1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K --------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-6402-1 --------------------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in its charter) <TABLE> <S> <C> TEXAS 74-1488375 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1929 ALLEN PARKWAY HOUSTON, TEXAS 77019 (Address of principal executive offices) (Zip code) </TABLE> Registrant's telephone number, including area code: 713/522-5141 --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: <TABLE> <CAPTION> TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- <S> <C> Common Stock ($1 par value) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange </TABLE> SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock held by non-affiliates of the registrant (assuming that the registrant's only affiliates are its officers and directors) is $10,632,528,700 based upon a closing market price of $42.50 on March 26, 1998 of a share of common stock as reported on the New York Stock Exchange -- Composite Transactions Tape. The number of shares outstanding of the registrant's common stock as of March 26, 1998 was 255,840,952 (excluding treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement in connection with its 1998 Annual Meeting of Shareholders (Part III) ================================================================================
2 PART I ITEM 1. BUSINESS. Service Corporation International was incorporated in Texas on July 5, 1962. The term "Company" or "SCI" includes the registrant and its subsidiaries, unless the context indicates otherwise. The Company is the largest provider of death care services in the world. At December 31, 1997, the Company operated 3,127 funeral service locations, 392 cemeteries and 166 crematoria located in 17 countries on five continents. In addition, the Company provides capital financing to independent funeral home and cemetery operators. The Company has continued to expand through the acquisition of funeral service locations, cemeteries and crematoria, both domestically and internationally. In 1997, the Company acquired 294 funeral service locations, 51 cemeteries and 19 crematoria. The Company has acquired most of its present operations through acquisitions. For information regarding acquisitions, see Note 3 to the consolidated financial statements in Item 8 of this Form 10-K. For financial information about the Company's industry segments, including the identifiable assets of the Company by industry segments, see Note 14 to the consolidated financial statements in Item 8 of this Form 10-K. FUNERAL AND CEMETERY OPERATIONS The Funeral and Cemetery Operations consist of the Company's funeral service locations, cemeteries and related businesses. The operations are organized into two North American divisions covering the United States and Canada and an international division responsible for all operations in Europe, the Pacific Rim and South America. Each division is under the direction of divisional executive management with substantial industry experience. Local funeral service location and cemetery managers, under the direction of the divisional management, receive support and resources from SCI's headquarters in Houston, Texas and have substantial autonomy with respect to the manner in which services are conducted. The majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. Clusters are established primarily in metropolitan areas to take advantage of operational efficiencies, including the sharing of service personnel, vehicles, preparation services, clerical staff and certain building facility costs. Funeral Service Locations. The funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral service locations sell caskets, coffins, burial vaults, cremation receptacles, flowers and burial garments, and certain funeral service locations also operate crematoria. At December 31, 1997, the Company owned 147 funeral service location/cemetery combinations and operated 54 flower shops engaged principally in the design and sale of funeral floral arrangements. These flower shops provide floral arrangements to some of the Company's funeral homes and cemeteries. In addition to selling its services and products to client families at the time of need, the Company also sells prearranged funeral services in most of its service markets, including foreign markets. Funeral prearrangement is a means through which a customer contractually agrees to the terms of a funeral to be performed in the future. The funds collected from prearranged funeral contracts are generally held in trust, are used to purchase life insurance or annuity contracts from third party insurers or, with respect to French contracts, are held in the Company's French insurance subsidiary. This French insurance subsidiary sells prearranged funeral insurance contracts primarily in connection with the Company's French funeral service operations. Funds paid on prearranged funerals may not be withdrawn until the funeral is performed or until cancellation by the customer. At December 31, 1997, the Company's unfulfilled prearranged funeral contracts, including accumulated trust fund earnings and increased benefits on insurance products, amounted to $3.163 billion, of which $274 million is estimated to be fulfilled in 1998. The unfulfilled prearranged funeral 1
3 contracts at December 31, 1996 were $2.726 billion. For additional information concerning prearranged funeral activities, see Note 4 to the consolidated financial statements in Item 8 of this Form 10-K. The Company has multiple funeral service locations and cemeteries in a number of metropolitan areas. Within individual metropolitan areas, the funeral service locations and cemeteries operate under various names because most operations were acquired as existing businesses and generally continue to be operated under the same name as before acquisition. The death rate tends to be somewhat higher in the winter months and the Company's funeral service locations generally experience a higher volume of business during those months. Since 1984, the Company has operated under the Federal Trade Commission's ("FTC") comprehensive trade regulation rule for the funeral industry. The rule contains minimum guidelines for funeral industry practices, requires extensive price and other affirmative disclosures and imposes mandatory itemization of funeral goods and services. From time to time in connection with acquisitions, the Company has entered into consent orders with the FTC that have required the Company to dispose of certain operations to proceed with acquisitions or have limited the Company's ability to make acquisitions in specified areas. The trade regulation rule and the various consent orders have not had a materially adverse effect on the Company's operations. Cemeteries. The Company's cemeteries sell cemetery interment rights (including mausoleum spaces and lawn crypts) and certain merchandise including stone and bronze memorials and burial vaults. The Company's cemeteries also perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries also operate crematoria. Cemetery sales are often made on a preneed basis pursuant to installment contracts providing for monthly payments. A portion of the proceeds from cemetery sales is generally required by law to be paid into perpetual care trust funds. Earnings of perpetual care trust funds are used to defray the maintenance cost of cemeteries. In addition, all or a portion of the proceeds from the sale of preneed cemetery merchandise may be required by law to be paid into trust until the merchandise is purchased on behalf of the customer. For additional information regarding cemetery trust funds, see Notes 2 and 5 to the consolidated financial statements in Item 8 of this Form 10-K. Death Care Industry. The funeral industry is characterized by a large number of locally owned, independent operations. The Company believes that based on the total number of funeral services performed in 1997, the Company, including companies acquired by it, performed approximately 10%, 28%, 14% and 25% of the funeral services in North America, France, the United Kingdom and Australia, respectively. To compete successfully, the Company's funeral service locations must maintain competitive prices, attractive, well-maintained and conveniently located facilities, a good reputation and high professional standards. In addition, heritage and tradition can provide an established funeral home with the opportunity for repeat business from client families. Furthermore, an established firm can generate future volume and revenues by marketing prearranged funeral services. The cemetery industry is also characterized by a large number of locally owned independent operations. The Company's cemetery properties compete with other cemeteries in the same general area. To compete successfully, the Company's cemeteries must maintain competitive prices, attractive and well-maintained properties, a good reputation, an effective sales force and high professional standards. FINANCIAL SERVICES OPERATION Since 1988, the Company's wholly owned subsidiary, Provident Services, Inc. ("Provident"), has provided secured financing to independent funeral home and cemetery operators. The majority of Provident's loans are made to clients seeking to finance funeral home or cemetery acquisitions. Additionally, Provident provides construction loans for funeral home or cemetery improvement and expansion. Loan packages take traditional forms of secured financing comparable to arrangements offered by leading commercial banks. Provident's loans are generally made at interest rates which float with the prime lending rate. 2
4 At December 31, 1997, Provident had $199 million in loans outstanding and $50 million of unfunded loan commitments. At December 31, 1996, Provident had $146 million in loans outstanding and $55 million of unfunded loan commitments. Provident obtains its funds primarily from the Company's variable interest rate bank borrowings. Provident is in competition with banks and other lending institutions, many of which have substantially greater resources than Provident. However, Provident believes that its knowledge of the death care industry provides it with the ability to make more accurate assessments of funeral home and cemetery loans, thereby providing Provident a competitive advantage in making such loans. EMPLOYEES At December 31, 1997, the Company employed 24,072 (15,403 in the United States) persons on a full time basis and 12,120 (8,421 in the United States) persons on a part time basis. Of the full time employees, 23,430 were in the Funeral and Cemetery Operations, eight were in Financial Services and 634 were in corporate services. All of the Company's eligible United States employees who so elect are covered by the Company's group health and life insurance plans, and all eligible United States employees are participants in retirement plans of the Company or various subsidiaries. Although labor disputes are experienced from time to time, in general relations with employees are considered satisfactory. REGULATION The Company's various operations are subject to regulations, supervision and licensing under various federal, state, local and Australian, Canadian, French, United Kingdom and other foreign statutes, ordinances and regulations. The Company believes that it is in substantial compliance with the significant provisions of such statutes, ordinances and regulations. See discussion of FTC funeral industry trade regulation and consent orders in "Funeral Service Locations" above. The French funeral services industry is currently undergoing significant regulatory change. Historically, the French funeral services industry has been controlled, as provided by national legislation, either (i) directly by municipalities through municipality-operated funeral establishments ("Municipal Monopoly"), or (ii) indirectly by the remaining municipalities that have contracted for funeral service activities with third party providers, such as SCI's French operations ("Exclusive Municipal Authority"). Legislation has been passed that will generally end municipal control of the French funeral service business and will allow the public to choose their funeral service provider. Under such legislation, the Exclusive Municipal Authority was abolished in January 1996, and the Municipal Monopoly was eliminated in January 1998. Cemeteries in France, however, are and will continue to be controlled by municipalities and religious organizations, with third parties, such as SCI, providing cemetery merchandise such as markers and monuments. ITEM 2. PROPERTIES. The Company's executive headquarters are located at 1929 Allen Parkway, Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary of the Company owns an undivided one-half interest in the building and its parking garage. The property consists of approximately 1.3 acres, 250,000 square feet of office space in the building and 160,000 square feet of parking space in the garage. The Company leases all of the office space in the building pursuant to a lease that expires June 30, 2005 providing for monthly rent of $43,000 through July 2000 and $59,000 thereafter. The Company pays all operating expenses. One half of the rent is paid to the wholly owned subsidiary and the other half is paid to the owners of the remaining undivided one-half interest. The Company owns and utilizes a three-story building at 1919 Allen Parkway, Houston, Texas 77019 containing 43,000 square feet of office space. At December 31, 1997, the Company owned the real estate and buildings of 2,552 of its funeral service and cemetery locations and leased facilities in connection with 1,133 of such operations. In addition, the Company leased four aircraft pursuant to cancelable leases. At December 31, 1997, the Company operated 11,498 vehicles, of which 8,641 were owned and 2,857 were leased. For additional information regarding leases, see Note 10 to the consolidated financial statements in Item 8 of this Form 10-K. 3
5 The Company's 392 cemeteries contain an aggregate of approximately 30,677 acres, of which approximately 54% are developed. The specialized nature of the Company's businesses requires that its facilities be well-maintained and kept in good condition. Management believes that these standards are met. ITEM 3. LEGAL PROCEEDINGS. Although the Company is involved in legal proceedings, the Company does not believe that any of the proceedings is material pursuant to the standards set forth in Item 103 of Regulation S-K promulgated under the Securities Exchange Act of 1934. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE COMPANY Pursuant to General Instruction G to Form 10-K, the information regarding executive officers of the Company called for by Item 401 of Regulation S-K is hereby included in Part I of this report. The following table sets forth as of March 26, 1998 the name and age of each executive officer of the Company, the office held, and the date first elected an officer. <TABLE> <CAPTION> YEAR FIRST BECAME OFFICER NAME AGE POSITION OFFICER(1) ------------ --- -------- ---------- <S> <C> <C> <C> R. L. Waltrip........................ (67) Chairman of the Board and Chief Executive 1962 Officer L. William Heilbrodt................. (56) President and Chief Operating Officer 1988 W. Blair Waltrip..................... (43) Executive Vice President Operations 1980 Jerald L. Pullins.................... (56) Executive Vice President International 1992 Operations John W. Morrow, Jr. ................. (62) Executive Vice President Special Services 1989 George R. Champagne.................. (44) Senior Vice President Chief Financial Officer 1989 Glenn G. McMillen.................... (55) Senior Vice President Operations 1993 Richard T. Sells..................... (58) Senior Vice President Preneed Sales 1987 James M. Shelger..................... (48) Senior Vice President General Counsel 1987 and Secretary Jack L. Stoner....................... (52) Senior Vice President Administration 1992 T. Craig Benson...................... (36) Vice President International Operations 1990 Gregory L. Cauthen................... (40) Vice President Treasurer 1995 J. Daniel Garrison................... (46) Vice President International Operations 1998 W. Mark Hamilton..................... (33) Vice President Prearranged Funeral Services 1996 Lowell A. Kirkpatrick, Jr. .......... (39) Vice President Operations, Finance and 1994 Development Stephen M. Mack...................... (46) Vice President Corporate Operations 1998 Todd A. Matherne..................... (43) Vice President Operations, Finance 1996 and Development Vincent L. Visosky................... (50) Vice President Operational Controller 1989 Michael R. Webb...................... (40) Vice President International Corporate 1998 Development Henry M. Nelly, III.................. (53) President -- Provident Services, 1989 Inc., a subsidiary of the Company </TABLE> - --------------- (1) Indicates the year a person was first elected as an officer although there were subsequent periods when certain persons ceased being officers of the Company. 4
6 Unless otherwise indicated below, the persons listed above have been executive officers or employees for more than five years. Mr. Matherne joined the Company in April 1995 as Managing Director Investor Relations and was promoted in May 1996 to Vice President Investor Relations and in February 1998 to Vice President Operations, Finance and Development. Prior thereto, Mr. Matherne was Vice President and General Manager of Baker Hughes Treatment Services, an environmental services business. Each officer of the Company is elected by the Board of Directors and holds his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner prescribed in the Bylaws of the Company. Each officer of a subsidiary of the Company is elected by the subsidiary's board of directors and holds his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner prescribed in the bylaws of the subsidiary. W. Blair Waltrip is a son of R. L. Waltrip, T. Craig Benson is a son-in-law of R. L. Waltrip and T. Craig Benson and W. Blair Waltrip are brothers-in-law. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock has been traded on the New York Stock Exchange since May 14, 1974. On December 31, 1997, there were 7,720 holders of record of the Company's common stock. The Company has declared 99 consecutive quarterly dividends on its common stock since it began paying dividends in 1974. The dividend rate is currently $.09 per share per quarter, or an indicated annual rate of $.36 per share. For the three years ended December 31, 1997, dividends per share were $.30, $.24 and $.22, respectively. The table below shows the Company's quarterly high and low common stock prices: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 --------------- --------------- --------------- HIGH LOW HIGH LOW HIGH LOW ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> First............................. $33.88 $26.88 $24.75 $19.44 $14.56 $13.13 Second............................ 36.00 29.63 30.13 24.13 15.81 13.44 Third............................. 35.75 29.81 29.44 27.63 19.75 15.19 Fourth............................ 38.00 27.88 30.75 26.50 22.00 18.81 </TABLE> SRV is the New York Stock Exchange ticker symbol for the common stock of the Company. Options in the Company's common stock are traded on the Philadelphia Stock Exchange under the symbol SRV. 5
7 ITEM 6. SELECTED FINANCIAL DATA. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS) <S> <C> <C> <C> <C> <C> Revenues........................ $ 2,468,402 $2,294,194 $1,652,126 $1,117,175 $ 899,178 Income before extraordinary loss and cumulative effect of change in accounting principle..................... 374,552 265,298 183,588 131,045 103,092 Net income...................... 333,750 265,298 183,588 131,045 101,061 Earnings per share**: Income before extraordinary loss and cumulative effect of change in accounting principle -- Basic.................... 1.53 1.13 .92 .76 .62 Diluted.................. 1.47 1.08 .86 .71 .59 Net income -- Basic.................... 1.36 1.13 .92 .76 .61 Diluted.................. 1.31 1.08 .86 .71 .58 Dividends per share............. .30 .24 .22 .21 .20 Total assets.................... 10,306,863 8,869,770 7,672,387 5,161,888 3,683,304 Long-term debt.................. 2,634,699 2,048,737 1,712,464 1,330,177 1,062,222 Convertible preferred securities of SCI Finance LLC............ -- 172,500 172,500 172,500 -- Stockholders' equity............ 2,726,004 2,235,317 1,975,345 1,196,622 884,513 Shares outstanding.............. 252,924 236,193 234,542 189,714 169,718 Ratio of earnings to fixed charges*...................... 4.29 3.24 2.84 3.13 3.19 </TABLE> - --------------- * For purposes of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes, less undistributed income of equity investees which are less than 50% owned, plus the minority interest of majority-owned subsidiaries with fixed charges and plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense, whether capitalized or expensed, amortization of debt costs, dividends on preferred securities of SCI Finance LLC and one-third of rental expense which the Company considers representative of the interest factor in the rentals. ** Earnings per share amounts have been restated to reflect the December 1997 adoption of Statement of Financial Accounting Standards No. 128. 6
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA) A primary objective of the Company is to maximize shareholder value. To accomplish this goal, one of the Company's strategies has been to provide consistent growth in earnings per share. This growth strategy initiates with the Company producing significant cash flow from its existing cluster operations, then continues by using that cash to expand clusters through add-on acquisitions, new construction, and improvements to existing locations. The Company also expands its network through strategic acquisitions of larger, multi-location death care companies, typically funding these transactions by accessing the debt and equity markets when appropriate. All businesses are continuously improved by further enhancing products, services and systems; leveraging operating and overhead costs; strengthening buying power; and expanding preneed sales. The majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. Clusters are established in and around metropolitan areas to take advantage of operational efficiencies, particularly the sharing of operating expenses such as service personnel, vehicles, preparation services, clerical staff and certain building facility costs. Personnel costs, the largest operating expense for the Company, is the cost component most beneficially affected by clustering. The sharing of employees, as well as the other costs mentioned, allow the Company to more efficiently utilize its operating facilities during fluctuations in the number of funeral services and cemetery interments performed in a given period. The Company's acquisitions are primarily located within existing cluster areas or create new cluster area opportunities. The Company has approximately 400 clusters, which range in size from two operations to 67 operations. There may be more than one cluster in a given metropolitan area, depending upon the level and degree of shared costs. RESULTS OF OPERATIONS: Year ended 1997 compared to 1996 Segment information for the Company's three lines of business was as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, PERCENTAGE ----------------------------------------- INCREASE INCREASE 1997 1996 (DECREASE) (DECREASE) ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenues: Funeral............. $ 1,727,003 $ 1,663,387 $ 63,616 3.8% Cemetery............ 724,862 612,421 112,441 18.4 Financial services......... 16,537 18,386 (1,849) (10.1) ----------- ----------- -------- ----- 2,468,402 2,294,194 174,208 7.6 Costs and expenses: Funeral............. (1,318,920) (1,282,546) 36,374 2.8 Cemetery............ (452,965) (397,700) 55,265 13.9 Financial services......... (8,905) (9,496) (591) (6.2) ----------- ----------- -------- ----- (1,780,790) (1,689,742) 91,048 5.4 Gross profit margin and percentage: Funeral............. 408,083 23.6% 380,841 22.9% 27,242 7.2 Cemetery............ 271,897 37.5% 214,721 35.1% 57,176 26.6 Financial services......... 7,632 46.2% 8,890 48.4% (1,258) (14.2) ----------- ----- ----------- ----- -------- ----- $ 687,612 27.9% $ 604,452 26.3% $ 83,160 13.8% =========== ===== =========== ===== ======== ===== </TABLE> 7
9 Funeral Funeral revenues were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, PERCENTAGE ------------------------- INCREASE INCREASE 1997 1996 (DECREASE) (DECREASE) ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States......................... $ 892,451 $ 820,860 $ 71,591 8.7% France................................ 485,264 537,079 (51,815) (9.6) Other European........................ 186,238 162,830 23,408 14.4 Other foreign......................... 114,389 115,707 (1,318) (1.1) ---------- ---------- -------- ---- 1,678,342 1,636,476 41,866 2.6 ---------- ---------- -------- ---- New clusters:* United States......................... 21,061 4,475 16,586 Other European........................ 16,378 2,847 13,531 Other foreign......................... 2,113 -- 2,113 ---------- ---------- -------- 39,552 7,322 32,230 ---------- ---------- -------- ---- Total clusters........................ 1,717,894 1,643,798 74,096 4.5 Non-cluster and disposed operations..... 9,109 19,589 (10,480) ---------- ---------- -------- ---- Total funeral revenues........ $1,727,003 $1,663,387 $ 63,616 3.8% ========== ========== ======== ==== </TABLE> - --------------- * Represents new geographic cluster areas entered into since the beginning of 1996 for the period that those businesses were owned by the Company. The $41,866 increase in revenues at existing clusters was the result of a 2.4% increase in the number of funeral services performed (515,733 compared to 503,476) and a slightly higher average sales price ($3,254 compared to $3,250). Acquisitions since January 1, 1996, included in existing clusters, accounted for $97,843 of the existing cluster revenue increase. Excluding a $68,138 decrease in French revenue caused exclusively by a change in the US dollar / French franc exchange rate, businesses owned before 1996 had a revenue increase of $12,161. The death rate in the Company's primary markets has remained relatively constant for several years and is expected to remain at this rate for at least the near future; however, due to the increasing proportion of people over age 65 in the Company's primary markets, demand for funeral services could increase in the decades to come. It is anticipated that the Company's near term revenue growth will continue to be primarily generated from acquired operations (added to existing clusters and the creation of new clusters) as well as from improved merchandising of funeral services and products. The Company is the world's largest in the funeral service industry and currently performs approximately 10%, 28%, 14% and 25% of the funeral services in North America, France, the United Kingdom and Australia, respectively. The Company believes that there are approximately 8,000 potential acquisition candidates in North America that meet its current metropolitan acquisition criteria and numerous other candidates outside of North America. The Company plans to continue to aggressively seek to acquire these potential candidates. During the year ended December 31, 1997, the Company sold (net of cancellations) approximately $509,000 of prearranged funeral services compared to approximately $512,000 for the same period in 1996. The obligations are funded through both trust funded and insurance backed contracts. These prearranged funeral services are deferred and will be reflected in funeral revenues in the periods that the funeral services are performed. The current emphasis on sales of prearranged funerals is expected to continue. 8
10 Funeral costs and expenses were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, PERCENTAGE ------------------------- INCREASE INCREASE 1997 1996 (DECREASE) (DECREASE) ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States......................... $ 581,633 $ 528,918 $ 52,715 10.0% France................................ 415,056 466,136 (51,080) (11.0) Other European........................ 144,513 123,517 20,996 17.0 Other foreign......................... 78,944 76,816 2,128 2.8 ---------- ---------- -------- ----- 1,220,146 1,195,387 24,759 2.1 ---------- ---------- -------- ----- New clusters:* United States......................... 15,805 3,192 12,613 Other European........................ 13,770 2,438 11,332 Other foreign......................... 1,753 -- 1,753 ---------- ---------- -------- ----- 31,328 5,630 25,698 ---------- ---------- -------- ----- Total clusters........................ 1,251,474 1,201,017 50,457 4.2 Non-cluster and disposed operations..... 12,730 19,209 (6,479) Administrative overhead................. 54,716 62,320 (7,604) (12.2) ---------- ---------- -------- ----- Total funeral costs and expenses.................... $1,318,920 $1,282,546 $ 36,374 2.8% ========== ========== ======== ===== </TABLE> The $24,759 increase in costs and expenses from existing clusters is primarily the result of the period to period increase in the number of funeral services performed. Acquisitions since January 1, 1996, included in existing clusters, accounted for $73,762 of the existing cluster cost increase. Excluding a $60,399 decrease in French costs caused exclusively by a change in the US dollar/French franc exchange rate, businesses owned before 1996 had a cost increase of $11,396. The gross profit margin before administrative overhead for existing clusters increased to 27.3% in 1997 from 27.0% in 1996. Typically, acquisitions will temporarily exhibit slightly lower gross profit margins than those experienced by the Company's existing locations at least until such time as these locations are assimilated into the Company's cluster management strategy. The overall funeral gross profit margin improved in 1997 to 23.6%, compared to 22.9% in 1996. Contributing to this period to period improvement were the Company's French operations which had a margin improvement to 11.0% from 9.8%. This margin percentage is consistent with the Company's expectations for these operations. Administrative overhead costs expressed as a percentage of total funeral revenues, decreased to 3.2%, compared to 3.7% in 1996. Cemetery Cemetery revenues were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------- PERCENTAGE 1997 1996 INCREASE INCREASE -------- -------- ---------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States............................ $637,136 $546,462 $ 90,674 16.6% Other European........................... 21,010 15,271 5,739 37.6 Other foreign............................ 49,024 46,155 2,869 6.2 -------- -------- -------- ----- 707,170 607,888 99,282 16.3 -------- -------- -------- ----- New clusters*.............................. 10,517 -- 10,517 -------- -------- -------- ----- Total clusters................... 717,687 607,888 109,799 18.1 Non-cluster and disposed operations........ 7,175 4,533 2,642 58.3 -------- -------- -------- ----- Total cemetery revenues.......... $724,862 $612,421 $112,441 18.4% ======== ======== ======== ===== </TABLE> 9
11 Revenues from existing clusters increased $99,282. Included in the existing cluster increase were $49,935 in increased revenues from cemeteries acquired since the beginning of 1996, while revenues from existing cluster locations owned before 1996 increased $49,347 due primarily to increased preneed sales of property and merchandise, higher average sales prices for these items and higher investment earnings on trusted amounts. The Company plans to continue to emphasize the selling of preneed cemetery property and merchandise by maintaining an active and well-trained sales force. Additionally, future growth through acquisitions is considered likely. Cemetery costs and expenses were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------- PERCENTAGE 1997 1996 INCREASE INCREASE -------- -------- ---------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States............................ $365,437 $329,530 $35,907 10.9% Other European........................... 12,378 9,571 2,807 29.3 Other foreign............................ 26,875 25,288 1,587 6.3 -------- -------- ------- ---- 404,690 364,389 40,301 11.1 -------- -------- ------- ---- New clusters*.............................. 8,191 13 8,178 -------- -------- ------- ---- Total clusters................... 412,881 364,402 48,479 13.3 Non-cluster and disposed operations........ 4,681 3,913 768 19.6 Administrative overhead.................... 35,403 29,385 6,018 20.5 -------- -------- ------- ---- Total cemetery costs and expenses....................... $452,965 $397,700 $55,265 13.9% ======== ======== ======= ==== </TABLE> Costs and expenses at existing clusters increased $40,301 due primarily to an increase of $31,667 from cemeteries acquired since the beginning of 1996, while costs from existing cluster cemeteries acquired before 1996 increased $8,634. The overall cemetery gross profit margin increased to 37.5% in 1997 from 35.1% last year. This increase reflects strong growth in sales of preneed cemetery property and merchandise as well as continued cost control in all major expense categories. Administrative overhead costs have increased to 4.9% of revenues this year compared to 4.8% last year. Acquisitions typically have lower gross profit margins, at least until such time that they are assimilated into the Company's cluster management strategy and preneed selling programs are fully implemented. Financial Services The Company's wholly-owned finance subsidiary, Provident Services, Inc. ("Provident") reported gross profit of $7,632 for the year ended December 31, 1997, compared to $8,890 for the same period in 1996. Provident's average outstanding loan portfolio during the current year decreased to $182,375 compared to $190,936 in 1996, and the average interest rate spread also decreased to 3.18% compared to 3.64% in 1996. Other Income and Expenses Expressed as a percentage of revenues, general and administrative expenses decreased slightly to 2.7% in 1997 compared to 2.8% in 1996. These expenses increased $3,566 or 5.6% during the year primarily from increased personnel costs. Interest expense, which excludes the amount incurred by financial service operations, decreased $1,837 or 1.3% during the current year. The decreased interest expense reflects an approximately 130 basis point decrease in average interest rates on indebtedness offset by the Company's higher debt level in 1997. The decreased average interest rate is primarily attributable to the Company's 1997 refinancing of certain long-term debt and hedging programs associated with its international investments. During the first quarter of 1997, the Company sold its interest in Equity Corporation International ("ECI") producing a before tax gain of $68,100. Dividends on preferred securities of SCI Finance LLC were 10
12 $4,382 in 1997 compared to $10,781 in 1996, a decrease of $6,399 or 59.4%. This decrease is the result of the May 1997 redemption of all outstanding shares of its convertible preferred securities of SCI Finance LLC. The provision for income taxes reflects a 35.4% effective tax rate for 1997 as compared to a 35.9% effective tax rate in 1996. The decrease in the effective tax rate is due primarily to lower taxes from international operations (1997 included a tax benefit relating to enacted tax rate changes in certain foreign tax jurisdictions), partially offset by the tax impact from the gain on sale of the Company's interest in ECI which is reflected at the Company's higher domestic tax rate. RESULTS OF OPERATIONS: Year ended 1996 compared to 1995 Segment information for the Company's three lines of business was as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, PERCENTAGE ----------------------------------------- INCREASE INCREASE 1996 1995 (DECREASE) (DECREASE) ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenues: Funeral............. $ 1,663,387 $ 1,166,247 $497,140 42.6% Cemetery............ 612,421 463,754 148,667 32.1 Financial services......... 18,386 22,125 (3,739) (16.9) ----------- ----------- -------- ----- 2,294,194 1,652,126 642,068 38.9 Costs and expenses: Funeral............. (1,282,546) (871,096) 411,450 47.2 Cemetery............ (397,700) (303,312) 94,388 31.1 Financial services......... (9,496) (12,497) (3,001) (24.0) ----------- ----------- -------- ----- (1,689,742) (1,186,905) 502,837 42.4 Gross profit margin and percentage: Funeral............. 380,841 22.9% 295,151 25.3% 85,690 29.0 Cemetery............ 214,721 35.1% 160,442 34.6% 54,279 33.8 Financial services......... 8,890 48.4% 9,628 43.5% (738) (7.7) ----------- ----- ----------- ----- -------- ----- $ 604,452 26.3% $ 465,221 28.2% $139,231 29.9% =========== ===== =========== ===== ======== ===== </TABLE> 11
13 Funeral Funeral revenues were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------- PERCENTAGE 1996 1995 INCREASE INCREASE ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States......................... $ 807,829 $ 730,053 $ 77,776 10.7% Other European........................ 141,969 130,849 11,120 8.5 Other foreign......................... 99,951 87,044 12,907 14.8 ---------- ---------- -------- ---- 1,049,749 947,946 101,803 10.7 ---------- ---------- -------- ---- New clusters:* United States......................... 25,203 10,999 14,204 Other European........................ 27,691 6,980 20,711 Other foreign......................... 15,450 4,278 11,172 France................................ 537,079 190,091 346,988 ---------- ---------- -------- 605,423 212,348 393,075 ---------- ---------- -------- ---- Total clusters................ 1,655,172 1,160,294 494,878 42.7 Non-cluster and disposed operations..... 8,215 5,953 2,262 ---------- ---------- -------- ---- Total funeral revenues........ $1,663,387 $1,166,247 $497,140 42.6% ========== ========== ======== ==== </TABLE> - --------------- * Represents new geographic cluster areas entered into since the beginning of 1995 for the period that those businesses were owned by the Company. The $101,803 increase in revenues at existing clusters was primarily the result of a 7.7% increase in North American funeral services performed at existing cluster locations (226,822 compared to 210,611) and a 3.0% higher average sales price ($3,745 compared to $3,635). Included in this increase were $79,290 in increased revenues from locations acquired since the beginning of 1995. The remaining existing cluster revenue increase of $22,513 was contributed by operations acquired before 1995. The 1995 results for France represent approximately four months of Company ownership. The increase in Other European new cluster revenue is primarily due to non-French European operations added in August 1995. During the year ended December 31, 1996, the Company sold (net of cancellations) approximately $512,000 of prearranged funeral services compared to approximately $367,000 for the same period in 1995. The obligations are funded through both trust funded and insurance backed contracts. These prearranged funeral services are deferred and will be reflected in funeral revenues in the periods that the funeral services are performed. 12
14 Funeral costs and expenses were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------- PERCENTAGE 1996 1995 INCREASE INCREASE ------------ ---------- -------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States.......................... $ 520,864 $482,497 $ 38,367 8.0% Other European......................... 104,176 101,327 2,849 2.8 Other foreign.......................... 65,549 57,650 7,899 13.7 ---------- -------- -------- ---- 690,589 641,474 49,115 7.7 ---------- -------- -------- ---- New clusters:* United States.......................... 18,431 8,148 10,283 Other European......................... 24,978 6,986 17,992 Other foreign.......................... 10,855 3,396 7,459 France................................. 466,136 165,778 300,358 ---------- -------- -------- 520,400 184,308 336,092 ---------- -------- -------- ---- Total clusters................. 1,210,989 825,782 385,207 46.6 Non-cluster and disposed operations...... 9,237 7,582 1,655 Administrative overhead.................. 62,320 37,732 24,588 65.2 ---------- -------- -------- ---- Total funeral costs and expenses..................... $1,282,546 $871,096 $411,450 47.2% ========== ======== ======== ==== </TABLE> The total gross profit for existing clusters increased to $359,160 in 1996 from $306,472 in 1995, and the related gross profit percentage for existing clusters increased to 34.2% from 32.3% in 1995. Acquisitions since the beginning of 1995, included in existing clusters, accounted for $23,980 of the existing gross profit increase. The gross profit margin for those funeral operations in existing clusters that were acquired before 1995 increased to 35.0% in 1996 from 32.7% in 1995 due to the increased revenues discussed above without a corresponding percentage increase in personnel and other operating costs. Contributing to the overall funeral gross profit margin decline (22.9% compared to 25.3% in 1995) was the Company's French operations. French operations had an increased gross profit margin of 9.8% in 1996, compared to 9.4% in 1995, however 1996 reflects a full year's results compared to the four months of ownership in 1995. The French margin is consistent with the Company's expectations for these operations which have historically produced lower gross margins than the Company's operations in North America and Australia. Administrative overhead costs expressed as a percentage of revenues increased in 1996 to 3.7%, compared to 3.2% in 1995. This administrative overhead cost increase was primarily attributable to the addition of the French operations as well as the Company's realignment of its North American operating structure. 13
15 Cemetery Cemetery revenues were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ PERCENTAGE 1996 1995 INCREASE INCREASE ---------- ---------- -------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States......................... $506,330 $395,821 $110,509 27.9% Other European........................ 13,978 11,307 2,671 23.6 Other foreign......................... 46,485 39,979 6,506 16.3 -------- -------- -------- ---- 566,793 447,107 119,686 26.8 -------- -------- -------- ---- New clusters:* United States......................... 41,221 12,972 28,249 Other European........................ 1,307 796 511 -------- -------- -------- 42,528 13,768 28,760 -------- -------- -------- ---- Total clusters................ 609,321 460,875 148,446 32.2 Non-cluster and disposed operations..... 3,100 2,879 221 -------- -------- -------- ---- Total cemetery revenues....... $612,421 $463,754 $148,667 32.1% ======== ======== ======== ==== </TABLE> Revenues for existing clusters increased due to an increased volume of sales and higher average sales prices for property and merchandise. Included in the existing cluster increase were $82,470 in increased revenues from cemeteries acquired since the beginning of 1995. This increase was primarily due to the impact of reporting a full year's results from a large United States acquisition in October 1995. A majority of these properties were additions to existing clusters. The remaining existing cluster revenue increase of $37,216 was contributed by operations acquired before 1995. Cemetery costs and expenses were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ PERCENTAGE 1996 1995 INCREASE INCREASE ---------- ---------- -------- ---------- <S> <C> <C> <C> <C> Existing clusters: United States......................... $304,732 $246,790 $ 57,942 23.5% Other European........................ 8,404 5,799 2,605 44.9 Other foreign......................... 25,322 20,227 5,095 25.2 -------- -------- -------- ---- 338,458 272,816 65,642 24.1 -------- -------- -------- ---- New clusters:* United States......................... 24,547 8,581 15,966 United Kingdom........................ 1,181 570 611 -------- -------- -------- 25,728 9,151 16,577 -------- -------- -------- ---- Total clusters................ 364,186 281,967 82,219 29.2 Non-cluster and disposed operations..... 4,129 3,509 620 Administrative overhead................. 29,385 17,836 11,549 64.8 -------- -------- -------- ---- Total cemetery costs and expenses.................... $397,700 $303,312 $ 94,388 31.1% ======== ======== ======== ==== </TABLE> Costs at existing clusters increased $65,642 due primarily to an increase of $48,864 from cemeteries acquired since the beginning of 1995, while costs from existing cluster cemeteries acquired before 1995 increased $16,796. The overall cemetery gross profit margin increased to 35.1% in 1996 from 34.6% in 1995. This increase reflects strong growth in sales of preneed cemetery property and merchandise as well as continued cost control in all major expense categories. Administrative overhead costs have increased to 4.8% of revenues in 1996 compared to 3.8% in 1995. This administrative overhead cost increase was primarily 14
16 attributable to increased costs from additional infrastructure added in the Company's United Kingdom operations as well as the Company's realignment of its North American operating structure. Financial Services Provident increased its gross margin percentage to 48.4% from 43.5%. This was primarily attributable to early termination fees associated with the payoff of outstanding loans in August 1996, by two of Provident's largest customers. These payoffs reduced the average outstanding loan portfolio during 1996 to approximately $191,000 with an average interest rate spread of 3.6% compared to approximately $206,000 and 3.7%, respectively, in 1995. Other Income and Expenses Expressed as a percentage of revenues, general and administrative expenses were 2.8% in 1996 compared to 3.2% in 1995. These expenses increased by approximately $9,600 or 17.9% during the year primarily due to the recognition of $6,000 in costs relating to the Loewen transaction (see below) as well as increases in personnel costs. On October 3, 1996, The Company filed a registration statement with the Securities and Exchange Commission ("Commission") that offered to acquire the outstanding shares of Loewen Group Inc. ("Loewen"), a publicly traded death care company, through an exchange offer. On January 7, 1997, the Company announced that it had withdrawn its exchange offer for Loewen. Interest expense, which excludes the amount incurred by financial service operations, increased $20,409 or 17.3% during 1996 primarily from incremental borrowings incurred to fund the Company's acquisition program. The 1996 increase is the result of an increase of approximately $296,875 in the Company's average debt (excluding debt related to Provident) outstanding during the year ended December 31, 1996, compared to 1995. The increased interest associated with the higher debt level was offset by a slightly lower average interest rate for the year. The provision for income taxes reflected a 35.9% effective tax rate for 1996 as compared to a 37.6% effective tax rate in 1995. The decrease in the effective tax rate is due primarily to lower taxes from international operations. FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1997: General Historically, the Company has funded its working capital needs and capital expenditures primarily through cash provided by operating activities and borrowings under bank revolving credit agreements and commercial paper. Funding required for the Company's acquisition program has been generated through public and private offerings of debt and the issuance of equity securities supplemented by the Company's revolving credit agreements and additional securities registered with the Commission. The Company believes cash from operations, additional funds available under its revolving credit agreements, proceeds from public and private offerings of securities will be sufficient to continue its current acquisition program and operating policies. At December 31, 1997, the Company had net working capital of $275,966 and a current ratio of 1.52:1, compared to working capital of $106,497 and a current ratio of 1.18:1 at December 31, 1996. Revolving Credit Agreements The Company has various revolving credit facilities and lines of credit which currently provide for aggregate borrowings of approximately $1,140,000. At December 31, 1997, approximately $530,000 was available under these facilities. These facilities have financial compliance provisions that contain certain restrictions on levels of net worth, debt, liens and guarantees. 15
17 Sources and Uses of Cash Cash Flows from Operating Activities: Net cash provided by operating activities was $299,436 for the year ended December 31, 1997, compared to $209,857 for the same period in 1996, an increase of $89,579. This increase was primarily due to improved operating results in 1997. Significant uses of operating cash include an increase in net receivables resulting from increased sales of funeral services and cemetery products and merchandise. Cash Flows from Investing Activities: Net cash used in investing activities was $633,444 for the year ended December 31, 1997, compared to $480,126 for the same period in 1996, an increase of $153,318. This increase was primarily due to a $130,411 increase in cash used in acquisitions and $37,380 of increased capital expenditures including new construction of facilities and major improvements to existing properties. Cash used for capital expenditures was $230,532 during the year ended December 31, 1997. Additionally, the Company used approximately $88,000 to increase its investment in existing equity investees, while approximately $147,000 in cash was provided by the sale of the Company's interest in ECI. Cash used relating to prearranged funeral activities decreased due to the timing of cash payments to and withdrawals from trusts, offset by increased cash outlays on prearranged marketing efforts. Cash Flows from Financing Activities: Net cash provided by financing activities was $336,754 for the year ended December 31, 1997, compared to $256,916 for the same period in 1996, an increase of $79,838. As of December 31, 1997, the Company's debt to capitalization ratio was 49.8% compared to 47.3% at December 31, 1996. The interest rate coverage ratio for the year ended December 31, 1997 was 4.43:1 (excluding the gain on the sale of the Company's investment in ECI), compared to 3.62:1 for the same period in 1996. This interest rate coverage level has been relatively consistent, despite higher levels of debt outstanding, for several years. The Company believes that the acquisition of funeral and cemetery operations funded with debt or Company common stock is a prudent business strategy given the stable cash flow generated and the low failure rate exhibited by these types of businesses. The Company believes these acquired firms are capable of servicing the additional debt and providing a sufficient return on the Company's investment. The Company expects adequate sources of funds to be available to finance its future operations and acquisitions through internally generated funds, borrowings under credit facilities and the issuance of securities. At December 31, 1997, the Company had approximately $530,000 of available borrowings under various revolving credit facilities and lines of credit. At December 31, 1997, the Company had the ability to issue $550,000 in securities registered with the Commission under a shelf registration (In March 1998, the company issued $500,000 of long-term notes under the shelf to repay borrowings under the company's credit facilities). In addition, 15,369,000 shares of common stock and a total of $201,000 of guaranteed promissory notes and convertible debentures are registered with the Commission under a separate shelf registration to be used exclusively for future acquisitions. Prearranged Funeral Services The Company has a marketing program to sell prearranged funeral contracts and the funds collected are generally held in trust or are used to purchase a life insurance or annuity contract. The principal amount of these prearranged funeral contracts will be received in cash by a Company funeral service location at the time the funeral is performed. Earnings on trust funds and increasing benefits under insurance funded contracts also increase the amount of cash to be received upon performance of the funeral and are intended to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs. During 1997, the Company completed a review of the prearranged trust investment process which included an asset/liability study. This has resulted in a new investment program which entails the consolidation of multiple trustees, the use of institutional managers with differing investment styles and consolidated performance monitoring and tracking. This new program targets a real return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs. This is accomplished by allocating the portfolio mix to the appropriate investments that more accurately match the anticipated 16
18 maturity of the policies. The Company is currently reallocating the portfolio to achieve a new asset allocation of approximately 65% equity and 35% fixed income. Marketing costs incurred with the sale of prearranged funeral contracts are a current use of cash which is partially offset with cash retained, pursuant to state laws, from amounts trusted and certain commissions earned by the Company for sales of insurance products issued by third party insurers. The Company sells prearranged funerals in most of its service markets including its foreign markets. Auxia, the Company's French life insurance subsidiary, primarily sells insurance products used to fund prearranged funerals to be performed by the Company's French funeral service locations. Prearranged funeral service sales afford the Company the opportunity to both protect current market share and mix as well as expand market share in certain markets. The Company believes this will stimulate future revenue growth. Prearranged funeral services fulfilled as a percent of the total North American funerals performed annually approximates 25% and is expected to grow, thereby making the total number of funerals performed more predictable. Cremations In recent years there has been steady, gradual growth in the number of cremations that have been chosen as an alternative to traditional methods of disposal of human remains. In 1997, nearly 33% of all families served by the Company's North American funeral service locations selected the cremation alternative, substantially more than the 20% national average according to industry studies. The Company has a significant number of operating locations in Florida and the west coast of North America where the cremation alternative continues to gain acceptance. Based on industry studies, the Company believes that cremations account for approximately 60-70% of all dispositions of human remains in Australia and the United Kingdom. It is estimated that cremations account for approximately 12% of all dispositions of human remains in France. Though a cremation typically results in fewer sales dollars than a traditional funeral service, the Company believes that funeral operations which are predominantly cremation businesses typically have higher gross profit margin percentages than those exhibited at traditional funeral operations. Cremation memorialization has long been a tradition in the Australian and United Kingdom markets. The Company has expanded its product alternatives in these markets which has resulted in higher average sales. The Company has also established markets in select areas within North America and believes that memorialization of cremated remains represents a source of revenue growth. Other Matters The Company will adopt Statement of Financial Accounting Standards ("FAS") No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits", FAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", and FAS No. 130 "Reporting Comprehensive Income" for the year ended December 31, 1998. FAS No. 132 revises disclosures about pension and other postretirement benefit plans, FAS No. 131 revises standards for reporting information about operating segments, and FAS No. 130 establishes standards for reporting and display of comprehensive income. The adoption of these disclosure standards will not have a material impact on the consolidated financial statements. Year 2000 Issue The "Year 2000" issue refers to the inability of certain computer programs to correctly differentiate the century from a date in which the year is represented by only two digits. A computer system which is not year 2000 compliant might not be able to process certain data or possibly cause the entire computer system to malfunction. The Company is currently assessing any potential impact that changing to the year 2000 will have on the computer programs that operate within the Company or are used by major vendors or service providers. Cautionary Statement on Forward-looking Statements The statements contained in this Annual Report that are not historical facts are forward-looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These statements may 17
19 be accompanied by words such as "believe," "estimate," "expect," "anticipate," or "predict," that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. Important factors which could cause actual results to differ materially from those in forward-looking statements include, among others, the following: (1) Changes in general economic conditions both domestically and internationally impacting financial markets (e.g. marketable security values as well as currency and interest rate fluctuations). (2) Changes in domestic and international political and/or regulatory environments in which the Company operates, including tax and accounting policies. Changes in regulations may impact the Company's ability to enter or expand new markets. (3) Changes in consumer demand for the Company's services caused by several factors such as changes in local death rates, cremation rates, competitive pressures and local economic conditions. (4) The Company's ability to identify and complete additional acquisitions on terms that are favorable to the Company, to successfully integrate acquisitions into the Company's business and to realize expected cost savings in connection with such acquisitions. The Company's future results may be materially impacted by changes in the level of acquisition activity. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the Company. Quantitative and Qualitative Disclosures about Market Risk The Company uses derivatives primarily in the form of interest rate swaps and cross-currency interest rate swaps in combination with local currency borrowings in order to manage its mix of fixed and floating rate debt and to substantially hedge the Company's net investment in foreign assets. Accordingly, movements in currency rates that impact the swaps are generally offset by a corresponding movement in the value of the underlying assets being hedged and movements in interest rates that impact the fair value of the interest rate swaps are generally offset by a corresponding movement in the value of the underlying debt being hedged. Similarly, currency movements that impact foreign interest expense due under the cross-currency interest rate swaps are generally offset by a corresponding movement in the earnings of the foreign operation. Fair values included herein have been determined based on market prices provided by counterparties. The information presented below should be read in conjunction with notes four, eight and nine to the consolidated financial statements. In general, interest rates are managed such that 40% to 60% of the total debt (excluding debt which offsets the Provident loan receivable portfolio) is floating rate and thus is sensitive to interest rate fluctuations. After giving effect to the interest rate swaps, the Company's total debt has been converted into approximately $1,078,000 of fixed interest rate debt at a weighted average rate of 7.0% and approximately $1,386,000 of floating interest rate debt at a weighted average rate of 5.5%. At December 31, 1997, a one percent increase in the various floating rate indices referenced in the debt and swaps (excluding amounts borrowed to issue loans by Provident) would cause a $13,860 net increase in interest expense. However, the Company's overall sensitivity to floating interest rates is diversified in that approximately 40% of the Company's floating rate exposure is based in four markets other than the United States. In general, the Company hedges up to 100% of its net investment in foreign assets when such investment is considered significant and when it is reasonably cost efficient to do so. The death care industries in countries where the Company has foreign operations are generally stable and have had predictable cash flows. In addition, those countries have not had highly inflationary economies. Approximately one-third of the Company's net assets and one-quarter of its operating income are denominated in foreign currencies. Due to the cross-currency hedges described above, approximately 6% of the Company's net assets and approximately 8% of the Company's operating earnings are subject to translation risk. 18
20 Equity-Price Risk Management In connection with prearranged funeral operations and preneed cemetery merchandise sales, the Company owns investments in equity securities and mutual funds which are sensitive to current market prices. Cost and market values as of December 31, 1997 and 1996, are presented in notes four and five to the consolidated financial statements. Market-Rate Sensitive Instruments and Risk Management The following discussion about the Company's risk-management activities includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The following table summarizes the financial instruments and derivative instruments held by the Company at December 31, 1997, which are sensitive to changes in interest rates, foreign exchange rates, and equity prices. The Company uses interest rate swaps and cross-currency interest rate swaps to manage these primary market exposures associated with underlying assets and liabilities. The Company uses these instruments to reduce risk by essentially creating offsetting market exposures. The instruments held by the Company are not leveraged and are held for non-speculative purposes. For certain assets and debt, the table below presents principal cash flows that exist by maturity date and the related average interest rate. For swaps, the table presents the notional amounts and expected interest rates that the Company will receive and pay that exist by contractual dates. The notional amount represents the foreign currency notional amount converted to US dollars at an estimated future currency exchange rate, and is used to calculate the contractual payments to be exchanged under the contract. The variable rates are estimated based on implied forward rates in the yield curve. 19
21 <TABLE> <CAPTION> FAIR VALUE 1998 1999 2000 2001 2002 THEREAFTER ASSET/(LIABILITY) -------- --------- --------- --------- --------- ----------- ----------------- <S> <C> <C> <C> <C> <C> <C> <C> ASSETS - ----- Provident receivables....... $ 15,922 $ 22,528 $ 21,264 $ 52,917 $ 58,218 $ 27,072 $ 197,921 Average rate.............. 9.34% 7.58% 9.99% 9.96% 8.48% 8.67% Auxia debt securities....... 2,809 17,014 59,739 24,300 67,522 142,901 314,285 Average rate.............. 5.97% 5.97% 6.30% 6.82% 6.16% 6.16% LIABILITIES - -------- Fixed rate debt............. (64,570) (62,192) (193,285) (196,661) (328,456) (1,050,596) (2,016,511) Average rate.............. 7.78% 7.83% 6.80% 7.12% 7.09% 7.35% Floating rate debt Floating rate notes....... (200,000) (200,000) Bank revolving credit and commercial paper........ (416,139) (200,450) (616,589) Average rate.............. 5.97% 5.19% DERIVATIVE CONTRACTS - ----------------- INTEREST RATE SWAPS US fixed to US floating..... 950,000 950,000 950,000 800,000 500,000 500,000 30,951 Average receive rate...... 6.87% 6.87% 6.87% 6.93% 7.19% 7.19% Average pay rate.......... 5.74% 5.78% 5.95% 5.99% 6.06% 6.15% US floating to US fixed..... 200,000 200,000 200,000 200,000 200,000 200,000 783 Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06% 6.15% Average pay rate.......... 5.72% 5.72% 5.72% 5.72% 5.72% 5.72% Foreign currency floating to foreign currency fixed.... 341,475 263,721 264,514 265,116 267,067 82,858 (20,085) Average receive rate...... 4.83% 5.03% 5.35% 5.55% 5.76% 6.51% Average pay rate.......... 6.60% 6.80% 6.80% 6.80% 6.79% 6.90% Foreign currency floating to foreign currency floating.................. 81,992 83,301 84,275 85,062 85,736 85,736 (1,479) Average receive rate...... 3.84% 4.12% 4.61% 4.93% 5.23% 5.42% Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66% Foreign currency fixed to foreign currency floating.................. 82,325 83,639 84,617 85,408 86,084 86,084 3,036 Average receive rate...... 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% Average pay rate.......... 4.03% 4.33% 4.81% 5.11% 5.41% 5.66% CROSS-CURRENCY INTEREST RATE SWAPS US fixed to foreign currency fixed..................... 702,391 682,268 532,955 506,191 407,039 407,039 83,237 Average receive rate...... 7.49% 7.43% 7.59% 7.52% 7.92% 7.92% Average pay rate.......... 7.38% 7.29% 7.29% 7.15% 7.61% 7.61% US fixed to foreign currency floating.................. 368,448 285,933 282,575 276,260 275,168 189,097 20,956 Average receive rate...... 6.69% 6.67% 6.63% 6.57% 6.54% 7.07% Average pay rate.......... 4.81% 4.90% 5.18% 5.36% 5.58% 6.14% US floating to foreign currency fixed............ 247,037 227,430 (40,619) Average receive rate...... 5.73% 5.77% Average pay rate.......... 5.39% 5.26% US floating to foreign currency floating......... 56,429 56,658 26,866 26,750 26,488 49,937 Average receive rate...... 5.73% 5.77% 5.94% 5.99% 6.06% Average pay rate.......... 5.18% 5.50% 6.13% 6.36% 6.67% </TABLE> 20
22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE <TABLE> <CAPTION> PAGE ---- <S> <C> Report of Independent Accountants........................... 22 Consolidated Statement of Income for the three years ended December 31, 1997......................................... 23 Consolidated Balance Sheet as of December 31, 1997 and 1996...................................................... 24 Consolidated Statement of Cash Flows for the three years ended December 31, 1997................................... 25 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 1997............................. 26 Notes to Consolidated Financial Statements.................. 27 Financial Statement Schedule: II -- Valuation and Qualifying Accounts..................... 50 </TABLE> All other schedules have been omitted because the required information is not applicable or is not present in amounts sufficient to require submission or because the information required is included in the consolidated financial statements or the related notes thereto. 21
23 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Service Corporation International We have audited the accompanying consolidated balance sheet of Service Corporation International as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. We have also audited the financial statement schedule for the three years ended December 31, 1997, listed in the index at item 8 of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Service Corporation International as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Houston, Texas March 18, 1998 22
24 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> Revenues............................................ $ 2,468,402 $ 2,294,194 $ 1,652,126 Costs and expenses.................................. (1,780,790) (1,689,742) (1,186,905) ----------- ----------- ----------- Gross profit........................................ 687,612 604,452 465,221 General and administrative expenses................. (66,781) (63,215) (53,600) ----------- ----------- ----------- Income from operations.............................. 620,831 541,237 411,621 Interest expense.................................... (136,720) (138,557) (118,148) Dividends on preferred securities of SCI Finance LLC............................................... (4,382) (10,781) (10,781) Other income........................................ 100,244 21,982 11,519 ----------- ----------- ----------- (40,858) (127,356) (117,410) ----------- ----------- ----------- Income before income taxes and extraordinary loss... 579,973 413,881 294,211 Provision for income taxes.......................... (205,421) (148,583) (110,623) ----------- ----------- ----------- Income before extraordinary loss.................... 374,552 265,298 183,588 Extraordinary loss on early extinguishment of debt (net of income taxes of $23,383).................. (40,802) -- -- ----------- ----------- ----------- Net income.......................................... $ 333,750 $ 265,298 $ 183,588 =========== =========== =========== Earnings per share: Basic: Income before extraordinary loss.................. $ 1.53 $ 1.13 $ .92 Extraordinary loss on early extinguishment of debt........................................... (0.17) -- -- ----------- ----------- ----------- Net income........................................ $ 1.36 $ 1.13 $ .92 =========== =========== =========== Diluted: Income before extraordinary loss.................. $ 1.47 $ 1.08 $ .86 Extraordinary loss on early extinguishment of debt........................................... (0.16) -- -- ----------- ----------- ----------- Net income........................................ $ 1.31 $ 1.08 $ .86 =========== =========== =========== Basic weighted average number of shares............. 245,470 235,299 199,603 =========== =========== =========== Diluted weighted average number of shares........... 257,781 252,870 229,967 =========== =========== =========== </TABLE> (See notes to consolidated financial statements) 23
25 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents................................. $ 46,877 $ 44,131 Receivables, net of allowances............................ 557,481 494,576 Inventories............................................... 172,169 139,019 Other..................................................... 34,881 36,314 ----------- ----------- Total current assets.............................. 811,408 714,040 ----------- ----------- Investments -- insurance subsidiary......................... 574,728 601,565 Prearranged funeral contracts............................... 2,610,632 2,159,348 Long-term receivables....................................... 981,121 809,287 Cemetery property, at cost.................................. 1,636,859 1,380,213 Property, plant and equipment, at cost (net)................ 1,644,137 1,457,075 Deferred charges and other assets........................... 549,862 371,608 Names and reputations (net)................................. 1,498,116 1,376,634 ----------- ----------- $10,306,863 $ 8,869,770 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $ 425,631 $ 440,797 Current maturities of long-term debt...................... 64,570 113,876 Income taxes.............................................. 45,241 52,870 ----------- ----------- Total current liabilities......................... 535,442 607,543 ----------- ----------- Long-term debt.............................................. 2,634,699 2,048,737 Deferred income taxes....................................... 701,221 527,460 Other liabilities........................................... 546,140 552,443 Deferred prearranged funeral contract revenues.............. 3,163,357 2,725,770 Commitments and contingencies............................... -- -- Company obligated, mandatorily redeemable, convertible preferred securities of SCI Finance LLC................... -- 172,500 Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 252,923,784 and 236,193,427, respectively, issued and outstanding................................. 252,924 236,193 Capital in excess of par value............................ 1,493,246 1,237,783 Retained earnings......................................... 983,353 728,108 Foreign currency translation adjustment................... (7,480) 22,315 Unrealized gain on securities available for sale, net of tax.................................................... 3,961 10,918 ----------- ----------- Total stockholders' equity........................ 2,726,004 2,235,317 ----------- ----------- $10,306,863 $ 8,869,770 =========== =========== </TABLE> (See notes to consolidated financial statements) 24
26 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ----------- ----------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Cash flows from operating activities: Net income......................................... $ 333,750 $ 265,298 $ 183,588 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 157,550 129,819 92,541 Provision for deferred income taxes............. 19,212 56,902 45,164 Extraordinary loss on early extinguishment of debt, net of income taxes..................... 40,802 -- -- Gains from dispositions (net)................... (89,252) (9,930) (1,024) Change in assets and liabilities net of effects from acquisitions: (Increase) in receivables..................... (174,429) (167,338) (115,888) (Increase) in other assets.................... (24,904) (36,781) (36,496) Increase (decrease) in other liabilities...... 36,045 (26,365) 7,473 Other......................................... 662 (1,748) (3,860) ----------- ----------- --------- Net cash provided by operating activities............ 299,436 209,857 171,498 ----------- ----------- --------- Cash flows from investing activities: Capital expenditures............................... (230,532) (193,152) (125,231) Changes in prearranged funeral balances............ (5,537) (51,485) (44,549) Purchases of securities -- insurance subsidiary.... (1,407,588) (1,212,305) (86,014) Sales of securities -- insurance subsidiary........ 1,383,934 1,177,499 49,769 Proceeds from sales of property and equipment...... 46,908 30,121 12,655 Acquisitions, net of cash acquired................. (409,731) (279,320) (693,627) Loans issued by finance subsidiary................. (98,446) (86,858) (38,184) Principal payments received on loans by finance subsidiary...................................... 45,915 156,064 24,312 Proceeds from sale of equity investment............ 147,700 -- -- Purchases of equity investments.................... (87,643) (39,752) (16,076) Other.............................................. (18,424) 19,062 (8,190) ----------- ----------- --------- Net cash used in investing activities................ (633,444) (480,126) (925,135) ----------- ----------- --------- Cash flows from financing activities: Increase (decrease) in borrowings under revolving credit agreements............................... 304,505 96,441 (453,959) Long-term debt issued.............................. 650,000 300,000 862,848 Early extinguishment of debt....................... (449,998) -- -- Payments of debt................................... (91,464) (109,458) (135,960) Common stock issued................................ -- -- 331,063 Dividends paid..................................... (69,888) (55,262) (43,676) Bank overdrafts and other.......................... (6,401) 25,195 32,464 ----------- ----------- --------- Net cash provided by financing activities............ 336,754 256,916 592,780 ----------- ----------- --------- Net increase (decrease) in cash and cash equivalents........................................ 2,746 (13,353) (160,857) Cash and cash equivalents at beginning of period..... 44,131 57,484 218,341 ----------- ----------- --------- Cash and cash equivalents at end of period........... $ 46,877 $ 44,131 $ 57,484 =========== =========== ========= </TABLE> (See notes to consolidated financial statements) 25
27 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> CAPITAL IN FOREIGN UNREALIZED COMMON EXCESS OF RETAINED CURRENCY GAIN STOCK PAR VALUE EARNINGS TRANSLATION ON SECURITIES -------- ---------- -------- ----------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> Balance at December 31, 1994............... $189,714 $ 624,001 $381,509 $ 1,398 $ -- Add (deduct): Net income............................... 183,588 Common stock issued: Common stock offerings................ 18,350 312,713 Stock option exercises and stock grants.............................. 696 5,792 Acquisitions.......................... 7,310 101,967 Debenture conversions................. 18,472 170,235 Dividends on common stock ($.22 per share)................................ (46,535) Foreign currency translation............. 349 Net change in unrealized gain on securities............................ 5,786 -------- ---------- -------- ------- ------- Balance at December 31, 1995............... 234,542 1,214,708 518,562 1,747 5,786 Add (deduct): Net income............................... 265,298 Common Stock issued: Stock option exercises and stock grants.............................. 723 6,940 Acquisitions.......................... 811 15,012 796 Debenture conversions................. 117 1,123 Dividends on common stock ($.24 per share)................................ (56,548) Foreign currency translation............. 20,568 Net change in unrealized gain on securities............................ 5,132 -------- ---------- -------- ------- ------- Balance at December 31, 1996............... 236,193 1,237,783 728,108 22,315 10,918 Add (deduct): Net income............................... 333,750 Common Stock issued: Stock option exercises and stock grants.............................. 820 9,296 Acquisitions.......................... 3,958 79,215 (3,832) Debenture conversions................. 492 5,925 Conversion of convertible preferred securities of SCI Finance LLC......... 11,461 161,027 Dividends on common stock ($.30 per share)................................ (74,673) Foreign currency translation............. (29,795) Net change in unrealized gain on securities............................ (6,957) -------- ---------- -------- ------- ------- Balance at December 31, 1997............... $252,924 $1,493,246 $983,353 $(7,480) $ 3,961 ======== ========== ======== ======= ======= </TABLE> (See notes to consolidated financial statements) 26
28 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE ONE NATURE OF OPERATIONS The Company is the largest provider of death care services in the world. At December 31, 1997, the Company operated 3,127 funeral service locations, 392 cemeteries and 166 crematoria located in 17 countries on five continents. The funeral service locations and cemetery operations consist of the Company's funeral homes, cemeteries, crematoria and related businesses. Company personnel at the funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral related merchandise is sold at funeral service locations and certain funeral service locations contain crematoria. The Company sells prearranged funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company's cemeteries provide cemetery interment rights (including mausoleum spaces and lawn crypts) and certain merchandise including stone and bronze memorials and burial vaults. These items are sold on an at need or preneed basis. Company personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries also operate crematoria. The Company's financial services operations consist of a finance subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital financing to independent funeral home and cemetery operators. NOTE TWO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Service Corporation International and all majority-owned subsidiaries (the "Company"). Intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years to conform to current period presentation with no effect on the consolidated financial position, results of operations or cash flows. Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories and Cemetery Property: Funeral merchandise and cemetery property and merchandise, are stated at the lower of average cost or market. Depreciation and Amortization: Depreciation of property, plant and equipment is provided using the straight line method over the estimated useful lives of the various classes of assets. Property and plant are depreciated over a period ranging from seven to 50 years, while equipment is depreciated over a period from three to 20 years. For the three years ended December 31, 1997, depreciation expense was $87,571, $74,854 and $52,828, respectively. Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized. Prepaid management, consultative and non-competition agreements, primarily with former owners and key employees of businesses acquired are amortized on a straight-line basis over the lives of the respective contracts. Funeral Operations: Funeral revenue is recognized when the funeral service is performed. The Company's trade receivables consist primarily of funeral services already performed. An allowance for doubtful accounts has been provided based on historical experience. The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreement is signed. Revenues associated with sales of prearranged funeral contracts (which include accumulated trust earnings and increasing insurance benefits) are deferred until such time that the funeral 27
29 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) service is performed (see note four). The Company considers price guaranteed prearranged funeral contracts to be investments made to retain and expand future market share. Cemetery Operations: All cemetery interment right sales, together with associated merchandise, are recorded as income at the time contracts are signed. Costs related to the sales of interment rights include property and other costs related to cemetery development activities which are charged to operations using the specific identification method. Allowances for customer cancellations are provided at the date of sale based upon historical experience. Costs related to merchandise are based on actual costs incurred or estimates of future costs necessary to purchase the merchandise, including provisions for inflation when required. Pursuant to state law, all or a portion of the proceeds from the sale of cemetery merchandise may also be required to be paid into trust funds until such merchandise is purchased by the Company for the customer. Merchandise funds trusted at December 31, 1997 and 1996 were $515,051 and $390,534, respectively (see note five). The Company recognizes realized trust income on these merchandise trusts in current cemetery revenues as trust earnings accrue to defray inflation costs recognized related to the unpurchased cemetery merchandise. Additionally, a portion of the proceeds from the sale of cemetery property is required by state law to be paid into perpetual care trust funds. Earnings from these trusts are recognized in current cemetery revenues and are intended to defray cemetery maintenance costs, which are expensed as incurred. Perpetual care funds trusted at December 31, 1997 and 1996 were $371,984 and $318,868, respectively, which approximates fair value. The principal of such perpetual care trust funds generally cannot be withdrawn by the Company and therefore is not included in the consolidated balance sheet. For the three years ended December 31, 1997, the earnings recognized from all cemetery trusts were $74,971, $51,601 and $33,795, respectively. Names and Reputations: The excess of purchase price over the fair value of identifiable net assets acquired in transactions accounted for as a purchase are included in "Names and reputations" and generally amortized on a straight line basis over 40 years which, in the opinion of management, is not necessarily the maximum period benefited. Fair values determined at the date of acquisition are determined by management or independent appraisals. Many of the Company's acquired funeral service locations have been providing high quality service to client families for many years. Such loyalty often forms the basic valuation of the funeral business. Additionally, the death care industry has historically exhibited stable cash flows as well as a low failure rate. The Company monitors the recoverability of names and reputations based on projections of future undiscounted cash flows of the acquired businesses. The amortization charged against income was $37,649, $33,836 and $25,226 for the three years ended December 31, 1997, respectively. Accumulated amortization of names and reputations as of December 31, 1997 and 1996 was $136,398 and $101,426, respectively. Derivatives: Amounts to be paid or received under interest rate swaps, including the interest rate provisions of the cross-currency swaps, are recorded on the accrual basis over the life of the swap agreements as an adjustment to interest expense. The related net amounts payable to, or receivable from, the counterparties are included in accrued liabilities or current receivables, respectively. Gains and losses resulting from currency movements on the cross-currency swaps that hedge the Company's net foreign investments are reflected in stockholders' equity, with the related net amounts due to, or from, the counterparties included in other liabilities, or other assets, respectively. Net deferred gains and losses on early termination of interest rate swaps are being amortized into interest expense over the remaining lives of the original agreements ($394 net unamortized loss at December 31, 1997). Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 28
30 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE THREE ACQUISITIONS The Company acquired certain funeral and cemetery operations both domestically and internationally during the years ended December 31, 1997 and 1996. The operating results of these acquisitions have been included since their respective dates of acquisition. The following table is a summary of the acquisitions made during the two years ended December 31, 1997: <TABLE> <CAPTION> 1997 1996 -------- -------- <S> <C> <C> Number acquired: Funeral service locations................................. 294 210 Cemeteries................................................ 51 35 Crematoria................................................ 19 9 Purchase price.............................................. $643,000 $362,651 </TABLE> The purchase price in both years consisted primarily of combinations of cash, Company common stock, issued and assumed debt. The effect of the above acquisitions on the consolidated balance sheet at December 31, was as follows: <TABLE> <CAPTION> 1997 1996 --------- -------- <S> <C> <C> Current assets.............................................. $ 38,569 $ 30,542 Prearranged funeral contracts............................... 86,452 61,994 Long-term receivables....................................... 31,522 (10,559) Cemetery property........................................... 298,466 210,507 Property, plant and equipment............................... 162,992 93,482 Deferred charges and other assets........................... 13,417 (1,244) Names and reputations....................................... 215,204 164,414 Current liabilities......................................... (67,464) (62,817) Long-term debt.............................................. (63,307) (32,532) Deferred income taxes and other liabilities................. (120,340) (85,635) Deferred prearranged funeral contract revenues.............. (106,439) (72,213) Stockholders' equity........................................ (79,341) (16,619) --------- -------- Cash used for acquisitions........................ $ 409,731 $279,320 ========= ======== </TABLE> NOTE FOUR PREARRANGED FUNERAL ACCOUNTING The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreement is signed. Payments under these contracts are generally placed in trust (pursuant to state law) or are used to pay premiums on life insurance policies issued by third party insurers in North America, the United Kingdom and Australia or the Company's French prearranged funeral service life insurance subsidiary ("Auxia"). Unperformed price guaranteed prearranged funeral contracts are included in the consolidated balance sheet as "prearranged funeral contracts" or, in the case of contracts funded by Auxia, "investments-insurance subsidiary." A corresponding credit is recorded to "deferred prearranged funeral contract revenues." Allowances for customer cancellations are provided at the date of sale based on historical experience. Amounts paid by the customer pursuant to the prearranged funeral contracts are recognized in funeral revenue at the time the funeral is performed. Trust earnings and increasing insurance benefits are accrued and deferred until the service is performed at which time these funds are also recognized in funeral revenues and are intended to cover future increases in the cost of providing a price guaranteed funeral service. Included in 29
31 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred prearranged funeral contract revenues are net obtaining costs, including sales commissions and certain other direct marketing costs, applicable to prearranged funeral contracts which are deferred and will be expensed over a period representing the average life of the prearranged contract. PREARRANGED FUNERAL CONTRACTS At December 31, 1997, $1,201,141 relate to trust funded contracts (which includes $326,310 of amounts that have not yet been collected from customers) and $1,409,491 relate to third party insurance funded contracts which will be available to the Company at the time the funeral services are performed. At December 31, 1996, $962,389 related to trust funded contracts ($235,433 due from customers) and $1,196,959 relate to third party insurance funded contracts. These amounts are shown net of estimated customer cancellations. The allowance for cancellation is based on historical experience and is equivalent to approximately 8% of the total balance. Accumulated realized earnings from trust funds and increasing insurance benefits have been included to the extent that they have accrued through December 31, 1997. The cumulative trust funded total has been reduced by allowable cash withdrawals for realized trust earnings and amounts retained by the Company pursuant to various state laws. The cost and market value associated with the assets held in the trust funds underlying the Company's prearranged funeral contracts are as follows: <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------- -------------------- COST MARKET COST MARKET -------- ---------- -------- -------- <S> <C> <C> <C> <C> Debt securities: Government.......................... $333,626 $ 358,607 $245,736 $259,910 Corporate........................... 114,066 116,435 121,887 122,322 Equity securities..................... 411,489 461,016 164,630 208,082 Money market/other.................... 134,211 134,428 274,949 275,581 -------- ---------- -------- -------- $993,392 $1,070,486 $807,202 $865,895 ======== ========== ======== ======== </TABLE> INVESTMENTS -- INSURANCE SUBSIDIARY As part of the Company's funding of prearranged funeral contracts, Auxia invests in securities which are considered as "available-for-sale" with unrealized gains and losses excluded from earnings and reported net of income taxes in stockholders' equity. The cost, market value and unrealized gains or losses related to Auxia's debt and equity securities were as follows: <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------------------------- --------------------------------------- UNREALIZED UNREALIZED ----------------- ----------------- COST MARKET GAINS LOSSES COST MARKET GAINS LOSSES -------- -------- ------- ------- -------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Debt securities: Foreign government...................... $292,991 $296,320 $ 3,503 $ (174) $220,256 $236,443 $16,187 $ -- Corporate............................... 17,883 17,965 95 (13) 210,235 210,428 385 (192) Equity securities......................... 141,512 162,129 23,640 (3,023) 96,157 96,735 6,166 (5,588) Mutual funds: Money market/other...................... 29,027 29,235 208 -- 27,749 27,942 193 -- Debt.................................... 53,276 53,276 -- -- 61,471 61,471 -- -- -------- -------- ------- ------- -------- -------- ------- ------- $534,689 $558,925 $27,446 $(3,210) $615,868 $633,019 $22,931 $(5,780) ======== ======== ======= ======= ======== ======== ======= ======= </TABLE> 30
32 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The contractual maturities of Auxia's debt securities (at market value) as of December 31, 1997, were as follows: <TABLE> <S> <C> Within one year............................................. $ 2,809 After one year through five years........................... 168,575 After five years through ten years.......................... 107,303 After ten years............................................. 35,598 -------- $314,285 ======== </TABLE> The following table summarizes the activity in prearranged funeral contracts and investments-insurance subsidiary: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> Beginning balance........................................... $2,760,913 $2,368,932 Net sales................................................. 490,297 503,150 Acquisitions.............................................. 86,452 61,994 Realized earnings and increasing insurance benefits....... 164,853 111,950 Maturities................................................ (250,134) (249,705) Increase in cancellation reserve.......................... (33,481) (25,962) Distributed earnings, effect of foreign currency and other.................................................. (33,540) (9,446) ---------- ---------- Ending balance.............................................. $3,185,360 $2,760,913 ========== ========== </TABLE> DEFERRED PREARRANGED FUNERAL CONTRACT REVENUES "Deferred prearranged funeral contract revenues" on the consolidated balance sheet includes the contract amount of all price guaranteed prearranged funeral service contracts as well as the accrued trust earnings and increasing insurance benefits. Also included in deferred prearranged funeral contract revenues are net obtaining costs applicable to prearranged funeral contracts. The aggregate net costs deferred as of December 31, 1997 and 1996 were $190,595 and $151,008, respectively. The Company defers additional accruals of trust earnings and insurance benefits as they are earned until the performance of the funeral service. Upon performance of the funeral service, the Company recognizes the fixed contract price as well as total accumulated trust earnings and increasing insurance benefits as funeral revenues. The following table summarizes the activity in deferred prearranged funeral contract revenues: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> Beginning balance........................................... $2,725,770 $2,362,053 Net sales................................................. 509,447 512,497 Acquisitions.............................................. 106,439 72,213 Realized earnings and increasing insurance benefits....... 164,853 111,950 Maturities................................................ (255,147) (252,603) Increase in cancellation reserve.......................... (33,481) (25,962) Deferred obtaining costs.................................. (67,742) (61,421) Effect of foreign currency and other...................... 13,218 7,043 ---------- ---------- Ending balance.............................................. $3,163,357 $2,725,770 ========== ========== </TABLE> 31
33 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The recognition of future funeral revenues is estimated to occur in the following years: <TABLE> <S> <C> 1998........................................................ $ 274,091 1999........................................................ 241,042 2000........................................................ 224,249 2001........................................................ 210,179 2002........................................................ 196,635 2003 through 2007........................................... 781,902 2008 and thereafter......................................... 1,235,259 ---------- $3,163,357 ========== </TABLE> NOTE FIVE CEMETERY MERCHANDISE TRUST FUNDS The cost and market value associated with the assets held in the cemetery merchandise trust funds (included in current and long-term receivables, at cost) were as follows: <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------- ------------------- COST MARKET COST MARKET -------- -------- -------- -------- <S> <C> <C> <C> <C> Debt securities: Government............................... $169,823 $172,440 $ 72,394 $ 72,101 Corporate................................ 64,474 65,468 35,060 34,560 Equity securities.......................... 227,424 230,931 71,239 75,297 Money market/other......................... 53,330 53,254 211,841 211,896 -------- -------- -------- -------- $515,051 $522,093 $390,534 $393,854 ======== ======== ======== ======== </TABLE> NOTE SIX INCOME TAXES The provision for income taxes includes United States income taxes, determined on a consolidated return basis, foreign and state and local income taxes. Income before income taxes: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> United States........................................ $474,478 $309,431 $257,318 Foreign.............................................. 105,495 104,450 36,893 -------- -------- -------- $579,973 $413,881 $294,211 ======== ======== ======== </TABLE> 32
34 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense (benefit) consisted of the following: <TABLE> <S> <C> <C> <C> Current: United States...................................... $157,450 $ 65,709 $ 43,396 Foreign............................................ 7,022 14,158 12,949 State and local.................................... 21,737 11,814 9,114 -------- -------- -------- 186,209 91,681 65,459 -------- -------- -------- Deferred: United States...................................... 15,045 45,330 39,767 Foreign............................................ 1,432 3,238 (1,498) State and local.................................... 2,735 8,334 6,895 -------- -------- -------- 19,212 56,902 45,164 -------- -------- -------- Total provision...................................... $205,421 $148,583 $110,623 ======== ======== ======== </TABLE> The Company made income tax payments of approximately $155,356, $99,377 and $65,859, for the three years ended December 31, 1997, respectively. The provision for income taxes for the year ended December 31, 1997, includes a decrease to deferred taxes of $5,491 related to enacted tax law changes in the United Kingdom and France. The differences between the U.S. federal statutory tax rate and the Company's effective rate were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Computed tax provision at the applicable U.S. federal statutory income tax rate................ $202,991 $144,858 $102,974 State and local taxes, net of federal income tax benefits......................................... 15,906 13,097 10,406 Dividends received deduction and tax exempt interest......................................... (1,618) (2,108) (1,939) Amortization of names and reputations.............. 5,622 4,765 4,554 Enacted foreign tax rate change.................... (5,491) -- -- Foreign jurisdiction tax rate difference........... (12,909) (11,849) (5,309) Other.............................................. 920 (180) (63) -------- -------- -------- Provision for income taxes....................... $205,421 $148,583 $110,623 -------- -------- -------- Total effective tax rate........................... 35.4% 35.9% 37.6% ======== ======== ======== </TABLE> 33
35 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences and carry-forwards that give rise to significant portions of deferred tax assets and liabilities consisted of the following: <TABLE> <CAPTION> DECEMBER 31, -------------------- 1997 1996 -------- -------- <S> <C> <C> Receivables, principally due to sales of cemetery interment rights and related products............................... $186,900 $152,069 Inventories and cemetery property, principally due to purchase accounting adjustments........................... 460,592 383,687 Property, plant and equipment, principally due to depreciation and to purchase accounting adjustments....... 129,796 110,907 Other....................................................... 40,773 -- -------- -------- Deferred tax liabilities.................................... 818,061 646,663 -------- -------- Deferred revenue on prearranged funeral contracts, principally due to earnings from trust funds.............. (50,862) (34,092) Accrued liabilities......................................... (24,768) (38,337) Carry-forwards and foreign tax credits...................... (21,053) (7,484) Other....................................................... -- (4,367) -------- -------- Deferred tax assets......................................... (96,683) (84,280) -------- -------- Valuation allowance......................................... 15,327 6,128 -------- -------- Net deferred income taxes................................... $736,705 $568,511 ======== ======== </TABLE> During the three years ended December 31, 1997, tax expense resulting from allocating certain tax benefits directly to capital in excess of par value totaled $3,799, $2,410 and $1,165, respectively. Current refundable income taxes and foreign current deferred tax assets are included in other current assets, with current taxes payable and current deferred taxes being reflected as "Income taxes" on the consolidated balance sheet. At December 31, 1997 and 1996, United States income taxes had not been provided on $252,369 and $153,598, respectively, of undistributed earnings of foreign subsidiaries since it is the Company's intention to reinvest such earnings indefinitely. As of December 31, 1997 the Company has United States foreign tax credit carry-forwards of $5,311 which will expire in the years 2000 through 2002. Various subsidiaries have federal and state operating loss carry-forwards of $49,337 with expiration dates through 2012. The Company believes that some uncertainty exists with respect to future realization of these tax credit and loss carry-forwards, therefore a valuation allowance has been established for the carry-forwards not expected to be realized. The increase in the valuation allowance is primarily attributable to foreign tax credits and operating losses generated in the current year. 34
36 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE SEVEN DEBT Debt was as follows: <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> Bank revolving credit agreements and commercial paper....... $ 616,589 $ 325,875 6.375% notes due in 2000.................................... 150,000 150,000 6.75% notes due in 2001..................................... 150,000 150,000 8.72% amortizing notes due in 2002.......................... 141,108 165,761 8.375% notes due in 2004.................................... 51,840 200,000 7.375% notes due in 2004.................................... 250,000 -- 7.2% notes due in 2006...................................... 150,000 150,000 6.875% notes due in 2007.................................... 150,000 150,000 6.95% amortizing notes due in 2010.......................... 58,859 61,576 7.70% notes due in 2009..................................... 200,000 -- Floating rate notes due in 2011 (putable in 1999)........... 200,000 -- 7.875% debentures due in 2013............................... 55,627 150,000 7.0% notes due in 2015 (putable in 2002).................... 300,000 300,000 Medium term notes, maturities through 2019, fixed average interest rate of 9.31%.................................... 35,720 186,040 Convertible debentures, interest rates range from 4.75% -- 5.5%, due through 2007, conversion price ranges from $11.25 -- $43.72..................................... 45,673 44,140 Mortgage and other notes payable with maturities through 2015, average interest rate of 7.05%...................... 156,931 151,836 Deferred loan costs......................................... (13,078) (22,615) ---------- ---------- Total debt.................................................. 2,699,269 2,162,613 Less current maturities..................................... (64,570) (113,876) ---------- ---------- Total long-term debt........................................ $2,634,699 $2,048,737 ========== ========== </TABLE> The Company's primary revolving credit agreement provides for borrowings up to $1,000,000 and consists of two committed facilities -- a 364-day facility and 5-year, multi-currency facility -- which are primarily used to support commercial paper issuance and for general corporate needs. The 364-day portion allows for borrowings up to $300,000. This facility expires June 26, 1998, but has provisions to be extended for additional 364-day terms. At the end of any term, the outstanding balance may be converted into a 2 year term loan at the Company's option. Interest rates are based on various indices as determined by the Company. In addition, a facility fee of 0.06% is paid quarterly on the total commitment amount. The 5-year facility allows for borrowings up to $700,000, including $500,000 in various foreign currencies. This facility expires June 27, 2002. Interest rates are based on various indices as determined by the Company. A facility fee is paid quarterly on this facility's total commitment amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the Company's senior debt ratings, and is currently set at 0.08%. At December 31, 1997, there was $200,250 outstanding under this agreement at a weighted average interest rate of 5.19%. As of December 31, 1997, there was $320,889 of commercial paper outstanding backed by the above two facilities at a weighted average interest rate of 6.36%. 35
37 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The commercial paper borrowings and revolving notes generally have maturities ranging from one to 90 days. On October 3, 1997, Service Corporation International (Canada), ("SCIC"), a wholly owned subsidiary of the Company, entered into a 364-day, $105,000 revolving credit agreement. This facility is used primarily to support acquisition and working capital requirements of the Company's Canadian subsidiaries. The facility fee is currently set at 0.08%. At December 31, 1997, there was approximately $67,400 outstanding under this facility at an average interest rate of 4.6%. SCIC partially restructured its Canadian debt in March 1998, placing approximately $147,000 into a new facility, replacing the immediately above described facility. This new facility has a one year revolving period, and allows SCIC, at its option, to convert to a five year term loan. This new facility carries no facility fee. Interest rates are based on various indices as determined by SCIC. The indebtedness has a put feature allowing the lender to require the Company to purchase any outstanding indebtedness upon request. The Company has several other bank lines of credit for approximately $116,000 at rates similar to the primary revolving credit agreements. At December 31, 1997, there was approximately $30,600 outstanding under those agreements. The credit facilities described above have financial compliance provisions that contain certain restrictions on levels of net worth, debt, liens, and guarantees. The Company's outstanding commercial paper and other borrowings under its various credit facilities at December 31, 1997 are classified as long-term debt. The Company uses these revolving credit agreements primarily to finance the Company's ongoing acquisition programs. From time to time, the Company raises debt and/or equity in the public markets to reduce its revolving credit facility balances. The timing of these public debt or equity offerings is dependent on numerous factors including market conditions, long and short term interest rates, the Company's capitalization ratios and the outstanding balances under the revolving credit facilities. Therefore, the Company has classified these borrowings as long-term debt. Additionally, the Company has excluded these borrowings from the five-year maturity of long-term debt disclosure due to the uncertainty of the eventual term of the related debt. It is the Company's intent to refinance such borrowings through the use of its credit agreements or other long-term notes issued under a shelf registration filed with the Securities and Exchange Commission (Commission). During the first quarter of 1997, the Company initiated a tender offer for three issues of its higher coupon debt and repurchased approximately $386,000 of the three series, resulting in a $40,802 extraordinary loss, using commercial paper and its revolving credit facility. In April 1997, the Company refinanced these and other working capital borrowings by issuing $250,000 7.375% notes due April 2004, and $200,000 7.7% notes due April 2009, which were sold through an underwritten public offering as well as $200,000 of floating rate notes due April 2011 (putable to the Company in April 1999) through a private placement. In May 1996, the Company issued $300,000 of notes which were sold through an underwritten public offering. These notes were issued in two tranches of $150,000 each with maturities in June 2001 and 2006 and interest rates of 6.75% and 7.2%, respectively. The proceeds of this offering were primarily used to repay existing debt outstanding under the Company's revolving credit agreements. Approximately $80,000 of the Company's facilities and cemetery properties are pledged as collateral for the mortgage notes at December 31, 1997. At December 31, 1997, the Company had $40,169 in letters of credit outstanding primarily to guarantee funding of certain insurance claims. In March 1998, the Company issued $500,000 of notes in an underwritten offering pursuant to the Company's $1,000,000 shelf registration filed with the Commission. These notes mature in 2008 as to the 36
38 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $200,000 and 2020 as to the $300,000 and have initial interest rates of 6.5% and 6.3%, respectively. The $300,000 notes contain certain early tender dates. The aggregate principal payments on debt for the five years subsequent to December 31, 1997, excluding amounts due to banks under revolving credit loan agreements are: 1998-$64,570; 1999-$262,192; 2000-$193,285; 2001-$196,661 and 2002-$328,458. Cash interest payments for the three years ended December 31, 1997 totaled $162,521, $150,961 and $111,609, respectively. Approximately $1,832,000 of the Company's debt consists of foreign denominated debt of which approximately $1,504,000 was converted to foreign currencies as a result of the cross-currency swaps. Similarly, the stated coupons described above have substantially been modified through the use of interest rate and cross-currency interest rate swaps used in the management of interest rates within defined targets for fixed and floating interest rate exposure. See note eight below. During the three months ended December 31, 1997, pursuant to a shelf registration filed with the Commission to be used exclusively for future acquisitions, the Company guaranteed the following promissory notes issued through subsidiaries in connection with various acquisitions of operations: <TABLE> <CAPTION> SUBSIDIARY AMOUNT ---------- ------ <S> <C> SCI Funeral Services of NY, Inc. .......................... (475) SCI Indiana Funeral Services, Inc. ........................ (500) SCI Illinois Services, Inc. ............................... (400) SCI Michigan Funeral Services, Inc. ....................... (740) SCI Illinois Services, Inc. ............................... (400) SCI Michigan Funeral Services, Inc. ....................... (740) SCI Illinois Services, Inc. ............................... (2,486) SCI Texas Funeral Services, Inc. .......................... (678) </TABLE> NOTE EIGHT DERIVATIVES The Company enters into derivatives primarily in the form of interest rate swaps and cross-currency interest rate swaps in combination with local currency borrowings in order to manage its mix of fixed and floating rate debt and to substantially hedge the Company's net investments in foreign assets. The Company has procedures in place to monitor and control the use of derivatives and enters into transactions only with a limited group of creditworthy financial institutions. The Company does not engage in derivative transactions for speculative or trading purposes, nor is it a party to leveraged derivatives. In general, cross-currency swaps convert US dollar debt into the respective foreign currency of the Company's various foreign operations. Such cross-currency swaps are used in combination with local currency borrowings to substantially hedge the Company's net investment in foreign operations. The cross-currency swaps generally include interest rate provisions to enable the Company to additionally hedge a portion of the earnings of its foreign operations. Accordingly, movements in currency rates that impact the swap are generally offset by a corresponding movement in the value of the underlying assets being hedged. Similarly, currency movements that impact foreign expense due under the cross-currency interest rate swaps are 37
39 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) generally offset by a corresponding movement in the earnings of the foreign operation. The following tables present information about the Company's derivatives: <TABLE> <CAPTION> DECEMBER 31, 1997 ------------------------------------------------------------------- WEIGHTED AVERAGE CARRYING INTEREST RATE NOTIONAL AMOUNT ASSET ---------------- FAIR AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE ---------- ------------ --------- ------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Interest Rate Swaps: US dollar fixed to US dollar floating.... $ 450,000 $ -- 2001-2002 6.53% 5.89% $ 4,392 US dollar fixed to US dollar floating.... 300,000 -- 2004-2006 7.02% 5.78% 14,295 US dollar fixed to US dollar floating.... 200,000 -- 2009 7.43% 5.76% 12,264 US dollar floating to US dollar fixed.... 200,000 -- 2004 5.81% 5.72% 783 Canadian dollar floating to Canadian dollar fixed........................... 78,138 -- 1999 2.64% 3.97% (4,024) Canadian dollar floating to Canadian dollar fixed........................... 38,456 -- 2007 1.41% 1.95% (1,927) Canadian dollar floating to Canadian dollar fixed effective 11/98........... 94,777 -- 2003 -- -- (5,559) Australian dollar floating to Australian dollar fixed........................... 42,270 -- 2006 5.91% 7.81% (3,672) French franc floating to German mark floating............................... 81,820 -- 2006 3.69% 3.99% (1,479) French franc fixed to German mark floating............................... 82,152 -- 2006 6.80% 5.38% 3,036 German mark floating to French franc fixed.................................. 82,152 -- 2003 5.38% 6.20% (4,903) Cross-Currency Interest Rate Swaps: US dollar fixed to French franc fixed.... 250,000 44,736 2000-2002 6.05% 5.89% 42,540 US dollar fixed to French franc fixed.... 150,000 26,722 2007 7.00% 6.93% 20,516 US dollar fixed to French franc floating............................... 100,000 13,183 2006 7.20% 3.93% 18,408 US dollar fixed to German mark floating............................... 100,000 17,861 2003 5.37% 3.25% 19,016 US dollar fixed to British pound fixed... 385,386 (23,509) 2002-2004 8.46% 8.43% 20,181 US dollar fixed to British pound floating............................... 28,222 (1,949) 2002 8.72% 7.94% (28,581) US dollar floating to Australian dollar fixed.................................. 132,296 11,526 1999-2000 5.91% 6.51% (36,676) US dollar floating to Australian dollar floating............................... 59,196 4,571 2000-2003 5.91% 5.07% 49,937 US dollar fixed to Canadian dollar floating............................... 100,000 5,223 2010 6.95% 4.83% 7,264 US dollar fixed to Canadian dollar floating............................... 81,727 3,589 1999 6.66% 3.94% 4,849 US dollar floating to French franc fixed.................................. 117,834 (4,189) 2000 5.88% 4.23% (3,943) ---------- -------- -------- $3,154,426 $ 97,764 $126,717 ========== ======== ======== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1996 ------------------------------------------------------------------- WEIGHTED AVERAGE CARRYING INTEREST RATE NOTIONAL AMOUNT ASSET ---------------- FAIR AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE ---------- ------------ --------- ------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Interest Rate Swaps: US dollar fixed to US dollar floating.... $ 525,000 $ -- 1999-2002 6.36% 5.57% $ (3,383) US dollar fixed to US dollar floating.... 50,000 -- 2006 6.50% 5.50% (744) Canadian dollar floating to Canadian dollar fixed........................... 40,134 -- 1999 2.94% 7.57% (3,096) Canadian dollar floating to Canadian dollar fixed (effective 11/98)......... 98,911 -- 2003 -- -- (984) Australian dollar floating to Australian dollar fixed (effective 12/97)......... 51,656 -- 2006 -- -- 745 French franc floating to German mark floating............................... 94,808 -- 2006 3.50% 3.47% (2,683) French franc fixed to German mark floating............................... 95,194 -- 2006 6.80% 5.10% (1,226) German mark floating to French franc fixed.................................. 95,194 -- 1998 5.10% 6.20% (193) </TABLE> 38
40 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) <TABLE> <CAPTION> DECEMBER 31, 1996 ------------------------------------------------------------------- WEIGHTED AVERAGE CARRYING INTEREST RATE NOTIONAL AMOUNT ASSET ---------------- FAIR AMOUNT (LIABILITY) MATURITY RECEIVE PAY VALUE ---------- ------------ --------- ------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Cross-Currency Interest Rate Swaps: US dollar fixed to French franc fixed.... 350,000 16,972 2002-2003 6.20% 5.94% 466 US dollar fixed to French franc fixed.... 150,000 7,151 2007 7.00% 6.93% (4,317) US dollar fixed to French franc floating............................... 100,000 (599) 2006 7.20% 3.74% 2,686 US dollar fixed to British pound fixed... 405,109 (40,394) 2002-2004 8.47% 7.98% 21,816 US dollar fixed to British pound floating............................... 33,152 (3,477) 2002 8.72% 6.56% (37,755) US dollar floating to British pound floating............................... 76,375 (4,113) 1997 5.50% 6.30% (4,136) US dollar floating to Australian dollar fixed.................................. 67,568 (10,881) 1999-2000 5.63% 7.02% (54,636) US dollar floating to Australian dollar floating............................... 29,436 (5,531) 2000 5.63% 5.93% 38,604 US dollar fixed to Canadian dollar fixed.................................. 75,000 133 1999 6.66% 6.64% (2,463) US dollar fixed to Canadian dollar floating............................... 100,000 1,089 2010 6.95% 3.54% (2,939) ---------- -------- -------- $2,437,537 $(39,650) $(54,238) ========== ======== ======== </TABLE> At December 31, 1997, after giving consideration to the interest rate and cross-currency swaps, the Company's debt (excluding $150,000 of Provident debt) consists of approximately $1,078,000 of fixed interest rate debt at a weighted average rate of 7.00% and approximately $1,386,000 of floating interest rate debt at a weighted average rate of 5.50%. Additionally, approximately $1,832,000 of the Company's debt consists of foreign denominated debt. Interest rate swap settlements are generally semiannual and match the coupons of the underlying debt or related intercompany loan payments on the foreign operations being hedged. In addition, as of December 31, 1997, $566,594 of the interest rate swaps contain provisions which require termination of the swap or convert the swap to a new index if certain interest rate conditions are met. In the cross-currency swaps, the notional amounts are exchangeable in accordance with the terms of the swaps: at maturity for nonamortizing swaps or according to defined amortization tables. Maturities of notional amounts relating to derivative financial instruments held on December 31, 1997, are as follows: 1999- $183,280; 2000-$406,152; 2001-$150,000; 2002-$541,108; and thereafter -- $1,873,886. NOTE NINE CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, trade receivables and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying value of Provident's receivables approximates fair value as the majority of the loan portfolio carries market rates of interest. It is not practicable to estimate the fair value of receivables due on cemetery contracts or prearranged funeral contracts (other than cemetery merchandise trust funds and prearranged funeral trust funds, see notes four and five) without incurring excessive costs because of the large number of individual contracts with varying terms. The investments of the Company's insurance subsidiary are reported at fair value in the consolidated balance sheet. The Company has entered into various derivative financial instruments with major financial institutions to hedge fluctuation exposures in interest and foreign exchange rates (swap agreements). Fair values were obtained from counterparties to the agreements and represent their estimate of the amount the Company would pay or receive to terminate the swap agreements based upon the existing terms and current market conditions. The net fair value of the Company's various swap agreements at December 31, 1997 is an asset of $126,717 (see note eight). At December 31, 1996, the net fair value was a liability of $54,238. The fair value 39
41 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the Company's swap agreements may vary substantially with changes in interest and currency rates. The Company's credit exposure is limited to the sum of the fair value of positions that have become favorable to the Company and any accrued interest receivable due from counterparties. Potential credit exposure is dependent upon the maximum adverse impact of interest and currency movement. Such potential credit exposure is minimized by selection of counterparties from a limited group of high quality institutions and inclusion of certain contract provisions. Management believes that any credit exposure with respect to its favorable positions at December 31, 1997 is remote (see note eight). Fair value of debt was as follows: <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> Bank revolving credit agreements and commercial paper....... $ 616,589 $ 325,875 6.375% notes due in 2000.................................... 150,285 149,220 6.75% notes due in 2001..................................... 151,755 149,876 8.72% amortizing notes due in 2002.......................... 150,266 174,861 8.375% notes due in 2004.................................... 57,055 215,404 7.375% notes due in 2004.................................... 260,725 -- 7.2% notes due in 2006...................................... 155,730 150,087 6.875% notes due in 2007.................................... 152,265 146,154 6.95% notes due in 2010..................................... 60,336 60,388 7.70% notes due in 2009..................................... 214,980 -- Floating rate notes due in 2011 (putable in 1999)........... 200,000 -- 7.875% debentures due in 2013............................... 61,001 155,048 7.0% notes due in 2015 (putable in 2002).................... 336,840 307,938 Medium term notes, maturities through 2018, fixed average interest rate of 9.31%.................................... 43,636 214,178 Convertible debentures, interest rates range from 4.75% -- 5.5%, due through 2007, conversion price ranges from $11.25 -- $43.72..................................... 83,258 39,243 Mortgage and other notes payable with maturities through 2015, average interest rate of 7.05%...................... 138,379 154,720 ---------- ---------- Total debt........................................ $2,833,100 $2,242,992 ========== ========== </TABLE> The fair value of the fixed rate long-term borrowings was estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors. The carrying value of convertible securities has been estimated based on the respective shares of SCI common stock into which such securities may be converted. The carrying value of the Company's revolving credit agreements approximate fair value because the rates on such agreements are variable, based on current market conditions. Provident is a party to financial instruments with potential credit risk. The financial instruments result from loans made in the normal course of business to meet the financing needs of borrowers who are principally independent funeral home and cemetery operators. These financial instruments also include loan commitments of approximately $50,000 at December 31, 1997 ($55,017 at December 31, 1996) to extend credit. Provident's total loans outstanding at December 31, 1997 were approximately $199,000. Provident evaluates each borrower's creditworthiness and the amount loaned and collateral obtained, if any, is determined by this evaluation. The Company grants credit in the normal course of business and the credit risk with respect to these trade, cemetery and prearranged funeral receivables due from customers is generally considered minimal 40
42 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) because of the wide dispersion of the customers served. Procedures are in effect to monitor the creditworthiness of customers and bad debts have not been significant in relation to the volume of revenues. Customer payments on prearranged funeral contracts that are placed in state regulated trusts or used to pay premiums on life insurance contracts generally do not subject the Company to collection risk. Insurance funded contracts are subject to supervision by state insurance departments and are protected in the majority of states by insurance guaranty acts. NOTE TEN COMMITMENTS The annual payments for operating leases (primarily for funeral home facilities and transportation equipment) are as follows: <TABLE> <S> <C> 1998........................................................ $62,462 1999........................................................ 44,340 2000........................................................ 32,928 2001........................................................ 24,517 2002........................................................ 19,481 Thereafter.................................................. 79,160 </TABLE> The majority of these operating leases contain one of the following options: (a) purchase the property at the fair value at date of exercise, (b) purchase the property for a value determined at the inception of the lease or (c) renew for the fair rental value at the end of the primary term of the lease. Some of the equipment leases contain residual value exposures. For the three years ended December 31, 1997, rental expense was $71,225, $64,073 and $47,848, respectively. The Company has entered into management, consultative and noncompetition agreements (generally for five to 10 years) with certain officers of the Company and former owners and key employees of businesses acquired. During the three years ended December 31, 1997, $68,667, $55,688 and $55,419, respectively, were charged to expense. At December 31, 1997, the maximum estimated future expense under all agreements with a remaining term in excess of one year is $321,265, including $11,477 with certain officers of the Company. The Company has a minimum purchase agreement with a major casket manufacturer for its North American operations. The agreement contains provisions to increase the minimum annual purchases for normal price increases and for the maintenance of product quality. The agreement expires in December 1998 and contains a remaining purchase commitment of $54,815. During the three years ended December 31, 1997, the Company purchased caskets for $57,574, $54,431 and $48,828, respectively, under this agreement. NOTE ELEVEN CONVERTIBLE PREFERRED SECURITIES OF SCI FINANCE LLC During 1997, the Company redeemed all the outstanding shares of its convertible preferred shares into 11,178,522 shares of Company common stock and cash. NOTE TWELVE STOCKHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock, $1 per share par value. No shares were issued as of December 31, 1997. At December 31, 1997, 500,000,000 common shares of $1 par value were authorized, 252,923,784 shares were issued and outstanding (236,193,427 at December 31, 1996), net of 66,373 shares held, at cost, in treasury (9,813 at December 31, 1996). 41
43 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has benefit plans whereby shares of the Company's common stock may be issued pursuant to the exercise of stock options granted to officers and key employees. The plans allow for options to be granted as either non-qualified or incentive stock options. The options are granted with an exercise price equal to the then current market price of the Company's common stock. The options are generally exercisable at a rate of 33 1/3% each year unless, at the discretion of the Company's Compensation Committee of the Board of Directors, alternative vesting methods are allowed. At December 31, 1997, 15,668,000 options had been granted to officers and key employees of the Company which contain alternative vesting methods. Under the alternative vesting methods, partial or full accelerated vesting will occur when the price of Company common stock reaches pre-determined prices. If the pre-determined stock prices are not met in the required time period, the options will fully vest in periods ranging from seven to nine years from date of grant. At December 31, 1997 and 1996, 7,628,350 and 14,802,500 shares, respectively, were reserved for future option grants under all stock option plans. The following tables set forth certain stock option information: <TABLE> <CAPTION> WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE ---------- ---------------- <S> <C> <C> Outstanding at December 31, 1994......................... 10,374,052 $12.01 Granted................................................ 2,854,000 16.35 Exercised.............................................. (668,552) 7.53 Cancelled.............................................. (977,668) 12.81 ---------- ------ Outstanding at December 31, 1995......................... 11,581,832 13.27 ---------- ------ Granted................................................ 2,239,200 22.63 Exercised.............................................. (724,425) 8.82 Cancelled.............................................. (47,338) 20.45 ---------- ------ Outstanding at December 31, 1996......................... 13,049,269 15.09 ---------- ------ Granted................................................ 7,144,150 30.37 Exercised.............................................. (775,716) 12.51 Cancelled.............................................. (104,252) 22.85 ---------- ------ Outstanding at December 31, 1997......................... 19,313,451 $20.81 ---------- ------ Exercisable at December 31, 1997......................... 9,488,214 $14.07 ========== ====== Exercisable at December 31, 1996......................... 1,055,435 ========== Exercisable at December 31, 1995......................... 1,206,762 ========== </TABLE> <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- NUMBER AVERAGE AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE - -------------- ------------ ---------------- --------- ------------ --------- <S> <C> <C> <C> <C> <C> $ 8.33- 9.41 272,004 1.7 $ 9.01 272,004 $ 9.01 12.88-18.38 9,827,954 9.0 13.83 8,334,298 13.34 20.09-29.59 4,756,993 4.6 25.64 881,912 22.60 31.56-33.31 4,456,500 3.5 31.76 -- -- ------------ ---------- --- ------ --------- ------ $ 8.33-33.31 19,313,451 6.5 $20.81 9,488,214 $14.07 ============ ========== === ====== ========= ====== </TABLE> The Company's 1996 Incentive Plan reserves 12,000,000 shares of common stock for future awards of stock options, restricted stock and other stock based awards to officers and key employees of the Company. The Company's 1996 Non-qualified Incentive Plan reserves 4,000,000 shares of common stock for future 42
44 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) awards of nonqualified stock options to employees who are not officers of the Company. Under the Company's 1995 Stock Plan for Non-Employee Directors, non-employee directors automatically receive yearly awards of restricted stock through the year 2000. Each award is for 3,000 shares of common stock and vests after one year of service. For the three years ended December 31, 1997, 73,000, 49,600 and 128,600 shares of restricted stock were awarded at average fair values of $33.35, $25.76 and $14.60, respectively. The Board of Directors has adopted a preferred share purchase rights plan and has declared a dividend of one preferred share purchase right for each share of common stock outstanding. The rights become exercisable in the event of certain attempts to acquire 20% or more of the common stock of the Company and entitle the rights holders to purchase certain securities of the Company or the acquiring company. The rights, which are redeemable by the Company for $.01 per right, expire in July 1998 unless extended. The Company has adopted the disclosure-only provisions of FAS 123, "Accounting for Stock-Based Compensation," and applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. If the Company had elected to recognize compensation cost for its option plans based on the fair value at the grant dates for awards under those plans, consistent with the method prescribed by FAS 123, net income and earnings per share would have been changed to the pro forma amounts indicated below: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Net income As reported........................................ $333,750 $265,298 $183,588 Pro forma.......................................... 315,733 252,929 181,285 Basic earnings per share As reported........................................ $ 1.36 $ 1.13 $ .92 Pro forma.......................................... 1.30 1.07 .91 Diluted earnings per share As reported........................................ $ 1.31 $ 1.08 $ .86 Pro forma.......................................... 1.25 1.03 .85 </TABLE> The fair value of the Company's stock options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: dividend yield of 1%, 1% and 1%; expected volatility of 26.6%, 25.3% and 25.3%; a risk free interest rate of 6.5%, 6.8% and 5.8%; and an expected holding period of 8, 9 and 7 years. NOTE THIRTEEN RETIREMENT PLANS The Company has a noncontributory defined benefit pension plan covering substantially all United States employees, a supplemental retirement plan for certain current and former key employees (SERP), a supplemental retirement plan for officers and certain key employees (Senior SERP), and a retirement plan for non-employee directors (Directors' Plan). For the pension plan, retirement benefits are generally based on years of service and compensation. The Company annually contributes to the pension plan an actuarially determined amount consistent with the funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the pension plan consist primarily of bank money market funds, fixed income investments, and marketable equity securities. The marketable equity securities include shares of Company common stock with a value of $12,141 at 43
45 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1997. Most foreign employees are covered by various foreign government mandated or defined contribution plans which are adequately funded and are not considered material to the financial condition or results of operations of the Company. The plans' liabilities and their related costs are computed in accordance with the laws of the individual countries and appropriate actuarial practices. Retirement benefits under the SERP are based on years of service and average monthly compensation, reduced by benefits under the pension plan and Social Security. The Senior SERP provides retirement benefits based on years of service and position. The Directors' Plan will provide an annual benefit to directors following their retirement, based on a vesting schedule. The Company purchased various life insurance policies on the participants in the SERP, Senior SERP and Directors' Plan with the intent to use the proceeds or any cash value buildup from such policies to assist in funding, at least to the extent of such assets, the plans' funding requirements. The net cost for the four defined plans described above were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Service cost -- benefits earned during the period.... $ 9,806 $ 8,550 $ 6,996 Interest cost on projected benefit obligation........ 10,033 9,400 9,114 Return on plan assets................................ (22,121) (13,341) (15,752) Net amortization and deferral of gain................ 15,838 9,747 12,189 -------- -------- -------- $ 13,556 $ 14,356 $ 12,547 ======== ======== ======== </TABLE> The plans' funded status were as follows: <TABLE> <CAPTION> DECEMBER 31, --------------------------------------------- 1997 1996 --------------------- --------------------- FUNDED NON-FUNDED FUNDED NON-FUNDED PLAN PLANS PLAN PLANS -------- ---------- -------- ---------- <S> <C> <C> <C> <C> Vested benefit obligation................ $ 88,220 $ 38,388 $ 76,701 $ 40,130 ======== ======== ======== ======== Accumulated benefit obligation........... $ 92,767 $ 39,754 $ 80,228 $ 40,245 ======== ======== ======== ======== Projected benefit obligation............. $101,293 $ 39,840 $ 88,080 $ 40,280 Plans' assets at fair value.............. 125,166 -- 103,603 -- -------- -------- -------- -------- Plans' assets in excess (deficit) of projected benefit obligation........... 23,873 (39,840) 15,523 (40,280) Unrecognized net (gain) loss from past experience and effects of changes in assumptions............................ (5,539) 5,823 1,634 7,484 Prior service (benefit) cost not yet recognized in net periodic pension cost................................... (1,674) 8,364 (2,035) 10,749 -------- -------- -------- -------- Prepaid (accrued) pension cost........... 16,660 (25,653) 15,122 (22,047) Adjustment for additional minimum liability.............................. -- (14,101) -- (18,198) -------- -------- -------- -------- Retirement plan asset (liability)........ $ 16,660 $(39,754) $ 15,122 $(40,245) ======== ======== ======== ======== </TABLE> 44
46 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following assumed rates were used in the determination of the plans' funded status: <TABLE> <CAPTION> 1997 1996 ------------------- ------------------- FUNDED NON-FUNDED FUNDED NON-FUNDED PLAN PLANS PLAN PLANS ------ ---------- ------ ---------- <S> <C> <C> <C> <C> Discount rate used to determine obligations........... 7.25% 7.25% 7.5% 7.5% Assumed rate of compensation increase................. 5.5 5.5 5.5 5.5 Assumed rate of return on plan assets................. 9.0 -- 8.5 -- </TABLE> NOTE FOURTEEN MAJOR SEGMENTS OF BUSINESS The Company conducts funeral and cemetery operations in 17 countries and offers financial services in the United States. <TABLE> <CAPTION> FINANCIAL FUNERAL CEMETERY SERVICES CORPORATE CONSOLIDATED ---------- ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> <C> Revenues: 1997.............................. $1,727,003 $ 724,862 $ 16,537 $ -- $ 2,468,402 1996.............................. 1,663,387 612,421 18,386 -- 2,294,194 1995.............................. 1,166,247 463,754 22,125 -- 1,652,126 Income from operations: 1997.............................. $ 408,083 $ 271,897 $ 7,632 $ (66,781) $ 620,831 1996.............................. 380,841 214,721 8,890 (63,215) 541,237 1995.............................. 295,151 160,442 9,628 (53,600) 411,621 Identifiable assets: 1997.............................. $6,553,708 $3,309,431 $ 200,562 $ 243,162 $10,306,863 1996.............................. 5,905,246 2,638,775 148,193 177,556 8,869,770 1995.............................. 5,110,145 2,157,906 218,963 185,373 7,672,387 Depreciation and amortization: 1997.............................. $ 127,359 $ 21,611 $ 5 $ 8,575 $ 157,550 1996.............................. 103,696 18,601 9 7,513 129,819 1995.............................. 72,477 11,772 33 8,259 92,541 Capital expenditures:(1) 1997.............................. $ 273,191 $ 404,100 $ 2 $ 14,698 $ 691,991 1996.............................. 234,673 268,039 -- 11,582 514,294 1995.............................. 442,227 480,372 10 6,090 928,699 Number of operating locations at year end (unaudited): 1997.............................. 3,244 441 -- -- 3,685 1996.............................. 2,987 390 -- -- 3,377 1995.............................. 2,836 360 -- -- 3,196 </TABLE> - --------------- (1) Includes $461,459, $321,142 and $803,468 for the three years ended December 31, 1997, respectively, for purchases of property, plant, and equipment and cemetery property of acquired businesses. 45
47 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Geographic segment information was as follows: <TABLE> <CAPTION> UNITED OTHER OTHER STATES FRANCE EUROPEAN FOREIGN CONSOLIDATED ---------- ---------- ---------- -------- ------------ <S> <C> <C> <C> <C> <C> Revenues: 1997............................... $1,588,831 $ 485,264 $ 225,087 $169,220 $ 2,468,402 1996............................... 1,409,409 537,079 184,943 162,763 2,294,194 1995............................... 1,178,407 190,091 151,225 132,403 1,652,126 Income from operations: 1997............................... $ 471,237 $ 54,541 $ 44,747 $ 50,306 $ 620,831 1996............................... 400,622 52,204 37,376 51,035 541,237 1995............................... 314,698 18,743 34,214 43,966 411,621 Identifiable assets: 1997............................... $7,340,407 $1,171,877 $1,059,238 $735,341 $10,306,863 1996............................... 6,135,950 1,252,738 923,692 557,390 8,869,770 1995............................... 5,256,876 1,169,484 777,247 468,780 7,672,387 Number of operating locations at year end (unaudited): 1997............................... 1,574 1,101 712 298 3,685 1996............................... 1,441 1,056 631 249 3,377 1995............................... 1,274 1,067 618 237 3,196 Number of funerals (unaudited): 1997............................... 231,243 148,223 102,985 50,678 533,129 1996............................... 217,471 150,269 92,491 50,039 510,270 1995............................... 198,682 49,298 81,101 44,381 373,462 </TABLE> 46
48 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE FIFTEEN SUPPLEMENTARY INFORMATION The detail of certain balance sheet accounts was as follows: <TABLE> <CAPTION> DECEMBER 31, ---------------------- 1997 1996 ---------- -------- <S> <C> <C> Cash and cash equivalents: Cash...................................................... $ 41,264 $ 41,344 Commercial paper and temporary investments................ 5,613 2,787 ---------- -------- $ 46,877 $ 44,131 ========== ======== Receivables and allowances: Current: Trade accounts......................................... $ 312,931 $273,696 Cemetery contracts..................................... 269,503 236,578 Loans and other........................................ 80,109 69,174 ---------- -------- 662,543 579,448 ---------- -------- Less: Allowance for contract cancellations and doubtful accounts............................................. 52,597 45,155 Unearned finance charges............................... 52,465 39,717 ---------- -------- 105,062 84,872 ---------- -------- $ 557,481 $494,576 ========== ======== Long-term: Cemetery contracts..................................... $ 387,566 $311,847 Trusted cemetery merchandise sales..................... 486,139 371,400 Loans and other........................................ 207,687 206,897 ---------- -------- 1,081,392 890,144 ---------- -------- Less: Allowance for contract cancellations and doubtful accounts............................................. 35,964 29,951 Unearned finance charges............................... 64,307 50,906 ---------- -------- 100,271 80,857 ---------- -------- $ 981,121 $809,287 ========== ======== </TABLE> 47
49 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest rates on cemetery contracts and loans and other notes receivable range from 1.5% to 19.0% at December 31, 1997. Included in loans and other notes receivable are $16,049 in notes with officers and employees of the Company, the majority of which are collateralized by real estate, and $24,095 in notes with other related parties. <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> Cemetery property: Undeveloped land.......................................... $1,234,321 $1,003,961 Developed land, lawn crypts and mausoleums................ 402,538 376,252 ---------- ---------- $1,636,859 $1,380,213 ========== ========== Property, plant and equipment: Land...................................................... $ 422,877 $ 355,017 Buildings and improvements................................ 1,152,235 1,017,334 Operating equipment....................................... 413,108 358,577 Leasehold improvements.................................... 46,853 45,606 ---------- ---------- 2,035,073 1,776,534 ---------- ---------- Less: accumulated depreciation............................ (390,936) (319,459) ---------- ---------- $1,644,137 $1,457,075 ========== ========== Accounts payable and accrued liabilities: Trade payables............................................ $ 63,868 $ 68,912 Dividends................................................. 18,975 14,189 Payroll................................................... 70,957 78,233 Interest.................................................. 31,665 28,984 Insurance................................................. 41,799 33,263 Bank overdraft............................................ 29,977 48,312 Other..................................................... 168,390 168,904 ---------- ---------- $ 425,631 $ 440,797 ========== ========== </TABLE> NON-CASH TRANSACTIONS <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 -------- ------- -------- <S> <C> <C> <C> Common stock issued under restricted stock plans.... $ 2,405 $ 1,278 $ 1,868 Minimum liability under retirement plans............ (4,097) (2,235) 4,213 Debenture conversions to common stock............... 6,417 1,240 188,707 Common stock issued in acquisitions................. 83,173 15,823 109,277 Debt issued in acquisitions......................... 21,325 26,467 114,609 Conversion of preferred securities of SCI Finance LLC............................................... 167,911 -- -- </TABLE> 48
50 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE SIXTEEN EARNINGS PER SHARE In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share". All prior periods presented have been restated to conform to this new standard. A reconciliation of the numerators and denominators of the basic and diluted per share computations for income before extraordinary item follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> Income (numerator): Income before extraordinary item -- basic........ $374,552 $265,298 $183,588 After tax interest on convertible debentures..... 4,611 8,031 13,384 -------- -------- -------- Income before extraordinary item -- diluted...... $379,163 $273,329 $196,972 ======== ======== ======== Shares (denominator): Shares -- basic.................................. 245,470 235,299 199,603 Stock options and warrants.................... 4,827 3,919 3,709 Convertible debentures........................ 2,212 2,187 15,190 Convertible preferred securities of SCI Finance LLC................................. 5,272 11,465 11,465 -------- -------- -------- Shares -- diluted................................ 257,781 252,870 229,967 ======== ======== ======== Earnings per share before extraordinary item: Basic............................................ $ 1.53 $ 1.13 $ .92 Diluted.......................................... $ 1.47 $ 1.08 $ .86 ======== ======== ======== </TABLE> NOTE SEVENTEEN QUARTERLY FINANCIAL DATA (UNAUDITED) <TABLE> <CAPTION> FIRST* SECOND THIRD FOURTH YEAR -------- -------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> Revenues: 1997............................. $638,449 $601,141 $584,818 $643,994 $2,468,402 1996............................. 575,453 564,749 544,500 609,492 2,294,194 Gross profit: 1997............................. 188,152 163,183 151,772 184,505 687,612 1996............................. 160,168 144,063 131,378 168,843 604,452 Net income: 1997............................. 90,345 78,801 72,724 91,880 333,750 1996............................. 71,897 62,250 57,395 73,756 265,298 Basic earnings per share: 1997............................. .38 .33 .29 .36 1.36 1996............................. .31 .26 .25 .31 1.13 Diluted earnings per share: 1997............................. .36 .31 .28 .36 1.31 1996............................. .29 .25 .24 .30 1.08 </TABLE> - --------------- * The quarter ended March 31, 1997 includes (1) a $68,100 gain ($42,000 after tax) on the sale of the Company's interest in ECI and (2) a $40,802 extraordinary loss (net of tax) on the early extinguishment of debt. 49
51 SERVICE CORPORATION INTERNATIONAL SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1997 <TABLE> <CAPTION> BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) OF PERIOD ----------- ---------- ---------- ----------- ------------- --------- (THOUSANDS) <S> <C> <C> <C> <C> <C> Current -- Allowance for contract cancellations and doubtful accounts: Year ended December 31, 1997.... $45,155 $23,400 $ 5,333 $(21,291) $ 52,597 Year ended December 31, 1996.... 34,147 14,187 6,638 (9,817) 45,155 Year ended December 31, 1995.... 20,156 8,853 10,904 (5,766) 34,147 Due After One Year -- Allowance for contract cancellations and doubtful accounts: Year ended December 31, 1997.... $29,951 $ 6,202 $ 1,123 $ (1,312) $ 35,964 Year ended December 31, 1996.... 23,298 3,072 3,581 -- 29,951 Year ended December 31, 1995.... 16,086 2,999 4,689 (476) 23,298 </TABLE> - --------------- (1) Uncollected receivables written off, net of recoveries. (2) Primarily acquisitions and dispositions of operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information called for by PART III (Items 10, 11, 12 and 13) has been omitted as the Company intends to file with the Commission not later than 120 days after the close of its fiscal year a definitive Proxy Statement pursuant to Regulation 14A. Such information is set forth in such Proxy Statement (i) with respect to Item 10 under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", (ii) with respect to Items 11 and 13 under the captions "Certain Information with Respect to Officers and Directors", "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" and (iii) with respect to Item 12 under the caption "Voting Securities and Principal Holders." The information as specified in the preceding sentence is incorporated herein by reference. Notwithstanding anything set forth in this Form 10-K, the information under the caption "Compensation Committee Report on Executive Compensation" and under the captions "Overview of Executive Compensation" and "Performance Graph" in such Proxy Statement are not incorporated by reference into this Form 10-K. The information regarding the Company's executive officers called for by Item 401 of Regulation S-K has been included in PART I of this report. 50
52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1)-(2) Financial Statements and Schedule: The financial statements and schedule are listed in the accompanying Index to Financial Statements and Related Schedule on page 21 of this report. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index on pages 54-56 are filed as part of this report. (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended December 31, 1997. (c) Included in (a) above. (d) Included in (a) above. 51
53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Service Corporation International, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERVICE CORPORATION INTERNATIONAL Dated: March 27, 1998 By: JAMES M. SHELGER ------------------------------------- (James M. Shelger, Senior Vice President, General Counsel and Secretary) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <C> <S> <C> R. L. WALTRIP* Chairman of the Board and Chief March 27, 1998 - ----------------------------------------------------- Executive Officer (R. L. Waltrip) GEORGE R. CHAMPAGNE* Senior Vice President Chief Financial March 27, 1998 - ----------------------------------------------------- Officer (Principal Financial (George R. Champagne) Officer) WESLEY T. MCRAE Corporate Controller of SCI March 27, 1998 - ----------------------------------------------------- Management Corporation, a (Wesley T. McRae) subsidiary of the Registrant (Principal Accounting Officer) ANTHONY L. COELHO* Director March 27, 1998 - ----------------------------------------------------- (Anthony L. Coelho) DOUGLAS M. CONWAY* Director March 27, 1998 - ----------------------------------------------------- (Douglas M. Conway) JACK FINKELSTEIN* Director March 27, 1998 - ----------------------------------------------------- (Jack Finkelstein) A. J. FOYT, JR.* Director March 27, 1998 - ----------------------------------------------------- (A. J. Foyt, Jr.) JAMES J. GAVIN, JR.* Director March 27, 1998 - ----------------------------------------------------- (James J. Gavin, Jr.) JAMES H. GREER* Director March 27, 1998 - ----------------------------------------------------- (James H. Greer) L. WILLIAM HEILIGBRODT* Director March 27, 1998 - ----------------------------------------------------- (L. William Heiligbrodt) </TABLE> 52
54 <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <C> <S> <C> B. D. HUNTER* Director March 27, 1998 - ----------------------------------------------------- (B. D. Hunter) JOHN W. MECOM, JR.* Director March 27, 1998 - ----------------------------------------------------- (John W. Mecom, Jr.) CLIFTON H. MORRIS, JR.* Director March 27, 1998 - ----------------------------------------------------- (Clifton H. Morris, Jr.) E. H. THORNTON, JR.* Director March 27, 1998 - ----------------------------------------------------- (E. H. Thornton, Jr.) W. BLAIR WALTRIP* Director March 27, 1998 - ----------------------------------------------------- (W. Blair Waltrip) EDWARD E. WILLIAMS* Director March 27, 1998 - ----------------------------------------------------- (Edward E. Williams) * By JAMES M. SHELGER ------------------------------------------------- (James M. Shelger, as Attorney-In-Fact For each of the Persons indicated) </TABLE> 53
55 EXHIBIT INDEX PURSUANT TO ITEM 601 OF REG. S-K <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <C> <S> 3.1 -- Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-10867 on Form S-3). 3.2 -- Articles of Amendment to Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996). 3.3 -- Statement of Resolution Establishing Series of Shares of Series C junior Participating Preferred Stock, dated August 5, 1988. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended July 31, 1988). 3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit 3.7 to Form 10-K for the fiscal year ended December 31, 1991). 4.1 -- Rights Agreement dated as of July 18, 1988 between the Company and Texas Commerce Bank National Association. (Incorporated by reference to Exhibit 1 to Form 8-K dated July 18, 1988). 4.2 -- Amendment, dated as of May 10, 1990, to the Rights Agreement, dated as of July 18, 1988, between the Company and Texas Commerce Bank National Association. (Incorporated by reference to Exhibit 1 to Form 8-K dated May 10, 1990). 4.3 -- Agreement Appointing a Successor Rights Agent under Rights Agreement, dated as of June 1, 1990, by the Company and Ameritrust Company National Association. (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 1990). 4.4 -- Undertaking to furnish instruments related to long-term debt. 10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.1 to Form 10-K for the fiscal year ended December 31, 1991). 10.2 -- Agreement dated May 14, 1992 between the Company, R. L. Waltrip and related parties relating to life insurance. (Incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended December 31, 1992). 10.3 -- Employment Agreement, dated November 11, 1991, as amended and restated as of August 12, 1992, further amended and restated as of May 12, 1993, and further amended and restated as of January 1, 1997, between SCI Executive Services, Inc. and R. L. Waltrip. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended December 31, 1996). 10.4 -- Non-Competition Agreement and Amendment to Employment Agreement, dated November 11, 1991, among the Company, R. L. Waltrip and Claire Waltrip. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 1992). 10.5 -- Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and L. William Heiligbrodt. 10.6 -- Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and W. Blair Waltrip. 10.7 -- Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and John W. Morrow, Jr. </TABLE> 54
56 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <C> <S> 10.8 -- Employment Agreement, dated November 11, 1991, as amended and restated as of August 12, 1992, further amended and restated as of May 12, 1993, and further amended and restated as of January 1, 1995, between Service Corporation International and Jerald L. Pullins. 10.9 -- Form of Employment Agreement pertaining to officers (other than the officers identified in the preceding exhibits). 10.10 -- Form of 1986 Stock Option Plan. (Incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended December 31, 1991). 10.11 -- Amendment to 1986 Stock Option Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 1996). 10.12 -- Amendment to 1986 Stock Option Plan, dated November 13, 1997. 10.13 -- Amended 1987 Stock Plan. (Incorporated by reference to Appendix A to Proxy Statement dated April 1, 1991). 10.14 -- First Amendment to Amended 1987 Stock Plan. (Incorporated by reference to Exhibit 10.23 to Form 10-K for the fiscal year ended December 31, 1993). 10.15 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4.12 to Registration Statement No. 333-00179 on Form S-8). 10.16 -- Amendment to 1993 Long-Term Incentive Stock Option Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.15 to Form 10-K for the fiscal year ended December 31, 1996). 10.17 -- Amendment to 1993 Long-Term Incentive Stock Option Plan, dated November 13, 1997. 10.18 -- Service Corporation International ECI Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 1994). 10.19 -- 1995 Incentive Equity Plan. (Incorporated by reference to Annex B to Proxy Statement dated April 17, 1995). 10.20 -- Amendment to 1995 Incentive Equity Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year ended December 31, 1996). 10.21 -- Amendment to 1995 Incentive Equity Plan, dated November 13, 1997. 10.22 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated by reference to Annex A to Proxy Statement dated April 17, 1995). 10.23 -- 1996 Incentive Plan. (Incorporated by reference to Annex A to Proxy Statement dated April 15, 1996). 10.24 -- Amendment to 1996 Incentive Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.22 to Form 10-K for the fiscal year ended December 31, 1996). 10.25 -- Amendment to 1996 Incentive Plan, dated November 13, 1997. 10.26 -- Split Dollar Life Insurance Plan. (Incorporated by reference to Exhibit 10.36 to Form 10-K for the fiscal year ended December 31, 1995). </TABLE> 55
57 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <C> <S> 10.27 -- Agreement for Reorganization, dated August 15, 1989 among Morrow Partners, Inc., J.W. Morrow Investment Company, John W. Morrow Jr., Billy Dee Davis and the Company; Agreement-Not-To-Compete, dated August 15, 1989, between John W. Morrow, Jr., Morrow Partners, Inc. and the Company, and; Lease dated August 15, 1989, by John W. Morrow, Jr. and Crawford A. Crim Funeral Home, Inc. (Incorporated by reference to Exhibit 10.27 to Form 10-K for the fiscal year ended December 31, 1989). 10.28 -- Supplemental Executive Retirement Plan for Senior Officers (as Amended and Restated Effective as of December 31, 1993). (Incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended December 31, 1993). 10.29 -- First Amendment to Supplemental Executive Retirement Plan for Senior Officers. (Incorporated by reference to Exhibit 10.26 to Form 10-K for the fiscal year ended December 31, 1994). 10.30 -- Second Amendment to Supplemental Executive Retirement Plan for Senior Officers. (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 1997). 10.31 -- Deferred Compensation Plan. 10.32 -- Second Supplemental Indenture, dated January 19, 1996, between the Company and Texas Commerce Bank National Association regarding Indenture dated May 1, 1970. 12.1 -- Ratio of Earnings to Fixed Charges. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Independent Accountants (Coopers & Lybrand L.L.P.). 24.1 -- Powers of Attorney. 27 -- Financial Data Schedules. </TABLE> In the above list, the management contracts or compensatory plans or arrangements are set forth in Exhibits 10.1 through 10.26 and 10.28 through 10.31. 56