10-Q 1 e10-q.txt SERVICE CORPORATION INTERNATIONAL - 06/30/2000 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 1-6402-1 -------------------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in charter) TEXAS 74-1488375 (State or other jurisdiction of (I. R. S. employer incorporation or organization) identification number) 1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019 (Address of principal executive offices) (Zip code) (713) 522-5141 (Registrant's telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. YES X NO ----- ----- The number of shares outstanding of the registrant's common stock as of August 10, 2000 was 272,203,513 (excluding treasury shares). 2 SERVICE CORPORATION INTERNATIONAL INDEX
Page Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Income - Three and Six Months Ended June 30, 2000 and 1999 3 Consolidated Balance Sheet - June 30, 2000 and December 31, 1999 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 2000 and 1999 5 Consolidated Statement of Stockholders' Equity - Six Months Ended June 30, 2000 6 Notes to Consolidated Financial Statements 7 - 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 - 30 Part II. Other Information Item 1. Legal Proceedings 30 - 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 6. Exhibits and Reports on Form 8-K 32 Signature 32
2 3 ITEM 1. FINANCIAL STATEMENTS SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended June 30, June 30, (In thousands, except share and per share amounts) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------- Revenues ..................................................... $ 702,100 $ 745,836 $ 1,467,850 $ 1,578,096 Costs and expenses ........................................... (575,888) (576,503) (1,156,860) (1,197,193) ----------- ----------- ----------- ----------- Gross profit ................................................. 126,212 169,333 310,990 380,903 General and administrative expenses .......................... (19,733) (16,807) (39,847) (36,517) Restructuring and non-recurring charges ...................... (13,281) -- (13,281) (89,884) ----------- ----------- ----------- ----------- Operating income from continuing operations .................. 93,198 152,526 257,862 254,502 Interest expense ............................................. (73,565) (56,761) (143,114) (114,209) Other income ................................................. 7,727 12,780 11,242 27,368 ----------- ----------- ----------- ----------- (65,838) (43,981) (131,872) (86,841) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes and extraordinary gains ................................. 27,360 108,545 125,990 167,661 Provision for income taxes ................................... (9,567) (38,622) (45,109) (60,131) ----------- ----------- ----------- ----------- Net income from continuing operations before extraordinary gains ..................................... 17,793 69,923 80,881 107,530 Income from discontinued operations before extraordinary gains (net of income taxes of $3,885, $4,162, $7,568 and $7,187, respectively).................................... 5,611 6,090 10,764 10,366 Extraordinary gains on early extinguishments of debt (net of income taxes of $8,845, $0, $12,630 and $1,071, respectively)............................................ 15,388 -- 21,973 1,885 ----------- ----------- ----------- ----------- Net income ................................................... $ 38,792 $ 76,013 $ 113,618 $ 119,781 =========== =========== =========== =========== Earnings per share: Basic: Income from continuing operations before extraordinary gains .............................. $ .07 $ .26 $ .30 $ .39 Income from discontinued operations before extraordinary gains .............................. .02 .02 .04 .04 Extraordinary gains on early extinguishments of debt .05 -- .08 .01 ----------- ----------- ----------- ----------- Net income .......................................... $ .14 $ .28 $ .42 $ .44 =========== =========== =========== =========== Diluted: Income from continuing operations before extraordinary gains .............................. $ .07 $ .26 $ .30 $ .39 Income from discontinued operations before extraordinary gains .............................. .02 .02 .04 .04 Extraordinary gains on early extinguishments of debt .05 -- .08 .01 ----------- ----------- ----------- ----------- Net income .......................................... $ .14 $ .28 $ .42 $ .44 =========== =========== =========== =========== Basic weighted average number of shares ...................... 272,093 272,013 272,078 272,502 =========== =========== =========== =========== Diluted weighted average number of shares .................... 272,097 274,587 272,801 275,012 =========== =========== =========== ===========
(See notes to consolidated financial statements) 3 4 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET
June 30, December 31, (In thousands, except share amounts) 2000 1999 ---------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 48,303 $ 57,814 Receivables, net of allowances ..................................... 527,311 585,269 Inventories ........................................................ 191,595 190,343 Net assets of discontinued operations .............................. 197,462 208,851 Other .............................................................. 84,128 101,220 ------------ ------------ Total current assets ............................................. 1,048,799 1,143,497 ------------ ------------ Prearranged funeral contracts ........................................... 2,824,653 2,898,139 Long-term receivables, net of allowances ................................ 1,585,773 1,532,225 Cemetery property, at cost .............................................. 2,162,228 2,182,410 Property, plant and equipment, at cost (net) ............................ 1,818,903 1,879,979 Deferred charges and other assets ....................................... 827,579 907,513 Names and reputations (net) ............................................. 2,342,801 2,434,467 ------------ ------------ $ 12,610,736 $ 12,978,230 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ........................... $ 510,179 $ 576,751 Current maturities of long-term debt ............................... 466,571 423,949 Income taxes ....................................................... 104,212 40,080 ------------ ------------ Total current liabilities ........................................ 1,080,962 1,040,780 ------------ ------------ Long-term debt .......................................................... 3,290,486 3,636,067 Deferred prearranged funeral contract revenues .......................... 3,194,423 3,186,081 Deferred income taxes ................................................... 819,766 864,780 Other liabilities ....................................................... 725,744 755,249 Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 272,151,281 and 272,064,618, issued and outstanding (net of 2,705,840 and 2,792,503 treasury shares, at par) ......... 272,151 272,064 Capital in excess of par value ..................................... 2,156,368 2,156,301 Retained earnings .................................................. 1,240,516 1,126,898 Accumulated other comprehensive loss ............................... (169,680) (59,990) ------------ ------------ Total stockholders' equity .................................... 3,499,355 3,495,273 ------------ ------------ $ 12,610,736 $ 12,978,230 ============ ============
(See notes to consolidated financial statements) 4 5 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30, (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ....................................................................... $ 113,618 $ 119,781 Adjustments to reconcile net income to net cash provided by continuing operations: Net income from discontinued operations ..................................... (10,764) (10,366) Depreciation and amortization ............................................... 123,009 122,040 Provision for deferred income taxes ......................................... 20,283 17,108 Restructuring and non-recurring charges ..................................... 13,281 89,884 Payments on restructuring charges ........................................... (36,242) (29,574) Net effect of interest rate component of swap terminations .................. (32,840) -- Extraordinary gains on early extinguishments of debt, net of income taxes ... (21,973) (1,885) Gains from dispositions (net) ............................................... (5,625) (20,150) Change in other assets and liabilities, net of effects from acquisitions: Increase in receivables ................................................... (52,982) (113,645) (Increase) decrease in other assets ....................................... (17,912) 18,689 Decrease in payables and other liabilities ................................ (17,545) (22,395) Other ..................................................................... (8,002) 11,140 --------- --------- Net cash provided by continuing operations .................................... 66,306 180,627 Net cash provided by discontinued operations .................................. 92,269 47,772 --------- --------- Net cash provided by operating activities ........................................ 158,575 228,399 Cash flows from investing activities: Capital expenditures ........................................................ (39,502) (113,836) Net effect of prearranged funeral production and maturities ................. 36,480 (36,071) Proceeds from sales of property and equipment ............................... 28,302 39,071 Acquisitions, net of cash acquired .......................................... 800 (66,026) Loans issued by lending subsidiary .......................................... (3,083) (41,674) Principal payments received on loans issued by lending subsidiary ........... 20,758 56,073 Deposit of restricted funds ................................................. (27,550) -- Other ....................................................................... (298) (19,440) --------- --------- Net cash provided by (used in) continuing operations .......................... 15,907 (181,903) Net cash used in discontinued operations ...................................... (82,022) (118,251) --------- --------- Net cash used in investing activities ............................................ (66,115) (300,154) Cash flows from financing activities: Net increase in borrowings under revolving credit agreements ................ 4,571 504,238 Payments of long-term debt .................................................. (63,876) (203,611) Early extinguishments of long-term debt ..................................... (194,097) (365,936) Net effect of cross-currency component of swap terminations ................. 143,498 -- Repurchase of common stock .................................................. -- (45,669) Dividends paid .............................................................. -- (47,809) Bank overdrafts and other ................................................... 2,745 10,652 --------- --------- Net cash used in financing activities of continuing operations ................... (107,159) (148,135) Effect of foreign currency ....................................................... (1,842) (9,250) --------- --------- Net decrease in cash and cash equivalents ........................................ (16,541) (229,140) Adjust for change in cash and cash equivalents used by discontinued operations ... 7,030 72,796 Cash and cash equivalents at beginning of period from continuing operations ...... 57,814 269,143 --------- --------- Cash and cash equivalents of continuing operations at June 30, 2000 and 1999 ..... $ 48,303 $ 112,799 ========= =========
(See notes to consolidated financial statements) 5 6 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated Capital in other Common excess Retained comprehensive (Dollars in thousands) stock of par value earnings loss Total --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $ 272,064 $2,156,301 $1,126,898 $ (59,990) $3,495,273 Comprehensive income: Net income.............................. 113,618 113,618 Other comprehensive loss: Foreign currency translation............. (106,403) (106,403) Unrealized loss on securities............ (3,287) (3,287) ---------- Total other comprehensive loss........... (109,690) ---------- Comprehensive income.................... 3,928 Common stock issued: Acquisitions.......................... 61 186 247 Stock grants.......................... 33 100 133 Repurchase and acquisition of common stock......................... (7) (219) (226) ---------- ---------- ---------- ---------- ---------- Balance at June 30, 2000 ................... $ 272,151 $2,156,368 $1,240,516 $ (169,680) $3,499,355 ========== ========== ========== ========== ==========
The Company's comprehensive income for the six months ended June 30, 1999, of $70,421 consisted of net income of $119,781, a foreign currency translation adjustment of $(22,049), and an unrealized loss on securities of $(27,311). (See notes to consolidated financial statements) 6 7 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE, RATIO AMOUNTS AND NUMBER OF LOCATIONS) 1. NATURE OF OPERATIONS Service Corporation International (the Company or SCI) is the largest provider of funeral and cemetery services in the world. At June 30, 2000, the Company operated 3,809 funeral service locations, 581 cemeteries and 201 crematoria located in 20 countries on five continents. The Company's funeral service locations and cemetery operations consist of funeral homes, cemeteries, crematoria and related businesses. Company personnel at the funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral related merchandise is sold at funeral locations and certain funeral service locations contain crematoria. The Company sells prearranged funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company's cemeteries provide cemetery interment rights (including mausoleum spaces, lots, and lawn crypts) and sell cemetery related merchandise. Cemetery items are sold on an atneed or preneed basis. Company personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries contain crematoria. The Company has approximately 197 combination facilities in which a funeral service location is contained within a cemetery. In July 2000, the Company entered into definitive agreements to sell its wholly-owned insurance operations, thereby discontinuing the operations of the Company's insurance segment (see note 10). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements for the three and six months ended June 30, 2000 and 1999 include the accounts of the Company and all majority-owned subsidiaries and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments which management considers necessary for a fair presentation of the results for these periods. These consolidated financial statements have been prepared in a manner consistent with the accounting policies described in the annual report on Form 10-K filed with the Securities and Exchange Commission (the Commission) for the year ended December 31, 1999, and should be read in conjunction therewith. The year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period. Certain reclassifications have been made to the prior period to conform to the current period presentation with no effect on previously reported net income, financial condition or cash flows. The Company has reclassified certain amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements to reflect the effect of discontinued operations on all periods and segments presented. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that may effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and may effect the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. Recent Accounting Pronouncements: In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS No. 133 on January 1, 2001. In December 1999, the Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101, as amended, is required to be implemented in the Company's fourth quarter of 2000. The Company, together with other members of the death care industry, are currently discussing the implementation of SAB No. 101 directly with the 7 8 staff of the Commission. Final resolution of the discussions will not have an impact on the Company's consolidated cash flows, or compliance with the Company's existing credit agreements, but will likely have a material impact on the Company's consolidated financial statements and on the manner in which the Company records preneed sales activities. The deferral of income that might occur as a result of implementing SAB No. 101, will be recognized in the consolidated statement of income in future periods. 3. PREARRANGED FUNERAL ACTIVITIES The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are placed into trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance or annuity contracts. Unperformed price guaranteed prearranged funeral contracts may be funded by insurance policies or annuities written currently by the Company's discontinued insurance operations, third party insurance companies or trust contracts. Contracts not funded through the Company's discontinued insurance operations are currently included in the consolidated balance sheet as prearranged funeral contracts. This balance represents amounts due from trust funds, customer receivables, or third party insurance companies. A corresponding credit is recorded to deferred prearranged funeral contract revenues. Funeral revenue is recognized on prearranged funeral contracts at the time the funeral services are performed. Trust earnings and increasing insurance benefits are accrued and deferred until the funeral services are performed, at which time the funds are also recognized in funeral revenues. Such amounts are intended to cover future increases in the cost of providing a price guaranteed funeral service. Net obtaining costs incurred pursuant to the sales of trust funded and third party insurance funded prearranged funeral contracts are included in deferred charges and other assets in the consolidated balance sheet. These obtaining costs include sales commissions and certain other direct costs, which are deferred and amortized over 20 years, a period representing the estimated life of the prearranged funeral contracts. The total value of unperformed prearranged funeral contracts consists of two components: (i) contracts funded by trust or third party insurance companies, and (ii) contracts currently funded by the Company's discontinued insurance operations. The total value represents the original contract values plus any accumulated trust fund earnings or increasing insurance benefits. The value of unperformed prearranged funeral contracts to be funded by trust or third party insurance companies are included in deferred prearranged funeral contract revenues in the consolidated balance sheet. In accordance with generally accepted accounting principles for life insurance companies, the current value of the actuarially determined portion of the unperformed prearranged funeral contracts to be funded by the Company's discontinued insurance operations is recorded in reserves and annuity benefits - insurance operations as shown in note 10 to the consolidated financial statements. The remaining component of reserves and annuity benefits - insurance operations represents the actuarially determined amounts to be funded for non-SCI unperformed prearranged funeral contracts. The total value of all SCI unperformed prearranged funeral contracts is shown below on a proforma basis as if the contracts funded through the Company's discontinued insurance operations were valued at original contract values plus increasing insurance benefits.
June 30, 2000 December 31, 1999 ------------- ----------------- Deferred prearranged funeral contract revenues................................ $3,194,423 $3,186,081 SCI contracts funded by Company's discontinued insurance operations........... 1,209,613 1,101,371 ---------- ---------- Total value of unperformed prearranged funeral contracts...................... $4,404,036 $4,287,452 ========== ==========
When the Company's insurance companies are disposed of, the total value of contracts to be funded by these discontinued insurance operations ($1,209,613 at June 30, 2000) will be recorded on the accompanying balance sheet consistent with contracts funded by third party insurance companies as discussed above. 8 9 4. DEBT Debt at June 30, 2000 and December 31, 1999 was as follows:
June 30, 2000 December 31, 1999 ------------- ----------------- Bank revolving credit agreements and commercial paper................... $1,167,325 $1,179,704 6.375% notes due 2000................................................... 70,710 150,000 6.75% notes due 2001.................................................... 123,000 150,000 8.72% amortizing notes due 2002......................................... 55,862 71,174 8.375% notes due 2004................................................... 51,840 51,840 7.375% notes due 2004................................................... 250,000 250,000 6.0% notes due 2005..................................................... 591,550 600,000 7.2% notes due 2006..................................................... 150,000 150,000 6.875% notes due 2007................................................... 150,000 150,000 6.5% notes due 2008..................................................... 200,000 200,000 7.7% notes due 2009..................................................... 200,000 200,000 6.95% amortizing notes due 2010......................................... 50,908 52,557 7.875% debentures due 2013.............................................. 55,627 55,627 7.0% notes due 2015 (putable 2002)...................................... 186,040 300,000 6.3% notes due 2020 (putable 2003)...................................... 300,000 300,000 Medium-term notes, maturities through 2019, fixed average interest rate of 9.32%........................................................ 35,720 35,720 Convertible debentures, maturities through 2008, fixed interest rates from 4.75% to 5.5%, conversion prices from $11.25 to $50.00.......... 49,213 49,213 Mortgage notes and other debt, maturities through 2050.................. 87,452 136,368 Deferred loan costs..................................................... (18,190) (22,187) ---------- ---------- Total debt......................................................... 3,757,057 4,060,016 Less current maturities................................................. (466,571) (423,949) ---------- ---------- Total long-term debt.................................................... $3,290,486 $3,636,067 ========== ==========
As of June 30, 2000, the Company's primary revolving credit agreements provided for borrowings up to $1,600,000 and consisted of three committed facilities - a short term facility, a 2-year term loan and a 5-year, multi-currency facility. These facilities are primarily used for general corporate purposes. The short term facility allows for borrowings up to $600,000 and expires October 30, 2000. A 5-year, multi-currency facility allows for borrowings up to $700,000, including $500,000 in various foreign currencies and expires June 27, 2002. Finally, a third facility in the amount of $300,000 was converted into a 2-year term loan, in accordance with the terms of the agreement, and will mature June 25, 2002. The borrowings under these credit facilities generally have maturities ranging from 1 to 180 days. Interest rates for these facilities are based on various indices as determined by the Company. For each facility, a fee is paid quarterly on the total commitment amount ranging from 0.25% to 0.50% based on the Company's senior debt ratings. The facility fee was 0.50% at June 30, 2000 and 0.25% at December 31, 1999. Furthermore, these credit facilities have financial compliance provisions, as defined in the credit agreements filed as an exhibit to the Company's 1999 Form 10-K, including a maximum debt-to-capitalization ratio of 60%, a minimum EBITDA to interest expense ratio of 2.75, a minimum net worth requirement defined in the credit agreements, and limitations on cash distributions, subsidiary borrowings, liens and guarantees. At June 30, 2000, $1,167,325 was outstanding under the above facilities with a weighted average interest rate of 7.93% ($870,545 at December 31, 1999, with a weighted average interest rate of 6.97%). Approximately $270,326 of these borrowings was denominated in various foreign currencies under the 5-year facility at June 30, 2000 ($295,545 at December 31, 1999). 9 10 The Company's commercial paper program is backed by the above facilities; however, the Company's downgraded credit ratings have rendered it unable to access the commercial paper market. At June 30, 2000, all previously issued commercial paper had matured. Commercial paper outstanding at December 31, 1999 was $309,159 with a weighted average interest rate of 6.58%. The Company has $27,550 deposited in restricted accounts as security for various credit instruments, which is included in the accompanying consolidated balance sheet as deferred charges and other assets at June 30, 2000. Approximately $14,106 was related to two embedded options associated with the Company's 6.30% notes due 2020 (putable 2003). The remaining $13,444 was used to secure various other obligations. During the six months ended June 30, 2000, the Company repurchased certain bonds in the open market with an aggregate face value of $228,700 as follows: $79,290 of the 6.375% notes due 2000, $27,000 of the 6.75% notes due 2001, $113,960 of the 7.00% notes due 2015, putable in 2002; and $8,450 of the 6.00% notes due 2005. The repurchase resulted in extraordinary gains on early extinguishments of debt totaling $15,388 (net of tax of $8,845) and $21,973 (net of tax of $12,630) for the three and six months ended June 30, 2000, respectively. 5. DERIVATIVES The Company has entered into various derivative financial instruments, which are primarily interest rate and cross-currency swap agreements, with high quality financial institutions to hedge potential exposures in interest and foreign exchange rates changes. The Company uses local currency borrowings in conjunction with these swap agreements to hedge the Company's net investment in foreign assets and to manage its mix of fixed and floating rate debt. The Company has procedures in place to monitor and control the use of derivatives and only enters into transactions with a limited group of creditworthy financial institutions. The Company does not engage in derivative transactions for speculative or trading purposes, nor is it a party to leveraged derivatives. During the first quarter of 2000, the Company materially modified its participation in derivative transactions by terminating or assigning away certain interest rate swaps and all cross-currency interest rate swaps, thereby removing the Company's hedges of foreign exchange rate exposure. A total notional value of $2,860,327 was eliminated in this process. The net proceeds from these terminations and assignments totaled $110,658, which was primarily used to extinguish debt. These proceeds have been classified according to the following components: $21,849 was due to the Company as accrued interest receivable, $143,498 resulted from foreign exchange rate gains, and $54,689 resulted from interest rate losses. The amount associated with the foreign exchange rate gains reduced the corresponding amount due from counterparties recorded in deferred charges and other assets. The amount associated with the interest rate losses will be amortized into interest expense over the remaining term of the swap agreements and $6,751 has been amortized into interest expense through June 30, 2000. Excluding $166,020 of borrowings related to the Company's previous lending activities, the Company's debt outstanding at June 30, 2000 had a weighted average interest rate of 7.11% compared to a weighted average interest rate of 6.83% at December 31, 1999. After giving consideration to the Company's remaining interest rate swap agreements, the weighted average interest rate at June 30, 2000 was 7.10% compared to 6.41% at December 31, 1999. The financial instruments associated with the 7.10% weighted average interest rate at June 30, 2000 consisted of approximately 45% of fixed interest rate debt at a weighted average interest rate of 6.88% and approximately 55% of floating interest rate debt at a weighted average interest rate of 7.28%. The fair market value of the Company's remaining swap agreements at June 30, 2000 was a net liability of $11,192 (a net asset of $122,581 at December 31, 1999). This change was primarily due to the above-mentioned termination or assigning away of certain interest rate swaps and all cross-currency interest rate swaps during the first quarter of 2000. Fair values were obtained from the counterparties to the agreements and represent their estimate of the amount the Company would pay or receive to terminate the swap agreements based upon the existing terms and current market conditions. 10 11 6. RATIO OF EARNINGS TO FIXED CHARGES
Six months ended June 30, 2000 1999 --------------------- 1.76 2.23
For purposes of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes and extraordinary gains; (1) less undistributed income of equity investees which are less than 50% owned; (2) plus the minority interest of majority-owned subsidiaries with fixed charges; and (3) plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense, whether capitalized or expensed, amortization of debt costs, and one-third of rental expense which the Company considers representative of the interest factor in the rentals. The decrease in the Company's ratio of earnings to fixed charges is attributable to the increase in interest expense. 7. SEGMENT REPORTING Due to the Company's operations being product or service based and geographically based, the Company's primary reportable operating segments presented below are based on products or services and include funeral and cemetery operations. The Company's geographic segments include North America, Europe and Other foreign. The Company conducts funeral and cemetery operations in all geographical regions. The Company has excluded the effects of its discontinued insurance operations from all periods and segments. The Company's reportable segment information from continuing operations was as follows:
Reportable Funeral Cemetery Segments --------------------------------------------------------------------------------------------------------------------- Revenues from external customers: Three months ended June 30, 2000................................................. $ 461,338 $236,485 $ 697,823 1999................................................. 483,178 257,168 740,346 Six months ended June 30, 2000................................................. $1,003,903 $455,336 $1,459,239 1999................................................. 1,057,819 509,026 1,566,845 --------------------------------------------------------------------------------------------------------------------- Gross profit: Three months ended June 30, 2000................................................. $ 57,930 $ 67,368 $ 125,298 1999................................................. 82,775 84,021 166,796 Six months ended June 30, 2000................................................. $ 181,564 $127,752 $ 309,316 1999................................................. 213,795 161,821 375,616 ---------------------------------------------------------------------------------------------------------------------
11 12 The following table reconciles reportable segment gross profit to the Company's consolidated income from continuing operations before income taxes and extraordinary gains:
Three months ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------- Gross profit from reportable segments ................. $ 125,298 $ 166,796 $ 309,316 $ 375,616 Lending subsidiary income from operations......... 914 2,537 1,674 5,287 General and administrative expenses .............. (19,733) (16,807) (39,847) (36,517) Restructuring and non-recurring charges (see note 9) ................................ (13,281) -- (13,281) (89,884) --------- --------- --------- --------- Operating income from continuing operations ........... 93,198 152,526 257,862 254,502 Interest expense ................................. (73,565) (56,761) (143,114) (114,209) Other income ..................................... 7,727 12,780 11,242 27,368 --------- --------- --------- --------- Income from continuing operations before income taxes and extraordinary gains .................... $ 27,360 $ 108,545 $ 125,990 $ 167,661 ========= ========= ========= =========
12 13 The Company's geographic segment information from continuing operations was as follows:
North Other America Europe foreign Total ------------------------------------------------------------------------------------------------------------------------ Revenues from external customers: Three months ended June 30, 2000 ...................................................... $ 484,987 $ 170,444 $ 46,669 $ 702,100 1999 ...................................................... 514,193 189,127 42,516 745,836 Six months ended June 30, 2000 ...................................................... $ 999,977 $ 382,327 $ 85,546 $1,467,850 1999 ...................................................... 1,076,229 424,923 76,944 1,578,096 ------------------------------------------------------------------------------------------------------------------------ Operating income from continuing operations before restructuring and non-recurring charges (see note 9): Three months ended June 30, 2000 ...................................................... $ 89,944 $ 3,745 $ 12,790 $ 106,479 1999 ...................................................... 121,528 18,863 12,135 152,526 Six months ended June 30, 2000 ...................................................... $ 211,600 $ 39,483 $ 20,060 $ 271,143 1999 ...................................................... 274,451 51,229 18,706 344,386 ------------------------------------------------------------------------------------------------------------------------ Operating income from continuing operations: Three months ended June 30, 2000 ...................................................... $ 76,489 $ 3,919 $ 12,790 $ 93,198 1999 ...................................................... 121,528 18,863 12,135 152,526 Six months ended June 30, 2000 ...................................................... $ 198,145 $ 39,657 $ 20,060 $ 257,862 1999 ...................................................... 221,386 17,200 15,916 254,502 ------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization from continuing operations: Three months ended June 30, 2000 ...................................................... $ 44,492 $ 14,281 $ 3,684 $ 62,457 1999 ...................................................... 39,071 22,957 4,262 66,290 Six months ended June 30, 2000 ...................................................... $ 86,922 $ 28,884 $ 7,203 $ 123,009 1999 ...................................................... 80,180 35,649 6,211 122,040 ------------------------------------------------------------------------------------------------------------------------ Operating locations at June 30: 2000 ...................................................... 2,339 2,063 189 4,591 1999 ...................................................... 2,298 2,059 185 4,542 ------------------------------------------------------------------------------------------------------------------------
Included in the North America figures above are the following United States amounts:
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------- Revenues from external customers .............................. $ 464,011 $ 495,125 $ 956,140 $1,035,133 Operating income from continuing operations before restructuring and non-recurring charges .................. $ 86,026 $ 118,360 $ 201,934 $ 264,725 Operating income from continuing operations ................... $ 72,571 $ 118,360 $ 188,479 $ 212,617 Depreciation and amortization from continuing operations ...... $ 42,581 $ 37,599 $ 83,089 $ 75,863 Operating locations ........................................... -- -- 2,185 2,142 -----------------------------------------------------------------------------------------------------------------------
13 14 Included in the European figures above are the following French amounts:
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- Revenues from external customers .............................. $ 103,911 $ 116,994 $ 227,097 $ 264,058 Operating income (loss) from continuing operations before restructuring and non-recurring charges .................. $ (934) $ 11,282 $ 15,726 $ 28,895 Operating income (loss) from continuing operations ............ $ (934) $ 11,282 $ 15,726 $ 8,028 Depreciation and amortization from continuing operations ...... $ 5,761 $ 14,977 $ 11,080 $ 20,009 Operating locations ........................................... -- -- 1,238 1,233 --------------------------------------------------------------------------------------------------------------------
8. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations are presented below:
Three months ended Six months ended June 30, June 30, ------------------------------------------------------------------------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Income (numerator): Income from continuing operations before extraordinary gains - basic ........................................ $ 17,793 $ 69,923 $ 80,881 $107,530 After tax interest on convertible debentures ....................... -- 195 190 327 -------- -------- -------- -------- Income from continuing operations before extraordinary gains - diluted ...................................... $ 17,793 $ 70,118 $ 81,071 $107,857 ------------------------------------------------------------------------------------------------------------------------- Shares (denominator): Shares - basic ..................................................... 272,093 272,013 272,078 272,502 Stock options and warrants .................................... 4 1,127 25 1,210 Convertible debentures ........................................ -- 1,447 698 1,300 -------- -------- -------- -------- Shares - diluted ................................................... 272,097 274,587 272,801 275,012 ------------------------------------------------------------------------------------------------------------------------- Earnings per share from continuing operations before extraordinary gains: Basic .............................................................. $ .07 $ .26 $ .30 $ .39 Diluted ............................................................ $ .07 $ .26 $ .30 $ .39 -------------------------------------------------------------------------------------------------------------------------
9. RESTRUCTURING AND NON-RECURRING CHARGES The Company recorded restructuring and nonrecurring charges in the first quarter (First Quarter Charge) and the fourth quarter (Fourth Quarter Charge) of 1999. In the second quarter of 2000, the Company made a change in estimate for certain items originally included in the Fourth Quarter Charge. These changes primarily related to increasing the provision for asset impairment by $22,250 to further write down to estimated fair value the loans made by the Company's lending subsidiary which are held for sale, offset by a reduction in the provision of $11,229 for funeral home and cemetery properties previously written down to their fair value, which are no longer being held for sale. The First Quarter Charge totaled $89,884 relating to a cost rationalization program initiated in 1999 and consisted of the following: (1) severance costs of $56,757; (2) a charge of $19,123 for terminated projects representing costs associated with certain construction projects that have been cancelled ($2,153) and costs associated with acquisition due diligence which will no longer be pursued ($16,970); (3) a $7,245 charge for business and facility closures, primarily in the Company's European operations; and (4) a remaining charge of $6,759 consisting of various other cost initiatives. The $56,757 for severance costs is related to the termination of five executive contractual relationships and the involuntary termination of approximately 800 employees throughout the Company's global 14 15 operations. The remaining severance costs related to the executive contractual relationships will be paid out according to the terms of the respective agreements and will extend through 2005. The remaining severance related to the 800 employees is expected to be paid out in 2000. The Fourth Quarter Charge totaled $272,544 relating to additional cost rationalization programs, as well as initiatives required to enhance cash flow and reduce debt. The Fourth Quarter Charge consisted of the following: (1) severance costs of $150,675; (2) asset impairment of $73,728 associated with assets held for sale which were written down to estimated fair value; (3) asset impairment of $18,245 associated with loans made by the Company's lending subsidiary held for sale which were written down to estimated fair value; (4) $12,719 of informational technology costs associated with projects that will no longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease obligations related to facility closures; and (6) $10,623 of various other items. The $150,675 of severance costs is related to the involuntary termination of 1,141 employees throughout the Company's global operations, including eight executive officers of the Company. Included in this total are 316 individuals that were former owners of independent funeral homes and cemeteries that were purchased by the Company and represent approximately $92,180 of the $150,675 of severance costs. Such individuals will continue to be paid by the Company pursuant to the terms of their contracts, the majority of which will be paid by 2007. The remaining severance costs are expected to be paid out through 2001. The severance costs associated with the executive officers will be paid in accordance with the terms of the respective agreements and will extend through 2005. The utilization of the First Quarter Charge and the Fourth Quarter Charge was as follows:
Utilization for six Months ended June 30, 2000 Original Balance at Changes in -------------------------- Balance at Charge amount December 31, 1999 Estimate Cash Non-cash June 30, 2000 ------------- ----------------- -------- --------- -------- -------------- First Quarter Charge... $ 89,884 $ 25,245 $ -- $ (6,939) $ (9,699) $ 8,607 Fourth Quarter Charge.. 272,544 135,944 13,281 (29,303) (16,389) 103,533 --------- --------- ------- --------- -------- -------- Total............ $ 362,428 $ 161,189 $13,281 $ (36,242) $(26,088) $112,140 ========= ========= ======= ========= ======== ========
Of the remaining total restructuring accrual balance of $112,140, approximately $6,544 and $97,100 relate to severance costs for the First Quarter Charge and the Fourth Quarter Charge, respectively. Further of the $112,140, approximately $51,763 is included in accounts payable and accrued liabilities and $60,377 is included in other liabilities in the accompanying consolidated balance sheet. 10. DISCONTINUED OPERATIONS In July 2000, the Company reached definitive agreements to sell the net assets of its wholly owned insurance operations. The financial statements have been reclassified to reflect these operations as discontinued. Summary operating results of discontinued operations:
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------ Revenues .................................... $ 99,919 $ 84,400 $ 203,636 $ 156,196 Cost and expenses ........................... (90,423) (74,148) (185,304) (138,643) --------- --------- --------- --------- Operating income from discontinued operations................................... 9,496 10,252 18,332 17,553 Provision for income taxes .................. (3,885) (4,162) (7,568) (7,187) --------- --------- --------- --------- Income from discontinued operations ......... $ 5,611 $ 6,090 $ 10,764 $ 10,366 ========= ========= ========= =========
15 16 Net assets of discontinued operations:
June 30, 2000 December 31, 1999 ----------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents ........................ $ 23,377 $ 30,407 Receivables, net of allowances ................... 19,597 19,858 Other current assets ............................. 14,651 11,240 Investments - insurance operations ............... 1,374,805 1,318,635 Long-term receivables ............................ 27,573 30,193 Property, plant and equipment, at cost (net)...... 2,309 1,546 Deferred charges and other assets ................ 403,005 379,454 Names and reputations (net) ...................... 40,363 40,889 ---------- ---------- Total assets .............................. $1,905,680 $1,832,222 ----------------------------------------------------------------------------------------------- Liabilities: Accounts payable and accrued liabilities ......... $ 25,964 $ 13,096 Income taxes payable ............................. 3,892 3,989 Reserves and annuity benefits - insurance operations ..................................... 1,381,067 1,313,328 Deferred income taxes ............................ 5,541 8,243 Other liabilities ................................ 291,754 284,715 ---------- ---------- Total liabilities ........................ $1,708,218 $1,623,371 ----------------------------------------------------------------------------------------------- Net assets of discontinued operations ................... $ 197,462 $ 208,851 -----------------------------------------------------------------------------------------------
16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT AVERAGE SALES PRICES, PER SHARE AMOUNTS, NUMBER OF FUNERAL SERVICES PERFORMED AND NUMBER OF LOCATIONS) OVERVIEW: The Company is the largest provider of death care services in the world conducting funeral services and cemetery operations in 20 countries on five continents. The Company's largest markets are North America and France, which when combined, represent approximately 78% of the Company's total operating locations, and approximately 84% of the Company's total revenues. The funeral and cemetery operations are organized into a North American division covering the United States and Canada, a European division responsible for all operations in Europe, and the Company also has operations managed in the Pacific Rim and South America. The majority of these operations are managed in groups called clusters. Clusters are geographical groups of funeral service locations and cemeteries that lower their individual overhead costs by sharing common resources such as operating personnel, preparation services, clerical staff, limousines, hearses and preneed sales personnel. Personnel costs, the largest of the operating expenses for the Company, are the cost components most beneficially affected by clustering. The sharing of employees, as well as the other costs mentioned, allow the Company to more efficiently utilize its operating facilities. In the first quarter of 2000, the Company initiated the implementation of Central Processing Centers throughout North America in order to further assist in the efficiencies of accounting and back-office functions. These Central Processing Centers will take further advantage of this clustering concept in order to reduce personnel costs. The funeral service locations and cemetery operations consist of the Company's funeral homes, cemeteries, crematoria and related businesses. Both funeral service locations and cemeteries can contain crematoria facilities. The Company has approximately 197 combination facilities in which a funeral service location is contained within a cemetery. The other services operations consist of the Company's lending subsidiary, which previously provided capital financing for independent funeral and cemetery operations. In August of 2000, the Company announced additional phases of the Company's current business strategy, which will redefine the Company's approach to a number of its existing business activities and improve financial stability for the Company's future. Initial Phase The initial phase of the Company's strategic plan begun in early 1999 was designed to reduce overhead, increase cash flow and pay down debt. The reduction of overhead was initially addressed through a cost rationalization program, which restructured the Company's operating clusters into more efficient operating units and resulted in two separate restructuring charges recorded in 1999 totaling $362,400. The Company's initiative to increase cash flow included the suspension of the quarterly cash dividend, the suspension of the acquisition program, realignment of preneed cemetery and prearranged funeral sales commission structures, increased efforts to expedite the receipt of funds due to the Company from certain funeral and cemetery trusts and the sale of certain non-core assets and businesses. The Company has executed sales of certain non-core financial assets during 2000 and will continue the process of selling other non-core assets. The Company intends to complete the sale of certain loans of its lending subsidiary (included in other services operations) in 2000 and has signed definitive agreements to sell its wholly owned insurance operations, American Memorial Life Insurance Company (AMLIC) and Auxia, which are both expected to close by October 31, 2000, subject to customary regulatory and other closing conditions. As a result, these operations are reported as discontinued operations and the financial statements have been reclassified for all periods presented. The AMLIC and Auxia transactions are expected to produce approximately $230,000 of after tax proceeds to be used to reduce the Company's debt outstanding. These transactions align SCI with very strong partners: Fortis, Inc. with AMLIC, and Mederic Assurances of France and Zurich France with Auxia. The Company has entered into marketing agreements with these strategic partners, which will become effective upon closing of the AMLIC and Auxia transactions, and are related to future performance and projected to produce more free cash flow for the Company than if the insurance operations were owned by the Company. Under the performance based ten year marketing agreement in conjunction with the AMLIC transaction, and based on the 17 18 Company's sales forecasts, the net present value of future overrides associated with the AMLIC marketing agreement is expected to exceed $200,000. The marketing agreements with both the AMLIC and Auxia transactions are also expected to provide enhanced opportunities to sell prearranged funerals in the Company's worldwide funeral markets. The overhead reductions and cash flow enhancing initiatives associated with the initial phase of the Company's strategic plan were designed to pay down the Company's debt due in 2000. The initial phase of the Company's strategic plan has increased operating free cash flow and will allow the Company, coupled with the closing of the AMLIC and Auxia transactions and other non-core asset sales expected to close before the end of October 2000, to retire all of its debt maturing in 2000. The Company's total debt at June 30, 2000 was $3,757,057, which is before the receipt of estimated proceeds associated with the sale of AMLIC and Auxia, and down from a previous high balance of approximately $4,200,000 at September 30, 1999. The June 30, 2000 debt balance is already within the Company's initial year-end 2000 targeted range of $3,600,000 to $3,800,000. Second Phase The second phase of the Company's strategic plan, which is presently being initiated, is to define the Company's operations by demographic, market and geographic segments and restructure these operations through alliances and joint ventures with strategic partners that the Company believes would add value to the businesses. Strategic partners could invest in and provide other benefits to the joint ventures, which would include funeral home and cemetery properties owned by or affiliated with the Company. Any investments made by strategic partners would be used by the Company to substantially reduce or eliminate amounts currently outstanding on its credit facilities due in 2002 or other indebtedness. Strategic partners could include companies or other groups that could offer unique competitive advantages not previously available to the Company, such as access to customer databases, marketing or telemarketing services and prearrangement financing. This strategic alliance and joint venture program is similar to the Company's ongoing affinity program, which aligns the core operations of the Company with third parties and could enhance future internal growth and incremental cash flows. Third Phase The third phase of the Company's strategic plan continues the focus on internal growth within the Company's existing core businesses. Central to this strategy is the continued execution of agreements with affinity partners which provide exclusive, direct access by the Company to large groups of individuals who meet the Company's ideal customer profile. Existing affinity relationships include insurance companies, charitable organizations, corporations and social/fraternal groups internationally and within North America with whom the Company is currently in various stages of discussion, contract negotiations, market testing or program execution. Marketing to affinity group customers will be either through the Company's existing funeral and cemetery network, direct to consumer or through e-commerce marketing initiatives. The third phase also includes the continued development and implementation of the Dignity Memorial(TM) Plan funeral packages and the Dignity Memorial(TM) brand name. The Company plans to develop a seamless, global, brand recognized network of funeral service providers under the Dignity Memorial(TM) brand name to provide funeral products and services, which would be recognized and portable on a worldwide basis. The Dignity Memorial(TM) provider network will be developed through a program of offering non-SCI funeral homes, primarily in markets where the Company does not currently have coverage, the opportunity to participate in the network and have access to the Company's affinity partners, Dignity Memorial(TM) products and services, prearranged funeral funding sources, merchandising expertise and Internet capabilities. The Dignity Memorial(TM) provider network will have the advantage of being accessible to consumers through the Internet site DignityMemorial.com. When fully implemented, this Internet site will give consumers the ability to locate Dignity Memorial(TM) providers throughout a worldwide network and offer consumers high value consumer friendly packages of funeral products and services that will be portable throughout the network. Additionally, DignityMemorial.com will participate as the exclusive death care provider in a much broader Internet portal, Besthalf.com, which is also being developed by the Company and could be available as early as the fall of 2000, and would provide a comprehensive array of products and services targeting the global senior citizen market. This participating relationship would give the Dignity Memorial(TM) consumer access to a much larger and broader range of products and services on Besthalf.com through other participating companies and organizations. Other participants in Besthalf.com could include 18 19 nursing homes, assisted living companies, rehabilitation hospitals, insurance companies, pharmaceutical companies and numerous other organizations marketing to the global senior citizen market. Earnings Outlook for Remainder of 2000 The Company had reported expectations of earnings per share for full-year 2000 in the range of $.65 to $.75 per diluted share and EBITDA of approximately $800,000, both before non-recurring items defined as extraordinary gains on early extinguishments of debt and restructuring and non-recurring charges. The most important factor in the determination of the Company's earnings is the number of deaths during a certain period in the Company's North America, European and other international funeral markets. Due to the high fixed cost structure inherent in the funeral industry, the number of funeral services performed can create large swings in the revenues, gross margin percentages and gross profits of the Company's funeral segment. Since the suspension of the Company's acquisition program in 1999, the Company's funeral segment revenues are almost entirely comprised of comparable funeral service locations, resulting in funeral segment gross profits affected primarily by market share and number of deaths in their respective markets. Primarily beginning in the third quarter of 1999, the Company has experienced the trend of fewer number of deaths in its worldwide funeral operating markets. Through June 2000, the Company believes the number of deaths in 2000 has decreased approximately 1.6% in North America and over 3.0% in Europe compared to the same period of 1999, respectively. The Company does not believe it will achieve its previously disclosed earnings guidance and with limited future visibility and insight into accurately predicting the number of deaths for the remainder of 2000, the Company is not comfortable disclosing revised earnings per share and EBITDA guidance for the full-year 2000 at this time. Furthermore, the Company believes if this negative trend in the number of deaths continues, the Company's underlying fixed cost structure and personnel needs would have to be adjusted accordingly. RESULTS OF OPERATIONS: The following is a discussion of the Company's results of operations for the three and six months ended June 30, 2000 and 1999. THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 For the quarter ended June 30, 2000, the Company reported revenues from continuing operations of $702,100, representing a 5.9% decrease compared to $745,836 for the second quarter of 1999. Gross profit in the second quarter of 2000 decreased 25.5% to $126,212 compared to $169,333 in the same period of 1999, while the gross margin percentage decreased to 18.0% for the second quarter of 2000 compared to 22.7% in the same period of 1999. For the three months ended June 30, 2000 the Company reported earnings before non-recurring items (defined as extraordinary gains on early extinguishments of debt and restructuring and non-recurring charges) of $31,837, net income of $38,792, diluted earnings per share before non-recurring items of $.12 ($.12 basic) and diluted earnings per share of $.14 ($.14 basic). The Company reported net income of $76,013 and diluted earnings per share of $.28 ($.28 basic) for the second quarter of 1999. In the second quarter of 2000, the Company made changes in estimates of its fourth quarter 1999 restructuring charge, increasing the charge by $13,281. The Company also recorded gains from the early extinguishments of debt in the amount of $15,388, net of tax in the second quarter of 2000. No such charges or extraordinary gains were recorded in the second quarter of 1999. 19 20 The Company has excluded the results of operations of its discontinued operations. Results for the Company's continuing operations by geographic segment were as follows:
Three months ended June 30, 2000 -------------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue -------------------------------------------------------------------------------------------- Revenues Funeral ..................... $279,090 57.5% $162,649 95.4% $ 19,599 42.0% $461,338 65.7% Cemetery .................... 201,620 41.6% 7,795 4.6% 27,070 58.0% 236,485 33.7% Other Services .............. 4,277 0.9% -- -- -- -- 4,277 0.6% -------------------------------------------------------------------------------------------- $484,987 100.0% $170,444 100.0% $ 46,669 100.0% $702,100 100.0% ============================================================================================ Gross profit and margin percentage Funeral ..................... $ 52,474 18.8% $ 2,306 1.4% $ 3,150 16.1% $ 57,930 12.6% Cemetery .................... 55,387 27.5% 2,341 30.0% 9,640 35.6% 67,368 28.5% Other Services .............. 914 21.4% -- -- -- -- 914 21.4% -------------------------------------------------------------------------------------------- $108,775 22.4% $ 4,647 2.7% $ 12,790 27.4% $126,212 18.0% ============================================================================================
Three months ended June 30, 1999 -------------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue -------------------------------------------------------------------------------------------- Revenues Funeral ..................... $284,540 55.3% $180,721 95.6% $ 17,917 42.1% $483,178 64.8% Cemetery .................... 224,163 43.6% 8,406 4.4% 24,599 57.9% 257,168 34.5% Other Services .............. 5,490 1.1% -- -- -- -- 5,490 0.7% -------------------------------------------------------------------------------------------- $514,193 100.0% $189,127 100.0% $ 42,516 100.0% $745,836 100.0% ============================================================================================ Gross profit and margin percentage Funeral ..................... $ 62,791 22.1% $ 17,262 9.6% $ 2,722 15.2% $ 82,775 17.1% Cemetery .................... 72,429 32.3% 2,179 25.9% 9,413 38.3% 84,021 32.7% Other Services .............. 2,537 46.2% -- -- -- -- 2,537 46.2% -------------------------------------------------------------------------------------------- $137,757 26.8% $ 19,441 10.3% $ 12,135 28.5% $169,333 22.7% ============================================================================================
FUNERAL The decrease in funeral segment revenues and gross profit and margin percentage in the second quarter of 2000 was primarily the result of decreases in the number of deaths and foreign currency translation. The number of deaths in the Company's funeral markets declined in 2000 compared to 1999 and, as a result, total funeral services performed by the Company's worldwide funeral service locations were 3.9% below total funeral services performed in the second quarter of 1999. Due to the high fixed cost structure inherent in the funeral industry, the number of funeral services performed can create significant swings in the results of operations during a reporting period. The negative effect of foreign currency translations was approximately $26,155 on funeral revenues and $1,334 on funeral gross profits, primarily related to the devaluing of the Euro relative to the U.S. dollar. North America funeral revenues and gross profit declined primarily as a result of a reduced number of deaths. In the second quarter of 2000, total volume declined approximately 1.6% compared to the second quarter of 1999. While the average revenue per 20 21 funeral service increased 1.3% over the first quarter of 2000 to $3,871, compared to the second quarter of 1999, the average remained relatively unchanged. Of the total mix of funeral services performed in the second quarter of 2000, 27.8% were previously prearranged funeral contracts compared to 27.1% in the second quarter of 1999, while 36.8% of total funeral services performed in the second quarter of 2000 were cremation services compared to 33.5% for the same period of 1999. The average revenue per funeral service from prearranged funeral contracts becoming atneed increased 2.5% to $3,652 in the second quarter of 2000 compared to the same period in 1999. Of the total cremation cases in the second quarter of 2000, approximately 63% were cremations with memorialization services versus immediate cremation cases, while approximately 52% of the total cremation cases in the second quarter of 1999 were cremations with memorialization services. Cremations with memorialization services have a higher average revenue per case compared to immediate cremations. This change in the mix of cremations, as well as the increase in average revenue per funeral associated with prearranged funeral contracts becoming atneed, helped to offset decreases in the total average revenue per funeral caused by the general trend in the total sales mix from traditional funerals to cremations. While the decrease in European funeral revenue and gross profit is primarily due to the decrease in the number of deaths experienced across Europe coupled with a slight decrease in market share over this period, this decline was further emphasized by the weakening of the Euro relative to the U.S. dollar. European funeral services performed in the second quarter of 2000 declined 6.5% compared to the same period of 1999. Funeral revenues and gross profit increased in the second quarter of 2000 compared to the same period of 1999 for the Company's Other Foreign operations. The increase is the result of strong sales in the Company's South American operations. The gross profit and margin percentage has improved as a result of integrating acquisitions into the Company's existing structure. Revenue remained stable in all other jurisdictions as a result of increased averages in the price per funeral service. CEMETERY Cemetery revenues declined 8.0% to $236,485 and cemetery gross profit declined 19.8% to $67,368 in the second quarter of 2000 compared to the second quarter of 1999. These decreases were primarily a result of anticipated decreases in realized investment earnings and capital gains related to cemetery trust funds and sales of excess undeveloped cemetery property. Realized investment earnings and capital gains for the second quarter of 2000 were $15,568 compared to $20,622 in the second quarter of 1999. Sales of excess undeveloped cemetery property had an impact of $4,363 on the gross profit in the second quarter of 2000 compared to $11,454 in the same quarter of 1999. The North America cemetery revenue and gross profit decrease from the second quarter of 1999 is primarily the result of the above mentioned factors coupled with lower atneed cemetery sales. The decline in the number of deaths in the second quarter of 2000 compared to the second quarter of 1999 had a similar negative impact on atneed cemetery sales as it did on atneed funeral sales. European cemetery revenue and gross profit also declined because of the decrease in atneed cemetery sales as a result of a lower number of deaths in the second quarter of 2000 compared to the second quarter of 1999, while Other Foreign revenue and gross profit increased as a result of strong preneed cemetery sales in Australia. OTHER SERVICES As part of the cost rationalization programs initiated in 1999, the Company decided, except for existing commitments, to indefinitely suspend the operations of its lending subsidiary. The Company is in the process of selling a portion of the loan portfolio and has acquired by deed in lieu of foreclosure the collateral underlying loans previously on non-accrual status which were written down as part of the Loan Provision in the fourth quarter of 1999. As a result, the revenues and gross profit were adversely affected in the second quarter of 2000 compared to the second quarter of 1999. The average outstanding loan portfolio was $162,156 in the second quarter of 2000 compared to $271,659 in the same period of 1999 and the average interest rate spread was 2.8% and 2.5%, respectively, over the same periods. RESTRUCTURING AND NON-RECURRING CHARGES In the second quarter of 2000, the Company made changes in estimates of certain items originally included in the Company's fourth quarter 1999 restructuring charge of $272,544, which resulted in an additional impairment provision of $13,281. The change in estimates 21 22 primarily related to an increase in the provision for asset impairment of $22,250 associated with loans made by the Company's lending subsidiary, which are held for sale, offset by a reduction in the provision of $11,229 associated with funeral homes and cemetery properties previously written down and held for sale that are no longer being held for sale by the Company. OTHER INCOME AND EXPENSES In the second quarter of 2000 general and administrative expenses increased $2,926 to $19,733 compared to the second quarter of 1999. The increase was related to anticipated increases in information technology costs associated with moving the Company's North American proprietary point of sale systems into production and reinforcing the Company's existing infrastructure. Expressed as a percentage of revenues, general and administrative expenses were 2.8% for the three months ended June 30, 2000, compared to 2.3% for the comparable period in 1999. Interest expense increased $16,804 or 29.6% to $73,565 in the second quarter of 2000 compared to the same period of 1999. The increased interest expense in the second quarter of 2000 primarily reflects the higher financing costs associated with the use of the Company's credit facilities rather than its commercial paper program and interest rate increases compared to the second quarter of 1999. In the second quarter of 2000, the average outstanding debt was $3,841,978 with an average interest rate of 7.66% compared to the average outstanding debt in the second quarter of 1999 of $4,137,253 with an average interest rate of 6.09%. Other income primarily consists of gains and losses from the sales of businesses that are disposed of for strategic or government mandated purposes. The provision for income taxes on continuing operations reflected a 35.0% effective tax rate for the three months ended June 30, 2000, compared to a 35.6% effective tax rate for the comparable period in 1999. DISCONTINUED OPERATIONS In July 2000, the Company entered into definitive agreements to sell its wholly owned insurance operations in France and the United States, thereby discontinuing the operations of the Company's insurance segment. As such, the Company has reclassified the financial statements in accordance with accounting principles applicable to discontinued operations for all periods presented. The Company has entered into marketing agreements with the purchasers, which will become effective at the closing of the transactions, and are related to future performance and are expected to produce more free cash flow for the Company than if the insurance operations were owned by the Company. The marketing agreements with both the United States and French insurance companies are also expected to provide enhanced opportunities to sell prearranged funerals in the Company's worldwide funeral markets. Revenues from discontinued operations increased 18.4% to $99,919, while gross profit decreased 7.4% to $9,496 for the three months ended June 30, 2000. This increase in revenues is due to the initiative to fund prearranged funeral contracts, whenever possible, through the Company owned insurance operations. While having the effect of increasing revenues, this initiative also initially increases the actuarially determined benefits and expenses more than revenues, having the effect of reducing the gross margin percentage. 22 23 SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Six months ended June 30, 2000 ----------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue ---------- ------- ---------- ------- ---------- ------- ---------- ------- Revenues Funeral ........................ $ 602,449 60.2% $ 364,288 95.3% $ 37,166 43.4% $1,003,903 68.4% Cemetery ....................... 388,917 38.9% 18,039 4.7% 48,380 56.6% 455,336 31.0% Other Services ................. 8,611 0.9% -- -- -- -- 8,611 0.6% ---------- ----- ---------- ----- ---------- ----- ---------- ----- $ 999,977 100.0% $ 382,327 100.0% $ 85,546 100.0% $1,467,850 100.0% ========== ===== ========== ===== ========== ===== ========== ===== Gross profit and margin percentage Funeral ........................ $ 142,194 23.6% $ 34,344 9.4% $ 5,026 13.5% $ 181,564 18.1% Cemetery ....................... 105,852 27.2% 6,866 38.1% 15,034 31.1% 127,752 28.1% Other Services ................. 1,674 19.4% -- -- -- -- 1,674 19.4% ---------- ----- ---------- ----- ---------- ----- ---------- ----- $ 249,720 25.0% $ 41,210 10.8% $ 20,060 23.4% $ 310,990 21.2% ========== ===== ========== ===== ========== ===== ========== =====
Six months ended June 30, 1999 ----------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue ---------- ------- ---------- ------- ---------- ------- ---------- ------- Revenues Funeral ........................ $ 617,738 57.4% $ 406,664 95.7% $ 33,417 43.4% $1,057,819 67.0% Cemetery ....................... 447,240 41.6% 18,259 4.3% 43,527 56.6% 509,026 32.3% Other Services ................. 11,251 1.0% -- -- -- -- 11,251 0.7% ---------- ----- ---------- ----- ---------- ----- ---------- ----- $1,076,229 100.0% $ 424,923 100.0% $ 76,944 100.0% $1,578,096 100.0% ========== ===== ========== ===== ========== ===== ========== ===== Gross profit and margin percentage Funeral ........................ $ 160,169 25.9% $ 48,646 12.0% $ 4,980 14.9% $ 213,795 20.2% Cemetery ....................... 141,759 31.7% 6,336 34.7% 13,726 31.5% 161,821 31.8% Other Services ................. 5,287 47.0% -- -- -- -- 5,287 47.0% ---------- ----- ---------- ----- ---------- ----- ---------- ----- $ 307,215 28.5% $ 54,982 12.9% $ 18,706 24.3% $ 380,903 24.1% ========== ===== ========== ===== ========== ===== ========== =====
FUNERAL For the six months ended June 30, 2000, funeral revenues were $1,003,903 and gross profit was $181,564, a decrease of 5.1% and 15.1%, respectively, compared to the same period in 1999. The decrease in revenue is primarily attributed to a decrease in the number of deaths and the negative effect of foreign currency translation. The decrease in North America revenues of 2.5% to 602,449 was consistent with the second quarter of 2000 and is related to a decline in volume of 1.6% for the six months ended June 30, 2000. This decrease was partially anticipated due to strong funeral service volume experienced in the first quarter of 1999 and was further caused by a decline in the average revenue per funeral service to $3,845 in the first six months of 2000 from $3,881 in the first six months of 1999. 23 24 The decrease in European funeral revenues is primarily due to the decrease in the number of deaths in 2000 compared to 1999. The number of European funeral services performed declined 3.4% in the six months ending June 30, 2000, with the majority of the shortfall occurring in the second quarter. Further, the negative effect of foreign currency translation impacted revenue by approximately $50,377 and gross profit by $5,428. This negative effect is the result of the Euro weakening relative to the U.S. dollar throughout 2000. The increase in Other Foreign revenues and gross profit is the result of an increase in funeral services performed of 1.9% to 14,872 in 2000 in conjunction with growth in South America. CEMETERY Cemetery revenues declined 10.5% to $455,336 while cemetery gross profit decreased 21.1% to $127,752 in the first six months of 2000 compared to 1999. The decrease in cemetery revenues and gross profit during this period is related to (a) lower total North America preneed cemetery sales due to changes in the cemetery sales compensation plans, (b) lower atneed volume due to lower death rates, (c) anticipated decreases in realized investment earnings and capital gains related to cemetery trust funds, and (d) anticipated fewer sales of excess undeveloped cemetery property. The majority of cemetery results is related to North America cemetery revenues and gross profit, which decreased 13.0% to $388,917 and 25.3% to $105,852, respectively. The lower preneed sales were the combined result of the initial negative impact from changes in cemetery compensation plans and the expected decline from strong sales in the first quarter of 1999. The Company has changed cemetery compensation plans to align its sales management compensation with gross profits of the cemetery sales instead of being only revenue based. Lower atneed volume is impacted by the decline in the number of deaths as experienced in the funeral segment, which also contributes to lower preneed sales. Cemetery trust income from realized investment earnings and capital gains was $28,116 in the first six months of 2000 compared to $38,824 in the same period of 1999. These earnings have a direct impact on the gross profit associated with the cemetery segment. Sales of excess undeveloped cemetery property had an impact of $4,411 on gross profit in the first six months of 2000 compared to $13,657 in the same period of 1999. Other Foreign revenue and gross profit increases relate to strong sales in South America resulting from the maturing of the Company's operational, sales and marketing initiatives implemented, as well as strong preneed sales in Australia. OTHER SERVICES Revenue and gross profit for the Company's other services has declined due to the decision to indefinitely suspend the operations of its lending subsidiary. The Company is in the process of selling a portion of the loan portfolio and has acquired by deed in lieu of foreclosure the collateral underlying non-accrual loans previously written down in the Loan Provision taken in the fourth quarter of 1999. The average outstanding loan portfolio in the first six months of 2000 was $174,973 compared to $279,272 in the same period of 1999 and the average interest rate spread was 2.2% and 2.7%, respectively, over the same periods. OTHER INCOME AND EXPENSES General and administrative expenses increased $3,330 to $39,847 in the six months ended June 30, 2000, compared to the same period in 1999. The increase primarily relates to increased information technology and infrastructure costs associated with moving the Company's North America proprietary point of sale systems into production, as well as the initial roll-out of Central Processing Centers in the Company's realigned operating clusters. Expressed as a percentage of revenues, general and administrative expenses were 2.7% in the first six months of 2000 compared to 2.3% for the same period in 1999. Interest expense increased $28,905 or 25.3% to $143,114 in the six months ended June 30, 2000 compared to the six months ended June 30, 1999. The increased interest expense for the six months ended June 30, 2000 reflects the higher financing costs associated with the use of the Company's credit facilities rather than its commercial paper program and interest rate increases compared to the six months ended June 30, 1999. For the six months ended June 30 2000, the average outstanding debt was $3,903,298 with an average interest rate of 7.31% compared to the average outstanding debt for the six months ended June 30, 1999 of $4,125,169 with an average interest rate of 5.48%. 24 25 Other income primarily consists of gains and losses from the sales of businesses that are disposed of for strategic or government mandated purposes. The provision for income taxes reflected a 35.8% effective tax rate for the six months ended June 30, 2000 compared to a 35.9% effective rate for the comparable period in 1999. DISCONTINUED OPERATIONS During July 2000, the Company entered into definitive agreements to sell its wholly-owned insurance operations in France and the United States, thereby discontinuing the operations of the Company's insurance segment. As such, the Company has reclassified the financial statements in accordance with accounting principles applicable to discontinued operations for all periods presented. The Company has entered into marketing agreements with the purchasers, which will become effective at the closing of the transactions, and are related to future performance and are expected to produce more free cash flow for the Company than if the insurance operations were owned by the Company. The marketing agreements with both the United States and French insurance companies are also expected to provide enhanced opportunities to sell prearranged funerals in the Company's worldwide funeral markets. Revenues from discontinued operations increased 30.4% to $203,636 and gross profit increased 4.4% to $18,332 for the six months ended June 30, 2000. This increase in revenues is due to the initiative to fund prearranged funeral contracts, whenever possible, through the Company owned insurance operations. While having the effect of increasing revenues, this initiative also initially increases the actuarially determined benefits and expenses more than revenues, having the effect of reducing the gross margin percentage. FINANCIAL CONDITION AND LIQUIDITY AT JUNE 30, 2000 GENERAL Historically, the Company had funded its working capital needs and capital expenditures primarily through cash provided by operating activities and borrowings under bank revolving credit agreements and commercial paper. Funding required for the Company's acquisition program has historically been generated through public and private offerings of debt and the issuance of equity securities supplemented by the Company's revolving credit agreements and commercial paper. The Company's liquidity needs and capital funding requirements have changed as the Company has transitioned away from an acquisition company to an operating company focusing on increasing cash flow, reducing overhead costs and paying down debt. The Company has developed a series of cash flow initiatives related to (i) ongoing operations of the Company, (ii) the sale of certain assets and non-core businesses and (iii) sources of cash flow from providing third party financing to consumers. The implementation of these initiatives is expected to improve the Company's cash flow in 2000 and beyond. Cash flow initiatives related to the ongoing operations of the Company include: (i) suspension of the acquisition program; (ii) reduction of capital expenditures compared to historical levels; (iii) suspension of the quarterly cash dividend; (iv) more efficient retrieval of funds available from trusts utilized by the Company; and (v) realignment of preneed cemetery and prearranged funeral sales structures to become more cash flow positive. The Company had believed the above cash flow initiatives, coupled with other working capital initiatives, would produce Operating Free Cash Flow on an after tax basis in the range of $100,000 to $200,000 in 2000. For the six months ended June 30, 2000, the Company has reported Operating Free Cash Flow of $131,350, already within the expected year-end 2000 range. Included in the $131,350 of Operating Free Cash Flow, is approximately $81,500 of non-recurring funds received as a result of the Company's initiative to expedite the receipt of funds due to the Company from certain funeral and cemetery trusts. Based upon these funds already received by the Company, additional funds expected during 2000 from certain funeral and cemetery trusts, efforts associated with the bonding of certain funeral and cemetery trusts in various states and normal recurring cash flow from operating businesses, the Company now expects operating free cash flow to be in the range of $100,000 to $250,000 by the end of 2000. The Company defines Operating Free Cash Flow as adjusted cash flow from operating activities, less capital expenditures, dividends paid, and the net effect of prearranged funeral production and maturities. Adjusted cash flow from operating activities includes cash flow provided by operating activities as reflected in the consolidated statement of cash flow adjusted for (i) cash flow provided by operating activities of the Company's discontinued insurance operations, (ii) cash payments associated with the Company's first and fourth quarter restructuring charges, and (iii) other proceeds or payments (included in cash flow provided by operating activities) which are of a non-recurring operational nature. 25 26 The Company also developed cash flow initiatives to sell certain assets and non-core businesses that are either not meeting the Company's criteria for returns on invested capital or are more strategically valuable to parties outside the Company. The Company had expected after tax proceeds of $200,000 to $300,000 from these sales of non-core financial or operational assets in 2000. Due to the definitive agreements signed by the Company to sell the Company's wholly owned insurance companies, the sale of certain financial assets already completed in 2000, the anticipated sales of certain loans of the Company's lending subsidiary and other non-core assets; the Company now expects after tax proceeds from the sales of non-core financial or operational assets of $200,000 to $500,000 by the end of 2000. The above cash flow initiatives are expected to produce approximately $300,000 to $750,000 of funds in 2000 available for reducing debt on an after tax basis. This projection does not include net cash outflows in 2000 associated with the Company's 1999 restructuring charges (expected to be $75,000 for the year), nor does it consider the possible effect on cash flows associated with the development of a consumer financing program in North America for the Company's atneed funeral and cemetery and preneed cemetery client families, which could improve or generate cash flow for the Company and enhance the Company's ability to further pay down debt. The Company's year-to-date progress towards its 2000 cash flow benchmarks is calculated below:
Six months ended Revised Year 2000 June 30, 2000 Benchmarks ---------------- -------------------- Consolidated cash flow provided by operating activities ......... $ 158,575 Amount pertaining to discontinued insurance operations .......... (92,269) Payments on restructuring charges ............................... 36,242 Effect of swap agreement terminations ........................... 32,840 ---------- Adjusted cash flow from operating activities ............. 135,388 Capital expenditures ............................................ (40,518) Dividends paid .................................................. -- Net effect of prearranged funeral production and maturities ..... 36,480 ---------- Operating Free Cash Flow .................................. 131,350 $100,000 to $250,000 Estimated after tax proceeds from sales of non-core assets ...... 109,715 $200,000 to $500,000 ---------- -------------------- Cash flow available ............................................. $ 241,065 $300,000 to $750,000 ========== ====================
The Company's original objective was to reduce total debt to a target level of between $3,600,000 and $3,800,000 by the end of 2000. At June 30, 2000 the Company had met those targets with total debt outstanding of $3,757,057, compared to $4,060,016 at December 31, 1999. The Company has revised it targets and now expects total debt to be in the range of $3,300,000 to $3,600,000 by the end of 2000. The largest component of this debt relates to the Company's primary revolving credit agreements consisting of three credit facilities that provide for borrowings up to $1,600,000. First, a short term facility allows for borrowings up to $600,000 and expires October 30, 2000. Next, a five-year, multi-currency facility allows for borrowings up to $700,000 including $500,000 in various foreign currencies and expires June 27, 2002. Finally, a third facility in the amount of $300,000 was converted into a two-year term loan, in accordance with the terms of the agreement, and will mature June 25, 2002. These facilities have financial compliance provisions, as defined in the credit agreements and filed as an exhibit to the Company's 1999 Form 10-K, including a maximum debt-to-capitalization ratio of 60%, a minimum EBITDA to interest expense ratio of 2.75, a minimum net worth requirement defined in the credit agreements, and limitations on cash distributions, subsidiary borrowings, liens and guarantees. Additionally, the credit agreements contain provisions whereby in the event the Company is required to change accounting principles currently utilized, the Company has the option of (i) agreeing to an amendment to the credit agreements which shall have the same economic effect of the original financial compliance provisions after taking into account the required change in accounting principles or (ii) perform the calculations of the financial compliance provisions in accordance with accounting principles utilized before the required change. As of 26 27 June 30, 2000 the Company is in compliance with the financial compliance provisions and has approximately $432,675 available under these three facilities. The Company further expects to be in compliance with these provisions through 2000. As of June 30, 2000, the Company had a total of $466,571 in current maturities of long-term debt. As mentioned above, the Company believes it will generate funds available for reducing debt on an after tax basis of $300,000 to $750,000, excluding the projected net cash outflow of $75,000 related to the Company's 1999 restructuring charges. Based on these expected funds available, the Company believes it will meet all of its financial obligations and requirements in 2000. Additionally, negotiations are currently underway with various financial institutions for a new secured credit facility. SOURCES AND USES OF CASH Cash flows from operating activities: Net cash provided by operating activities of continuing operations was $66,306 for the six months ended June 30, 2000, compared to $180,627 for the same period in 1999, a decrease of $114,321. Significant components of cash flow provided by operating activities for the six months ended June 30, 2000 included net income of $113,618 adjusted for net income from discontinued operations of $10,764, the net effect of the interest rate component of the swap terminations totaling $32,840, depreciation and amortization of $123,009, an increase in receivables of $52,982, and cash paid related to restructuring charges of $36,242. The Company's decision to terminate certain interest rate swaps and all cross-currency swaps generated cash proceeds of $110,658 and consists of three components (see note 5 to the consolidated financial statements in Item 1 of this Form 10-Q). The collection of accrued interest receivable of $21,849 offset by the interest rate losses of $54,689 have been classified as part of cash flows from operating activities, while the foreign exchange rate gains of $143,498 have been classified as part of cash flows from financing activities (see below). The receivables increase primarily results from sales of preneed cemetery products and services, which are usually financed on an installment basis in excess of twelve months, and undistributed cemetery trust fund income. In reference to the increase in receivables, the Company is in the process of developing a consumer finance program in North America for the Company's atneed funeral and cemetery and preneed cemetery client families, which could improve or generate cash flows for the Company. Cash flows from investing activities: Net cash provided by investing activities of continuing operations was $15,907 for the six months ended June 30, 2000, compared to a use of cash of $181,903 for the same period in 1999, an increase of cash of $197,810. Significant components of cash provided by investing activities for the six months ended June 30, 2000 included $36,480 net cash provided from the net effect of prearranged funeral production and maturities and approximately $28,302 of proceeds from the sale of excess property and equipment, offset by $39,502 in capital expenditures. The net effect of prearranged funeral production and maturities line item consists primarily of several items: (1) the effect of originating sales and maturities of trust funded prearranged funeral contacts, (2) the effect of net obtaining costs incurred pursuant to the sales of prearranged funeral contracts and (3) the receipt of funds due to the Company from certain funeral trusts. The increase in the net effect of prearranged funeral production and maturities line item relates to the distribution of excess trust funds of approximately $66,000 offset by net obtaining costs incurred during the period of $38,908 and the higher increase in maturities over origination related to trust funded prearranged funeral sales. Cash flows from financing activities: Net cash used in financing activities of continuing operations was $107,159 for the six months ended June 30, 2000, compared to $148,135 for the same period in 1999, a net improvement in cash of $40,976. The significant component of cash used in financing activities for the six months ended June 30, 2000 was the $194,097 for the repurchase of certain bonds in the open market offset by cash provided by the net effect of the cross-currency component of the swap terminations totaling $143,498. The bonds had an aggregate face value of $228,700 and the repurchase resulted in an extraordinary gain on early extinguishment of debt. Adjusted for discontinued operations at June 30, 2000, the Company had a working capital deficit of $32,163 and a current ratio of 0.97:1, compared to net working capital of $102,717 and a current ratio of 1.10:1 at December 31, 1999. The net working capital deficit in 2000 is primarily a result of the current liability related to the Company's 1999 restructuring charges as well as current maturities of long-term debt. Certain balances outstanding on the revolving credit facilities are classified as current maturities. The Company intends to pay off these current maturities from asset sales proceeds, operating free cash flow or by arranging a secured credit facility. 27 28 As of June 30, 2000, the Company's debt to capitalization ratio was 51.8% compared to 53.7% at December 31, 1999. The Company also had the ability to issue $900,000 in securities registered with the Commission under a shelf registration. Due to the Company's senior debt rating downgrade and current lack of access to the capital markets, it is unlikely the shelf registration will be utilized in the near future. In addition, 12,804 shares of common stock and a total of $187,000 of guaranteed promissory notes and convertible debentures are registered with the Commission under a separate shelf registration to be used exclusively for future acquisitions. The Company has suspended its acquisition program and does not anticipate its acquisition shelf registration to be drawn upon in the near future. PREARRANGED FUNERAL ACTIVITIES The Company sells prearranged funeral contracts in most of its service markets, including its major foreign markets. The Company has a marketing program to sell price guaranteed prearranged funeral contracts at prices prevailing when the contracts are signed. Payments under these contracts are placed into trust funds or are used to pay premiums on life insurance or annuity contracts. Earnings on trust funds and increasing insurance benefits are accrued and deferred until funeral services are performed, at which time, all funds are recognized in funeral revenue. Direct costs incurred with a sale of prearranged funeral contracts are a current use of cash which is partially offset with cash retained, pursuant to state laws, from amounts trusted and certain general agency commissions earned by the Company for sales of insurance products. The total value of unperformed prearranged funeral contracts includes both trust funded and insurance funded contracts and represents the original contract value plus any accumulated trust fund earnings or increasing insurance benefits. The total value of unperformed prearranged funeral revenues expected to be recognized in future periods was $4,404,036 at June 30, 2000 and $4,287,452 at December 31, 1999. The increase in the value is attributable to an increase of 6.9% related to prearranged funeral contract sales and 2.1% related to accumulated trust fund earnings and increasing insurance benefits. Such increases are offset primarily by maturities, of approximately 4.3%, as well as unfavorable foreign currency fluctuations of 1.4%. The Company's investment program targets a real return in excess of the amount necessary to cover future increases in the cost of providing price guaranteed funeral services as well as any selling costs. This is accomplished by allocating the portfolio mix to investments that match the anticipated maturity of the contracts. The sales of prearranged funeral contracts afford the Company the opportunity to protect both current market share as well as expand market share in certain markets. On a comparable basis, prearranged funeral services fulfilled as a percent of North American funerals performed was 28.2% and 27.5% for the six months ended June 30, 2000 and 1999, respectively, and is expected to increase over time. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS No. 133 on January 1, 2001. In December 1999, the Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101, as amended, is required to be implemented in the Company's fourth quarter of 2000. The Company, together with other members of the death care industry, are currently discussing the implementation of SAB No. 101 directly with the Commission. Final resolution of the discussions will not have an impact on the Company's consolidated cash flows or compliance with the Company's existing credit agreements, but will likely have a material impact on the Company's consolidated financial statements and on the manner in which the Company records preneed sales activities. The deferral of income that might occur as a result of implementing SAB No. 101 will be recognized in the consolidated statement of income in future periods. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS The statements contained in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe", 28 29 "estimate", "project", "expect", "anticipate" or "predict", that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however, many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. Important factors which could cause actual results of the Company to differ materially from those in forward-looking statements include, among others, the following: 1) Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g. marketable security values, as well as currency and interest rate fluctuations) that could negatively affect the Company, particularly but not limited to, levels of interest expense and negative currency translation effects. 2) Changes in credit relationships impacting the availability of credit. 3) The Company's ability to successfully implement and complete all three phases of its strategic plan as defined in this Form 10-Q, including the interest of third parties to enter into and consummate alliances and joint ventures with the Company, and the successful implementation of its Internet initiatives. 4) Changes in consumer demand and/or pricing for the Company's products and services caused by several factors, such as changes in local death rates, cremation rates, competitive pressures and local economic conditions. 5) The Company's ability to sell preneed heritage cemetery property which is usually associated with new customers of the Company's cemeteries. 6) The Company's ability to successfully implement ongoing cost reduction initiatives, as well as changes in domestic and international economic, political and/or regulatory environments, which could negatively effect the implementation of the Company's cost reduction initiatives. 7) The Company's ability to successfully realize the estimated savings associated with the Company's cost reduction initiatives announced in 1999. 8) The Company's ability to successfully implement certain strategic revenue and marketing initiatives resulting in increased volume through its existing facilities. 9) The Company's ability to successfully implement certain strategic cash flow initiatives, including but not limited to the sale of non-core assets and the previously announced funeral and cemetery consumer financing program, which could improve or generate cash flow for the Company and enhance the Company's ability to reduce debt. 10) Changes in domestic and international political and/or regulatory environments in which the Company operates, including tax and accounting policies. 11) The Company's ability to successfully exploit its substantial purchasing power with certain of the Company's vendors. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the Company's exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the Company's Form 10-K for the year ended December 31, 1999. Except as noted below, there have been no material changes to the disclosure on this matter made in such Form 10-K. During the first quarter of 2000, the Company materially modified its participation in derivative transactions by terminating or assigning away certain interest rate swaps and all cross-currency interest rate swaps as mentioned in note five to the consolidated financial statements in Item 1 of this Form 10-Q, thereby removing the Company's hedges of foreign exchange rate exposure and changing the Company's diversification of floating interest rate exposure. As a result, 9% of the Company's total debt at June 30, 2000 was based in foreign markets versus 52% at December 31, 1999. Also at June 30, 2000, 14% of the Company's floating interest rate debt and 4% of the Company's fixed interest rate debt was based in foreign markets versus 28% and 67%, respectively, at December 31, 1999. Approximately 26% of the Company's total investment and 32% of its income from operations are denominated 29 30 in foreign currencies at June 30, 2000, versus 32% at December 31, 1999, for both the Company's total investment and income from operations. Due to foreign local borrowings, approximately 22% of the Company's net assets and approximately 24% of the Company's income from operations are subject to translation risk at June 30, 2000 versus 13% and 16%, respectively, at December 31, 1999. SERVICE CORPORATION INTERNATIONAL PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Previously Reported Litigation. The following discussion describes certain litigation as of August 11, 2000, which was previously reported: Civil Action H-99-0280; In Re Service Corporation International; In the United States District Court for the Southern District of Texas, Houston Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before Judge Lynn N. Hughes and includes 21 class action lawsuits that were filed in the United States District Court for the Southern District of Texas, two class action lawsuits that were originally brought in the United States District Court for the Eastern District of Texas, the Treadwell Litigation , the Fredrick Litigation and the Hunter Litigation described below. The Consolidated Lawsuit names as defendants the Company and three of the Company's current or former executive officers or directors: Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne (the Individual Defendants). The plaintiffs have filed a Consolidated Class Action Complaint in the Consolidated Lawsuit alleging that defendants violated federal securities laws by making materially false and misleading statements and failing to disclose material information concerning the Company's prearranged funeral business. The Consolidated Lawsuit seeks to recover an unspecified amount of monetary damages. Since the litigation is in its preliminary stages, no discovery has occurred, and the Company cannot quantify its ultimate liability, if any, for the payment of damages. However, the Company believes that the allegations in the Consolidated Lawsuit do not provide a basis for the recovery of damages because the Company has made all required disclosures on a timely basis. The Company and the Individual Defendants have filed an Answer to the Consolidated Class Action Complaint, and the Company intends to aggressively defend this lawsuit. The Consolidated Lawsuit has been brought on behalf of all persons and entities who (i) acquired shares of Company common stock in the merger of a wholly owned subsidiary of Company into Equity Corporation International (ECI); (ii) purchased shares of Company common stock in the open market during the period from July 17, 1998, through January 26, 1999 (the Class Period); (iii) purchased Company call options in the open market during the Class Period; (iv) sold Company put options in the open market during the Class Period; (v) held employee stock options in ECI that became options to purchase Company common stock pursuant to the merger; and (vi) held Company employee stock options to purchase Company common stock under a stock plan during the Class Period. Excluded from the foregoing categories are the Individual Defendants, the members of their immediate families and all other persons who were directors or executive officers of the Company or its affiliated entities at any time during the Class Period. Judge Hughes has certified the Consolidated Lawsuit as a class action. On May 10, 2000, Judge Hughes signed an order amending the class definition to include James P. Hunter, III as a class member. Mr. Hunter was Chairman, President and Chief Executive Officer of ECI at the time of its merger with a wholly-owned subsidiary of the Company. The Company and the Individual Defendants have filed a Motion to Dismiss the Consolidated Lawsuit; the plaintiffs have filed their Opposition to Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the Individual Defendants have filed a Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Lawsuit. The foregoing pleadings will be considered by Judge Hughes in due course. 30 31 In May 2000, Judge Hughes signed orders compelling the litigants in the Fredrick Litigation, Hunter Litigation and Treadwell Litigation to pursue their claims exclusively in the class action case pending in his court. The plaintiffs in the Hunter Litigation have appealed Judge Hughes' order to the Fifth Circuit Court of Appeals. The appeal will be heard on an expedited basis on September 6, 2000. Copies of the complaint in the Consolidated Lawsuit and the pleadings that have been filed in response thereto and that are referred to herein are filed as exhibits to this Quarterly Report on Form 10-Q. Civil Action H-00-0250; Jack Treadwell v. Service Corporation International, et al; In the United States District Court for the Southern District of Texas, Houston Division (Treadwell Litigation). This securities fraud case has been brought by a Macon, Georgia man who sold his funeral home to the Company in June 1998. The factual allegations contained in Plaintiff's Complaint are taken verbatim from the Consolidated Lawsuit. This lawsuit names as defendants the Company and 16 of the Company's current and former officers and directors. A trial date has been set for October 2001. Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International; In the ________ Judicial District Court of Angelina County, Texas (Fredrick Litigation). This additional securities fraud case has been brought against the Company by a former shareholder of ECI alleging causes of action exclusively under Texas statutory and common law. Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation International et al; In the __________________ Judicial District Court of Angelina County, Texas. On November 10, 1999, James P. Hunter, III and a related family trust filed a lawsuit against the Company, the Individual Defendants, two other officers, an employee of the Company and PricewaterhouseCoopers LLP, the Company's independent accountants, in state District Court in Angelina County, Texas (Hunter Litigation). The plaintiffs allege, among other things, violations of Texas securities law and statutory and common law fraud, and seek unspecified compensatory and exemplary damages. The Company and the other defendants filed an answer in the Hunter Litigation denying the plaintiffs' allegations. Since the litigation is in its very preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages. However, the Company believes that the allegations in the Hunter Litigation, like those in the Consolidated Lawsuit, do not provide a basis for the recovery of damages because all required disclosures were made in a timely basis. The Company intends to aggressively defend this litigation. A copy of the Plaintiff's Original Petition in the Hunter Litigation and the Defendants' original answer in that proceeding are filed as exhibits to this Quarterly Report on Form 10-Q. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 11, 2000, the Company held is annual meeting of shareholders and the shareholders elected five directors. The shares voting on the director nominees were cast as follows:
Abstentions or Broker Nominee Votes For Votes Withheld Non-Votes ------------------------- ------------ -------------- ------------ Anthony L. Coelho 232,077,770 10,189,838 0 A. J. Foyt, Jr. 233,112,281 9,155,327 0 E. H. Thornton, Jr. 232,850,606 9,417,002 0 R. L. Waltrip 219,773,248 22,494,360 0 Edward E. Williams 233,423,144 8,844,464 0
31 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 2000 and 1999. 27.1 Financial data schedule. 99.1 Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999.) 99.2 Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In Re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999.) 99.3 Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999.) 99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99- 280, In Re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999.) 99.5 Defendants' Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999.) 99.6 Plaintiff's Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers, LLP; in the __________ Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999.) 99.7 Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999.) (b) Reports on Form 8-K There were no reports on Form 8-K during the quarter ended June 30, 2000. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 14, 2000 SERVICE CORPORATION INTERNATIONAL By: /s/ Jeffrey E. Curtiss -------------------------------------- Jeffrey E. Curtiss Senior Vice President Chief Financial Officer (Principal Financial Officer) 32 33 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 2000 and 1999. 27.1 Financial data schedule.