FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 or ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6402-1 -------------------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in charter) Texas 74-1488375 (State or other jurisdiction of (I. R. S. employer identification incorporation or organization) number) 1929 Allen Parkway, Houston, Texas 77019 (Address of principal executive offices) (Zip code) (713) 522-5141 (Registrant's telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. YES X NO The number of shares outstanding of the registrant's common stock as of August 10, 1998, was 257,260,158 (excluding treasury shares).
SERVICE CORPORATION INTERNATIONAL INDEX <TABLE> <CAPTION> <S> <C> Page Part I Financial Information Consolidated Statement of Income (Unaudited) - Three and Six Months Ended June 30, 1998 and 1997 3 Consolidated Balance Sheet - June 30, 1998 (Unaudited) and December 31, 1997 4 Consolidated Statement of Cash Flows (Unaudited) - Six Months Ended June 30, 1998 and 1997 5 Consolidated Statement of Stockholders' Equity (Unaudited) - Six Months Ended June 30, 1998 6 Notes to the Consolidated Financial Statements (Unaudited) 7 - 12 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 21 PartII Other Information 22 Signature 22 2 </TABLE>
SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended (Dollars in thousands, June 30, June 30, except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues..................... $ 671,904 $ 601,141 $1,354,588 $1,239,590 Costs and expenses........... (484,214) (437,958) (950,770) (888,255) --------- --------- ---------- ---------- Gross profit................. 187,690 163,183 403,818 351,335 General and administrative expenses.................... (17,251) (15,812) (34,259) (32,440) --------- --------- ---------- ---------- Income from operations....... 170,439 147,371 369,559 318,895 Interest expense............. (40,464) (33,093) (78,174) (67,631) Dividends on preferred securities of SCI Finance LLC................. - (1,753) - (4,382) Other income................. 10,528 8,765 17,179 11,855 Gain on sale of investment... - - - 68,077 --------- --------- ---------- ---------- (29,936) (26,081) (60,995) 7,919 --------- --------- ---------- ---------- Income before income taxes and extraordinary loss.......... 140,503 121,290 308,564 326,814 Provision for income taxes... (49,555) (42,489) (108,830) (116,866) --------- --------- ---------- ---------- Income before extraordinary loss........................ 90,948 78,801 199,734 209,948 Extraordinary loss on early extinguishment of debt (net of income taxes of $23,383)........... - - - (40,802) --------- --------- ---------- ---------- Net income................... $ 90,948 $ 78,801 $ 199,734 $ 169,146 ========= ========= ========== ========== Earnings per share: Basic: Income before extraordinary loss........ $ .36 $ .33 $ .78 $ .88 Extraordinary loss on early extinguishment of debt.... - - - (.17) --------- --------- ---------- ---------- Net income................. $ .36 $ .33 $ .78 $ .71 ========= ========= ========== ========== Diluted: Income before extraordinary loss........ $ .35 $ .31 $ .77 $ .83 Extraordinary loss on early extinguishment of debt.... - - - (.16) --------- --------- ---------- ---------- Net income................. $ .35 $ .31 $ .77 $ .67 ========= ========= ========== ========== Dividends per share.......... $ .09 $ .08 $ .18 $ .15 ========= ========= ========== ========== Basic weighted average number of shares............ 255,004 240,872 254,820 239,068 ========= ========= ========== ========== Diluted weighted average number of shares............ 261,740 257,695 261,754 256,616 ========= ========= ========== ========== </TABLE> (See notes to consolidated financial statements) 3
SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> June 30, 1998 December 31, (Dollars in thousands, except per share amounts) (Unaudited) 1997 - ------------------------------------------------------------------------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents.......................... $ 75,526 $ 46,877 Receivables, net of allowances..................... 580,011 557,481 Inventories........................................ 183,920 172,169 Other.............................................. 46,188 34,881 ----------- ----------- Total current assets.............................. 885,645 811,408 ----------- ----------- Investments - insurance subsidiary.................... 640,962 574,728 Prearranged funeral contracts ........................ 2,754,034 2,610,632 Long-term receivables ................................ 1,107,684 981,121 Cemetery property, at cost............................ 1,761,443 1,636,859 Property, plant and equipment, at cost (net).......... 1,718,685 1,644,137 Deferred charges and other assets..................... 670,281 549,862 Names and reputations (net)........................... 1,705,928 1,498,116 ----------- ----------- $11,244,662 $10,306,863 =========== =========== Liabilities & Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities........... $ 368,256 $ 425,631 Current maturities of long-term debt............... 68,338 64,570 Income taxes ...................................... 88,612 45,241 ----------- ----------- Total current liabilities......................... 525,206 535,442 ----------- ----------- Long-term debt........................................ 3,077,286 2,634,699 Deferred income taxes................................. 732,650 701,221 Other liabilities .................................... 572,523 546,140 Deferred prearranged funeral contract revenues ....... 3,400,012 3,163,357 Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 257,186,137 and 252,923,784, respectively, issued and outstanding............................ 257,186 252,924 Capital in excess of par value..................... 1,534,730 1,493,246 Retained earnings.................................. 1,136,891 983,353 Accumulated other comprehensive income............. 8,178 (3,519) ----------- ----------- Total stockholders' equity........................ 2,936,985 2,726,004 ----------- ----------- $11,244,662 $10,306,863 =========== =========== </TABLE> (See notes to consolidated financial statements) 4
SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, (Dollars in thousands) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Cash flows from operating activities: Net income........................................... $ 199,734 $ 169,146 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 85,512 75,063 Provision for deferred income taxes............... 19,661 24,789 Extraordinary loss on early extinguishment of debt, net of income taxes........................ - 40,802 Gains from dispositions (net)..................... (9,748) (76,645) Change in assets and liabilities, net of effects from acquisitions: (Increase) in receivables........................ (116,546) (60,474) (Increase) decrease in other assets.............. (24,285) 15,426 (Decrease) in payables and other liabilities .... (7,966) (27,036) Other............................................ 7,541 11,232 ----------- ---------- Net cash provided by operating activities ........... 153,903 172,303 ----------- ---------- Cash flows from investing activities: Capital expenditures.............................. (117,705) (118,163) Change in prearranged funeral balances............ 44,737 (32,503) Purchases of securities - insurance subsidiary.... (318,800) (589,778) Sales of securities - insurance subsidiary........ 305,554 582,122 Proceeds from sales of property and equipment..... 16,663 11,585 Acquisitions, net of cash acquired................ (366,823) (190,692) Loans issued by finance subsidiary................ (66,564) (50,638) Principal payments received on loans by finance subsidiary....................................... 48,882 5,418 Proceeds from sale of equity investment........... - 147,739 Purchases of equity investments................... (3,836) (20,360) Other............................................. (7,205) (10,281) ----------- ---------- Net cash (used in) investing activities.............. (465,097) (265,551) ----------- ---------- Cash flows from financing activities: (Decrease) in borrowings under revolving credit agreements................................ (68,952) (37,349) Long-term debt issued............................. 500,000 650,000 Payments of debt.................................. (32,722) (35,877) Early extinguishment of debt...................... - (449,998) Dividends paid.................................... (42,007) (32,136) Bank overdrafts and other......................... (16,476) (13,966) ----------- ---------- Net cash provided by financing activities............ 339,843 80,674 ----------- ---------- Net increase (decrease) in cash and cash equivalents. 28,649 (12,574) Cash and cash equivalents at beginning of period..... 46,877 44,131 ----------- ---------- Cash and cash equivalents at June 30, 1998 and 1997..$ 75,526 $ 31,557 =========== ========== Cash used for: Interest..........................................$ 86,047 $ 81,807 ========== ========== Taxes............................................. 74,155 74,769 ========== ========== Non-cash investing and financing transactions: Common stock issued in acquisitions............... $ 28,896 $ 43,499 ========== ========== Debt issued in acquisitions....................... 19,060 4,771 ========== ========== Debenture conversions to common stock............. 2,238 5,127 ========== ========== Conversion of preferred securities of SCI Finance LLC.................................. - 167,911 ========== ========== </TABLE> (See notes to consolidated financial statements) 5
SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Capital in Accum. excess other (Dollars in thousands, Common of par Retained compre. except per share amounts) stock value earnings income Total - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 1997........$ 252,924 $1,493,246 $ 983,353 $(3,519) $2,726,004 Comprehensive income: Net income.............. 199,734 199,734 Other comprehensive income: Foreign currency translation............ 6,663 Unrealized gain on securities............. 5,034 ---------- Total other comprehensive income................... 11,697 11,697 ---------- Comprehensive income...... 211,431 Common stock issued: Stock option exercises and stock grants........ 3,409 11,203 14,612 Acquisitions............ 687 28,209 28,896 Debenture conversions... 166 2,072 2,238 Dividends on common stock ($.18 per share)......... (46,196) (46,196) -------- ---------- ---------- ------- ---------- Balance at June 30, 1998.. $ 257,186 $1,534,730 $1,136,891 $ 8,178 $2,936,985 ========= ========== =========== ======= ========== </TABLE> (See notes to consolidated financial statements) 6
SERVICE CORPORATION INTERNATIONAL NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) (Unaudited) 1. Nature of Operations The Company is the largest provider of death care services in the world. At June 30, 1998, the Company operated 3,292 funeral service locations, 422 cemeteries and 174 crematoria located in 18 countries on five continents. The funeral service locations and cemetery operations consist of the Company's funeral homes, cemeteries, crematoria and related businesses. Company personnel at the funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral related merchandise is sold at funeral service locations and certain funeral service locations contain crematoria. The Company sells prearranged funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company's cemeteries provide cemetery interment rights (including mausoleum spaces and lawn crypts) and certain merchandise including stone and bronze memorials and burial vaults. These items are sold on an at need or preneed basis. Company personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries also contain crematoria. There are 152 combination locations that contain a funeral service location within a company owned cemetery. The Company's financial services operations consist of a finance subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital financing to independent funeral home and cemetery operators. The Company recently announced its intentions to combine management of its prearranged funeral marketing, funeral and cemetery trust administration, investments, life insurance operations (see note ten) and Provident into a reorganized financial services segment. 2. Summary of Significant Accounting Policies Basis of Presentation: The consolidated financial statements for the six months ended June 30, 1998 and 1997 include the accounts of Service Corporation International and all majority-owned subsidiaries (the "Company") and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments which management considers necessary for a fair presentation of the results for these periods. These financial statements have been prepared consistent with the accounting policies described in the annual report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") for the year ended December 31, 1997 and should be read in conjunction therewith. Certain reclassifications have been made to the prior period to conform to the current period presentation with no effect on previously reported net income, financial condition and cash flows. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. 3. Acquisitions The Company acquired 167 funeral service locations, 31 cemeteries and 8 crematoria during the six months ended June 30, 1998 (136 funeral service locations, 22 cemeteries and one crematory during the six months ended June 30, 1997). The consideration for these acquisitions consisted of combinations of cash, common stock of the Company and issued or assumed debt. The operating results of all of these acquisitions have been included since their respective dates of acquisitions. 7
The effect of acquisitions on the consolidated balance sheet at June 30, was as follows: <TABLE> <CAPTION> 1998 1997 - ---------------------------------------------------------------------------- <S> <C> <C> Current assets................................... $ 22,021 $ 8,180 Prearranged funeral contracts.................... 38,093 52,346 Long-term receivables............................ 23,820 11,881 Cemetery property................................ 81,306 179,829 Property, plant and equipment.................... 44,736 59,929 Deferred charges and other assets................ 84,587 14,604 Names and reputations............................ 237,915 70,507 Current liabilities.............................. (23,353) (23,977) Long-term debt................................... (46,972) (19,612) Deferred income taxes and other liabilities...... (29,083) (51,698) Deferred prearranged funeral contract revenues... (35,836) (67,798) Stockholders' equity............................. (30,411) (43,499) --------- -------- Cash used for acquisitions................. $ 366,823 $190,692 ========= ======== </TABLE> 4. Prearranged Funeral Activities The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are generally placed in trust (pursuant to state law) or are used to pay premiums on life insurance policies issued by third party insurers in North America, the United Kingdom and Australia or the Company's French prearranged funeral service life insurance subsidiary, "Auxia". Unperformed price guaranteed prearranged funeral contracts are included in the consolidated balance sheet as "prearranged funeral contracts" or, in the case of contracts funded by Auxia, "investments-insurance subsidiary." A corresponding credit is recorded to "deferred prearranged funeral contract revenues." Allowances for customer cancellations are provided at the date of sale based on historical experience. Amounts paid by the customer pursuant to the prearranged funeral contracts are recognized in funeral revenue at the time the funeral is performed. Trust earnings and increasing insurance benefits are accrued and deferred until the service is performed at which time these funds are also recognized in funeral revenues and are intended to cover future increases in the cost of providing a price guaranteed funeral service. Included in deferred prearranged funeral contract revenues are net obtaining costs, including sales commissions and certain other direct marketing costs, applicable to prearranged funeral contracts which are deferred and will be expensed over a period representing the actuarially determined life of the prearranged contract. The recognition of future funeral revenues is estimated to occur in the following years: <TABLE> <CAPTION> <S> <C> 1998 (remaining six months).............. $ 180,969 1999..................................... 279,228 2000..................................... 261,198 2001..................................... 246,066 2002..................................... 231,495 2003 and through 2007.................... 860,905 2008 and thereafter...................... 1,340,151 ---------- $3,400,012 ========== </TABLE> 8
5. Debt Debt at June 30, 1998 and December 31, 1997, was as follows: <TABLE> <CAPTION> June 30, December 31, 1998 1997 -------------------------------- <S> <C> <C> Bank revolving credit agreements and commercial paper........................ $ 544,562 $ 588,539 6.375% notes due in 2000................. 150,000 150,000 6.75% notes due in 2001.................. 150,000 150,000 8.72% amortizing notes due in 2002....... 127,970 141,108 8.375% notes due in 2004................. 51,840 51,840 7.375% notes due in 2004................. 250,000 250,000 7.2% notes due in 2006................... 150,000 150,000 6.875% notes due in 2007................. 150,000 150,000 6.5% notes due in 2008................... 200,000 - 7.70% notes due in 2009.................. 200,000 200,000 6.95% amortizing notes due in 2010....... 57,178 58,859 Floating rate notes due in 2011 (putable in 1999)....................... 200,000 200,000 7.875% debentures due in 2013............ 55,627 55,627 7.0% notes due in 2015 (putable in 2002). 300,000 300,000 6.3% notes due in 2020 (putable in 2003). 300,000 - Medium term notes, maturities through 2019, fixed average interest rate of 9.32%................. 35,720 35,720 Convertible debentures, interest rates range from 4.75% - 5.5%, due through 2008, conversion price ranges from $11.25 - $45.69............ 47,735 45,673 Mortgage notes and other debt with maturities through 2015................ 185,892 184,981 Deferred loan costs...................... (10,900) (13,078) ---------- ---------- Total debt............................... 3,145,624 2,699,269 ---------- ---------- Less current maturities.................. (68,338) (64,570) ---------- ---------- Total long-term debt................ $3,077,286 $2,634,699 ========== ========== </TABLE> The Company's primary revolving credit agreement provides for borrowings up to $1,000,000 and consists of two committed facilities -- a 364-day facility and a 5-year, multi-currency facility - which are primarily used to support commercial paper issuance and for general corporate needs. The 364-day facility allows for borrowings up to $300,000. This facility expires June 26, 1999, but has provisions to be extended for additional 364-day terms. At the end of any term, the outstanding balance may be converted into a two-year term loan at the Company's option. Interest rates are based on various indices as determined by the Company. In addition, a facility fee of 0.08% is paid quarterly on the total commitment amount. The 5-year facility allows for borrowings up to $700,000, including $500,000 in various foreign currencies. This facility expires June 27, 2002. Interest rates on this facility are based on various indices as determined by the Company. In addition, a facility fee is paid quarterly on the total commitment amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the Company's senior debt ratings and is currently set at 0.08%. At June 30, 1998, there was approximately $189,000 of revolving notes outstanding under this facility at a weighted average interest rate of 6.45%. As of June 30, 1998, there was approximately $356,000 of commercial paper outstanding backed by the above two facilities at a weighted average interest rate of 6.06%. The credit facilities described above have financial compliance provisions that contain certain restrictions on levels of net worth, debt, liens, and guarantees. The Company's outstanding commercial paper and other borrowings under its various credit facilities are classified as long-term debt, since it is the Company's intent to refinance such borrowings through long-term notes and/or equity offerings. 9
The timing of any debt or equity offering is dependent on numerous factors including market conditions, long and short term interest rates, the Company's capitalization ratios and the outstanding balances under the revolving credit facilities. In March of 1998, the Company issued two senior note securities. The first note issued was a $200,000, 10-year, non-callable security with a 6.5% coupon, due in March of 2008. The second note was a $300,000, 22-year security due in March of 2020. This security is subject to mandatory tender to a remarketing agent in March of 2003 and in March of 2010. The coupon on this issue is 6.30%. The proceeds of this offering were primarily used to repay existing debt outstanding under the Company's revolving credit agreeements. 6. Derivatives The Company enters into derivatives primarily in the form of interest rate swaps to manage its mix of fixed and floating rate debt, and cross-currency interest rate swaps in combination with local currency to substantially hedge the Company's net investment in foreign assets. The Company has procedures in place to monitor and control the use of derivatives and only enters into transactions with a limited group of credit-worthy financial institutions. The Company does not engage in derivative transactions for speculative or trading purposes, nor is it a party to leveraged transactions. At June 30, 1998, after giving consideration to the interest rate and cross-currency swaps, the Company's debt (excluding Provident debt) consists of approximately 68% of fixed interest rate debt at a weighted average rate of 6.32% and approximately 32% of floating interest rate debt at a weighted average rate of 5.85%. Approximately $1,692,000 of the Company's debt has been converted from US dollar denominated debt to foreign currency denominated debt as the result of cross-currency swaps. Including these swaps, foreign denominated debt totals $1,949,000. The net fair value of the Company's various swap agreements at June 30, 1998, was an asset of $162,000. Fair values were obtained from counterparties to the agreements and represent their estimate of the net amount the Company would receive to terminate the swap agreements based upon the existing terms and current market conditions. 7. Ratio of Earnings to Fixed Charges <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 ---------------- <S> <C> 4.27 4.66 </TABLE> For purposes of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes, less undistributed income of equity investees which are less than 50% owned, plus the minority interest of majority-owned subsidiaries with fixed charges and plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense, whether capitalized or expensed, amortization of debt costs, dividends on preferred securities of SCI Finance LLC and one-third of rental expense which the Company considers representative of the interest factor in the rentals. The decrease in the Company's ratio of earnings to fixed charges is primarily attributable to the 1997 gain on the sale of a Company investment. 10
8. Geographic Segment Information The Company conducts funeral and cemetery operations in 18 countries and offers financial services in the United States. Geographic segment information was as follows: <TABLE> <CAPTION> United Other Other States France European Foreign - ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues: Three months ended June 30: 1998......................... $ 422,945 $140,679 $ 62,762 $ 45,600 1997......................... 390,830 119,433 50,039 41,192 Six months ended June 30: 1998......................... $ 875,971 $263,607 $126,476 $ 88,996 1997......................... 794,112 253,047 111,352 82,036 Income from operations: Three months ended June 30: 1998......................... $ 132,265 $ 18,426 $ 9,443 $ 10,305 1997......................... 115,627 12,907 7,957 10,880 Six months ended June 30: 1998......................... $ 294,379 $ 30,882 $ 23,205 $ 21,093 1997......................... 242,082 28,400 24,655 23,758 Funeral services performed: Three months ended June 30: 1998......................... 57,030 37,321 28,206 12,849 1997......................... 56,271 34,899 22,987 12,238 Six months ended June 30: 1998......................... 123,099 76,097 57,536 26,149 1997......................... 118,235 76,486 52,759 24,478 Number of locations at June 30: 1998......................... 1,638 1,163 780 307 1997......................... 1,514 1,087 658 274 </TABLE> 11
9. Earnings Per Share A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations are presented below: <TABLE> <CAPTION> Three Months ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Income (numerator): Income before extraordinary item - basic...$ 90,948 $ 78,801 $199,734 $209,948 After tax interest on convertible debentures...... 399 1,838 770 3,916 -------- -------- -------- -------- Income before extraordinary item - diluted.$ 91,347 $ 80,639 $200,504 $213,864 - -------------------------------------------------------------------------------- Shares (denominator): Shares - basic.............. 255,004 240,872 254,820 239,068 Stock options and warrants 4,593 5,022 4,792 4,699 Convertible debentures...... 2,143 9,705 2,142 2,294 Convertible preferred securities of SCI Finance LLC................ - 2,096 - 10,555 -------- ------- -------- -------- Shares - diluted............ 261,740 257,695 261,754 256,616 - -------------------------------------------------------------------------------- Earnings per share before extraordinary item: Basic...................... $ .36 $ .33 $ .78 $ .88 Diluted.................... $ .35 $ .31 $ .77 $ .83 - -------------------------------------------------------------------------------- </TABLE> 10.Subsequent Events On July 17, 1998, the Company announced its plans to acquire the pre-need funeral division of American Annuity Group Inc. (AAG) of Cincinnati, Ohio for $164,000 in cash. AAG offers a variety of pre-need and final expense life insurance and annuity products to finance prearranged funerals. AAG will become part of the Company's new financial services segment. On August 6, 1998, the Company announced that it has reached a definitive agreement with Equity Corporation International (ECI) to form a business combination between the two companies. ECI, the nation's fourth largest publicly traded death care company, currently owns 326 funeral homes and 81 cemeteries in 35 U.S. states and one Canadian province. The combination would occur through a stock-for-stock transaction that would result in ECI shareholders receiving common shares of the Company with a value of approximately $578,000. Both of the above transactions are subject to regulatory approval and, in the case of ECI, an affirmative vote of ECI shareholders. Both transactions are expected to close in the fourth quarter of 1998. 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except average sales prices) Overview: The majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. Clusters are established primarily in metropolitan areas to take advantage of operational efficiencies, particularly the sharing of operating expenses such as service personnel, vehicles, preparation services, clerical staff and certain building facility costs. Personnel costs, the largest operating expense for the Company, is the cost component most beneficially affected by clustering. The sharing of employees, as well as the other costs mentioned, allow the Company to more efficiently utilize its operating facilities due to the traditional fluctuation in the number of funeral services and cemetery interments performed in a given period. The Company's acquisitions are primarily located within existing cluster areas or create new cluster area opportunities. The Company has approximately 400 clusters, which range in size from two operations to 65 operations. There may be more than one cluster in a given metropolitan area, depending upon the level and degree of shared costs. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Results of Operations: Segment information for the Company's three lines of business was as follows: <TABLE> <CAPTION> Six Months Ended June 30, Percentage 1998 1997 Increase Increase ---------------------------------------------------- <S> <C> <C> <C> <C> Revenues: Funeral............. $ 922,621 $ 876,355 $ 46,266 5.3 % Cemetery............ 422,307 355,529 66,778 18.8 Financial services.. 9,660 7,706 1,954 25.4 --------- ---------- ------- 1,354,588 1,239,590 114,998 9.3 Costs and expenses: Funeral............. 695,283 662,155 33,128 5.0 Cemetery............ 250,327 221,886 28,441 12.8 Financial services.. 5,160 4,214 946 22.4 --------- --------- -------- 950,770 888,255 62,515 7.0 Gross profit and margin percentage: Funeral............. 227,338 24.6% 214,200 24.4% 13,138 6.1 Cemetery............ 171,980 40.7 133,643 37.6 38,337 28.7 Financial services.. 4,500 46.6 3,492 45.3 1,008 28.9 --------- --------- -------- $ 403,818 29.8% $ 351,335 28.3% $ 52,483 14.9 % ========= ========= ======== </TABLE> 13
Funeral Funeral revenues were as follows: <TABLE> <CAPTION> Percentage Six Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States...............$481,859 $457,392 $24,467 5.3 % France...................... 263,145 252,089 11,056 4.4 Other European.............. 98,623 98,354 269 0.3 Other foreign............... 53,709 57,045 (3,336) (5.8) -------- -------- ------- 897,336 864,880 32,456 3.8 New clusters:* United States............... 3,916 1,416 2,500 Other European.............. 16,073 1,102 14,971 Other foreign............... 2,225 444 1,781 -------- -------- ------- 22,214 2,962 19,252 Non-cluster and disposed operations.................... 3,071 8,513 (5,442) -------- -------- ------- Total funeral revenues......$922,621 $876,355 $46,266 5.3 % ======== ======== ======= </TABLE> The $32,456 increase in revenues from existing clusters was the result of a 3.2% higher average sales price ($3,320 compared to $3,218), combined with a 0.5% increase in the number of funeral services performed (270,251 compared to 268,776). Acquisitions since January 1, 1997, included in existing clusters, contributed $48,932 to the existing cluster revenue increase, while locations acquired before 1997 had a decline of $16,476 due primarily to fewer funeral services performed. French funeral revenues increased $11,056 caused primarily by an increase in the number of funeral services performed. During the six months ended June 30, 1998, the Company sold $274,749 of prearranged funeral services compared to $274,019 for the same period in 1997. Funeral costs and expenses were as follows: <TABLE> <CAPTION> Percentage Six Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States............. $300,962 $291,589 $ 9,373 3.2 % France.................... 223,484 215,699 7,785 3.6 Other European............ 78,683 74,770 3,913 5.2 Other foreign............. 39,373 39,458 (85) (0.2) -------- -------- -------- 642,502 621,516 20,986 3.4 New clusters:* United States............. 2,738 953 1,785 Other European............ 12,863 820 12,043 Other foreign............. 1,692 334 1,358 -------- -------- -------- 17,293 2,107 15,186 Non-cluster and disposed operations.................. 6,210 9,399 (3,189) Administrative overhead...... 29,278 29,132 146 0.5 -------- -------- -------- Total funeral costs and expense................ $695,283 $662,154 $ 33,129 5.0 % ======== ======== ======== </TABLE> - --------------------- * Represents new geographic cluster areas entered into since January 1, 1997 for the period that those businesses were owned by the Company. 14
The $20,986 increase in costs and expenses from existing clusters is primarily the result of a period to period increase in the total number of funeral services performed. Acquisitions since January 1, 1997, included in existing clusters, reported $37,689 of increased costs, while existing locations acquired before 1997 had a $16,703 cost decrease. The gross profit margin for existing clusters increased to 28.4% in 1998, from 28.1% in 1997. Typically, acquisitions will temporarily exhibit slightly lower gross profit margins than those experienced by the Company's existing locations at least until such time as these locations are assimilated into the Company's cluster management strategy. The overall funeral gross profit margin percentage improved in 1998 to 24.6%, compared to 24.4% in 1997. Contributing to this period to period improvement were the Company's North American and French operations, offset by lower gross profit margins from the Company's other foreign operations. Administrative overhead costs, expressed as a percentage of total funeral revenues, decreased slightly to 3.2%, compared to 3.3% in 1997. Cemetery Cemetery revenues were as follows: <TABLE> <CAPTION> Percentage Six Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States............ $369,331 $313,858 $55,473 17.7 % Other European........... 10,093 10,888 (795) (7.3) Other foreign............ 23,981 26,327 (2,346) (8.9) -------- -------- ------- 403,405 351,073 52,332 14.9 New clusters*............... 17,333 1,184 16,149 Non-cluster and disposed operations................. 1,570 3,272 (1,702) -------- -------- ------- Total cemetery revenues.. $422,308 $355,529 $66,779 18.8 % ======== ======== ======= </TABLE> Revenues from the existing clusters increased $52,332 in 1998. Included in the existing cluster increase were $31,945 in increased revenues from cemeteries acquired since the beginning of 1997. Locations acquired before 1997 increased $20,387 due primarily to increased trust investment income. Cemetery costs and expenses were as follows: <TABLE> <CAPTION> Percentage Six Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States........... $193,976 $181,888 $12,088 6.6% Other European.......... 6,075 5,849 226 3.9 Other foreign........... 13,732 13,527 205 1.5 -------- -------- ------- 213,783 201,264 12,519 6.2 New clusters*.............. 12,468 1,126 11,342 Non-cluster and disposed operations................ 2,401 2,422 (21) Administrative overhead.... 21,675 17,074 4,601 26.9 -------- -------- ------- Total cemetery costs and expenses............. $250,327 $221,886 $28,441 12.8% ======== ======== ======= </TABLE> - --------------------- * Represents new geographic cluster areas entered into since January 1, 1997 for the period that those businesses were owned by the Company. 15
Costs and expenses from existing clusters increased $12,519 due primarily to an increase of $19,757 at cemeteries acquired since the beginning of 1997, while locations acquired before 1997 had a decline of $7,238. The overall cemetery gross profit margin percentage improved in 1998 to 40.7% from 37.6% in 1997. This increase reflects a favorable product mix in sales of preneed cemetery property and merchandise, increased trust investment income, as well as continued cost control in all major expense categories primarily in the United States. Administrative overhead costs have increased to 5.1% of revenues compared to 4.8% during the six months ended June 30, 1998. Financial Services The Company's wholly-owned finance subsidiary, Provident Services, Inc. ("Provident") reported a gross profit of $4,500 for the six months ended June 30, 1998, compared to $3,492 for the same period in 1997. Provident's average outstanding loan portfolio during the current period increased to $213,009 compared to $173,547 in 1997, while the average interest rate spread decreased slightly to 3.1% compared to 3.2% in 1997. Other Income and Expenses Expressed as a percentage of revenues, general and administrative expenses decreased slightly to 2.5% for the six months ended June 30, 1998, compared to 2.6% for the comparable period in 1997. Interest expense, which excludes the amount incurred through financial service operations, increased $10,543 or 15.6% period to period. The increased interest expense reflects the Company's funding of acquisitions with debt. During the first quarter of 1997, the Company sold its interest in Equity Corporation International ("ECI") producing a pre-tax gain of $68,077. The provision for income taxes reflected a 35.3% effective tax rate for the six months ended June 30, 1998, compared to a 35.8% effective tax rate for the comparable period in 1997. The decrease in the effective tax rate is due primarily to lower taxes from international operations and the 1997 tax impact from the gain on sale of the Company's interest in ECI which was reflected at the Company's higher domestic tax rate. Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Results of Operations: Segment information for the Company's three lines of business was as follows: <TABLE> <CAPTION> Three Months Ended June 30, Percentage 1998 1997 Increase Increase ---------------------------------------------------- <S> <C> <C> <C> <C> Revenues: Funeral............. $450,493 $419,284 $31,209 7.4 % Cemetery............ 216,366 177,739 38,627 21.7 Financial services.. 5,045 4,118 927 22.5 -------- -------- ------- 671,904 601,141 70,763 11.8 Costs and expenses: Funeral............. 355,847 324,787 31,060 9.6 Cemetery............ 125,639 110,889 14,750 13.3 Financial services.. 2,728 2,282 446 19.5 -------- -------- ------- 484,214 437,958 46,256 10.6 Gross profit and margin percentage: Funeral............. 94,646 21.0% 94,497 22.5% 149 0.2 Cemetery............ 90,727 41.9 66,850 37.6 23,877 35.7 Financial services.. 2,317 45.9 1,836 44.6 481 26.2 --------- -------- ------- $187,690 27.9% $163,183 27.1% $24,507 15.0 % ======== ======== ======= </TABLE> 16
Funeral Funeral revenues were as follows: <TABLE> <CAPTION> Percentage Three Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States........... $223,982 $222,693 $ 1,289 0.6 % France.................. 140,597 119,078 21,519 18.1 Other European.......... 46,882 43,861 3,021 6.9 Other foreign........... 26,033 28,709 (2,676) (9.3) -------- -------- ------- 437,494 414,341 23,153 5.6 New clusters:* United States........... 1,281 889 392 Other European.......... 10,041 921 9,120 Other foreign........... 1,040 223 817 -------- -------- ------- 12,362 2,033 10,329 Non-cluster and disposed operations................ 637 2,910 (2,273) -------- -------- ------- Total funeral revenues.. $450,493 $419,284 $31,209 7.4 % ======== ======== ======= </TABLE> The $23,153 increase in revenues from existing clusters was the result of a 2.9% increase in the number of funeral services performed (128,443 compared to 124,840), and a 2.6% higher average sales price ($3,406 compared to $3,319). Acquisitions since January 1, 1997, included in existing clusters, contributed $25,481 to the existing cluster revenue increase, while locations acquired before 1997 had a decline of $2,328 due primarily to fewer funeral services performed in April and May in the United States. French funeral revenues for the quarter increased $21,519 due to a 5.6% increase in the number of funeral services performed (36,840 compared to 34,899). During the three months ended June 30, 1998, the Company sold $138,919 of prearranged funeral services compared to $148,704 for the same period in 1997. Funeral costs and expenses were as follows: <TABLE> <CAPTION> Percentage Three Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States.......... $153,079 $147,301 $ 5,778 3.9 % France................. 117,750 102,047 15,703 15.4 Other European......... 39,546 36,423 3,123 8.6 Other foreign.......... 19,809 20,221 (412) (2.0) -------- -------- ------- 330,184 305,992 24,192 7.9 New clusters:* United States.......... 986 536 450 Other European......... 8,419 714 7,705 Other foreign.......... 889 160 729 -------- -------- ------- 10,294 1,410 8,884 Non-cluster and disposed operations............... 3,002 4,326 (1,324) Administrative overhead... 12,367 13,059 (692) (5.3) -------- -------- ------- Total funeral costs and expenses.......... $355,847 $324,787 $31,060 9.6 % ======== ======== ======= </TABLE> - --------------------- * Represents new geographic cluster areas entered into since January 1, 1997 for the period that those businesses were owned by the Company. 17
The $24,192 increase in costs and expenses from existing clusters is primarily the result of a period to period increase in the total number of funeral services performed. Acquisitions since January 1, 1997, included in existing clusters, reported $18,664 of increased costs, while costs from existing locations acquired before 1997 increased $5,528. The gross profit margin for existing clusters decreased to 24.5% in 1998 from 26.1% in 1997. This decrease is primarily attributable to the Company's United States funeral operations, a historically high margin market for the Company. This is due to the aforementioned weakness in the United States funeral service volumes. Administrative overhead costs, expressed as a percentage of total funeral revenues, decreased slightly to 2.7%, compared to 3.1% in 1997 due to reclassifications of certain of these costs to the cemetery segment to better reflect the cost of administrative support. Cemetery Cemetery revenues were as follows: <TABLE> <CAPTION> Percentage Three Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States............ $188,929 $155,922 $33,007 21.2 % Other European........... 4,976 5,079 (103) (2.0) Other foreign............ 12,421 14,124 (1,703) (12.1) -------- -------- ------- 206,326 175,125 31,201 17.8 New clusters*............... 9,558 891 8,667 Non-cluster and disposed operations................. 482 1,723 (1,241) -------- -------- ------- Total cemetery revenues.. $216,366 $177,739 $38,627 21.7 % ======== ======== ======= </TABLE> Revenues from the existing clusters increased $31,201 in 1998. Included in the existing cluster increase were $17,893 in increased revenues from cemeteries acquired since the beginning of 1997, while revenues from existing cluster locations owned before 1997 increased $13,308 due to increased sales of pre-need and at-need property and merchandise as well as additional trust investment income. Cemetery costs and expenses were as follows: <TABLE> <CAPTION> Percentage Three Months Ended June 30, Increase Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------------- <S> <C> <C> <C> <C> Existing clusters: United States............ $ 94,459 $ 91,148 $ 3,311 3.6 % Other European........... 2,875 2,888 (13) (0.5) Other foreign............ 7,031 6,955 76 1.1 -------- -------- ------- 104,365 100,991 3,374 3.3 New clusters*............... 7,118 799 6,319 Non-cluster and disposed operations................. 1,030 1,470 (440) Administrative overhead..... 13,126 7,629 5,497 72.1 -------- -------- ------- Total cemetery costs and expenses............ $125,639 $110,889 $14,750 13.3 % ======== ======== ======= </TABLE> - --------------------- * Represents new geographic cluster areas entered into since January 1, 1997 for the period that those businesses were owned by the Company. 18
Costs and expenses from existing clusters increased $3,374 due primarily to an increase of $10,407 at cemeteries acquired since the beginning of 1997. The overall cemetery gross profit margin percentage improved in 1998 to 41.9% from 37.6% in 1997. This increase reflects a favorable product mix in sales of preneed cemetery property and merchandise, increased trust investment income, as well as continued cost control in all major expense categories primarily in the United States. Administrative overhead costs have increased to 6.1% of revenues for the three months ended June 30, 1998, compared to 4.3% during the comparable period in 1997 due to the aforementioned reclassifications discussed in the funeral segment. Financial Services Provident reported a gross profit of $2,317 for the three months ended June 30, 1998, compared to $1,836 for the same period in 1997. Provident's average outstanding loan portfolio during the current period increased to $220,062 compared to $181,709 for the comparable period in 1997, while the average interest rate spread remained stable at 3.2% for the three months ended June 30, 1998 and 1997. Other Income and Expenses Expressed as a percentage of revenues, general and administrative expenses remained stable at 2.6% for the three months ended June 30, 1998 and 1997. Interest expense, which excludes the amount incurred through financial service operations, increased $7,371 or 22.3% period to period. This increased interest expense reflects the Company's funding of acquisitions with debt. The provision for income taxes reflected a 35.3% effective tax rate for the three months ended June 30, 1998, compared to a 35.0% effective tax rate for the comparable period in 1997. Financial Condition and Liquidity at June 30, 1998: General Historically, the Company has funded its working capital needs and capital expenditures primarily through cash provided by operating activities and borrowings under bank revolving credit agreements and commercial paper. Funding required for the Company's acquisition program has been generated through public and private offerings of debt and the issuance of equity securities supplemented by the Company's revolving credit agreements and additional securities registered with the Securities and Exchange Commission (the "Commission"). The Company believes cash from operations, additional funds available under its revolving credit agreements, and proceeds from public and private offerings of securities will be sufficient to continue its current acquisition program and operating policies. For the three-month period ended June 30, 1998, the Company acquired 45 funeral service locations and 7 cemeteries (see Note 3). In addition, the Company has received signed letters of intent to acquire an additional 138 funeral service locations, 29 cemeteries and 2 crematoria for an aggregate purchase price of approximately $386,000 and has reached a definitive agreement to merge with ECI (see note 10) which will add 326 funeral homes and 81 cemeteries in a stock for stock transaction valued at approximately $578,000. These businesses are expected to produce approximately $449,000 in annualized revenues, including $324,000 in North American operations and $125,000 from operations outside North America. At June 30, 1998, the Company had net working capital of $360,439 and a current ratio of 1.69:1, compared to working capital of $275,966 and a current ratio of 1.52:1 at December 31, 1997. Sources And Uses of Cash Cash flows from operating activities: Net cash provided by operating activities was $153,903 for the six months ended June 30, 1998, compared to $172,303 for the same period in 1997, a decrease of $18,400. This decrease results from a combination of higher operating profits, offset by increased uses of cash generated by changes in the Company's working capital accounts. Significant reductions of operating cash include amounts receivable resulting from increased sales of funeral services as well as increased sales of cemetery products and merchandise. Cash flows from investing activities: Net cash used in investing activities was $465,097 for the six months ended June 30, 1998, compared to $265,551 for the same period in 1997, an increase of $199,546. Cash used for acquisitions increased by $176,131 while the level of capital expenditures remained unchanged during the six months ended June 30, 1998, as the 19
Company continues to expand through both acquisitions of existing businesses and through increased construction of funeral and cemetery facilities. Additionally, in 1997 approximately $148,000 in cash was provided by the sale of the Company's interest in ECI. Cash used relating to prearranged funeral activities decreased due to the timing of cash payments to and withdrawals from trusts. Cash flows from financing activities: Net cash provided by financing activities was $339,843 for the six months ended June 30, 1998, compared to $80,674 for the same period in 1997, an increase of $259,169. The six months ended June 30, 1997 included a use of cash of $449,998 for the early extinguishment of certain higher interest rate debt. As of June 30, 1998, the Company's debt to capitalization ratio was 51.7% compared to 49.8% at December 31, 1997. The interest rate coverage ratio for the six months ended June 30, 1998 was 4.72:1, compared to 4.42:1 (excluding the gain on the sale of the Company's investment in ECI) for the same period in 1997. This interest rate coverage level has been relatively consistent, despite higher levels of debt outstanding, for several years. The Company believes that the acquisition of funeral and cemetery operations funded with debt or Company common stock is a prudent business strategy given the stable cash flow generated and the low failure rate exhibited by these types of businesses. The Company believes these acquired firms are capable of servicing the additional debt and providing a sufficient return on the Company's investment. The Company expects adequate sources of funds to be available to finance its future operations and acquisitions through internally generated funds, borrowings under credit facilities and the issuance of securities. The Company's various revolving credit facilities and lines of credit currently provide for aggregate borrowings of approximately $1,000,000 of which approximately $455,000 was available under these facilities at June 30, 1998. The Company also had the ability to issue $1,000,000 in securities registered with the Commission under a shelf registration. In addition, 14,682,000 shares of common stock and a total of $197,000 of guaranteed promissory notes and convertible debentures are registered with the Commission under a separate shelf registration to be used exclusively for future acquisitions. Prearranged Funeral Services The Company has a marketing program to sell prearranged funeral contracts and the funds collected are generally held in trust or are used to purchase life insurance or annuity contracts. The principal amount of each such prearranged funeral contract will be received in cash by a Company funeral service location at the time the funeral is performed. Earnings on trust funds and increasing benefits under insurance funded contracts also increase the amount of cash to be received upon performance of the funeral and are intended to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs. During 1997, the Company completed a review of the prearranged trust investment process which included an asset/liability study. This has resulted in a new investment program which entails the consolidation of multiple trustees, the use of institutional managers with differing investment styles and consolidated performance monitoring and tracking. This new program targets a real return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs. This is accomplished by allocating the portfolio mix to the appropriate investments that more accurately match the anticipated maturity of the policies. The Company anticipates an asset allocation of approximately 65% equity and 35% fixed income. Marketing costs incurred with the sale of prearranged funeral contracts are a current use of cash which is partially offset with cash retained, pursuant to state laws, from amounts trusted and certain commissions earned by the Company for sales of insurance products issued by third party insurers. The Company sells prearranged funerals in most of its service markets including its foreign markets. Auxia, the Company's French life insurance subsidiary, primarily sells insurance products used to fund prearranged funerals to be performed by the Company's French funeral service locations. Prearranged funeral service sales afford the Company the opportunity to both protect current market share and mix as well as expand market share in certain markets. The Company believes this will stimulate future revenue growth. Prearranged funeral services fulfilled as a percent of the total North American funerals performed annually approximates 25% and is expected to grow, thereby making the total number of funerals performed more predictable. 20
Other Matters: Year 2000 Issue The "Year 2000" issue refers to the inability of certain computer programs to correctly differentiate the century from a date in which the year is represented by only two digits. A computer system which is not year 2000 compliant might not be able to process certain data, or possibly could cause the entire computer system to malfunction. The Company is aware of the issues pertaining to computer software and microprocessor performance as they relate to the year 2000, and is taking steps to minimize the possibility that operations will be significantly disrupted by the manner in which Company computers process date codes. The Company has established Year 2000 program offices in Houston and Europe to organize and oversee the Company's Year 2000 preparedness efforts. The Company's Year 2000 preparedness efforts have been divided into four general categories: planning and assessment, correction, validation and testing, and acceptance and deployment. All of the Company's major systems are being assessed to determine Year 2000 compliance and all non-compliant systems will be repaired or replaced. Most major systems have already been assessed and are at various stages of correction, testing, and deployment. Efforts are underway to educate appropriate Company personnel about the importance of the Year 2000 problem and to mitigate potential problems at all levels of the organization. The Company is currently seeking Year 2000 compliance assurances from third party service providers with which it has significant business relationships. As major systems are assessed, the Company will be able to prepare accurate cost estimates for completing the Company's Year 2000 preparedness efforts. The Company operates in a relatively low technology business environment that is not dependent upon complex customer on-line processing to execute business operations. The Company currently does not believe that any significant disruptions to operations will occur as a result of the Year 2000 problem. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted on a timely basis, or that a failure to successfully convert by another company, would not have a material adverse effect on the Company. Recent Accounting Standards The Company will adopt Statement of Financial Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" for the year ended December 31, 2000. The Company is currently evaluating the impact of this standard, but does not anticipate that it will have a material impact on the Company's financial position, results of operations, or statement of cash flows. Cautionary Statement on Forward-looking Statements The statements contained in this filing on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe," "estimate," "expect," "anticipate," or "predict," that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. Important factors which could cause actual results to differ materially from those in forward-looking statements include, among others, the following: 1) Changes in general economic conditions both domestically and internationally impacting financial markets (e.g. marketable security values as well as currency and interest rate fluctuations). 2) Changes in domestic and international political and/or regulatory environments in which the Company operates, including tax and accounting policies. Changes in regulations may impact the Company's ability to enter or expand new markets. 3) Changes in consumer demand for the Company's services caused by several factors such as changes in local death rates, cremation rates, competitive pressures and local economic conditions. 4) The Company's ability to identify and complete additional acquisitions on terms that are favorable to the Company, to successfully integrate acquisitions into the Company's business and to realize expected cost savings in connection with such acquisitions. The Company's future results may be materially impacted by changes in the level of acquisition activity. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward- looking statements made by the Company. 21
SERVICE CORPORATION INTERNATIONAL PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 14, 1998, the Company held its annual meeting of shareholders and the shareholders elected two directors. The shares voting on the director nominees were cast as follows: Abstention or Broker Nominee Votes For Votes Withheld Non-votes B. D. Hunter 205,618,107 2,626,776 -0- John W. Mecom, Jr. 205,699,268 2,545 -0- ITEM 5. OTHER INFORMATION Discretionary Proxy Voting Authority With respect to any proposal of a holder of the Company's common stock to be submitted to the Company's shareholders at its next annual meeting outside the processes of Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended, (that is, where a shareholder has not sought inclusion of the proposal in the Company's proxy statement), the proxies solicited by the Company's Board of Directors for use at such annual meeting may confer discretionary authority to the proxies named therein to vote on any such proposal, unless the Company receives notice of such shareholder proposal by February 25, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)Exhibits 3.1 Statement of Resolution Eliminating Series of Shares of Series C Junior Participating Preferred Stock dated July 27, 1998. 3.2 Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred Stock dated July 27, 1998. 10.1 Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and Jerald L. Pullins. 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 1998 and 1997. 27.1 Financial data schedule. (b)Reports on Form 8-K During the quarter ended June 30, 1998, the Company filed a Form 8-K dated May 14, 1998, reporting (i) under "Item 5. Other Events" the preferred share purchase rights which the Company distributed as a dividend on common stock of the Company on July 28, 1998, and (ii) under "Item 7. Exhibits" the Rights Agreement dated May 14, 1998 and the Company's press release dated May 14, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 13, 1998 SERVICE CORPORATION INTERNATIONAL By: /s/ George R. Champagne --------------------------------- George R. Champagne Senior Vice President Chief Financial Officer (Principal Financial Officer) 22