========== ===== ========== ===== ========== ===== ========== =====
Gross profit and margin percentage
Funeral ........................ $ 160,169 25.9% $ 48,646 12.0% $ 4,980 14.9% $ 213,795 20.2%
Cemetery ....................... 141,759 31.7% 6,336 34.7% 13,726 31.5% 161,821 31.8%
Other Services ................. 5,287 47.0% -- -- -- -- 5,287 47.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 307,215 28.5% $ 54,982 12.9% $ 18,706 24.3% $ 380,903 24.1%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
FUNERAL
For the six months ended June 30, 2000, funeral revenues were $1,003,903
and gross profit was $181,564, a decrease of 5.1% and 15.1%, 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 of 2.5% to 602,449 was consistent
with the second quarter of 2000 and is related to a decline in volume of 1.6%
for the six months ended June 30, 2000. This decrease was partially anticipated
due to strong funeral service volume experienced in the first quarter of 1999
and was further caused by a decline in the average revenue per funeral service
to $3,845 in the first six months of 2000 from $3,881 in the first six months of
1999.
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<PAGE> 24
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 3.4% in the six months ending June 30, 2000, with
the majority of the shortfall occurring in the second quarter. Further, the
negative effect of foreign currency translation impacted revenue by
approximately $50,377 and gross profit by $5,428. 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 funeral services performed of 1.9% to 14,872 in 2000 in
conjunction with growth in South America.
CEMETERY
Cemetery revenues declined 10.5% to $455,336 while cemetery gross profit
decreased 21.1% to $127,752 in the first six 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 fewer sales of excess
undeveloped cemetery property.
The majority of cemetery results is related to North America cemetery
revenues and gross profit, which decreased 13.0% to $388,917 and 25.3% to
$105,852, respectively. The lower preneed sales were the combined result of the
initial negative impact from changes in cemetery 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 only revenue based.
Lower atneed volume is impacted by the decline in the number of deaths as
experienced in the funeral segment, which also contributes to lower preneed
sales. Cemetery trust income from realized investment earnings and capital gains
was $28,116 in the first six months of 2000 compared to $38,824 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 $4,411 on gross profit in the first six months of 2000
compared to $13,657 in the same period of 1999.
Other Foreign revenue and gross profit increases relate to strong sales in
South America resulting from the maturing of the Company's operational, sales
and marketing initiatives implemented, as well as strong preneed sales in
Australia.
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. The Company is in the process of selling a portion of the loan
portfolio and has acquired by deed in lieu of foreclosure the collateral
underlying non-accrual loans previously written down in the Loan Provision taken
in the fourth quarter of 1999. The average outstanding loan portfolio in the
first six months of 2000 was $174,973 compared to $279,272 in the same period of
1999 and the average interest rate spread was 2.2% and 2.7%, respectively, over
the same periods.
OTHER INCOME AND EXPENSES
General and administrative expenses increased $3,330 to $39,847 in the six
months ended June 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 2.7% in the first six
months of 2000 compared to 2.3% for the same period in 1999.
Interest expense increased $28,905 or 25.3% to $143,114 in the six months
ended June 30, 2000 compared to the six months ended June 30, 1999. The
increased interest expense for the six months ended June 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 six months ended June 30, 1999. For the six months ended June 30
2000, the average outstanding debt was $3,903,298 with an average interest rate
of 7.31% compared to the average outstanding debt for the six months ended June
30, 1999 of $4,125,169 with an average interest rate of 5.48%.
24
<PAGE> 25
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 reflected a 35.8% effective tax rate for
the six months ended June 30, 2000 compared to a 35.9% effective rate for the
comparable period in 1999.
DISCONTINUED OPERATIONS
During July 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. As such, the
Company has reclassified the financial statements in accordance with accounting
principles applicable to discontinued operations for all periods presented. The
Company has entered into marketing agreements with the purchasers, which will
become effective at the closing of the transactions, and are related to future
performance and are expected 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 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 30.4% to $203,636 and gross
profit increased 4.4% to $18,332 for the six months ended June 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.
FINANCIAL CONDITION AND LIQUIDITY AT JUNE 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 has 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 (i) ongoing operations of the Company, (ii) the sale of certain
assets and non-core businesses and (iii) sources of cash flow from providing
third party financing to consumers. The implementation of these initiatives is
expected to improve the Company's cash flow in 2000 and beyond.
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 available from trusts
utilized by the Company; and (v) realignment of preneed cemetery and prearranged
funeral sales structures to become more cash flow positive. The Company had
believed the above cash flow initiatives, coupled with other working capital
initiatives, would produce Operating Free Cash Flow on an after tax basis in the
range of $100,000 to $200,000 in 2000. For the six months ended June 30, 2000,
the Company has reported Operating Free Cash Flow of $131,350, already within
the expected year-end 2000 range. Included in the $131,350 of Operating Free
Cash Flow, is approximately $81,500 of non-recurring funds received as a result
of the Company's initiative to expedite the receipt of funds due to the Company
from certain funeral and cemetery trusts. Based upon these funds already
received by the Company, additional funds expected during 2000 from certain
funeral and cemetery trusts, efforts associated with the bonding of certain
funeral and cemetery trusts in various states and normal recurring cash flow
from operating businesses, the Company now expects operating free cash flow to
be in the range of $100,000 to $250,000 by the end of 2000. 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 for (i) cash flow provided by 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.
25
<PAGE> 26
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. The Company had expected after tax proceeds of $200,000 to
$300,000 from these sales of non-core financial or operational assets in 2000.
Due to the definitive agreements signed by the Company to sell the Company's
wholly owned insurance companies, the sale of certain financial assets already
completed in 2000, the anticipated sales of certain loans of the Company's
lending subsidiary and other non-core assets; the Company now expects after tax
proceeds from the sales of non-core financial or operational assets of $200,000
to $500,000 by the end of 2000.
The above cash flow initiatives are expected to produce approximately
$300,000 to $750,000 of 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 $75,000 for the
year), nor does it consider the possible effect on cash flows associated with
the development of a consumer financing program in North America for the
Company's atneed funeral and cemetery and preneed cemetery client families,
which could improve or generate cash flow for the Company and enhance the
Company's ability to further pay down debt.
The Company's year-to-date progress towards its 2000 cash flow benchmarks is
calculated below:
<TABLE>
<CAPTION>
Six months ended Revised Year 2000
June 30, 2000 Benchmarks
---------------- --------------------
<S> <C> <C>
Consolidated cash flow provided by operating activities ......... $ 158,575
Amount pertaining to discontinued insurance operations .......... (92,269)
Payments on restructuring charges ............................... 36,242
Effect of swap agreement terminations ........................... 32,840
----------
Adjusted cash flow from operating activities ............. 135,388
Capital expenditures ............................................ (40,518)
Dividends paid .................................................. --
Net effect of prearranged funeral production and maturities ..... 36,480
----------
Operating Free Cash Flow .................................. 131,350 $100,000 to $250,000
Estimated after tax proceeds from sales of non-core assets ...... 109,715 $200,000 to $500,000
---------- --------------------
Cash flow available ............................................. $ 241,065 $300,000 to $750,000
========== ====================
</TABLE>
The Company's original objective was to reduce total debt to a target
level of between $3,600,000 and $3,800,000 by the end of 2000. At June 30, 2000
the Company had met those targets with total debt outstanding of $3,757,057,
compared to $4,060,016 at December 31, 1999. The Company has revised it targets
and now expects total debt to be in the range of $3,300,000 to $3,600,000 by the
end of 2000.
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 allows for
borrowings up to $600,000 and expires October 30, 2000. Next, a five-year,
multi-currency facility allows 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 25, 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
26
<PAGE> 27
June 30, 2000 the Company is in compliance with the financial compliance
provisions and has approximately $432,675 available under these three
facilities. The Company further expects to be in compliance with these
provisions through 2000.
As of June 30, 2000, the Company had a total of $466,571 in current
maturities of long-term debt. As mentioned above, the Company believes it will
generate funds available for reducing debt on an after tax basis of $300,000 to
$750,000, excluding the projected net cash outflow of $75,000 related to the
Company's 1999 restructuring charges. Based on these expected funds available,
the Company believes it will meet all of its financial obligations and
requirements in 2000. Additionally, negotiations are currently underway with
various financial institutions for a new secured credit facility.
SOURCES AND USES OF CASH
Cash flows from operating activities: Net cash provided by operating activities
of continuing operations was $66,306 for the six months ended June 30, 2000,
compared to $180,627 for the same period in 1999, a decrease of $114,321.
Significant components of cash flow provided by operating activities for the six
months ended June 30, 2000 included net income of $113,618 adjusted for net
income from discontinued operations of $10,764, the net effect of the interest
rate component of the swap terminations totaling $32,840, depreciation and
amortization of $123,009, an increase in receivables of $52,982, and cash paid
related to restructuring charges of $36,242. 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. In reference to the increase in receivables, the
Company is in the process of developing a consumer finance program in North
America for the Company's atneed funeral and cemetery and preneed cemetery
client families, which could improve or generate cash flows for the Company.
Cash flows from investing activities: Net cash provided by investing
activities of continuing operations was $15,907 for the six months ended June
30, 2000, compared to a use of cash of $181,903 for the same period in 1999, an
increase of cash of $197,810. Significant components of cash provided by
investing activities for the six months ended June 30, 2000 included $36,480 net
cash provided from the net effect of prearranged funeral production and
maturities and approximately $28,302 of proceeds from the sale of excess
property and equipment, offset by $39,502 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 excess trust funds of approximately $66,000
offset by net obtaining costs incurred during the period of $38,908 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 $107,159 for the six months ended June
30, 2000, compared to $148,135 for the same period in 1999, a net improvement in
cash of $40,976. The significant component of cash used in financing activities
for the six months ended June 30, 2000 was the $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 June 30, 2000, the Company had a
working capital deficit of $32,163 and a current ratio of 0.97:1, 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 well as
current maturities of long-term debt. Certain balances outstanding on the
revolving credit facilities are classified as current maturities. The Company
intends to pay off these current maturities from asset sales proceeds, operating
free cash flow or by arranging a secured credit facility.
27
<PAGE> 28
As of June 30, 2000, the Company's debt to capitalization ratio was 51.8%
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 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.
The total value of unperformed prearranged funeral revenues expected to be
recognized in future periods was $4,404,036 at June 30, 2000 and $4,287,452 at
December 31, 1999. The increase in the value is attributable to an increase of
6.9% related to prearranged funeral contract sales and 2.1% related to
accumulated trust fund earnings and increasing insurance benefits. Such
increases are offset primarily by maturities, of approximately 4.3%, as well as
unfavorable foreign currency fluctuations of 1.4%.
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 28.2% and 27.5%
for the six months ended June 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 on
January 1, 2001.
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, are
currently discussing the implementation of SAB No. 101 directly with the
Commission. Final resolution of the discussions will not have an impact on the
Company's consolidated cash flows or 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.
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",
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<PAGE> 29
"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.
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 announced in 1999.
8) The Company's ability to successfully implement certain strategic revenue
and marketing initiatives resulting in increased volume through its
existing facilities.
9) The Company's ability to successfully implement certain strategic cash flow
initiatives, including but not limited to the sale of non-core assets 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.
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 changing the Company's diversification of floating interest rate
exposure. As a result, 9% of the Company's total debt at June 30, 2000 was based
in foreign markets versus 52% at December 31, 1999. Also at June 30, 2000, 14%
of the Company's floating interest rate debt and 4% of the Company's fixed
interest rate debt was based in foreign markets versus 28% and 67%,
respectively, at December 31, 1999. Approximately 26% of the Company's total
investment and 32% of its income from operations are denominated
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<PAGE> 30
in foreign currencies at June 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 22% of the Company's net assets and
approximately 24% of the Company's income from operations are subject to
translation risk at June 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 August 11, 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, the Treadwell Litigation , the Fredrick Litigation
and the Hunter Litigation described below. 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.
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.
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<PAGE> 31
In May 2000, Judge Hughes signed orders compelling the litigants in
the Fredrick Litigation, Hunter Litigation and Treadwell Litigation to
pursue their claims exclusively in the class action case pending in
his court. The plaintiffs in the Hunter Litigation have appealed Judge
Hughes' order to the Fifth Circuit Court of Appeals. The appeal will
be heard on an expedited basis on September 6, 2000.
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.
Civil Action H-00-0250; Jack Treadwell v. Service Corporation
International, et al; In the United States District Court for the
Southern District of Texas, Houston Division (Treadwell Litigation).
This securities fraud case has been brought by a Macon, Georgia man
who sold his funeral home to the Company in June 1998. The factual
allegations contained in Plaintiff's Complaint are taken verbatim from
the Consolidated Lawsuit. This lawsuit names as defendants the Company
and 16 of the Company's current and former officers and directors. A
trial date has been set for October 2001.
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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 2000, the Company held is annual meeting of shareholders
and the shareholders elected five directors. The shares voting on the
director nominees were cast as follows:
<TABLE>
<CAPTION>
Abstentions or Broker
Nominee Votes For Votes Withheld Non-Votes
------------------------- ------------ -------------- ------------
<S> <C> <C> <C>
Anthony L. Coelho 232,077,770 10,189,838 0
A. J. Foyt, Jr. 233,112,281 9,155,327 0
E. H. Thornton, Jr. 232,850,606 9,417,002 0
R. L. Waltrip 219,773,248 22,494,360 0
Edward E. Williams 233,423,144 8,844,464 0
</TABLE>
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<PAGE> 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the six months ended
June 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.)
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
There were no reports on Form 8-K during the quarter ended June 30,
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.
August 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 six months ended
June 30, 2000 and 1999.
27.1 Financial data schedule.
</TABLE>
