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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
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DATE OF EARLIEST EVENT REPORTED: AUGUST 6, 1998
EQUITY CORPORATION INTERNATIONAL
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-24728 75-2521142
(STATE OR OTHER JURISDICTION (COMMISSION FILE NO.) (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
415 SOUTH FIRST STREET, SUITE 210
LUFKIN, TEXAS 75901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 631-8700
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ITEM 5. OTHER EVENTS
DEFINITIVE MERGER AGREEMENT WITH SERVICE CORPORATION INTERNATIONAL
On August 6, 1998, Equity Corporation International ("ECI") entered
into an Agreement and Plan of Merger (the "Merger Agreement") with Service
Corporation International, a Texas corporation ("SCI"), and SCI Delaware
Funeral Services, Inc., a Delaware corporation and a wholly owned subsidiary of
SCI ("Merger Sub"), whereby, upon the terms and subject to the conditions of
the Merger Agreement, at the effective time of the Merger, Merger Sub will
merge with and into ECI (the "Merger"), with ECI being the surviving
corporation in the Merger (the "Surviving Corporation").
The consummation of the merger, which is anticipated to occur in the
fourth quarter of 1998, is subject to the satisfaction (or waiver) of various
conditions set forth in the Merger Agreement, including without limitation, the
approval of holders of a majority of the shares of the outstanding ECI Common
Stock and regulatory approvals pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. There is no assurance that such
conditions will be satisfied or waived, or that the Merger will be consummated.
For a description of SCI, see "Information Concerning Service
Corporation International" below.
SUMMARY OF CERTAIN TERMS OF THE MERGER AGREEMENT
The detailed terms and conditions of the Merger, including conditions
to consummation of the Merger, are contained in the Merger Agreement, a copy of
which is filed as Exhibit 2.1 to this Current Report on Form 8-K and is
incorporated herein by reference. The following discussion sets forth a
description of material terms and conditions of the Merger Agreement, which
description in this Current Report on Form 8-K is qualified in its entirety by
reference to the Merger Agreement. Certain capitalized terms used herein
without definition have the respective meanings set forth in the Merger
Agreement.
Effective Time of the Merger. The Merger will become effective at such
time as a certificate of merger is filed with the secretary of state of the
State of Delaware in accordance with the General Corporation Law of the State
of Delaware (the "Merger Filing"). The Merger Filing shall be made
simultaneously with, or as soon as practicable after, the closing of the
transactions contemplated by the Merger Agreement in accordance with the Merger
Agreement.
Manner and Basis for Converting Shares. At the effective time of the
Merger, each outstanding share of common stock, par value $0.01 per share, of
ECI ("ECI Common Stock") (other than shares owned by SCI and its subsidiaries
or shares held in the treasury of ECI or held by ECI's subsidiaries) will be
converted into the right to receive, without interest, the number of shares of
common stock, par value $1.00 per share, of SCI ("SCI Common Stock") determined
by dividing
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$27.00 by the average of the Daily Per Share Prices (defined below) for the ten
(10) consecutive trading days ending on the third trading day prior to the
closing of the transactions contemplated by the Merger Agreement (the "Average
SCI Stock Price"). "Daily Per Share Price" for any trading day means the
weighted average of the per share selling prices on the New York Stock
Exchange, Inc. ("NYSE") of SCI Common Stock (as reported in the NYSE Composite
Transactions) for that day. In the event the Average SCI Stock Price is
greater than $41.50, ECI Common Stock shall be converted into the right to
receive the number of shares of SCI Common Stock determined by dividing $27.00
by $41.50. In the event the Average SCI Stock Price is less than $34.00, ECI
Common Stock shall be converted into the right to receive the number of shares
of SCI Common Stock determined by dividing $27.00 by $34.00. In addition, at
the effective time of the Merger, each issued and outstanding share of Merger
Sub common stock will be converted into one share of common stock, par value
$.01 per share, of the Surviving Corporation.
After the effective time of the Merger, the stock transfer books of
ECI will be closed. No certificates or scrip for fractional shares of SCI
Common Stock will be issued in the Merger and no SCI Common Stock dividend,
stock split or interest shall relate to any fractional security, and such
fractional interests will not entitle the owner thereof to vote or to any other
rights of a security holder. In lieu of any such fractional shares, each holder
of shares of ECI Common Stock who would otherwise have been entitled to receive
a fraction of a share of SCI Common Stock upon surrender of ECI Common Stock
certificates for exchange pursuant to the Merger Agreement will be entitled to
receive from the exchange agent a cash payment equal to such fraction
multiplied by the Daily Per Share Price on the date of the effective time of
the Merger.
From and after the effective time of the Merger, each holder of an
outstanding certificate which immediately prior to the effective time of the
Merger represented shares of ECI Common Stock will be entitled to receive in
exchange therefor, upon surrender thereof to the exchange agent, a certificate
or certificates representing the number of whole shares of SCI Common Stock to
which such holder is entitled pursuant to the Merger Agreement. Until holders
or transferees of certificates theretofore representing shares of ECI Common
Stock have surrendered them for exchange as provided herein, no dividends or
other distributions will be paid with respect to any shares represented by such
certificates and no payment for fractional shares will be made and, without
regard to when such certificates representing shares of ECI Common Stock are
surrendered for exchange as provided herein, no interest will be paid on any
dividends or other distributions or any payment for fractional shares. Upon
surrender of a certificate which, immediately prior to the effective time of
the Merger, represented shares of ECI Common Stock, there will be paid to the
holder of such certificate the amount of any dividends or other distributions
which theretofore became payable, but which were not paid by reason of the
foregoing, with respect to the number of whole shares of SCI Common Stock
represented by the certificate or certificates issued upon such surrender.
Conversion of ECI Options. Each option outstanding at the effective
time of the Merger to purchase shares of ECI Common Stock (a "Stock Option")
granted under (A) the Equity Corporation International Amended and Restated
1994 Long-Term Incentive Plan, the Equity Corporation International 1998
Long-Term Incentive Plan, and the Equity Corporation International
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1997 Employee Stock Purchase Plan (collectively, the "ECI Stock Plans") or (B)
any other stock plan or agreement of ECI, which by its terms is not
extinguished in the Merger shall be deemed assumed by SCI and deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Stock Option prior to the effective time of the Merger,
the number of shares of SCI Common Stock as the holder of such Stock Option
would have been entitled to receive pursuant to the Merger had such holder
exercised such option in full immediately prior to the effective time of the
Merger (not taking into account whether or not such option was in fact
exercisable), at a price per share equal to (x) the aggregate exercise price
for ECI Common Stock otherwise purchasable pursuant to such Stock Option
divided by (y) the number of shares of SCI Common Stock deemed purchasable
pursuant to such Stock Option if such Stock Option had been exercised
immediately prior to the Closing Date without regard to vesting; provided,
however, that in connection with the 1997 Employee Stock Purchase Plan, the
participants' options may be adjusted or exercised in accordance with the
provisions and intent of such plan.
Execution of Supplemental Indenture. Upon the consummation of the
Merger, SCI shall use its reasonable efforts to enter into a supplemental
indenture with the trustee for the holders of the 4 1/2% Convertible
Subordinated Debentures due 2004 of ECI in accordance with Section 7.2 of the
Indenture, dated as of February 25, 1998, between ECI and Bankers Trust
Company, as trustee.
ECI Rights Plan. ECI has agreed to take all necessary action prior to
the effective time of the Merger to (i) render rights issued pursuant to the
Stockholder Rights Agreement dated as of October 13, 1994 between ECI and
American Stock Transfer & Trust Company, as rights agent (the "ECI Rights
Plan"), inapplicable to the Merger, and (ii) ensure that (x) neither SCI nor
any of its Affiliates (as defined in the ECI Rights Plan) is an Acquiring
Person (as defined in the ECI Rights Plan) and (y) none of certain events
triggering stockholder rights under the ECI Rights Plan shall occur by reason
of the approval, execution or delivery of the Merger Agreement, or the
announcement or consummation of the Merger.
Conditions to the Merger. The respective obligations of SCI and ECI to
effect the Merger are subject to the fulfillment at or prior to the closing date
of the Merger of the following conditions: (a) the Merger Agreement and the
transactions contemplated thereby shall have been approved and adopted by the
requisite vote of the stockholders of ECI under applicable law; (b) the shares
of SCI Common Stock issuable in the Merger shall have been authorized for
listing on the NYSE upon official notice of issuance; (c) the waiting period
applicable to consummation of the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or been
terminated; (d) the registration statement on Form S-4 to be filed under the
Securities Act with the Securities and Exchange Commission (the "Commission")
by SCI in connection with the Merger for the purpose of registering the shares
of SCI Common Stock to be issued in the Merger (the "Registration Statement")
shall have become effective in accordance with the provisions of the Securities
Act of 1933, as amended (the "Securities Act"), any material state blue sky or
securities law shall have been complied with, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the Commission or any state
regulatory authority; (e) no preliminary or permanent injunction or other order
or decree by any federal or state court which prevents the consummation of the
Merger
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shall have been issued and remain in effect; and (f) no action shall have been
taken and no statute, rule or regulation shall have been enacted by any state
or federal government or governmental agency in the United States which would
prevent the consummation of the Merger or make the consummation of the Merger
illegal.
The obligation of ECI to effect the Merger is further subject to the
fulfillment at or prior to the effective time of the Merger of the following
additional conditions, unless waived by ECI: (a) SCI and Merger Sub shall have
performed in all material respects their agreements in the Merger Agreement
required to be performed on or prior to the closing date of the Merger, and the
representations and warranties of SCI and Merger Sub contained in the Merger
Agreement shall be true and correct in all material respects on and as of the
date made and on and as of the closing date of the Merger as if made at and as
of such date, and ECI shall have received a certificate executed on behalf of
SCI by the President or a Vice President of SCI and on behalf of Merger Sub by
the President and Chief Executive Officer or a Vice President of Merger Sub to
that effect; (b) ECI shall have received a legal opinion of Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P., in form reasonably satisfactory to ECI; and (c)
ECI shall have received a legal opinion from Andrews & Kurth L.L.P., reasonably
acceptable to ECI, to the effect that (i) the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) ECI, SCI and Merger Sub will
each be a "party to a reorganization" within the meaning of Section 368(b) of
the Code with respect to the Merger.
The obligations of SCI and Merger Sub to effect the Merger is further
subject to the fulfillment at or prior to the effective date of the Merger of
the following additional conditions, unless waived by SCI and Merger Sub: (a)
ECI shall have performed in all material respects its agreements in the Merger
Agreement required to be performed on or prior to the closing date of the
Merger, and the representations and warranties of ECI contained in the Merger
Agreement shall be true and correct in all material respects on and as of the
date made and on and as of the closing date of the Merger as if made at and as
of such date, and SCI shall have received a certificate executed on behalf of
ECI by the President and Chief Executive Officer of ECI to that effect; (b)
since the date of the Merger Agreement, there shall have been no changes that
constitute, and no event or events shall have occurred which have resulted in
or constitute, a material adverse effect to the business, assets, liabilities,
financial condition, results of operations, properties or business prospects of
ECI and its subsidiaries, taken as a whole; (c) SCI shall have received a legal
opinion from Andrews & Kurth L.L.P., in form reasonably satisfactory to SCI;
(d) James P. Hunter, III shall have entered into employment and non-competition
agreements in form reasonably satisfactory to SCI and shall have terminated his
Consulting Agreement and his Executive Severance Agreement with ECI; and (e)
SCI shall have received a written agreement from each "affiliate" to the effect
that each such person will not offer to sell, sell or otherwise dispose of any
shares of SCI Common Stock issued in the Merger, except pursuant to an
effective registration statement, in compliance with Rule 145 of the Securities
Act or in a transaction exempt from the registration requirements of the
Securities Act.
Cooperation. Pursuant to the Merger Agreement, each of the parties has
agreed to take, or to cause to be taken, all action and to do or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions
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contemplated by the Merger Agreement. The Merger Agreement further provides
that SCI will propose, negotiate, commit to and effect, by consent decree, hold
separate order, or otherwise, the sale, divestiture, or disposition of such
assets or businesses of SCI or, effective as of the effective time of the
Merger, ECI as may be required in order to avoid the entry of, or to effect the
dissolution of, any injunction, temporary restraining order or other order in
any suit or proceeding, which would otherwise have the effect of preventing or
delaying the closing of the transactions contemplated by the Merger; provided,
however, that SCI will not be required to sell, divest, dispose of, or hold
separate assets or businesses with aggregate 1997 revenues in excess of $10
million.
Representations and Warranties of SCI and ECI. In the Merger
Agreement, SCI and ECI have made various representations and warranties
relating to, among other things, their respective financial conditions, the
accuracy of their various filings with the Commission, the satisfaction of
certain legal requirements for the Merger and the absence of undisclosed
liabilities. The representations and warranties of each of the parties to the
Merger Agreement will expire upon consummation of the Merger.
Conduct of the Business of ECI Prior to the Merger. Pursuant to the
Merger Agreement, ECI has agreed that, after the date of the Merger Agreement
and prior to the closing date of the Merger or earlier termination of the
Merger Agreement, and except as otherwise agreed to in writing by SCI or as
otherwise contemplated by the Merger Agreement or disclosed in ECI's schedules
to the Merger Agreement, ECI shall, and shall cause each of its subsidiaries
to:
(a) conduct their respective businesses in the ordinary and
usual course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective
charters or bylaws, (ii) split, combine or reclassify their outstanding capital
stock or (iii) declare, set aside or pay any dividend or distribution payable
in cash, stock, property or otherwise, except for the payment of dividends or
distributions to ECI by a wholly owned subsidiary of ECI;
(c) comply in all material respects with all applicable laws,
including without limitation, the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder;
(d) not issue, sell, pledge or dispose of, or agree to issue,
sell, pledge or dispose of, any additional shares of, or any options, warrants
or rights of any kind to acquire any shares of their capital stock of any class
or any debt or equity securities convertible into or exchangeable for such
capital stock, except that ECI may issue shares upon conversion of convertible
securities and exercise of options outstanding on the date of the Merger
Agreement;
(e) not (i) incur or become contingently liable with respect
to any indebtedness for borrowed money other than (A) borrowings required for
working capital purposes in the ordinary course of business or (B) borrowings
to refinance existing indebtedness on terms which are reasonably acceptable to
SCI, or (C) borrowings to make new capital expenditures in the ordinary
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course of business and otherwise permitted by the Merger Agreement, (ii)
redeem, purchase, acquire or offer to redeem, purchase or acquire any shares of
its capital stock, or any options, warrants or rights to acquire any of its
capital stock, or any security convertible into or exchangeable for its capital
stock, (iii) sell, pledge, dispose of or encumber any of the assets or
businesses of ECI other than transactions in the ordinary course of business
not exceeding $1 million in any instance or $3 million in the aggregate, or
(iv) enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing;
(f) use all reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees, preserve the goodwill and
business relationships with customers and others having business relationships
with them and not engage in any action, directly or indirectly, with the intent
to adversely impact the transactions contemplated by the Merger Agreement;
(g) not enter into or amend any employment, severance, special
pay arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees;
(h) with the exception of the adoption of or changes to, in
each case in the ordinary course of business, health insurance plans or
casualty insurance of ECI in progress on the date of the Merger Agreement, not
adopt, enter into or amend any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, health care, employment or
other employee benefit plan, agreement, trust fund or arrangement for the
benefit or welfare of any employee or retiree, except as required to comply
with changes in applicable law or other provisions of the Merger Agreement;
(i) use commercially reasonable efforts to maintain with
financially responsible insurance companies insurance on its tangible assets
and its businesses in such amounts and against such risks and losses as are
consistent with past practice;
(j) not make, change or revoke any material tax election or
make any material agreement or settlement regarding taxes with any taxing
authority;
(k) not make any change in ECI's or its subsidiaries'
financial tax or accounting methods, practices or policies, or in any
assumption underlying such a method, practice or policy;
(l) use its commercially reasonable efforts to cause the
transfer of Environmental Permits (as defined in the Merger Agreement) (on the
same terms and conditions), and any financial assurance required thereunder to
SCI or Merger Sub as may be necessary under applicable Environmental Laws (as
defined in the Merger Agreement) in connection with the consummation of the
transactions under the Merger Agreement to allow SCI or Merger Sub to conduct
the business of ECI and its subsidiaries, as currently conducted;
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(m) not enter into or assume any contracts or agreements
having a term longer than one year (unless ECI may terminate such contracts or
agreements by 30 days written notice without penalty to ECI) or imposing a firm
or uncancellable obligation upon ECI or its subsidiaries in excess of $250,000
annually or imposing a firm or uncancellable obligation on ECI or its
subsidiaries of $500,000 or more in the aggregate for all such contracts and
agreements, regardless of the annual payment, except for contracts or
agreements for (1) indebtedness permitted under (e) above or (2) capital
expenditures permitted under (q) below;
(n) maintain its books of account and records in the usual,
regular and ordinary manner consistent with past policies and practice;
(o) not compromise, settle, grant any waiver or release
relating to or otherwise adjust any material litigation or claims of any nature
whatsoever pending against ECI or its subsidiaries;
(p) not take any action or omit to take any action, which
action or omission would result in a breach of any of the representations and
warranties set forth in the Merger Agreement; and
(q) not make or commit to make any capital expenditures,
except for capital expenditures in the ordinary course of business not in
excess of $10 million in the aggregate.
Notwithstanding the foregoing restrictions, nothing in the Merger
Agreement shall be construed to prohibit ECI or its subsidiaries from acquiring
funeral homes or cemeteries in the ordinary course of business and any actions
(including, without limitation, incurring indebtedness, issuing capital stock,
making capital expenditures or entering into contracts in connection therewith)
reasonably related to such acquisitions so long as the aggregate consideration
for all such acquisitions does not exceed $75 million.
Conduct of the Business of SCI Prior to the Merger. The Merger
Agreement provides that after the date of the Merger Agreement until the
effective time of the Merger, SCI and its subsidiaries shall conduct their
business in the ordinary course consistent with past practice and shall use
their reasonable best efforts to preserve intact their business organizations
and relationships with third parties. In addition, SCI shall not redeem or
repurchase any SCI Common Stock during the period in which the average selling
price of SCI Stock is being determined, except as required pursuant to the
terms of any securities outstanding or commitments in effect prior to the
commencement of such period.
No Solicitation of Acquisition Transactions. The Merger Agreement
provides that after the date of the Merger Agreement and prior to the effective
time of the Merger or earlier termination of the Merger Agreement, ECI shall
not, and shall cause each of its subsidiaries not to, initiate, solicit,
negotiate, encourage or provide confidential information to facilitate, and ECI
shall, and shall cause each of its subsidiaries to, cause any officer, director
or employee of ECI, or any attorney, accountant, investment banker, financial
advisor or any other agent retained by it, not to initiate, solicit, negotiate,
encourage or provide non-public or confidential information to facilitate, any
Acquisition Transaction (as defined in the Merger Agreement). Notwithstanding
the foregoing, ECI
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may, in response to an Acquisition Proposal (as defined in the Merger
Agreement), furnish (subject to the execution of a confidentiality agreement
substantially similar to the confidentiality agreement executed by SCI in
connection with the Merger Agreement for the benefit of ECI) confidential or
non-public information concerning its business, properties or assets to any
Potential Acquiror (as defined in the Merger Agreement) and negotiate with such
Potential Acquiror if, based upon advice of its outside legal counsel and
financial advisors, ECI's Board of Directors determines in good faith that such
action to provide such confidential or non-public information to such Potential
Acquiror is necessary for ECI's Board of Directors to act in a manner
consistent with its fiduciary duties to its stockholders; provided, however,
that ECI is prohibited from providing to a Potential Acquiror any confidential
or non-public information not previously furnished to SCI. The Merger
Agreement requires that ECI immediately notify SCI after receipt of any
Acquisition Proposal or request for non-public information relating to ECI or
its subsidiaries in connection with an Acquisition Proposal or for access to
the properties, books or records of ECI or any subsidiary by any person or
entity that informs the Board of Directors of ECI or such subsidiary that it is
considering making, or has made, an Acquisition Proposal. Such notice to SCI
must be made orally and in writing and must indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal, inquiry
or contact.
Termination or Amendment. The Merger Agreement may be terminated at
any time prior to the effective time of the Merger, whether before or after
approval by the stockholders of ECI, if the Board of Directors of ECI and SCI
mutually agree or as follows:
(a) by either SCI or ECI if (i) the representations and
warranties of the non-terminating party shall fail to be true and correct in all
material respects on and as of the date made or, except in the case of any
representations and warranties made as of a specified date, on and as of any
subsequent date as if made at and as of such subsequent date and such failure
shall not have been cured in all material respects within thirty (30) days after
written notice of such failure is given to the non-terminating party by the
terminating party; (ii) the Merger is not completed by February 28, 1999 (unless
due to a delay or default on the part of the terminating party); (iii) the
non-terminating party (A) fails to perform in any material respects any of its
covenants in the Merger Agreement and (B) does not cure such default in all
material respects within thirty (30) days after written notice of such default
is given to the non-terminating party by the terminating party; or (iv) the
requisite vote of the stockholders of ECI shall not have been obtained by
February 28, 1999, or the stockholders of ECI shall not have approved the Merger
and the Merger Agreement at the Special Meeting or any adjournment thereof;
(b) by ECI if: (i) the Merger is enjoined by a final,
unappealable court order; (ii) (A) ECI receives an offer from any third party
(excluding any affiliate of ECI or any group of which any affiliate of ECI is a
member) with respect to a merger, sale of substantial assets or other business
combination involving ECI, (B) ECI's Board of Directors determines in good
faith that such offer constitutes a Superior Proposal (as defined in the Merger
Agreement) and resolves to accept such Superior Proposal and (C) ECI shall have
given SCI two (2) days prior written notice of its intention to terminate the
Merger Agreement (provided that such termination shall not be effective until
such time as any termination fees required to be paid by ECI pursuant to the
Merger Agreement have been
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received by SCI); or (iii) (A) a tender or exchange offer is commenced by a
third party (excluding any affiliate of ECI or any group of which any affiliate
of ECI is a member) for all outstanding shares of ECI Common Stock, (B) ECI's
Board of Directors determines in good faith that such offer constitutes a
Superior Proposal and resolves to accept such Superior Proposal or recommend to
the stockholders of ECI that they tender their shares in such tender or exchange
offer, and (C) ECI shall have given SCI two (2) days prior written notice of its
intention to terminate the Merger Agreement (provided that such termination
shall not be effective until such time as the payment of any termination fees
required to be paid by ECI pursuant to the Merger Agreement have been received
by SCI); and
(c) by SCI if the Board of Directors of ECI shall have: (i)
recommended to the stockholders of ECI to accept a Superior Proposal, or
resolved to do so; (ii) recommended to the stockholders of ECI that they tender
their shares in a tender or exchange offer commenced by a third party
(excluding any affiliate of SCI or any group of which any affiliate of SCI is a
member), or resolved to do so; or (iii) withdrawn, modified or changed the
recommendation of the Merger Agreement or the Merger in a manner adverse to SCI
or shall have resolved to do so, other than in connection with the exercise of
ECI's right to terminate the Merger Agreement as a result of a material breach
of a representation, warranty or covenant by SCI.
In the event of termination of the Merger Agreement pursuant to its
terms by either SCI or ECI, the Merger Agreement shall become void and there
shall be no further obligations on the part of ECI, SCI, Merger Sub or their
respective officers or directors (except for certain obligations of the parties
regarding confidential information, expenses and fees payable in connection
with the Merger Agreement and/or the termination thereof, governing law
applicable to the Merger Agreement and binding arbitration, all of which shall
survive the termination).
The Merger Agreement may not be amended except by action taken by the
Boards of Directors of SCI, ECI and Merger Sub and then only by an instrument
in writing signed on behalf of each party and in compliance with applicable
law. Such amendment may take place before or after approval by the
stockholders of ECI, but after any such stockholder approval, no amendment may
be made which decreases the merger consideration or which adversely affects the
rights of ECI's stockholders under the Merger Agreement without the approval of
the stockholders of ECI.
Termination Fees. ECI has agreed to pay a termination fee to SCI
should certain of the termination rights described in "--Termination or
Amendment" above be exercised under certain circumstances. ECI has agreed to
pay SCI (a) a fee equal to $20 million plus (b) all documentable out-of-pocket
costs and expenses incurred by SCI and Merger Sub in connection with the Merger
Agreement and the transactions contemplated thereby (not to exceed $2 million)
if: (i) ECI terminates the Merger Agreement pursuant to clauses (b)(ii) or
(b)(iii) of "--Termination or Amendment" above; (ii) SCI terminates the Merger
Agreement as described in clause (c) of "--Termination or Amendment" above; or
(iii) (A) SCI or ECI terminates the Merger Agreement pursuant to clause (a)
(iv) of "--Termination or Amendment" above, (B) on February 28, 1999 (if a vote
has not earlier been held at the Special Meeting), or at the time of such
failure to so approve the Merger or the Merger Agreement, there shall exist or
have been proposed an Acquisition
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Proposal which has been publicly announced, and (C) within twelve months after
such termination any Acquisition Transaction shall be consummated. For
purposes of (iii) (B) and (C) of "--Termination Fees," an Acquisition Proposal
and an Acquisition Transaction with respect to (1) the capital stock of ECI
shall be for a minimum of 25% or more of the outstanding shares of ECI Common
Stock, and (2) all or any substantial part of the business or properties of ECI
and its subsidiaries shall be for a minimum of 25% or more of the business or
properties of ECI and its subsidiaries, taken as a whole.
Expenses. The Merger Agreement provides that all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses, except
that (i) the filing fee and expenses incurred in connection with the HSR Act
filing shall be paid by SCI, (ii) all filing fees incurred in connection with
the filing of the Proxy Statement/Prospectus and Registration Statement,
including any filing required under state blue sky or securities laws, shall be
paid by SCI, and (iii) those expenses incurred in connection with printing the
Proxy Statement/Prospectus shall be shared equally by SCI and ECI.
Indemnification. The Merger Agreement provides that, for six years
after the effective time of the Merger, present and former officers and
directors of ECI will be indemnified by SCI and ECI in respect of acts or
omissions occurring prior to the effective time of the Merger to the extent
provided under the ECI certificate of incorporation and the ECI bylaws as in
effect on the date of the Merger Agreement. The Merger Agreement also provides
that to the fullest extent permitted under the General Corporation Law of the
State of Delaware, such indemnified parties shall be entitled to the
indemnification provided in the Merger Agreement whether such indemnified
liabilities shall be based on their own negligence, whether such persons are
solely, concurrently or comparatively negligent, and whether under strict
liability or any other theory of recovery. For six years after the effective
time of the Merger, SCI will, or will cause ECI to, use its commercially
reasonable efforts to provide officers' and directors' liability insurance in
respect of acts or omissions occurring prior to the effective time of the
Merger covering each such person currently covered by ECI's officers' and
directors' liability insurance policy on terms and with respect to coverage and
amount no less favorable than those of such policy in effect on the date of the
Merger Agreement.
INFORMATION CONCERNING SERVICE CORPORATION INTERNATIONAL
SCI is the largest provider of deathcare services and products in the
world. As of June 30, 1998, SCI owned and operated 3,292 funeral service
locations, 422 cemeteries and 174 crematoria located in 18 countries on five
continents. SCI provides all professional services relating to funerals,
burials and cremations, including the use of funeral homes and motor vehicles,
the performance of cemetery interment services and the management and
maintenance of cemetery grounds. It sells caskets, coffins, burial vaults and
garments, cemetery interment rights, including mausoleum spaces and lawn
crypts, stone and bronze memorials, cremation receptacles and related
merchandise. SCI sells its services and products to client families both at
and prior to the time of need. In addition, SCI's finance subsidiary,
Provident Services, Inc., provides financing to independent funeral home and
cemetery operators.
-11-
<PAGE> 12
The following reports, filed by SCI in accordance with its reporting
requirements under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), are included as Annexes to this filing and are incorporated
herein by reference:
Annex 1. Annual Report on Form 10-K for the Year Ended December 31,
1997, filed with the Commission on March 30, 1998.
Annex 2. Definitive Proxy Statement on Schedule 14A, filed with the
Commission on April 8, 1998.
Annex 3. Quarterly Report on Form 10-Q for the Quarterly Period Ended
June 30, 1998, filed with the Commission on August 14, 1998.
Annex 4. Quarterly Report on Form 10-Q for the Quarterly Period Ended
March 31, 1998, filed with the Commission on May 14, 1998.
Annex 5. Current Report on Form 8-K, filed with the Commission on May
15, 1998.
Annex 6. Current Report on Form 8-K, filed with the Commission on
March 24, 1998.
-12-
<PAGE> 13
Annex 1
SCI Form 10-K for Year
Ended December 31, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
---------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 its charter)
<TABLE>
<S> <C>
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: 713/522-5141
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $10,632,528,700 based upon a closing market price of $42.50 on
March 26, 1998 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.
The number of shares outstanding of the registrant's common stock as of
March 26, 1998 was 255,840,952 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1998
Annual Meeting of Shareholders (Part III)
================================================================================
<PAGE> 14
PART I
ITEM 1. BUSINESS.
Service Corporation International was incorporated in Texas on July 5,
1962. The term "Company" or "SCI" includes the registrant and its subsidiaries,
unless the context indicates otherwise.
The Company is the largest provider of death care services in the world. At
December 31, 1997, the Company operated 3,127 funeral service locations, 392
cemeteries and 166 crematoria located in 17 countries on five continents. In
addition, the Company provides capital financing to independent funeral home and
cemetery operators.
The Company has continued to expand through the acquisition of funeral
service locations, cemeteries and crematoria, both domestically and
internationally. In 1997, the Company acquired 294 funeral service locations, 51
cemeteries and 19 crematoria. The Company has acquired most of its present
operations through acquisitions. For information regarding acquisitions, see
Note 3 to the consolidated financial statements in Item 8 of this Form 10-K.
For financial information about the Company's industry segments, including
the identifiable assets of the Company by industry segments, see Note 14 to the
consolidated financial statements in Item 8 of this Form 10-K.
FUNERAL AND CEMETERY OPERATIONS
The Funeral and Cemetery Operations consist of the Company's funeral
service locations, cemeteries and related businesses. The operations are
organized into two North American divisions covering the United States and
Canada and an international division responsible for all operations in Europe,
the Pacific Rim and South America. Each division is under the direction of
divisional executive management with substantial industry experience. Local
funeral service location and cemetery managers, under the direction of the
divisional management, receive support and resources from SCI's headquarters in
Houston, Texas and have substantial autonomy with respect to the manner in which
services are conducted.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, including the
sharing of service personnel, vehicles, preparation services, clerical staff and
certain building facility costs.
Funeral Service Locations. The funeral service locations provide all
professional services relating to funerals, including the use of funeral
facilities and motor vehicles. Funeral service locations sell caskets, coffins,
burial vaults, cremation receptacles, flowers and burial garments, and certain
funeral service locations also operate crematoria. At December 31, 1997, the
Company owned 147 funeral service location/cemetery combinations and operated 54
flower shops engaged principally in the design and sale of funeral floral
arrangements. These flower shops provide floral arrangements to some of the
Company's funeral homes and cemeteries.
In addition to selling its services and products to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets, including foreign markets. Funeral prearrangement is a means
through which a customer contractually agrees to the terms of a funeral to be
performed in the future. The funds collected from prearranged funeral contracts
are generally held in trust, are used to purchase life insurance or annuity
contracts from third party insurers or, with respect to French contracts, are
held in the Company's French insurance subsidiary. This French insurance
subsidiary sells prearranged funeral insurance contracts primarily in connection
with the Company's French funeral service operations. Funds paid on prearranged
funerals may not be withdrawn until the funeral is performed or until
cancellation by the customer. At December 31, 1997, the Company's unfulfilled
prearranged funeral contracts, including accumulated trust fund earnings and
increased benefits on insurance products, amounted to $3.163 billion, of which
$274 million is estimated to be fulfilled in 1998. The unfulfilled prearranged
funeral
1
<PAGE> 15
contracts at December 31, 1996 were $2.726 billion. For additional information
concerning prearranged funeral activities, see Note 4 to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses and generally continue to be
operated under the same name as before acquisition.
The death rate tends to be somewhat higher in the winter months and the
Company's funeral service locations generally experience a higher volume of
business during those months.
Since 1984, the Company has operated under the Federal Trade Commission's
("FTC") comprehensive trade regulation rule for the funeral industry. The rule
contains minimum guidelines for funeral industry practices, requires extensive
price and other affirmative disclosures and imposes mandatory itemization of
funeral goods and services. From time to time in connection with acquisitions,
the Company has entered into consent orders with the FTC that have required the
Company to dispose of certain operations to proceed with acquisitions or have
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a materially adverse
effect on the Company's operations.
Cemeteries. The Company's cemeteries sell cemetery interment rights
(including mausoleum spaces and lawn crypts) and certain merchandise including
stone and bronze memorials and burial vaults. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries also operate crematoria.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise may be required by law to be paid into trust
until the merchandise is purchased on behalf of the customer. For additional
information regarding cemetery trust funds, see Notes 2 and 5 to the
consolidated financial statements in Item 8 of this Form 10-K.
Death Care Industry. The funeral industry is characterized by a large
number of locally owned, independent operations. The Company believes that based
on the total number of funeral services performed in 1997, the Company,
including companies acquired by it, performed approximately 10%, 28%, 14% and
25% of the funeral services in North America, France, the United Kingdom and
Australia, respectively.
To compete successfully, the Company's funeral service locations must
maintain competitive prices, attractive, well-maintained and conveniently
located facilities, a good reputation and high professional standards. In
addition, heritage and tradition can provide an established funeral home with
the opportunity for repeat business from client families. Furthermore, an
established firm can generate future volume and revenues by marketing
prearranged funeral services.
The cemetery industry is also characterized by a large number of locally
owned independent operations. The Company's cemetery properties compete with
other cemeteries in the same general area. To compete successfully, the
Company's cemeteries must maintain competitive prices, attractive and
well-maintained properties, a good reputation, an effective sales force and high
professional standards.
FINANCIAL SERVICES OPERATION
Since 1988, the Company's wholly owned subsidiary, Provident Services, Inc.
("Provident"), has provided secured financing to independent funeral home and
cemetery operators. The majority of Provident's loans are made to clients
seeking to finance funeral home or cemetery acquisitions. Additionally,
Provident provides construction loans for funeral home or cemetery improvement
and expansion. Loan packages take traditional forms of secured financing
comparable to arrangements offered by leading commercial banks. Provident's
loans are generally made at interest rates which float with the prime lending
rate.
2
<PAGE> 16
At December 31, 1997, Provident had $199 million in loans outstanding and
$50 million of unfunded loan commitments. At December 31, 1996, Provident had
$146 million in loans outstanding and $55 million of unfunded loan commitments.
Provident obtains its funds primarily from the Company's variable interest rate
bank borrowings.
Provident is in competition with banks and other lending institutions, many
of which have substantially greater resources than Provident. However, Provident
believes that its knowledge of the death care industry provides it with the
ability to make more accurate assessments of funeral home and cemetery loans,
thereby providing Provident a competitive advantage in making such loans.
EMPLOYEES
At December 31, 1997, the Company employed 24,072 (15,403 in the United
States) persons on a full time basis and 12,120 (8,421 in the United States)
persons on a part time basis. Of the full time employees, 23,430 were in the
Funeral and Cemetery Operations, eight were in Financial Services and 634 were
in corporate services. All of the Company's eligible United States employees who
so elect are covered by the Company's group health and life insurance plans, and
all eligible United States employees are participants in retirement plans of the
Company or various subsidiaries. Although labor disputes are experienced from
time to time, in general relations with employees are considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision
and licensing under various federal, state, local and Australian, Canadian,
French, United Kingdom and other foreign statutes, ordinances and regulations.
The Company believes that it is in substantial compliance with the significant
provisions of such statutes, ordinances and regulations. See discussion of FTC
funeral industry trade regulation and consent orders in "Funeral Service
Locations" above.
The French funeral services industry is currently undergoing significant
regulatory change. Historically, the French funeral services industry has been
controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments ("Municipal
Monopoly"), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
SCI's French operations ("Exclusive Municipal Authority"). Legislation has been
passed that will generally end municipal control of the French funeral service
business and will allow the public to choose their funeral service provider.
Under such legislation, the Exclusive Municipal Authority was abolished in
January 1996, and the Municipal Monopoly was eliminated in January 1998.
Cemeteries in France, however, are and will continue to be controlled by
municipalities and religious organizations, with third parties, such as SCI,
providing cemetery merchandise such as markers and monuments.
ITEM 2. PROPERTIES.
The Company's executive headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and its
parking garage. The property consists of approximately 1.3 acres, 250,000 square
feet of office space in the building and 160,000 square feet of parking space in
the garage. The Company leases all of the office space in the building pursuant
to a lease that expires June 30, 2005 providing for monthly rent of $43,000
through July 2000 and $59,000 thereafter. The Company pays all operating
expenses. One half of the rent is paid to the wholly owned subsidiary and the
other half is paid to the owners of the remaining undivided one-half interest.
The Company owns and utilizes a three-story building at 1919 Allen Parkway,
Houston, Texas 77019 containing 43,000 square feet of office space.
At December 31, 1997, the Company owned the real estate and buildings of
2,552 of its funeral service and cemetery locations and leased facilities in
connection with 1,133 of such operations. In addition, the Company leased four
aircraft pursuant to cancelable leases. At December 31, 1997, the Company
operated 11,498 vehicles, of which 8,641 were owned and 2,857 were leased. For
additional information regarding leases, see Note 10 to the consolidated
financial statements in Item 8 of this Form 10-K.
3
<PAGE> 17
The Company's 392 cemeteries contain an aggregate of approximately 30,677
acres, of which approximately 54% are developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition. Management believes
that these standards are met.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is involved in legal proceedings, the Company does not
believe that any of the proceedings is material pursuant to the standards set
forth in Item 103 of Regulation S-K promulgated under the Securities Exchange
Act of 1934.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 26, 1998 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
<TABLE>
<CAPTION>
YEAR
FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
------------ --- -------- ----------
<S> <C> <C> <C>
R. L. Waltrip........................ (67) Chairman of the Board and Chief Executive 1962
Officer
L. William Heiligbrodt............... (56) President and Chief Operating Officer 1988
W. Blair Waltrip..................... (43) Executive Vice President Operations 1980
Jerald L. Pullins.................... (56) Executive Vice President International 1992
Operations
John W. Morrow, Jr. ................. (62) Executive Vice President Special Services 1989
George R. Champagne.................. (44) Senior Vice President Chief Financial Officer 1989
Glenn G. McMillen.................... (55) Senior Vice President Operations 1993
Richard T. Sells..................... (58) Senior Vice President Preneed Sales 1987
James M. Shelger..................... (48) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner....................... (52) Senior Vice President Administration 1992
T. Craig Benson...................... (36) Vice President International Operations 1990
Gregory L. Cauthen................... (40) Vice President Treasurer 1995
J. Daniel Garrison................... (46) Vice President International Operations 1998
W. Mark Hamilton..................... (33) Vice President Prearranged Funeral Services 1996
Lowell A. Kirkpatrick, Jr. .......... (39) Vice President Operations, Finance and 1994
Development
Stephen M. Mack...................... (46) Vice President Corporate Operations 1998
Todd A. Matherne..................... (43) Vice President Operations, Finance 1996
and Development
Vincent L. Visosky................... (50) Vice President Operational Controller 1989
Michael R. Webb...................... (40) Vice President International Corporate 1998
Development
Henry M. Nelly, III.................. (53) President -- Provident Services, 1989
Inc., a subsidiary of the Company
</TABLE>
- -----------------
(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
4
<PAGE> 18
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Matherne joined the Company in April 1995 as Managing Director Investor
Relations and was promoted in May 1996 to Vice President Investor Relations and
in February 1998 to Vice President Operations, Finance and Development. Prior
thereto, Mr. Matherne was Vice President and General Manager of Baker Hughes
Treatment Services, an environmental services business.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary. W. Blair Waltrip is a son of
R. L. Waltrip, T. Craig Benson is a son-in-law of R. L. Waltrip and T. Craig
Benson and W. Blair Waltrip are brothers-in-law.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 1997, there were 7,720 holders of record of
the Company's common stock.
The Company has declared 99 consecutive quarterly dividends on its common
stock since it began paying dividends in 1974. The dividend rate is currently
$.09 per share per quarter, or an indicated annual rate of $.36 per share. For
the three years ended December 31, 1997, dividends per share were $.30, $.24 and
$.22, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First............................. $33.88 $26.88 $24.75 $19.44 $14.56 $13.13
Second............................ 36.00 29.63 30.13 24.13 15.81 13.44
Third............................. 35.75 29.81 29.44 27.63 19.75 15.19
Fourth............................ 38.00 27.88 30.75 26.50 22.00 18.81
</TABLE>
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
5
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 2,468,402 $2,294,194 $1,652,126 $1,117,175 $ 899,178
Income before extraordinary loss
and cumulative effect of
change in accounting
principle..................... 374,552 265,298 183,588 131,045 103,092
Net income...................... 333,750 265,298 183,588 131,045 101,061
Earnings per share**:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle --
Basic.................... 1.53 1.13 .92 .76 .62
Diluted.................. 1.47 1.08 .86 .71 .59
Net income --
Basic.................... 1.36 1.13 .92 .76 .61
Diluted.................. 1.31 1.08 .86 .71 .58
Dividends per share............. .30 .24 .22 .21 .20
Total assets.................... 10,306,863 8,869,770 7,672,387 5,161,888 3,683,304
Long-term debt.................. 2,634,699 2,048,737 1,712,464 1,330,177 1,062,222
Convertible preferred securities
of SCI Finance LLC............ -- 172,500 172,500 172,500 --
Stockholders' equity............ 2,726,004 2,235,317 1,975,345 1,196,622 884,513
Shares outstanding.............. 252,924 236,193 234,542 189,714 169,718
Ratio of earnings to fixed
charges*...................... 4.29 3.24 2.84 3.13 3.19
</TABLE>
- -----------------
* For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus
the minority interest of majority-owned subsidiaries with fixed charges and
plus fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt
costs, dividends on preferred securities of SCI Finance LLC and one-third of
rental expense which the Company considers representative of the interest
factor in the rentals.
** Earnings per share amounts have been restated to reflect the December 1997
adoption of Statement of Financial Accounting Standards No. 128.
6
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
A primary objective of the Company is to maximize shareholder value. To
accomplish this goal, one of the Company's strategies has been to provide
consistent growth in earnings per share. This growth strategy initiates with the
Company producing significant cash flow from its existing cluster operations,
then continues by using that cash to expand clusters through add-on
acquisitions, new construction, and improvements to existing locations. The
Company also expands its network through strategic acquisitions of larger,
multi-location death care companies, typically funding these transactions by
accessing the debt and equity markets when appropriate. All businesses are
continuously improved by further enhancing products, services and systems;
leveraging operating and overhead costs; strengthening buying power; and
expanding preneed sales.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established in and around
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allow the Company to more efficiently utilize
its operating facilities during fluctuations in the number of funeral services
and cemetery interments performed in a given period. The Company's acquisitions
are primarily located within existing cluster areas or create new cluster area
opportunities. The Company has approximately 400 clusters, which range in size
from two operations to 67 operations. There may be more than one cluster in a
given metropolitan area, depending upon the level and degree of shared costs.
RESULTS OF OPERATIONS:
Year ended 1997 compared to 1996
Segment information for the Company's three lines of business was as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral............. $ 1,727,003 $ 1,663,387 $ 63,616 3.8%
Cemetery............ 724,862 612,421 112,441 18.4
Financial
services......... 16,537 18,386 (1,849) (10.1)
----------- ----------- -------- -----
2,468,402 2,294,194 174,208 7.6
Costs and expenses:
Funeral............. (1,318,920) (1,282,546) 36,374 2.8
Cemetery............ (452,965) (397,700) 55,265 13.9
Financial
services......... (8,905) (9,496) (591) (6.2)
----------- ----------- -------- -----
(1,780,790) (1,689,742) 91,048 5.4
Gross profit margin
and percentage:
Funeral............. 408,083 23.6% 380,841 22.9% 27,242 7.2
Cemetery............ 271,897 37.5% 214,721 35.1% 57,176 26.6
Financial
services......... 7,632 46.2% 8,890 48.4% (1,258) (14.2)
----------- ----- ----------- ----- -------- -----
$ 687,612 27.9% $ 604,452 26.3% $ 83,160 13.8%
=========== ===== =========== ===== ======== =====
</TABLE>
7
<PAGE> 21
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States......................... $ 892,451 $ 820,860 $ 71,591 8.7%
France................................ 485,264 537,079 (51,815) (9.6)
Other European........................ 186,238 162,830 23,408 14.4
Other foreign......................... 114,389 115,707 (1,318) (1.1)
---------- ---------- -------- ----
1,678,342 1,636,476 41,866 2.6
---------- ---------- -------- ----
New clusters:*
United States......................... 21,061 4,475 16,586
Other European........................ 16,378 2,847 13,531
Other foreign......................... 2,113 -- 2,113
---------- ---------- --------
39,552 7,322 32,230
---------- ---------- -------- ----
Total clusters........................ 1,717,894 1,643,798 74,096 4.5
Non-cluster and disposed operations..... 9,109 19,589 (10,480)
---------- ---------- -------- ----
Total funeral revenues........ $1,727,003 $1,663,387 $ 63,616 3.8%
========== ========== ======== ====
</TABLE>
- -----------------
* Represents new geographic cluster areas entered into since the beginning of
1996 for the period that those businesses were owned by the Company.
The $41,866 increase in revenues at existing clusters was the result of a
2.4% increase in the number of funeral services performed (515,733 compared to
503,476) and a slightly higher average sales price ($3,254 compared to $3,250).
Acquisitions since January 1, 1996, included in existing clusters, accounted for
$97,843 of the existing cluster revenue increase. Excluding a $68,138 decrease
in French revenue caused exclusively by a change in the US dollar / French franc
exchange rate, businesses owned before 1996 had a revenue increase of $12,161.
The death rate in the Company's primary markets has remained relatively
constant for several years and is expected to remain at this rate for at least
the near future; however, due to the increasing proportion of people over age 65
in the Company's primary markets, demand for funeral services could increase in
the decades to come. It is anticipated that the Company's near term revenue
growth will continue to be primarily generated from acquired operations (added
to existing clusters and the creation of new clusters) as well as from improved
merchandising of funeral services and products. The Company is the world's
largest in the funeral service industry and currently performs approximately
10%, 28%, 14% and 25% of the funeral services in North America, France, the
United Kingdom and Australia, respectively. The Company believes that there are
approximately 8,000 potential acquisition candidates in North America that meet
its current metropolitan acquisition criteria and numerous other candidates
outside of North America. The Company plans to continue to aggressively seek to
acquire these potential candidates.
During the year ended December 31, 1997, the Company sold (net of
cancellations) approximately $509,000 of prearranged funeral services compared
to approximately $512,000 for the same period in 1996. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed. The current
emphasis on sales of prearranged funerals is expected to continue.
8
<PAGE> 22
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENTAGE
------------------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States......................... $ 581,633 $ 528,918 $ 52,715 10.0%
France................................ 415,056 466,136 (51,080) (11.0)
Other European........................ 144,513 123,517 20,996 17.0
Other foreign......................... 78,944 76,816 2,128 2.8
---------- ---------- -------- -----
1,220,146 1,195,387 24,759 2.1
---------- ---------- -------- -----
New clusters:*
United States......................... 15,805 3,192 12,613
Other European........................ 13,770 2,438 11,332
Other foreign......................... 1,753 -- 1,753
---------- ---------- -------- -----
31,328 5,630 25,698
---------- ---------- -------- -----
Total clusters........................ 1,251,474 1,201,017 50,457 4.2
Non-cluster and disposed operations..... 12,730 19,209 (6,479)
Administrative overhead................. 54,716 62,320 (7,604) (12.2)
---------- ---------- -------- -----
Total funeral costs and
expenses.................... $1,318,920 $1,282,546 $ 36,374 2.8%
========== ========== ======== =====
</TABLE>
The $24,759 increase in costs and expenses from existing clusters is
primarily the result of the period to period increase in the number of funeral
services performed. Acquisitions since January 1, 1996, included in existing
clusters, accounted for $73,762 of the existing cluster cost increase. Excluding
a $60,399 decrease in French costs caused exclusively by a change in the US
dollar/French franc exchange rate, businesses owned before 1996 had a cost
increase of $11,396. The gross profit margin before administrative overhead for
existing clusters increased to 27.3% in 1997 from 27.0% in 1996. Typically,
acquisitions will temporarily exhibit slightly lower gross profit margins than
those experienced by the Company's existing locations at least until such time
as these locations are assimilated into the Company's cluster management
strategy.
The overall funeral gross profit margin improved in 1997 to 23.6%, compared
to 22.9% in 1996. Contributing to this period to period improvement were the
Company's French operations which had a margin improvement to 11.0% from 9.8%.
This margin percentage is consistent with the Company's expectations for these
operations.
Administrative overhead costs expressed as a percentage of total funeral
revenues, decreased to 3.2%, compared to 3.7% in 1996.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States............................ $637,136 $546,462 $ 90,674 16.6%
Other European........................... 21,010 15,271 5,739 37.6
Other foreign............................ 49,024 46,155 2,869 6.2
-------- -------- -------- -----
707,170 607,888 99,282 16.3
-------- -------- -------- -----
New clusters*.............................. 10,517 -- 10,517
-------- -------- -------- -----
Total clusters................... 717,687 607,888 109,799 18.1
Non-cluster and disposed operations........ 7,175 4,533 2,642 58.3
-------- -------- -------- -----
Total cemetery revenues.......... $724,862 $612,421 $112,441 18.4%
======== ======== ======== =====
</TABLE>
9
<PAGE> 23
Revenues from existing clusters increased $99,282. Included in the existing
cluster increase were $49,935 in increased revenues from cemeteries acquired
since the beginning of 1996, while revenues from existing cluster locations
owned before 1996 increased $49,347 due primarily to increased preneed sales of
property and merchandise, higher average sales prices for these items and higher
investment earnings on trusted amounts. The Company plans to continue to
emphasize the selling of preneed cemetery property and merchandise by
maintaining an active and well-trained sales force. Additionally, future growth
through acquisitions is considered likely.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------- PERCENTAGE
1997 1996 INCREASE INCREASE
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States............................ $365,437 $329,530 $35,907 10.9%
Other European........................... 12,378 9,571 2,807 29.3
Other foreign............................ 26,875 25,288 1,587 6.3
-------- -------- ------- ----
404,690 364,389 40,301 11.1
-------- -------- ------- ----
New clusters*.............................. 8,191 13 8,178
-------- -------- ------- ----
Total clusters................... 412,881 364,402 48,479 13.3
Non-cluster and disposed operations........ 4,681 3,913 768 19.6
Administrative overhead.................... 35,403 29,385 6,018 20.5
-------- -------- ------- ----
Total cemetery costs and
expenses....................... $452,965 $397,700 $55,265 13.9%
======== ======== ======= ====
</TABLE>
Costs and expenses at existing clusters increased $40,301 due primarily to
an increase of $31,667 from cemeteries acquired since the beginning of 1996,
while costs from existing cluster cemeteries acquired before 1996 increased
$8,634. The overall cemetery gross profit margin increased to 37.5% in 1997 from
35.1% last year. This increase reflects strong growth in sales of preneed
cemetery property and merchandise as well as continued cost control in all major
expense categories. Administrative overhead costs have increased to 4.9% of
revenues this year compared to 4.8% last year. Acquisitions typically have lower
gross profit margins, at least until such time that they are assimilated into
the Company's cluster management strategy and preneed selling programs are fully
implemented.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported gross profit of $7,632 for the year ended December 31,
1997, compared to $8,890 for the same period in 1996. Provident's average
outstanding loan portfolio during the current year decreased to $182,375
compared to $190,936 in 1996, and the average interest rate spread also
decreased to 3.18% compared to 3.64% in 1996.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.7% in 1997 compared to 2.8% in 1996. These expenses
increased $3,566 or 5.6% during the year primarily from increased personnel
costs.
Interest expense, which excludes the amount incurred by financial service
operations, decreased $1,837 or 1.3% during the current year. The decreased
interest expense reflects an approximately 130 basis point decrease in average
interest rates on indebtedness offset by the Company's higher debt level in
1997. The decreased average interest rate is primarily attributable to the
Company's 1997 refinancing of certain long-term debt and hedging programs
associated with its international investments.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a before tax gain of $68,100.
Dividends on preferred securities of SCI Finance LLC were
10
<PAGE> 24
$4,382 in 1997 compared to $10,781 in 1996, a decrease of $6,399 or 59.4%. This
decrease is the result of the May 1997 redemption of all outstanding shares of
its convertible preferred securities of SCI Finance LLC.
The provision for income taxes reflects a 35.4% effective tax rate for 1997
as compared to a 35.9% effective tax rate in 1996. The decrease in the effective
tax rate is due primarily to lower taxes from international operations (1997
included a tax benefit relating to enacted tax rate changes in certain foreign
tax jurisdictions), partially offset by the tax impact from the gain on sale of
the Company's interest in ECI which is reflected at the Company's higher
domestic tax rate.
RESULTS OF OPERATIONS:
Year ended 1996 compared to 1995
Segment information for the Company's three lines of business was as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENTAGE
----------------------------------------- INCREASE INCREASE
1996 1995 (DECREASE) (DECREASE)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral............. $ 1,663,387 $ 1,166,247 $497,140 42.6%
Cemetery............ 612,421 463,754 148,667 32.1
Financial
services......... 18,386 22,125 (3,739) (16.9)
----------- ----------- -------- -----
2,294,194 1,652,126 642,068 38.9
Costs and expenses:
Funeral............. (1,282,546) (871,096) 411,450 47.2
Cemetery............ (397,700) (303,312) 94,388 31.1
Financial
services......... (9,496) (12,497) (3,001) (24.0)
----------- ----------- -------- -----
(1,689,742) (1,186,905) 502,837 42.4
Gross profit margin
and percentage:
Funeral............. 380,841 22.9% 295,151 25.3% 85,690 29.0
Cemetery............ 214,721 35.1% 160,442 34.6% 54,279 33.8
Financial
services......... 8,890 48.4% 9,628 43.5% (738) (7.7)
----------- ----- ----------- ----- -------- -----
$ 604,452 26.3% $ 465,221 28.2% $139,231 29.9%
=========== ===== =========== ===== ======== =====
</TABLE>
11
<PAGE> 25
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1996 1995 INCREASE INCREASE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States......................... $ 807,829 $ 730,053 $ 77,776 10.7%
Other European........................ 141,969 130,849 11,120 8.5
Other foreign......................... 99,951 87,044 12,907 14.8
---------- ---------- -------- ----
1,049,749 947,946 101,803 10.7
---------- ---------- -------- ----
New clusters:*
United States......................... 25,203 10,999 14,204
Other European........................ 27,691 6,980 20,711
Other foreign......................... 15,450 4,278 11,172
France................................ 537,079 190,091 346,988
---------- ---------- --------
605,423 212,348 393,075
---------- ---------- -------- ----
Total clusters................ 1,655,172 1,160,294 494,878 42.7
Non-cluster and disposed operations..... 8,215 5,953 2,262
---------- ---------- -------- ----
Total funeral revenues........ $1,663,387 $1,166,247 $497,140 42.6%
========== ========== ======== ====
</TABLE>
- -----------------
* Represents new geographic cluster areas entered into since the beginning of
1995 for the period that those businesses were owned by the Company.
The $101,803 increase in revenues at existing clusters was primarily the
result of a 7.7% increase in North American funeral services performed at
existing cluster locations (226,822 compared to 210,611) and a 3.0% higher
average sales price ($3,745 compared to $3,635). Included in this increase were
$79,290 in increased revenues from locations acquired since the beginning of
1995. The remaining existing cluster revenue increase of $22,513 was contributed
by operations acquired before 1995. The 1995 results for France represent
approximately four months of Company ownership. The increase in Other European
new cluster revenue is primarily due to non-French European operations added in
August 1995.
During the year ended December 31, 1996, the Company sold (net of
cancellations) approximately $512,000 of prearranged funeral services compared
to approximately $367,000 for the same period in 1995. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed.
12
<PAGE> 26
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------- PERCENTAGE
1996 1995 INCREASE INCREASE
------------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States.......................... $ 520,864 $482,497 $ 38,367 8.0%
Other European......................... 104,176 101,327 2,849 2.8
Other foreign.......................... 65,549 57,650 7,899 13.7
---------- -------- -------- ----
690,589 641,474 49,115 7.7
---------- -------- -------- ----
New clusters:*
United States.......................... 18,431 8,148 10,283
Other European......................... 24,978 6,986 17,992
Other foreign.......................... 10,855 3,396 7,459
France................................. 466,136 165,778 300,358
---------- -------- --------
520,400 184,308 336,092
---------- -------- -------- ----
Total clusters................. 1,210,989 825,782 385,207 46.6
Non-cluster and disposed operations...... 9,237 7,582 1,655
Administrative overhead.................. 62,320 37,732 24,588 65.2
---------- -------- -------- ----
Total funeral costs and
expenses..................... $1,282,546 $871,096 $411,450 47.2%
========== ======== ======== ====
</TABLE>
The total gross profit for existing clusters increased to $359,160 in 1996
from $306,472 in 1995, and the related gross profit percentage for existing
clusters increased to 34.2% from 32.3% in 1995. Acquisitions since the beginning
of 1995, included in existing clusters, accounted for $23,980 of the existing
gross profit increase. The gross profit margin for those funeral operations in
existing clusters that were acquired before 1995 increased to 35.0% in 1996 from
32.7% in 1995 due to the increased revenues discussed above without a
corresponding percentage increase in personnel and other operating costs.
Contributing to the overall funeral gross profit margin decline (22.9%
compared to 25.3% in 1995) was the Company's French operations. French
operations had an increased gross profit margin of 9.8% in 1996, compared to
9.4% in 1995, however 1996 reflects a full year's results compared to the four
months of ownership in 1995. The French margin is consistent with the Company's
expectations for these operations which have historically produced lower gross
margins than the Company's operations in North America and Australia.
Administrative overhead costs expressed as a percentage of revenues increased in
1996 to 3.7%, compared to 3.2% in 1995. This administrative overhead cost
increase was primarily attributable to the addition of the French operations as
well as the Company's realignment of its North American operating structure.
13
<PAGE> 27
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States......................... $506,330 $395,821 $110,509 27.9%
Other European........................ 13,978 11,307 2,671 23.6
Other foreign......................... 46,485 39,979 6,506 16.3
-------- -------- -------- ----
566,793 447,107 119,686 26.8
-------- -------- -------- ----
New clusters:*
United States......................... 41,221 12,972 28,249
Other European........................ 1,307 796 511
-------- -------- --------
42,528 13,768 28,760
-------- -------- -------- ----
Total clusters................ 609,321 460,875 148,446 32.2
Non-cluster and disposed operations..... 3,100 2,879 221
-------- -------- -------- ----
Total cemetery revenues....... $612,421 $463,754 $148,667 32.1%
======== ======== ======== ====
</TABLE>
Revenues for existing clusters increased due to an increased volume of
sales and higher average sales prices for property and merchandise. Included in
the existing cluster increase were $82,470 in increased revenues from cemeteries
acquired since the beginning of 1995. This increase was primarily due to the
impact of reporting a full year's results from a large United States acquisition
in October 1995. A majority of these properties were additions to existing
clusters. The remaining existing cluster revenue increase of $37,216 was
contributed by operations acquired before 1995.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Existing clusters:
United States......................... $304,732 $246,790 $ 57,942 23.5%
Other European........................ 8,404 5,799 2,605 44.9
Other foreign......................... 25,322 20,227 5,095 25.2
-------- -------- -------- ----
338,458 272,816 65,642 24.1
-------- -------- -------- ----
New clusters:*
United States......................... 24,547 8,581 15,966
United Kingdom........................ 1,181 570 611
-------- -------- --------
25,728 9,151 16,577
-------- -------- -------- ----
Total clusters................ 364,186 281,967 82,219 29.2
Non-cluster and disposed operations..... 4,129 3,509 620
Administrative overhead................. 29,385 17,836 11,549 64.8
-------- -------- -------- ----
Total cemetery costs and
expenses.................... $397,700 $303,312 $ 94,388 31.1%
======== ======== ======== ====
</TABLE>
Costs at existing clusters increased $65,642 due primarily to an increase
of $48,864 from cemeteries acquired since the beginning of 1995, while costs
from existing cluster cemeteries acquired before 1995 increased $16,796. The
overall cemetery gross profit margin increased to 35.1% in 1996 from 34.6% in
1995. This increase reflects strong growth in sales of preneed cemetery property
and merchandise as well as continued cost control in all major expense
categories. Administrative overhead costs have increased to 4.8% of revenues in
1996 compared to 3.8% in 1995. This administrative overhead cost increase was
primarily
14
<PAGE> 28
attributable to increased costs from additional infrastructure added in the
Company's United Kingdom operations as well as the Company's realignment of its
North American operating structure.
Financial Services
Provident increased its gross margin percentage to 48.4% from 43.5%. This
was primarily attributable to early termination fees associated with the payoff
of outstanding loans in August 1996, by two of Provident's largest customers.
These payoffs reduced the average outstanding loan portfolio during 1996 to
approximately $191,000 with an average interest rate spread of 3.6% compared to
approximately $206,000 and 3.7%, respectively, in 1995.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
were 2.8% in 1996 compared to 3.2% in 1995. These expenses increased by
approximately $9,600 or 17.9% during the year primarily due to the recognition
of $6,000 in costs relating to the Loewen transaction (see below) as well as
increases in personnel costs. On October 3, 1996, The Company filed a
registration statement with the Securities and Exchange Commission
("Commission") that offered to acquire the outstanding shares of Loewen Group
Inc. ("Loewen"), a publicly traded death care company, through an exchange
offer. On January 7, 1997, the Company announced that it had withdrawn its
exchange offer for Loewen.
Interest expense, which excludes the amount incurred by financial service
operations, increased $20,409 or 17.3% during 1996 primarily from incremental
borrowings incurred to fund the Company's acquisition program. The 1996 increase
is the result of an increase of approximately $296,875 in the Company's average
debt (excluding debt related to Provident) outstanding during the year ended
December 31, 1996, compared to 1995. The increased interest associated with the
higher debt level was offset by a slightly lower average interest rate for the
year.
The provision for income taxes reflected a 35.9% effective tax rate for
1996 as compared to a 37.6% effective tax rate in 1995. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1997:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Commission. The Company believes cash from operations,
additional funds available under its revolving credit agreements, proceeds from
public and private offerings of securities will be sufficient to continue its
current acquisition program and operating policies.
At December 31, 1997, the Company had net working capital of $275,966 and a
current ratio of 1.52:1, compared to working capital of $106,497 and a current
ratio of 1.18:1 at December 31, 1996.
Revolving Credit Agreements
The Company has various revolving credit facilities and lines of credit
which currently provide for aggregate borrowings of approximately $1,140,000. At
December 31, 1997, approximately $530,000 was available under these facilities.
These facilities have financial compliance provisions that contain certain
restrictions on levels of net worth, debt, liens and guarantees.
15
<PAGE> 29
Sources and Uses of Cash
Cash Flows from Operating Activities: Net cash provided by operating
activities was $299,436 for the year ended December 31, 1997, compared to
$209,857 for the same period in 1996, an increase of $89,579. This increase was
primarily due to improved operating results in 1997. Significant uses of
operating cash include an increase in net receivables resulting from increased
sales of funeral services and cemetery products and merchandise.
Cash Flows from Investing Activities: Net cash used in investing activities
was $633,444 for the year ended December 31, 1997, compared to $480,126 for the
same period in 1996, an increase of $153,318. This increase was primarily due to
a $130,411 increase in cash used in acquisitions and $37,380 of increased
capital expenditures including new construction of facilities and major
improvements to existing properties. Cash used for capital expenditures was
$230,532 during the year ended December 31, 1997. Additionally, the Company used
approximately $88,000 to increase its investment in existing equity investees,
while approximately $147,000 in cash was provided by the sale of the Company's
interest in ECI. Cash used relating to prearranged funeral activities decreased
due to the timing of cash payments to and withdrawals from trusts, offset by
increased cash outlays on prearranged marketing efforts.
Cash Flows from Financing Activities: Net cash provided by financing
activities was $336,754 for the year ended December 31, 1997, compared to
$256,916 for the same period in 1996, an increase of $79,838.
As of December 31, 1997, the Company's debt to capitalization ratio was
49.8% compared to 47.3% at December 31, 1996. The interest rate coverage ratio
for the year ended December 31, 1997 was 4.43:1 (excluding the gain on the sale
of the Company's investment in ECI), compared to 3.62:1 for the same period in
1996. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash flow generated
and the low failure rate exhibited by these types of businesses. The Company
believes these acquired firms are capable of servicing the additional debt and
providing a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance
its future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. At December
31, 1997, the Company had approximately $530,000 of available borrowings under
various revolving credit facilities and lines of credit. At December 31, 1997,
the Company had the ability to issue $550,000 in securities registered with the
Commission under a shelf registration (In March 1998, the company issued
$500,000 of long-term notes under the shelf to repay borrowings under the
company's credit facilities). In addition, 15,369,000 shares of common stock and
a total of $201,000 of guaranteed promissory notes and convertible debentures
are registered with the Commission under a separate shelf registration to be
used exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts
and the funds collected are generally held in trust or are used to purchase a
life insurance or annuity contract. The principal amount of these prearranged
funeral contracts will be received in cash by a Company funeral service location
at the time the funeral is performed. Earnings on trust funds and increasing
benefits under insurance funded contracts also increase the amount of cash to be
received upon performance of the funeral and are intended to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. During 1997, the Company completed a review of the
prearranged trust investment process which included an asset/liability study.
This has resulted in a new investment program which entails the consolidation of
multiple trustees, the use of institutional managers with differing investment
styles and consolidated performance monitoring and tracking. This new program
targets a real return in excess of the amount necessary to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. This is accomplished by allocating the portfolio mix to the
appropriate investments that more accurately match the anticipated
16
<PAGE> 30
maturity of the policies. The Company is currently reallocating the portfolio to
achieve a new asset allocation of approximately 65% equity and 35% fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are
a current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American funerals performed annually approximates
25% and is expected to grow, thereby making the total number of funerals
performed more predictable.
Cremations
In recent years there has been steady, gradual growth in the number of
cremations that have been chosen as an alternative to traditional methods of
disposal of human remains. In 1997, nearly 33% of all families served by the
Company's North American funeral service locations selected the cremation
alternative, substantially more than the 20% national average according to
industry studies. The Company has a significant number of operating locations in
Florida and the west coast of North America where the cremation alternative
continues to gain acceptance. Based on industry studies, the Company believes
that cremations account for approximately 60-70% of all dispositions of human
remains in Australia and the United Kingdom. It is estimated that cremations
account for approximately 12% of all dispositions of human remains in France.
Though a cremation typically results in fewer sales dollars than a traditional
funeral service, the Company believes that funeral operations which are
predominantly cremation businesses typically have higher gross profit margin
percentages than those exhibited at traditional funeral operations. Cremation
memorialization has long been a tradition in the Australian and United Kingdom
markets. The Company has expanded its product alternatives in these markets
which has resulted in higher average sales. The Company has also established
markets in select areas within North America and believes that memorialization
of cremated remains represents a source of revenue growth.
Other Matters
The Company will adopt Statement of Financial Accounting Standards ("FAS")
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits", FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", and FAS No. 130 "Reporting Comprehensive Income" for the year
ended December 31, 1998. FAS No. 132 revises disclosures about pension and other
postretirement benefit plans, FAS No. 131 revises standards for reporting
information about operating segments, and FAS No. 130 establishes standards for
reporting and display of comprehensive income. The adoption of these disclosure
standards will not have a material impact on the consolidated financial
statements.
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs
to correctly differentiate the century from a date in which the year is
represented by only two digits. A computer system which is not year 2000
compliant might not be able to process certain data or possibly cause the entire
computer system to malfunction. The Company is currently assessing any potential
impact that changing to the year 2000 will have on the computer programs that
operate within the Company or are used by major vendors or service providers.
Cautionary Statement on Forward-looking Statements
The statements contained in this Annual Report that are not historical
facts are forward-looking statements within the meaning of the private
Securities Litigation Reform Act of 1995. These statements may
17
<PAGE> 31
be accompanied by words such as "believe," "estimate," "expect," "anticipate,"
or "predict," that convey the uncertainty of future events or outcomes. These
statements are based on assumptions that the Company believes are reasonable;
however many important factors could cause the Company's actual results in the
future to differ materially from the forward-looking statements made herein and
in any other documents or oral presentations made by, or on behalf of, the
Company. Important factors which could cause actual results to differ materially
from those in forward-looking statements include, among others, the following:
(1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable security
values as well as currency and interest rate fluctuations).
(2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
(3) Changes in consumer demand for the Company's services caused by
several factors such as changes in local death rates, cremation rates,
competitive pressures and local economic conditions.
(4) The Company's ability to identify and complete additional
acquisitions on terms that are favorable to the Company, to successfully
integrate acquisitions into the Company's business and to realize expected
cost savings in connection with such acquisitions. The Company's future
results may be materially impacted by changes in the level of acquisition
activity.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivatives primarily in the form of interest rate swaps
and cross-currency interest rate swaps in combination with local currency
borrowings in order to manage its mix of fixed and floating rate debt and to
substantially hedge the Company's net investment in foreign assets. Accordingly,
movements in currency rates that impact the swaps are generally offset by a
corresponding movement in the value of the underlying assets being hedged and
movements in interest rates that impact the fair value of the interest rate
swaps are generally offset by a corresponding movement in the value of the
underlying debt being hedged. Similarly, currency movements that impact foreign
interest expense due under the cross-currency interest rate swaps are generally
offset by a corresponding movement in the earnings of the foreign operation.
Fair values included herein have been determined based on market prices provided
by counterparties. The information presented below should be read in conjunction
with notes four, eight and nine to the consolidated financial statements.
In general, interest rates are managed such that 40% to 60% of the total
debt (excluding debt which offsets the Provident loan receivable portfolio) is
floating rate and thus is sensitive to interest rate fluctuations. After giving
effect to the interest rate swaps, the Company's total debt has been converted
into approximately $1,078,000 of fixed interest rate debt at a weighted average
rate of 7.0% and approximately $1,386,000 of floating interest rate debt at a
weighted average rate of 5.5%. At December 31, 1997, a one percent increase in
the various floating rate indices referenced in the debt and swaps (excluding
amounts borrowed to issue loans by Provident) would cause a $13,860 net increase
in interest expense. However, the Company's overall sensitivity to floating
interest rates is diversified in that approximately 40% of the Company's
floating rate exposure is based in four markets other than the United States.
In general, the Company hedges up to 100% of its net investment in foreign
assets when such investment is considered significant and when it is reasonably
cost efficient to do so. The death care industries in countries where the
Company has foreign operations are generally stable and have had predictable
cash flows. In addition, those countries have not had highly inflationary
economies. Approximately one-third of the Company's net assets and one-quarter
of its operating income are denominated in foreign currencies. Due to the
cross-currency hedges described above, approximately 6% of the Company's net
assets and approximately 8% of the Company's operating earnings are subject to
translation risk.
18
<PAGE> 32
Equity-Price Risk Management
In connection with prearranged funeral operations and preneed cemetery
merchandise sales, the Company owns investments in equity securities and mutual
funds which are sensitive to current market prices. Cost and market values as of
December 31, 1997 and 1996, are presented in notes four and five to the
consolidated financial statements.
Market-Rate Sensitive Instruments and Risk Management
The following discussion about the Company's risk-management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
The following table summarizes the financial instruments and derivative
instruments held by the Company at December 31, 1997, which are sensitive to
changes in interest rates, foreign exchange rates, and equity prices. The
Company uses interest rate swaps and cross-currency interest rate swaps to
manage these primary market exposures associated with underlying assets and
liabilities. The Company uses these instruments to reduce risk by essentially
creating offsetting market exposures. The instruments held by the Company are
not leveraged and are held for non-speculative purposes.
For certain assets and debt, the table below presents principal cash flows
that exist by maturity date and the related average interest rate. For swaps,
the table presents the notional amounts and expected interest rates that the
Company will receive and pay that exist by contractual dates. The notional
amount represents the foreign currency notional amount converted to US dollars
at an estimated future currency exchange rate, and is used to calculate the
contractual payments to be exchanged under the contract. The variable rates are
estimated based on implied forward rates in the yield curve.
19
<PAGE> 33
<TABLE>
<CAPTION>
FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER ASSET/(LIABILITY)
-------- --------- --------- --------- --------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- -------
Provident receivables....... $ 15,922 $ 22,528 $ 21,264 $ 52,917 $ 58,218 $ 27,072 $ 197,921
Average rate.............. 9.34% 7.58% 9.99% 9.96% 8.48% 8.67%
Auxia debt securities....... 2,809 17,014 59,739 24,300 67,522 142,901 314,285
Average rate.............. 5.97% 5.97% 6.30% 6.82% 6.16% 6.16%
LIABILITIES
- ----------
Fixed rate debt............. (64,570) (62,192) (193,285) (196,661) (328,456) (1,050,596) (2,016,511)
Average rate.............. 7.78% 7.83% 6.80% 7.12% 7.09% 7.35%
Floating rate debt
Floating rate notes....... (200,000) (200,000)
Bank revolving credit and
commercial paper........ (416,139) (200,450) (616,589)
Average rate.............. 5.97% 5.19%
DERIVATIVE CONTRACTS
- -------------------
INTEREST RATE SWAPS
US fixed to US floating..... 950,000 950,000 950,000 800,000 500,000 500,000 30,951
Average receive rate...... 6.87% 6.87% 6.87% 6.93% 7.19% 7.19%
Average pay rate.......... 5.74% 5.78% 5.95% 5.99% 6.06% 6.15%
US floating to US fixed..... 200,000 200,000 200,000 200,000 200,000 200,000 783
Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06% 6.15%
Average pay rate.......... 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Foreign currency floating to
foreign currency fixed.... 341,475 263,721 264,514 265,116 267,067 82,858 (20,085)
Average receive rate...... 4.83% 5.03% 5.35% 5.55% 5.76% 6.51%
Average pay rate.......... 6.60% 6.80% 6.80% 6.80% 6.79% 6.90%
Foreign currency floating to
foreign currency
floating.................. 81,992 83,301 84,275 85,062 85,736 85,736 (1,479)
Average receive rate...... 3.84% 4.12% 4.61% 4.93% 5.23% 5.42%
Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66%
Foreign currency fixed to
foreign currency
floating.................. 82,325 83,639 84,617 85,408 86,084 86,084 3,036
Average receive rate...... 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%
Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66%
CROSS-CURRENCY INTEREST RATE
SWAPS
US fixed to foreign currency
fixed..................... 702,391 682,268 532,955 506,191 407,039 407,039 83,237
Average receive rate...... 7.49% 7.43% 7.59% 7.52% 7.92% 7.92%
Average pay rate.......... 7.38% 7.29% 7.29% 7.15% 7.61% 7.61%
US fixed to foreign currency
floating.................. 368,448 285,933 282,575 276,260 275,168 189,097 20,956
Average receive rate...... 6.69% 6.67% 6.63% 6.57% 6.54% 7.07%
Average pay rate.......... 4.81% 4.90% 5.18% 5.36% 5.58% 6.14%
US floating to foreign
currency fixed............ 247,037 227,430 (40,619)
Average receive rate...... 5.73% 5.77%
Average pay rate.......... 5.39% 5.26%
US floating to foreign
currency floating......... 56,429 56,658 26,866 26,750 26,488 49,937
Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06%
Average pay rate.......... 5.18% 5.50% 6.13% 6.36% 6.67%
</TABLE>
20
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 22
Consolidated Statement of Income for the three years ended
December 31, 1997......................................... 23
Consolidated Balance Sheet as of December 31, 1997 and
1996...................................................... 24
Consolidated Statement of Cash Flows for the three years
ended December 31, 1997................................... 25
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1997............................. 26
Notes to Consolidated Financial Statements.................. 27
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 50
</TABLE>
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
21
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of
Directors of Service Corporation International
We have audited the accompanying consolidated balance sheet of Service
Corporation International as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. We have also audited
the financial statement schedule for the three years ended December 31, 1997,
listed in the index at item 8 of this Form 10-K. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Service
Corporation International as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 18, 1998
22
<PAGE> 36
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................ $ 2,468,402 $ 2,294,194 $ 1,652,126
Costs and expenses.................................. (1,780,790) (1,689,742) (1,186,905)
----------- ----------- -----------
Gross profit........................................ 687,612 604,452 465,221
General and administrative expenses................. (66,781) (63,215) (53,600)
----------- ----------- -----------
Income from operations.............................. 620,831 541,237 411,621
Interest expense.................................... (136,720) (138,557) (118,148)
Dividends on preferred securities of SCI Finance
LLC............................................... (4,382) (10,781) (10,781)
Other income........................................ 100,244 21,982 11,519
----------- ----------- -----------
(40,858) (127,356) (117,410)
----------- ----------- -----------
Income before income taxes and extraordinary loss... 579,973 413,881 294,211
Provision for income taxes.......................... (205,421) (148,583) (110,623)
----------- ----------- -----------
Income before extraordinary loss.................... 374,552 265,298 183,588
Extraordinary loss on early extinguishment of debt
(net of income taxes of $23,383).................. (40,802) -- --
----------- ----------- -----------
Net income.......................................... $ 333,750 $ 265,298 $ 183,588
=========== =========== ===========
Earnings per share:
Basic:
Income before extraordinary loss.................. $ 1.53 $ 1.13 $ .92
Extraordinary loss on early extinguishment of
debt........................................... (0.17) -- --
----------- ----------- -----------
Net income........................................ $ 1.36 $ 1.13 $ .92
=========== =========== ===========
Diluted:
Income before extraordinary loss.................. $ 1.47 $ 1.08 $ .86
Extraordinary loss on early extinguishment of
debt........................................... (0.16) -- --
----------- ----------- -----------
Net income........................................ $ 1.31 $ 1.08 $ .86
=========== =========== ===========
Basic weighted average number of shares............. 245,470 235,299 199,603
=========== =========== ===========
Diluted weighted average number of shares........... 257,781 252,870 229,967
=========== =========== ===========
</TABLE>
(See notes to consolidated financial statements)
23
<PAGE> 37
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46,877 $ 44,131
Receivables, net of allowances............................ 557,481 494,576
Inventories............................................... 172,169 139,019
Other..................................................... 34,881 36,314
----------- -----------
Total current assets.............................. 811,408 714,040
----------- -----------
Investments -- insurance subsidiary......................... 574,728 601,565
Prearranged funeral contracts............................... 2,610,632 2,159,348
Long-term receivables....................................... 981,121 809,287
Cemetery property, at cost.................................. 1,636,859 1,380,213
Property, plant and equipment, at cost (net)................ 1,644,137 1,457,075
Deferred charges and other assets........................... 549,862 371,608
Names and reputations (net)................................. 1,498,116 1,376,634
----------- -----------
$10,306,863 $ 8,869,770
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 425,631 $ 440,797
Current maturities of long-term debt...................... 64,570 113,876
Income taxes.............................................. 45,241 52,870
----------- -----------
Total current liabilities......................... 535,442 607,543
----------- -----------
Long-term debt.............................................. 2,634,699 2,048,737
Deferred income taxes....................................... 701,221 527,460
Other liabilities........................................... 546,140 552,443
Deferred prearranged funeral contract revenues.............. 3,163,357 2,725,770
Commitments and contingencies............................... -- --
Company obligated, mandatorily redeemable, convertible
preferred securities of SCI Finance LLC................... -- 172,500
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 252,923,784 and 236,193,427, respectively,
issued and outstanding................................. 252,924 236,193
Capital in excess of par value............................ 1,493,246 1,237,783
Retained earnings......................................... 983,353 728,108
Foreign currency translation adjustment................... (7,480) 22,315
Unrealized gain on securities available for sale, net of
tax.................................................... 3,961 10,918
----------- -----------
Total stockholders' equity........................ 2,726,004 2,235,317
----------- -----------
$10,306,863 $ 8,869,770
=========== ===========
</TABLE>
(See notes to consolidated financial statements)
24
<PAGE> 38
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 333,750 $ 265,298 $ 183,588
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 157,550 129,819 92,541
Provision for deferred income taxes............. 19,212 56,902 45,164
Extraordinary loss on early extinguishment of
debt, net of income taxes..................... 40,802 -- --
Gains from dispositions (net)................... (89,252) (9,930) (1,024)
Change in assets and liabilities net of effects
from acquisitions:
(Increase) in receivables..................... (174,429) (167,338) (115,888)
(Increase) in other assets.................... (24,904) (36,781) (36,496)
Increase (decrease) in other liabilities...... 36,045 (26,365) 7,473
Other......................................... 662 (1,748) (3,860)
----------- ----------- ---------
Net cash provided by operating activities............ 299,436 209,857 171,498
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures............................... (230,532) (193,152) (125,231)
Changes in prearranged funeral balances............ (5,537) (51,485) (44,549)
Purchases of securities -- insurance subsidiary.... (1,407,588) (1,212,305) (86,014)
Sales of securities -- insurance subsidiary........ 1,383,934 1,177,499 49,769
Proceeds from sales of property and equipment...... 46,908 30,121 12,655
Acquisitions, net of cash acquired................. (409,731) (279,320) (693,627)
Loans issued by finance subsidiary................. (98,446) (86,858) (38,184)
Principal payments received on loans by finance
subsidiary...................................... 45,915 156,064 24,312
Proceeds from sale of equity investment............ 147,700 -- --
Purchases of equity investments.................... (87,643) (39,752) (16,076)
Other.............................................. (18,424) 19,062 (8,190)
----------- ----------- ---------
Net cash used in investing activities................ (633,444) (480,126) (925,135)
----------- ----------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving
credit agreements............................... 304,505 96,441 (453,959)
Long-term debt issued.............................. 650,000 300,000 862,848
Early extinguishment of debt....................... (449,998) -- --
Payments of debt................................... (91,464) (109,458) (135,960)
Common stock issued................................ -- -- 331,063
Dividends paid..................................... (69,888) (55,262) (43,676)
Bank overdrafts and other.......................... (6,401) 25,195 32,464
----------- ----------- ---------
Net cash provided by financing activities............ 336,754 256,916 592,780
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 2,746 (13,353) (160,857)
Cash and cash equivalents at beginning of period..... 44,131 57,484 218,341
----------- ----------- ---------
Cash and cash equivalents at end of period........... $ 46,877 $ 44,131 $ 57,484
=========== =========== =========
</TABLE>
(See notes to consolidated financial statements)
25
<PAGE> 39
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN FOREIGN UNREALIZED
COMMON EXCESS OF RETAINED CURRENCY GAIN
STOCK PAR VALUE EARNINGS TRANSLATION ON SECURITIES
-------- ---------- -------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... $189,714 $ 624,001 $381,509 $ 1,398 $ --
Add (deduct):
Net income............................... 183,588
Common stock issued:
Common stock offerings................ 18,350 312,713
Stock option exercises and stock
grants.............................. 696 5,792
Acquisitions.......................... 7,310 101,967
Debenture conversions................. 18,472 170,235
Dividends on common stock ($.22 per
share)................................ (46,535)
Foreign currency translation............. 349
Net change in unrealized gain on
securities............................ 5,786
-------- ---------- -------- ------- -------
Balance at December 31, 1995............... 234,542 1,214,708 518,562 1,747 5,786
Add (deduct):
Net income............................... 265,298
Common Stock issued:
Stock option exercises and stock
grants.............................. 723 6,940
Acquisitions.......................... 811 15,012 796
Debenture conversions................. 117 1,123
Dividends on common stock ($.24 per
share)................................ (56,548)
Foreign currency translation............. 20,568
Net change in unrealized gain on
securities............................ 5,132
-------- ---------- -------- ------- -------
Balance at December 31, 1996............... 236,193 1,237,783 728,108 22,315 10,918
Add (deduct):
Net income............................... 333,750
Common Stock issued:
Stock option exercises and stock
grants.............................. 820 9,296
Acquisitions.......................... 3,958 79,215 (3,832)
Debenture conversions................. 492 5,925
Conversion of convertible preferred
securities of SCI Finance LLC......... 11,461 161,027
Dividends on common stock ($.30 per
share)................................ (74,673)
Foreign currency translation............. (29,795)
Net change in unrealized gain on
securities............................ (6,957)
-------- ---------- -------- ------- -------
Balance at December 31, 1997............... $252,924 $1,493,246 $983,353 $(7,480) $ 3,961
======== ========== ======== ======= =======
</TABLE>
(See notes to consolidated financial statements)
26
<PAGE> 40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world. At
December 31, 1997, the Company operated 3,127 funeral service locations, 392
cemeteries and 166 crematoria located in 17 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also operate crematoria.
The Company's financial services operations consist of a finance
subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital
financing to independent funeral home and cemetery operators.
NOTE TWO
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Service Corporation International and all majority-owned
subsidiaries (the "Company"). Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation with no effect on the
consolidated financial position, results of operations or cash flows.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories and Cemetery Property: Funeral merchandise and cemetery
property and merchandise, are stated at the lower of average cost or market.
Depreciation and Amortization: Depreciation of property, plant and
equipment is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property and plant are depreciated over
a period ranging from seven to 50 years, while equipment is depreciated over a
period from three to 20 years. For the three years ended December 31, 1997,
depreciation expense was $87,571, $74,854 and $52,828, respectively. Maintenance
and repairs are charged to expense whereas renewals and major replacements are
capitalized. Prepaid management, consultative and non-competition agreements,
primarily with former owners and key employees of businesses acquired are
amortized on a straight-line basis over the lives of the respective contracts.
Funeral Operations: Funeral revenue is recognized when the funeral service
is performed. The Company's trade receivables consist primarily of funeral
services already performed. An allowance for doubtful accounts has been provided
based on historical experience. The Company sells price guaranteed prearranged
funeral contracts through various programs providing for future funeral services
at prices prevailing when the agreement is signed. Revenues associated with
sales of prearranged funeral contracts (which include accumulated trust earnings
and increasing insurance benefits) are deferred until such time that the funeral
27
<PAGE> 41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
service is performed (see note four). The Company considers price guaranteed
prearranged funeral contracts to be investments made to retain and expand future
market share.
Cemetery Operations: All cemetery interment right sales, together with
associated merchandise, are recorded as income at the time contracts are signed.
Costs related to the sales of interment rights include property and other costs
related to cemetery development activities which are charged to operations using
the specific identification method. Allowances for customer cancellations are
provided at the date of sale based upon historical experience. Costs related to
merchandise are based on actual costs incurred or estimates of future costs
necessary to purchase the merchandise, including provisions for inflation when
required. Pursuant to state law, all or a portion of the proceeds from the sale
of cemetery merchandise may also be required to be paid into trust funds until
such merchandise is purchased by the Company for the customer. Merchandise funds
trusted at December 31, 1997 and 1996 were $515,051 and $390,534, respectively
(see note five). The Company recognizes realized trust income on these
merchandise trusts in current cemetery revenues as trust earnings accrue to
defray inflation costs recognized related to the unpurchased cemetery
merchandise. Additionally, a portion of the proceeds from the sale of cemetery
property is required by state law to be paid into perpetual care trust funds.
Earnings from these trusts are recognized in current cemetery revenues and are
intended to defray cemetery maintenance costs, which are expensed as incurred.
Perpetual care funds trusted at December 31, 1997 and 1996 were $371,984 and
$318,868, respectively, which approximates fair value. The principal of such
perpetual care trust funds generally cannot be withdrawn by the Company and
therefore is not included in the consolidated balance sheet. For the three years
ended December 31, 1997, the earnings recognized from all cemetery trusts were
$74,971, $51,601 and $33,795, respectively.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as a purchase are
included in "Names and reputations" and generally amortized on a straight line
basis over 40 years which, in the opinion of management, is not necessarily the
maximum period benefited. Fair values determined at the date of acquisition are
determined by management or independent appraisals. Many of the Company's
acquired funeral service locations have been providing high quality service to
client families for many years. Such loyalty often forms the basic valuation of
the funeral business. Additionally, the death care industry has historically
exhibited stable cash flows as well as a low failure rate. The Company monitors
the recoverability of names and reputations based on projections of future
undiscounted cash flows of the acquired businesses. The amortization charged
against income was $37,649, $33,836 and $25,226 for the three years ended
December 31, 1997, respectively. Accumulated amortization of names and
reputations as of December 31, 1997 and 1996 was $136,398 and $101,426,
respectively.
Derivatives: Amounts to be paid or received under interest rate swaps,
including the interest rate provisions of the cross-currency swaps, are recorded
on the accrual basis over the life of the swap agreements as an adjustment to
interest expense. The related net amounts payable to, or receivable from, the
counterparties are included in accrued liabilities or current receivables,
respectively. Gains and losses resulting from currency movements on the
cross-currency swaps that hedge the Company's net foreign investments are
reflected in stockholders' equity, with the related net amounts due to, or from,
the counterparties included in other liabilities, or other assets, respectively.
Net deferred gains and losses on early termination of interest rate swaps are
being amortized into interest expense over the remaining lives of the original
agreements ($394 net unamortized loss at December 31, 1997).
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
28
<PAGE> 42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THREE
ACQUISITIONS
The Company acquired certain funeral and cemetery operations both domestically
and internationally during the years ended December 31, 1997 and 1996. The
operating results of these acquisitions have been included since their
respective dates of acquisition. The following table is a summary of the
acquisitions made during the two years ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Number acquired:
Funeral service locations................................. 294 210
Cemeteries................................................ 51 35
Crematoria................................................ 19 9
Purchase price.............................................. $643,000 $362,651
</TABLE>
The purchase price in both years consisted primarily of combinations of
cash, Company common stock, issued and assumed debt.
The effect of the above acquisitions on the consolidated balance sheet at
December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current assets.............................................. $ 38,569 $ 30,542
Prearranged funeral contracts............................... 86,452 61,994
Long-term receivables....................................... 31,522 (10,559)
Cemetery property........................................... 298,466 210,507
Property, plant and equipment............................... 162,992 93,482
Deferred charges and other assets........................... 13,417 (1,244)
Names and reputations....................................... 215,204 164,414
Current liabilities......................................... (67,464) (62,817)
Long-term debt.............................................. (63,307) (32,532)
Deferred income taxes and other liabilities................. (120,340) (85,635)
Deferred prearranged funeral contract revenues.............. (106,439) (72,213)
Stockholders' equity........................................ (79,341) (16,619)
--------- --------
Cash used for acquisitions........................ $ 409,731 $279,320
========= ========
</TABLE>
NOTE FOUR
PREARRANGED FUNERAL ACCOUNTING
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreement is signed. Payments under these contracts are generally placed in
trust (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers in North America, the United Kingdom and
Australia or the Company's French prearranged funeral service life insurance
subsidiary ("Auxia"). Unperformed price guaranteed prearranged funeral contracts
are included in the consolidated balance sheet as "prearranged funeral
contracts" or, in the case of contracts funded by Auxia, "investments-insurance
subsidiary." A corresponding credit is recorded to "deferred prearranged funeral
contract revenues." Allowances for customer cancellations are provided at the
date of sale based on historical experience.
Amounts paid by the customer pursuant to the prearranged funeral contracts
are recognized in funeral revenue at the time the funeral is performed. Trust
earnings and increasing insurance benefits are accrued and deferred until the
service is performed at which time these funds are also recognized in funeral
revenues and are intended to cover future increases in the cost of providing a
price guaranteed funeral service. Included in
29
<PAGE> 43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred prearranged funeral contract revenues are net obtaining costs,
including sales commissions and certain other direct marketing costs, applicable
to prearranged funeral contracts which are deferred and will be expensed over a
period representing the average life of the prearranged contract.
PREARRANGED FUNERAL CONTRACTS
At December 31, 1997, $1,201,141 relate to trust funded contracts (which
includes $326,310 of amounts that have not yet been collected from customers)
and $1,409,491 relate to third party insurance funded contracts which will be
available to the Company at the time the funeral services are performed. At
December 31, 1996, $962,389 related to trust funded contracts ($235,433 due from
customers) and $1,196,959 relate to third party insurance funded contracts.
These amounts are shown net of estimated customer cancellations. The allowance
for cancellation is based on historical experience and is equivalent to
approximately 8% of the total balance. Accumulated realized earnings from trust
funds and increasing insurance benefits have been included to the extent that
they have accrued through December 31, 1997. The cumulative trust funded total
has been reduced by allowable cash withdrawals for realized trust earnings and
amounts retained by the Company pursuant to various state laws.
The cost and market value associated with the assets held in the trust
funds underlying the Company's prearranged funeral contracts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- --------------------
COST MARKET COST MARKET
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
Debt securities:
Government.......................... $333,626 $ 358,607 $245,736 $259,910
Corporate........................... 114,066 116,435 121,887 122,322
Equity securities..................... 411,489 461,016 164,630 208,082
Money market/other.................... 134,211 134,428 274,949 275,581
-------- ---------- -------- --------
$993,392 $1,070,486 $807,202 $865,895
======== ========== ======== ========
</TABLE>
INVESTMENTS -- INSURANCE SUBSIDIARY
As part of the Company's funding of prearranged funeral contracts, Auxia
invests in securities which are considered as "available-for-sale" with
unrealized gains and losses excluded from earnings and reported net of income
taxes in stockholders' equity.
The cost, market value and unrealized gains or losses related to Auxia's
debt and equity securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
UNREALIZED UNREALIZED
----------------- -----------------
COST MARKET GAINS LOSSES COST MARKET GAINS LOSSES
-------- -------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
Foreign government...................... $292,991 $296,320 $ 3,503 $ (174) $220,256 $236,443 $16,187 $ --
Corporate............................... 17,883 17,965 95 (13) 210,235 210,428 385 (192)
Equity securities......................... 141,512 162,129 23,640 (3,023) 96,157 96,735 6,166 (5,588)
Mutual funds:
Money market/other...................... 29,027 29,235 208 -- 27,749 27,942 193 --
Debt.................................... 53,276 53,276 -- -- 61,471 61,471 -- --
-------- -------- ------- ------- -------- -------- ------- -------
$534,689 $558,925 $27,446 $(3,210) $615,868 $633,019 $22,931 $(5,780)
======== ======== ======= ======= ======== ======== ======= =======
</TABLE>
30
<PAGE> 44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contractual maturities of Auxia's debt securities (at market value) as
of December 31, 1997, were as follows:
<TABLE>
<S> <C>
Within one year............................................. $ 2,809
After one year through five years........................... 168,575
After five years through ten years.......................... 107,303
After ten years............................................. 35,598
--------
$314,285
========
</TABLE>
The following table summarizes the activity in prearranged funeral
contracts and investments-insurance subsidiary:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Beginning balance........................................... $2,760,913 $2,368,932
Net sales................................................. 490,297 503,150
Acquisitions.............................................. 86,452 61,994
Realized earnings and increasing insurance benefits....... 164,853 111,950
Maturities................................................ (250,134) (249,705)
Increase in cancellation reserve.......................... (33,481) (25,962)
Distributed earnings, effect of foreign currency and
other.................................................. (33,540) (9,446)
---------- ----------
Ending balance.............................................. $3,185,360 $2,760,913
========== ==========
</TABLE>
DEFERRED PREARRANGED FUNERAL CONTRACT REVENUES
"Deferred prearranged funeral contract revenues" on the consolidated
balance sheet includes the contract amount of all price guaranteed prearranged
funeral service contracts as well as the accrued trust earnings and increasing
insurance benefits. Also included in deferred prearranged funeral contract
revenues are net obtaining costs applicable to prearranged funeral contracts.
The aggregate net costs deferred as of December 31, 1997 and 1996 were $190,595
and $151,008, respectively. The Company defers additional accruals of trust
earnings and insurance benefits as they are earned until the performance of the
funeral service. Upon performance of the funeral service, the Company recognizes
the fixed contract price as well as total accumulated trust earnings and
increasing insurance benefits as funeral revenues.
The following table summarizes the activity in deferred prearranged funeral
contract revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Beginning balance........................................... $2,725,770 $2,362,053
Net sales................................................. 509,447 512,497
Acquisitions.............................................. 106,439 72,213
Realized earnings and increasing insurance benefits....... 164,853 111,950
Maturities................................................ (255,147) (252,603)
Increase in cancellation reserve.......................... (33,481) (25,962)
Deferred obtaining costs.................................. (67,742) (61,421)
Effect of foreign currency and other...................... 13,218 7,043
---------- ----------
Ending balance.............................................. $3,163,357 $2,725,770
========== ==========
</TABLE>
31
<PAGE> 45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The recognition of future funeral revenues is estimated to occur in the
following years:
<TABLE>
<S> <C>
1998........................................................ $ 274,091
1999........................................................ 241,042
2000........................................................ 224,249
2001........................................................ 210,179
2002........................................................ 196,635
2003 through 2007........................................... 781,902
2008 and thereafter......................................... 1,235,259
----------
$3,163,357
==========
</TABLE>
NOTE FIVE
CEMETERY MERCHANDISE TRUST FUNDS
The cost and market value associated with the assets held in the cemetery
merchandise trust funds (included in current and long-term receivables, at cost)
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Debt securities:
Government............................... $169,823 $172,440 $ 72,394 $ 72,101
Corporate................................ 64,474 65,468 35,060 34,560
Equity securities.......................... 227,424 230,931 71,239 75,297
Money market/other......................... 53,330 53,254 211,841 211,896
-------- -------- -------- --------
$515,051 $522,093 $390,534 $393,854
======== ======== ======== ========
</TABLE>
NOTE SIX
INCOME TAXES
The provision for income taxes includes United States income taxes,
determined on a consolidated return basis, foreign and state and local income
taxes.
Income before income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
United States........................................ $474,478 $309,431 $257,318
Foreign.............................................. 105,495 104,450 36,893
-------- -------- --------
$579,973 $413,881 $294,211
======== ======== ========
</TABLE>
32
<PAGE> 46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) consisted of the following:
<TABLE>
<S> <C> <C> <C>
Current:
United States...................................... $157,450 $ 65,709 $ 43,396
Foreign............................................ 7,022 14,158 12,949
State and local.................................... 21,737 11,814 9,114
-------- -------- --------
186,209 91,681 65,459
-------- -------- --------
Deferred:
United States...................................... 15,045 45,330 39,767
Foreign............................................ 1,432 3,238 (1,498)
State and local.................................... 2,735 8,334 6,895
-------- -------- --------
19,212 56,902 45,164
-------- -------- --------
Total provision...................................... $205,421 $148,583 $110,623
======== ======== ========
</TABLE>
The Company made income tax payments of approximately $155,356, $99,377 and
$65,859, for the three years ended December 31, 1997, respectively. The
provision for income taxes for the year ended December 31, 1997, includes a
decrease to deferred taxes of $5,491 related to enacted tax law changes in the
United Kingdom and France.
The differences between the U.S. federal statutory tax rate and the
Company's effective rate were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Computed tax provision at the applicable U.S.
federal statutory income tax rate................ $202,991 $144,858 $102,974
State and local taxes, net of federal income tax
benefits......................................... 15,906 13,097 10,406
Dividends received deduction and tax exempt
interest......................................... (1,618) (2,108) (1,939)
Amortization of names and reputations.............. 5,622 4,765 4,554
Enacted foreign tax rate change.................... (5,491) -- --
Foreign jurisdiction tax rate difference........... (12,909) (11,849) (5,309)
Other.............................................. 920 (180) (63)
-------- -------- --------
Provision for income taxes....................... $205,421 $148,583 $110,623
-------- -------- --------
Total effective tax rate........................... 35.4% 35.9% 37.6%
======== ======== ========
</TABLE>
33
<PAGE> 47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and carry-forwards that give rise
to significant portions of deferred tax assets and liabilities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Receivables, principally due to sales of cemetery interment
rights and related products............................... $186,900 $152,069
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... 460,592 383,687
Property, plant and equipment, principally due to
depreciation and to purchase accounting adjustments....... 129,796 110,907
Other....................................................... 40,773 --
-------- --------
Deferred tax liabilities.................................... 818,061 646,663
-------- --------
Deferred revenue on prearranged funeral contracts,
principally due to earnings from trust funds.............. (50,862) (34,092)
Accrued liabilities......................................... (24,768) (38,337)
Carry-forwards and foreign tax credits...................... (21,053) (7,484)
Other....................................................... -- (4,367)
-------- --------
Deferred tax assets......................................... (96,683) (84,280)
-------- --------
Valuation allowance......................................... 15,327 6,128
-------- --------
Net deferred income taxes................................... $736,705 $568,511
======== ========
</TABLE>
During the three years ended December 31, 1997, tax expense resulting from
allocating certain tax benefits directly to capital in excess of par value
totaled $3,799, $2,410 and $1,165, respectively.
Current refundable income taxes and foreign current deferred tax assets are
included in other current assets, with current taxes payable and current
deferred taxes being reflected as "Income taxes" on the consolidated balance
sheet.
At December 31, 1997 and 1996, United States income taxes had not been
provided on $252,369 and $153,598, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention to reinvest such
earnings indefinitely.
As of December 31, 1997 the Company has United States foreign tax credit
carry-forwards of $5,311 which will expire in the years 2000 through 2002.
Various subsidiaries have federal and state operating loss carry-forwards of
$49,337 with expiration dates through 2012. The Company believes that some
uncertainty exists with respect to future realization of these tax credit and
loss carry-forwards, therefore a valuation allowance has been established for
the carry-forwards not expected to be realized. The increase in the valuation
allowance is primarily attributable to foreign tax credits and operating losses
generated in the current year.
34
<PAGE> 48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SEVEN
DEBT
Debt was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Bank revolving credit agreements and commercial paper....... $ 616,589 $ 325,875
6.375% notes due in 2000.................................... 150,000 150,000
6.75% notes due in 2001..................................... 150,000 150,000
8.72% amortizing notes due in 2002.......................... 141,108 165,761
8.375% notes due in 2004.................................... 51,840 200,000
7.375% notes due in 2004.................................... 250,000 --
7.2% notes due in 2006...................................... 150,000 150,000
6.875% notes due in 2007.................................... 150,000 150,000
6.95% amortizing notes due in 2010.......................... 58,859 61,576
7.70% notes due in 2009..................................... 200,000 --
Floating rate notes due in 2011 (putable in 1999)........... 200,000 --
7.875% debentures due in 2013............................... 55,627 150,000
7.0% notes due in 2015 (putable in 2002).................... 300,000 300,000
Medium term notes, maturities through 2019, fixed average
interest rate of 9.31%.................................... 35,720 186,040
Convertible debentures, interest rates range from
4.75% -- 5.5%, due through 2007, conversion price ranges
from $11.25 -- $43.72..................................... 45,673 44,140
Mortgage and other notes payable with maturities through
2015, average interest rate of 7.05%...................... 156,931 151,836
Deferred loan costs......................................... (13,078) (22,615)
---------- ----------
Total debt.................................................. 2,699,269 2,162,613
Less current maturities..................................... (64,570) (113,876)
---------- ----------
Total long-term debt........................................ $2,634,699 $2,048,737
========== ==========
</TABLE>
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consists of two committed facilities -- a 364-day facility and
5-year, multi-currency facility -- which are primarily used to support
commercial paper issuance and for general corporate needs.
The 364-day portion allows for borrowings up to $300,000. This facility
expires June 26, 1998, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may be converted into a 2
year term loan at the Company's option. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of 0.06% is
paid quarterly on the total commitment amount.
The 5-year facility allows for borrowings up to $700,000, including
$500,000 in various foreign currencies. This facility expires June 27, 2002.
Interest rates are based on various indices as determined by the Company. A
facility fee is paid quarterly on this facility's total commitment amount. The
facility fee, which ranges from 0.07% to 0.15%, is based on the Company's senior
debt ratings, and is currently set at 0.08%. At December 31, 1997, there was
$200,250 outstanding under this agreement at a weighted average interest rate of
5.19%.
As of December 31, 1997, there was $320,889 of commercial paper outstanding
backed by the above two facilities at a weighted average interest rate of 6.36%.
35
<PAGE> 49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The commercial paper borrowings and revolving notes generally have
maturities ranging from one to 90 days.
On October 3, 1997, Service Corporation International (Canada), ("SCIC"), a
wholly owned subsidiary of the Company, entered into a 364-day, $105,000
revolving credit agreement. This facility is used primarily to support
acquisition and working capital requirements of the Company's Canadian
subsidiaries. The facility fee is currently set at 0.08%. At December 31, 1997,
there was approximately $67,400 outstanding under this facility at an average
interest rate of 4.6%.
SCIC partially restructured its Canadian debt in March 1998, placing
approximately $147,000 into a new facility, replacing the immediately above
described facility. This new facility has a one year revolving period, and
allows SCIC, at its option, to convert to a five year term loan. This new
facility carries no facility fee. Interest rates are based on various indices as
determined by SCIC. The indebtedness has a put feature allowing the lender to
require the Company to purchase any outstanding indebtedness upon request.
The Company has several other bank lines of credit for approximately
$116,000 at rates similar to the primary revolving credit agreements. At
December 31, 1997, there was approximately $30,600 outstanding under those
agreements.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at December 31, 1997 are classified as long-term debt.
The Company uses these revolving credit agreements primarily to finance the
Company's ongoing acquisition programs. From time to time, the Company raises
debt and/or equity in the public markets to reduce its revolving credit facility
balances. The timing of these public debt or equity offerings is dependent on
numerous factors including market conditions, long and short term interest
rates, the Company's capitalization ratios and the outstanding balances under
the revolving credit facilities. Therefore, the Company has classified these
borrowings as long-term debt. Additionally, the Company has excluded these
borrowings from the five-year maturity of long-term debt disclosure due to the
uncertainty of the eventual term of the related debt. It is the Company's intent
to refinance such borrowings through the use of its credit agreements or other
long-term notes issued under a shelf registration filed with the Securities and
Exchange Commission (Commission).
During the first quarter of 1997, the Company initiated a tender offer for
three issues of its higher coupon debt and repurchased approximately $386,000 of
the three series, resulting in a $40,802 extraordinary loss, using commercial
paper and its revolving credit facility. In April 1997, the Company refinanced
these and other working capital borrowings by issuing $250,000 7.375% notes due
April 2004, and $200,000 7.7% notes due April 2009, which were sold through an
underwritten public offering as well as $200,000 of floating rate notes due
April 2011 (putable to the Company in April 1999) through a private placement.
In May 1996, the Company issued $300,000 of notes which were sold through
an underwritten public offering. These notes were issued in two tranches of
$150,000 each with maturities in June 2001 and 2006 and interest rates of 6.75%
and 7.2%, respectively. The proceeds of this offering were primarily used to
repay existing debt outstanding under the Company's revolving credit agreements.
Approximately $80,000 of the Company's facilities and cemetery properties
are pledged as collateral for the mortgage notes at December 31, 1997.
At December 31, 1997, the Company had $40,169 in letters of credit
outstanding primarily to guarantee funding of certain insurance claims.
In March 1998, the Company issued $500,000 of notes in an underwritten
offering pursuant to the Company's $1,000,000 shelf registration filed with the
Commission. These notes mature in 2008 as to the
36
<PAGE> 50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$200,000 and 2020 as to the $300,000 and have initial interest rates of 6.5% and
6.3%, respectively. The $300,000 notes contain certain early tender dates.
The aggregate principal payments on debt for the five years subsequent to
December 31, 1997, excluding amounts due to banks under revolving credit loan
agreements are: 1998-$64,570; 1999-$262,192; 2000-$193,285; 2001-$196,661 and
2002-$328,458.
Cash interest payments for the three years ended December 31, 1997 totaled
$162,521, $150,961 and $111,609, respectively.
Approximately $1,832,000 of the Company's debt consists of foreign
denominated debt of which approximately $1,504,000 was converted to foreign
currencies as a result of the cross-currency swaps.
Similarly, the stated coupons described above have substantially been
modified through the use of interest rate and cross-currency interest rate swaps
used in the management of interest rates within defined targets for fixed and
floating interest rate exposure. See note eight below.
During the three months ended December 31, 1997, pursuant to a shelf
registration filed with the Commission to be used exclusively for future
acquisitions, the Company guaranteed the following promissory notes issued
through subsidiaries in connection with various acquisitions of operations:
<TABLE>
<CAPTION>
SUBSIDIARY AMOUNT
---------- ------
<S> <C>
SCI Funeral Services of NY, Inc. .......................... (475)
SCI Indiana Funeral Services, Inc. ........................ (500)
SCI Illinois Services, Inc. ............................... (400)
SCI Michigan Funeral Services, Inc. ....................... (740)
SCI Illinois Services, Inc. ............................... (400)
SCI Michigan Funeral Services, Inc. ....................... (740)
SCI Illinois Services, Inc. ............................... (2,486)
SCI Texas Funeral Services, Inc. .......................... (678)
</TABLE>
NOTE EIGHT
DERIVATIVES
The Company enters into derivatives primarily in the form of interest rate
swaps and cross-currency interest rate swaps in combination with local currency
borrowings in order to manage its mix of fixed and floating rate debt and to
substantially hedge the Company's net investments in foreign assets. The Company
has procedures in place to monitor and control the use of derivatives and enters
into transactions only 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.
In general, cross-currency swaps convert US dollar debt into the respective
foreign currency of the Company's various foreign operations. Such
cross-currency swaps are used in combination with local currency borrowings to
substantially hedge the Company's net investment in foreign operations. The
cross-currency swaps generally include interest rate provisions to enable the
Company to additionally hedge a portion of the earnings of its foreign
operations. Accordingly, movements in currency rates that impact the swap are
generally offset by a corresponding movement in the value of the underlying
assets being hedged. Similarly, currency movements that impact foreign expense
due under the cross-currency interest rate swaps are
37
<PAGE> 51
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally offset by a corresponding movement in the earnings of the foreign
operation. The following tables present information about the Company's
derivatives:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
WEIGHTED AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET ---------------- FAIR
AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE
---------- ------------ --------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
US dollar fixed to US dollar floating.... $ 450,000 $ -- 2001-2002 6.53% 5.89% $ 4,392
US dollar fixed to US dollar floating.... 300,000 -- 2004-2006 7.02% 5.78% 14,295
US dollar fixed to US dollar floating.... 200,000 -- 2009 7.43% 5.76% 12,264
US dollar floating to US dollar fixed.... 200,000 -- 2004 5.81% 5.72% 783
Canadian dollar floating to Canadian
dollar fixed........................... 78,138 -- 1999 2.64% 3.97% (4,024)
Canadian dollar floating to Canadian
dollar fixed........................... 38,456 -- 2007 1.41% 1.95% (1,927)
Canadian dollar floating to Canadian
dollar fixed effective 11/98........... 94,777 -- 2003 -- -- (5,559)
Australian dollar floating to Australian
dollar fixed........................... 42,270 -- 2006 5.91% 7.81% (3,672)
French franc floating to German mark
floating............................... 81,820 -- 2006 3.69% 3.99% (1,479)
French franc fixed to German mark
floating............................... 82,152 -- 2006 6.80% 5.38% 3,036
German mark floating to French franc
fixed.................................. 82,152 -- 2003 5.38% 6.20% (4,903)
Cross-Currency Interest Rate Swaps:
US dollar fixed to French franc fixed.... 250,000 44,736 2000-2002 6.05% 5.89% 42,540
US dollar fixed to French franc fixed.... 150,000 26,722 2007 7.00% 6.93% 20,516
US dollar fixed to French franc
floating............................... 100,000 13,183 2006 7.20% 3.93% 18,408
US dollar fixed to German mark
floating............................... 100,000 17,861 2003 5.37% 3.25% 19,016
US dollar fixed to British pound fixed... 385,386 (23,509) 2002-2004 8.46% 8.43% 20,181
US dollar fixed to British pound
floating............................... 28,222 (1,949) 2002 8.72% 7.94% (28,581)
US dollar floating to Australian dollar
fixed.................................. 132,296 11,526 1999-2000 5.91% 6.51% (36,676)
US dollar floating to Australian dollar
floating............................... 59,196 4,571 2000-2003 5.91% 5.07% 49,937
US dollar fixed to Canadian dollar
floating............................... 100,000 5,223 2010 6.95% 4.83% 7,264
US dollar fixed to Canadian dollar
floating............................... 81,727 3,589 1999 6.66% 3.94% 4,849
US dollar floating to French franc
fixed.................................. 117,834 (4,189) 2000 5.88% 4.23% (3,943)
---------- -------- --------
$3,154,426 $ 97,764 $126,717
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
WEIGHTED AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET ---------------- FAIR
AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE
---------- ------------ --------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
US dollar fixed to US dollar floating.... $ 525,000 $ -- 1999-2002 6.36% 5.57% $ (3,383)
US dollar fixed to US dollar floating.... 50,000 -- 2006 6.50% 5.50% (744)
Canadian dollar floating to Canadian
dollar fixed........................... 40,134 -- 1999 2.94% 7.57% (3,096)
Canadian dollar floating to Canadian
dollar fixed (effective 11/98)......... 98,911 -- 2003 -- -- (984)
Australian dollar floating to Australian
dollar fixed (effective 12/97)......... 51,656 -- 2006 -- -- 745
French franc floating to German mark
floating............................... 94,808 -- 2006 3.50% 3.47% (2,683)
French franc fixed to German mark
floating............................... 95,194 -- 2006 6.80% 5.10% (1,226)
German mark floating to French franc
fixed.................................. 95,194 -- 1998 5.10% 6.20% (193)
</TABLE>
38
<PAGE> 52
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
WEIGHTED AVERAGE
CARRYING INTEREST RATE
NOTIONAL AMOUNT ASSET ---------------- FAIR
AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE
---------- ------------ --------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Cross-Currency Interest Rate Swaps:
US dollar fixed to French franc fixed.... 350,000 16,972 2002-2003 6.20% 5.94% 466
US dollar fixed to French franc fixed.... 150,000 7,151 2007 7.00% 6.93% (4,317)
US dollar fixed to French franc
floating............................... 100,000 (599) 2006 7.20% 3.74% 2,686
US dollar fixed to British pound fixed... 405,109 (40,394) 2002-2004 8.47% 7.98% 21,816
US dollar fixed to British pound
floating............................... 33,152 (3,477) 2002 8.72% 6.56% (37,755)
US dollar floating to British pound
floating............................... 76,375 (4,113) 1997 5.50% 6.30% (4,136)
US dollar floating to Australian dollar
fixed.................................. 67,568 (10,881) 1999-2000 5.63% 7.02% (54,636)
US dollar floating to Australian dollar
floating............................... 29,436 (5,531) 2000 5.63% 5.93% 38,604
US dollar fixed to Canadian dollar
fixed.................................. 75,000 133 1999 6.66% 6.64% (2,463)
US dollar fixed to Canadian dollar
floating............................... 100,000 1,089 2010 6.95% 3.54% (2,939)
---------- -------- --------
$2,437,537 $(39,650) $(54,238)
========== ======== ========
</TABLE>
At December 31, 1997, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding $150,000 of Provident debt)
consists of approximately $1,078,000 of fixed interest rate debt at a weighted
average rate of 7.00% and approximately $1,386,000 of floating interest rate
debt at a weighted average rate of 5.50%. Additionally, approximately $1,832,000
of the Company's debt consists of foreign denominated debt.
Interest rate swap settlements are generally semiannual and match the
coupons of the underlying debt or related intercompany loan payments on the
foreign operations being hedged. In addition, as of December 31, 1997, $566,594
of the interest rate swaps contain provisions which require termination of the
swap or convert the swap to a new index if certain interest rate conditions are
met. In the cross-currency swaps, the notional amounts are exchangeable in
accordance with the terms of the swaps: at maturity for nonamortizing swaps or
according to defined amortization tables. Maturities of notional amounts
relating to derivative financial instruments held on December 31, 1997, are as
follows: 1999- $183,280; 2000-$406,152; 2001-$150,000; 2002-$541,108; and
thereafter -- $1,873,886.
NOTE NINE
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. The carrying amounts of
cash and cash equivalents, trade receivables and accounts payable approximate
fair values due to the short-term maturities of these instruments. The carrying
value of Provident's receivables approximates fair value as the majority of the
loan portfolio carries market rates of interest. It is not practicable to
estimate the fair value of receivables due on cemetery contracts or prearranged
funeral contracts (other than cemetery merchandise trust funds and prearranged
funeral trust funds, see notes four and five) without incurring excessive costs
because of the large number of individual contracts with varying terms. The
investments of the Company's insurance subsidiary are reported at fair value in
the consolidated balance sheet.
The Company has entered into various derivative financial instruments with
major financial institutions to hedge fluctuation exposures in interest and
foreign exchange rates (swap agreements). Fair values were obtained from
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. The net fair value of the
Company's various swap agreements at December 31, 1997 is an asset of $126,717
(see note eight). At December 31, 1996, the net fair value was a liability of
$54,238. The fair value
39
<PAGE> 53
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's swap agreements may vary substantially with changes in interest
and currency rates. The Company's credit exposure is limited to the sum of the
fair value of positions that have become favorable to the Company and any
accrued interest receivable due from counterparties. Potential credit exposure
is dependent upon the maximum adverse impact of interest and currency movement.
Such potential credit exposure is minimized by selection of counterparties from
a limited group of high quality institutions and inclusion of certain contract
provisions. Management believes that any credit exposure with respect to its
favorable positions at December 31, 1997 is remote (see note eight).
Fair value of debt was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Bank revolving credit agreements and commercial paper....... $ 616,589 $ 325,875
6.375% notes due in 2000.................................... 150,285 149,220
6.75% notes due in 2001..................................... 151,755 149,876
8.72% amortizing notes due in 2002.......................... 150,266 174,861
8.375% notes due in 2004.................................... 57,055 215,404
7.375% notes due in 2004.................................... 260,725 --
7.2% notes due in 2006...................................... 155,730 150,087
6.875% notes due in 2007.................................... 152,265 146,154
6.95% notes due in 2010..................................... 60,336 60,388
7.70% notes due in 2009..................................... 214,980 --
Floating rate notes due in 2011 (putable in 1999)........... 200,000 --
7.875% debentures due in 2013............................... 61,001 155,048
7.0% notes due in 2015 (putable in 2002).................... 336,840 307,938
Medium term notes, maturities through 2018, fixed average
interest rate of 9.31%.................................... 43,636 214,178
Convertible debentures, interest rates range from
4.75% -- 5.5%, due through 2007, conversion price ranges
from $11.25 -- $43.72..................................... 83,258 39,243
Mortgage and other notes payable with maturities through
2015, average interest rate of 7.05%...................... 138,379 154,720
---------- ----------
Total debt........................................ $2,833,100 $2,242,992
========== ==========
</TABLE>
The fair value of the fixed rate long-term borrowings was estimated by
discounting the future cash flows, including interest payments, using rates
currently available for debt of similar terms and maturity, based on the
Company's credit standing and other market factors. The carrying value of
convertible securities has been estimated based on the respective shares of SCI
common stock into which such securities may be converted. The carrying value of
the Company's revolving credit agreements approximate fair value because the
rates on such agreements are variable, based on current market conditions.
Provident is a party to financial instruments with potential credit risk.
The financial instruments result from loans made in the normal course of
business to meet the financing needs of borrowers who are principally
independent funeral home and cemetery operators. These financial instruments
also include loan commitments of approximately $50,000 at December 31, 1997
($55,017 at December 31, 1996) to extend credit. Provident's total loans
outstanding at December 31, 1997 were approximately $199,000. Provident
evaluates each borrower's creditworthiness and the amount loaned and collateral
obtained, if any, is determined by this evaluation.
The Company grants credit in the normal course of business and the credit
risk with respect to these trade, cemetery and prearranged funeral receivables
due from customers is generally considered minimal
40
<PAGE> 54
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
because of the wide dispersion of the customers served. Procedures are in effect
to monitor the creditworthiness of customers and bad debts have not been
significant in relation to the volume of revenues.
Customer payments on prearranged funeral contracts that are placed in state
regulated trusts or used to pay premiums on life insurance contracts generally
do not subject the Company to collection risk. Insurance funded contracts are
subject to supervision by state insurance departments and are protected in the
majority of states by insurance guaranty acts.
NOTE TEN
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
<TABLE>
<S> <C>
1998........................................................ $62,462
1999........................................................ 44,340
2000........................................................ 32,928
2001........................................................ 24,517
2002........................................................ 19,481
Thereafter.................................................. 79,160
</TABLE>
The majority of these operating leases contain one of the following
options: (a) purchase the property at the fair value at date of exercise, (b)
purchase the property for a value determined at the inception of the lease or
(c) renew for the fair rental value at the end of the primary term of the lease.
Some of the equipment leases contain residual value exposures. For the three
years ended December 31, 1997, rental expense was $71,225, $64,073 and $47,848,
respectively.
The Company has entered into management, consultative and noncompetition
agreements (generally for five to 10 years) with certain officers of the Company
and former owners and key employees of businesses acquired. During the three
years ended December 31, 1997, $68,667, $55,688 and $55,419, respectively, were
charged to expense. At December 31, 1997, the maximum estimated future expense
under all agreements with a remaining term in excess of one year is $321,265,
including $11,477 with certain officers of the Company.
The Company has a minimum purchase agreement with a major casket
manufacturer for its North American operations. The agreement contains
provisions to increase the minimum annual purchases for normal price increases
and for the maintenance of product quality. The agreement expires in December
1998 and contains a remaining purchase commitment of $54,815. During the three
years ended December 31, 1997, the Company purchased caskets for $57,574,
$54,431 and $48,828, respectively, under this agreement.
NOTE ELEVEN
CONVERTIBLE PREFERRED SECURITIES OF SCI FINANCE LLC
During 1997, the Company redeemed all the outstanding shares of its
convertible preferred shares into 11,178,522 shares of Company common stock and
cash.
NOTE TWELVE
STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock, $1
per share par value. No shares were issued as of December 31, 1997. At December
31, 1997, 500,000,000 common shares of $1 par value were authorized, 252,923,784
shares were issued and outstanding (236,193,427 at December 31, 1996), net of
66,373 shares held, at cost, in treasury (9,813 at December 31, 1996).
41
<PAGE> 55
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has benefit plans whereby shares of the Company's common stock
may be issued pursuant to the exercise of stock options granted to officers and
key employees. The plans allow for options to be granted as either non-qualified
or incentive stock options. The options are granted with an exercise price equal
to the then current market price of the Company's common stock. The options are
generally exercisable at a rate of 33 1/3% each year unless, at the discretion
of the Company's Compensation Committee of the Board of Directors, alternative
vesting methods are allowed. At December 31, 1997, 15,668,000 options had been
granted to officers and key employees of the Company which contain alternative
vesting methods. Under the alternative vesting methods, partial or full
accelerated vesting will occur when the price of Company common stock reaches
pre-determined prices. If the pre-determined stock prices are not met in the
required time period, the options will fully vest in periods ranging from seven
to nine years from date of grant. At December 31, 1997 and 1996, 7,628,350 and
14,802,500 shares, respectively, were reserved for future option grants under
all stock option plans.
The following tables set forth certain stock option information:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994......................... 10,374,052 $12.01
Granted................................................ 2,854,000 16.35
Exercised.............................................. (668,552) 7.53
Cancelled.............................................. (977,668) 12.81
---------- ------
Outstanding at December 31, 1995......................... 11,581,832 13.27
---------- ------
Granted................................................ 2,239,200 22.63
Exercised.............................................. (724,425) 8.82
Cancelled.............................................. (47,338) 20.45
---------- ------
Outstanding at December 31, 1996......................... 13,049,269 15.09
---------- ------
Granted................................................ 7,144,150 30.37
Exercised.............................................. (775,716) 12.51
Cancelled.............................................. (104,252) 22.85
---------- ------
Outstanding at December 31, 1997......................... 19,313,451 $20.81
---------- ------
Exercisable at December 31, 1997......................... 9,488,214 $14.07
========== ======
Exercisable at December 31, 1996......................... 1,055,435
==========
Exercisable at December 31, 1995......................... 1,206,762
==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
- ---------------- ------------ ---------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 8.33- 9.41 272,004 1.7 $ 9.01 272,004 $ 9.01
12.88-18.38 9,827,954 9.0 13.83 8,334,298 13.34
20.09-29.59 4,756,993 4.6 25.64 881,912 22.60
31.56-33.31 4,456,500 3.5 31.76 -- --
------------ ---------- --- ------ --------- ------
$ 8.33-33.31 19,313,451 6.5 $20.81 9,488,214 $14.07
============ ========== === ====== ========= ======
</TABLE>
The Company's 1996 Incentive Plan reserves 12,000,000 shares of common
stock for future awards of stock options, restricted stock and other stock based
awards to officers and key employees of the Company. The Company's 1996
Non-qualified Incentive Plan reserves 4,000,000 shares of common stock for
future
42
<PAGE> 56
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
awards of nonqualified stock options to employees who are not officers of the
Company. Under the Company's 1995 Stock Plan for Non-Employee Directors,
non-employee directors automatically receive yearly awards of restricted stock
through the year 2000. Each award is for 3,000 shares of common stock and vests
after one year of service.
For the three years ended December 31, 1997, 73,000, 49,600 and 128,600
shares of restricted stock were awarded at average fair values of $33.35, $25.76
and $14.60, respectively.
The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the rights holders to purchase certain securities of the Company or the
acquiring company. The rights, which are redeemable by the Company for $.01 per
right, expire in July 1998 unless extended.
The Company has adopted the disclosure-only provisions of FAS 123,
"Accounting for Stock-Based Compensation," and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans. If
the Company had elected to recognize compensation cost for its option plans
based on the fair value at the grant dates for awards under those plans,
consistent with the method prescribed by FAS 123, net income and earnings per
share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income
As reported........................................ $333,750 $265,298 $183,588
Pro forma.......................................... 315,733 252,929 181,285
Basic earnings per share
As reported........................................ $ 1.36 $ 1.13 $ .92
Pro forma.......................................... 1.30 1.07 .91
Diluted earnings per share
As reported........................................ $ 1.31 $ 1.08 $ .86
Pro forma.......................................... 1.25 1.03 .85
</TABLE>
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1997, 1996 and 1995, respectively: dividend
yield of 1%, 1% and 1%; expected volatility of 26.6%, 25.3% and 25.3%; a risk
free interest rate of 6.5%, 6.8% and 5.8%; and an expected holding period of 8,
9 and 7 years.
NOTE THIRTEEN
RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all United States employees, a supplemental retirement plan for
certain current and former key employees (SERP), a supplemental retirement plan
for officers and certain key employees (Senior SERP), and a retirement plan for
non-employee directors (Directors' Plan).
For the pension plan, retirement benefits are generally based on years of
service and compensation. The Company annually contributes to the pension plan
an actuarially determined amount consistent with the funding requirements of the
Employee Retirement Income Security Act of 1974. Assets of the pension plan
consist primarily of bank money market funds, fixed income investments, and
marketable equity securities. The marketable equity securities include shares of
Company common stock with a value of $12,141 at
43
<PAGE> 57
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997. Most foreign employees are covered by various foreign
government mandated or defined contribution plans which are adequately funded
and are not considered material to the financial condition or results of
operations of the Company. The plans' liabilities and their related costs are
computed in accordance with the laws of the individual countries and appropriate
actuarial practices.
Retirement benefits under the SERP are based on years of service and
average monthly compensation, reduced by benefits under the pension plan and
Social Security. The Senior SERP provides retirement benefits based on years of
service and position. The Directors' Plan will provide an annual benefit to
directors following their retirement, based on a vesting schedule. The Company
purchased various life insurance policies on the participants in the SERP,
Senior SERP and Directors' Plan with the intent to use the proceeds or any cash
value buildup from such policies to assist in funding, at least to the extent of
such assets, the plans' funding requirements.
The net cost for the four defined plans described above were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.... $ 9,806 $ 8,550 $ 6,996
Interest cost on projected benefit obligation........ 10,033 9,400 9,114
Return on plan assets................................ (22,121) (13,341) (15,752)
Net amortization and deferral of gain................ 15,838 9,747 12,189
-------- -------- --------
$ 13,556 $ 14,356 $ 12,547
======== ======== ========
</TABLE>
The plans' funded status were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Vested benefit obligation................ $ 88,220 $ 38,388 $ 76,701 $ 40,130
======== ======== ======== ========
Accumulated benefit obligation........... $ 92,767 $ 39,754 $ 80,228 $ 40,245
======== ======== ======== ========
Projected benefit obligation............. $101,293 $ 39,840 $ 88,080 $ 40,280
Plans' assets at fair value.............. 125,166 -- 103,603 --
-------- -------- -------- --------
Plans' assets in excess (deficit) of
projected benefit obligation........... 23,873 (39,840) 15,523 (40,280)
Unrecognized net (gain) loss from past
experience and effects of changes in
assumptions............................ (5,539) 5,823 1,634 7,484
Prior service (benefit) cost not yet
recognized in net periodic pension
cost................................... (1,674) 8,364 (2,035) 10,749
-------- -------- -------- --------
Prepaid (accrued) pension cost........... 16,660 (25,653) 15,122 (22,047)
Adjustment for additional minimum
liability.............................. -- (14,101) -- (18,198)
-------- -------- -------- --------
Retirement plan asset (liability)........ $ 16,660 $(39,754) $ 15,122 $(40,245)
======== ======== ======== ========
</TABLE>
44
<PAGE> 58
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assumed rates were used in the determination of the plans'
funded status:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Discount rate used to determine obligations........... 7.25% 7.25% 7.5% 7.5%
Assumed rate of compensation increase................. 5.5 5.5 5.5 5.5
Assumed rate of return on plan assets................. 9.0 -- 8.5 --
</TABLE>
NOTE FOURTEEN
MAJOR SEGMENTS OF BUSINESS
The Company conducts funeral and cemetery operations in 17 countries and
offers financial services in the United States.
<TABLE>
<CAPTION>
FINANCIAL
FUNERAL CEMETERY SERVICES CORPORATE CONSOLIDATED
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
1997.............................. $1,727,003 $ 724,862 $ 16,537 $ -- $ 2,468,402
1996.............................. 1,663,387 612,421 18,386 -- 2,294,194
1995.............................. 1,166,247 463,754 22,125 -- 1,652,126
Income from operations:
1997.............................. $ 408,083 $ 271,897 $ 7,632 $ (66,781) $ 620,831
1996.............................. 380,841 214,721 8,890 (63,215) 541,237
1995.............................. 295,151 160,442 9,628 (53,600) 411,621
Identifiable assets:
1997.............................. $6,553,708 $3,309,431 $ 200,562 $ 243,162 $10,306,863
1996.............................. 5,905,246 2,638,775 148,193 177,556 8,869,770
1995.............................. 5,110,145 2,157,906 218,963 185,373 7,672,387
Depreciation and amortization:
1997.............................. $ 127,359 $ 21,611 $ 5 $ 8,575 $ 157,550
1996.............................. 103,696 18,601 9 7,513 129,819
1995.............................. 72,477 11,772 33 8,259 92,541
Capital expenditures:(1)
1997.............................. $ 273,191 $ 404,100 $ 2 $ 14,698 $ 691,991
1996.............................. 234,673 268,039 -- 11,582 514,294
1995.............................. 442,227 480,372 10 6,090 928,699
Number of operating locations at
year end (unaudited):
1997.............................. 3,244 441 -- -- 3,685
1996.............................. 2,987 390 -- -- 3,377
1995.............................. 2,836 360 -- -- 3,196
</TABLE>
- -----------------
(1) Includes $461,459, $321,142 and $803,468 for the three years ended December
31, 1997, respectively, for purchases of property, plant, and equipment and
cemetery property of acquired businesses.
45
<PAGE> 59
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic segment information was as follows:
<TABLE>
<CAPTION>
UNITED OTHER OTHER
STATES FRANCE EUROPEAN FOREIGN CONSOLIDATED
---------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
1997............................... $1,588,831 $ 485,264 $ 225,087 $169,220 $ 2,468,402
1996............................... 1,409,409 537,079 184,943 162,763 2,294,194
1995............................... 1,178,407 190,091 151,225 132,403 1,652,126
Income from operations:
1997............................... $ 471,237 $ 54,541 $ 44,747 $ 50,306 $ 620,831
1996............................... 400,622 52,204 37,376 51,035 541,237
1995............................... 314,698 18,743 34,214 43,966 411,621
Identifiable assets:
1997............................... $7,340,407 $1,171,877 $1,059,238 $735,341 $10,306,863
1996............................... 6,135,950 1,252,738 923,692 557,390 8,869,770
1995............................... 5,256,876 1,169,484 777,247 468,780 7,672,387
Number of operating locations at year
end (unaudited):
1997............................... 1,574 1,101 712 298 3,685
1996............................... 1,441 1,056 631 249 3,377
1995............................... 1,274 1,067 618 237 3,196
Number of funerals (unaudited):
1997............................... 231,243 148,223 102,985 50,678 533,129
1996............................... 217,471 150,269 92,491 50,039 510,270
1995............................... 198,682 49,298 81,101 44,381 373,462
</TABLE>
46
<PAGE> 60
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIFTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 41,264 $ 41,344
Commercial paper and temporary investments................ 5,613 2,787
---------- --------
$ 46,877 $ 44,131
========== ========
Receivables and allowances:
Current:
Trade accounts......................................... $ 312,931 $273,696
Cemetery contracts..................................... 269,503 236,578
Loans and other........................................ 80,109 69,174
---------- --------
662,543 579,448
---------- --------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 52,597 45,155
Unearned finance charges............................... 52,465 39,717
---------- --------
105,062 84,872
---------- --------
$ 557,481 $494,576
========== ========
Long-term:
Cemetery contracts..................................... $ 387,566 $311,847
Trusted cemetery merchandise sales..................... 486,139 371,400
Loans and other........................................ 207,687 206,897
---------- --------
1,081,392 890,144
---------- --------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 35,964 29,951
Unearned finance charges............................... 64,307 50,906
---------- --------
100,271 80,857
---------- --------
$ 981,121 $809,287
========== ========
</TABLE>
47
<PAGE> 61
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rates on cemetery contracts and loans and other notes receivable
range from 1.5% to 19.0% at December 31, 1997. Included in loans and other notes
receivable are $16,049 in notes with officers and employees of the Company, the
majority of which are collateralized by real estate, and $24,095 in notes with
other related parties.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cemetery property:
Undeveloped land.......................................... $1,234,321 $1,003,961
Developed land, lawn crypts and mausoleums................ 402,538 376,252
---------- ----------
$1,636,859 $1,380,213
========== ==========
Property, plant and equipment:
Land...................................................... $ 422,877 $ 355,017
Buildings and improvements................................ 1,152,235 1,017,334
Operating equipment....................................... 413,108 358,577
Leasehold improvements.................................... 46,853 45,606
---------- ----------
2,035,073 1,776,534
---------- ----------
Less: accumulated depreciation............................ (390,936) (319,459)
---------- ----------
$1,644,137 $1,457,075
========== ==========
Accounts payable and accrued liabilities:
Trade payables............................................ $ 63,868 $ 68,912
Dividends................................................. 18,975 14,189
Payroll................................................... 70,957 78,233
Interest.................................................. 31,665 28,984
Insurance................................................. 41,799 33,263
Bank overdraft............................................ 29,977 48,312
Other..................................................... 168,390 168,904
---------- ----------
$ 425,631 $ 440,797
========== ==========
</TABLE>
NON-CASH TRANSACTIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Common stock issued under restricted stock plans.... $ 2,405 $ 1,278 $ 1,868
Minimum liability under retirement plans............ (4,097) (2,235) 4,213
Debenture conversions to common stock............... 6,417 1,240 188,707
Common stock issued in acquisitions................. 83,173 15,823 109,277
Debt issued in acquisitions......................... 21,325 26,467 114,609
Conversion of preferred securities of SCI Finance
LLC............................................... 167,911 -- --
</TABLE>
48
<PAGE> 62
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEEN
EARNINGS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". All prior periods presented
have been restated to conform to this new standard. A reconciliation of the
numerators and denominators of the basic and diluted per share computations for
income before extraordinary item follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income (numerator):
Income before extraordinary item -- basic........ $374,552 $265,298 $183,588
After tax interest on convertible debentures..... 4,611 8,031 13,384
-------- -------- --------
Income before extraordinary item -- diluted...... $379,163 $273,329 $196,972
======== ======== ========
Shares (denominator):
Shares -- basic.................................. 245,470 235,299 199,603
Stock options and warrants.................... 4,827 3,919 3,709
Convertible debentures........................ 2,212 2,187 15,190
Convertible preferred securities of SCI
Finance LLC................................. 5,272 11,465 11,465
-------- -------- --------
Shares -- diluted................................ 257,781 252,870 229,967
======== ======== ========
Earnings per share before extraordinary item:
Basic............................................ $ 1.53 $ 1.13 $ .92
Diluted.......................................... $ 1.47 $ 1.08 $ .86
======== ======== ========
</TABLE>
NOTE SEVENTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST* SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
1997............................. $638,449 $601,141 $584,818 $643,994 $2,468,402
1996............................. 575,453 564,749 544,500 609,492 2,294,194
Gross profit:
1997............................. 188,152 163,183 151,772 184,505 687,612
1996............................. 160,168 144,063 131,378 168,843 604,452
Net income:
1997............................. 90,345 78,801 72,724 91,880 333,750
1996............................. 71,897 62,250 57,395 73,756 265,298
Basic earnings per share:
1997............................. .38 .33 .29 .36 1.36
1996............................. .31 .26 .25 .31 1.13
Diluted earnings per share:
1997............................. .36 .31 .28 .36 1.31
1996............................. .29 .25 .24 .30 1.08
</TABLE>
- -----------------
* The quarter ended March 31, 1997 includes (1) a $68,100 gain ($42,000 after
tax) on the sale of the Company's interest in ECI and (2) a $40,802
extraordinary loss (net of tax) on the early extinguishment of debt.
49
<PAGE> 63
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) OF PERIOD
----------- ---------- ---------- ----------- ------------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 1997.... $45,155 $23,400 $ 5,333 $(21,291) $ 52,597
Year ended December 31, 1996.... 34,147 14,187 6,638 (9,817) 45,155
Year ended December 31, 1995.... 20,156 8,853 10,904 (5,766) 34,147
Due After One Year -- Allowance for
contract cancellations and doubtful
accounts:
Year ended December 31, 1997.... $29,951 $ 6,202 $ 1,123 $ (1,312) $ 35,964
Year ended December 31, 1996.... 23,298 3,072 3,581 -- 29,951
Year ended December 31, 1995.... 16,086 2,999 4,689 (476) 23,298
</TABLE>
- -----------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily acquisitions and dispositions of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by PART III (Items 10, 11, 12 and 13) has been
omitted as the Company intends to file with the Commission not later than 120
days after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement (i) with
respect to Item 10 under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance", (ii) with respect to Items 11 and 13
under the captions "Certain Information with Respect to Officers and Directors",
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" and (iii) with respect to Item 12 under the caption "Voting
Securities and Principal Holders." The information as specified in the preceding
sentence is incorporated herein by reference. Notwithstanding anything set forth
in this Form 10-K, the information under the caption "Compensation Committee
Report on Executive Compensation" and under the captions "Overview of Executive
Compensation" and "Performance Graph" in such Proxy Statement are not
incorporated by reference into this Form 10-K.
The information regarding the Company's executive officers called for by
Item 401 of Regulation S-K has been included in PART I of this report.
50
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedule:
The financial statements and schedule are listed in the accompanying Index
to Financial Statements and Related Schedule on page 21 of this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 54-56 are
filed as part of this report.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
(c) Included in (a) above.
(d) Included in (a) above.
51
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Service Corporation International, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SERVICE CORPORATION INTERNATIONAL
Dated: March 27, 1998 By: JAMES M. SHELGER
-------------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
R. L. WALTRIP* Chairman of the Board and Chief March 27, 1998
- ------------------------------------------------------- Executive Officer
(R. L. Waltrip)
GEORGE R. CHAMPAGNE* Senior Vice President Chief Financial March 27, 1998
- ------------------------------------------------------- Officer (Principal Financial
(George R. Champagne) Officer)
WESLEY T. MCRAE Corporate Controller of SCI March 27, 1998
- ------------------------------------------------------- Management Corporation, a
(Wesley T. McRae) subsidiary of the Registrant
(Principal Accounting Officer)
ANTHONY L. COELHO* Director March 27, 1998
- -------------------------------------------------------
(Anthony L. Coelho)
DOUGLAS M. CONWAY* Director March 27, 1998
- -------------------------------------------------------
(Douglas M. Conway)
JACK FINKELSTEIN* Director March 27, 1998
- -------------------------------------------------------
(Jack Finkelstein)
A. J. FOYT, JR.* Director March 27, 1998
- -------------------------------------------------------
(A. J. Foyt, Jr.)
JAMES J. GAVIN, JR.* Director March 27, 1998
- -------------------------------------------------------
(James J. Gavin, Jr.)
JAMES H. GREER* Director March 27, 1998
- -------------------------------------------------------
(James H. Greer)
L. WILLIAM HEILIGBRODT* Director March 27, 1998
- -------------------------------------------------------
(L. William Heiligbrodt)
</TABLE>
52
<PAGE> 66
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
B. D. HUNTER* Director March 27, 1998
- -------------------------------------------------------
(B. D. Hunter)
JOHN W. MECOM, JR.* Director March 27, 1998
- -------------------------------------------------------
(John W. Mecom, Jr.)
CLIFTON H. MORRIS, JR.* Director March 27, 1998
- -------------------------------------------------------
(Clifton H. Morris, Jr.)
E. H. THORNTON, JR.* Director March 27, 1998
- -------------------------------------------------------
(E. H. Thornton, Jr.)
W. BLAIR WALTRIP* Director March 27, 1998
- -------------------------------------------------------
(W. Blair Waltrip)
EDWARD E. WILLIAMS* Director March 27, 1998
- -------------------------------------------------------
(Edward E. Williams)
* By JAMES M. SHELGER
-------------------------------------------------
(James M. Shelger, as Attorney-In-Fact
For each of the Persons indicated)
</TABLE>
53
<PAGE> 67
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Registration Statement No.
333-10867 on Form S-3).
3.2 -- Articles of Amendment to Restated Articles of
Incorporation. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended September 30,
1996).
3.3 -- Statement of Resolution Establishing Series of Shares of
Series C junior Participating Preferred Stock, dated
August 5, 1988. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended July 31, 1988).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.7 to Form 10-K for the fiscal year ended December 31,
1991).
4.1 -- Rights Agreement dated as of July 18, 1988 between the
Company and Texas Commerce Bank National Association.
(Incorporated by reference to Exhibit 1 to Form 8-K dated
July 18, 1988).
4.2 -- Amendment, dated as of May 10, 1990, to the Rights
Agreement, dated as of July 18, 1988, between the Company
and Texas Commerce Bank National Association.
(Incorporated by reference to Exhibit 1 to Form 8-K dated
May 10, 1990).
4.3 -- Agreement Appointing a Successor Rights Agent under
Rights Agreement, dated as of June 1, 1990, by the
Company and Ameritrust Company National Association.
(Incorporated by reference to Exhibit 4.1 to Form 10-Q
for the fiscal quarter ended June 30, 1990).
4.4 -- Undertaking to furnish instruments related to long-term
debt.
10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated
by reference to Exhibit 10.1 to Form 10-K for the fiscal
year ended December 31, 1991).
10.2 -- Agreement dated May 14, 1992 between the Company, R. L.
Waltrip and related parties relating to life insurance.
(Incorporated by reference to Exhibit 10.4 to Form 10-K
for the fiscal year ended December 31, 1992).
10.3 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1997, between SCI Executive
Services, Inc. and R. L. Waltrip. (Incorporated by
reference to Exhibit 10.3 to Form 10-K for the fiscal
year ended December 31, 1996).
10.4 -- Non-Competition Agreement and Amendment to Employment
Agreement, dated November 11, 1991, among the Company, R.
L. Waltrip and Claire Waltrip. (Incorporated by reference
to Exhibit 10.9 to Form 10-K for the fiscal year ended
December 31, 1992).
10.5 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and L. William Heiligbrodt.
10.6 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and W. Blair Waltrip.
10.7 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and John W. Morrow, Jr.
</TABLE>
54
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1995, between Service
Corporation International and Jerald L. Pullins.
10.9 -- Form of Employment Agreement pertaining to officers
(other than the officers identified in the preceding
exhibits).
10.10 -- Form of 1986 Stock Option Plan. (Incorporated by
reference to Exhibit 10.21 to Form 10-K for the fiscal
year ended December 31, 1991).
10.11 -- Amendment to 1986 Stock Option Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.11 to Form
10-K for the fiscal year ended December 31, 1996).
10.12 -- Amendment to 1986 Stock Option Plan, dated November 13,
1997.
10.13 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.14 -- First Amendment to Amended 1987 Stock Plan. (Incorporated
by reference to Exhibit 10.23 to Form 10-K for the fiscal
year ended December 31, 1993).
10.15 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 4.12 to Registration Statement
No. 333-00179 on Form S-8).
10.16 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated February 12, 1997. (Incorporated by reference to
Exhibit 10.15 to Form 10-K for the fiscal year ended
December 31, 1996).
10.17 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997.
10.18 -- Service Corporation International ECI Stock Option Plan.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the fiscal quarter ended September 30, 1994).
10.19 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.20 -- Amendment to 1995 Incentive Equity Plan, dated February
12, 1997. (Incorporated by reference to Exhibit 10.18 to
Form 10-K for the fiscal year ended December 31, 1996).
10.21 -- Amendment to 1995 Incentive Equity Plan, dated November
13, 1997.
10.22 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated
by reference to Annex A to Proxy Statement dated April
17, 1995).
10.23 -- 1996 Incentive Plan. (Incorporated by reference to Annex
A to Proxy Statement dated April 15, 1996).
10.24 -- Amendment to 1996 Incentive Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.22 to Form
10-K for the fiscal year ended December 31, 1996).
10.25 -- Amendment to 1996 Incentive Plan, dated November 13,
1997.
10.26 -- Split Dollar Life Insurance Plan. (Incorporated by
reference to Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 1995).
</TABLE>
55
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.27 -- Agreement for Reorganization, dated August 15, 1989 among
Morrow Partners, Inc., J.W. Morrow Investment Company,
John W. Morrow Jr., Billy Dee Davis and the Company;
Agreement-Not-To-Compete, dated August 15, 1989, between
John W. Morrow, Jr., Morrow Partners, Inc. and the
Company, and; Lease dated August 15, 1989, by John W.
Morrow, Jr. and Crawford A. Crim Funeral Home, Inc.
(Incorporated by reference to Exhibit 10.27 to Form 10-K
for the fiscal year ended December 31, 1989).
10.28 -- Supplemental Executive Retirement Plan for Senior
Officers (as Amended and Restated Effective as of
December 31, 1993). (Incorporated by reference to Exhibit
10.21 to Form 10-K for the fiscal year ended December 31,
1993).
10.29 -- First Amendment to Supplemental Executive Retirement Plan
for Senior Officers. (Incorporated by reference to
Exhibit 10.26 to Form 10-K for the fiscal year ended
December 31, 1994).
10.30 -- Second Amendment to Supplemental Executive Retirement
Plan for Senior Officers. (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the fiscal quarter ended
June 30, 1997).
10.31 -- Deferred Compensation Plan.
10.32 -- Second Supplemental Indenture, dated January 19, 1996,
between the Company and Texas Commerce Bank National
Association regarding Indenture dated May 1, 1970.
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Accountants (Coopers & Lybrand
L.L.P.).
24.1 -- Powers of Attorney.
27 -- Financial Data Schedules.
</TABLE>
In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.26 and 10.28 through
10.31.
56
<PAGE> 70
ANNEX 2
SCI 1998 Definitive Proxy Statement
SERVICE CORPORATION INTERNATIONAL
1929 ALLEN PARKWAY, P.O. BOX 130548
HOUSTON, TEXAS 77219-0548
----------------------
PROXY STATEMENT AND
1998 ANNUAL MEETING
NOTICE
----------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 14, 1998
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Service Corporation International
will be held in the Chase Auditorium, First Floor, Chase Center, 601 Travis,
Houston, Texas, on Thursday, May 14, 1998, at 10:00 a.m., Houston time, for the
following purposes:
(1) To elect two directors as members of the class of directors to
serve until the third succeeding Annual Meeting of Shareholders and until
their successors have been elected and qualified; and
(2) To act on such other business that may properly come before the
meeting or any adjournment(s) thereof.
The transfer books of the Company will not be closed, but only holders of
Common Stock of record at the close of business on March 26, 1998 will be
entitled to notice of and to vote at the Annual Meeting. A majority of the
outstanding stock entitled to vote is required for a quorum.
The management sincerely desires your presence at the meeting. However, so
that we may be sure that your vote will be included, please sign and date the
enclosed proxy and return it promptly in the enclosed stamped envelope. If you
attend the meeting, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
James M. Shelger, Secretary
Houston, Texas
April 8, 1998
<PAGE> 71
PROXY STATEMENT
SERVICE CORPORATION INTERNATIONAL
1929 ALLEN PARKWAY, P.O. BOX 130548 HOUSTON, TEXAS 77219-0548
SOLICITATION AND REVOCABILITY OF PROXIES
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of Service Corporation International, a Texas corporation
("SCI" or the "Company"), of proxies to be used at the Annual Meeting of
Shareholders to be held in the Chase Auditorium, First Floor, Chase Center, 601
Travis, Houston, Texas, on Thursday, May 14, 1998, at 10:00 a.m., Houston time,
and at any recess or adjournments thereof. This proxy statement and the
accompanying proxy are being mailed to shareholders on or about April 8, 1998. A
copy of the Annual Report to Shareholders of the Company for the fiscal year
ended December 31, 1997, including the consolidated financial statements, is
being mailed with this proxy statement to all shareholders entitled to vote at
the Annual Meeting.
At March 26, 1998, the Company had outstanding and entitled to vote
255,840,952 shares of Common Stock, $1.00 par value ("Common Stock"). The
holders of Common Stock will be entitled to one vote per share on each matter
considered (cumulative voting is not permitted). A majority of the votes
entitled to be cast must be represented at the Annual Meeting, in person or by
proxy, for a quorum to be present for the transaction of business. Only
shareholders of record at the close of business on March 26, 1998 will be
entitled to vote at the Annual Meeting. The affirmative vote of a majority of
the total shares represented in person or by proxy and entitled to vote at the
Annual Meeting is required for (a) the election of directors, and (b) the
approval of such other matters as may properly come before the meeting or any
adjournment thereof.
The enclosed proxy, even though executed and returned, may be revoked at
any time prior to its voting by a later dated proxy or by written notice of
revocation filed with the Secretary of the Company. Shareholders who attend the
Annual Meeting may revoke their proxies and vote in person.
In the election of directors, a shareholder has the right to vote the
number of his or her shares for as many persons as there are directors to be
elected. Abstentions are counted toward the calculation of a quorum. An
abstention has the same effect as a vote against the proposal or, in the case of
the election of directors, as shares to which voting power has been withheld.
Under Texas law, any unvoted position in a brokerage account with respect to any
matter will be considered as not voted and will not count toward a quorum as to
that matter.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, each with staggered
terms of three years. Two directors whose terms expire at this Annual Meeting
have been renominated for three-year terms expiring at the 2001 Annual Meeting
of Shareholders. The terms of office of the directors in the other two classes
expire at the Annual Meetings of Shareholders to be held in 1999 and 2000.
The enclosed proxy provides a means for the holders of Common Stock to vote
for all of the nominees listed therein, to withhold authority to vote for one or
more of such nominees or to withhold authority to vote for all of such nominees.
Each properly executed proxy received in time for the Annual Meeting will be
voted as specified therein, or if a shareholder does not specify how the shares
represented by his or her proxy are to be voted, such shares shall be voted for
the nominees listed therein or for other nominees as provided below.
Although the Board of Directors does not contemplate that any nominee will
be unable or unwilling to serve, if such a situation arises, the proxies that do
not withhold authority to vote for directors will be voted for a substitute
nominee(s) chosen by the Board.
<PAGE> 72
The following table sets forth, as to each nominee for election and each
director whose term will continue, such person's name and age, the committees on
which such person serves, the person's current principal occupation and the year
in which such person was first elected a director of the Company.
<TABLE>
<CAPTION>
DIRECTOR DIRECTOR
NAME PRINCIPAL OCCUPATION SINCE AGE
-------- -------------------- -------- ---
<S> <C> <C> <C>
DIRECTOR NOMINEES FOR TERMS EXPIRING AT THE 2001 ANNUAL MEETING:
B. D. Hunter(1).................. Chairman of the Board and Chief Executive 1986 68
Officer of Huntco, Inc. (intermediate steel
processor)
John W. Mecom, Jr.(2)............ Chairman of the Board of The John W. Mecom 1983 58
Co. (personal and family investments)
DIRECTORS WHOSE TERMS EXPIRE AT THE 1999 ANNUAL MEETING:
Jack Finkelstein(1)(3)(4)........ Personal and family trust investments 1965 70
James H. Greer(2)................ Chairman of the Board of Shelton W. Greer 1978 71
Co., Inc. (engineering, manufacturing,
fabrication and installation of building
specialty products)
L. William President and Chief Operating Officer of 1975 56
Heiligbrodt(1)(4)(5)........... the Company
Clifton H. Morris, Jr.(3)........ Chairman of the Board and Chief Executive 1990 62
Officer of AmeriCredit Corp. (financing of
automotive vehicles)
W. Blair Waltrip(1)(4)(5)........ Executive Vice President Operations of the 1986 43
Company
DIRECTORS WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING:
Anthony L. Coelho................ Consultant 1991 55
A. J. Foyt, Jr................... President of A. J. Foyt Enterprises, Inc. 1974 63
(designer, manufacturer, and exhibitor of
high-speed engines and racing vehicles and
marketer of automotive vehicles)
E. H. Thornton, Jr.(1)(2)(3)..... Attorney with Thornton & Burnett, Attorneys 1962 88
at Law
R. L. Waltrip(1)(4)(5)........... Chairman of the Board and Chief Executive 1962 67
Officer of the Company
Edward E. Williams(1)(3)(4)...... Henry Gardiner Symonds Professor and 1991 52
Director of the Entrepreneurship Program at
the Jesse H. Jones Graduate School of
Management at Rice University
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Investment Committee
(5) Member of Directors Stock Committee and 1996 Nonqualified Incentive Plan
Stock Option Committee
Each director has been engaged in his current principal occupation set
forth in the table during the last five years except as indicated below. Also
set forth below are certain other directorships held by directors.
2
<PAGE> 73
B. D. Hunter is a member of the Board of Directors of Cash America
International, Inc. and Celebrity, Inc.
James H. Greer is a member of the Board of Directors of AmeriCredit Corp.
and TEI, Inc.
L. William Heiligbrodt is a member of the Board of Directors of BJ Services
Company.
Since January 1990, W. Blair Waltrip also served as Chairman of the Board
and President of Service Corporation International (Canada) Limited, a Company
subsidiary which was 31% publicly owned until September 1995. Mr. W. Blair
Waltrip is a member of the Board of Directors of TEI, Inc. Mr. W. Blair Waltrip
is the son of Mr. R. L. Waltrip.
Since September 1997, Anthony L. Coelho has served as a consultant to
Telecommunications, Inc. From July 1995 to November 1997 Mr. Coelho served as
Chairman and Chief Executive Officer of Coelho Associates, L.L.C. (investment
consulting and brokerage firm) and served from October 1995 to September 1997 as
Chairman and Chief Executive Officer of ETC w/tci (training and communication
firm). Prior thereto, from January 1990 to June 1995, he was President and Chief
Executive Officer of Wertheim Schroder Investment Services, Inc. (asset
management firm) and from October 1989 to June 1995, Managing Director, Wertheim
Schroder & Co., Inc. (investment banking firm). Mr. Coelho is a member of the
Board of Directors of AutoLend Group, Inc., Cyberonics, Inc., ICF Kaiser
International, Inc., International Thoroughbred Breeders, Inc., ITT Educational
Services, Inc. and TEI, Inc.
R. L. Waltrip is a member of the Board of Directors of TEI, Inc.
Edward E. Williams is a member of the Board of Directors of Equus II
Incorporated.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held four meetings during 1997. Standing committees
of the Board include the Executive Committee, Audit Committee, Compensation
Committee, Investment Committee, Directors Stock Committee and 1996 Nonqualified
Incentive Plan Stock Option Committee.
The Executive Committee has authority to exercise many of the powers of the
Board between Board meetings, including selection on its own motion of nominees
for election to the Board. The Executive Committee held twelve meetings during
1997.
The primary function of the Audit Committee is to review the scope and
results of audits by the Company's independent and internal auditors, internal
accounting controls, non-audit services performed by the independent accountants
and the cost of all accounting and financial services. During 1997, the Audit
Committee held two meetings.
The Compensation Committee, which has the general duty to review and
approve compensation for officers, including the granting of bonuses and the
administration of the Company's stock and stock option plans, held four meetings
during 1997.
The Investment Committee's primary functions are to establish overall
guidelines and review the transactions in the investment portfolios of
independent trusts which hold funds collected by the Company and required to be
held in trust under various state laws. During 1997, the Investment Committee
held four meetings.
The Directors Stock Committee administers the 1995 Stock Plan For
Non-Employee Directors. The 1996 Nonqualified Incentive Plan Stock Option
Committee administers the 1996 Nonqualified Incentive Plan. These committees did
not hold any meetings in 1997.
During 1997, each incumbent director attended at least 75% of the total
number of meetings of the Board and committees on which he served.
3
<PAGE> 74
OVERVIEW OF EXECUTIVE COMPENSATION
During 1997, SCI enjoyed increased revenues and net income. In management's
opinion, SCI has generated excellent returns for its shareholders. For example,
an investment of $100 in SCI's stock at the end of 1992 would have been worth
$430 by year-end 1997, producing a total shareholder return (assuming quarterly
reinvestment of dividends) of 330% for this period. During the same period, a
$100 investment in the S&P 500 Index (assuming quarterly reinvestment of
dividends) would have been worth $252, which represents a 152% total return.
Thus, SCI's total shareholder return over the five-year period ended December
31, 1997 was more than two times the return generated by the broader market
index.
During 1997, the Company acquired 294 funeral service locations, 51
cemeteries and 19 crematoria. Including these acquisitions, the Company operated
3,127 funeral service locations, 392 cemeteries and 166 crematoria located in 17
countries on five continents as of the end of 1997.
SCI remains committed to a path of growth and continued focus on increasing
shareholder value. To achieve these aims, the Company's Board of Directors
believes that it is crucial to provide key employees with substantial incentive
compensation opportunities tied to performance. These incentive programs (which
are described in the Compensation Committee Report set forth below) are intended
to enable the Company to retain and attract the core talent needed to sustain
the results achieved over the last five years. The central focus of SCI's total
compensation program is intended to forge a direct link between the economic
interests of shareholders and management.
SCI's Board of Directors and employees are proud of the Company's
accomplishments in 1997.
4
<PAGE> 75
PERFORMANCE GRAPH
The following graph presents the Company's cumulative shareholder return
over the period from December 31, 1992 to December 31, 1997. The Company is
compared to the S&P 500 Index and to a Peer Group Index. Each Index assumes $100
invested at the close of trading on December 31, 1992 and is calculated assuming
quarterly reinvestment of dividends and quarterly weighting by market
capitalization.
The data source for the following graph is S&P Compustat Services.
COMPARISON OF CUMULATIVE SHAREHOLDER RETURN
1992-1997
<TABLE>
<CAPTION>
Measurement Period S&P 500
(Fiscal Year Covered) SCI Index Peer Group
<S> <C> <C> <C>
1992 100 100 100
1993 147 110 109
1994 157 112 113
1995 253 153 136
1996 325 189 165
1997 430 252 196
</TABLE>
Peer Group companies are: Airtouch Communications Inc., American Greetings
Corp., Corning Inc., The Dial Corporation., Harcourt General, Inc., Harris
Corporation, Jostens Inc., Minnesota Mining & Manufacturing Co., Pioneer Hi-Bred
International, TRW Inc., Viad Corp., and Whitman Corporation. These companies
are the same companies that previously made up the S&P Miscellaneous Index, with
the addition of Viad Corp. The Dial Corporation split into two companies (The
Dial Corporation and Viad Corp.) in 1996, so Viad Corp. has been added to the
group. Standard & Poor's discontinued its S&P Miscellaneous Index after 1995.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is a committee of
outside Directors chaired by Mr. E. H. Thornton, Jr. Other members are Mr. James
H. Greer and Mr. John W. Mecom, Jr. This Committee is responsible for reviewing
and approving all elements of the total compensation program for officers of the
Company, including long-term incentive arrangements. The Committee has ultimate
responsibility for aligning the Company's total compensation programs with its
business strategy and for assuring shareholders that pay delivery programs are
effective, responsible and competitive when compared to similarly situated
organizations. This Committee report documents the basis on which 1997
compensation determinations were made and further describes the components of
officer compensation programs for the Company.
5
<PAGE> 76
COMPENSATION PHILOSOPHY AND OBJECTIVES OF EXECUTIVE COMPENSATION PROGRAMS
It is the philosophy of the Company and the Committee that all compensation
programs should (1) link pay and performance, and (2) attract, motivate, reward
and retain the broad-based management talent required to achieve corporate
objectives. The Company also focuses strongly on stock-based compensation, since
this form of compensation provides the clearest link to enhanced shareholder
value. From time to time, the Committee works with compensation consultants to
assist with the design, implementation and communication of various compensation
plans. These programs include base salaries, annual performance-based incentives
and long-term incentives, all as further detailed below.
BASE SALARIES
Base salaries for the Company's officers in 1997 were reviewed through
comparisons with a group of approximately 83 companies of similar size (as
measured by revenues and level of earnings) across various industries (the
"Comparison Group"). The competitive pay data is not drawn from the entire group
of companies which comprise the Peer Group Index (formerly the S&P Miscellaneous
Index) reflected in the performance graph in this proxy statement, since the
Committee believes revenue size and earnings level comparisons are more
appropriate criteria for establishing base salary and annual incentive
compensation rates. There has been no attempt to tie together the performance
graph companies and the Comparison Group although there is some overlap between
the groups. The Committee does not consider any financial performance criteria
on a formula basis in determining salary increases. Rather, the Committee, using
its discretion, considers market base salary rates at the 75th percentile of
salaries of the Comparison Group, and considers earnings per share growth,
operating income growth, sales growth, and total shareholder return. The
Committee also makes a subjective review of individual performance in making
base salary decisions for officers. These criteria are assessed in a non-formula
fashion and are not weighted. All of the officers shown in the summary
compensation table (the "Named Executives") have employment agreements (see
"Executive Employment Agreements"). Under these agreements, the Committee has
the sole discretion for determining any increase in base salary; however, under
the agreements, base salaries may not be decreased. In 1997, the Named
Executives received salary increases averaging approximately eight percent over
the prior year. However, the size of increases ranged from a low of 6% to a high
of 13%. The current base salary levels for Named Executives are, overall,
consistent with the Company's philosophy of targeting the 75th percentile of
salaries of the Comparison Group. With respect to an item of compensation of an
executive, the term "75th percentile" means a level of compensation which is
greater than the compensation of peer executives at 75% of the companies in a
survey or selected group of companies.
ANNUAL INCENTIVE COMPENSATION
All of the Company's officers have a significant portion of their total
compensation at risk through annual incentive opportunities that are linked to
key financial and operational objectives for the Company on a consolidated
basis. The objective of this policy is to focus the Named Executives on the
attainment of objectives that the Committee believes are primary determinants of
share price over time. While the Committee has discretion to consider other
factors (including operating income growth, sales growth and total shareholder
return), the primary basis for determining awards is earnings per share growth.
Actual awards are proportionately decreased or increased on the basis of the
Company's earnings per share growth compared to target, subject to maximum award
amounts. Target award levels are set at approximately the 75th percentile of
annual incentive compensation of the Comparison Group. Payments are generally
made in cash and are subject to the discretion of the Committee to make downward
adjustments.
In the first quarter of 1997, the Committee established performance goals
for 1997. Annual incentive awards earned for 1997 performance were significantly
above target for the Named Executives because the Company's earnings per share
growth of 21% exceeded 1997 targeted levels of growth in earnings per share. No
corporate performance criterion or factor other than earnings per share growth
was considered for 1997.
6
<PAGE> 77
LONG-TERM INCENTIVE COMPENSATION
In recent years, the Committee has placed significant emphasis on
stock-based compensation for officers. In 1997, new long-term incentive awards
were granted to the Named Executives and other officers on two separate
occasions. The initial awards were made in January 1997 in the form of stock
option grants established at approximately the 90th percentile of long-term
incentive awards of a survey group of 24 companies (the "Survey Group") having
high earnings per share growth rates similar to the Company's. There has been no
attempt to tie together the performance graph companies and the Survey Group,
although there is overlap between companies in the S&P 500 Index and the Survey
Group. This grant was intended to represent a normal single-year option award
reflecting the Company's philosophy of focusing strongly on stock-based
compensation. For positions other than the Chief Executive Officer ("CEO"),
these stock options fully vest seven years after the grant date and have an
eight-year term. However, vesting is automatically accelerated if SCI's stock
price reaches certain pre-determined target levels within four years of the date
of grant as shown in the table below.
Following further analysis of marketplace pay levels for the Survey Group
and the Comparison Group and in light of the accelerated vesting of performance
options previously granted under the 1993 Long-Term Incentive Stock Option Plan,
the Committee chose to grant additional stock options in August 1997. In
determining the size of all 1997 option grants, the Committee did not consider
restricted stock and stock option grants made in prior periods or the number and
value of stock options held by such executives.
The January 1997 and August 1997 stock options were granted with exercise
prices equal to 100% of the fair market value of the Common Stock on the grant
dates. The terms and conditions of the August 1997 option grant were the same as
the January 1997 option grant (i.e., eight year term, seven year full vesting,
vesting acceleration for achievement of specified share price targets) except
that the share price targets were set at a higher level than the January grant.
The August 1997 option grants were made in amounts equal to approximately three
times the Survey Group's 75th to 90th percentile levels of annual long-term
incentive awards. The table below shows the stock price performance targets for
accelerated vesting under both 1997 stock option grants.
<TABLE>
<CAPTION>
TARGET SHARE PRICE
- ----------------------------
JANUARY GRANT AUGUST GRANT % OF EACH GRANT VESTING
- ------------- ------------ -----------------------
<S> <C> <C>
$45 $48 20%
$50 $56 50%
$55 $65 100%
</TABLE>
These stock price targets must be sustained for 10 consecutive trading days
within four years of the grant date before vesting is accelerated.
Certain officers other than the Named Executives also received grants of
restricted stock. The restricted stock grants were made to increase share
ownership levels of certain executives and to focus on total shareholder return
performance. The awards vest at a rate of 50% three years after grant, 25% four
years after grant, and 25% five years after grant.
1997 CHIEF EXECUTIVE OFFICER PAY
As described above, the Company manages its pay for all executives,
including the CEO, considering both a pay-for-performance philosophy and market
rates of compensation for each executive position. Specific actions taken by the
Committee regarding the CEO's compensation are summarized below.
Base Salary
In 1997, Mr. R. L. Waltrip's salary was increased from $798,000 to
$870,000, a 9% increase. This base salary is consistent with the Company's
philosophy of targeting the 75th percentile of the salaries of the Comparison
Group. Mr. Waltrip's base salary increase was determined on the same basis as
salary increases for other officers.
7
<PAGE> 78
Annual Incentive Compensation
The annual incentive earned by the CEO for 1997 performance was $2,333,400,
which was paid in cash. This annual incentive was calculated using a
performance/payout formula with earnings per share growth as the sole corporate
performance measure. The actual annual incentive award was above target since
the Company's earnings per share performance was well above target. While the
Committee had discretionary authority to make downward adjustments, the
Committee concluded the CEO's individual performance was at the same level as
the Company's earnings per share growth performance, so no downward adjustment
to the annual incentive calculation was made by the Committee.
Long-Term Incentive Compensation
The CEO received a grant of 365,500 stock options in January 1997. This
grant was equal to an annual grant at the 90th percentile of the Survey Group.
This award vests at a rate of 50% per year commencing one year after the grant
date. These stock options have an eight-year term and were granted with an
exercise price equal to 100% of fair market value of the Common Stock on the
grant date.
The CEO also received a second grant of 1.2 million stock options in August
1997. The grant is equal to three times a market 90th percentile annual award
for the Survey Group. These stock options have a term of eight years and were
granted with an exercise price equal to 100% of fair market value of the Common
Stock on the date of grant. The vesting of these stock options may be
accelerated based on the attainment of the August 1997 share price targets
discussed under the long-term incentive section of this report. The performance
sensitivity of this grant is built into the stock option concept, since the
executive receives no income from stock options unless the share price rises. It
is further enhanced by the feature that accelerates vesting based on the
achievement of significant increases in share price.
LIMITATION OF TAX DEDUCTION FOR EXECUTIVE COMPENSATION
Subject to certain exceptions, the Omnibus Budget Reconciliation Act of
1993 ("OBRA") prohibits publicly traded companies from receiving a tax deduction
on compensation paid to named executive officers in excess of $1 million
annually. Although the Committee has not adopted a policy relating to OBRA, the
Committee considers the OBRA restrictions when structuring compensation
programs. However, the Committee believes that compensation is more important
than tax deductibility in focusing management on its goal of increasing
shareholder value.
COMPENSATION COMMITTEE:
E.H. Thornton, Jr., Chairman
James H. Greer
John W. Mecom, Jr.
8
<PAGE> 79
CERTAIN INFORMATION WITH RESPECT TO OFFICERS AND DIRECTORS
CASH COMPENSATION
The following table sets forth information for the three years ended
December 31, 1997 with respect to the Chief Executive Officer and the four other
most highly compensated executive officers of the Company. The determination as
to which executive officers were most highly compensated was made with reference
to the amounts required to be disclosed under the "Salary" and "Bonus" columns
in the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ---------------------------------------------------------------------------------------------------------------------
RESTRICTED LONG-TERM
NAME AND OTHER ANNUAL STOCK STOCK INCENTIVE
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) AWARD OPTIONS PAYOUTS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. L. Waltrip 1997 $879,000 $2,333,400 $ 342,588 $ 0 1,565,500 $ 0
Chairman and 1996 844,000 2,170,500 266,976 0 440,000 740,300
Chief Executive Officer 1995 821,750 1,919,400 713,312 0 0 694,700
L. William Heiligbrodt 1997 660,000 1,729,900 195,720 0 1,204,500 0
President and 1996 566,000 1,238,400 192,998 0 400,000 441,100
Chief Operating Officer 1995 551,500 1,095,600 470,513 0 0 413,900
W. Blair Waltrip 1997 450,000 823,200 141,431 0 623,500 0
Executive Vice President 1996 416,000 800,800 125,090 0 200,000 234,700
Operations 1995 387,277 629,900 271,447 0 0 220,300
Jerald L. Pullins 1997 362,500 631,000 254,476 0 506,500 0
Executive Vice President 1996 320,000 598,400 260,535 0 0 0
International Operations 1995 290,000 436,500 95,800 170,625 400,000 0
John W. Morrow, Jr. 1997 340,000 573,700 97,723 0 356,500 0
Executive Vice President 1996 318,000 580,800 90,758 0 130,000 208,900
Special Services 1995 301,500 489,700 197,961 0 0 196,100
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------- ---------------
- --------------------------- ---------------
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION(3)
- --------------------------- ---------------
<S> <C>
R. L. Waltrip $284,126
Chairman and 272,234
Chief Executive Officer 78,580
L. William Heiligbrodt 74,451
President and 69,846
Chief Operating Officer 787
W. Blair Waltrip 42,252
Executive Vice President 41,238
Operations 830
Jerald L. Pullins 53,608
Executive Vice President 50,779
International Operations 735
John W. Morrow, Jr. 62,773
Executive Vice President 58,336
Special Services 1,481
- ------------------------------------------------------------
</TABLE>
(1) Salary includes director fees of $45,000 each for Messrs. R. L. Waltrip,
Heiligbrodt and W. Blair Waltrip for 1997.
(2) Figures include tax gross-up payments on restricted stock award vestings and
Interest Reimbursements. Figures also include other executive perquisites
and benefits, including, for 1997, $110,500 for Interest Reimbursement for
Mr. R. L. Waltrip; $43,890 for use of aircraft and $65,000 for Interest
Reimbursement for Mr. Heiligbrodt; $45,968 for use of aircraft and $39,000
for Interest Reimbursement for Mr. W. Blair Waltrip; $101,263 for expatriate
allowances for Mr. Pullins; and $34,125 for Interest Reimbursement for Mr.
Morrow. "Interest Reimbursement" means a payment to the individual as
reimbursement of interest paid by him on the loan from the Company described
in the fifth paragraph under "Certain Transactions."
(3) Consists of the following for 1997: $281,790 for split dollar life insurance
and $2,336 for term life insurance for Mr. R. L. Waltrip; $73,514 for split
dollar life insurance and $937 for term life insurance for Mr. Heiligbrodt;
$41,486 for split dollar life insurance and $766 for term life insurance for
Mr. W. Blair Waltrip; $52,762 for split dollar life insurance and $846 for
term life insurance for Mr. Pullins; and $61,134 for split dollar life
insurance and $1,639 for term life insurance for Mr. Morrow.
9
<PAGE> 80
STOCK OPTIONS
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SCI SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES PRICE PER EXPIRATION PRESENT
GRANT DATE GRANTED(1) IN 1997 SHARE(2) DATE VALUE(3)
---------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. L. Waltrip................... 01/02/97 365,500 5.1% $27.625 01/02/05 $ 4,219,076
08/12/97 1,200,000 16.8% 31.75 08/12/05 15,855,720
L. W. Heiligbrodt............... 01/02/97 304,500 4.3% 27.625 01/02/05 3,514,935
08/12/97 900,000 12.6% 31.75 08/12/05 11,891,790
W. Blair Waltrip................ 01/02/97 198,500 2.8% 27.625 01/02/05 2,291,345
08/12/97 425,000 5.9% 31.75 08/12/05 5,615,568
Jerald L. Pullins............... 01/02/97 106,500 1.5% 27.625 01/02/05 1,229,361
08/12/97 400,000 5.6% 31.75 08/12/05 5,285,240
John W. Morrow, Jr.............. 01/02/97 106,500 1.5% 27.625 01/02/05 1,229,361
08/12/97 250,000 3.5% 31.75 08/12/05 3,303,275
</TABLE>
- ---------------
(1) The stock options granted to Mr. R. L. Waltrip on January 2, 1997, vested
50% on January 2, 1998 and will vest 50% on January 2, 1999. The stock
options granted to R.L. Waltrip on August 12, 1997 and all stock options
granted to Messrs. Heiligbrodt, W. Blair Waltrip, Jerald L. Pullins and John
W. Morrow will vest upon the occurrence of certain events, including vesting
at seven years after the date of the grant, or earlier if the Common Stock
exceeds or equals certain target price levels during the first four years
from the date of grant. If the market price of the Common Stock exceeds or
equals the following target price for 10 consecutive trading days, the stock
options will vest as follows:
<TABLE>
<CAPTION>
1/2/97 GRANT 8/12/97 GRANT
TARGET SHARE PRICE TARGET SHARE PRICE OPTION VESTING
------------------ -------------------- --------------
<S> <C> <C>
$45 $48 20%
$50 $56 50%
$55 $65 100%
</TABLE>
Each option will also fully vest upon a change of control of the Company
(as defined in the plan).
(2) The exercise price for all grants is the market price at the date of grant.
(3) The present value of options is based on a present value model known as the
"Black-Scholes option pricing model" to arrive at the values shown. The
choice of such valuation method does not reflect any belief by the Company
that such a method, or any other valuation method, can accurately assign a
value to an option at the grant date. The assumptions used for valuing the
1/2/97 and 8/12/97 grants are: volatility rate of 26.8%; annual dividend
yield of 1.0%; and risk free interest rate of 6.6% and 6.5%, respectively.
10
<PAGE> 81
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND DECEMBER 31, 1997
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED AT DECEMBER 31, 1997 DECEMBER 31, 1997
ON VALUE ------------------------------ ---------------------------
NAME EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. L. Waltrip.............. 157,500 $1,666,870 3,320,000 1,785,500 $77,740,950 $12,777,469
L. William Heiligbrodt..... 112,500 1,190,621 2,100,000 1,404,500 48,580,300 10,366,906
W. Blair Waltrip........... 75,000 793,748 1,200,000 723,500 27,899,450 5,484,469
Jerald L. Pullins.......... 30,000 317,500 157,010 749,490 3,162,135 7,949,349
John W. Morrow, Jr......... 182,500 3,082,433 885,000 421,500 20,661,153 3,218,969
</TABLE>
- ---------------
(1) The amounts in the column represent shares of common stock of Equity
Corporation International ("ECI") for which options were held, except that
the amount for John W. Morrow, Jr. also includes 130,000 SCI shares acquired
on exercise of options. During 1997, the Company sold all of its shares of
common stock of ECI, and in connection therewith, the Company accelerated
the vesting of ECI stock options and allowed a cash-out by the option
holders in an amount equal to the stock appreciation over the exercise price
for the options held.
(2) The amounts in the column represent the amounts received by the option
holders upon cash-out of the ECI options by the Company, except that the
amount for John W. Morrow, Jr. also includes the value realized on the
exercise of options for 130,000 SCI shares.
RETIREMENT PLANS
Cash Balance Plan
The SCI Cash Balance Plan is a defined benefit plan. Each participant in
the plan has an account, which will be credited, each year that a participant
qualifies, with a Company contribution (based on annual compensation and years
of benefit service) and interest. The chart below is the percentage applied to
total compensation for determining the Company contribution for each
participant.
<TABLE>
<CAPTION>
PERCENTAGE OF
YEARS OF BENEFIT SERVICE COMPENSATION
------------------------ -------------
<S> <C>
Less than six years......................................... 5.5%
Six to ten years............................................ 6.5%
Eleven or more years........................................ 8.0%
</TABLE>
The maximum compensation used in computing benefits under the SCI Cash
Balance Plan for 1997 was limited to $160,000.
For 1997, interest for each account was credited at the annual rate of
5.25%.
Estimated Annual Benefits Payable at Age 65
<TABLE>
<CAPTION>
NAME ANNUAL BENEFIT
---- --------------
<S> <C>
R. L. Waltrip............................................... $118,852*
L. William Heiligbrodt...................................... 31,781
W. Blair Waltrip............................................ 89,317
Jerald L. Pullins........................................... 35,874
John W. Morrow, Jr.......................................... 17,143
</TABLE>
- ---------------
* Currently being paid.
Normal Retirement Age is defined in the SCI Cash Balance Plan as (1) the
date upon which a member attains age 65 or (2) in the case of an employee who
becomes a member of the SCI Cash Balance Plan after the age of 60, it will be
the fifth anniversary of the date that such member became a participant.
11
<PAGE> 82
The predecessor plan, the SCI Pension Plan, was restated and renamed the
SCI Cash Balance Plan effective October 1, 1993. The SCI Pension Plan, a defined
benefit plan, assumed employment continued to a normal retirement date of age
65. The annuity provided by the SCI Pension Plan, payable for life with 120
monthly payments certain, would provide a monthly benefit computed as follows:
40% of final average monthly compensation for the highest five consecutive years
multiplied by a fraction of which the numerator is the years of benefit service
(not to exceed 30) and the denominator is 30.
Employees at least age 60 years old with 10 years of benefit service on
September 30, 1993 will receive the greater of the benefit they would have
earned under the SCI Pension Plan or the benefit earned under the SCI Cash
Balance Plan.
The credited years of service under the SCI Cash Balance Plan as of
December 31, 1997, for the following named individuals are as follows: R. L.
Waltrip (41), L. William Heiligbrodt (10), W. Blair Waltrip (20), Jerald L.
Pullins (15) and John W. Morrow, Jr. (8).
Supplemental Executive Retirement Plan for Senior Officers
The Supplemental Executive Retirement Plan for Senior Officers ("SERP for
Senior Officers") is a non-qualified plan which covers officers and subsidiary
operating presidents, including the Named Executives. Benefits under the SERP
for Senior Officers do not consist of compensation deferred at the election of
participants. The amounts of benefits under the plan are set by the Compensation
Committee from time to time. The Compensation Committee has set current
guidelines such that the annual benefits will generally equal a percentage (75%
for the Chairman and the President, and lesser percentages for the other
officers) of a participant's 1997 annual base salary and target bonus, with the
benefits being reduced to the extent of the participant's benefits under Social
Security and the SCI Cash Balance Plan. The participant will be entitled at age
60 to the annual payment of the full amount of his benefit; if his employment
terminates earlier than age 60, he will be entitled to the annual payment of the
amount of his benefit multiplied by a fraction of which the numerator is the
participant's years of service and the denominator is the number of years from
the participant's hire date until he reaches age 60. These guidelines will not
be applied if the participant would have been entitled to higher benefits under
the Committee's previous guidelines.
Benefit payments will be made in the form of 180 monthly installments
commencing at the later of severance of employment or the attainment of age
fifty-five. Prior to retirement, if a participant dies or in the event of a
change of control of the Company (as defined in the SERP for Senior Officers),
the Company will promptly pay to each beneficiary or participant a lump sum
equal to the present value of the benefit that the participant would have been
entitled to receive if he had continued to accrue benefit service from the date
of death or the date of the change of control to the date of his 65th birthday.
Participants may elect to begin receiving monthly benefits at age 55, while
still employed, provided the participant gives written notice at least twelve
months prior to the attainment of age 55. Such installments will be reduced for
early commencement to reasonably reflect the time value of money.
The table below sets forth benefits for the Named Executives.
ANNUAL BENEFITS UNDER SERP FOR SENIOR OFFICERS
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
BENEFIT AT AGE 60
-----------------
<S> <C>
R. L. Waltrip............................................... $1,093,281(1)
L. William Heiligbrodt...................................... 655,021(2)
W. Blair Waltrip............................................ 574,580(2)
Jerald L. Pullins........................................... 267,980
John W. Morrow, Jr. ........................................ 260,098
</TABLE>
12
<PAGE> 83
- ---------------
(1) This is Mr. R. L. Waltrip's actual benefit which, pursuant to his election,
is being paid in the form of monthly installments beginning January 1, 1995.
(2) Current participants have the greater of the benefit they would have earned
under the previous guidelines or the amount provided by the current
guidelines. For Mr. Heiligbrodt and Mr. W. Blair Waltrip, the annual benefit
is the amount earned under the previous guidelines.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has executive employment agreements with its executive
officers, including Messrs. R. L. Waltrip, Heiligbrodt, W. Blair Waltrip,
Pullins and Morrow. The agreements have an initial term of five years for Mr. R.
L. Waltrip, four years for Mr. Heiligbrodt and three years for each of Messrs.
W. Blair Waltrip, Pullins and Morrow. The terms of the agreements for Messrs.
R.L. Waltrip and Pullins are automatically extended annually for an additional
year unless notice of nonrenewal is given by either party. Upon annual
authorization by the Compensation Committee of the Board of Directors, the terms
of the agreements for Messrs. Heiligbrodt, W. Blair Waltrip and Morrow are
extended for an additional year unless notice of nonrenewal is given by either
party. If such notice of nonrenewal is given by the Company or if notice is not
given of the Compensation Committee's decision to authorize renewal, the
employment period is extended so as to terminate the same number of years after
the date of such notice as the original term of the agreement. The agreements
provide for base salaries, which may be increased by the Board of Directors, and
the right to participate in bonus and other compensation and benefit
arrangements. As of March 26, 1998, the base salaries for Messrs. R. L. Waltrip,
Heiligbrodt, W. Blair Waltrip, Pullins and Morrow were $870,000, $645,000,
$425,000, $385,000 and $350,000, respectively.
In the event of termination of employment due to disability or death, the
executive or his estate will be entitled to receive any accrued and unpaid
salary or other compensation, a pro rata portion (based on the portion of the
year elapsed at the date of termination) of the highest bonus the executive
received in the preceding three years and continuation of welfare plan benefits.
If an executive is terminated without cause or by the executive for certain
specified reasons generally relating to a failure by the Company to honor the
terms of the employment agreement ("Good Reason"), he will be entitled to
continuation of compensation and certain other benefits for the remaining term
of his employment agreement. In the event of a change of control of the Company
(as defined in the agreements), the executive will be entitled to terminate his
employment for Good Reason, or without any reason during the 30-day period
beginning one year after the change of control (the "Window Period"), and
receive a lump-sum payment equal to (a) any accrued and unpaid salary or other
compensation plus (b) a pro rata portion (based on the portion of the year
elapsed at the date of termination) of the highest bonus the executive received
in the preceding three years plus (c) a multiple (equal to the number of years
in the initial term) of both the executive's base salary and his highest recent
bonus.
Upon termination of his employment, each executive will be subject, at the
Company's option, to a non-competition obligation for a period equal to the
number of years in the executive's initial term (except for Mr. R. L. Waltrip,
who has a 10-year non-competition obligation). If the Company elects to have the
non-competition provisions apply, during the non-competition period the Company
will make payments to the executive (other than Mr. R. L. Waltrip) at a rate
equal to his base salary at the time of termination, unless such termination was
for cause or if the executive terminates his employment other than for Good
Reason or during the Window Period, in which case the executive will be bound by
the non-competition provisions without the Company making the corresponding
payments. Any payments relating to the non-competition provisions will be
reduced to the extent the executive has received a lump-sum payment in lieu of
salary and bonus after termination of employment.
If any payments under the executive employment agreement or under the
benefit plans of the Company (including the Amended 1987 Stock Plan, the SERP
for Senior Officers, the 1993 Long-Term Incentive Stock Option Plan, the 1995
Incentive Equity Plan and the 1996 Incentive Plan) would subject the executive
to any excise tax under the Internal Revenue Code, the executive will also be
entitled to receive an additional
13
<PAGE> 84
payment in an amount such that, after the payment of all taxes (income and
excise), the executive will be in the same after-tax position as if no excise
tax had been imposed.
OTHER COMPENSATION
The Named Executives and certain other officers participate in the Split
Dollar Life Insurance Plan, under which they are owners of life insurance
policies providing death benefits to the Named Executives as follows: $2,000,000
for Mr. R. L. Waltrip; $1,500,000 for Mr. Heiligbrodt; and $1,000,000 each for
Messrs. W. Blair Waltrip, Pullins and Morrow. SCI advances the annual premium on
each policy, with the executive paying income tax on the term cost of the death
benefit. Each executive collaterally assigned an interest in the policy to SCI
in an amount equal to its cumulative premiums paid. SCI will recover its
cumulative premiums paid at the earlier of 15 years or death.
DIRECTOR COMPENSATION
The current rates of directors' and committee fees are $5,250 quarterly
plus $6,000 for each meeting of the Board attended (payable to all directors),
and $1,500 for each committee meeting attended (payable to non-employee
directors only).
In addition, directors or directors emeritus who are not employees of the
Company or its subsidiaries automatically receive yearly awards of restricted
Common Stock through 2000 pursuant to the 1995 Stock Plan For Non-Employee
Directors. Each award will be made on the second Thursday of May for an amount
of 3,000 shares. Each award will have a restriction period which will lapse on
the second Thursday in May of the year following the year the award is granted.
If the director terminates service as a director for any reason other than
disability or death prior to the lapse of the restriction period, the restricted
shares shall be forfeited. The restrictions shall lapse upon the occurrence of
death or total and permanent disability of the director or upon a change of
control of the Company (as defined in the plan). While the restrictions are in
effect, the shares cannot be sold, pledged or transferred. Except for the
restrictions described above, a participant in the plan who has been awarded
shares of restricted Common Stock has all the rights of a holder of Common
Stock, including the right to receive dividends paid on such shares and the
right to vote such shares. In 1997, each of the eleven directors who were not
employees and the director emeritus received an award of 3,000 shares under the
plan.
The Company maintains a Retirement Plan for Non-Employee Directors. Under
this plan, each of the directors who is not an employee of the Company,
including the director emeritus, was designated as a plan participant and will
be entitled to receive annual retirement benefits of $42,500 for ten years,
subject to a vesting schedule. The retirement benefits will vest in 25%
increments at the end of five years, eight years, eleven years and fifteen years
of credited service, except that the benefits will automatically vest 100% in
the event of death while a director or in the event of a change in control of
the Company (as defined in the plan).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, the members of the Compensation Committee of the Board of
Directors of the Company were Messrs. James H. Greer, John W. Mecom, Jr. and E.
H. Thornton, Jr. No member of the Compensation Committee was, during 1997, an
officer or employee of the Company or any of its subsidiaries, or was formerly
an officer of the Company or any of its subsidiaries or had any relationships
requiring disclosure by the Company.
14
<PAGE> 85
CERTAIN TRANSACTIONS
In August 1989, the Company acquired from J. W. Morrow Investment Company
its funeral home businesses located in Henderson, Texas and Charlotte, North
Carolina. John W. Morrow, Jr. was the primary shareholder of J. W. Morrow
Investment Company and was elected Executive Vice President of the Company in
August 1989. Mr. Morrow is currently the Executive Vice President Special
Services of the Company. In the August 1989 transaction, Mr. Morrow received
shares of Common Stock of the Company as his share of the acquisition price and,
in addition, entered a ten-year Agreement-Not-To-Compete with the Company. Under
the Agreement-Not-To-Compete, Mr. Morrow received a cash payment and monthly
payments scheduled to continue for a total of 96 months, which monthly payments
were completed and totaled $101,333 in 1997. Each of Mr. Morrow's adult children
entered a ten-year Agreement-Not-To-Compete under which the Company is obligated
to make monthly payments for the term of such agreements. The Company paid
$36,000 in 1997 under the children's agreements.
In 1997, the Company provided salary and bonus of $441,900, relocation
expenses of $41,321 and other benefits of $209,242 and granted stock options for
90,000 shares of Common Stock to T. Craig Benson, son-in-law of R. L. Waltrip,
in his capacity as a vice president of the Company.
In 1997, the Company paid $45,000 cash remuneration and awarded 3,000
restricted shares of Common Stock of the Company to Wanda A. McGee, mother of R.
L. Waltrip, in her capacity as director emeritus of the Company. Pursuant to a
resolution adopted by the Board in 1983, Ms. McGee is entitled as director
emeritus to receive such fees and other emoluments as may be paid or awarded to
directors of the Company.
In 1997, the Company leased vehicles to companies owned by Mr. R. L.
Waltrip and received rentals aggregating $45,788. The Company also leased
vehicles to a company owned by Mr. Heiligbrodt and received rentals aggregating
$51,852. All of the leases were entered at market rates and contain terms which,
in the opinion of management, are as favorable to the Company as could have been
negotiated with any third party.
In connection with grants of restricted stock under the Amended 1987 Stock
Plan, on August 19, 1993 the Company made loans of $1,700,000 to Mr. R. L.
Waltrip, $1,000,000 to Mr. Heiligbrodt, $600,000 to Mr. W. Blair Waltrip and
$525,000 to Mr. Morrow. The loans were made to enable such officers to pay the
estimated federal income taxes resulting from their receipt of the restricted
stock grants. Each of the loans remained outstanding in 1997, is due August 10,
2003 and bears interest at 6 1/2% per annum, which interest is reimbursed by the
Company (together with a tax gross-up payment on the interest).
Provident Services, Inc. and its subsidiaries ("Provident") provide various
types of financing in the funeral and cemetery industry, including loans to
certain employees and directors of the Company. Provident Services, Inc. is a
subsidiary of the Company. During 1997, Provident had outstanding loans of
$60,000 or more to officers and directors as set forth below. All such loans are
secured and contain terms which, in the opinion of management, are as favorable
to Provident as could have been negotiated with any third party.
T. Craig Benson, Vice President International Operations of the Company,
has a loan to exercise stock options at the prime rate, of which the largest
balance in 1997 was $83,751 and the year end balance was $73,751.
Gregory L. Cauthen, Vice President Treasurer of the Company, has a mortgage
loan at 7.10% interest, of which the largest balance in 1997 was $174,436 and
the year end balance was $162,389.
George R. Champagne, Senior Vice President and Chief Financial Officer of
the Company, has a mortgage loan at 8.3% interest, of which the largest balance
in 1997 was $475,000 and the year end balance was $467,615. In addition, Mr.
Champagne paid off in 1997 a loan for personal use at the prime rate, of which
the largest balance in 1997 was $134,206.
Anthony L. Coelho, a member of the Board of Directors of the Company, has a
mortgage loan at 7.20% interest, of which the largest balance in 1997 was
$466,692 and the year end balance was $418,922.
J. Daniel Garrison, Vice President-International Operations of the Company,
has a mortgage loan at 6.95% interest, of which the largest balance in 1997 was
$157,239 and the year end balance was $147,632.
15
<PAGE> 86
W. Mark Hamilton, Vice President Prearranged Funeral Services of the
Company, paid off in 1997 a loan for personal use at the prime rate, of which
the largest balance in 1997 was $104,375.
L. William Heiligbrodt, President and Chief Operating Officer of the
Company, has a mortgage loan at 7.70% interest, of which the largest balance in
1997 was $361,707 and the year end balance was $357,007. Mr. Heiligbrodt has a
mortgage loan at 7.60% interest, of which the largest balance in 1997 was
$95,806 and the year end balance was $94,565. Mr. Heiligbrodt has a mortgage
loan at 7.45% interest, of which the largest balance in 1997 was $128,634 and
the year end balance was $126,767. In addition, Mr. Heiligbrodt paid off in 1997
a loan for personal use at the prime rate, of which the largest balance in 1997
was $275,868.
Lowell A. Kirkpatrick, Jr., Vice President Operations, Finance and
Development of the Company, has a mortgage loan at 6.50% interest, of which the
largest balance in 1997 was $310,265 and the year end balance was $305,625. In
addition, Mr. Kirkpatrick paid off in 1997 a loan for personal use at the prime
rate, of which the largest balance in 1997 was $104,383.
Todd A. Matherne, Vice President Operations, Finance and Development of the
Company, paid off in 1997 a loan for personal use at the prime rate, of which
the largest balance in 1997 was $104,383.
Glenn G. McMillen, Senior Vice President Operations of the Company, has a
mortgage loan at 7.60% interest, of which the largest balance in 1997 was
$229,580 and the year end balance was $219,826. In addition, Mr. McMillen paid
off in 1997 a loan for personal use at the prime rate, of which the largest
balance in 1997 was $134,206.
John W. Morrow, Jr., Executive Vice President Special Services of the
Company, paid off in 1997 a loan for personal use at the prime rate, of which
the largest balance in 1997 was $151,338.
Henry M. Nelly, III, President of Provident Services, Inc., paid off in
1997 a mortgage loan at 9.10% interest, of which the largest balance in 1997 was
$102,500. Mr. Nelly paid off in 1997 a loan to exercise stock options at the
prime rate, of which the largest balance in 1997 was $104,375. Mr. Nelly paid
off in 1997 a loan for personal use at the prime rate, of which the largest
balance in 1997 was $134,206. In addition, Mr. Nelly paid off in 1997 a mortgage
loan at 7.75% interest, of which the largest balance in 1997 was $516,250.
Jerald L. Pullins, Executive Vice President-International Operations of the
Company, has a mortgage loan at 9.20% interest, of which the largest balance in
1997 was $378,575 and the year end balance was $354,541. In addition, Mr.
Pullins paid off a loan for personal use at the prime rate, of which the largest
balance in 1997 was $164,030.
Richard T. Sells, Senior Vice President Preneed Sales of the Company, paid
off in 1997 a mortgage loan at 7.80% interest, of which the largest balance in
1997 was $225,296. Mr. Sells paid off in 1997 a loan for personal use at the
prime rate, of which the largest balance in 1997 was $130,000. In addition, Mr.
Sells paid off in 1997 a loan for personal use at the prime rate, of which the
largest balance in 1997 was $134,206.
James M. Shelger, Senior Vice President General Counsel and Secretary of
the Company, paid off in 1997 a loan for personal use at the prime rate, of
which the largest balance in 1997 was $134,206.
Jack L. Stoner, Senior Vice President Administration of the Company, has a
mortgage loan at 7.20% interest, of which the largest balance in 1997 was
$205,282 and the year end balance was $192,305.
Vincent L. Visosky, Vice President Operational Controller of the Company,
paid off in 1997 a loan for personal use at the prime rate, of which the largest
balance in 1997 was $89,471.
R. L. Waltrip, Chairman of the Board and Chief Executive Officer of the
Company, paid off in 1997 a loan for personal use at the prime rate, of which
the largest balance in 1997 was $275,868.
Michael R. Webb, Vice President-International Corporate Development of the
Company, has a mortgage loan at 8.10% interest, of which the largest balance in
1997 was $299,175 and the year end balance was $296,714.
16
<PAGE> 87
VOTING SECURITIES AND PRINCIPAL HOLDERS
The table below sets forth information with respect to any person who is
known to the Company as of March 26, 1998 to be the beneficial owner of more
than five percent of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
------------------- ------------ ---------
<S> <C> <C>
AMVESCAP PLC, AVZ, Inc., AIM Management Group Inc., AMVESCAP
Group Services, Inc., INVESCO, Inc., INVESCO North
American Holdings, Inc., INVESCO Capital Management, Inc.,
INVESCO Funds Group, Inc., INVESCO Management & Research,
Inc. and INVESCO Realty Advisers, Inc. ................... 13,823,997(1) 5.4%
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- ---------------
(1) Based on a filing dated February 9, 1998, which reported shared voting and
dispositive power by the listed firms. The ultimate parent of the listed
companies is AMVESCAP PLC.
The table below sets forth, as of March 26, 1998, the amount of the
Company's Common Stock beneficially owned by each executive officer named in the
Summary Compensation Table, each director and nominee for director, and all
directors and executive officers as a group, based upon information obtained
from such persons. Securities reported as beneficially owned include those for
which the persons listed have voting or investment power, unless otherwise
noted. Such persons have sole voting power and investment power unless otherwise
noted.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY PERCENT
NAME OF INDIVIDUAL OR GROUP OWNED(1) OF CLASS
--------------------------- ------------ --------
<S> <C> <C>
R. L. Waltrip............................................ 3,310,398(2) 1.3%
L. William Heiligbrodt................................... 1,923,856(3) *
W. Blair Waltrip......................................... 2,486,846(4) *
Jerald L. Pullins........................................ 411,088(5) *
John W. Morrow, Jr ...................................... 756,223(6) *
Anthony L. Coelho........................................ 30,250 *
Douglas M. Conway........................................ 143,506(7) *
Jack Finkelstein......................................... 481,290(8) *
A. J. Foyt, Jr .......................................... 35,800(9) *
James J. Gavin, Jr ...................................... 84,452(10) *
James H. Greer........................................... 28,274 *
B. D. Hunter............................................. 135,634(11) *
John W. Mecom, Jr ....................................... 8,000 *
Clifton H. Morris, Jr ................................... 29,034(12) *
E. H. Thornton, Jr ...................................... 112,575 *
Edward E. Williams....................................... 30,316 *
Executive Officers and Directors as a Group (32
persons)............................................... 11,134,608(1)(13) 4.3%
</TABLE>
- ---------------
* Less than one percent
(1) For each of Messrs. Coelho, Conway, Finkelstein, Foyt, Gavin, Greer,
Hunter, Mecom, Morris, Thornton and Williams, the amounts include 3,000
shares held under the 1995 Stock Plan for Non-Employee Directors, and each
such director has sole voting and shared investment power with respect to
such shares.
(2) Includes 468,384 shares held in trusts (under one of which trusts Mr. R. L.
Waltrip's wife is a beneficiary) under which Mr. R. L. Waltrip's three
children, as trustees, share voting and investment
17
<PAGE> 88
powers. These shares are also included in the shares owned by Mr. W. Blair
Waltrip. See Footnote (4). The information herein regarding ownership of
equity securities by the trusts is for informational purposes only and is
not to be construed as a statement that Mr. R. L. Waltrip is a beneficial
owner of any such securities, as any beneficial ownership thereof is
expressly disclaimed by Mr. R. L. Waltrip. Also includes 2,235,753 shares
which may be acquired upon exercise of stock options exercisable within 60
days.
(3) Includes 6,750 shares and 1,460 shares held in trusts for which Mr.
Heiligbrodt is trustee and 5,830 shares owned by Mr. Heiligbrodt's wife,
daughter, or son, all of which shares Mr. Heiligbrodt disclaims beneficial
ownership. Also includes 1,333,452 shares which may be acquired upon
exercise of stock options exercisable within 60 days.
(4) Includes 127,204 shares held in a trust for the benefit of Mr. W. Blair
Waltrip, 1,072,224 shares held in trusts under which Mr. W. Blair Waltrip,
his brother and his sister are trustees and have shared voting and
investment power and for which Mr. W. Blair Waltrip disclaims 2/3
beneficial ownership. Also includes 31,636 shares held by other family
members or trusts, of which Mr. W. Blair Waltrip disclaims beneficial
ownership of 27,136 shares. Of the shares attributable to the trusts,
468,384 shares are also included in the shares owned by Mr. R. L. Waltrip.
See Footnote (2). Also includes 630,852 shares which may be acquired upon
exercise of stock options exercisable within 60 days.
(5) Includes 15,160 shares held by a trust of which Mr. Pullins' wife is
trustee for the benefit of Mr. Pullins' children. Mr. Pullins disclaims
beneficial ownership of such shares. Also includes 157,010 shares which may
be acquired upon exercise of stock options exercisable within 60 days.
(6) Includes 578,251 shares which may be acquired upon exercise of stock
options exercisable within 60 days.
(7) Includes 137,506 shares held by a family trust of which Mr. Conway is a
trustee and as to which he shares voting and investment power.
(8) Includes 459,308 shares held in trusts for the benefit of other family
members and/or himself, and 8,600 shares held by a charitable foundation of
which Mr. Finkelstein is President. As trustee, Mr. Finkelstein has sole
voting and investment power with respect to 286,574 shares and shares
voting and investment power with respect to 181,334 shares. Mr. Finkelstein
disclaims beneficial ownership as to 181,334 shares held in such trusts and
by the foundation.
(9) Includes 8,800 shares held by Mr. Foyt as custodian for family members. Mr.
Foyt has sole voting and investment power for such shares and disclaims
beneficial ownership of such shares.
(10) Includes 37,884 shares held by a charitable foundation of which Mr. Gavin
is President, of which shares Mr. Gavin disclaims beneficial ownership.
(11) Includes 25,484 shares held directly by Mr. Hunter, 38,408 shares
indirectly controlled by Mr. Hunter (of which Mr. Hunter disclaims
beneficial ownership) and 71,742 shares held by Mr. Hunter's Individual
Retirement Account.
(12) Includes 4,034 shares owned by Mr. Morris' wife. Mr. Morris disclaims
beneficial ownership of such shares.
(13) Includes 31,000 restricted shares held by six persons under Company stock
plans, as well as 5,105,802 shares which may be acquired upon exercise of
stock options exercisable within 60 days.
18
<PAGE> 89
INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has selected Coopers & Lybrand
L.L.P., Certified Public Accountants ("Coopers"), to serve as the independent
accountants for the Company for the fiscal year ending December 31, 1998.
Coopers has audited the Company's accounts since 1993. A representative of
Coopers is expected to be present at the Annual Meeting of Shareholders, will
have the opportunity to make a statement if he or she desires to do so and will
be available to respond to appropriate questions at such meeting.
OTHER MATTERS
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and written representations from reporting persons that no Form 5
was required, the Company believes that James M. Shelger, Senior Vice President,
General Counsel and Secretary, and Edward E. Williams, a director, each filed
late one Form 4 reporting one transaction.
PROXY SOLICITATION
In addition to solicitation by mail, further solicitation of proxies may be
made by mail, facsimile, telephone, telegraph or oral communication following
the original solicitation by directors, officers and regular employees of the
Company who will not be additionally compensated therefor, or by its transfer
agent. The expense of such solicitation will be borne by the Company and will
include reimbursement paid to brokerage firms and other custodians, nominees and
fiduciaries for their expenses in forwarding solicitation material regarding the
meeting to beneficial owners. In addition, the Company has retained Kissel-Blake
Inc. to aid in the solicitation of proxies from shareholders generally in
connection with the Annual Meeting of Shareholders. Such solicitations may be by
mail, facsimile, telephone, telegraph or personal interview. The fee of such
firm is not expected to exceed $12,000 plus reimbursement for reasonable
expenses.
OTHER BUSINESS
The Board of Directors of the Company is not aware of other matters to be
presented for action at the meeting; however, if any such matters are presented
for action, it is the intention of the persons named in the enclosed form of
proxy to vote in accordance with their judgment.
SUBMISSION OF SHAREHOLDER PROPOSALS
Any proposal to be presented by a shareholder at the Company's 1999 Annual
Meeting of Shareholders scheduled to be held on May 13, 1999 must be received by
the Company by December 9, 1998, so that it may be considered by the Company for
inclusion in its proxy statement relating to that meeting.
It is important that proxies be returned to avoid unnecessary expense.
Therefore, shareholders are urged, regardless of the number of shares of stock
owned, to date, sign and return the enclosed proxy in the enclosed business
reply envelope.
Service Corporation International
1929 Allen Parkway,
P.O. Box 130548
Houston, Texas 77219-0548
April 8, 1998
19
<PAGE> 90
Annex 3
SCI Form 10-Q for Quarter
Ended June 30, 1998
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6402-1
--------------------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
Texas 74-1488375
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
1929 Allen Parkway, Houston, Texas 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
The number of shares outstanding of the registrant's common stock as of August
10, 1998, was 257,260,158 (excluding treasury shares).
<PAGE> 91
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page
Part I Financial Information
Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheet -
June 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 1998 6
Notes to the Consolidated Financial Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 21
PartII Other Information 22
Signature 22
2
</TABLE>
<PAGE> 92
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands, June 30, June 30,
except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $ 671,904 $ 601,141 $1,354,588 $1,239,590
Costs and expenses........... (484,214) (437,958) (950,770) (888,255)
--------- --------- ---------- ----------
Gross profit................. 187,690 163,183 403,818 351,335
General and administrative
expenses.................... (17,251) (15,812) (34,259) (32,440)
--------- --------- ---------- ----------
Income from operations....... 170,439 147,371 369,559 318,895
Interest expense............. (40,464) (33,093) (78,174) (67,631)
Dividends on preferred
securities of SCI
Finance LLC................. - (1,753) - (4,382)
Other income................. 10,528 8,765 17,179 11,855
Gain on sale of investment... - - - 68,077
--------- --------- ---------- ----------
(29,936) (26,081) (60,995) 7,919
--------- --------- ---------- ----------
Income before income taxes and
extraordinary loss.......... 140,503 121,290 308,564 326,814
Provision for income taxes... (49,555) (42,489) (108,830) (116,866)
--------- --------- ---------- ----------
Income before extraordinary
loss........................ 90,948 78,801 199,734 209,948
Extraordinary loss on early
extinguishment of
debt (net of income
taxes of $23,383)........... - - - (40,802)
--------- --------- ---------- ----------
Net income................... $ 90,948 $ 78,801 $ 199,734 $ 169,146
========= ========= ========== ==========
Earnings per share:
Basic:
Income before
extraordinary loss........ $ .36 $ .33 $ .78 $ .88
Extraordinary loss on early
extinguishment of debt.... - - - (.17)
--------- --------- ---------- ----------
Net income................. $ .36 $ .33 $ .78 $ .71
========= ========= ========== ==========
Diluted:
Income before
extraordinary loss........ $ .35 $ .31 $ .77 $ .83
Extraordinary loss on early
extinguishment of debt.... - - - (.16)
--------- --------- ---------- ----------
Net income................. $ .35 $ .31 $ .77 $ .67
========= ========= ========== ==========
Dividends per share.......... $ .09 $ .08 $ .18 $ .15
========= ========= ========== ==========
Basic weighted average
number of shares............ 255,004 240,872 254,820 239,068
========= ========= ========== ==========
Diluted weighted average
number of shares............ 261,740 257,695 261,754 256,616
========= ========= ========== ==========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 93
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Dollars in thousands, except per share amounts) (Unaudited) 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 75,526 $ 46,877
Receivables, net of allowances..................... 580,011 557,481
Inventories........................................ 183,920 172,169
Other.............................................. 46,188 34,881
----------- -----------
Total current assets.............................. 885,645 811,408
----------- -----------
Investments - insurance subsidiary.................... 640,962 574,728
Prearranged funeral contracts ........................ 2,754,034 2,610,632
Long-term receivables ................................ 1,107,684 981,121
Cemetery property, at cost............................ 1,761,443 1,636,859
Property, plant and equipment, at cost (net).......... 1,718,685 1,644,137
Deferred charges and other assets..................... 670,281 549,862
Names and reputations (net)........................... 1,705,928 1,498,116
----------- -----------
$11,244,662 $10,306,863
=========== ===========
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities........... $ 368,256 $ 425,631
Current maturities of long-term debt............... 68,338 64,570
Income taxes ...................................... 88,612 45,241
----------- -----------
Total current liabilities......................... 525,206 535,442
----------- -----------
Long-term debt........................................ 3,077,286 2,634,699
Deferred income taxes................................. 732,650 701,221
Other liabilities .................................... 572,523 546,140
Deferred prearranged funeral contract revenues ....... 3,400,012 3,163,357
Stockholders' equity:
Common stock, $1 per share par value,
500,000,000 shares authorized,
257,186,137 and 252,923,784, respectively,
issued and outstanding............................ 257,186 252,924
Capital in excess of par value..................... 1,534,730 1,493,246
Retained earnings.................................. 1,136,891 983,353
Accumulated other comprehensive income............. 8,178 (3,519)
----------- -----------
Total stockholders' equity........................ 2,936,985 2,726,004
----------- -----------
$11,244,662 $10,306,863
=========== ===========
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 94
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 199,734 $ 169,146
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization..................... 85,512 75,063
Provision for deferred income taxes............... 19,661 24,789
Extraordinary loss on early extinguishment of
debt, net of income taxes........................ - 40,802
Gains from dispositions (net)..................... (9,748) (76,645)
Change in assets and liabilities, net of effects
from acquisitions:
(Increase) in receivables........................ (116,546) (60,474)
(Increase) decrease in other assets.............. (24,285) 15,426
(Decrease) in payables and other liabilities .... (7,966) (27,036)
Other............................................ 7,541 11,232
----------- ----------
Net cash provided by operating activities ........... 153,903 172,303
----------- ----------
Cash flows from investing activities:
Capital expenditures.............................. (117,705) (118,163)
Change in prearranged funeral balances............ 44,737 (32,503)
Purchases of securities - insurance subsidiary.... (318,800) (589,778)
Sales of securities - insurance subsidiary........ 305,554 582,122
Proceeds from sales of property and equipment..... 16,663 11,585
Acquisitions, net of cash acquired................ (366,823) (190,692)
Loans issued by finance subsidiary................ (66,564) (50,638)
Principal payments received on loans by finance
subsidiary....................................... 48,882 5,418
Proceeds from sale of equity investment........... - 147,739
Purchases of equity investments................... (3,836) (20,360)
Other............................................. (7,205) (10,281)
----------- ----------
Net cash (used in) investing activities.............. (465,097) (265,551)
----------- ----------
Cash flows from financing activities:
(Decrease) in borrowings under revolving
credit agreements................................ (68,952) (37,349)
Long-term debt issued............................. 500,000 650,000
Payments of debt.................................. (32,722) (35,877)
Early extinguishment of debt...................... - (449,998)
Dividends paid.................................... (42,007) (32,136)
Bank overdrafts and other......................... (16,476) (13,966)
----------- ----------
Net cash provided by financing activities............ 339,843 80,674
----------- ----------
Net increase (decrease) in cash and cash equivalents. 28,649 (12,574)
Cash and cash equivalents at beginning of period..... 46,877 44,131
----------- ----------
Cash and cash equivalents at June 30, 1998 and 1997..$ 75,526 $ 31,557
=========== ==========
Cash used for:
Interest..........................................$ 86,047 $ 81,807
========== ==========
Taxes............................................. 74,155 74,769
========== ==========
Non-cash investing and financing transactions:
Common stock issued in acquisitions............... $ 28,896 $ 43,499
========== ==========
Debt issued in acquisitions....................... 19,060 4,771
========== ==========
Debenture conversions to common stock............. 2,238 5,127
========== ==========
Conversion of preferred securities of
SCI Finance LLC.................................. - 167,911
========== ==========
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE> 95
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Capital in Accum.
excess other
(Dollars in thousands, Common of par Retained compre.
except per share amounts) stock value earnings income Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997........$ 252,924 $1,493,246 $ 983,353 $(3,519) $2,726,004
Comprehensive income:
Net income.............. 199,734 199,734
Other comprehensive
income:
Foreign currency
translation............ 6,663
Unrealized gain on
securities............. 5,034
----------
Total other comprehensive
income................... 11,697 11,697
----------
Comprehensive income...... 211,431
Common stock issued:
Stock option exercises
and stock grants........ 3,409 11,203 14,612
Acquisitions............ 687 28,209 28,896
Debenture conversions... 166 2,072 2,238
Dividends on common stock
($.18 per share)......... (46,196) (46,196)
-------- ---------- ---------- ------- ----------
Balance at June 30, 1998.. $ 257,186 $1,534,730 $1,136,891 $ 8,178 $2,936,985
========= ========== =========== ======= ==========
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE> 96
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. Nature of Operations
The Company is the largest provider of death care services in the world. At June
30, 1998, the Company operated 3,292 funeral service locations, 422 cemeteries
and 174 crematoria located in 18 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also contain crematoria. There are 152
combination locations that contain a funeral service location within a company
owned cemetery.
The Company's financial services operations consist of a finance subsidiary,
Provident Services, Inc. ("Provident"). Provident provides capital financing to
independent funeral home and cemetery operators. The Company recently announced
its intentions to combine management of its prearranged funeral marketing,
funeral and cemetery trust administration, investments, life insurance
operations (see note ten) and Provident into a reorganized financial services
segment.
2. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements for the six months
ended June 30, 1998 and 1997 include the accounts of Service Corporation
International and all majority-owned subsidiaries (the "Company") and are
unaudited but include all adjustments, consisting of normal recurring accruals
and any other adjustments which management considers necessary for a fair
presentation of the results for these periods. These financial statements have
been prepared consistent with the accounting policies described in the annual
report on Form 10-K filed with the Securities and Exchange Commission (the
"Commission") for the year ended December 31, 1997 and should be read in
conjunction therewith. Certain reclassifications have been made to the prior
period to conform to the current period presentation with no effect on
previously reported net income, financial condition and cash flows.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. As a result, actual results
could differ from these estimates.
3. Acquisitions
The Company acquired 167 funeral service locations, 31 cemeteries and 8
crematoria during the six months ended June 30, 1998 (136 funeral service
locations, 22 cemeteries and one crematory during the six months ended June 30,
1997). The consideration for these acquisitions consisted of combinations of
cash, common stock of the Company and issued or assumed debt. The operating
results of all of these acquisitions have been included since their respective
dates of acquisitions.
7
<PAGE> 97
The effect of acquisitions on the consolidated balance sheet at June 30, was
as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Current assets................................... $ 22,021 $ 8,180
Prearranged funeral contracts.................... 38,093 52,346
Long-term receivables............................ 23,820 11,881
Cemetery property................................ 81,306 179,829
Property, plant and equipment.................... 44,736 59,929
Deferred charges and other assets................ 84,587 14,604
Names and reputations............................ 237,915 70,507
Current liabilities.............................. (23,353) (23,977)
Long-term debt................................... (46,972) (19,612)
Deferred income taxes and other liabilities...... (29,083) (51,698)
Deferred prearranged funeral contract revenues... (35,836) (67,798)
Stockholders' equity............................. (30,411) (43,499)
--------- --------
Cash used for acquisitions................. $ 366,823 $190,692
========= ========
</TABLE>
4. Prearranged Funeral Activities
The Company sells price guaranteed prearranged funeral contracts through various
programs providing for future funeral services at prices prevailing when the
agreements are signed. Payments under these contracts are generally placed in
trust (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers in North America, the United Kingdom and
Australia or the Company's French prearranged funeral service life insurance
subsidiary, "Auxia". Unperformed price guaranteed prearranged funeral contracts
are included in the consolidated balance sheet as "prearranged funeral
contracts" or, in the case of contracts funded by Auxia, "investments-insurance
subsidiary." A corresponding credit is recorded to "deferred prearranged funeral
contract revenues." Allowances for customer cancellations are provided at the
date of sale based on historical experience.
Amounts paid by the customer pursuant to the prearranged funeral contracts
are recognized in funeral revenue at the time the funeral is performed. Trust
earnings and increasing insurance benefits are accrued and deferred until the
service is performed at which time these funds are also recognized in funeral
revenues and are intended to cover future increases in the cost of providing a
price guaranteed funeral service. Included in deferred prearranged funeral
contract revenues are net obtaining costs, including sales commissions and
certain other direct marketing costs, applicable to prearranged funeral
contracts which are deferred and will be expensed over a period representing the
actuarially determined life of the prearranged contract.
The recognition of future funeral revenues is estimated to occur in the
following years:
<TABLE>
<CAPTION>
<S> <C>
1998 (remaining six months).............. $ 180,969
1999..................................... 279,228
2000..................................... 261,198
2001..................................... 246,066
2002..................................... 231,495
2003 and through 2007.................... 860,905
2008 and thereafter...................... 1,340,151
----------
$3,400,012
==========
</TABLE>
8
<PAGE> 98
5. Debt
Debt at June 30, 1998 and December 31, 1997, was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------------------------
<S> <C> <C>
Bank revolving credit agreements and
commercial paper........................ $ 544,562 $ 588,539
6.375% notes due in 2000................. 150,000 150,000
6.75% notes due in 2001.................. 150,000 150,000
8.72% amortizing notes due in 2002....... 127,970 141,108
8.375% notes due in 2004................. 51,840 51,840
7.375% notes due in 2004................. 250,000 250,000
7.2% notes due in 2006................... 150,000 150,000
6.875% notes due in 2007................. 150,000 150,000
6.5% notes due in 2008................... 200,000 -
7.70% notes due in 2009.................. 200,000 200,000
6.95% amortizing notes due in 2010....... 57,178 58,859
Floating rate notes due in 2011
(putable in 1999)....................... 200,000 200,000
7.875% debentures due in 2013............ 55,627 55,627
7.0% notes due in 2015 (putable in 2002). 300,000 300,000
6.3% notes due in 2020 (putable in 2003). 300,000 -
Medium term notes, maturities through
2019, fixed average
interest rate of 9.32%................. 35,720 35,720
Convertible debentures, interest rates
range from 4.75% - 5.5%,
due through 2008, conversion price
ranges from $11.25 - $45.69............ 47,735 45,673
Mortgage notes and other debt with
maturities through 2015................ 185,892 184,981
Deferred loan costs...................... (10,900) (13,078)
---------- ----------
Total debt............................... 3,145,624 2,699,269
---------- ----------
Less current maturities.................. (68,338) (64,570)
---------- ----------
Total long-term debt................ $3,077,286 $2,634,699
========== ==========
</TABLE>
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consists of two committed facilities -- a 364-day facility and
a 5-year, multi-currency facility - which are primarily used to support
commercial paper issuance and for general corporate needs.
The 364-day facility allows for borrowings up to $300,000. This facility
expires June 26, 1999, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may be converted into a
two-year term loan at the Company's option. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of 0.08% is
paid quarterly on the total commitment amount.
The 5-year facility allows for borrowings up to $700,000, including $500,000
in various foreign currencies. This facility expires June 27, 2002. Interest
rates on this facility are based on various indices as determined by the
Company. In addition, a facility fee is paid quarterly on the total commitment
amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the
Company's senior debt ratings and is currently set at 0.08%. At June 30, 1998,
there was approximately $189,000 of revolving notes outstanding under this
facility at a weighted average interest rate of 6.45%.
As of June 30, 1998, there was approximately $356,000 of commercial paper
outstanding backed by the above two facilities at a weighted average interest
rate of 6.06%.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities are classified as long-term debt, since it is the
Company's intent to refinance such borrowings through long-term notes and/or
equity offerings.
9
<PAGE> 99
The timing of any debt or equity offering is dependent on numerous factors
including market conditions, long and short term interest rates, the Company's
capitalization ratios and the outstanding balances under the revolving credit
facilities.
In March of 1998, the Company issued two senior note securities. The first
note issued was a $200,000, 10-year, non-callable security with a 6.5% coupon,
due in March of 2008. The second note was a $300,000, 22-year security due in
March of 2020. This security is subject to mandatory tender to a remarketing
agent in March of 2003 and in March of 2010. The coupon on this issue is 6.30%.
The proceeds of this offering were primarily used to repay existing debt
outstanding under the Company's revolving credit agreements.
6. Derivatives
The Company enters into derivatives primarily in the form of interest rate swaps
to manage its mix of fixed and floating rate debt, and cross-currency interest
rate swaps in combination with local currency to substantially hedge the
Company's net investment in foreign assets. The Company has procedures in place
to monitor and control the use of derivatives and only enters into transactions
with a limited group of credit-worthy financial institutions. The Company does
not engage in derivative transactions for speculative or trading purposes, nor
is it a party to leveraged transactions.
At June 30, 1998, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding Provident debt) consists of
approximately 68% of fixed interest rate debt at a weighted average rate of
6.32% and approximately 32% of floating interest rate debt at a weighted average
rate of 5.85%. Approximately $1,692,000 of the Company's debt has been converted
from US dollar denominated debt to foreign currency denominated debt as the
result of cross-currency swaps. Including these swaps, foreign denominated debt
totals $1,949,000.
The net fair value of the Company's various swap agreements at June 30, 1998,
was an asset of $162,000. Fair values were obtained from counterparties to the
agreements and represent their estimate of the net amount the Company would
receive to terminate the swap agreements based upon the existing terms and
current market conditions.
7. Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
----------------
<S> <C>
4.27 4.66
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus the
minority interest of majority-owned subsidiaries with fixed charges and plus
fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt costs,
dividends on preferred securities of SCI Finance LLC and one-third of rental
expense which the Company considers representative of the interest factor in the
rentals. The decrease in the Company's ratio of earnings to fixed charges is
primarily attributable to the 1997 gain on the sale of a Company investment.
10
<PAGE> 100
8. Geographic Segment Information
The Company conducts funeral and cemetery operations in 18 countries and offers
financial services in the United States. Geographic segment information was as
follows:
<TABLE>
<CAPTION>
United Other Other
States France European Foreign
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Three months ended June 30:
1998......................... $ 422,945 $140,679 $ 62,762 $ 45,600
1997......................... 390,830 119,433 50,039 41,192
Six months ended June 30:
1998......................... $ 875,971 $263,607 $126,476 $ 88,996
1997......................... 794,112 253,047 111,352 82,036
Income from operations:
Three months ended June 30:
1998......................... $ 132,265 $ 18,426 $ 9,443 $ 10,305
1997......................... 115,627 12,907 7,957 10,880
Six months ended June 30:
1998......................... $ 294,379 $ 30,882 $ 23,205 $ 21,093
1997......................... 242,082 28,400 24,655 23,758
Funeral services performed:
Three months ended June 30:
1998......................... 57,030 37,321 28,206 12,849
1997......................... 56,271 34,899 22,987 12,238
Six months ended June 30:
1998......................... 123,099 76,097 57,536 26,149
1997......................... 118,235 76,486 52,759 24,478
Number of locations at June 30:
1998......................... 1,638 1,163 780 307
1997......................... 1,514 1,087 658 274
</TABLE>
11
<PAGE> 101
9. Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations are presented below:
<TABLE>
<CAPTION>
Three Months ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (numerator):
Income before
extraordinary item - basic...$ 90,948 $ 78,801 $199,734 $209,948
After tax interest on
convertible debentures...... 399 1,838 770 3,916
-------- -------- -------- --------
Income before
extraordinary item - diluted.$ 91,347 $ 80,639 $200,504 $213,864
- --------------------------------------------------------------------------------
Shares (denominator):
Shares - basic.............. 255,004 240,872 254,820 239,068
Stock options and warrants 4,593 5,022 4,792 4,699
Convertible debentures...... 2,143 9,705 2,142 2,294
Convertible preferred
securities of SCI
Finance LLC................ - 2,096 - 10,555
-------- ------- -------- --------
Shares - diluted............ 261,740 257,695 261,754 256,616
- --------------------------------------------------------------------------------
Earnings per share before
extraordinary item:
Basic...................... $ .36 $ .33 $ .78 $ .88
Diluted.................... $ .35 $ .31 $ .77 $ .83
- --------------------------------------------------------------------------------
</TABLE>
10.Subsequent Events
On July 17, 1998, the Company announced its plans to acquire the pre-need
funeral division of American Annuity Group Inc. (AAG) of Cincinnati, Ohio for
$164,000 in cash. AAG offers a variety of pre-need and final expense life
insurance and annuity products to finance prearranged funerals. AAG will become
part of the Company's new financial services segment.
On August 6, 1998, the Company announced that it has reached a definitive
agreement with Equity Corporation International (ECI) to form a business
combination between the two companies. ECI, the nation's fourth largest publicly
traded death care company, currently owns 326 funeral homes and 81 cemeteries in
35 U.S. states and one Canadian province. The combination would occur through a
stock-for-stock transaction that would result in ECI shareholders receiving
common shares of the Company with a value of approximately $578,000.
Both of the above transactions are subject to regulatory approval and, in the
case of ECI, an affirmative vote of ECI shareholders. Both transactions are
expected to close in the fourth quarter of 1998.
12
<PAGE> 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except average sales prices)
Overview:
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allow the Company to more efficiently utilize
its operating facilities due to the traditional fluctuation in the number of
funeral services and cemetery interments performed in a given period. The
Company's acquisitions are primarily located within existing cluster areas or
create new cluster area opportunities. The Company has approximately 400
clusters, which range in size from two operations to 65 operations. There may be
more than one cluster in a given metropolitan area, depending upon the level and
degree of shared costs.
Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Percentage
1998 1997 Increase Increase
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral............. $ 922,621 $ 876,355 $ 46,266 5.3 %
Cemetery............ 422,307 355,529 66,778 18.8
Financial services.. 9,660 7,706 1,954 25.4
--------- ---------- -------
1,354,588 1,239,590 114,998 9.3
Costs and expenses:
Funeral............. 695,283 662,155 33,128 5.0
Cemetery............ 250,327 221,886 28,441 12.8
Financial services.. 5,160 4,214 946 22.4
--------- --------- --------
950,770 888,255 62,515 7.0
Gross profit and
margin percentage:
Funeral............. 227,338 24.6% 214,200 24.4% 13,138 6.1
Cemetery............ 171,980 40.7 133,643 37.6 38,337 28.7
Financial services.. 4,500 46.6 3,492 45.3 1,008 28.9
--------- --------- --------
$ 403,818 29.8% $ 351,335 28.3% $ 52,483 14.9 %
========= ========= ========
</TABLE>
13
<PAGE> 103
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States...............$481,859 $457,392 $24,467 5.3 %
France...................... 263,145 252,089 11,056 4.4
Other European.............. 98,623 98,354 269 0.3
Other foreign............... 53,709 57,045 (3,336) (5.8)
-------- -------- -------
897,336 864,880 32,456 3.8
New clusters:*
United States............... 3,916 1,416 2,500
Other European.............. 16,073 1,102 14,971
Other foreign............... 2,225 444 1,781
-------- -------- -------
22,214 2,962 19,252
Non-cluster and disposed
operations.................... 3,071 8,513 (5,442)
-------- -------- -------
Total funeral revenues......$922,621 $876,355 $46,266 5.3 %
======== ======== =======
</TABLE>
The $32,456 increase in revenues from existing clusters was the result of a
3.2% higher average sales price ($3,320 compared to $3,218), combined with a
0.5% increase in the number of funeral services performed (270,251 compared to
268,776). Acquisitions since January 1, 1997, included in existing clusters,
contributed $48,932 to the existing cluster revenue increase, while locations
acquired before 1997 had a decline of $16,476 due primarily to fewer funeral
services performed. French funeral revenues increased $11,056 caused primarily
by an increase in the number of funeral services performed.
During the six months ended June 30, 1998, the Company sold $274,749 of
prearranged funeral services compared to $274,019 for the same period in 1997.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............. $300,962 $291,589 $ 9,373 3.2 %
France.................... 223,484 215,699 7,785 3.6
Other European............ 78,683 74,770 3,913 5.2
Other foreign............. 39,373 39,458 (85) (0.2)
-------- -------- --------
642,502 621,516 20,986 3.4
New clusters:*
United States............. 2,738 953 1,785
Other European............ 12,863 820 12,043
Other foreign............. 1,692 334 1,358
-------- -------- --------
17,293 2,107 15,186
Non-cluster and disposed
operations.................. 6,210 9,399 (3,189)
Administrative overhead...... 29,278 29,132 146 0.5
-------- -------- --------
Total funeral costs
and expense................ $695,283 $662,154 $ 33,129 5.0 %
======== ======== ========
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
14
<PAGE> 104
The $20,986 increase in costs and expenses from existing clusters is primarily
the result of a period to period increase in the total number of funeral
services performed. Acquisitions since January 1, 1997, included in existing
clusters, reported $37,689 of increased costs, while existing locations acquired
before 1997 had a $16,703 cost decrease. The gross profit margin for existing
clusters increased to 28.4% in 1998, from 28.1% in 1997. Typically, acquisitions
will temporarily exhibit slightly lower gross profit margins than those
experienced by the Company's existing locations at least until such time as
these locations are assimilated into the Company's cluster management strategy.
The overall funeral gross profit margin percentage improved in 1998 to 24.6%,
compared to 24.4% in 1997. Contributing to this period to period improvement
were the Company's North American and French operations, offset by lower gross
profit margins from the Company's other foreign operations.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, decreased slightly to 3.2%, compared to 3.3% in 1997.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............ $369,331 $313,858 $55,473 17.7 %
Other European........... 10,093 10,888 (795) (7.3)
Other foreign............ 23,981 26,327 (2,346) (8.9)
-------- -------- -------
403,405 351,073 52,332 14.9
New clusters*............... 17,333 1,184 16,149
Non-cluster and disposed
operations................. 1,570 3,272 (1,702)
-------- -------- -------
Total cemetery revenues.. $422,308 $355,529 $66,779 18.8 %
======== ======== =======
</TABLE>
Revenues from the existing clusters increased $52,332 in 1998. Included in
the existing cluster increase were $31,945 in increased revenues from cemeteries
acquired since the beginning of 1997. Locations acquired before 1997 increased
$20,387 due primarily to increased trust investment income.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Percentage
Six Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States........... $193,976 $181,888 $12,088 6.6%
Other European.......... 6,075 5,849 226 3.9
Other foreign........... 13,732 13,527 205 1.5
-------- -------- -------
213,783 201,264 12,519 6.2
New clusters*.............. 12,468 1,126 11,342
Non-cluster and disposed
operations................ 2,401 2,422 (21)
Administrative overhead.... 21,675 17,074 4,601 26.9
-------- -------- -------
Total cemetery costs
and expenses............. $250,327 $221,886 $28,441 12.8%
======== ======== =======
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
15
<PAGE> 105
Costs and expenses from existing clusters increased $12,519 due primarily to
an increase of $19,757 at cemeteries acquired since the beginning of 1997, while
locations acquired before 1997 had a decline of $7,238. The overall cemetery
gross profit margin percentage improved in 1998 to 40.7% from 37.6% in 1997.
This increase reflects a favorable product mix in sales of preneed cemetery
property and merchandise, increased trust investment income, as well as
continued cost control in all major expense categories primarily in the United
States. Administrative overhead costs have increased to 5.1% of revenues
compared to 4.8% during the six months ended June 30, 1998.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $4,500 for the six months ended June
30, 1998, compared to $3,492 for the same period in 1997. Provident's average
outstanding loan portfolio during the current period increased to $213,009
compared to $173,547 in 1997, while the average interest rate spread decreased
slightly to 3.1% compared to 3.2% in 1997.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.5% for the six months ended June 30, 1998, compared to
2.6% for the comparable period in 1997.
Interest expense, which excludes the amount incurred through financial
service operations, increased $10,543 or 15.6% period to period. The increased
interest expense reflects the Company's funding of acquisitions with debt.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a pre-tax gain of $68,077.
The provision for income taxes reflected a 35.3% effective tax rate for the
six months ended June 30, 1998, compared to a 35.8% effective tax rate for the
comparable period in 1997. The decrease in the effective tax rate is due
primarily to lower taxes from international operations and the 1997 tax impact
from the gain on sale of the Company's interest in ECI which was reflected at
the Company's higher domestic tax rate.
Three Months Ended June 30, 1998
Compared to Three Months Ended June 30, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Percentage
1998 1997 Increase Increase
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral............. $450,493 $419,284 $31,209 7.4 %
Cemetery............ 216,366 177,739 38,627 21.7
Financial services.. 5,045 4,118 927 22.5
-------- -------- -------
671,904 601,141 70,763 11.8
Costs and expenses:
Funeral............. 355,847 324,787 31,060 9.6
Cemetery............ 125,639 110,889 14,750 13.3
Financial services.. 2,728 2,282 446 19.5
-------- -------- -------
484,214 437,958 46,256 10.6
Gross profit and
margin percentage:
Funeral............. 94,646 21.0% 94,497 22.5% 149 0.2
Cemetery............ 90,727 41.9 66,850 37.6 23,877 35.7
Financial services.. 2,317 45.9 1,836 44.6 481 26.2
--------- -------- -------
$187,690 27.9% $163,183 27.1% $24,507 15.0 %
======== ======== =======
</TABLE>
16
<PAGE> 106
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States........... $223,982 $222,693 $ 1,289 0.6 %
France.................. 140,597 119,078 21,519 18.1
Other European.......... 46,882 43,861 3,021 6.9
Other foreign........... 26,033 28,709 (2,676) (9.3)
-------- -------- -------
437,494 414,341 23,153 5.6
New clusters:*
United States........... 1,281 889 392
Other European.......... 10,041 921 9,120
Other foreign........... 1,040 223 817
-------- -------- -------
12,362 2,033 10,329
Non-cluster and disposed
operations................ 637 2,910 (2,273)
-------- -------- -------
Total funeral revenues.. $450,493 $419,284 $31,209 7.4 %
======== ======== =======
</TABLE>
The $23,153 increase in revenues from existing clusters was the result of a
2.9% increase in the number of funeral services performed (128,443 compared to
124,840), and a 2.6% higher average sales price ($3,406 compared to $3,319).
Acquisitions since January 1, 1997, included in existing clusters, contributed
$25,481 to the existing cluster revenue increase, while locations acquired
before 1997 had a decline of $2,328 due primarily to fewer funeral services
performed in April and May in the United States. French funeral revenues for the
quarter increased $21,519 due to a 5.6% increase in the number of funeral
services performed (36,840 compared to 34,899).
During the three months ended June 30, 1998, the Company sold $138,919 of
prearranged funeral services compared to $148,704 for the same period in 1997.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.......... $153,079 $147,301 $ 5,778 3.9 %
France................. 117,750 102,047 15,703 15.4
Other European......... 39,546 36,423 3,123 8.6
Other foreign.......... 19,809 20,221 (412) (2.0)
-------- -------- -------
330,184 305,992 24,192 7.9
New clusters:*
United States.......... 986 536 450
Other European......... 8,419 714 7,705
Other foreign.......... 889 160 729
-------- -------- -------
10,294 1,410 8,884
Non-cluster and disposed
operations............... 3,002 4,326 (1,324)
Administrative overhead... 12,367 13,059 (692) (5.3)
-------- -------- -------
Total funeral costs
and expenses.......... $355,847 $324,787 $31,060 9.6 %
======== ======== =======
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
17
<PAGE> 107
The $24,192 increase in costs and expenses from existing clusters is primarily
the result of a period to period increase in the total number of funeral
services performed. Acquisitions since January 1, 1997, included in existing
clusters, reported $18,664 of increased costs, while costs from existing
locations acquired before 1997 increased $5,528. The gross profit margin for
existing clusters decreased to 24.5% in 1998 from 26.1% in 1997. This decrease
is primarily attributable to the Company's United States funeral operations, a
historically high margin market for the Company. This is due to the
aforementioned weakness in the United States funeral service volumes.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, decreased slightly to 2.7%, compared to 3.1% in 1997 due to
reclassifications of certain of these costs to the cemetery segment to better
reflect the cost of administrative support.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............ $188,929 $155,922 $33,007 21.2 %
Other European........... 4,976 5,079 (103) (2.0)
Other foreign............ 12,421 14,124 (1,703) (12.1)
-------- -------- -------
206,326 175,125 31,201 17.8
New clusters*............... 9,558 891 8,667
Non-cluster and disposed
operations................. 482 1,723 (1,241)
-------- -------- -------
Total cemetery revenues.. $216,366 $177,739 $38,627 21.7 %
======== ======== =======
</TABLE>
Revenues from the existing clusters increased $31,201 in 1998. Included in
the existing cluster increase were $17,893 in increased revenues from cemeteries
acquired since the beginning of 1997, while revenues from existing cluster
locations owned before 1997 increased $13,308 due to increased sales of pre-need
and at-need property and merchandise as well as additional trust investment
income.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Percentage
Three Months Ended June 30, Increase Increase
1998 1997 (Decrease) (Decrease)
----------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............ $ 94,459 $ 91,148 $ 3,311 3.6 %
Other European........... 2,875 2,888 (13) (0.5)
Other foreign............ 7,031 6,955 76 1.1
-------- -------- -------
104,365 100,991 3,374 3.3
New clusters*............... 7,118 799 6,319
Non-cluster and disposed
operations................. 1,030 1,470 (440)
Administrative overhead..... 13,126 7,629 5,497 72.1
-------- -------- -------
Total cemetery costs
and expenses............ $125,639 $110,889 $14,750 13.3 %
======== ======== =======
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
18
<PAGE> 108
Costs and expenses from existing clusters increased $3,374 due primarily to
an increase of $10,407 at cemeteries acquired since the beginning of 1997. The
overall cemetery gross profit margin percentage improved in 1998 to 41.9% from
37.6% in 1997. This increase reflects a favorable product mix in sales of
preneed cemetery property and merchandise, increased trust investment income, as
well as continued cost control in all major expense categories primarily in the
United States. Administrative overhead costs have increased to 6.1% of revenues
for the three months ended June 30, 1998, compared to 4.3% during the comparable
period in 1997 due to the aforementioned reclassifications discussed in the
funeral segment.
Financial Services
Provident reported a gross profit of $2,317 for the three months ended June 30,
1998, compared to $1,836 for the same period in 1997. Provident's average
outstanding loan portfolio during the current period increased to $220,062
compared to $181,709 for the comparable period in 1997, while the average
interest rate spread remained stable at 3.2% for the three months ended June 30,
1998 and 1997.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
remained stable at 2.6% for the three months ended June 30, 1998 and 1997.
Interest expense, which excludes the amount incurred through financial
service operations, increased $7,371 or 22.3% period to period. This increased
interest expense reflects the Company's funding of acquisitions with debt.
The provision for income taxes reflected a 35.3% effective tax rate for the
three months ended June 30, 1998, compared to a 35.0% effective tax rate for the
comparable period in 1997.
Financial Condition and Liquidity at June 30, 1998:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Securities and Exchange Commission (the "Commission"). The
Company believes cash from operations, additional funds available under its
revolving credit agreements, and proceeds from public and private offerings of
securities will be sufficient to continue its current acquisition program and
operating policies. For the three-month period ended June 30, 1998, the Company
acquired 45 funeral service locations and 7 cemeteries (see Note 3). In
addition, the Company has received signed letters of intent to acquire an
additional 138 funeral service locations, 29 cemeteries and 2 crematoria for an
aggregate purchase price of approximately $386,000 and has reached a definitive
agreement to merge with ECI (see note 10) which will add 326 funeral homes and
81 cemeteries in a stock for stock transaction valued at approximately $578,000.
These businesses are expected to produce approximately $449,000 in annualized
revenues, including $324,000 in North American operations and $125,000 from
operations outside North America.
At June 30, 1998, the Company had net working capital of $360,439 and a
current ratio of 1.69:1, compared to working capital of $275,966 and a current
ratio of 1.52:1 at December 31, 1997.
Sources And Uses of Cash
Cash flows from operating activities: Net cash provided by operating activities
was $153,903 for the six months ended June 30, 1998, compared to $172,303 for
the same period in 1997, a decrease of $18,400. This decrease results from a
combination of higher operating profits, offset by increased uses of cash
generated by changes in the Company's working capital accounts. Significant
reductions of operating cash include amounts receivable resulting from increased
sales of funeral services as well as increased sales of cemetery products and
merchandise.
Cash flows from investing activities: Net cash used in investing activities was
$465,097 for the six months ended June 30, 1998, compared to $265,551 for the
same period in 1997, an increase of $199,546. Cash used for acquisitions
increased by $176,131 while the level of capital expenditures remained unchanged
during the six months ended June 30, 1998, as the
19
<PAGE> 109
Company continues to expand through both acquisitions of existing businesses and
through increased construction of funeral and cemetery facilities. Additionally,
in 1997 approximately $148,000 in cash was provided by the sale of the Company's
interest in ECI. Cash used relating to prearranged funeral activities decreased
due to the timing of cash payments to and withdrawals from trusts.
Cash flows from financing activities: Net cash provided by financing activities
was $339,843 for the six months ended June 30, 1998, compared to $80,674 for the
same period in 1997, an increase of $259,169. The six months ended June 30, 1997
included a use of cash of $449,998 for the early extinguishment of certain
higher interest rate debt.
As of June 30, 1998, the Company's debt to capitalization ratio was 51.7%
compared to 49.8% at December 31, 1997. The interest rate coverage ratio for the
six months ended June 30, 1998 was 4.72:1, compared to 4.42:1 (excluding the
gain on the sale of the Company's investment in ECI) for the same period in
1997. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash flow generated
and the low failure rate exhibited by these types of businesses. The Company
believes these acquired firms are capable of servicing the additional debt and
providing a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance its
future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. The Company's
various revolving credit facilities and lines of credit currently provide for
aggregate borrowings of approximately $1,000,000 of which approximately $455,000
was available under these facilities at June 30, 1998. The Company also had the
ability to issue $1,000,000 in securities registered with the Commission under a
shelf registration. In addition, 14,682,000 shares of common stock and a total
of $197,000 of guaranteed promissory notes and convertible debentures are
registered with the Commission under a separate shelf registration to be used
exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts and
the funds collected are generally held in trust or are used to purchase life
insurance or annuity contracts. The principal amount of each such prearranged
funeral contract will be received in cash by a Company funeral service location
at the time the funeral is performed. Earnings on trust funds and increasing
benefits under insurance funded contracts also increase the amount of cash to be
received upon performance of the funeral and are intended to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. During 1997, the Company completed a review of the
prearranged trust investment process which included an asset/liability study.
This has resulted in a new investment program which entails the consolidation of
multiple trustees, the use of institutional managers with differing investment
styles and consolidated performance monitoring and tracking. This new program
targets a real return in excess of the amount necessary to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. This is accomplished by allocating the portfolio mix to the
appropriate investments that more accurately match the anticipated maturity of
the policies. The Company anticipates an asset allocation of approximately 65%
equity and 35% fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are a
current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American funerals performed annually approximates
25% and is expected to grow, thereby making the total number of funerals
performed more predictable.
20
<PAGE> 110
Other Matters:
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs to
correctly differentiate the century from a date in which the year is represented
by only two digits. A computer system which is not year 2000 compliant might not
be able to process certain data, or possibly could cause the entire computer
system to malfunction. The Company is aware of the issues pertaining to computer
software and microprocessor performance as they relate to the year 2000, and is
taking steps to minimize the possibility that operations will be significantly
disrupted by the manner in which Company computers process date codes. The
Company has established Year 2000 program offices in Houston and Europe to
organize and oversee the Company's Year 2000 preparedness efforts.
The Company's Year 2000 preparedness efforts have been divided into four general
categories: planning and assessment, correction, validation and testing, and
acceptance and deployment. All of the Company's major systems are being assessed
to determine Year 2000 compliance and all non-compliant systems will be repaired
or replaced. Most major systems have already been assessed and are at various
stages of correction, testing, and deployment. Efforts are underway to educate
appropriate Company personnel about the importance of the Year 2000 problem and
to mitigate potential problems at all levels of the organization. The Company is
currently seeking Year 2000 compliance assurances from third party service
providers with which it has significant business relationships.
As major systems are assessed, the Company will be able to prepare accurate cost
estimates for completing the Company's Year 2000 preparedness efforts. The
Company operates in a relatively low technology business environment that is not
dependent upon complex customer on-line processing to execute business
operations. The Company currently does not believe that any significant
disruptions to operations will occur as a result of the Year 2000 problem.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be converted on a timely basis, or that a
failure to successfully convert by another company, would not have a material
adverse effect on the Company.
Recent Accounting Standards
The Company will adopt Statement of Financial Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" for the year ended December 31,
2000. The Company is currently evaluating the impact of this standard, but does
not anticipate that it will have a material impact on the Company's financial
position, results of operations, or statement of cash flows.
Cautionary Statement on Forward-looking Statements
The statements contained in this filing on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements may be accompanied by
words such as "believe," "estimate," "expect," "anticipate," or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results to differ materially from those in
forward-looking statements include, among others, the following:
1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable security
values as well as currency and interest rate fluctuations).
2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
3) Changes in consumer demand for the Company's services caused by several
factors such as changes in local death rates, cremation rates, competitive
pressures and local economic conditions.
4) The Company's ability to identify and complete additional acquisitions on
terms that are favorable to the Company, to successfully integrate
acquisitions into the Company's business and to realize expected cost
savings in connection with such acquisitions. The Company's future results
may be materially impacted by changes in the level of acquisition
activity.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward- looking statements
made by the Company.
21
<PAGE> 111
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1998, the Company held its annual meeting of shareholders and
the shareholders elected two directors. The shares voting on the
director nominees were cast as follows:
Abstention or Broker
Nominee Votes For Votes Withheld Non-votes
B. D. Hunter 205,618,107 2,626,776 -0-
John W. Mecom, Jr. 205,699,268 2,545 -0-
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority
With respect to any proposal of a holder of the Company's
common stock to be submitted to the Company's shareholders at its next
annual meeting outside the processes of Rule 14a-8 promulgated under the
Securities Exchange Act of 1934, as amended, (that is, where a
shareholder has not sought inclusion of the proposal in the Company's
proxy statement), the proxies solicited by the Company's Board of
Directors for use at such annual meeting may confer discretionary
authority to the proxies named therein to vote on any such proposal,
unless the Company receives notice of such shareholder proposal by
February 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
3.1 Statement of Resolution Eliminating Series of Shares of Series C
Junior Participating Preferred Stock dated July 27, 1998.
3.2 Statement of Resolution Establishing Series of Shares of Series
D Junior Participating Preferred Stock dated July 27, 1998.
10.1 Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and Jerald L. Pullins.
12.1 Ratio of earnings to fixed charges for the six months ended
June 30, 1998 and 1997.
27.1 Financial data schedule.
(b)Reports on Form 8-K
During the quarter ended June 30, 1998, the Company filed a Form 8-K
dated May 14, 1998, reporting (i) under "Item 5. Other Events" the
preferred share purchase rights which the Company distributed as a
dividend on common stock of the Company on July 28, 1998, and (ii)
under "Item 7. Exhibits" the Rights Agreement dated May 14, 1998 and
the Company's press release dated May 14, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1998
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
---------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 112
Annex 4
SCI Form 10-Q for Quarter
Ended March 31, 1998
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 March 31, 1998
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6402-1
--------------------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
Texas 74-1488375
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
1929 Allen Parkway, Houston, Texas 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to the
filing requirements for the past 90 days.
YES X NO
The number of shares outstanding of the registrant's common stock as of
May 12, 1998, was 255,998,673 (excluding treasury shares).
<PAGE> 113
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Consolidated Statement of Income (Unaudited) -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheet -
March 31, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Three Months Ended March 31, 1998 6
Notes to the Consolidated Financial Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 18
PartII Other Information 19
Signature 19
2
</TABLE>
<PAGE> 114
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Revenues......................................... $682,684 $638,449
Costs and expenses............................... (466,556) (450,297)
-------- --------
Gross profit..................................... 216,128 188,152
General and administrative expenses.............. (17,008) (16,628)
-------- --------
Income from operations........................... 199,120 171,524
Interest expense................................. (37,710) (34,538)
Dividends on preferred securities of SCI Finance LLC - (2,629)
Other income..................................... 6,651 3,090
Gain on sale of investment....................... - 68,077
-------- --------
(31,059) 34,000
Income before income taxes and
extraordinary loss............................ 168,061 205,524
Provision for income taxes....................... (59,275) (74,377)
-------- --------
Income before extraordinary loss................. 108,786 131,147
Extraordinary loss on early extinguishment of
debt (net of income taxes of $23,383)......... - (40,802)
-------- --------
Net income....................................... $108,786 $ 90,345
======== ========
Earnings per share:
Basic:
Income before extraordinary loss............. $ .43 $ .55
Extraordinary loss on early extinguishment
of debt - (.17)
-------- --------
Net income................................... $ .43 $ .38
======== ========
Diluted:
Income before extraordinary loss............. $ .42 $ .52
Extraordinary loss on early extinguishment
of debt - (.16)
-------- --------
Net income................................... $ .42 $ .36
======== ========
Dividends per share.............................. $ .09 $ .08
======== ========
Basic weighted average number of shares ......... 254,635 237,264
======== ========
Diluted weighted average number of shares ....... 261,768 255,538
======== ========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 115
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
1998 December 31,
(Dollars in thousands, except per share amounts) (Unaudited) 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 241,587 $ 46,877
Receivables, net of allowances................ 574,154 557,481
Inventories................................... 170,410 172,169
Other......................................... 36,919 34,881
----------- -----------
Total current assets......................... 1,023,070 811,408
----------- -----------
Investments - insurance subsidiary............... 606,629 574,728
Prearranged funeral contracts ................... 2,683,364 2,610,632
Long-term receivables ........................... 1,049,608 981,121
Cemetery property, at cost....................... 1,680,857 1,636,859
Property, plant and equipment, at cost (net)..... 1,674,988 1,644,137
Deferred charges and other assets................ 559,958 549,862
Names and reputations (net)...................... 1,520,286 1,498,116
----------- ------------
$10,798,760 $ 10,306,863
=========== ============
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities...... $ 405,933 $ 425,631
Current maturities of long-term debt.......... 64,603 64,570
Income taxes ................................. 99,752 45,241
----------- ------------
Total current liabilities.................... 570,288 535,442
----------- ------------
Long-term debt................................... 2,842,697 2,634,699
Deferred income taxes............................ 707,852 701,221
Other liabilities ............................... 566,950 546,140
Deferred prearranged funeral contract revenues . 3,280,549 3,163,357
Stockholders' equity:
Common stock, $1 per share par value,
500,000,000 shares authorized,
255,902,790 and 252,923,784, respectively,
issued and outstanding 255,903 252,924
Capital in excess of par value................ 1,503,626 1,493,246
Retained earnings............................. 1,069,086 983,353
Accumulated other comprehensive income/(loss). 1,809 (3,519)
----------- ------------
Total stockholders' equity................... 2,830,424 2,726,004
----------- ------------
$10,798,760 $ 10,306,863
=========== ============
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 116
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $108,786 $ 90,345
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 42,853 37,321
Provision for deferred income taxes............ 10,708 16,216
Extraordinary loss on early extinguishment of
debt, net of income taxes - 40,802
Gains from dispositions (net).................. (2,117) (68,970)
Change in assets and liabilities, net of
effects from acquisitions:
(Increase) in receivables..................... (64,812) (34,037)
(Increase) decrease in other assets........... (14,912) 1,209
Increase (decrease) in payables and
other liabilities............................ 57,906 (2,805)
Other......................................... 1,219 7,274
-------- ---------
Net cash provided by operating activities ........ 139,631 87,355
-------- ---------
Cash flows from investing activities:
Capital expenditures........................... (56,465) (31,593)
Change in prearranged funeral balances......... 16,718 (7,000)
Purchases of securities - insurance subsidiary. (245,244) (451,602)
Sales of securities - insurance subsidiary..... 244,687 434,444
Proceeds from sales of property and equipment.. 5,135 1,886
Acquisitions, net of cash acquired............. (55,608) (117,266)
Loans issued by finance subsidiary............. (23,837) (27,643)
Principal payments received on loans by
finance subsidiary............................ 4,296 2,676
Proceeds from sale of equity investment........ - 147,739
Purchases of equity investments................ (2,436) (18,960)
Other.......................................... 7,952 (7,807)
--------- ---------
Net cash (used in) investing activities........... (104,802) (75,126)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under
revolving credit agreements................... (284,031) 469,655
Long-term debt issued.......................... 500,000 -
Payments of debt............................... (27,021) (15,842)
Early extinguishment of debt................... - (449,998)
Dividends paid................................. (18,795) (14,189)
Bank overdrafts and other...................... (10,272) 1,425
--------- ---------
Net cash provided by (used in) financing activities 159,881 (8,949)
--------- ---------
Net increase in cash and cash equivalents......... 194,710 3,280
Cash and cash equivalents at beginning of period.. 46,877 44,131
--------- ---------
Cash and cash equivalents at
March 31, 1998 and 1997.......................... $ 241,587 $ 47,411
========= =========
Cash used for:
Interest....................................... $ 21,719 $ 32,646
========= =========
Taxes.......................................... 16,126 14,841
========= =========
Non-cash investing and financing transactions:
Common stock issued in acquisitions............ $ 6,499 $9,039
========= ========
Debt issued in acquisitions.................... 4,300 1,752
========= ========
Debenture conversions to common stock.......... 1,493 5,127
========= ========
Conversion of preferred securities of
SCI Finance LLC............................... - 4,142
========= ========
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE> 117
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
other
(Dollars In Thousands, Retained comprehensive Common Paid in
Except Per Share Amounts) Total earnings income stock capital
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997.........$2,726,004 $ 983,353 $(3,519) $252,924 $1,493,246
Comprehensive income:
Net income.............. 108,786 108,786
Other comprehensive income:
Foreign currency
translation............ 1,378
Unrealized gain on
securities............. 3,950
---------
Total other comprehensive
income................. 5,328 5,328
---------
Comprehensive income.... 114,114
Common stock issued:
Stock option exercises
and stock grants....... 5,367 2,685 2,682
Acquisitions............ 6,499 179 6,320
Debenture conversions... 1,493 115 1,378
Dividends on common stock
($.09 per share)........ (23,053) (23,053)
---------- ---------- ------- -----------------
Balance at March 31, 1998.$2,830,424 $1,069,086 $ 1,809 $255,903 $1,503,626
========== ========== ======= ======== ==========
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE> 118
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. Nature of Operations
The Company is the largest provider of death care services in the world. At
March 31, 1998, the Company operated 3,166 funeral service locations, 398
cemeteries and 166 crematoria located in 18 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also contain crematoria. There are 147
combination locations that contain a funeral service location within a company
owned cemetery.
The Company's financial services operations consist of a finance subsidiary,
Provident Services, Inc. ("Provident"). Provident provides capital financing to
independent funeral home and cemetery operators.
2. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements for the three
months ended March 31,1998 and 1997 include the accounts of Service Corporation
International and all majority-owned subsidiaries (the "Company") and are
unaudited but include all adjustments, consisting of normal recurring accruals
and any other adjustments which management considers necessary for a fair
presentation of the results for these periods. These financial statements have
been prepared consistent with the accounting policies described in the annual
report on Form 10-K filed with the Securities and Exchange Commission (the
"Commission") for the year ended December 31, 1997 and should be read in
conjunction therewith. Certain reclassifications have been made to the prior
period to conform to the current period presentation with no effect on
previously reported net income, financial condition and cash flows.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
3. Acquisitions
The Company acquired 45 funeral service locations and 7 cemeteries during the
three month period ended March 31, 1998 (60 funeral service locations, 12
cemeteries and one crematory during the three months ended March 31, 1997). The
consideration for these acquisitions consisted of combinations of cash, common
stock of the Company and issued or assumed debt. The operating results of all of
these acquisitions have been included since their respective dates of
acquisitions.
7
<PAGE> 119
The effect of acquisitions on the consolidated balance sheet at March 31,
was as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Current assets...................................... $ (3,622) $ 6,841
Prearranged funeral contracts....................... (216) 40,606
Long-term receivables............................... 5,083 5,405
Cemetery property................................... 33,499 72,730
Property, plant and equipment....................... 10,679 28,425
Deferred charges and other assets................... 2,945 8,479
Names and reputations............................... 34,098 39,035
Current liabilities................................. 205 (10,906)
Long-term debt...................................... (13,258) (5,093)
Deferred income taxes and other liabilities......... (7,536) (18,273)
Deferred prearranged funeral contract revenues...... 230 (40,944)
Stockholders' equity................................ (6,499) (9,039)
-------- --------
Cash used for acquisitions.................... $ 55,608 $117,266
======== ========
</TABLE>
4. Prearranged Funeral Activities
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing
when the agreements are signed. Payments under these contracts are generally
placed in trust (pursuant to state law) or are used to pay premiums on life
insurance policies issued by third party insurers in North America, the
United Kingdom and Australia or the Company's French prearranged funeral
service life insurance subsidiary, "Auxia". Unperformed price guaranteed
prearranged funeral contracts are included in the consolidated balance sheet
as "prearranged funeral contracts" or, in the case of contracts funded by
Auxia, "investments-insurance subsidiary." A corresponding credit is recorded
to "deferred prearranged funeral contract revenues." Allowances for customer
cancellations are provided at the date of sale based on historical experience.
Amounts paid by the customer pursuant to the prearranged funeral contracts
are recognized in funeral revenue at the time the funeral is performed. Trust
earnings and increasing insurance benefits are accrued and deferred until the
service is performed at which time these funds are also recognized in funeral
revenues and are intended to cover future increases in the cost of providing a
price guaranteed funeral service. Included in deferred prearranged funeral
contract revenues are net obtaining costs, including sales commissions and
certain other direct marketing costs, applicable to prearranged funeral
contracts which are deferred and will be expensed over a period representing
the actuarially determined life of the prearranged contract.
The recognition of future funeral revenues is estimated to occur in the
following years:
<TABLE>
<S> <C>
1998 (remaining nine months)............. $ 227,570
1999..................................... 260,208
2000..................................... 242,762
2001..................................... 228,138
2002..................................... 214,057
2003 and through 2007.................... 822,404
2008 and thereafter...................... 1,285,410
----------
$3,280,549
==========
</TABLE>
8
<PAGE> 120
5. Debt
Debt at March 31, 1998 and December 31, 1997, was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------------------------
<S> <C> <C>
Bank revolving credit agreements
and commercial paper.................... $ 349,455 $ 616,589
6.375% notes due in 2000................. 150,000 150,000
6.75% notes due in 2001.................. 150,000 150,000
8.72% amortizing notes due in 2002....... 127,154 141,108
8.375% notes due in 2004................. 51,840 51,840
7.375% notes due in 2004................. 250,000 250,000
7.2% notes due in 2006................... 150,000 150,000
6.875% notes due in 2007................. 150,000 150,000
6.5% notes due in 2008................... 200,000 -
7.70% notes due in 2009.................. 200,000 200,000
6.95% amortizing notes due in 2010....... 58,859 58,859
Floating rate notes due in 2011
(putable in 1999)....................... 200,000 200,000
7.875% debentures due in 2013............ 55,627 55,627
7.0% notes due in 2015 (putable in 2002). 300,000 300,000
6.3% notes due in 2020 (putable in 2003). 300,000 -
Medium term notes, maturities through
2019, fixed average
interest rate of 9.32%.................. 35,720 35,720
Convertible debentures, interest rates
range from 4.75% - 5.5%,
due through 2008, conversion price
ranges from $11.25 - $45.69............. 48,272 45,673
Mortgage notes and other notes payable
with maturities through 2015........... 139,969 156,931
Deferred loan costs...................... (9,596) (13,078)
---------- ----------
Total debt............................... 2,907,300 2,699,269
Less current maturities.................. (64,603) (64,570)
---------- ----------
Total long-term debt................ $2,842,697 $2,634,699
========== ==========
</TABLE>
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consist of two committed facilities -- a 364-day facility and
a 5-year, multi-currency facility - which are primarily used to support
commercial paper issuance and for general corporate needs.
The 364-day facility allows for borrowings up to $300,000. This facility
expires June 26, 1998, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may be converted into a
two-year term loan at the Company's option. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of 0.06% is
paid quarterly on the total commitment amount.
The 5-year facility allows for borrowings up to $700,000, including $500,000
in various foreign currencies. This facility expires June 27, 2002. Interest
rates on this facility are based on various indices as determined by the
Company. In addition, a facility fee is paid quarterly on the total commitment
amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the
Company's senior debt ratings and is currently set at 0.08%. At March 31, 1998,
there was approximately $173,000 of revolving notes outstanding under this
facility at a weighted average interest rate of 6.62%.
As of March 31, 1998, the Company had no commercial paper outstanding.
On March 6, 1998, Service Corporation International (Canada), ("SCIC"), a
wholly owned subsidiary of the Company, entered into a 364-day, $148,000
revolving credit agreement which allows SCIC the option to convert to a five
year term loan. This facility is used primarily to support acquisition and
working capital requirements of the Company's Canadian subsidiaries. This new
facility carries no facility fee. At March 31, 1998, there was approximately
$148,000 outstanding under this facility at an average interest rate of 5.1%.
9
<PAGE> 121
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at March 31, 1998 are classified as long-term debt.
The Company uses these revolving credit agreements primarily to finance the
Company's ongoing acquisition programs. From time to time, the Company raises
debt and/or equity in the public markets to reduce its revolving credit
facility balances. The timing of these public debt or equity offerings is
dependent on numerous factors including market conditions, long and short term
interest rates, the Company's capitalization ratios and the outstanding
balances under the revolving credit facilities. Therefore, the Company has
classified these borrowings as long-term debt. It is the Company's intent to
refinance such borrowings through the use of its credit agreements or other
long-term notes issued under a shelf registration filed with the Commission.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
In March of 1998, the Company issued two senior note securities. The first
note issued was a $200,000, 10-year, non-callable security with a 6.5% coupon,
due in March of 2008. The second note was a $300,000, 22-year security due in
March of 2020. This security is subject to mandatory tender to a remarketing
agent in March of 2003 and in March of 2010. The coupon on this issue is 6.30%.
The proceeds of this offering were primarily used to repay existing debt
outstanding under the Company's revolving credit agreements.
Similarly, the stated coupons described above have substantially been
modified through the use of interest rate and cross-currency interest rate
swaps used in the management of interest rates within defined targets for
fixed and floating interest rate exposure.
During the three months ended March 31, 1998, pursuant to a shelf
registration filed with the Commission, the Company guaranteed the following
promissory notes issued through subsidiaries in connection with various
acquisitions of operations:
<TABLE>
<CAPTION>
Subsidiary Amount
-------------------------------------------- ------
<S> <C>
SCI Illinois Services, Inc.................. $ 800
</TABLE>
6. Derivatives
The Company enters into derivatives primarily in the form of interest rate swaps
to manage its mix of fixed and floating rate debt, and cross-currency interest
rate swaps in combination with local currency to substantially hedge the
Company's net investment in foreign assets. The Company has procedures in place
to monitor and control the use of derivatives and only enters into transactions
with a limited group of credit-worthy financial institutions. The Company does
not engage in derivative transactions for speculative or trading purposes, nor
is it a party to leveraged transactions.
At March 31, 1998, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding Provident debt) consists
of approximately 40% of fixed interest rate debt at a weighted average rate of
7.23% and approximately 60% of floating interest rate debt at a weighted average
rate of 5.53%. Approximately $1,385,000 of the Company's debt has been converted
from US dollar denominated debt to foreign currency denominated debt as the
result of cross-currency swaps. Including these swaps, foreign denominated debt
totals $1,752,000.
The net fair value of the Company's various swap agreements at March 31,
1998, was an asset of $138,000. Fair values were obtained from counterparties to
the agreements and represent their estimate of the net amount the Company would
receive to terminate the swap agreements based upon the existing terms and
current market conditions.
10
<PAGE> 122
7. Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------------------
<S> <C>
4.69 5.52
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus
the minority interest of majority-owned subsidiaries with fixed charges and
plus fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt costs,
dividends on preferred securities of SCI Finance LLC and one-third of rental
expense which the Company considers representative of the interest factor in
the rentals. The decrease in the Company's ratio of earnings to fixed charges
is primarily attributable to the 1997 gain on the sale of a Company investment.
8. Geographic Segment Information
The Company conducts funeral and cemetery operations in 18 countries and offers
financial services in the United States. Geographic segment information was as
follows:
<TABLE>
<CAPTION>
United Other Other
States France European Foreign
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Three months ended March 31:
1998......................... $453,026 $122,928 $63,714 $43,396
1997......................... 403,282 133,614 61,313 40,844
Income from operations:
Three months ended March 31:
1998......................... $163,804 $ 11,554 $13,293 $10,469
1997......................... 126,721 15,258 16,590 12,806
Funeral services performed:
Three months ended March 31:
1998......................... 66,069 38,776 29,330 13,300
1997......................... 61,964 41,587 29,772 12,240
Number of locations at March 31:
1998......................... 1,584 1,118 731 297
1997......................... 1,483 1,073 633 261
</TABLE>
11
<PAGE> 123
9. Earnings Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". All prior periods presented
have been restated to conform to this new standard. A reconciliation of the
numerators and denominators of the basic and diluted per share computations for
income before extraordinary item follows:
<TABLE>
<CAPTION>
Three Months ended March 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Income (numerator):
Income before extraordinary item - basic....... $108,786 $131,147
After tax interest on convertible debentures... 371 2,078
-------- --------
Income before extraordinary item - diluted..... $109,157 $133,255
- -------------------------------------------------------------------------------
Shares (denominator):
Shares - basic................................. 254,635 237,264
Stock options and warrants.................. 4,992 4,376
Convertible debentures...................... 2,141 2,493
Convertible preferred securities of
SCI Finance LLC............................ - 11,405
-------- --------
Shares - diluted............................... 261,768 255,538
- -------------------------------------------------------------------------------
Earnings per share before extraordinary item:
Basic.......................................... $ .43 $ .55
Diluted........................................ $ .42 $ .52
- -------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 124
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except average sales prices)
Overview:
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees,
as well as the other costs mentioned, allow the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given
period. The Company's acquisitions are primarily located within existing
cluster areas or create new cluster area opportunities. The Company has
approximately 400 clusters, which range in size from two operations to 73
operations. There may be more than one cluster in a given metropolitan area,
depending upon the level and degree of shared costs.
Three Months Ended March 31, 1998
Compared to Three Months Ended March 31, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Percentage
1998 1997 Increase Increase
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral............. $ 472,128 $ 457,071 $ 15,057 3.3 %
Cemetery............ 205,941 177,790 28,151 15.8
Financial services.. 4,615 3,588 1,027 28.6
--------- --------- --------
682,684 638,449 44,235 6.9
Costs and expenses:
Funeral............. 339,436 337,368 2,068 0.6
Cemetery............ 124,688 110,997 13,691 12.3
Financial services.. 2,432 1,932 500 25.9
--------- --------- --------
466,556 450,297 16,259 3.6
Gross profit and
margin percentage:
Funeral............. 132,692 28.1% 119,703 26.2% 12,989 10.9
Cemetery............ 81,253 39.5 66,793 37.6 14,460 21.6
Financial services.. 2,183 47.3 1,656 46.2 527 31.8
--------- --------- --------
$ 216,128 31.7% $ 188,152 29.5% $ 27,976 14.9 %
========= ========= ========
</TABLE>
13
<PAGE> 125
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 257,877 $ 234,699 $23,178 9.9 %
France...................... 122,548 133,010 (10,462) (7.9)
Other European.............. 51,741 54,493 (2,752) (5.1)
Other foreign............... 27,676 28,336 (660) (2.3)
---------- --------- -------
459,842 450,538 9,304 2.1
New clusters:*
United States............... 2,635 527 2,108
Other European.............. 6,032 181 5,851
Other foreign............... 1,185 222 963
---------- --------- -------
9,852 930 8,922
Non-cluster and disposed
operations.................... 2,434 5,603 (3,169)
---------- --------- -------
Total funeral revenues...... $ 472,128 $ 457,071 $15,057 3.3 %
========== ========= =======
</TABLE>
The $9,304 increase in revenues from existing clusters was the result of a
3.6% higher average sales price ($3,243 compared to $3,130), offset by a 1.5%
decline in the number of funeral services performed (141,808 compared to
143,936). Acquisitions since January 1, 1997, included in existing clusters,
contributed $23,451 to the existing cluster revenue increase, while locations
acquired before 1997 had a decline of $14,147. French funeral revenues for the
quarter decreased $10,237 caused exclusively by an adverse change in the US
dollar / French franc exchange rate.
During the three months ended March 31, 1998, the Company sold $135,830 of
prearranged funeral services compared to $125,315 for the same period in 1997.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 147,883 $ 144,288 $ 3,595 2.5 %
France...................... 105,734 113,652 (7,918) (7.0)
Other European.............. 39,137 38,347 790 2.1
Other foreign............... 19,564 19,237 327 1.7
--------- --------- -------
312,318 315,524 (3,206) (1.0)
New clusters:*
United States............... 1,752 417 1,335
Other European.............. 4,444 106 4,338
Other foreign............... 803 175 628
--------- --------- -------
6,999 698 6,301
Non-cluster and disposed
operations.................... 3,208 5,073 (1,865)
Administrative overhead........ 16,911 16,073 838 5.2
--------- --------- -------
Total funeral costs and expenses $ 339,436 $ 337,368 $ 2,068 0.6 %
========= ========= =======
</TABLE>
- --------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
14
<PAGE> 126
The $3,206 decrease in costs and expenses from existing clusters is primarily
the result of a period to period 1.5% decline in the number of funeral services
performed. Acquisitions since January 1, 1997, included in existing clusters,
reported $19,026 of increased costs, while continued cost controls at existing
locations acquired before 1997 contributed to a $22,232 cost decrease. French
funeral costs and expenses decreased $9,228 due to a change in the US dollar /
French franc exchange rate. The gross profit margin for existing clusters
increased to 28.4% in 1998 from 26.4% in 1997. Typically, acquisitions will
temporarily exhibit slightly lower gross profit margins than those experienced
by the Company's existing locations at least until such time as these locations
are assimilated into the Company's cluster management strategy.
The overall funeral gross profit margin percentage improved in 1998 to 28.1%,
compared to 26.2% in 1997. Contributing to this period to period improvement
were the Company's North American operations, which had a margin improvement to
38.2% from 34.0% due primarily to seasonal volume levels and continued cost
control efforts. Partially offsetting was the French gross profit margin of
10.1% for the period ended March 31, 1998 which declined from 11.6% in 1997
due primarily to weaker than expected funeral service volumes. The reduced
funeral service volume was noticeable throughout Europe and is primarily due
to milder winter weather.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, increased slightly to 3.6%, compared to 3.5% in 1997.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 180,402 $157,936 $22,466 14.2 %
Other European.............. 5,117 5,809 (692) (11.9)
Other foreign............... 11,560 12,203 (643) (5.3)
--------- -------- -------
197,079 175,948 21,131 12.0
New clusters*.................. 7,775 293 7,482
Non-cluster and disposed
operations.................... 1,087 1,549 (462)
--------- -------- -------
Total cemetery revenues..... $ 205,941 $177,790 $28,151 15.8 %
========= ======== =======
</TABLE>
Revenues from the existing clusters increased $21,131 in 1998. Included in
the existing cluster increase were $14,052 in increased revenues from
cemeteries acquired since the beginning of 1997, while revenues from existing
cluster locations owned before 1997 increased $7,079.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 99,517 $ 90,740 $ 8,777 9.7%
Other European.............. 3,200 2,961 239 8.1
Other foreign............... 6,701 6,572 129 2.0
-------- -------- -------
109,418 100,273 9,145 9.1
New clusters*.................. 5,350 327 5,023
Non-cluster and disposed
operations.................... 1,371 950 421
Administrative overhead........ 8,549 9,447 (898) (9.5)
-------- -------- -------
Total cemetery costs
and expenses............... $124,688 $110,997 $13,691 12.3%
======== ======== =======
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
15
<PAGE> 127
Costs and expenses from existing clusters increased $9,145 due primarily to
an increase of $9,351 at cemeteries acquired since the beginning of 1997. The
overall cemetery gross profit margin percentage improved in 1998 to 39.5% from
37.6% in 1997. This increase reflects growth and a favorable product mix in
sales of preneed cemetery property and merchandise, increased trust investment
income, as well as continued cost control in all major expense categories
primarily in the United States. Administrative overhead costs have decreased to
4.2% of revenues compared to 5.3% during the three months ended March 31, 1998.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $2,183 for the three months ended
March 31, 1998, compared to $1,656 for the same period in 1997. Provident's
average outstanding loan portfolio during the current period increased to
$197,551 compared to $165,384 in 1997, and the average interest rate spread
also increased to 3.5% compared to 3.1% in 1997.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.5% for the three months ended March 31, 1998 compared
to 2.6% for the comparable period in 1997.
Interest expense, which excludes the amount incurred through financial
service operations, increased $3,172 or 9.2% period to period. The increased
interest expense reflects the lower average interest rates on indebtedness
offset by the Company's higher debt level in 1998.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a gain of $68,100.
The provision for income taxes reflected a 35.3% effective tax rate for the
quarter ended March 31, 1998, compared to a 36.2% effective tax rate for the
comparable period in 1997. The decrease in the effective tax rate is due
primarily to lower taxes from international operations, partially offset by the
1997 tax impact from the gain on sale of the Company's interest in ECI which
was reflected at the Company's higher domestic tax rate.
Financial Condition and Liquidity at March 31, 1998:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Securities and Exchange Commission (the "Commission"). The
Company believes cash from operations, additional funds available under its
revolving credit agreements, proceeds from public and private offerings of
securities will be sufficient to continue its current acquisition program and
operating policies. During the first quarter of 1998, the Company acquired 45
funeral service locations and 7 cemeteries (see Note 3). In addition, the
Company has received signed letters of intent to acquire an additional 138
funeral service locations, 29 cemeteries and 2 crematoria for an aggregate
purchase price of approximately $386,000. These businesses are expected to
produce approximately $189,000 in annualized revenues, including $64,000
in North American operations and $125,000 from operations outside North
America.
At March 31, 1998, the Company had net working capital of $452,782 and a
current ratio of 1.79:1, compared to working capital of $275,966 and a current
ratio of 1.52:1 at December 31, 1997.
Sources And Uses of Cash
Cash flows from operating activities: Net cash provided by operating activities
was $139,631 for the three months ended March 31, 1998, compared to $87,355 for
the same period in 1997, an increase of $52,276. This increase was primarily due
to improved operating results and an increase in payables and other liabilities
during the current three months. Significant reductions of operating cash
include amounts receivable resulting from increased sales of funeral services
and cemetery products and merchandise.
16
<PAGE> 128
Cash flows from investing activities: Net cash used in investing activities was
$104,802 for the three months ended March 31, 1998, compared to $75,126 for the
same period in 1997, an increase of $29,676. Cash used for acquisitions
decreased by $61,658 and capital expenditures increased by $24,872 during the
three months ended March 31, 1998, as the Company continues to expand through
both acquisitions of existing businesses and through increased construction of
funeral and cemetery facilities. Additionally, in 1997 approximately $147,000
in cash was provided by the sale of the Company's interest in ECI. Cash used
relating to prearranged funeral activities decreased due to the timing of cash
payments to and withdrawals from trusts, offset by increased cash outlays on
prearranged marketing efforts.
Cash flows from financing activities: Net cash provided by financing activities
was $159,881 for the three months ended March 31, 1998, compared to net used of
$8,949 for the same period in 1997, an increase of $168,830. Last year included
a use of cash of $449,998 for the early extinguishment of certain higher
interest rate debt.
As of March 31, 1998, the Company's debt to capitalization ratio was 50.7%
compared to 49.8% at December 31, 1997. The interest rate coverage ratio for the
three months ended March 31, 1998 was 5.20:1, compared to 4.54:1 (excluding the
gain on the sale of the Company's investment in ECI) for the same period in
1997. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash flow generated
and the low failure rate exhibited by these types of businesses. The Company
believes these acquired firms are capable of servicing the additional debt and
providing a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance its
future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. The Company's
various revolving credit facilities and lines of credit currently provide for
aggregate borrowings of approximately $1,148,000 of which approximately $828,000
was available under these facilities at March 31, 1998. The Company also had the
ability to issue $50,000 in securities registered with the Commission under a
shelf registration. In addition, 15,190,000 shares of common stock and a total
of $197,000 of guaranteed promissory notes and convertible debentures are
registered with the Commission under a separate shelf registration to be used
exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts and
the funds collected are generally held in trust or are used to purchase a life
insurance or annuity contract. The principal amount of these prearranged funeral
contracts will be received in cash by a Company funeral service location at the
time the funeral is performed. Earnings on trust funds and increasing benefits
under insurance funded contracts also increase the amount of cash to be received
upon performance of the funeral and are intended to cover future increases in
the cost of providing a price guaranteed funeral service as well as any selling
costs. During 1997, the Company completed a review of the prearranged trust
investment process which included an asset/liability study. This has resulted in
a new investment program which entails the consolidation of multiple trustees,
the use of institutional managers with differing investment styles and
consolidated performance monitoring and tracking. This new program targets a
real return in excess of the amount necessary to cover future increases in the
cost of providing a price guaranteed funeral service as well as any selling
costs. This is accomplished by allocating the portfolio mix to the appropriate
investments that more accurately match the anticipated maturity of the policies.
The Company anticipates an asset allocation of approximately 65% equity and 35%
fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are a
current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American
17
<PAGE> 129
funerals performed annually approximates 25% and is expected to grow, thereby
making the total number of funerals performed more predictable.
Other Matters:
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs to
correctly differentiate the century from a date in which the year is represented
by only two digits. A computer system which is not year 2000 compliant might not
be able to process certain data or possibly cause the entire computer system to
malfunction. The Company is currently assessing any potential impact that
changing to the year 2000 will have on the computer programs that operate within
the Company or are used by major vendors or service providers.
Cautionary Statement on Forward-looking Statements
The statements contained in this filing on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements may be accompanied by
words such as "believe," "estimate," "expect," "anticipate," or "predict," that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results to differ materially from those in
forward-looking statements include, among others, the following:
1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g. marketable security
values as well as currency and interest rate fluctuations).
2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies. Changes in regulations may impact the Company's ability to enter
or expand new markets.
3) Changes in consumer demand for the Company's services caused by several
factors such as changes in local death rates, cremation rates, competitive
pressures and local economic conditions.
4) The Company's ability to identify and complete additional acquisitions on
terms that are favorable to the Company, to successfully integrate
acquisitions into the Company's business and to realize expected cost
savings in connection with such acquisitions. The Company's future results
may be materially impacted by changes in the level of acquisition
activity.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
18
<PAGE> 130
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the three months
ended March 31, 1998 and 1997.
27.1 Financial data schedule.
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, the Company filed a
Form 8-K dated March 24, 1998 reporting (i) under "Item 5.
Other Events" certain information regarding a registration
statement relating to the public offering of securities from
time to time, and (ii) under "Item 7. Financial Statements
and Exhibits" certain exhibits, including underwriting
agreements, relating to the aforementioned registration
statement.
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.
May 14, 1998
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
--------------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
19
<PAGE> 131
Annex 5
SCI Form 8-K Filed
on May 15, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) MAY 14, 1998
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 1-6402-1 74-1488375
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 713-522-5141
<PAGE> 132
ITEM 5. OTHER EVENTS
On May 14, 1998, the Board of Directors of Service Corporation
International (the "Company") declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock, par value
$1.00 per share (the "Common Shares"), of the Company. The dividend is payable
on July 28, 1998 (the "Record Date") to the stockholders of record on that date.
Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series D Junior Participating Preferred Stock, par
value $1.00 per share (the "Preferred Shares"), of the Company at a price of
$220 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and Harris Trust and
Savings Bank, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 20% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding Common Shares
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of a Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution
Date (or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Shares. Until the Distribution Date
(or earlier redemption or expiration of the Rights), new Common Share
certificates issued after the Record Date upon transfer or new issuance of
Common Shares will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
outstanding as of the Record Date, even without such notation or a copy of a
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Shares as of the close of business on the Distribution Date and
such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date.
The Rights will expire on July 28, 2008 (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights are earlier redeemed
or exchanged by the Company, in each case, as described below.
Page 2
<PAGE> 133
The Purchase Price payable, and the number of Preferred Shares
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred Shares at a
price, or securities convertible into Preferred Shares with a conversion price,
less than the then-current market price of the Preferred Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of indebtedness
or assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one
one-thousandths of a Preferred Share issuable upon exercise of each Right are
also subject to adjustment in the event of a stock split of the Common Shares or
a stock dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1 per share but will be entitled to
an aggregate dividend of 1,000 times the dividend declared per Common Share. In
the event of liquidation, the holders of the Preferred Shares will be entitled
to a minimum preferential liquidation payment of $1,000 per share but will be
entitled to an aggregate payment of 1,000 times the payment made per Common
Share. In the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
1,000 times the amount received per Common Share. These rights are protected by
customary antidilution provisions. Each Preferred Share will have one vote,
voting together with the Common Shares.
Because of the nature of the Preferred Shares' dividend and
liquidation rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate, to some
degree, the value of one Common Share.
In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold after a person or group has become an Acquiring Person,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then-current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market value
of two times the exercise price of the Right. In the event that any person or
group of affiliated or associated persons becomes an Acquiring Person, proper
provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of Common Shares
having a market value of two times the exercise price of the Right.
Page 3
<PAGE> 134
At any time after any person or group becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by such person or group which will
have become void), in whole or in part, at an exchange ratio of one Common Share
(or of a number of shares of preferred stock, or fraction thereof, having
equivalent value to one Common Share) per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
1% in such Purchase Price. No fractional Preferred Shares will be issued (other
than fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 20% or more of the
outstanding Common Shares, the Board of Directors of the Company may redeem the
Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time on such
basis with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the Board of
Directors of the Company without the consent of the holders of the Rights,
including an amendment to lower the threshold for exercisability of the Rights
from 20% to not less than the greater of (i) any percentage greater than the
largest percentage of the outstanding Common Shares then known to the Company to
be beneficially owned by any person or group of affiliated or associated persons
and (ii) 10%, except that from and after such time as any person or group of
affiliated or associated persons becomes an Acquiring Person no such amendment
may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
The Rights Agreement, dated as of May 14, 1998, between the
Company and Harris Trust and Savings Bank, as Rights Agent, specifying the terms
of the Rights, the press release and letter to shareholders announcing the
declaration of the Rights and the Statement of Resolution setting forth the
terms of the Preferred Shares are attached hereto as exhibits and are
incorporated herein by reference. The foregoing summary description of the
Rights is qualified in its entirety by reference to such exhibit.
Page 4
<PAGE> 135
ITEM 7. EXHIBITS.
99.1. Rights Agreement, dated as of May 14, 1998, by and between
Service Corporation International and Harris Trust and
Savings Bank, as Rights Agent, which includes the form of
Statement of Resolution setting forth the terms of the
Series D Junior Participating Preferred Stock, par value
$1.00 per share, as Exhibit A, the form of Right Certificate
as Exhibit B and the Summary of Rights to Purchase Preferred
Shares as Exhibit C. Pursuant to the Rights Agreement,
printed Right Certificates will not be mailed until as soon
as practicable after the earlier of the tenth day after
public announcement that a person or group has acquired
beneficial ownership of 20% or more of the Common Shares or
the tenth business day after a person commences or announces
its intention to commence a tender or exchange offer the
consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the Common
Shares.
99.2. Press Release issued May 14, 1998.
Page 5
<PAGE> 136
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 hereunto duly authorized.
SERVICE CORPORATION INTERNATIONAL
Date: May 14, 1998 By: /s/ James M. Shelger
-------------------------------------
Name: James M. Shelger
Title: Senior Vice President,
General Counsel and Secretary
Page 6
<PAGE> 137
Annex 6
SCI Form 8-K Filed
on March 24, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 11, 1998
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation)
1-6402-1 74-1488375
(Commission File Number) (IRS Employer Identification No.)
1929 Allen Parkway, Houston, Texas 77019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 522-5141
<PAGE> 138
ITEM 5. OTHER EVENTS
On August 27, 1996, Service Corporation International (the "Company")
filed with the Securities and Exchange Commission a registration statement on
Form S-3 (File No. 333-10867) under the Securities Act of 1933, as amended,
relating to the public offering from time to time of up to $1,000,000,000 in
aggregate initial offering price of debt securities, common stock and common
stock warrants of the Company.
On March 11, 1998, the Company entered into (i) an Underwriting
Agreement with J.P. Morgan Securities Inc., Chase Securities Inc., Citicorp
Securities, Inc., BancAmerica Robertson Stephens and Societe Generale Securities
Corporation with respect to $200,000,000 aggregate principal amount of its 6.50%
Notes due March 15, 2008, and (ii) an Underwriting Agreement with J.P. Morgan
Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and UBS Securities LLC with respect to $300,000,000
aggregate principal amount of its 6.30% Dealer remarketable securities sm
("Drs.sm") due March 15, 2020. On March 16, 1998, the Company entered into a
Remarketing Agreement with J.P. Morgan Securities Inc. with respect to the
remarketing of the Drs. Both Underwriting Agreements, the Global Securities
issued pursuant thereto and the Remarketing Agreement are attached as exhibits.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) The following exhibits to Registration Statement on Form S-3
(Registration No. 333-10867) are filed as part of this report
on Form 8-K.
Exhibit 1.1 Underwriting Agreement dated as of March 11, 1998 between the
Company and J.P. Morgan Securities Inc., Chase Securities
Inc., Citicorp Securities, Inc., BancAmerica Robertson
Stephens and Societe Generale Securities Corporation with
respect to $200,000,000 aggregate principal amount of the
Company's 6.50% Notes due March 15, 2008.
Exhibit 1.2 Underwriting Agreement dated as of March 11, 1998 between the
Company and J.P. Morgan Securities Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated and UBS Securities LLC with respect to
$300,000,000 aggregate principal amount of the Company's 6.30%
Dealer remarketable securities sm due March 15, 2020.
Exhibit 1.3 Remarketing Agreement dated as of March 16, 1998 between the
Company and J.P. Morgan Securities Inc.
<PAGE> 139
Exhibit 1.4 Form of Global Security dated March 16, 1998 with respect to
$200,000,000 aggregate principal amount of the Company's 6.50%
Notes due March 15, 2008.
Exhibit 1.5 Form of Global Security dated March 16, 1998 with respect to
$200,000,000 aggregate principal amount of the Company's 6.30%
Dealer remarketable securities(sm) due March 15, 2020.
Exhibit 1.6 Form of Global Security dated March 16, 1998 with respect to
$100,000,000 aggregate principal amount of the Company's 6.30%
Dealer remarketable securities(sm) due March 15, 2020.
<PAGE> 140
SIGNATURES
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 hereunto duly authorized.
SERVICE CORPORATION INTERNATIONAL
Date: March 24, 1998 By: /s/ James M. Shelger
------------------------------
James M. Shelger
Senior Vice President
General Counsel and Secretary
<PAGE> 141
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<S> <C>
*2.1 Agreement and Plan of Merger, dated as of August 6, 1998, by and
among Service Corporation International, a Texas corporation ("SCI"),
SCI Delaware Funeral Services, Inc., a Delaware corporation and a
wholly owned subsidiary of SCI, and Equity Corporation International,
a Delaware corporation.
*23.1 Consent of Independent Accountants of Service Corporation
International.
</TABLE>
- ----------
* Filed herewith.
-19-
<PAGE> 142
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EQUITY CORPORATION INTERNATIONAL
By: /s/ W. Cardon Gerner
--------------------------------------
W. Cardon Gerner
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer
and Duly Authorized Officer)
Date: September 2, 1998
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<PAGE> 143
EXHIBIT INDEX
<TABLE>
<S> <C>
*2.1 Agreement and Plan of Merger, dated as of August 6, 1998, by and
among Service Corporation International, a Texas corporation ("SCI"),
SCI Delaware Funeral Services, Inc., a Delaware corporation and a
wholly owned subsidiary of SCI, and Equity Corporation International,
a Delaware corporation
*23.1 Consent of Independent Accountants of Service Corporation
International.
</TABLE>
- ----------
* Filed herewith.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SERVICE CORPORATION INTERNATIONAL,
SCI DELAWARE FUNERAL SERVICES, INC.,
AND
EQUITY CORPORATION INTERNATIONAL
<PAGE> 2
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. EFFECTIVE TIME OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II THE SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.1. CERTIFICATE OF INCORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2. BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.3. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.4. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.1. EFFECT ON CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.2. EXCHANGE OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.3. STOCK TRANSFER BOOKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.4. NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK . . . . . . . . . . . . . . . 5
Section 3.5. LOST, STOLEN OR DESTROYED CERTIFICATES . . . . . . . . . . . . . . . . . . . . . 5
Section 3.6. TAX AND ACCOUNTING CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.7. TAKING OF NECESSARY ACTION; FURTHER ACTION . . . . . . . . . . . . . . . . . . . 5
Section 3.8. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB . . . . . . . . . . . . . . . . . . . . 5
Section 4.1. ORGANIZATION AND QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.2. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS . . . . . . . . . . . . . . . . . . . . . 6
Section 4.4. REGISTRATION STATEMENT AND PROXY STATEMENT . . . . . . . . . . . . . . . . . . . 7
Section 4.5. REPORTS AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.6. ABSENCE OF UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.7. ABSENCE OF CERTAIN CHANGES OR EVENTS . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.8. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.9. NO VIOLATION OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.10. COMPLIANCE WITH AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.11. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.1. ORGANIZATION AND QUALIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.2. CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.3. SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5.5. REPORTS AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.6. ABSENCE OF UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS . . . . . . . . . . . . . . . . . . . . . 12
Section 5.8. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.9. PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.10. NO VIOLATION OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.11. COMPLIANCE WITH AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.12. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.13. EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.14. LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.15. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.16. NON-COMPETITION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.17. TITLE TO ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.18. MATERIAL CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.19. INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.20. COMPANY STOCKHOLDERS' APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.21. BROKERS AND FINDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.22. INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.23. YEAR 2000 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.24. OPINION OF FINANCIAL ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER . . . . . . . . . . . . . 18
Section 6.2. CONTROL OF THE COMPANY'S OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.3. ACQUISITION TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.4. CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER . . . . . . . . . . . . . . . 21
ARTICLE VII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.1. ACCESS TO INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.2. REGISTRATION STATEMENT AND PROXY STATEMENT . . . . . . . . . . . . . . . . . . 21
Section 7.3. STOCKHOLDERS' APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.4. COMPLIANCE WITH THE SECURITIES; ACT POOLING-OF-INTERESTS ACCOUNTING TREATMENT. . 22
Section 7.5. EXCHANGE LISTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.6. EXPENSES AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.7. AGREEMENT TO COOPERATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.8. PUBLIC STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.9. NOTIFICATION OF CERTAIN MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.10. CORRECTIONS TO THE PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT . . . 23
Section 7.11. RIGHTS AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.12. DIRECTOR AND OFFICER LIABILITY; INDEMNIFICATION . . . . . . . . . . . . . . . 24
Section 7.13. REORGANIZATION; ACCOUNTING TREATMENT. . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7.14. ASSUMPTION OF COMPANY STOCK PLANS . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.15. EXECUTION OF SUPPLEMENTAL INDENTURE; RESERVATION OF SHARES. . . . . . . . . . . 24
Section 7.16. EMPLOYMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE VIII CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. . . . . . . . . . . 25
Section 8.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER . . . . . . . . . 25
Section 8.3. CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB TO EFFECT THE MERGER . . . . 26
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 9.1. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 9.2. EFFECT OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.3. AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.4. EXTENSIONS; WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 10.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 28
Section 10.2. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 10.3. INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 10.4. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 10.5. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 10.6. BINDING ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 10.7. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.8. PARTIES IN INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.9. ENFORCEMENT OF THE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.10. CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.11. VALIDITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
-iii-
<PAGE> 5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 6, 1998 (the
"Agreement"), is by and among Service Corporation International, a Texas
corporation ("Parent"), SCI Delaware Funeral Services, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Equity
Corporation International, a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
the Company have approved the merger of Merger Sub with and into the Company
(the "Merger");
WHEREAS, Parent, Merger Sub and the Company intend the Merger to
qualify as a tax-free reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder; and
WHEREAS, Parent, Merger Sub and the Company intend that the Merger be
accounted for as a pooling-of-interests for financial reporting purposes.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
Section 1.1. THE MERGER. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in Section 1.2)
in accordance with Delaware General Corporation Law (the "DGCL"), Merger Sub
shall be merged with and into the Company and the separate existence of Merger
Sub shall thereupon cease. The Company shall be the surviving corporation in
the Merger and is hereinafter sometimes referred to as the "Surviving
Corporation."
Section 1.2. EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time (the "Effective Time") as a certificate of merger is
filed with the Secretary of State of the State of Delaware in accordance with
the DGCL (the "Merger Filing"). The Merger Filing shall be made simultaneously
with or as soon as practicable after the Closing (as defined in Section 3.8) in
accordance with Article III. The parties acknowledge that it is their mutual
desire and intent to consummate the Merger as soon as practicable after the
date hereof, and in any event within five business days after the satisfaction,
or waiver, of all conditions to Closing set forth in Article VIII hereof,
subject to the terms and conditions hereof. Accordingly, subject to the
provisions hereof and to the fiduciary duties of their respective boards of
directors, the parties shall use all reasonable efforts to consummate, as soon
as practicable, the transactions contemplated by this Agreement in accordance
with Article III.
<PAGE> 6
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1. CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of the Company as in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation
after the Effective Time, as the same may thereafter be amended in accordance
with its terms and as provided under the DGCL.
Section 2.2. BYLAWS. The Bylaws of the Company as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation after the Effective Time, as the same may thereafter be amended in
accordance with their terms and as provided by the Certificate of Incorporation
of the Surviving Corporation and the DGCL.
Section 2.3. DIRECTORS. The directors of the Surviving Corporation
shall be as designated in Schedule 2.3, and such directors shall serve in
accordance with the Bylaws of the Surviving Corporation until their respective
successors are duly elected or appointed and qualified.
Section 2.4. OFFICERS. The officers of the Surviving Corporation
shall be as designated in Schedule 2.4, and such officers shall serve in
accordance with the Bylaws of the Surviving Corporation until their respective
successors are duly elected or appointed and qualified.
ARTICLE III
CONVERSION OF SHARES
Section 3.1. EFFECT ON CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of the Parent, Merger
Sub, the Company or the holders of any of the following securities:
(a) CONVERSION OF SECURITIES. Each share of the
Company's common stock, par value $.01 per share, issued and outstanding
immediately prior to the Effective Time ("Company Common Stock") (excluding any
shares of Company Common Stock to be canceled pursuant to Section 3.1(b)) shall
be converted, subject to Section 3.1(f), into the right to receive the number
of validly issued, fully paid and nonassessable shares of common stock, par
value $1.00 per share, of Parent ("Parent Common Stock") determined by dividing
$27.00 by the Average Parent Stock Price (as hereinafter defined); provided,
however, that (i) in the event the Average Parent Stock Price is greater than
$41.50, the Company Common Stock shall be converted, subject to Section 3.1(f),
into the right to receive the number of validly issued, fully paid and
nonassessable shares of Parent Common Stock determined by dividing $27.00 by
$41.50, and (ii) in the event the Average Parent Stock Price is less than
$34.00, the Company Common Stock shall be converted, subject to Section 3.1(f),
into the right to receive the number of validly issued, fully paid and
nonassessable shares of Parent Common Stock determined by dividing $27.00 by
$34.00.
-2-
<PAGE> 7
The capitalized terms used in this Section 3.1(a) shall have the
following meanings:
"Average Parent Stock Price" means the average of the Daily
Per Share Prices for the ten (10) consecutive trading days ending on
the third trading day prior to the Closing.
"Daily Per Share Price" for any trading day means the weighted
average of the per share selling prices on the New York Stock
Exchange, Inc. (the "NYSE") of Parent Common Stock (as reported in the
NYSE Composite Transactions) for that day.
(b) CANCELLATION. Each share of Company Common Stock
held by Parent, Merger Sub or any other direct or indirect Subsidiary of Parent
(other than shares held in trust or held for the benefit of anyone other than
Parent, Merger Sub or any other such Subsidiary), held in the treasury of the
Company and held by any direct or indirect wholly owned Subsidiary (as defined
in Section 10.10) of the Company, if any, immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, cease to be outstanding, be canceled and retired without
payment of any consideration therefor and cease to exist.
(c) ASSUMPTION OF OUTSTANDING STOCK OPTIONS.
(i) Each option outstanding at the Effective Time to
purchase shares of Company Common Stock (a "Stock Option") granted under (A)
the Equity Corporation International Amended and Restated 1994 Long-Term
Incentive Plan, the Equity Corporation International 1998 Long-Term Incentive
Plan and the Equity Corporation International 1997 Employee Stock Purchase Plan
(collectively, the "Company Stock Plans"), or (B) any other stock plan or
agreement of the Company, which by its terms is not extinguished in the Merger,
upon the approval of the Committee directing such Company Stock Plan in
accordance with Section 7.14, shall be deemed assumed by Parent and deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Stock Option prior to the Effective Time, the number of
shares of Parent Common Stock as the holder of such Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time (not taking into account
whether or not such option was in fact exercisable), at a price per share equal
to (x) the aggregate exercise price for Company Common Stock otherwise
purchasable pursuant to such Stock Option divided by (y) the number of shares
of Parent Common Stock deemed purchasable pursuant to such Stock Option if such
Stock Option had been exercised immediately prior to the Closing Date without
regard to vesting; provided, however, that the number of shares of Parent
Common Stock that may be purchased upon exercise of any such Stock Option shall
not include any fractional share and, upon exercise of the Stock Option, a cash
payment shall be made for any fractional share based upon the Daily Per Share
Price on the trading day immediately preceding the date of exercise; provided,
further, in connection with the 1997 Employee Stock Purchase Plan, the
participants' options may be adjusted or exercised in accordance with the
provisions and intent of such plan. Prior to the Effective Time, the Company
shall not amend any of the Company Stock Plans, any other stock plan or
agreement of the Company or any Stock
-3-
<PAGE> 8
Option, or accelerate the vesting provisions of any Stock Option, without the
prior written consent of Parent.
(ii) As soon as practicable after the Effective
Time, Parent shall cause to be delivered to each holder of an outstanding Stock
Option an appropriate notice setting forth such holder's rights pursuant
thereto as assumed by Parent, and such Stock Option shall otherwise continue in
effect on the same terms and conditions.
(iii) Parent shall cause to be taken all corporate
action necessary to reserve for issuance a sufficient number of shares of
Parent Common Stock for delivery upon exercise of Stock Options in accordance
with this Section 3.1(c). As soon as practicable after the Effective Time,
Parent shall cause the Parent Common Stock subject to the Stock Options to be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules of the Securities and Exchange Commission (the "SEC") thereunder
pursuant to a registration statement on Form S-8, as the case may be (or any
successor or other appropriate form), and shall use its reasonable efforts to
cause the effectiveness of such registration statement or registration
statements (and the current status of the prospectus or prospectuses contained
therein) to be maintained for so long as the Stock Options remain outstanding.
(d) CAPITAL STOCK OF MERGER SUB. Each share of common
stock, par value $.01 per share, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock, $.01 par value per share, of the Surviving
Corporation.
(e) ADJUSTMENTS TO MERGER CONSIDERATION. The Merger
Consideration (as defined in Section 3.2(b)) shall be appropriately adjusted to
reflect fully the effect of any stock split, reverse split, cash dividends
(other than regular cash dividends in the ordinary course of business,
including reasonable increases), stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock), property
distribution (other than regular cash dividends in the ordinary course of
business, including reasonable increases), reorganization, reclassification,
recapitalization or other similar change with respect to Parent Common Stock
occurring (including the record date thereof) after the date hereof and prior
to the Effective Time.
(f) FRACTIONAL SHARES. No certificates or scrip
representing less than one share of Parent Common Stock shall be issued upon
the surrender for exchange of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock (the "Certificates"). In lieu of any such fractional share, each holder
of shares of Company Common Stock who would otherwise have been entitled to a
fraction of a share of Parent Common Stock upon surrender of Certificates for
exchange shall be paid upon such surrender cash (without interest) in an amount
equal to such fraction multiplied by the Daily Per Share Price on the date of
the Effective Time.
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Section 3.2. EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time, Parent
shall appoint an agent, which shall be Parent's Transfer Agent or such other
person or persons reasonably satisfactory to the Company (the "Exchange Agent")
for the purpose of exchanging Certificates for the Merger Consideration (as
defined in Section 3.2(b)). As of the Effective Time, Parent will make
available to the Exchange Agent, as needed, the Merger Consideration to be paid
in respect of shares of Company Common Stock.
(b) EXCHANGE PROCEDURES. As soon as reasonably
practicable after the Effective Time, Parent will instruct the Exchange Agent
to mail to each holder of record of Certificates (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify), and (ii) instructions to
effect the surrender of the Certificates in exchange for the certificates
evidencing shares of Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, and such other customary documents as may be required pursuant
to such instructions, the holder of such Certificate shall be entitled to
receive in exchange therefor (A) certificates evidencing that number of whole
shares of Parent Common Stock which such holder has the right to receive in
accordance with Section 3.1 hereof in respect of the shares of Company Common
Stock formerly evidenced by such Certificate, (B) any dividends or other
distributions to which such holder is entitled pursuant to Section 3.2(c), and
(C) cash in respect of fractional shares as provided in Section 3.1(f) (the
shares of Parent Common Stock and cash being, collectively, the "Merger
Consideration"), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of shares of Company Common
Stock which is not registered in the transfer records of the Company as of the
Effective Time, shares of Parent Common Stock, dividends or distributions as
provided in Section 3.2(c), and cash in respect of fractional shares as
provided in Section 3.1(f), may be issued and paid in accordance with this
Article III to a transferee if the Certificate evidencing such shares of
Company Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer pursuant to this
Section 3.2(b) and by evidence that any applicable stock transfer taxes have
been paid. Until so surrendered, each outstanding Certificate that, prior to
the Effective Time, represented shares of the Company Common Stock will be
deemed from and after the Effective Time, for all corporate purposes, to
evidence the ownership of the number of full shares of Parent Common Stock, and
cash in respect of fractional shares, into which such shares of the Company
Common Stock shall have been so converted.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No
dividends or other distributions declared or made after the Effective Time with
respect to shares of Parent Common Stock with a record date after the Effective
Time shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Parent Common Stock they are entitled to receive until the
holder of such Certificate shall surrender such Certificate. Subject to
applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, at the time
of such
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<PAGE> 10
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Parent Common Stock.
(d) TRANSFERS OF OWNERSHIP. If any certificate for
shares of Parent Common Stock is to be issued in a name other than that in
which the Certificate surrendered in exchange therefor is registered, it will
be a condition of the issuance thereof that the Certificate so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the issuance
of a certificate for shares of Parent Common Stock in any name other than that
of the registered holder of the certificate surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been
paid or is not payable.
(e) NO LIABILITY. Neither Parent, Merger Sub nor the
Company shall be liable to any holder of Company Common Stock for any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(f) WITHHOLDING RIGHTS. Parent or the Exchange Agent
shall be entitled to deduct and withhold from the Merger Consideration
otherwise payable pursuant to this Agreement to any holder of Company Common
Stock such amounts as Parent or the Exchange Agent is required to deduct and
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are
so withheld by Parent or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder of
the shares of Company Common Stock in respect of which such deduction and
withholding was made by Parent or the Exchange Agent.
Section 3.3. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
registration of transfers of the Company Common Stock thereafter on the records
of the Company.
Section 3.4. NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK.
The Merger Consideration delivered upon the surrender for exchange of shares of
Company Common Stock in accordance with the terms hereof shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares
of Company Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Company
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article III.
Section 3.5. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event
any Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificates, upon
the making of an affidavit of that fact by the holder thereof, such shares of
Parent Common Stock as may be required pursuant to Section 3.1; provided,
however, that Parent
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may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim
that may be made against Parent or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
Section 3.6. TAX AND ACCOUNTING CONSEQUENCES. It is intended by the
parties hereto that the Merger shall (i) constitute a reorganization within the
meaning of Section 368 of the Code and (ii) subject to applicable accounting
standards, qualify for accounting treatment as a pooling of interests. The
parties hereto hereby adopt this Agreement as a "plan of reorganization" within
the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
Section 3.7. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of
Parent, Merger Sub and the Company will take all such reasonable and lawful
action as may be necessary or appropriate in order to effectuate the Merger in
accordance with this Agreement as promptly as possible. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Merger Sub, the officers and directors
of the Company and Merger Sub in office immediately prior to the Effective Time
are fully authorized in the name of their respective corporations or otherwise
to take, and will take, all such lawful and necessary action.
Section 3.8. CLOSING. The closing (the "Closing") of the
transactions contemplated by this Agreement shall take place at a location
mutually agreeable to Parent and the Company in Houston, Texas as promptly as
practicable (but in any event within five business days) following the date on
which the last of the conditions set forth in Article VIII is fulfilled or
waived, or at such other time and place as Parent and the Company shall agree.
The date on which the Closing occurs is referred to in this Agreement as the
"Closing Date."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub each represent and warrant to the Company as
follows:
Section 4.1. ORGANIZATION AND QUALIFICATION. Each of Parent and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation and has the requisite
corporate power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted. Parent
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the properties owned, leased, or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not have, or could not reasonably be anticipated to have,
individually or in the aggregate, a Material Adverse Effect (as defined in
Section 10.10).
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Section 4.2. CAPITALIZATION.
(a) As of June 30, 1998, the authorized capital stock of
Parent consisted of 500,000,000 shares of Parent Common Stock and 1,000,000
shares of preferred stock, par value $1.00 per share ("Parent Preferred
Stock"). As of June 30, 1998, (i) 257,186,137 shares of Parent Common Stock
were issued and outstanding, all of which were validly issued and are fully
paid, nonassessable and free of preemptive rights, (ii) no shares of Parent
Preferred Stock were issued and outstanding and (iii) 66,363 shares of Parent
Common Stock and no shares of Parent Preferred Stock were held in the treasury
of Parent.
(b) As of June 30, 1998, except for options granted
pursuant to Parent incentive or option plans and convertible securities issued
in connection with acquisitions, there are no outstanding (i) securities of
Parent convertible into or exchangeable for shares of capital stock or voting
securities of Parent or (ii) options or other rights to acquire from Parent or
other obligations of Parent to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of Parent.
(c) All of the shares of capital stock of Merger Sub are
owned beneficially and of record by Parent.
(d) The shares of Parent Common Stock to be issued as
part of the Merger Consideration have been duly authorized and when issued and
delivered in accordance with the terms of this Agreement, will have been
validly issued and will be fully paid and non-assessable, and the issuance
thereof is not subject to any preemptive or other similar right.
Section 4.3. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Parent and Merger Sub each have full corporate power
and authority to execute and deliver this Agreement and, subject to the Parent
Required Statutory Approvals (as defined in Section 4.3(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the
Boards of Directors of Parent and Merger Sub, and no other corporate
proceedings on the part of Parent or Merger Sub, including, without limitation,
any stockholder approval, are necessary to authorize the execution and delivery
of this Agreement or the consummation by Parent and Merger Sub of the
transactions contemplated hereby, including, without limitation, under the
applicable requirements of any securities exchange. This Agreement has been
duly executed and delivered by each of Parent and Merger Sub, and, assuming the
due authorization, execution and delivery hereof by the Company, constitutes a
valid and legally binding agreement of each of Parent and Merger Sub
enforceable against each of them in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles.
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<PAGE> 13
(b) The execution and delivery of this Agreement by each
of Parent and Merger Sub and the consummation by each of Parent and Merger Sub
of the transactions contemplated hereby do not and will not violate or result
in a breach of any provision of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under, or
result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of Parent or any of its Subsidiaries under any of the
terms, conditions or provisions of (i) the respective charters or bylaws of
Parent or any of its Subsidiaries, (ii) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or governmental authority applicable to Parent or any of its Subsidiaries
or any of their respective properties or assets (assuming compliance with the
matters referred to in Section 4.3(c)) or (iii) any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which Parent
or any of its Subsidiaries is now a party or by which Parent or any of its
Subsidiaries or any of their respective properties or assets may be bound or
affected except, in the case of clauses (ii) and (iii), for matters as would
not have, or could not reasonably be anticipated to have, individually or in
the aggregate, a Material Adverse Effect or materially impair the ability of
Parent or Merger Sub to consummate the transactions contemplated by this
Agreement.
(c) Except for (i) the filings by Parent required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) the filing of the Proxy Statement/Prospectus (as defined in Section
4.4) with the SEC pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the Securities Act, and the declaration of the
effectiveness thereof by the SEC and filings with various state blue sky
authorities, and (iii) the making of the Merger Filing with the Secretary of
State of the State of Delaware in connection with the Merger (the filings and
approvals referred to in clauses (i) through (iii) are collectively referred to
as the "Parent Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution and
delivery of this Agreement by Parent or Merger Sub or the consummation by
Parent or Merger Sub of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not have,
or could not reasonably be anticipated to have, individually or in the
aggregate, a Material Adverse Effect or materially impair the ability of Parent
or Merger Sub to consummate the transactions contemplated by this Agreement.
Section 4.4. REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information to be supplied by Parent or its Subsidiaries for inclusion in (a)
the Registration Statement on Form S-4 to be filed under the Securities Act
with the SEC by Parent in connection with the Merger for the purpose of
registering the shares of Parent Common Stock to be issued in the Merger (the
"Registration Statement") or (b) the proxy statement to be distributed in
connection with the Company's meeting of its stockholders to vote upon this
Agreement and the transactions contemplated hereby (the "Proxy Statement" and,
together with the prospectus included in the Registration Statement, the "Proxy
Statement/Prospectus") will, in the case of the Proxy Statement
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<PAGE> 14
or any amendments thereof or supplements thereto, at the time of the mailing of
the Proxy Statement and any amendments or supplements thereto, and at the time
of the meetings of stockholders of the Company to be held in connection with
the transactions contemplated by this Agreement, or, in the case of the
Registration Statement, as amended or supplemented, at the time it becomes
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading.
Section 4.5. REPORTS AND FINANCIAL STATEMENTS.
(a) Since January 1, 1995, Parent has filed with the SEC
all material forms, statements, reports and documents (including all exhibits,
amendments and supplements thereto) required to be filed by it under each of
the Securities Act, the Exchange Act and the respective rules and regulations
thereunder, all of which complied in all material respects with all applicable
requirements of the appropriate act and the rules and regulations thereunder.
(b) Parent has previously made available or delivered to
the Company copies of its (a) Annual Reports on Form 10-K for the fiscal year
ended December 31, 1997, and for the immediately preceding fiscal year, as
filed with the SEC, (b) proxy and information statements relating to (i) all
meetings of its shareholders (whether annual or special) and (ii) any actions
by written consent in lieu of a shareholders' meeting from January 1, 1998,
until the date hereof, and (c) all other reports, including quarterly reports,
or registration statements filed by Parent with the SEC since January 1, 1998
(other than Registration Statements filed on Form S-8) (the documents referred
to in clauses (a), (b) and (c), including the exhibits thereto, collectively
referred to as the "Parent SEC Reports").
(c) As of their respective dates the Parent SEC Reports,
as of the effective date of any registration statement as amended or
supplemented filed by Parent, did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d) The audited consolidated financial statements and
unaudited interim consolidated financial statements of Parent included in such
reports (collectively, the "Parent Financial Statements") have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present in all material respects the consolidated financial position
of Parent and its Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended, subject,
in the case of the unaudited interim financial statements, to normal year-end
and audit adjustments and any other adjustments described therein.
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Section 4.6. ABSENCE OF UNDISCLOSED LIABILITIES. Neither Parent nor
any of its Subsidiaries has incurred any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities or obligations (i) which are provided for in the Parent Financial
Statements or reflected in the notes thereto or (ii) which were incurred after
March 31, 1998, and were incurred in the ordinary course of business and
consistent with past practices, (b) liabilities or obligations which have been
discharged or paid in full prior to the date hereof, (c) liabilities or
obligations which would not have, or could not reasonably be anticipated to
have, individually or in the aggregate, a Material Adverse Effect, (d)
liabilities or obligations under this Agreement and (e) liabilities or
obligations arising out of contractual obligations entered into in the ordinary
course of business which would not have, or could not reasonably be anticipated
to have, a Material Adverse Effect.
Section 4.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December
31, 1997, the business of Parent has been conducted in the ordinary course of
business consistent with past practices, and there has not been any event,
occurrence, development or state of circumstances or facts which has had, or
could reasonably be anticipated to have, individually or in the aggregate, a
Material Adverse Effect.
Section 4.8. LITIGATION. There are no claims, suits, actions,
Environmental Claims (as defined in Section 10.10) or proceedings pending or,
to the Knowledge (as defined in Section 10.10) of Parent, threatened against,
relating to or affecting Parent or any of its Subsidiaries, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that would have, or could reasonably be anticipated to have,
individually or in the aggregate, a Material Adverse Effect. Neither Parent
nor any of its Subsidiaries is subject to any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator that would have, or could
reasonably be anticipated to have, individually or in the aggregate, a Material
Adverse Effect.
Section 4.9. NO VIOLATION OF LAW. Neither the Parent nor any of its
Subsidiaries is in violation of or has been given notice or been charged with
any violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable Environmental Law) of
any governmental or regulatory body or authority except for such matters as
would not have, or could not reasonably be anticipated to have, individually or
in the aggregate, a Material Adverse Effect. As of the date of this Agreement,
to the Knowledge of Parent, no investigation or review by any governmental or
regulatory body or authority is pending or threatened, nor has any governmental
or regulatory body or authority indicated an intention to conduct the same
except for such matters as would not have, or could not reasonably be
anticipated to have, individually or in the aggregate, a Material Adverse
Effect. Parent and its Subsidiaries have all permits (including without
limitation Environmental Permits (as defined in Section 10.10)), licenses,
franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct their businesses as
presently conducted (collectively, the "Parent Permits") except as would not
have, or could not reasonably be anticipated to have, individually or in the
aggregate, a Material Adverse Effect. Parent and its Subsidiaries are not in
violation of the terms of any Parent Permit except as
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<PAGE> 16
would not have, or could not reasonably be anticipated to have, individually or
in the aggregate, a Material Adverse Effect.
Section 4.10. COMPLIANCE WITH AGREEMENTS. Parent and each of its
Subsidiaries are not in breach or violation of or in default in the performance
or observance of any term or provision of, and no event has occurred which,
with lapse of time or action by a third party, could result in a default under,
(a) the respective charters, bylaws or similar organizational instruments of
Parent or any of its Subsidiaries or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which Parent or any of its Subsidiaries is a party or by
which any of them is bound or to which any of their property is subject except
as would not have, or could not reasonably be anticipated to have, individually
or in the aggregate, a Material Adverse Effect.
Section 4.11. ENVIRONMENTAL MATTERS. Except as set forth in the
Parent SEC Filings prior to the date hereof and except as would not have, or
could not reasonably be anticipated to have, individually or in the aggregate,
a Material Adverse Effect,
(a) no notice, demand, request for information, citation,
summons or order has been received, no complaint has been filed, no penalty has
been assessed, and no investigation, action, claim, suit, proceeding or review
is pending or, to the Knowledge of Parent, is threatened by any governmental
entity or other person relating to or arising out of any Environmental Law;
(b) Parent and its Subsidiaries are and have been in
compliance with all Environmental Laws and Environmental Permits; and
(c) there are no liabilities of or relating to Parent or
any of its Subsidiaries of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise arising under or relating to
any Environmental Law and there are no facts, conditions, situations or set of
circumstances which could reasonably be expected to result in or be the basis
for any such liability.
For purposes of this Section, "Parent" and "its Subsidiaries" shall include any
entity which is, in whole or in part, a corporate predecessor of Parent or any
of its Subsidiaries.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that,
except as set forth in the disclosure schedule dated as of the date hereof and
attached hereto (the "Company Disclosure Schedule"), each of which exceptions
shall specifically identify the relevant Section hereof to which it relates:
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<PAGE> 17
Section 5.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the properties owned, leased, or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified and in good standing would not have, or could not
reasonably be anticipated to have, individually or in the aggregate, a Material
Adverse Effect. True, accurate and complete copies of the Company's Certificate
of Incorporation, as amended, and Bylaws, in each case as in effect on the date
hereof, including all amendments thereto, have heretofore been delivered to
Parent.
Section 5.2. CAPITALIZATION.
(a) The authorized capital stock of the Company consists
of 50,000,000 shares of Company Common Stock and 10,000,000 shares of preferred
stock, par value $.01 per share ("Company Preferred Stock"). As of June 30,
1998, 21,420,717 shares of Company Common Stock, and no shares of Company
Preferred Stock were issued and outstanding. All of such issued and
outstanding shares of Company Common Stock are validly issued and are fully
paid, nonassessable and free of preemptive rights. No Subsidiary of the
Company holds any shares of the capital stock of the Company.
(b) Except as set forth on the Company Disclosure
Schedule, as of the date hereof there are no outstanding (i) subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, debenture, instrument or other agreement and
also including any rights plan or other anti-takeover agreement, obligating the
Company or any Subsidiary of the Company to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of the capital stock of the
Company or obligating the Company or any Subsidiary of the Company to grant,
extend or enter into any such agreement or commitment or (ii) obligations of
the Company or any of its subsidiaries to repurchase, redeem or otherwise
acquire any securities referred to in clause (i) above. There are no voting
trusts, proxies or other agreements or understandings to which the Company or
any Subsidiary of the Company is a party or is bound with respect to the voting
of any shares of capital stock of the Company other than voting agreements
executed in connection with this Agreement.
Section 5.3. SUBSIDIARIES.
(a) Each direct and indirect corporate Subsidiary of the
Company has been duly organized, is validly existing and in good standing under
the laws of its jurisdiction of incorporation and has the requisite corporate
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted, except where the failure to
be so organized and in good standing would not have, or could not reasonably be
anticipated to have, when taken
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<PAGE> 18
together with all such other failures, a Material Adverse Effect. Each
Subsidiary of the Company is qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction in which the properties owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified and
in good standing would not have, or could not reasonably be anticipated to
have, when taken together with all such other failures, a Material Adverse
Effect.
(b) Except as set forth on the Company Disclosure
Schedule, (i) all of the outstanding shares of capital stock of each corporate
Subsidiary of the Company are validly issued, fully paid, nonassessable and
free of preemptive rights and are owned directly or indirectly by the Company
free and clear of any liens, claims, encumbrances, security interests,
equities, charges and options of any nature whatsoever, and (ii) there are no
subscriptions, options, warrants, rights, calls, contracts, voting trusts,
proxies or other commitments, understandings, restrictions or arrangements
relating to the issuance, sale, voting, transfer, ownership or other rights
with respect to any shares of capital stock of any corporate Subsidiary of the
Company, including any right of conversion or exchange under any outstanding
security, instrument or agreement.
Section 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to
execute and deliver this Agreement and, subject to the Company Stockholders'
Approval (as defined in Section 7.3) and the Company Required Statutory
Approvals (as defined in Section 5.4(c)), to consummate the transactions
contemplated hereby. This Agreement has been approved by the Board of
Directors of the Company, and no other corporate proceedings on the part of the
Company are necessary to authorize the execution and delivery of this Agreement
or, except for the Company Stockholders' Approval, the consummation by the
Company of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Company, and, assuming the due authorization,
execution and delivery hereof by Parent and Merger Sub, constitutes a valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, except that such enforcement may be subject to (a)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (b)
general equitable principles.
(b) Except as set forth in the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby do not and
will not violate or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any of its
Subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or bylaws of the Company or any of its Subsidiaries, (ii)
any statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable
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to the Company or any of its Subsidiaries or any of their respective properties
or assets (assuming compliance with the matters referred to in Section 5.4(c)),
or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which the Company or any of its Subsidiaries is now
a party or by which the Company or any of its Subsidiaries or any of their
respective properties or assets may be bound or affected except, in the case of
clauses (ii) and (iii), for matters as would not have, or could not reasonably
be anticipated to have, individually or in the aggregate, a Material Adverse
Effect or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
(c) Except for (i) the filings by Parent and the Company
required by the HSR Act, (ii) the filing of the Proxy Statement/Prospectus with
the SEC pursuant to the Exchange Act and the Securities Act, the declaration of
the effectiveness by the SEC and filings with various state blue sky
authorities, and (iii) the making of the Merger Filing with the Secretary of
State of the State of Delaware in connection with the Merger (the filings and
approvals referred to in clauses (i) through (iii) are collectively referred to
as the "Company Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not
made or obtained, as the case may be, would not have, or could not reasonably
be anticipated to have, individually or in the aggregate, a Material Adverse
Effect or materially impair the ability of the Company to consummate the
transaction contemplated by this Agreement.
Section 5.5. REPORTS AND FINANCIAL STATEMENTS.
(a) Since January 1, 1995, the Company has filed with the
SEC all material forms, statements, reports and documents (including all
exhibits, amendments and supplements thereto) required to be filed by it under
each of the Securities Act, the Exchange Act and the respective rules and
regulations thereunder, all of which complied in all material respects with all
applicable requirements of the appropriate act and the rules and regulations
thereunder.
(b) The Company has previously made available or
delivered to Parent copies of its (a) Annual Reports on Form 10-K for the
fiscal year ended December 31, 1997, and for each of the two immediately
preceding fiscal years, as filed with the SEC, (b) proxy and information
statements relating to (i) all meetings of its stockholders (whether annual or
special) and (ii) any actions by written consent in lieu of a stockholders'
meeting from January 1, 1998, until the date hereof, and (c) all other reports,
including quarterly reports, or registration statements filed by the Company
with the SEC since January 1, 1998 (other than Registration Statements filed on
Form S-8) (the documents referred to in clauses (a), (b) and (c), including the
exhibits filed therewith, collectively referred to as the "Company SEC
Reports"). There have been no actions by written consent in lieu of a
stockholders' meeting since January 1998.
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(c) As of their respective dates, the Company SEC Reports,
and as of the effective date of any registration statement as amended or
supplemented filed by the Company, did not contain any untrue statement of any
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d) The audited consolidated financial statements and
unaudited interim consolidated financial statements of the Company included in
such reports (collectively, the "Company Financial Statements") have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present in all material respects the consolidated financial position
of the Company and its Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
normal year-end and audit adjustments and any other adjustments described
therein.
Section 5.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed
in the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has incurred any liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of any nature, except (a) liabilities or
obligations (i) which are provided for in the Company Financial Statements or
reflected in the notes thereto or (ii) which were incurred after March 31,
1998, and were incurred in the ordinary course of business and consistent with
past practices, (b) liabilities or obligations which have been discharged or
paid in full prior to the date hereof, (c) liabilities or obligations which
would not have, or could not reasonably be anticipated to have, individually or
in the aggregate, a Material Adverse Effect, (d) liabilities or obligations
under this Agreement and (e) liabilities or obligations arising out of
contractual obligations entered into in the ordinary course of business which
would not have, or could not reasonably be anticipated to have, a Material
Adverse Effect.
Section 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December
31, 1997, the business of the Company has been conducted in the ordinary course
of business consistent with past practices, and there has not been any event,
occurrence, development or state of circumstances or facts which has had, or
could reasonably be anticipated to have, individually or in the aggregate, a
Material Adverse Effect.
Section 5.8. LITIGATION. Except as described in the Company
Disclosure Schedule, there are no claims, suits, actions, Environmental Claims
or proceedings pending or, to the Knowledge of the Company, threatened against,
relating to or affecting the Company or any of its Subsidiaries, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator. Except as described in the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is subject to any
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any
arbitrator.
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Section 5.9. PROXY STATEMENT. None of the information to be supplied
by the Company or its Subsidiaries for inclusion in the Proxy Statement will,
at the time of the mailing of the Proxy Statement and any amendments or
supplements thereto, and at the time of the meeting of stockholders of the
Company to be held in connection with the transactions contemplated by this
Agreement, contain any untrue statement of any material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. The Proxy Statement will comply, as of its mailing date,
as to form in all material respects with all applicable laws, including the
provisions of the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by the Company with respect
to information supplied by Parent or Subsidiary for inclusion therein.
Section 5.10. NO VIOLATION OF LAW. Except as disclosed in the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is
in violation of or has been given notice or been charged with any violation of,
any law, statute, order, rule, regulation, ordinance or judgment (including,
without limitation, any applicable Environmental Law) of any governmental or
regulatory body or authority. Except as disclosed in the Company Disclosure
Schedule, as of the date of this Agreement, to the Knowledge of the Company, no
investigation or review by any governmental or regulatory body or authority is
pending or threatened, nor has any governmental or regulatory body or authority
indicated an intention to conduct the same. The Company and its Subsidiaries
have all permits (including without limitation Environmental Permits (as
defined in Section 10.10)), licenses, franchises, variances, exemptions, orders
and other governmental authorizations, consents and approvals necessary to
conduct their businesses as presently conducted (collectively, the "Company
Permits") except as would not have, or could not reasonably be anticipated to
have, individually or in the aggregate, a Material Adverse Effect. The Company
and its Subsidiaries are not in violation of the terms of any Company Permit
except as would not have, or could not reasonably be anticipated to have,
individually or in the aggregate, a Material Adverse Effect.
Section 5.11. COMPLIANCE WITH AGREEMENTS. Except as disclosed in the
Company Disclosure Schedule, the Company and each of its Subsidiaries are not
in breach or violation of or in default in the performance or observance of any
term or provision of, and no event has occurred which, with lapse of time or
action by a third party, could result in a default under, (a) the respective
charters, bylaws or similar organizational instruments of the Company or any of
its Subsidiaries or (b) any contract, commitment, agreement, indenture,
mortgage, loan agreement, note, lease, bond, license, approval or other
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them is bound or to which any of their property is subject.
Section 5.12. TAXES.
(a) Except as set forth on the Company Disclosure Schedule,
(i) the Company and its Subsidiaries have (x) duly filed (or there has been
filed on their behalf) with the appropriate taxing authority all Tax Returns (as
hereinafter defined) required to be filed by them on or prior to the date
hereof, and (y) duly paid in full or made adequate provision therefor on their
financial
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statements in accordance with generally accepted accounting principles ("GAAP")
(or there has been paid or adequate provision has been made on their behalf)
for the payment of all Taxes (as hereinafter defined) for all periods ending
through the date hereof; (ii) all such Tax Returns filed by or on behalf of the
Company and its Subsidiaries are true, correct and complete in all material
respects; (iii) the liabilities and reserves for Taxes reflected in the balance
sheet included in the latest Company SEC Report to cover all Taxes for all
periods ending at or prior to the date of such balance sheet have been
determined in accordance with GAAP, and there is no material liability for
Taxes for any period beginning after such date other than Taxes arising in the
ordinary course of business; (iv) there are no liens for Taxes upon any
property or assets of the Company or any Subsidiary thereof, except for liens
for Taxes not yet due; (v) neither the Company nor any of its Subsidiaries has
made any change in accounting methods since December 31, 1997; (vi) neither the
Company nor any of its Subsidiaries has received a ruling from any taxing
authority or signed an agreement with any taxing authority; (vii) the Company
and its Subsidiaries have complied in all respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441
and 1442 of the Code, as amended or similar provisions under any foreign laws)
and have, within the time and the manner prescribed by law, withheld from
employee wages and paid over to the appropriate taxing authority all amounts
required to be so withheld and paid over under all applicable laws; (viii) no
federal, state, local or foreign audits or other administrative proceedings or
court proceedings are presently pending with regard to any Taxes or Tax Returns
of the Company or its Subsidiaries, and as of the date of this Agreement
neither the Company nor its Subsidiaries has received a written notice of any
pending audits or proceedings; (ix) the federal income Tax Returns of the
Company and its Subsidiaries have been examined by the Internal Revenue Service
("IRS") (which examination has been completed) or the statute of limitations
for the assessment of federal income Taxes of the Company and its Subsidiaries
has expired, for all periods through and including December 31, 1993, and no
deficiencies were asserted as a result of such examinations which have not been
resolved and fully paid; and (x) no adjustments or deficiencies relating to Tax
Returns of the Company and its Subsidiaries have been proposed, asserted or
assessed by any taxing authority, except for such adjustments or deficiencies
which have been fully paid or finally settled or which, if imposed, would not
have a Material Adverse Effect.
(b) There are no outstanding requests, agreements, consents
or waivers to extend the statute of limitations applicable to the assessment of
any Taxes or deficiencies against the Company or any of its Subsidiaries, and no
power of attorney granted by either the Company or any of its Subsidiaries with
respect to any Taxes is currently in force. Neither the Company nor any of its
Subsidiaries is a party to any agreement providing for the allocation or sharing
of Taxes with any entity that is not directly or indirectly, a wholly-owned
corporate Subsidiary of the Company. Neither the Company nor any of its
Subsidiaries has, with regard to any assets or property held, acquired or to be
acquired by any of them, filed a consent to the application of Section 341(f) of
the Code, or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by the Company or any of its Subsidiaries. Except
as provided on the Company Disclosure Schedule, the deductibility of
compensation paid by the Company and/or its Subsidiaries will not be limited by
Section 162(m) of
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the Code. Except as provided on the Company Disclosure Schedule, no payment to
be made in connection with the transactions contemplated by this Agreement will
fail to be deductible under Section 280G of the Code. None of the Company and
its Subsidiaries has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code. None of the Company
and its Subsidiaries (i) has been a member of an affiliate group filing a
consolidated federal income Tax Return (other than a group the common parent of
which was the Company) or (ii) has any liability for Taxes of any person (other
than any of the Company and its Subsidiaries) under Section 1.1502-6 of the
United States Treasury Regulations (or any similar provision of state, local or
foreign law), as a transferee or successor, by contract, or otherwise.
(c) "Taxes" shall mean any and all taxes, charges, fees,
levies or other assessments, including, without limitation, income, gross
receipts, excise, real or personal property, sales, withholding, social
security, occupation, use, service, service use, license, net worth, payroll,
franchise, transfer and recording taxes, fees and charges, imposed by the IRS
or any other taxing authority (whether domestic or foreign including, without
limitation, any state, county, local or foreign government or any subdivision
or taxing agency thereof (including a United States possession)), whether
computed on a separate, consolidated, unitary, combined or any other basis; and
such term shall include any interest whether paid or received, fines, penalties
or additional amounts attributable to, or imposed upon, or with respect to, any
such taxes, charges, fees, levies or other assessments.
(d) "Tax Return" shall mean any report, return, document,
declaration or other information or filing required to be supplied to any
taxing authority or jurisdiction (foreign or domestic) with respect to Taxes,
including, without limitation, information returns and documents (i) with
respect to or accompanying payments of estimated Taxes or (ii) with respect to
or accompanying requests for the extension of time in which to file any such
report, return, document, declaration or other information.
Section 5.13. EMPLOYEE BENEFIT PLANS.
(a) The Company Disclosure Schedule lists, with respect
to the Company and its Subsidiaries and any trade or business (whether or not
incorporated) which is treated as a single employer with the Company (an "ERISA
Affiliate") within the meaning of Sections 414(b), (c), (m) or (o) of the Code,
(i) all material employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and
subject to ERISA, (ii) each loan to a non-officer employee in excess of
$150,000, loans to officers and directors and any stock option, stock purchase,
phantom stock, stock appreciation right other than individual account balances
under the 1997 Employee Stock Purchase Plan, (iii) all supplemental retirement,
severance, sabbatical, medical, dental, vision care, disability, employee
relocation, cafeteria benefit (Code Section 125) or dependent care (Code
Section 129), life insurance or accident insurance, bonus, pension, profit
sharing, savings, deferred compensation or incentive plans, programs or
arrangements which are not employee benefit plans as otherwise covered under
clause (i) above, (iv) other fringe
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or employee benefit plans, programs or arrangements that apply to senior
management of the Company or its Subsidiaries and that do not generally apply
to all employees and (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of the Company or its Subsidiaries remain for the
benefit of, or relating to, any present or former employee, consultant or
director of the Company or its Subsidiaries (together, the "Company Employee
Plans").
(b) Any Company Employee Plan intended to be qualified
under Section 401(a) of the Code has either obtained from the IRS a favorable
determination letter as to its qualified status under the Code, including all
amendments to the Code effected by the Tax Reform Act of 1986 and subsequent
legislation for which plan amendments are required to have been made by the
Closing Date, or has applied or will apply to the IRS for such a determination
letter prior to the expiration of the requisite period under applicable
Treasury Regulations or IRS pronouncements in which to apply for such
determination letter and to make any amendments necessary to obtain a favorable
determination. Nothing has occurred since the issuance of the most recent IRS
determination letter which could reasonably be expected to cause the loss of
the tax-qualified status of any Company Employee Plan subject to Code Section
401(a).
(c) (i) Other than continued health care coverage
required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), none of the Company Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person except as set
forth on the Company Disclosure Schedule, and each Company Employee Plan may be
amended or terminated at any time without any Material Adverse Effect to the
Company; (ii) there has been no "prohibited transaction," as such term is
defined in Section 406 of ERISA and Section 4975 of the Code, with respect to
any Company Employee Plan; (iii) each Company Employee Plan is in material
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including but not limited to ERISA and the Code) and has been
materially administered in accordance with its terms and in material compliance
with the requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), and the Company and each Subsidiary or ERISA
Affiliate has performed all material obligations required to be performed by
them under, are not in any respect in default under or violation of, and have no
Knowledge of any default or violation by any other party to, any of the Company
Employee Plans that could reasonably be expected to result in a Material Adverse
Effect; (iv) all contributions required to be made by the Company or any
Subsidiary or ERISA Affiliate to any Company Employee Plan have been made on or
before their due dates, and a reasonable amount has been accrued for
contributions to each Company Employee Plan for the current plan years; (v) with
respect to each Company Employee Plan, no "reportable event" within the meaning
of Section 4043 of ERISA (excluding any such event for which the 30 day notice
requirement has been waived under the regulations to Section 4043 of ERISA) nor
any event described in Sections 4062, 4063 or 4041 of ERISA has occurred; and
(vi) no Company Employee Plan is covered by, and neither the Company nor any
Subsidiary or ERISA Affiliate has incurred or could incur any liability under,
Title IV of ERISA or Section 412 of the Code. No suit, administrative
proceeding, action or other litigation has been brought, or to the Knowledge of
the Company, is threatened, against or with
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respect to any such Company Employee Plan, including, without limitation, any
audit or inquiry by the IRS or Department of Labor. Except as disclosed on the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries or
other ERISA Affiliate is a party to, or has made any contribution to or
otherwise incurred any obligation under, any "Multiemployer Plan," as defined
in Section 3(37) of ERISA, and no event (other than routine claims for
benefits) has occurred and no set of circumstances have occurred in connection
with any Company Employee Plan for which the Company or any of its affiliates
or Subsidiaries could be subject to any liability. The Company Disclosure
Schedule sets forth a true and complete list of each Multiemployer Plan to
which the Company, its Subsidiaries or an ERISA Affiliate may have an
obligation to contribute. Neither the Company nor an ERISA Affiliate nor any
of their respective predecessors has incurred a "complete withdrawal" or a
"partial withdrawal" (as such terms are defined in Sections 4203 and 4205 of
ERISA) with respect to a Multiemployer Plan) that could result in a material
liability being imposed on the Company, its Subsidiaries or any ERISA
Affiliate. If the Company, any of its Subsidiaries or any ERISA Affiliate were
to completely withdraw from each Multiemployer Plan to which one of them
currently has an obligation to contribute, the aggregate withdrawal liability
assessed as a result thereof would not have a Material Adverse Effect. No
Multiemployer Plan to which the Company, its Subsidiaries or any ERISA
Affiliate have or had an obligation to contribute is in reorganization,
insolvent or has been terminated and no such Multiemployer Plan is reasonably
expected to be in reorganization, insolvent or terminated where such
reorganization, insolvency or termination could result in material liability
being imposed on the Company or its Subsidiaries. No Company Employee Plan is
funded through a 'welfare benefit fund' as such term is defined in Code Section
419(e).
(d) With respect to each Company Employee Plan, the Company
and each of its Subsidiaries have complied in all material respects with (i) the
applicable health care continuation coverage and notice provisions of COBRA and
the proposed regulations thereunder, (ii) ERISA Section 609 and (iii) the
applicable requirements of the Family and Medical Leave Act of 1993 and the
regulations thereunder.
(e) Except as set forth on the Company Disclosure Schedule,
the consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former employee or other service provider of the Company,
any Subsidiary of the Company or any other ERISA Affiliate to severance benefits
or any other payment, or (ii) accelerate the time of payment or vesting, or
increase the amount of compensation due any such employee or service provider.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written) by the Company, any Subsidiary of the
Company or other ERISA Affiliate relating to, or change in participation or
coverage under, the Company Employee Plans which would increase the expense of
maintaining such plan above the level of expense incurred with respect to that
plan for the most recent fiscal year included in the Company Financial
Statements which would have a Material Adverse Effect.
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(g) No Company Employee Plan is a voluntary employee
benefit association under Section 501(c)(9) of the Code.
(h) Except as disclosed on the Company Disclosure
Schedule, no Company Employee Plan covers persons employed outside the United
States and no such plan is subject to the laws of a foreign jurisdiction.
(i) The present value of benefits payable presently or in
the future to present or former employees of the Company or any of its
Subsidiaries or affiliates under any unfunded Company Employee Plan has been
accounted for in all material respects under the Company Financial Statements.
(j) With respect to each Company Employee Plan, all
insurance premiums required to be paid with respect to said plans as of the
Effective Time have been or will be paid prior to the Effective Time and
adequate reserves have been provided for on the Company's balance sheet for any
premiums (or portions thereof) attributable to service on or prior to the
Effective Time.
Section 5.14. LABOR MATTERS. Except as set forth in the Company
Disclosure Schedule, (a) there are no material controversies pending or, to the
Knowledge of the Company, threatened between the Company or its Subsidiaries
and any of their employees other than routine individual grievances, and (b)
neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement of other labor union contract applicable to persons
employed by the Company or its Subsidiaries, nor does the Company or any of its
Subsidiaries know of any activities or proceedings of any labor union to
organize any such employees.
Section 5.15. ENVIRONMENTAL MATTERS. Except as set forth in the
Company SEC Filings prior to the date hereof and except as would not have, or
could not reasonably be anticipated to have, individually or in the aggregate,
a Material Adverse Effect,
(a) no notice, demand, request for information, citation,
summons or order has been received, no complaint has been filed, no penalty has
been assessed, and no investigation, action, claim, suit, proceeding or review
is pending or, to the Knowledge of Company, is threatened by any governmental
entity or other person relating to or arising out of any Environmental Law;
(b) the Company and its Subsidiaries are and have been in
compliance with all Environmental Laws and Environmental Permits; and
(c) there are no liabilities of or relating to the
Company or any of its Subsidiaries of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise arising under or
relating to any Environmental Law and there are no facts, conditions,
situations or set of circumstances which could reasonable be expected to result
in or be the basis for any such liability.
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For purposes of this Section, the "Company" and "its Subsidiaries" shall
include any entity which is, in whole or in part, a corporate predecessor of
the Company or any of its Subsidiaries.
Section 5.16. NON-COMPETITION AGREEMENTS. Neither the Company nor
any Subsidiary of the Company is a party to any agreement which purports to
restrict or prohibit any of them from, directly or indirectly, engaging in any
business (including without limitation the funeral, cemetery or preneed
insurance businesses) currently engaged in by the Company or any of its
Subsidiaries or, to the Knowledge of the Company, the Parent or any of its
Subsidiaries, or any corporations affiliated with either of them. None of the
Company's officers, directors, or key employees is a party to any agreement
which, by virtue of such person's relationship with the Company, restricts the
Company or any Subsidiary of the Company from, directly or indirectly, engaging
in any of the businesses described above.
Section 5.17. TITLE TO ASSETS. Except as described in the Company
Disclosure Schedule, the Company and each of its Subsidiaries has good and
indefeasible title to all its material real property purported to be owned in
fee simple and good title to all its leasehold interests and other properties,
as reflected in the most recent balance sheet included in the Company Financial
Statements, except for properties and assets that have been disposed of in the
ordinary course of business since the date of the latest balance sheet included
therein, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (i) liens for current taxes,
payments of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not substantial in character, amount
or extent and do not detract from the value, or interfere with the present use
of the property subject thereto or affected thereby, or otherwise impair the
Company's business operations (in the manner presently carried on by the
Company), or (iii) any lien securing any debt or obligation described on the
Company Disclosure Schedule which is expressly referenced as being secured
except as would not have, or could not reasonably be anticipated to have,
individually or in the aggregate, a Material Adverse Effect. All leases under
which the Company leases any substantial amount of real property are in good
standing, valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event which
with notice or lapse of time or both would become a default by or on behalf of
the Company or its Subsidiaries, or to the Knowledge of the Company, by or on
behalf of any third party except as would not have, or could not reasonably be
anticipated to have, individually or in the aggregate, a Material Adverse
Effect.
Section 5.18. MATERIAL CONTRACTS. All contracts (i) required to be
filed by the Company pursuant to Item 601 of Regulation S-K or (ii) granting
the right to do business exclusively with the Company or its Subsidiaries, or
imposing any exclusivity or minimum purchase or payment obligation on the
Company or its Subsidiaries, which obligations are not terminable upon not more
than 30 days' notice without material penalty by the Company or its
Subsidiaries, are in each case set forth as exhibits to the Company Disclosure
Schedule. All such contracts are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
material contracts, any existing default or event which with notice or lapse of
time or both would
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become a default by or on behalf of the Company or its Subsidiaries, or to the
Knowledge of the Company, by or on behalf of any third party.
Section 5.19. INVESTMENTS.
(a) The Company and its Subsidiaries, and any preneed
funeral trust or similar entity established by the Company or any Subsidiary,
have good and marketable title to all securities, mortgages and other
investments (collectively, the "Investments") owned by the Company and its
Subsidiaries and any preneed funeral trust or similar entity established by the
Company or any Subsidiary.
(b) None of the Investments is in material default, and
all Investments held in any such trust or similar entity are in compliance with
industry regulatory standards and are owned and administered in accordance with
prudent man trust standards; and all Investments owned by the Company or any
Subsidiary are investment grade debt obligations or repurchase agreements
having a maturity of no more than 30 days.
Section 5.20. COMPANY STOCKHOLDERS' APPROVAL. The affirmative vote
of stockholders of the Company required for approval and adoption of this
Agreement and the Merger is a majority of the outstanding shares of Company
Common Stock.
Section 5.21. BROKERS AND FINDERS. Except for the fees and expenses
payable to ABN AMRO Incorporated ("ABN AMRO"), which fees are reflected in its
agreement with the Company (a copy of which has been delivered to Parent), the
Company has not entered into any contract, arrangement or understanding with
any person or firm which may result in the obligation of the Company to pay any
finder's fees , brokerage or agent commissions or other like payments in
connection with the transactions contemplated hereby. Except for the fees and
expenses paid or payable to ABN AMRO, there is no claim for payment by the
Company of any investment banking fees, finder's fees, brokerage or agent
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
Section 5.22. INTELLECTUAL PROPERTY. The Company and its
Subsidiaries have rights to use, whether through ownership, licensing or
otherwise, all patents, trademarks, service marks, trade names, copyrights,
trade secrets and other proprietary rights and processes that are material to
its business as now conducted (collectively the "Intellectual Property
Rights"). Except for such matters as would not have, or could not reasonably
be anticipated to have, individually or in the aggregate, a Material Adverse
Effect, (a) the Company and its Subsidiaries have not assigned, hypothecated or
otherwise encumbered any of the Intellectual Property Rights, (b) none of the
licenses included in the Intellectual Property Rights purports to grant sole or
exclusive licenses to another person including, without limitation, sole or
exclusive licenses limited to specific fields of use, and (c) the Company and
its Subsidiaries may freely assign or transfer all licenses that it has with
third parties to Parent or Parent's Subsidiaries. Neither the Company nor any
of its Subsidiaries owns any patents.
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The Company has no knowledge of any infringement by any other person of any of
the Intellectual Property Rights, and the Company and its Subsidiaries have not
entered into any agreement to indemnify any other party against any charge of
infringement of any of the Intellectual Property Rights, except for such
matters as would not have, or could not reasonably be anticipated to have,
individually or in the aggregate, a Material Adverse Effect. The Company and
its Subsidiaries have not and do not violate or infringe any intellectual
property right of any other person, and neither the Company nor any of its
Subsidiaries have received any communication alleging that it violates or
infringes the intellectual property right of any other person except for such
matters as would not have, or could not reasonably be anticipated to have, a
Material Adverse Effect. The Company and its Subsidiaries have not been sued
for infringing any intellectual property right of another person. None of the
Intellectual Property Rights or other know-how relating to the business of the
Company and its Subsidiaries, the value of which to the Company is contingent
upon maintenance of the confidentiality thereof, has been disclosed by the
Company or any Affiliate or Subsidiary thereof to any person other than those
persons who are bound to hold such information in confidence pursuant to
confidentiality agreements or by operation of law.
Section 5.23. YEAR 2000 COMPLIANCE. The Company knows of no matter
which would prevent the Company or its Subsidiaries from becoming Year 2000
Compliant on or before September 30, 1999. "Year 2000 Compliant" means as to
any person or entity that all software, firmware, microprocessing chips and
other data processing devices and services (both as a recipient and as a
provider), capabilities and facilities utilized by, and material to the
business operations or financial condition of, that person or entity will be
able to record and process all calendar dates (whether before, in and after
the year 2000) correctly with four-digit year processing and will be able to
communicate with other applicable systems to accept any two-digit year date
data in a manner that resolves any ambiguities as to century in a properly
defined manner.
Section 5.24. OPINION OF FINANCIAL ADVISOR. The Company's Board of
Directors has received a written opinion of its financial advisor to the effect
that the Merger Consideration to be paid in the Merger is fair from a financial
point of view to the stockholders of the Company.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
Except as otherwise contemplated by this Agreement or disclosed in Section 6.1
of the Company Disclosure Schedule, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless Parent shall
otherwise agree in writing, the Company shall, and shall cause its Subsidiaries
to:
(a) conduct their respective businesses in the ordinary
and usual course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective
charters or bylaws, (ii) split, combine, reorganize, reclassify, recapitalize
or take any similar action with respect to their
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outstanding capital stock or (iii) declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise, except for the
payment of dividends or distributions by a wholly-owned Subsidiary of the
Company to the Company;
(c) comply in all material respects with all applicable
laws, including without limitation the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder;
(d) not issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of, any additional share of, or any options,
warrants or rights of any kind to acquire any share of their capital stock of
any class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that the Company may issue shares upon conversion of
convertible securities and exercise of options outstanding on the date hereof;
(e) not (i) incur or become contingently liable with
respect to any indebtedness for borrowed money other than (A) borrowing
required for working capital purposes in the ordinary course of business, (B)
borrowing to refinance existing indebtedness on terms which are reasonably
acceptable to Parent, or (C) borrowing to make new capital expenditures in the
ordinary course of business and otherwise permitted by this Section 6.1, (ii)
redeem, purchase, acquire or offer to redeem, purchase or acquire any shares of
its capital stock or any options, warrants or rights to acquire any of its
capital stock or any security convertible into or exchangeable for its capital
stock, (iii) sell, pledge, dispose of or encumber any of the assets or
businesses of the Company other than transactions in the ordinary course of
business not exceeding $1,000,000 in any instance or $3,000,000 in the
aggregate or (iv) enter into any contract, agreement, commitment or arrangement
with respect to any of the foregoing;
(f) use all reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services of
their respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(g) not enter into or amend any employment, severance,
special pay arrangement with respect to termination of employment or other
similar arrangements or agreements with any directors, officers, or key
employees;
(h) with the exception of the adoption of or changes to,
in each case in the ordinary course of business, health insurance plans or
casualty insurance of the Company in progress on the date of this Agreement,
not adopt, enter into or amend any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, health care, employment or
other employee benefit plan, agreement, trust fund or arrangement for the
benefit or welfare of any employee or retiree, except as required to comply
with changes in applicable law or other provisions of this Agreement;
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(i) use commercially reasonable efforts to maintain with
financially responsible insurance companies insurance on its tangible assets
and its businesses in such amounts and against such risks and losses as are
consistent with past practice;
(j) not make, change or revoke any material Tax election
or make any material agreement or settlement regarding Taxes with any taxing
authority;
(k) not make any change in the Company's or its
Subsidiaries' financial Tax or accounting methods, practices or policies, or in
any assumption underlying such a method, practice or policy;
(l) use its commercially reasonable efforts to cause the
transfer of Environmental Permits (on the same terms and conditions), and any
financial assurance required thereunder to Parent or Merger Sub as may be
necessary under applicable Environmental Laws in connection with the
consummation of the transactions under this Agreement to allow Parent or Merger
Sub to conduct the business of the Company and its Subsidiaries, as currently
conducted;
(m) not enter into or assume any contracts or agreements
having a term longer than one year (unless the Company may terminate such
contracts or agreements by 30 days' written notice without penalty to the
Company) or imposing a firm or uncancellable obligation upon the Company or its
Subsidiaries in excess of $250,000 annually or imposing a firm or uncancellable
obligation on the Company or its Subsidiaries of $500,000 or more in the
aggregate for all such contracts and agreements, regardless of the annual
payment, except for contracts or agreements for (1) indebtedness permitted
under Section 6.1(e) or (2) capital expenditures permitted under Section
6.1(q);
(n) maintain its books of account and records in the
usual, regular and ordinary manner consistent with past policies and practice;
(o) not compromise, settle, grant any waiver or release
relating to or otherwise adjust any material litigation or claims of any nature
whatsoever pending against the Company or its Subsidiaries;
(p) not take any action or omit to take any action, which
action or omission would result in a breach of any of the representations and
warranties set forth in this Agreement; and
(q) not make or commit to make any capital expenditures,
except for capital expenditures in the ordinary course of business not in
excess of $10,000,000 in the aggregate;
provided, however that nothing in this Section 6.1 shall be construed to
prohibit the Company or its Subsidiaries from acquiring funeral homes or
cemeteries in the ordinary course of business and any actions (including,
without limitation, incurring indebtedness, issuing capital stock, making
capital
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expenditures or entering into contracts in connection therewith) reasonably
related to such acquisitions so long as the aggregate consideration for all
such acquisitions does not exceed $75,000,000.
Section 6.2. CONTROL OF THE COMPANY'S OPERATIONS. Nothing contained
in this Agreement shall give to Parent, directly or indirectly, rights to
control or direct the Company's operations prior to the Effective Time. Prior
to the Effective Time, the Company shall exercise, consistent with the terms
and conditions of this Agreement, complete control and supervision of its
operations.
Section 6.3. ACQUISITION TRANSACTIONS.
(a) After the date hereof and prior to the Effective Time
or earlier termination of this Agreement, the Company shall not, and shall
cause each of its Subsidiaries not to, initiate, solicit, negotiate, encourage
or provide confidential information to facilitate, and the Company shall, and
shall cause each of its Subsidiaries to, cause any officer, director or
employee of, or any attorney, accountant, investment banker, financial advisor
or other agent retained by it, not to initiate, solicit, negotiate, encourage
or provide non-public or confidential information to facilitate, any proposal
or offer to acquire all or any substantial part of the business or properties
of the Company or any of its Subsidiaries or any capital stock of the Company
or any of its Subsidiaries, whether by merger, purchase of assets, tender offer
or otherwise, whether for cash, securities or any other consideration or
combination thereof (such transactions being referred to herein as "Acquisition
Transactions");
(b) Notwithstanding the provisions of paragraph (a)
above, the Company may, in response to an unsolicited written proposal with
respect to an Acquisition Transaction ("Acquisition Proposal"), furnish
(subject to the execution of a confidentiality agreement substantially similar
to the confidentiality provisions of the Confidentiality Agreement executed by
Parent in connection herewith for the benefit of the Company (the "Company
Confidentiality Agreement") confidential or non-public information concerning
its business, properties or assets to any corporation, partnership, person or
other entity or group (a "Potential Acquiror") and negotiate with such
Potential Acquiror if based upon advice of its outside legal counsel and
financial advisors, its Board of Directors determines in good faith that such
action to provide such confidential or non-public information to such Potential
Acquiror is necessary for the Company's Board of Directors to act in a manner
which is consistent with its fiduciary duties to its stockholders; provided,
however, that the Company is prohibited from providing to a Potential Acquiror
any confidential or non-public information not previously furnished to Parent.
Moreover, the Company's Board of Directors may take and disclose to the
Company's stockholders a position with respect to a tender offer by a third
party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act
or may make such other disclosures to the Company's stockholders which, as
advised by outside counsel, is required under applicable law. It is understood
and agreed that negotiations conducted in accordance with this paragraph (b)
shall not constitute a violation of paragraph (a) of Section 6.3.
(c) The Company shall immediately notify Parent after
receipt of any Acquisition Proposal or any request for non-public information
relating to the Company or its Subsidiaries in
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connection with an Acquisition Proposal or for access to the properties, books
or records of the Company or any Subsidiary by any person or entity that
informs the Board of Directors of the Company or such Subsidiary that it is
considering making, or has made, an Acquisition Proposal. Such notice to
Parent shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
Section 6.4. CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER.
Parent agrees that from the date hereof until the Effective Time, Parent and
its Subsidiaries shall conduct their business in the ordinary course consistent
with past practice and shall use their reasonable best efforts to preserve
intact their business organizations and relationships with third parties.
Parent agrees not to redeem or repurchase any Parent Common Stock during the
period in which the Average Parent Stock Price is being determined pursuant to
Section 3.1(a), except as required pursuant to the terms of any securities
outstanding or commitments in effect prior to the commencement of such period.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1. ACCESS TO INFORMATION. The Company and its
Subsidiaries, and Parent and its Subsidiaries, shall afford to the other party
and their respective accountants, counsel, financial advisors and other
representatives reasonable access during normal business hours throughout the
period prior to the Effective Time to all of their respective properties,
books, contracts, personnel, representatives of or contacts with governmental
or regulatory authorities, agencies or bodies, commitments, and records
(including, but not limited to, Tax Returns and any and all records or
documents which are within the possession of governmental or regulatory
authorities, agencies or bodies, and the disclosure of which the Company and
its Subsidiaries can facilitate or control) and, such parties as its
representatives may reasonably request. Any investigation pursuant to this
Section shall be conducted in such manner as not to interfere unreasonably with
the conduct of the business of the Company and Parent, as the case may be. No
investigation pursuant to this Section shall affect any representation or
warranty made by any party.
Section 7.2. REGISTRATION STATEMENT AND PROXY STATEMENT. Parent and
the Company shall file with the SEC as soon as is reasonably practicable after
the date hereof the Proxy Statement/Prospectus and shall use their reasonable
best efforts to have the Registration Statement declared effective by the SEC
as promptly as reasonably practicable. Parent shall also take any action
required to be taken under applicable state blue sky or securities laws in
connection with the issuance of Parent Common Stock pursuant hereto. Parent
and the Company shall promptly furnish to each other all information, and take
such other actions, as may reasonably be requested in connection with any
action by any of them in connection with the preceding sentence.
Section 7.3. STOCKHOLDERS' APPROVALS. Subject to the fiduciary
duties of the Board of Directors of the Company under applicable law, the
Company shall, as promptly as practicable, submit this Agreement and the
transactions contemplated hereby for the approval and adoption of its
stockholders at a meeting of stockholders (the "Company Stockholders'
Approval"). Such
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meeting of stockholders shall be held as soon as practicable, and shall be
referred to herein as the "Company Stockholders' Meeting."
Section 7.4. COMPLIANCE WITH THE SECURITIES; ACT POOLING-OF-INTERESTS
ACCOUNTING TREATMENT. Within 45 days following the date of this Agreement, the
Company shall deliver to Parent a letter identifying all known persons who may
be deemed affiliates of the Company under Rule 145 of the 1933 Act. The Company
shall use its reasonable best efforts to cause each principal executive
officer, each director and each other person who is an "affiliate," as that
term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act, of
the Company, to deliver to Parent on or prior to the Effective Time a written
agreement in form acceptable to Parent (an "Affiliate Agreement") to the effect
that such person will not offer to sell, sell or otherwise dispose of any
shares of Parent Common Stock issued in the Merger, except, in each case,
pursuant to an effective registration statement or in compliance with Rule 145,
as amended from time to time, or in a transaction which, in the opinion of
legal counsel satisfactory to Parent, is exempt from the registration
requirements of the Securities Act and, in any case, until after the results
covering 30 days of post-Merger combined operations of Parent and the Company
have been filed with the SEC, sent to stockholders of Parent or otherwise
publicly issued.
Section 7.5. EXCHANGE LISTING. Parent shall use its reasonable best
efforts to effect, at or before the Effective Time, authorization for listing
on the NYSE, upon official notice of issuance, of the shares of Parent Common
Stock to be issued pursuant to the Merger or to be reserved for issuance upon
the exercise of Stock Options and the conversion of convertible securities.
Section 7.6. EXPENSES AND FEES.
(a) All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses, except that (i) the filing fee and expenses
incurred in connection with the HSR filing shall be paid by Parent, (ii) all
filing fees incurred in connection with the filing of the Proxy and
Registration Statement, including any filing required under state blue sky or
securities laws, shall be paid by Parent, and (iii) those expenses incurred in
connection with printing the Proxy Statement/Prospectus shall be shared equally
by Parent and the Company.
(b) Notwithstanding (a) above, the Company agrees to pay
to Parent (i) a fee equal to twenty million dollars ($20,000,000) plus (ii) all
documentable out-of-pocket costs and expenses incurred by Parent and Merger Sub
in connection with this Agreement and the transactions contemplated hereby,
including without limitation, all attorney's fees, accountant's fees and
broker's and investment banker's fees incurred in connection with this
Agreement and the transactions contemplated hereby (such costs and expenses not
to exceed two million dollars ($2,000,000)), if (A) the Company terminates this
Agreement pursuant to clause (v) or (vi) of Section 9.1(a); (B) Parent
terminates this Agreement pursuant to clause (iv) of Section 9.1(b); or (C) (1)
Parent terminates this Agreement pursuant to clause (v) of Section 9.1(b) or
the Company terminates this Agreement pursuant to clause (vii) of Section
9.1(a), (2) on February 28, 1999 (if a vote has not
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earlier been held at the Company Stockholders' Meeting), or at the time of such
failure to so approve the Merger or this Agreement, there shall exist or have
been proposed an Acquisition Proposal which has been publicly announced, and
(3) within twelve months after such termination, any Acquisition Transaction
shall be consummated. Notwithstanding any other provision in this Section
7.6(b), for purposes of this Section 7.6(b)(C)(2) and (3) an Acquisition
Proposal and an Acquisition Transaction with respect to (i) the capital stock
of the Company shall be for a minimum of 25% or more of the outstanding shares
of Company Common Stock, and (ii) all or any substantial part of the business
or properties of the Company and its Subsidiaries shall be for a minimum of 25%
or more of the business or properties of the Company and its Subsidiaries,
taken as a whole.
Section 7.7. AGREEMENT TO COOPERATE.
(a) Subject to the terms and conditions herein provided,
each of the parties hereto shall use all reasonable efforts to take, or cause
to be taken, all action and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement, including using
its reasonable efforts to obtain all necessary, proper or advisable waivers,
consents and approvals under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement, including using
its reasonable efforts to obtain all necessary or appropriate waivers, consents
or approvals of third parties required in order to preserve material
contractual relationships of the Company and its Subsidiaries, all necessary or
appropriate waivers, consents and approvals and SEC "no-action" letters to
effect all necessary registrations, filings and submissions and to lift any
injunction or other legal bar to the Merger (and, in such case, to proceed with
the Merger as expeditiously as possible), subject, however, to the fiduciary
duties of the Board of Directors of the Company and Parent and the requisite
vote of the stockholders of the Company.
(b) Without limitation of the foregoing, each of Parent
and the Company undertakes and agrees to file as soon as practicable a
Notification and Report Form under the HSR Act with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division"). Each of Parent and the Company shall respond as
promptly as practicable to any inquiries received from the FTC or the Antitrust
Division for additional information or documentation and to all inquiries and
requests received from any State Attorney General or other governmental
authority in connection with antitrust matters. Without limiting the
foregoing, Parent shall propose, negotiate, commit to and effect, by consent
decree, hold separate order, or otherwise, the sale, divestiture or disposition
of such assets or businesses of Parent or, effective as of the Effective Time,
the Surviving Corporation as may be required in order to avoid the entry of, or
to effect the dissolution of, any injunction, temporary restraining order or
other order in any suit or proceeding, which would otherwise have the effect of
preventing or delaying the Closing; provided, however, that Parent shall not be
required to sell, divest, dispose of or hold separate assets or businesses with
aggregate 1997 revenues in excess of $10,000,000. Each party shall promptly
notify the other party of any communication to that party from the FTC, the
Antitrust Division, any State Attorney General or any other governmental entity
and permit the other party to review in advance any proposed communication to
any of the foregoing.
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(c) In the event any claim, action, suit, investigation
or other proceeding by any governmental body or other person or other legal or
administrative proceeding is commenced that questions the validity or legality
of the transactions contemplated hereby or seeks damages in connection
therewith, whether before or after the Effective Time, the parties hereto agree
to cooperate and use their reasonable efforts to defend against and respond
thereto; provided, however, that in the event any claim, action, suit,
investigation or other proceeding is commenced against the Company or any
Subsidiary by any governmental body or other person or other legal or
administrative proceeding is commenced against the Company or any Subsidiary,
in each case under the HSR Act or pursuant to federal or state antitrust laws,
Parent shall have the right, at its own expense, to participate therein, and
the Company will not settle any such litigation without the consent of Parent,
which consent will not be unreasonably withheld.
Section 7.8. PUBLIC STATEMENTS. The parties shall consult with each
other prior to issuing any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby and shall not
issue any such press release or written public statement prior to such
consultation.
Section 7.9. NOTIFICATION OF CERTAIN MATTERS. Each of the Company,
Parent and Merger Sub agrees to give prompt notice to each other of, and to use
their respective reasonable best efforts to prevent or promptly remedy, (i) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to
be untrue or inaccurate in any material respect (or in all respects in the case
of any representation or warranty containing any materiality qualification) at
any time from the date hereof to the Effective Time and (ii) any material
failure (or any failure in the case of any covenant, condition or agreement
containing any materiality qualification) on its part to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 7.9 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 7.10. CORRECTIONS TO THE PROXY STATEMENT/PROSPECTUS AND
REGISTRATION STATEMENT. Prior to the date of approval of the Merger by the
Company's stockholders, each of the Company, Parent and Merger Sub shall
correct promptly any information provided by it to be used specifically in the
Proxy Statement/Prospectus and Registration Statement that shall have become
false or misleading in any material respect and shall take all steps necessary
to file with the SEC and have declared effective or cleared by the SEC any
amendment or supplement to the Proxy Statement/Prospectus or the Registration
Statement so as to correct the same and to cause the Proxy Statement/Prospectus
as so corrected to be disseminated to the stockholders of the Company, in each
case to the extent required by applicable law.
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Section 7.11. RIGHTS AGREEMENT. Prior to the Effective Time, the
Company shall take all necessary action to (i) render rights (the "Company
Rights") issued pursuant to the Stockholder Rights Agreement dated as of
October 13, 1994 by and between the Company and American Stock Transfer & Trust
Company, as Rights Agent (as amended, the "Company Rights Agreement"),
inapplicable to the Merger, and (ii) ensure that (x) neither Parent nor any of
its Affiliates (as defined in the Company Rights Agreement) is an Acquiring
Person (as defined in the Company Rights Agreement) and (y) no Distribution
Date, event listed in Section 11(a)(ii), Section 13 Event, Shares Acquisition
Date or Section 11(a)(ii) Triggering Date (each as defined in the Company
Rights Agreement) shall occur by reason of the approval, execution or delivery
of this Agreement, or the announcement or consummation of the Merger.
Section 7.12. DIRECTOR AND OFFICER LIABILITY; INDEMNIFICATION. For
six years after the Effective Time, Parent will, or will cause the Surviving
Corporation to, indemnify and hold harmless the present and former officers and
directors of the Company in respect of acts or omissions occurring prior to the
Effective Time to the extent provided under the Company's certificate of
incorporation and bylaws in effect on the date hereof. To the maximum extent
permitted by the DGCL, the Indemnified Parties shall be entitled to the
indemnification provided herein whether such indemnified liabilities shall be
based on their own negligence, whether such persons are solely, concurrently or
comparatively negligent, and whether under strict liability or any other theory
of recovery. For six years after the Effective Time, Parent will, or will
cause the Surviving Corporation to use its commercially reasonable efforts to
provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such person
currently covered by the Company's officers' and directors' liability insurance
policy on terms and with respect to coverage and amount no less favorable than
those of such policy in effect on the date hereof.
Section 7.13. REORGANIZATION; ACCOUNTING TREATMENT.
(a) Each party shall use its reasonable best efforts to not fail to
take any action either before or after the Effective Time which action or
failure would prevent, or would be likely to prevent, the Merger from
qualifying as a reorganization with the meaning of Section 368(a) of the Code,
and the Company shall use reasonable best efforts to obtain the opinion of
counsel referred to in Section 8.2(c) of this Agreement.
(b) The Company shall use its reasonable best efforts to (i) cause
the Merger to receive accounting treatment as a pooling-of-interests
transaction, (ii) obtain the opinions from PricewaterhouseCoopers LLP
confirming the accounting treatment of the Merger as a pooling-of-interests
transaction, and (iii) not to take any action reasonably likely to cause the
Merger not to so qualify.
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Section 7.14. ASSUMPTION OF COMPANY STOCK PLANS. In accordance with
each of the Company Stock Plans, the applicable Committee of the Company
thereunder shall approve and direct the assumption of awards pursuant to such
Stock Plans to be assumed by Parent, and Parent shall agree to and make such
assumptions or provide an equivalent option or award.
Section 7.15. EXECUTION OF SUPPLEMENTAL INDENTURE; RESERVATION OF
SHARES. Upon the consummation of the Merger, Parent shall use its reasonable
efforts to enter into a supplemental indenture with the trustee (the "Trustee")
for the holders of the Convertible Subordinated Debentures due 2004 (the
"Debentures") of the Company in accordance with Section 7.2 of the Indenture,
dated as of February 25, 1998 between the Company and Bankers Trust Company, as
trustee. Parent shall cause to be taken all corporate action for issuance of a
sufficient number of shares of Parent Common Stock for delivery upon conversion
of the Debentures.
Section 7.16. EMPLOYMENT AGREEMENT. At the Closing, upon execution
and delivery of the Employment Agreement (as defined in Section 8.3(d) below)
by James P. Hunter, III, Parent shall execute and deliver such Employment
Agreement. Parent agrees to use reasonable efforts to negotiate in good faith
the form of such Employment Agreement prior to the preliminary filing of the
Proxy Statement/Prospectus.
ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment or waiver, if permissible, at or prior to the
Effective Time of the following conditions:
(a) the waiting period applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated;
(b) no preliminary or permanent injunction or other order
or decree by any federal or state court which prevents the consummation of the
Merger shall have been issued and remain in effect (each party agreeing to use
its reasonable efforts to have any such injunction, order or decree lifted);
(c) no action shall have been taken, and no statute, rule
or regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation
of the Merger or make the consummation of the Merger illegal;
(d) the shares of Parent Common Stock issuable in the
Merger shall have been authorized for listing on the NYSE upon official notice
of issuance;
(e) the Registration Statement shall have become
effective in accordance with the provisions of the Securities Act, any material
state blue sky or securities law shall have been
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complied with, and no stop order suspending such effectiveness shall have been
issued and remain in effect and no proceeding for that purpose shall have been
instituted by the SEC or any state regulatory authorities; and
(f) this Agreement and the Merger, shall have been
approved and adopted by the affirmative vote of the stockholders of the Company
as required by and in accordance with applicable law.
Section 8.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Effective
Time of the following additional conditions:
(a) Parent and Merger Sub shall have performed in all
material respects (or in all respects in the case of any agreement containing
any materiality qualification) their agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of Parent and Merger Sub contained in this
Agreement shall be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made and on and as of the
Closing Date as if made at and as of such date, and the Company shall have
received a certificate executed on behalf of Parent by the President or a Vice
President of Parent and on behalf of Merger Sub by the President and Chief
Executive Officer or a Vice President of Merger Sub to that effect;
(b) Company shall have received a legal opinion from
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., in form reasonably satisfactory
to Company, except that no opinion shall be required with respect to the
enforceability of this Agreement; and
(c) the Company shall have received an opinion from the
Company's counsel, reasonably acceptable to the Company, to the effect that (i)
the Merger will qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Code; and (ii) the Company, the Parent and Merger Sub
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code with respect to the Merger.
Section 8.3. CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB TO
EFFECT THE MERGER. Unless waived by Parent and Merger Sub, the obligations of
Parent and Merger Sub to effect the Merger shall be subject to the fulfillment
at or prior to the Effective Time of the additional following conditions:
(a) the Company shall have performed in all material
respects (or in all respects in the case of any agreement containing any
materiality qualification) its agreements contained in this Agreement required
to be performed on or prior to the Closing Date and the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects (or in all respects in the case of any representation
or warranty containing any materiality qualification) on and as of the date
made and on and as of the Closing Date as if made at and as of
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such date, and Parent shall have received a certificate executed on behalf of
the Company by the President and Chief Executive Officer of the Company to that
effect;
(b) since the date hereof, there shall have been no changes
that constitute, and no event or events shall have occurred which have resulted
in or constitute, a Material Adverse Effect;
(c) Parent shall have received a legal opinion from Andrews
& Kurth L.L.P., in form reasonably satisfactory to Parent, except that no
opinion shall be required with respect to the enforceability of this Agreement;
(d) James P. Hunter, III shall have entered into Employment
and Non-competition Agreements upon the terms and conditions set forth in
Schedule 8.3(d) (the "Employment Agreement") and otherwise in form reasonably
satisfactory to Parent, and shall have terminated his Consulting Agreement with
the Company dated September 10, 1996 and his Executive Severance Agreement with
the Company; and
(e) Parent shall have received an Affiliate Agreement from
each person identified as an "affiliate" pursuant to Section 7.4.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1. TERMINATION. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval by the
stockholders of the Company as follows:
(a) The Company shall have the right to terminate this
Agreement:
(i) if the representations and warranties of Parent and Merger Sub shall
fail to be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in
the case of any such representations and warranties made as of a
specified date, on and as of any subsequent date as if made at and as
of subsequent date and such failure shall not have been cured in all
material respects (or in all respects in the case of any
representation or warranty containing any materiality qualification)
within 30 days after written notice of such failure is given to Parent
by the Company;
(ii) if the Merger is not completed by February 28, 1999 (provided that the
right to terminate this Agreement under this Section 9.1(a)(ii) shall
not be available to the Company if the failure of the Company to
fulfill any obligation to Parent under or in connection with this
Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date);
(iii) if the Merger is enjoined by a final, unappealable court order;
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(iv) if Parent or Merger Sub (A) fails to perform in any material respect
any of its covenants (or in all respects in the case of any covenant
containing any materiality qualification) in this Agreement and (B)
does not cure such default in all material respects (or in all
respects in the case of any covenant containing any materiality
qualification) within 30 days after written notice of such default is
given to Parent by the Company;
(v) if (A) the Company receives an offer from any third party (excluding
any affiliate of the Company or any group of which any affiliate of
the Company is a member) with respect to a merger, sale of substantial
assets or other business combination involving the Company, (B) the
Company's Board of Directors determines in good faith that such offer
constitutes an Acquisition Proposal which, if consummated pursuant to
its terms, would result in a transaction more favorable to the
Company's stockholders than the Merger (a "Superior Proposal") and
resolves to accept such Superior Proposal, and (C) the Company shall
have given Parent two (2) days' prior written notice of its intention
to terminate this Agreement pursuant to this provision, provided that
termination shall not be effective until such time as the payment
required by Section 7.6(b) shall have been received by Parent;
(vi) if (A) a tender or exchange offer is commenced by a third party
(excluding any affiliate of the Company or any group of which any
affiliate of the Company is a member) for all outstanding shares of
Company Common Stock, (B) the Company's Board of Directors determines
in good faith that such offer constitutes a Superior Proposal and
resolves to accept such Superior Proposal or recommend to the
stockholders that they tender their shares in such tender or exchange
offer, and (C) the Company shall have given Parent two (2) days' prior
written notice of its intention to terminate this Agreement pursuant
to this provision, provided that such termination shall not be
effective until such time as the payment required by Section 7.6(b)
shall have been received by Parent; or
(vii) if the requisite vote of the stockholders of the Company shall not
have been obtained by February 28, 1999, or if the stockholders of the
Company shall not have approved the Merger and this Agreement at the
Company Stockholders' Meeting, or any adjournment thereof.
(b) Parent shall have the right to terminate this Agreement;
(i) if the representations and warranties of the Company shall fail to be
true and correct in all material respects (or in all respects in the
case of any representation or warranty containing any materiality
qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date,
on and as of any subsequent date as if made at and as of such
subsequent date and such failure shall not have been cured in all
material respects (or in all respects in the case of any
representation or warranty containing any materiality qualification)
within 30 days after written notice of such failure is given to the
Company by Parent;
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(ii) if the Merger is not completed by February 28, 1999 (provided that the
right to terminate this Agreement under this Section 9.1(b)(ii) shall
not be available to Parent if the failure of Parent to fulfill any
obligation to the Company under or in connection with this Agreement
has been the cause of or resulted in the failure of the Merger to
occur on or before such date);
(iii) if the Company (A) fails to perform in any material respect (or in
all respects in the case of any covenant containing any materiality
qualification) any of its covenants in this Agreement and (B) does not
cure such default in all material respects (or in all respects in the
case of any covenant containing any materiality qualification) within
30 days after notice of such default is given to the Company by
Parent;
(iv) if the Board of Directors of the Company shall have (A) recommended to
the stockholders of the Company to accept a Superior Proposal, or
resolved to do so; (B) recommended to the stockholders of the Company
that they tender their shares in a tender or exchange offer commenced
by a third party (excluding any affiliate of Parent or any group of
which any affiliate of Parent is a member), or resolved to do so; or
(C) withdrawn, modified or changed the recommendation of this
Agreement or the Merger in a manner adverse to Parent or shall have
resolved to do so, other than in connection with the exercise of the
Company's rights to terminate this Agreement under Section 9.1(a)(i)
or 9.1(a)(iv) as a result of a material breach of a representation,
warranty or covenant; or
(v) if the requisite vote of the stockholders of the Company shall not
have been obtained by February 28, 1999, or if the stockholders of the
Company shall not have approved the Merger and this Agreement at the
Company Stockholders' Meeting, or any adjournment thereof.
(c) The Board of Directors of the Company and Parent mutually agree.
Section 9.2. EFFECT OF TERMINATION. In the event of termination of
this Agreement by either Parent or the Company pursuant to the provisions of
Section 9.1, this Agreement shall forthwith become void and there shall be no
further obligations on the part of the Company, Parent, Merger Sub or their
respective officers or directors (except as set forth in this Section 9.2 and
in Sections 7.6, 10.5 and 10.6, all of which shall survive the termination).
Nothing in this Section 9.2 shall relieve any party from liability for any
breach of this Agreement. The Company Confidentiality Agreement and the
Confidentiality Agreement executed by the Company for the benefit of the Parent
in connection herewith (the "Parent Confidentiality Agreement") shall remain in
full force and effect following any termination of this Agreement.
Section 9.3. AMENDMENT. To the extent permitted by applicable law,
this Agreement may be amended by action taken by or on behalf of the Boards of
Directors of the Company, the Parent and the Merger Sub at any time before or
after adoption of this Agreement by the stockholders of the Company, but, after
any such stockholder approval, no amendment shall be made which decreases the
Merger Consideration or which adversely affects the rights of the Company's
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stockholders hereunder without the approval of the stockholders of the Company.
This Agreement may not be amended except by an instrument in writing signed on
behalf of all of the parties.
Section 9.4. EXTENSIONS; WAIVER. At any time prior to the Effective
Time, the parties hereto may (a) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto and (c) waive compliance with any of the
agreements or conditions herein. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties in this Agreement shall not survive the Merger,
and after the Effective Time neither the Company, Parent, Merger Sub or their
respective officers or directors shall have any further obligation with respect
thereto. This Section 10.1 shall not limit any covenant or agreement of the
parties hereto which by its terms contemplates performance after the Effective
Time.
Section 10.2. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, mailed by registered or certified mail (return receipt requested)
or sent via facsimile to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to Parent or Merger Sub to:
Service Corporation International
P. O. Box 130548
1929 Allen Parkway
Houston, Texas 77219-0548
Attention: James M. Shelger
Telecopy: (713) 525-9067
with a copy to:
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
3400 Chase Tower
600 Travis
Houston, Texas 77002
Attention: Marcus A. Watts
Telecopy: (713) 223-3717
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(b) if to the Company, to:
Equity Corporation International
415 South First Street, Suite 210
Lufkin, Texas 75901
Attention: James P. Hunter, III
Telecopy: (409) 634-1041
with a copies to:
Andrews & Kurth L.L.P.
4200 Chase Tower, 600 Travis
Houston, Texas 77002-3090
Attention: William N. Finnegan, IV
Telecopy: (713) 220-4285
and
Doherty, Doherty & Adams L.L.P.
1717 St. James Place
Suite 520
Houston, Texas 77056
Attention: J. Patrick Doherty
Telecopy: (713) 572-1001
Section 10.3. INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way or
interpretation of this Agreement. In this Agreement, unless a contrary
intention appears, (i) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision and (ii) reference to any
Article or Section means such Article or Section hereof. No provision of this
Agreement shall be interpreted or construed against any party hereto solely
because such party or its legal representative drafted such provision.
Section 10.4. MISCELLANEOUS. Except for the Company Confidentiality
Agreement and the Parent Confidentiality Agreement, this Agreement (including
the documents and instruments referred to herein) (a) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, among the parties, or any of them, with respect to the
subject matter hereof and (b) shall not be assigned by operation of law or
otherwise, except that, prior to filing the Proxy Statement with the SEC,
Merger Sub may assign this Agreement to any other wholly-owned Subsidiary of
Parent incorporated in Delaware, but no such assignment shall relieve the
Parent or the Merger Sub, as the case may be, of its obligations hereunder.
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Section 10.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN
ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF TEXAS APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
Section 10.6. BINDING ARBITRATION.
(a) GENERAL. Notwithstanding any provision of this
Agreement to the contrary, upon the request of any party (defined for the
purpose of this provision to include affiliates, principles and agents of any
such party), any dispute, controversy or claim arising out of, relating to, or
in connection with, this Agreement or any agreement executed in connection
herewith or contemplated hereby, or the breach, termination, interpretation, or
validity hereof or thereof (hereinafter referred to as a "Dispute"), shall be
finally resolved by mandatory and binding arbitration in accordance with the
terms hereof. Any party to this Agreement may bring an action in court to
compel arbitration of any Dispute. Any party who fails or refuses to submit
any Dispute to binding arbitration following a lawful demand by the opposing
party shall bear all costs and expenses incurred by the opposing party in
compelling arbitration of such Dispute.
(b) GOVERNING RULES. The arbitration shall be conducted
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association in effect at the time of the arbitration, except as they may be
modified herein or by mutual agreement of the parties. The seat of the
arbitration shall be Houston, Texas. Notwithstanding Section 10.5, the
arbitration and this clause shall be governed by the Federal Arbitration Act, 9
U.S.C. Sections 1 et seq. (the "Federal Arbitration Act"). The arbitrator
shall award all reasonable and necessary costs (including the reasonable fees
and expenses of counsel) incurred in conducting the arbitration to the
prevailing party in any such Dispute. The parties expressly waive all rights
whatsoever to file an appeal against or otherwise to challenge any award by the
arbitrators hereunder; provided, that the foregoing shall not limit the rights
of either party to bring a proceeding in any applicable jurisdiction to
confirm, enforce or enter judgment upon such award (and the rights of the other
party, if such proceeding is brought to contest such confirmation, enforcement
or entry of judgment, but only to the extent permitted by the Federal
Arbitration Act).
(c) NO WAIVER; PRESERVATION OF REMEDIES. No provision
of, nor the exercise of any rights under this Agreement shall limit the right
of any party to apply for injunctive relief or similar equitable relief with
respect to the enforcement of this Agreement or any agreement executed in
connection herewith or contemplated hereby, and any such action shall not be
deemed an election of remedies. Such rights can be exercised at any time
except to the extent such action is contrary to a final award or decision in
any arbitration proceeding. The institution and maintenance of an action for
injunctive relief or similar equitable relief shall not constitute a waiver of
the right of any party, including without limitation the plaintiff, to submit
any Dispute to arbitration nor render inapplicable the compulsory arbitration
provisions of this Agreement.
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(d) ARBITRATION PROCEEDING. In addition to the authority
conferred on the arbitration tribunal by the rules specified above, the
arbitration tribunal shall have the authority to order reasonable discovery,
including the deposition of party witnesses and production of documents. The
arbitral award shall be in writing, state the reasons for the award, and be
final and binding on the parties. All statutes of limitations that would
otherwise be applicable shall apply to any arbitration proceeding. Any
attorney-client privilege and other protection against disclosure of
confidential information, including without limitation any protection afforded
the work-product of any attorney, that could otherwise be claimed by any party
shall be available to and may be claimed by any such party in any arbitration
proceeding. No party waives any attorney-client privilege or any other
protection against disclosure of confidential information by reason of anything
contained in or done pursuant to or in connection with this Agreement. Each
party agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information to the parties' legal
counsel or auditors or those required by applicable law. The arbitrators shall
determine the matters in dispute in accordance with the substantive law of
Texas, without regard to conflict of law rules.
(e) APPOINTMENT OF ARBITRATORS. The arbitration shall be
conducted by three (3) arbitrators. The party initiating arbitration (the
"Claimant") shall appoint its arbitrator in its request for arbitration (the
"Request"). The other party (the "Respondent") shall appoint its arbitrator
within thirty (30) days after receipt of the Request and shall notify the
Claimant of such appointment in writing. If the Respondent fails to appoint an
arbitrator within such thirty (30) day period, the arbitrator named in the
Request shall decide the controversy or claim as sole arbitrator. Otherwise,
the two (2) arbitrators appointed by the parties shall appoint a third (3rd)
arbitrator within thirty (30) days after the Respondent has notified Claimant
of the appointment of the Respondent's arbitrator. When the third (3rd)
arbitrator has accepted the appointment, the two (2) party-appointed
arbitrators shall promptly notify the parties of the appointment. If the two
(2) arbitrators appointed by the parties fail to appoint a third (3rd)
arbitrator or so to notify the parties within the time period prescribed above,
then the appointment of the third (3rd) arbitrator shall be made by the
American Arbitration Association, which shall promptly notify the parties of
the appointment. The third (3rd) arbitrator shall act as Chair of the panel.
(f) OTHER MATTERS. This arbitration provision
constitutes the entire agreement of the parties with respect to its subject
matter and supersedes all prior discussions, arrangements, negotiations and
other communications on dispute resolution. This arbitration provision shall
survive any termination, amendment, renewal, extension or expiration of this
Agreement or any agreement executed in connection herewith or contemplated
hereby unless the parties otherwise expressly agree in writing. The obligation
to arbitrate any dispute shall be binding upon the successors and assigns of
each of the parties.
Section 10.7. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
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Section 10.8. PARTIES IN INTEREST. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 10.9. ENFORCEMENT OF THE AGREEMENT. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof.
Section 10.10. CERTAIN DEFINITIONS.
(a) For purposes of this Agreement, "Business Facility"
includes any property (whether real or personal) which the Company or any of
its Subsidiaries currently leases, operates, or owns or manages in any manner
or which the Company or any of its Subsidiaries or any of their respective
organizational predecessors formerly leased, operated, owned or managed in any
manner. To the extent any representations in Section 5.15 of this Agreement
apply to any Business Facility not currently leased, operated, owned, or
managed, such representations shall be deemed to be made to the best Knowledge
of the Company and its Subsidiaries.
(b) For purposes of this Agreement, "Environmental Claim"
means any claim; litigation; demand; action; cause of action; suit; loss; cost,
including, but not limited to, attorneys' fees, diminution in value, and
expert's fees; damage; punitive damage; fine, penalty, expense, liability,
criminal liability, strict liability, judgment, governmental or private
investigation and testing; notification of status of being potentially
responsible for clean-up of any facility or for being in violation or in
potential violation of any Requirement of Environmental Law; proceeding;
consent or administrative orders, agreements or decrees; lien; personal injury
or death of any person; or property damage, whether threatened, sought, brought
or imposed, that is related to or that seeks to recover losses, damages, costs,
expenses and/or liabilities related to, or seeks to impose liability for: (i)
improper use of treatment of wetlands, pinelands or other protected land or
wildlife; (ii) noise; (iii) radioactive materials (including naturally
occurring radioactive materials ["NORM"]; (iv) explosives; (v) pollution,
contamination, preservation, protection, decontamination, remediation or
clean-up of the air, surface water, groundwater, soil or protected lands; (vi)
solid, gaseous or liquid waste generation, handling, discharge, release,
threatened release, treatment, storage, disposal or transportation; (vii)
exposure of persons or property to Materials of Environmental Concern and the
effects thereof; (viii) the release or threatened release (into the indoor or
outdoor environment), generation, extraction, mining, beneficiating,
manufacture, processing, distribution in commerce, use, transfer,
transportation, treatment, storage, disposal of Remediation of Materials of
Environmental Concern; (ix) injury to, death of or threat to the health or
safety of any person or persons caused directly or indirectly by Materials of
Environmental Concern; (x) destruction caused directly or indirectly by
Materials of Environmental Concern or the release or threatened release of any
Materials of Environmental Concern or any property (whether real or personal);
(xi) the
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implementation of spill prevention and/or disaster plans relating to Material
of Environmental Concern; (xiii) community right-to-know and other disclosure
laws; or (xiii) maintaining, disclosing or reporting information to
Governmental Authorities of any other third person under any Environmental Law.
The term, "Environmental Claim," also includes, without limitation, any losses,
damages, costs, expenses and/or liabilities incurred in testing.
(c) For purposes of this Agreement, "Environmental Law"
means any federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval, consent, legal
doctrine, guidance document, order, consent agreement, order or consent
judgment, decree, injunction, requirement or agreement with any governmental
entity or any judicial or administrative decision relating to (x) the
protection, preservation or restoration of the environment (including, without
limitation, air, water, vapor, surface water, groundwater, drinking water
supply, surface land, subsurface land, plant and animal life or any other
natural resource) or to human health or safety, (y) the exposure to, or the
use, storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of Materials of
Environmental Concern, in each case as amended from time to time, or (z)
health, worker protection or community's right to know. The term
"Environmental Law" includes, without limitation, (i) the Federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act, the Federal Water Pollution Control Act of
1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976 (including the hazardous and
Solid Waste Amendments thereto), the Federal Solid Waste Disposal Act and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, and the Federal Occupational Safety and Health Act of 1970,
each as amended from time to time, and (ii) any common law or equitable
doctrine (including, without limitation, injunctive relief and tort doctrines
such as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of, effects of or exposure to any Materials of
Environmental Concern.
(d) For purposes of this Agreement, "Environmental
Permits" means all permits, licenses, certificates, registrations,
identification numbers, applications, consents, approvals, variances, notices
of intent, and exemptions necessary for the ownership, use and/or operation of
any current Business Facility to comply with Requirements of Environmental
Laws.
(e) For purposes of this Agreement, "Intellectual
Property" includes all fictitious business names, trade names, brand names,
registered and unregistered trademarks, service marks and applications, all
patents and patent applications, all copyrights in both published works and
unpublished works, and all inventions, processes, formulas, patterns, designs,
know-how, trade secrets, confidential information, software, technical
information, process technology, plans, drawings and blue prints owned, used or
licensed by the Company or its Subsidiaries as licensee or licensor.
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(f) For purposes of this Agreement, when such term is used in
connection with the Company or its Subsidiaries, "Knowledge" means the actual
knowledge after reasonable inquiry of the persons listed on Schedule
10.10(f)(i); when used in connection with Parent or its Subsidiaries,
"Knowledge" means the actual knowledge after reasonable inquiry of the persons
listed on Schedule 10.10(f)(ii).
(g) When used in this Agreement in connection with the Company
and its Subsidiaries, or Parent and its Subsidiaries, as the case may be,
"Material Adverse Effect" means any event, occurrence, fact, condition, change,
development or effect that is or could reasonably be anticipated to be
materially adverse to the business, assets (including intangible assets),
liabilities, financial condition, results of operations, properties (including
intangible properties) or business prospects of the Company and all of its
Subsidiaries or the Parent and all of its Subsidiaries, as applicable, taken as
a whole, excluding specifically any such event, occurrence, fact, condition,
change, development or effect resulting from (a) changes in general economic or
political conditions, (b) changes generally applicable to companies engaged in
businesses or industries similar to those in which the Company and its
Subsidiaries and Parent and its Subsidiaries are engaged, or (c) solely with
reference to the Company and its Subsidiaries, as a result of the public
announcement of the Merger, (1) the failure by the Company or its Subsidiaries
to consummate pending or new acquisitions or (2) the termination of employment
by employees of the Company or its Subsidiaries.
(h) For purposes of this Agreement, "Materials of
Environmental Concern" means: (i) those substances included within the
statutory and/or regulatory definitions or listings of "hazardous substance,"
"medical waste," "special waste," "hazardous waste," "extremely hazardous
substance," "regulated substance," "hazardous materials," or "toxic substances,"
under any Environmental Law; (ii) any material, waste or substance which is or
contains: (A) petroleum, oil or a fraction thereof, (B) explosives, (C)
radioactive materials (including naturally occurring radioactive materials), or
(D) solid wastes that pose imminent and substantial endangerment to health or
the environment; and (iii) such other substances, materials, or wastes that are
or become classified or regulated as hazardous or toxic under any applicable
federal, state or local law or regulation. To the extent that the laws or
regulations of any applicable state or local jurisdiction establish a meaning
for any term defined herein through reference to federal Environmental Laws
which is broader than the meaning under such federal Environmental Laws, such
broader meaning shall apply.
(i) For purposes of this Agreement, "Remediation" means any
action necessary to: (i) comply with and ensure compliance with the
Requirements of Environmental Laws and (ii) the taking of all reasonably
necessary precautions to protect against and/or respond to, remove or remediate
or monitor the release or threatened release of Materials of Environmental
Concern at, on, in, about, under, within or near the air, soil, surface water,
groundwater or soil vapor at any Business Facility of the Company or any of its
Subsidiaries or of any public domain affected by the business of the Company or
any of its Subsidiaries.
(j) For purposes of this Agreement, "Requirement(s) of
Environmental Law(s)"means all requirements, conditions, restrictions or
stipulations of Environmental Laws
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imposed upon or related to the Company or any of its Subsidiaries or the assets
and/or the business of the Company or any of its Subsidiaries.
(k) For purposes of this Agreement, "Subsidiary" shall mean,
when used with reference to an entity, any other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions, or a
majority of the outstanding voting securities of which, are owned directly or
indirectly by such entity.
Section 10.11. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused
this Agreement to be signed by their respective officers and attested to as of
the date first written above.
SERVICE CORPORATION INTERNATIONAL
By: /s/ L. WILLIAM HEILIGBRODT
Name: L. William Heiligbrodt
Title: President and Chief Operating
Officer
SCI DELAWARE FUNERAL SERVICES, INC.
By: /s/ CURTIS G. BRIGGS
Name: Curtis G. Briggs
Title: President
EQUITY CORPORATION INTERNATIONAL
By: /s/ JAMES P. HUNTER, III
Name: James P. Hunter, III
Title: President
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
OF SERVICE CORPORATION INTERNATIONAL
We consent to the inclusion in this Current Report on Form 8-K of
Equity Corporation International ("ECI") and the incorporation by reference in
the registration statements of ECI on Form S-3 (File No. 333-50861), Form S-4
(File Nos. 333-50861 and 33-92876) and Form S-8 (File Nos. 333-25303, 333-12327
and 33-98052) of our report dated March 18, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Service
Corporation International ("SCI") as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, which report is
included in the Annual Report on Form 10-K of SCI for the Year Ended December
31, 1997.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
September 2, 1998
