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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1929 ALLEN PARKWAY 77019
HOUSTON, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 713/522-5141
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------- --------------------------------------------
Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
$3.125 Term Convertible Shares, New York Stock Exchange
Series A, of SCI Finance LLC,
a subsidiary of the registrant
10% Subordinated Debentures due 2000 American Stock Exchange
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 $5,500,814,304 based upon a closing market price of $48.00 on
March 22, 1996 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 22, 1996 was 117,482,046 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1996
Annual Meeting of Shareholders (Part III)
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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, 1995, the Company operated 2,739 funeral service locations, 318
cemeteries and 139 crematoria located in North America, Europe and Australia. 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 1995, the Company acquired two French companies that the
Company believes together constitute the largest funeral service organization in
Europe. Also in 1995, the Company acquired the fourth largest funeral service
organization in North America. Including these acquisitions, the Company in 1995
acquired 1,263 funeral service locations, 99 cemeteries and 30 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 13 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 five North American divisions covering the United States and
Canada, a European division which includes the Company's French and United
Kingdom operations, and an Australian division. 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. The Company owns 126 funeral
service location/cemetery combinations and operates 60 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, 1995, the Company's unfulfilled
prearranged funeral contracts, including accumulated trust fund earnings and
increased benefits on insurance products, amounted to $2,362 million of which
$219 million is estimated, based on actuarial assumptions, to be fulfilled in
1996. The
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unfulfilled prearranged funeral contracts at December 31, 1994 were $1,520
million. For additional information concerning prearranged funeral activities,
see Notes 4 and 8 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 Note 2 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 1995, the Company,
including companies acquired by it, performed approximately 9%, 29%, 14% and 24%
of the funeral services in the 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.
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Provident had $214 million in loans outstanding at December 31, 1995 and
unfunded loan commitments amounting to $28 million. Such loans outstanding
increased from $209 million in loans outstanding at December 31, 1994. 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, 1995, the Company employed 19,824 (12,191 in the United
States) persons on a full time basis and 9,237 (6,012 in the United States)
persons on a part time basis. Of the full time employees, 19,342 were in the
Funeral and Cemetery Operations, eight were in Financial Services and 474 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.
In May 1995, the Monopolies and Mergers Commission (the "Commission") of
the United Kingdom issued a report with respect to SCI's 1994 acquisition of
Plantsbrook Group plc that recommended that SCI divest of certain operations in
ten localities to achieve a competitive balance satisfactory to the Commission.
SCI is in negotiations with the Commission to settle the number of locations to
be divested. The Company believes compliance with such settlement will not have
a materially adverse effect on the Company's operations in the United Kingdom.
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 Monopolies will be eliminated by 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,
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Texas 77019 containing 43,000 square feet of office space. The Company also owns
the facilities of certain closed casket manufacturing operations.
At December 31, 1995, the Company owned the real estate and buildings of
2,380 of its funeral service and cemetery locations and leased facilities in
connection with 816 of such operations. In addition, the Company leased five
aircraft pursuant to cancelable leases. At December 31, 1995, the Company
operated 10,425 vehicles, of which 7,882 were owned and 2,543 were leased. For
additional information regarding leases, see Note 9 to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company's 318 cemeteries contain an aggregate of approximately 22,639
acres, of which approximately 55% 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.
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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 22, 1996 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
- --------------------------------------- ---- -------------------------------------- ----------
R. L. Waltrip.......................... (65) Chairman of the Board and Chief 1962
Executive Officer
L. William Heiligbrodt................. (54) President and Chief Operating Officer 1988
W. Blair Waltrip....................... (41) Executive Vice President Operations 1980
John W. Morrow, Jr. ................... (60) Executive Vice President 1989
Corporate Development
Jerald L. Pullins...................... (54) Executive Vice President 1992
European Operations
George R. Champagne.................... (42) Senior Vice President 1989
Chief Financial Officer
Glenn G. McMillen...................... (53) Senior Vice President Operations 1993
Richard T. Sells....................... (56) Senior Vice President Prearranged 1987
Sales
James M. Shelger....................... (46) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner......................... (50) Senior Vice President Administration 1992
T. Craig Benson........................ (34) Vice President Operations; 1990
President -- Investment Capital
Corporation, a subsidiary of the
Company
Gregory L. Cauthen..................... (38) Vice President Treasurer 1995
W. Mark Hamilton....................... (31) Vice President Finance 1996
European Operations
Lowell A. Kirkpatrick, Jr. ............ (37) Vice President Corporate Development 1994
Vincent L. Visosky..................... (48) Vice President Operational Controller 1989
Henry M. Nelly, III.................... (51) President -- Provident Services, Inc., 1989
a subsidiary of the Company
- ---------------
(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.
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Pullins joined the Company in September 1991, was elected Senior Vice
President Corporate Development in February 1992 and was promoted to his present
position in November 1994. Prior thereto from January 1987 through August 1991,
Mr. Pullins was President, Chief Executive Officer and Chief Operating Officer
of Sentinel Group, Inc., a funeral service company.
Mr. Stoner joined the Company in September 1991, was elected Vice President
Employee Services in August 1992, Vice President Administration in February 1993
and Senior Vice President Administration in August 1993. Prior thereto for more
than five years, Mr. Stoner was a general partner and Director of Tax of Ernst &
Young (formerly Arthur Young & Company), certified public accountants.
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Mr. Cauthen joined the Company in February 1991 as Director/Taxation and
was promoted in March 1993 to Managing Director/Taxation. Prior to joining the
Company, Mr. Cauthen served as Vice President/ Taxes of First Interstate Bank of
Texas, N.A. from August 1988 to February 1991.
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. There is no family
relationship between any of the persons in the preceding table except that W.
Blair Waltrip is a son of R. L. Waltrip, that T. Craig Benson is a son-in-law of
R. L. Waltrip and that T. Craig Benson and W. Blair Waltrip are brothers-in-law.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK 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, 1995, there were 8,492 holders of record of
the Company's common stock.
The Company has declared 91 consecutive quarterly dividends on its common
stock since it began paying dividends in 1974. The dividend rate is currently
$.12 per share per quarter, or an indicated annual rate of $.48 per share. For
the three years ended December 31, 1995, dividends per share were $.44, $.42 and
$.40, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- ---- ---- ----
First......................................... 29 1/8 26 1/4 28 24 3/4 21 5/8 17 7/8
Second........................................ 31 5/8 26 7/8 25 7/8 22 1/2 22 1/8 18 1/2
Third......................................... 39 1/2 30 3/8 26 5/8 24 7/8 25 1/4 20 3/4
Fourth........................................ 44 37 5/8 27 3/4 24 1/8 26 3/8 23 1/2
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.
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ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,*
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues.......................... $1,652,126 $1,117,175 $ 899,178 $ 772,477 $ 643,248
Income before income taxes........ 294,211 219,021 173,492 139,336 108,872
Net income........................ 183,588 131,045 101,061 86,536 73,372
Earnings per share:
Primary......................... 1.80 1.51 1.21 1.13 1.03
Fully diluted................... 1.70 1.43 1.17 1.07 1.00
Dividends per share............... .44 .42 .40 .39 .37
Total assets...................... 7,663,811 5,161,888 3,683,304 2,611,123 2,123,452
Long-term debt.................... 1,732,047 1,330,177 1,062,222 980,029 786,685
Convertible preferred securities
of SCI Finance LLC.............. 172,500 172,500 -- -- --
Stockholders' equity.............. 1,975,345 1,196,622 884,513 683,097 615,776
Shares outstanding................ 117,271 94,857 84,859 76,905 75,981
Ratio of earnings to fixed
charges**....................... 2.78 3.13 3.19 3.03 2.82
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* The year ended December 31, 1993 reflects a change in accounting principles
adopted January 1, 1993. The two years ended December 31, 1992 reflect
results as historically reported.
** 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 and dividends on preferred
securities of SCI Finance LLC). 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.
SCI International Limited
SCI International Limited ("International") is a wholly owned subsidiary of
the Company. International, through wholly owned subsidiaries, began operations
in mid-1993 and owns the Company's foreign operations.
Set forth below is certain summary financial information for International.
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- ---------- --------
(DOLLARS IN THOUSANDS)
Revenues................................................ $ 439,750 $ 99,033 $ 17,345
--------- ---------- --------
Gross profit............................................ $ 88,551 $ 30,068 $ 5,185
--------- ---------- --------
Net income.............................................. $ 21,163 $ 4,353 $ 2,806
--------- ---------- --------
Current assets.......................................... $ 207,411 $ 215,104 $ 8,746
Non-current assets...................................... 2,218,977 885,417 91,982
--------- ---------- --------
Total assets............................................ $2,426,388 $1,100,521 $100,728
--------- ---------- --------
Current liabilities..................................... $ 257,682 $ 258,723 $ 7,787
Non-current liabilities................................. 1,584,979 805,939 70,084
--------- ---------- --------
Total liabilities....................................... $1,842,661 $1,064,662 $ 77,871
--------- ---------- --------
Stockholder's equity.................................... $ 583,727 $ 35,859 $ 22,857
--------- ---------- --------
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
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 successfully implemented
the cluster strategy in its North American, United Kingdom and Australian
operations and is proceeding with implementation in its recently acquired French
operations. The Company acquired a French funeral service company in August
1995 -- see note three to the consolidated financial statements. The Company has
approximately 269 clusters in North America, the United Kingdom and Australia,
which range in size from two operations to 73 operations. There may be more than
one cluster in a given metropolitan area, depending upon the level and degree of
shared costs.
RESULTS OF OPERATIONS:
Year ended 1995 compared to 1994
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31,
------------------------------------------ PERCENTAGE
1995 1994 INCREASE INCREASE
-------------------- ------------------- -------- ----------
Revenues:
Funeral......................... $ 1,166,247 $ 754,408 $411,839 54.6%
Cemetery........................ 463,754 343,521 120,233 35.0
Financial services.............. 22,125 19,246 2,879 15.0
----------- ---------- --------
1,652,126 1,117,175 534,951 47.9
Costs and expenses:
Funeral......................... (871,096) (531,803) 339,293 63.8
Cemetery........................ (303,312) (233,295) 70,017 30.0
Financial services.............. (12,497) (10,882) 1,615 14.8
----------- ---------- --------
(1,186,905) (775,980) 410,925 53.0
Gross profit margin and
percentage:
Funeral......................... 295,151 25.3% 222,605 29.5% 72,546 32.6
Cemetery........................ 160,442 34.6% 110,226 32.1% 50,216 45.6
Financial services.............. 9,628 43.5% 8,364 43.5% 1,264 15.1
----------- ---------- --------
$ 465,221 28.2% $ 341,195 30.5% $124,026 36.4%
========== ========= ========
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FUNERAL
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ INCREASE PERCENTAGE
1995 1994 (DECREASE) INCREASE
---------- --------- ---------- ----------
Existing clusters:
North America.................................. $ 756,043 $663,447 $ 92,596 14.0%
Australia...................................... 48,006 38,288 9,718 25.4
---------- -------- -------- ----
804,049 701,735 102,314 14.6
New clusters:*
North America.................................. 21,336 4,450 16,886
Australia...................................... 5,785 1,631 4,154
United Kingdom................................. 131,523 39,277 92,246
---------- -------- --------
158,644 45,358 113,286
---------- -------- -------- ----
Total clusters......................... 962,693 747,093 215,600 28.9
France and other foreign......................... 198,018 -- 198,018
Non-cluster and disposed operations.............. 5,536 7,315 (1,779)
---------- -------- -------- ----
Total funeral revenues................. $1,166,247 $754,408 $ 411,839 54.6%
========== ======== ======== ====
The $102,314 increase in revenues at existing clusters was primarily the
result of a 9.7% increase in North American funeral services performed (207,834
compared to 189,481) and a 3.9% higher average sales price ($3,638 compared to
$3,501). Included in this increase were $77,434 in increased revenues from
locations acquired since the beginning of 1994. The remaining revenue increase
of $24,880 was contributed by operations acquired before 1994. The death rate in
North America 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 North American population,
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 potentially higher average sales
prices from improved merchandising of funeral services and products and periodic
price increases. The Company anticipates continued growth through acquisitions
is likely although the level of acquisitions is not likely to match the previous
two years. The Company is the world's largest company in the funeral service
industry and currently performs approximately 9%, 29%, 14% and 24% of the
funeral services in North America, France, the United Kingdom and Australia,
respectively. The Company believes that there are several thousand potential
acquisition candidates in North America. Additionally, the Company's recent
United Kingdom and French acquisitions demonstrate an increased focus on
international acquisition opportunities.
The France and other foreign operations represent approximately four months
of Company ownership, while the 1994 United Kingdom operations represent
approximately four months of Company ownership.
During the year ended December 31, 1995, the Company sold approximately
$371,000 of prearranged funeral services compared to approximately $245,000 for
the same period in 1994. The Company also acquired approximately $508,000 of
deferred revenues associated with prearranged funerals in the 1995 French
acquisition. 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.
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1994 for the period that those businesses were owned by the Company.
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Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ INCREASE PERCENTAGE
1995 1994 (DECREASE) INCREASE
--------- ----------- ---------- ----------
Existing clusters:
North America................................. $496,893 $432,602 $ 64,291 14.9%
Australia..................................... 31,325 25,786 5,539 21.5
-------- -------- -------- -----
528,218 458,388 69,830 15.2
New clusters:*
North America................................. 16,552 3,679 12,873
Australia..................................... 4,502 1,286 3,216
United Kingdom................................ 101,992 29,909 72,083
-------- -------- --------
123,046.. 34,874 88,172
-------- -------- -------- -----
Total clusters................................ 651,264 493,262 158,002 32.0
France and other foreign........................ 173,437 -- 173,437
Non-cluster and disposed operations............. 8,663 9,733 (1,070)
Administrative overhead......................... 37,732 28,808 8,924 31.0
-------- -------- -------- -----
Total funeral costs and expenses...... $871,096 $531,803 $ 339,293 63.8%
======== ======== ======== =====
The total gross profit for existing clusters increased to $275,831 in 1995
from $243,347 in 1994, while the related gross profit margin percentage for
existing clusters declined slightly to 34.3% from 34.7% last year. Acquisitions
since the beginning of 1994, included in existing clusters, accounted for
$19,905 of the existing gross profit increase and were the primary reason for
the existing cluster gross profit margin decline. 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. This was
especially noticeable given the large number of acquired operations incorporated
into existing clusters in 1995 and 1994. The gross profit margin for those
funeral operations in existing clusters that were acquired before 1994 increased
to 36.0% in 1995 from 35.5% last year 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 (25.3%
compared to 29.5% last year) were the Company's United Kingdom and French
operations. The Company's United Kingdom operations had a gross profit margin of
22.5% for the year ended December 31, 1995, compared to 23.9% in 1994 (four
months of ownership). French operations had a gross profit margin of 12.4% in
1995 (four months of ownership). These margins are consistent with the Company's
expectations for its European funeral 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
declined in 1995 to 3.2%, compared to 3.8% last year.
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1994 for the period that those businesses were owned by the Company.
10
12
CEMETERY
Cemetery revenues were as follows:
YEARS ENDED
DECEMBER 31,
--------------------- PERCENTAGE
1995 1994 INCREASE INCREASE
-------- -------- -------- ----------
Existing clusters:
North America................................. $406,891 $321,586 $ 85,305 26.5%
Australia..................................... 26,037 16,501 9,536 57.8
-------- -------- -------- ----
432,928 338,087 94,841 28.1
New clusters:*
North America................................. 14,148 -- 14,148
United Kingdom................................ 12,232 3,316 8,916
-------- -------- --------
26,380 3,316 23,064
-------- -------- -------- ----
Total clusters........................ 459,308 341,403 117,905 34.5
Non-cluster and disposed operations............. 4,446 2,118 2,328
-------- -------- -------- ----
Total cemetery revenues............... $463,754 $343,521 $120,233 35.0%
======== ======== ======== ====
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 $38,157 in increased revenues from cemeteries
acquired since the beginning of 1994. 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:
YEARS ENDED
DECEMBER 31,
--------------------- PERCENTAGE
1995 1994 INCREASE INCREASE
-------- -------- -------- ----------
Existing clusters:
North America.................................. $252,125 $203,637 $ 48,488 23.8%
Australia...................................... 12,652 7,659 4,993 65.2
-------- -------- ------- ----
264,777 211,296 53,481 25.3
New clusters:*
North America.................................. 10,438 -- 10,438
United Kingdom................................. 6,517 2,425 4,092
-------- -------- -------
16,955 2,425 14,530
-------- -------- ------- ----
Total clusters......................... 281,732 213,721 68,011 31.8
Non-cluster and disposed operations.............. 3,744 2,045 1,699
Administrative overhead.......................... 17,836 17,529 307 1.8
-------- -------- ------- ----
Total cemetery costs and expenses...... $303,312 $233,295 $ 70,017 30.0%
======== ======== ======= ====
Costs at existing clusters increased $53,481 due primarily to an increase
of $26,404 from cemeteries acquired since the beginning of 1994, while costs
from existing cluster cemeteries acquired before 1994 increased $27,077. The
overall cemetery gross profit margin increased to 34.6% in 1995 from 32.1% 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 decreased to 3.8% of revenues
this year compared to 5.1% last year. The Company believes that the overall
cemetery gross profit margin may decline slightly in 1996 from the level
reported in 1995, due primarily to the lower gross profit
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1994 for the period that those businesses were owned by the Company.
11
13
margins achieved by the large number of cemetery acquisitions late in 1995.
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 an improved interest rate spread offset by higher
administrative expenses. The average outstanding loan portfolio during the
current year was approximately $206,000 with an average interest rate spread of
3.7% compared to approximately $235,000 and 3.4%, respectively, last year.
OTHER INCOME AND EXPENSES
Expressed as a percentage of revenues, general and administrative expenses
were 3.2% in 1995 compared to 4.6% last year. These expenses increased by $1,900
or 3.7% during the year primarily from corporate transportation and travel costs
partially offset by decreased professional fees and other corporate expenses.
Interest expense, which excludes the amount incurred through financial
service operations, increased $38,025 or 47.5% during the current year primarily
from incremental borrowings incurred to fund the Company's international
acquisition program. Of the 1995 increase, approximately $27,000 is the result
of financings for the United Kingdom acquisition and represents a full year of
interest compared to only four months in 1994. Approximately $10,000 of the
remaining increase is due to debt related to the French acquisition in late
August 1995.
The provision for income taxes reflected a 37.6% effective tax rate for
1995 as compared to a 40.2% effective tax rate in the prior year. The decrease
in the effective tax rate is due primarily to lower taxes from international
operations.
RESULTS OF OPERATIONS:
Year ended 1994 compared to 1993
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------- PERCENTAGE
1994 1993 INCREASE INCREASE
--------------------- -------------------- -------- ----------
Revenues:
Funeral.................... $ 754,408 $ 603,099 $151,309 25.1%
Cemetery................... 343,521 280,421 63,100 22.5
Financial services......... 19,246 15,658 3,588 22.9
---------- --------
1,117,175 899,178 217,997 24.2
Costs and expenses:
Funeral.................... (531,803) (426,008) 105,795 24.8
Cemetery................... (233,295) (200,682) 32,613 16.3
Financial services......... (10,882) (9,168) 1,714 18.7
---------- --------
(775,980) (635,858) 140,122 22.0
Gross profit margin and
percentage:
Funeral.................... 222,605 29.5% 177,091 29.4% 45,514 25.7
Cemetery................... 110,226 32.1% 79,739 28.4% 30,487 38.2
Financial services......... 8,364 43.5% 6,490 41.4% 1,874 28.9
---------- --------
$ 341,195 30.5% $ 263,320 29.3% $ 77,875 29.6%
========== ========
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FUNERAL
Funeral revenues were as follows:
YEARS ENDED
DECEMBER 31,
--------------------- PERCENTAGE
1994 1993 INCREASE INCREASE
-------- -------- -------- ----------
Existing clusters............................... $627,365 $562,231 $ 65,134 11.6%
New clusters*................................... 58,419 15,162 43,257
---------- --------- -------- ----
Total clusters............................. 685,784 577,393 108,391 18.8
United Kingdom.................................. 39,277 -- 39,277
Non-cluster and disposed operations............. 29,347 25,706 3,641
---------- --------- -------- ----
Total funeral revenues..................... $754,408 $603,099 $151,309 25.1%
========== ========= ======== ====
The $65,134 increase in revenues at existing clusters was the result of an
8.0% increase in funeral services performed (175,284 compared to 162,287) and a
3.3% higher average sales price ($3,579 compared to $3,464). Included in this
increase were $46,896 in increased revenues from locations acquired since the
beginning of 1993.
The majority of new cluster revenue represents the Company's Australian
operations which contributed $29,042 of the increase. The Company began
operations in Australia in the latter half of 1993. The United Kingdom
operations represent approximately four months of Company ownership.
During the year ended December 31, 1994, the Company sold approximately
$245,000 of prearranged funeral services compared to approximately $159,000 for
the same period in 1993.
Funeral costs and expenses were as follows:
YEARS ENDED
DECEMBER 31,
--------------------- PERCENTAGE
1994 1993 INCREASE INCREASE
-------- -------- -------- ----------
Existing clusters............................... $411,604 $367,285 $ 44,319 12.1%
New clusters*................................... 41,353 11,326 30,027
-------- -------- -------- --------
Total clusters............................. 452,957 378,611 74,346 19.6
United Kingdom.................................. 29,909 -- 29,909
Non-cluster and disposed operations............. 20,129 18,916 1,213
Administrative overhead......................... 28,808 28,481 327
-------- -------- -------- --------
Total funeral costs and expenses........... $531,803 $426,008 $105,795 24.8%
======== ======== ======== ========
The gross profit margin for existing clusters declined to 34.4% from 34.7%
in 1993. Acquisitions since the beginning of 1993, included in existing
clusters, accounted for $37,580 of the existing cluster cost increase and were
the reason for the existing cluster gross profit margin decline. The gross
profit margin for those funeral operations in existing clusters that were
acquired before 1993 increased to 35.6% in 1994 from 34.7% in 1993 due to the
increased revenues discussed above without a corresponding percentage increase
in personnel and other operating costs.
The majority of new cluster costs represent the Company's Australian
operations which contributed $19,544 of the increase. Contributing to the
overall funeral gross profit margin improvement (29.5% compared to 29.4% last
year) were reduced administrative overhead costs when expressed as a percentage
of revenues.
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1993 for the period that those businesses were owned by the Company.
13
15
CEMETERY
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1994 1993 INCREASE INCREASE
---------- --------- -------- ----------
Existing clusters............................ $ 309,332 $ 262,643 $ 46,689 17.8%
New clusters*................................ 19,775 7,633 12,142
-------- -------- -------- --------
Total clusters.......................... 329,107 270,276 58,831 21.8
United Kingdom............................... 3,316 -- 3,316
Non-cluster and disposed operations.......... 11,098 10,145 953
-------- -------- -------- --------
Total cemetery revenues................. $ 343,521 $ 280,421 $ 63,100 22.5%
======== ======== ======== ========
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 $16,395 in increased revenues from cemeteries
acquired since the beginning of 1993. The majority of new cluster revenue
represents the Company's Australian operations which contributed $10,033 of the
increase.
Cemetery costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ INCREASE PERCENTAGE
1994 1993 (DECREASE) INCREASE
---------- --------- -------- ----------
Existing clusters............................ $ 195,886 $ 172,147 $ 23,739 13.8%
New clusters*................................ 9,706 3,962 5,744
-------- -------- -------- --------
Total clusters.......................... 205,592 176,109 29,483 16.7
United Kingdom............................... 2,425 -- 2,425
Non-cluster and disposed operations.......... 7,749 7,978 (229)
Administrative overhead...................... 17,529 16,595 934
-------- -------- -------- --------
Total cemetery costs and
expenses......................... $ 233,295 $ 200,682 $ 32,613 16.3%
======== ======== ======== ========
Costs at existing clusters increased $23,739 due to an increase of $12,296
from cemeteries acquired since the beginning of 1993. Costs from existing
cluster cemeteries acquired before 1993 increased $11,443 due to the costs
associated with the increased revenues discussed above. The majority of new
cluster costs represent the Company's Australian operations which contributed
$4,914 of the increase.
The overall cemetery gross profit margin increase to 32.1% from 28.4% in
1993 reflects the strong revenue growth as well as continued cost control in all
major expense categories. Administrative overhead costs have decreased to 5.1%
of revenues in 1994 compared to 5.9% in 1993.
FINANCIAL SERVICES
Provident reported a slightly improved interest rate spread and reduced
administrative expense, when expressed as a percentage of revenue, which
increased the gross profit margin percentage to 43.5% in 1994 from 41.4% in
1993. The average outstanding loan portfolio during 1994 was approximately
$235,000 with an average interest rate spread of 3.4% compared to approximately
$216,000 and 3.3%, respectively, in 1993.
OTHER INCOME AND EXPENSES
Expressed as a percentage of revenues, general and administrative expenses
were 4.6% in 1994 compared to 4.9% in 1993. These expenses increased by $7,994
or 18.3% during 1994. Of the increase, $2,811 was attributable to personnel
expenses primarily relating to incentive compensation and retirement plan costs.
- ---------------
* Represents new geographic cluster areas entered into since the beginning of
1993 for the period that those businesses were owned by the Company.
14
16
Professional fees increased $3,817 in 1994 primarily from legal costs associated
with the informal investigation of the Company by the Securities and Exchange
Commission (the "SEC") relating to the Company's change of accountants in 1993
and the Company's Form 8-K dated March 31, 1993, as amended in April 1993,
reporting such change. The remainder of the increase was derived primarily from
corporate transportation and travel costs.
Interest expense, which excludes the amount incurred through financial
service operations, increased $20,492 or 34.4% during 1994 primarily from
borrowings incurred to fund the Company's ongoing acquisition program. Increased
borrowings and higher interest rates incurred under the existing lines of credit
and commercial paper added $7,759. Also contributing to the increase was the
recognition of $8,311 in interest expense associated with the 1994 acquisitions
in the United Kingdom, $2,909 in increased interest expense from the Company's
various debenture issues and $838 from the December 1994 issuance of $200,000 in
8.375% notes.
Other income (expense) declined in 1994 primarily from fewer sales of
excess real estate and businesses.
The provision for income taxes reflected a 40.2% effective tax rate for
1994 as compared to a 40.6% effective tax rate in 1993.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1995:
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 SEC. The Company believes cash from operations, additional
funds available under its revolving credit agreements, proceeds from offerings
of securities and the other registered securities will be sufficient to continue
its current acquisition program and operating policies.
At December 31, 1995, the Company had net working capital of $45,527 and a
current ratio of 1.08:1, compared to working capital of $120,246 and a current
ratio of 1.25:1 at December 31, 1994. The cash balance at December 31, 1994
included net proceeds from the Company's December 1994 public offerings which
were used in the first quarter of 1995 to repay bank debt associated with the
1994 United Kingdom acquisitions.
OCTOBER 1995 PUBLIC OFFERINGS
In October 1995, the Company issued 8,395,000 shares of common stock at a
net offering price of $37.30 per share through an underwritten public offering.
Also, in October 1995, the Company issued $300,000 of notes which were also sold
through an underwritten public offering. These notes were issued in two tranches
of $150,000 each with maturities in 2000 and 2007 and interest rates of 6.375%
and 6.875%, respectively. All of these offerings were issued pursuant to a
$1,000,000 shelf registration from September 1995. The net proceeds of
approximately $613,000 from the October 1995 offerings were used primarily to
repay amounts borrowed under the Company's French revolving credit agreement
(such borrowings had been used to purchase the French funeral service
operations) and the Company's other existing revolving credit agreements.
REVOLVING CREDIT AGREEMENTS
The Company's primary revolving credit agreement allows for borrowings of
up to $800,000. One portion is a 364-day facility that allows for borrowings of
up to $450,000, which is used to primarily support commercial paper. This
facility expires June 28, 1996, but has provisions to be extended for 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. At December 31, 1995 there was
$20,000 of commercial paper outstanding backed by this agreement. The second
portion represents a multi-currency revolving credit agreement that allows
borrowings of up to
15
17
$350,000, including up to $75,000 each in Pound Sterling, Canadian Dollar and
Australian Dollar. This facility expires June 30, 2000, but has provisions to
extend the termination date each year for 364-day periods. At December 31, 1995,
$95,176 was outstanding under the multi-currency agreement.
In August 1995, the Company entered into a French revolving credit
agreement with a 364-day term which currently allows for borrowings up to
$150,000. At December 31, 1995, $99,095 was outstanding under this agreement.
DERIVATIVES
The Company enters into derivatives in the form of interest rate swaps and
cross-currency interest rate swaps 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.
In general, interest rates are managed such that up to 50% 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 and cross-currency interest rate swaps discussed
more fully in notes two and seven to the Company's consolidated financial
statements, the Company's total debt has been converted into approximately
$1,338,000 of fixed interest rate debt at a weighted average rate of 7.96% and
approximately $516,000 of floating interest rate debt at a weighted average rate
of 6.75%. Based on short-term rates at December 31, 1995 and the related debt or
swaps outstanding subject thereto, a two percent increase in the various
floating rate indices referenced in the debt and swaps would cause a $10,293 net
increase in interest expense. This impact is mitigated by the Provident loan
receivable portfolio which generally carries floating rates. Thus, the Company's
overall sensitivity to floating interest rate fluctuations on amounts owed is
offset by a corresponding higher interest rate on the receivables issued by
Provident (approximately $214,000 in receivables at December 31, 1995).
FOREIGN OPERATIONS
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. The
Company believes, due to foreign currency hedges described above, that the
effects of foreign currency translations have been mitigated.
SOURCES AND USES OF CASH
Cash Flows from Operating Activities: Net cash provided by operating
activities was $90,704 for the year ended December 31, 1995, compared to
$162,444 for the same period in 1994, a decrease of $71,740. This decrease was
due partially to an increase in net receivables resulting from increased sales
of funeral services and cemetery products and merchandise. Additionally, cash
flows relating to prearranged funeral activities decreased due to the timing of
cash payments and withdrawals to and from trusts and increased cash outlays on
marketing efforts. These decreases were offset by improved operating results in
1995.
Cash Flows from Investing Activities: Net cash used in investing activities
was $844,341 for the year ended December 31, 1995, compared to $756,227 for the
same period in 1994. This increase reflects the Company's aggressive acquisition
of funeral service locations and cemeteries. During the year ended December 31,
1995, $693,627 of cash was used for acquisitions. The effect of acquisitions is
detailed in note three to the consolidated financial statements. In addition to
acquisitions, capital expenditures including new construction of facilities and
major improvements to existing properties, continue to require significant
amounts of cash. Cash used for capital expenditures was $125,231 during the year
ended December 31, 1995.
16
18
Cash Flows from Financing Activities: Net cash provided by financing
activities was $565,031 for the year ended December 31, 1995, compared to
$791,302 for the same period in 1994. During 1995, cash inflows included
$862,848 of proceeds from issuances of long-term debt (issued in public and
private offerings) and $331,063 of proceeds from issuances of Company common
stock compared to $562,226 of public offerings last year. In 1995, cash outflows
included $179,636 of scheduled long-term debt payments and cash dividend
payments compared to $67,909 last year. Other cash outflows during 1995 included
a $453,959 net decrease in borrowings under the Company's revolving credit
agreements. In 1994, the Company had a net increase of $295,570 from revolving
credit agreements. See notes six and eleven to the consolidated financial
statements.
The Company believes that debt service has no adverse effect on its
operations or financing activities at the current levels of debt outstanding. As
of December 31, 1995, the Company's debt to capitalization ratio was 46.3%
compared to 54.0% at December 31, 1994. The interest rate coverage ratio for the
year ended December 31, 1995 was 3.11:1, compared to 3.42:1 for the same period
in 1994. 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, 1995, the Company had approximately $430,000 and $255,000 of available
borrowings under its primary and multi-currency credit facilities, respectively.
In addition, as of December 31, 1995, the Company had the ability to issue
$387,000 in securities under the September 1995 shelf registration as well as
7,527,000 shares of common stock and a total of $34,753 of guaranteed promissory
notes and convertible debentures registered with the SEC 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. 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 at the Company's
French funeral service locations. The Company believes prearrangements add
stability to the funeral service industry and will stimulate future revenue
growth. Prearranged funeral services fulfilled as a percent of the total North
American funerals performed annually approximates 22% 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. According to industry studies, cremations currently
account for approximately 20% of all dispositions in the United States. The
Company's North American operations perform substantially more cremations than
the national average. In 1995, slightly over 32% of all families served by the
Company's North American funeral service locations selected the cremation
alternative. 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
17
19
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 11% of all dispositions of
human remains in France. Though a cremation typically results in less 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. The Company believes that the memorialization of cremated remains
represents a source of revenue growth. Since the number of cremations is
increasing, the Company is emphasizing the marketing of memorialization
alternatives.
OTHER MATTERS
The Company will adopt Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FAS 121") in the first quarter of 1996. FAS 121 attempts to
standardize methods used to determine whether the costs of long-lived assets
will be recovered, and how such costs should be tested for value impairment. The
Company has not experienced impairment of its assets, including names and
reputations, in the past and does not anticipate that FAS 121 will have a
material impact on the Company's financial position or results of operations in
the future. In addition, in the first quarter of 1996, the Company plans to
adopt the disclosure requirements of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans.
18
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE
----
Report of Independent Accountants..................................................... 20
Consolidated Statement of Income for the three years ended December 31, 1995.......... 21
Consolidated Balance Sheet as of December 31, 1995 and 1994........................... 22
Consolidated Statement of Cash Flows for the three years ended December 31, 1995...... 23
Consolidated Statement of Stockholders' Equity for the three years ended December 31,
1995................................................................................ 24
Notes to Consolidated Financial Statements............................................ 25
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts............................................... 47
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.
19
21
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, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. We have also audited
the financial statement schedule for the three years ended December 31, 1995,
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 and the financial statement schedule 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, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, 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.
As discussed in Note 15 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for prearranged
funeral contracts and cemetery sales.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 11, 1996
20
22
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Revenues............................................... $1,652,126 $1,117,175 $ 899,178
Costs and expenses..................................... (1,186,905) (775,980) (635,858)
----------- ---------- ---------
Gross profit........................................... 465,221 341,195 263,320
General and administrative expenses.................... (53,600) (51,700) (43,706)
----------- ---------- ---------
Income from operations................................. 411,621 289,495 219,614
Interest expense....................................... (118,148) (80,123) (59,631)
Dividends on preferred securities of SCI Finance LLC... (10,781) (539) --
Other income........................................... 11,519 10,188 13,509
----------- ---------- ---------
(117,410) (70,474) (46,122)
----------- ---------- ---------
Income before income taxes............................. 294,211 219,021 173,492
Provision for income taxes............................. (110,623) (87,976) (70,400)
----------- ---------- ---------
Income before cumulative effect of change in
accounting principles................................ 183,588 131,045 103,092
Cumulative effect of change in accounting principles
(net of income tax).................................. -- -- (2,031)
----------- ---------- ---------
Net income............................................. $ 183,588 $ 131,045 $ 101,061
=========== ========== =========
Earnings per share:
Primary
Income before cumulative effect of change in
accounting principles........................... $ 1.80 $ 1.51 $ 1.24
Cumulative effect of change in accounting
principles
(net of income tax)............................. -- -- (.03)
----------- ---------- ---------
Net income........................................... $ 1.80 $ 1.51 $ 1.21
=========== ========== =========
Fully diluted
Income before cumulative effect of change in
accounting principles............................. $ 1.70 $ 1.43 $ 1.19
Cumulative effect of change in accounting principles
(net of income tax)............................... -- -- (.02)
----------- ---------- ---------
Net income........................................... $ 1.70 $ 1.43 $ 1.17
=========== ========== =========
Weighted average number of shares and equivalents...... 102,074 86,926 83,372
=========== ========== =========
(See notes to consolidated financial statements)
21
23
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Current assets:
Cash and cash equivalents.......................................... $ 29,735 $ 218,341
Receivables, net of allowances..................................... 446,618 291,135
Inventories........................................................ 120,805 60,897
Other.............................................................. 32,371 21,436
---------- ----------
Total current assets....................................... 629,529 591,809
---------- ----------
Investments -- insurance subsidiary.................................. 557,335 --
Prearranged funeral contracts........................................ 1,816,466 1,418,104
Long-term receivables................................................ 759,935 529,843
Cemetery property, at cost........................................... 1,162,556 748,639
Property, plant and equipment, at cost (net)......................... 1,273,722 832,401
Deferred charges and other assets.................................... 312,053 230,336
Names and reputations (net).......................................... 1,152,215 810,756
---------- ----------
$7,663,811 $5,161,888
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................... $ 393,191 $ 154,770
Income taxes....................................................... 68,574 39,084
Current maturities of long-term debt............................... 122,237 277,709
---------- ----------
Total current liabilities.................................. 584,002 471,563
---------- ----------
Long-term debt....................................................... 1,732,047 1,330,177
Deferred income taxes................................................ 437,840 238,088
Other liabilities.................................................... 400,434 233,356
Deferred prearranged funeral contract revenues....................... 2,361,643 1,519,582
Commitments and contingencies........................................ -- --
Company obligated, mandatorily redeemable, convertible preferred
securities of SCI Finance LLC, whose principal asset is a 6.25%,
$216,315 note from the Company..................................... 172,500 172,500
Stockholders' equity:
Common stock, $1 per share par value, 200,000,000 shares
authorized, 117,271,086 and 94,857,060, respectively,
issued and outstanding.......................................... 117,271 94,857
Capital in excess of par value..................................... 1,331,979 718,858
Retained earnings.................................................. 518,562 381,509
Foreign translation adjustment and other........................... 7,533 1,398
---------- ----------
Total stockholders' equity................................. 1,975,345 1,196,622
---------- ----------
$7,663,811 $5,161,888
========== ==========
(See notes to consolidated financial statements)
22
24
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.............................................. $ 183,588 $ 131,045 $ 101,061
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 98,432 76,077 58,214
Provision for deferred income taxes................... 45,164 27,490 29,235
Gains from dispositions (net)......................... (1,024) (2,143) (7,076)
Cumulative effect of change in accounting
principles......................................... -- -- 2,031
Change in assets and liabilities net of effects from
acquisitions:
(Increase) in receivables.......................... (115,888) (103,935) (35,520)
Change in prearranged funeral contracts and
associated deferred revenues..................... (86,685) 42,446 (14,464)
(Increase) decrease in other assets................ (36,496) (35,983) 1,967
Increase (decrease) in other liabilities........... 7,473 27,606 (9,826)
Other.............................................. (3,860) (159) 5,332
--------- --------- ---------
Net cash provided by operating activities............... 90,704 162,444 130,954
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (125,231) (81,090) (59,585)
Proceeds from sales of property and equipment......... 12,655 13,294 24,006
Acquisitions, net of cash acquired.................... (693,627) (711,357) (175,753)
Loans issued by finance subsidiary.................... (38,184) (48,320) (102,328)
Principal payments received on loans by finance
subsidiary......................................... 24,312 76,288 41,652
Change in investments and other....................... (24,266) (5,042) (2,367)
--------- --------- ---------
Net cash used in investing activities................... (844,341) (756,227) (274,375)
--------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving
credit agreements.................................. (453,959) 295,570 37,500
Long-term debt issued................................. 862,848 200,000 150,000
Payments of debt...................................... (135,960) (31,896) (24,283)
Convertible preferred shares of SCI Finance LLC
issued............................................. -- 172,500 --
Common stock issued................................... 331,063 189,726 --
Repurchase of common stock............................ -- ...... -- (1,637)
Dividends paid........................................ (43,676) (36,013) (32,887)
Exercise of stock options and other................... 4,715 1,415 4,297
--------- --------- ---------
Net cash provided by financing activities............... 565,031 791,302 132,990
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (188,606) 197,519 (10,431)
Cash and cash equivalents at beginning of year.......... 218,341 20,822 31,253
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 29,735 $ 218,341 $ 20,822
========= ========= =========
(See notes to consolidated financial statements)
23
25
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOREIGN
CAPITAL IN TRANSLATION
COMMON EXCESS OF RETAINED ADJUSTMENT
STOCK PAR VALUE EARNINGS AND OTHER
--------- ---------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1992.................... $ 76,905 $ 389,238 $220,497 $(3,543)
Add (deduct):
Net income.................................... 101,061
Repurchase of common stock.................... (66) (388) (1,183)
Common stock issued:
Stock option exercises and stock grants.... 995 18,899
Acquisitions............................... 1,418 17,432 (1,422)
Debenture conversion....................... 5,607 92,721
Dividends on common stock ($.40 per share).... (34,074)
Unrealized appreciation of investments........ 1,254
Foreign translation adjustment................ (838)
--------- ---------- -------- -------
Balance at December 31, 1993.................... 84,859 517,902 284,879 (3,127)
Add (deduct):
Net income.................................... 131,045
Retirement of common stock.................... (32) (773)
Common stock issued:
Common stock offering...................... 7,700 182,026
Stock option exercises and stock grants.... 226 3,675
Acquisitions............................... 2,033 7,458 2,729
Debenture conversion....................... 71 1,222
Dividends on common stock ($.42 per share).... (37,144)
Foreign translation adjustment................ 4,525
Gain on sale of subsidiary stock and other.... 7,348
--------- ---------- -------- -------
Balance at December 31, 1994.................... 94,857 718,858 381,509 1,398
Add (deduct):
Net income.................................... 183,588
Common stock issued:
Common stock offerings..................... 9,175 321,888
Stock option exercises and stock grants.... 348 6,140
Acquisitions............................... 3,655 105,622
Debenture conversions...................... 9,236 179,471
Dividends on common stock ($.44 per share).... (46,535)
Foreign translation adjustment and other...... 6,135
--------- ---------- -------- -------
Balance at December 31, 1995.................... $ 117,271 $1,331,979 $518,562 $ 7,533
========= ========== ======== =======
(See notes to consolidated financial statements)
24
26
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world. At
December 31, 1995, the Company operated 2,739 funeral service locations, 318
cemeteries and 139 crematoria located in North America, Europe and Australia.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. The
funeral service locations provide all professional services relating to
funerals, including the use of funeral facilities and motor vehicles. Funeral
homes sell funeral related merchandise and certain funeral service locations
contain crematoria. The Company markets prearranged funeral services whereby a
customer contractually agrees to the terms of a funeral to be performed in the
future. 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. Cemeteries also 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.
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 cost, which is not in excess of market,
determined using average cost.
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, plant and equipment are
depreciated over a period ranging from seven to 50 years for property and plant
while equipment is depreciated over a period from three to 20 years. For the
three years ended December 31, 1995, depreciation expense was $52,828, $35,546
and $26,757, 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 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. 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") which was acquired in the 1995 French
25
27
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition (see note three). 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.
Prearranged funeral trust earnings and increasing insurance benefits are
accrued and deferred until the service is performed 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 average life of the prearranged
contract. The aggregate net costs deferred as of December 31, 1995 and 1994 were
$87,638 and $53,962, respectively.
Cemetery Operations: All cemetery interment right sales, together with
associated merchandise, are recorded to 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, 1995 and 1994 were $314,400 and $176,071, respectively,
which approximates fair value. The Company recognizes accrued 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. Perpetual care funds trusted at
December 31, 1995 and 1994 were $242,449 and $216,706, 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, 1995, the
earnings recognized from all cemetery trusts were $33,795, $24,456 and $23,721,
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 non-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 $25,226, $15,495 and $10,339 for the three years
ended December 31, 1995, respectively. Accumulated amortization of names and
reputations as of December 31, 1995 and 1994 was $77,855 and $52,290,
respectively.
Derivatives: The Company enters into derivatives in the form of interest
rate swaps and cross-currency interest rate swaps 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 credit worthy 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 are entered into concurrently with
significant foreign acquisitions and convert U.S. dollar debt into the
respective foreign currency of the acquisitions. Such cross-currency swaps are
26
28
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 generally offset by a corresponding
movement in the earnings of the foreign operation (see note seven).
Interest rate swap settlements are generally semi-annual and match the
coupon settlements of the underlying debt being hedged or related intercompany
loan payments from the foreign operation. 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. In the cross-currency swaps,
the notional amount is exchangeable in accordance with the terms of the swaps:
at maturity for non-amortizing swaps or according to a defined amortization
table for swaps which are amortizing. 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 ($2,193 net unamortized loss at December 31,
1995).
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 those estimates.
NOTE THREE
ACQUISITIONS
On August 25, 1995, the Company acquired an approximate 51% interest in
Omnium de Gestion et de Financement S.A. ("OGF"). OGF, in turn, owned
approximately 65% of Pompes Funebres Generales S.A. ("PFG"). OGF and PFG, when
combined, is the largest funeral service organization in Europe, operating 1,099
funeral service locations, 28 crematoria and Auxia which primarily sells
insurance policies in connection with OGF/PFG's prearranged funeral business. On
December 31, 1995, the Company owned shares representing over 98% of OGF and
over 96% of PFG with the intent to acquire 100% of the outstanding shares of
both companies. The total purchase price for OGF and the portion of PFG not
owned by OGF is expected to be approximately $577,000 consisting of cash and
debt assumed. Financing for this acquisition was initially provided by
borrowings under a short-term French revolving credit facility, with permanent
financing provided by issuances of notes and Company common stock in October
1995 (see notes six and eleven). OGF/PFG was accounted for as a purchase and the
results of operations have been consolidated with the Company's since August 25,
1995.
On October 11, 1995, the Company purchased Gibraltar Mausoleum Corporation
("Gibraltar"). Gibraltar, a private funeral and cemetery company based in
Indianapolis, owned 23 funeral service locations and 54 cemeteries. The purchase
price of approximately $267,000 was financed through the issuance of securities
under the Company's acquisition shelf registration and borrowings under the
Company's revolving credit facilities.
27
29
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1994 the Company acquired the two largest publicly-traded funeral
service providers in the United Kingdom, Great Southern Group plc and
Plantsbrook Group plc. These firms owned a combined 534 funeral service
locations, 13 crematoria and two cemeteries. The purchase price of approximately
$508,000 was primarily funded by borrowings under two short-term bank facilities
in the United Kingdom (subsequently repaid or refinanced with long-term
securities in early 1995), other revolving credit borrowings and debt assumed by
the Company. Both acquisitions were accounted for as purchases and the results
of operations have been consolidated with the Company since September 1, 1994.
In addition to the acquisitions disclosed above, the Company has acquired
certain other funeral and cemetery operations during the years ended December
31, 1995 and 1994. The operating results of all of these acquisitions have been
included since their respective dates of acquisitions.
The following table is a summary of the above acquisitions made during the
two years ended December 31, 1995 accounted for as purchases:
1995 1994
--------- --------
Number acquired:
Funeral service locations................................... 1,263 674
Cemeteries.................................................. 99 28
Crematoria.................................................. 30 24
Purchase price................................................ $1,145,777 $814,493
The purchase price in both years consisted primarily of combinations of
cash, Company common stock, issued and assumed debt and the retirement of loans
receivable issued by Provident.
In addition on September 5, 1995, the Company acquired the shares of
Service Corporation International (Canada) Limited ("SCIC") not already owned by
the Company. This transaction eliminated the approximate 31% minority interest
ownership of SCIC and made SCIC a wholly owned subsidiary of the Company. On
that date SCIC owned 75 funeral service locations and three cemeteries. The
purchase price of approximately $62,578 was financed through borrowings under
the Company's existing revolving credit agreements, with permanent financing
provided by the issuance of an amortizing note in December 1995.
The effect of the above acquisitions on the consolidated balance sheet at
December 31, was as follows:
1995 1994
--------- --------
Current assets................................................. $ 171,431 $ 43,754
Investments-insurance subsidiary............................... 541,784 --
Prearranged funeral contracts.................................. 132,158 126,721
Long-term receivables.......................................... 155,013 (9,363)
Cemetery property.............................................. 423,852 323,633
Property, plant and equipment.................................. 379,616 195,289
Deferred charges and other assets.............................. 42,949 4,721
Names and reputations.......................................... 363,506 398,583
Current liabilities............................................ (320,158) (60,814)
Long-term debt................................................. (89,724) (50,122)
Deferred income taxes and other liabilities.................... (341,070) (104,935)
Deferred prearranged funeral contract revenues................. (656,453) (143,890)
Stockholders' equity........................................... (109,277) (12,220)
--------- --------
Cash used for acquisitions................................... $ 693,627 $711,357
========= ========
28
30
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information assumes that the acquisition
by the Company of all operations acquired during the years ended December 31,
1995 and 1994 took place on January 1, 1994 (1,937 funeral service locations,
127 cemeteries and 54 crematoria acquired in 158 separate transactions.) This
information also assumes that the net proceeds from the Company's December 1994
public offerings of Company common stock, 8.375% notes and convertible preferred
securities of SCI Finance LLC and October 1995 public offerings of notes and
Company common stock (disclosed in notes six and eleven) were issued at the
beginning of 1994. The net proceeds of the December 1994 public offerings were
first applied toward the purchase price of the Company's September 1994
acquisitions in the United Kingdom, with the excess net proceeds used to repay
amounts outstanding under the Company's existing revolving credit facilities.
The net proceeds of the October 1995 public offerings were first applied toward
the purchase price of OGF/PFG, with the excess net proceeds used to repay
amounts outstanding under the Company's existing revolving credit facilities.
This unaudited pro forma information may not be indicative of results that would
have actually resulted if these transactions had occurred on the dates indicated
or which may be obtained in the future.
YEARS ENDED DECEMBER
31,
-----------------------
1995 1994
--------- ---------
(UNAUDITED)
Revenues..................................................... $2,127,459 $1,957,091
========== ==========
Net income................................................... $ 200,580 $ 168,457
========== ==========
Primary earnings per common share............................ $ 1.80 $ 1.56
========== ==========
NOTE FOUR
PREARRANGED FUNERAL CONTRACTS
At December 31, 1995, amounts due from trust funded contracts ($866,829)
and amounts due from third party insurance funded contracts ($949,637) will be
available to the Company at the time the funeral services are performed and are
shown net of estimated customer cancellations. The cancellation rate is based on
historical experience equivalent to approximately 8% of the total balance.
Accumulated earnings from trust funds and increasing insurance benefits have
been included to the extent that they have accrued through December 31, 1995.
The cumulative total has been reduced by allowable cash withdrawals for trust
earnings and amounts retained by the Company pursuant to various state laws.
29
31
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIVE
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:
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
United States....................................... $257,318 $198,961 $157,004
Foreign............................................. 36,893 20,060 16,488
-------- -------- --------
$294,211 $219,021 $173,492
======== ======== ========
Provision for income taxes:
Current:
United States..................................... $ 43,396 $ 43,290 $ 29,449
Foreign........................................... 12,949 9,443 6,083
State and local................................... 9,114 7,753 5,633
-------- -------- --------
65,459 60,486 41,165
-------- -------- --------
Deferred:
United States..................................... 39,767 25,282 26,245
Foreign........................................... (1,498) (219) (512)
State and local................................... 6,895 2,427 3,502
-------- -------- --------
45,164 27,490 29,235
-------- -------- --------
Total provision..................................... $110,623 $ 87,976 $ 70,400
======== ======== ========
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- ------- -------
Computed tax provision at the applicable federal
statutory income tax rate.............................. $102,974 $76,658 $60,722
State and local taxes, net of federal income tax
benefits............................................... 10,406 6,617 5,930
Dividends received deduction and tax exempt interest..... (1,939) (1,425) (1,767)
Amortization of names and reputations.................... 4,554 3,807 3,426
Enacted tax rate increase for deferred income taxes...... -- -- 2,431
Foreign tax rate difference.............................. (5,309) 2,144 (26)
Other.................................................... (63) 175 (316)
-------- -------- --------
Provision for income taxes............................. $110,623 $87,976 $70,400
======== ======== ========
Total effective tax rate................................. 37.6% 40.2% 40.6%
======== ======== ========
30
32
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities as of December 31, were as follows:
1995 1994
-------- --------
Receivables, principally due to sales of cemetery interment
rights and related products.................................. $128,755 $ 85,532
Inventories and cemetery property, principally due to purchase
accounting adjustments....................................... 317,937 173,430
Property, plant and equipment, principally due to depreciation
and to purchase accounting adjustments....................... 110,755 72,194
Other.......................................................... 5,519 --
-------- --------
Deferred tax liabilities..................................... 562,966 331,156
-------- --------
Deferred revenue on prearranged funeral contracts, principally
due to earnings from trust funds............................. (49,889) (42,704)
Accrued liabilities............................................ (20,273) (17,577)
Carry-forwards and foreign tax credits......................... (10,888) (11,592)
-------- --------
Deferred tax assets.......................................... (81,050) (71,873)
-------- --------
Valuation allowance.......................................... 8,729 5,390
-------- --------
Net deferred income taxes.................................... $490,645 $264,673
======== ========
During the three years ended December 31, 1995, tax expense resulting from
allocating certain tax benefits directly to capital in excess of par totaled
$1,165, $1,223 and $1,197, 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.
United States income taxes have not been provided on $87,912 of
undistributed earnings of foreign subsidiaries since it is the Company's
intention to reinvest such earnings indefinitely.
As of December 31, 1995 the Company has United States foreign tax credit
carry-forwards of $5,509 and worldwide net operating loss carry-forwards of
$4,108 principally related to acquired subsidiaries which will expire in the
years 1996 through 2010.
Various subsidiaries have state operating loss carry-forwards of $30,825
with expiration dates through 2010.
The Company believes that some uncertainty exists with respect to future
realization of these tax credits 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
the foreign tax credits.
Actual cash disbursements for income taxes and other tax assessments during
the three years ended December 31, 1995, totaled $65,859, $69,555 and $46,557,
respectively.
31
33
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIX
DEBT
Debt at December 31, was as follows:
1995 1994
---------- ----------
Bank revolving credit agreements and commercial paper....... $ 226,611 $ 680,570
6.375% notes due in 2000.................................... 150,000 --
8.72% amortizing notes due in 2002.......................... 178,866 --
8.375% notes due in 2004.................................... 200,000 200,000
6.875% notes due in 2007.................................... 150,000 --
6.95% amortizing notes due in 2010.......................... 63,837 --
7.875% debentures due in 2013............................... 150,000 150,000
7.0% notes due in 2015...................................... 300,000 --
Medium term notes, maturities through 2019, fixed average
interest rate of 9.6%..................................... 186,040 234,700
6.5% convertible subordinated debentures, redeemed at $20.74
per common share in 1995.................................. -- 172,500
8% convertible debentures, redeemed at $18 per common share
in 1995................................................... -- 14,939
5.0% convertible debentures, interest rates range from
5% -- 5.5%, due through 2005, conversion price ranges
from $22.50 -- $48.81..................................... 27,090 25,618
Mortgage notes payable with maturities through 2013, average
interest rate is 7.9%..................................... 99,025 69,684
Other....................................................... 122,815 59,875
---------- ----------
Total debt.................................................. 1,854,284 1,607,886
Less current maturities..................................... (122,237) (277,709)
---------- ----------
Total long-term debt.............................. $1,732,047 $1,330,177
========== ==========
The Company's primary revolving credit agreement provides for borrowings up
to $800,000. The 364-day portion allows for borrowings up to $450,000, and is
used primarily to support commercial paper. The agreement expires June 28, 1996,
but has provisions to be extended for 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 ranging from .06% to .15% is paid quarterly
on the total commitment amount. At December 31, 1995, there was $20,000 of
commercial paper outstanding backed by this agreement at a weighted average
interest rate of 5.98%. In addition, the Company has a multi-currency revolving
credit agreement which allows for borrowings of up to $350,000, including up to
$75,000 each in Pound Sterling, Canadian Dollar and Australian Dollar. This
agreement expires June 30, 2000, but has provisions to extend the termination
date each year for 364-day periods. Interest rates are based on various indices
as determined by the Company. In addition, a facility fee ranging from .085% to
.15% is paid quarterly on the total commitment amount. At December 31, 1995,
there was $95,176 outstanding under this agreement at a weighted average
interest rate of 7.12%. These credit agreements disclosed above contain
financial compliance provisions that contain certain restrictions on levels of
net worth, debt, equity, liens, letters of credit and guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at December 31, 1995 are classified as long-term debt.
It is the Company's intent to refinance such borrowings through the use of its
credit agreements or other long-term notes issued under the Company's shelf
registration.
32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1995, the Company entered into a French revolving credit
agreement with a 364-day term which currently allows for borrowings, in French
francs, up to $150,000. Borrowings under the facility were used to provide short
term financing for the purchase of OGF/PFG. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of .075% is
paid quarterly on the total commitment amount. At December 31, 1995, $99,095 was
outstanding under this agreement at a weighted average interest rate of 5.78%.
The Company also has a bank line of credit for $100,000 (no borrowings
outstanding at December 31, 1995) at rates similar to the primary revolving
credit agreements. This line may be withdrawn at any time at the option of the
bank. Additionally, the Company has approximately $64,000 in lines of credit
with several international banks and at December 31, 1995, $12,340 was borrowed
under these international lines of credit. All borrowings under the Company's
various lines of credit are included in long-term debt.
In October 1995, the Company issued $300,000 of notes which were sold
through an underwritten public offering pursuant to the Company's $1,000,000
shelf registration that became effective in September 1995. These notes were
issued in two tranches of $150,000 each with maturities in October 2000 and 2007
and interest rates of 6.375% and 6.875%, respectively. The net proceeds from
this offering were used primarily to finance the Company's acquisition of
OGF/PFG.
In January 1995, the Company issued $199,011 of 8.72% fixed rate, seven
year amortizing notes through a private offering. The net proceeds from this
offering were used to finance the Company's 1994 United Kingdom acquisitions.
In December 1994, the Company issued, through an underwritten public
offering, $200,000 in 8.375% notes at an original discount price of 99.247%. The
notes are considered senior debt and are not redeemable by the Company prior to
maturity. The Company used the net proceeds of this issue to repay existing debt
outstanding under the Company's bank revolving credit agreements.
In December 1995, the Company issued $63,837 of 6.95% fixed rate, fifteen
year amortizing notes through a private offering. The net proceeds from this
offering were used to finance the Company's purchase of the minority interest of
SCIC.
The $150,000 of 7.875% debentures were issued in February 1993 and are
considered senior debt and are not redeemable prior to maturity.
In June 1995, the Company issued $300,000, 7% notes due in June 2015. The
holders of the notes have the right to require the Company to redeem such notes,
in whole or in part, on June 1, 2002 at a redemption price equal to 100% of the
aggregate principal amount thereof plus accrued unpaid interest. The net
proceeds of the notes were used to repay existing amounts outstanding under the
Company's existing revolving credit facilities or to retire commercial paper
backed by such facilities.
The Company has outstanding $186,040 in medium term notes with maturities
from two to 24 years which are not callable prior to maturity. The average
remaining maturity for the notes is approximately 15 years.
At December 31, 1995, other debt and current maturities include $53,500 of
promissory notes issued in the Gibraltar purchase. These notes were repaid in
January 1996. At December 31, 1994, current maturities include $204,759 (6.16%
weighted average interest rate) of bank borrowings used in the United Kingdom
acquisitions that were repaid during the first quarter of 1995.
Some of the Company's facilities and cemetery properties are pledged as
collateral for the mortgage notes.
Additionally, at December 31, 1995, the Company had $40,519 letters of
credit outstanding primarily to guarantee funding of certain insurance claims.
33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate principal payments on debt for the five years subsequent to
December 31, 1995, excluding amounts due to banks under revolving credit loan
agreements are: 1996 -- $122,237; 1997 -- $76,149; 1998 -- $38,979;
1999 -- $41,519 and 2000 -- $201,069.
Cash interest payments for the three years ended December 31, 1995 totaled
$111,609, $77,334 and $61,062, respectively.
In general, interest rates are managed such that up to 50% of the total
debt (excluding debt which offsets the Provident loan receivable portfolio) is
floating rate debt and therefore is sensitive to interest rate fluctuations.
After giving effect to the interest rate and cross-currency interest rate swaps
discussed in notes two and seven, the Company's total debt has been converted
into approximately $1,338,000 of fixed rate debt at a weighted average rate of
7.96% and approximately $516,000 of floating rate debt at a weighted average
rate of 6.75%.
NOTE SEVEN
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
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). See note two.
The following is a summary of these swap agreements at December 31, 1995:
WEIGHTED
CARRYING AVERAGE INTEREST
AMOUNT RATE
NOTIONAL ASSET -------------------
AMOUNT (LIABILITY) MATURITY RECEIVE PAY
---------- ----------- --------- ------- -------
Interest Rate Swaps:
US dollar fixed to US dollar
floating............................ $ 75,000 $ -- 1999 5.36% 5.88%
Canadian dollar floating to Canadian
dollar fixed........................ 40,310 -- 1999 5.98 7.57
Cross-Currency Interest Rate Swaps:
US dollar fixed to French franc
fixed............................... 302,221 (2,221) 2000-2007 6.75 6.96
US dollar fixed to British pound
fixed............................... 251,417 753 2002-2004 8.63 9.22
US dollar fixed to British pound
floating............................ 207,812 916 2002-2004 8.35 6.85
US dollar floating to Australian dollar
fixed............................... 73,395 (5,827) 1999-2000 5.56 7.03
US dollar floating to Australian dollar
floating............................ 32,714 (3,278) 2000 5.56 7.35
US dollar fixed to Canadian dollar
floating............................ 99,345 655 2010 6.95 6.58
---------- -------
$1,082,214 $(9,002)
========== =======
The net fair value of the Company's various swap agreements at December 31,
1995 is $34,905. Fair values were obtained from counterparties to the agreements
and represent their estimate of the amount the Company would receive to
terminate the swap agreements based upon the existing terms and current market
conditions. At December 31, 1994, the net fair value was a payable owed by the
Company of $15,200. The fair value of the Company's swap agreements may vary
substantially with changes in interest and currency rates. At December 31, 1995,
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 certain contract provisions. Management
believes that any credit exposure with respect to this and other favorable
positions is remote.
34
36
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and cemetery operators. These financial instruments also
include loan commitments of $28,319 at December 31, 1995 ($10,068 at December
31, 1994) to extend credit. Provident's total loans outstanding at December 31,
1995 were approximately $214,000 and include a loan in the amount of $100,143 to
one customer. Although this represents a concentration of credit risk, the
Company believes no significant credit risk exists. Provident evaluates each
borrower's credit worthiness 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 because of the wide
dispersion of the customers served. Procedures are in effect to monitor the
credit worthiness 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.
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. It is not
practicable to estimate the fair value of receivables due on cemetery contracts
without incurring excessive costs because of the large number of individual
contracts with varying terms. The carrying amounts of prearranged funeral
contracts and the related deferred prearranged funeral revenue approximate their
fair value.
The carrying amounts and fair values of the Company's fixed rate long-term
obligations as of December 31, were as follows:
1995 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
6.375% notes.............................. $150,000 $152,881 $ -- $ --
8.72% amortizing notes.................... 178,866 206,904 -- --
8.375% notes.............................. 200,000 228,155 200,000 197,319
6.875% notes.............................. 150,000 157,369 -- --
6.95% amortizing notes.................... 63,837 66,944 -- --
7.875% debentures......................... 150,000 165,799 150,000 137,663
7.0% notes................................ 300,000 305,149 -- --
Medium term notes......................... 186,040 224,053 234,700 244,692
5.0% convertible debentures............... 27,090 24,760 25,618 19,622
8.0% convertible debentures............... -- -- 14,939 14,305
Mortgage notes payable.................... 99,025 99,159 69,684 66,731
6.5% convertible preferred securities of
SCI Finance LLC......................... 172,500 174,903 172,500 172,500
The fair value of the above 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 the
revolving credit agreements approximate fair value because the rates on such
agreements are variable, based on current market conditions.
35
37
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all of the Company's remaining long-term debt and receivables
carry variable interest rates and their carrying amounts approximate fair value.
NOTE EIGHT
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 earned through December 31, 1995. The Company will continue
to defer 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 will recognize the fixed contract price as well as
total accumulated trust earnings and increasing insurance benefits as funeral
revenues.
The recognition in future funeral revenues is estimated to occur in the
following years based on actuarial assumptions as follows:
1996..................................................... $ 219,339
1997..................................................... 202,481
1998..................................................... 186,128
1999..................................................... 171,118
2000..................................................... 156,703
2001 through 2005........................................ 599,738
2006 and thereafter...................................... 826,136
--------
$2,361,643
========
NOTE NINE
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
1996....................................................... $44,228
1997....................................................... 39,405
1998....................................................... 32,468
1999....................................................... 23,536
2000....................................................... 15,204
Thereafter................................................. 73,817
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, 1995, rental expense was $47,848, $36,244 and $33,673,
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, 1995, $55,419, $48,053 and $36,138, respectively, was
charged to expense. At December 31, 1995, the maximum estimated future expense
under all agreements with a remaining term in excess of one year is $188,776,
including $14,924 with certain officers of the Company.
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into a minimum purchase agreement with a major
casket manufacturer. 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 1998 and contains a remaining purchase
commitment of approximately $164,000. During the three years ended December 31,
1995, the Company purchased caskets for $48,828, $47,098 and $41,200,
respectively, under this agreement.
Included in the Company's acquisition of OGF/PFG is an eight year
(beginning in January 1996) casket purchase agreement with a French casket
manufacturer. The total value of merchandise to be purchased under the contract
is approximately $28,000.
NOTE TEN
CONVERTIBLE PREFERRED SECURITIES OF SCI FINANCE LLC
In December 1994 SCI Finance LLC, a subsidiary of the Company, issued,
through an underwritten public offering, 3,450,000 shares of 6.25% convertible
preferred shares. These shares are non-voting, carry a liquidation value of $50
per share and are convertible into Company common stock at a conversion price of
$30.09 per share at any time unless previously redeemed. Liquidation may occur
after December 5, 1999 unless earlier redemption is permitted based on Company
common stock price performance. The proceeds from this offering were used in
1995 to repay bank debt incurred in connection with the United Kingdom
acquisitions.
NOTE ELEVEN
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, 1995. At December
31, 1995, 200,000,000 common shares of one dollar par value were authorized,
117,271,086 shares were issued and outstanding (94,857,060 at December 31,
1994), net of 20,113 shares held, at cost, in treasury (16,875 at December 31,
1994).
In October 1995, the Company issued 8,395,000 shares of common stock at a
net price of $37.30 per share through an underwritten public offering pursuant
to the Company's September 1995 $1,000,000 shelf registration. The net proceeds
of approximately $313,000 from the offering were used primarily to finance the
Company's worldwide acquisition program including OGF/PFG. In addition, on
October 11, 1995, the Company completed the purchase of Gibraltar and issued
3,286,759 shares of Company common stock as part of the purchase price.
During the fourth quarter of 1995, the Company redeemed the remaining
outstanding 6.5% convertible subordinated debentures due in 2001. This
redemption resulted in the issuance of 8,317,261 shares of Company common stock.
In December 1994 and January 1995 the Company sold, through an underwritten
public offering, 8,480,000 common shares at a net $24.70 per share. The net
proceeds of approximately $209,000 were used to repay existing bank debt.
The fully diluted earnings per share calculation assumes full conversion
into common stock of the Company's various convertible securities.
The Company has stockholder approved 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, 1995,
37
39
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4,617,500 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 ($50 and $60 per share) and
for certain of these options an additional earnings per share growth increase is
required. If the pre-determined stock prices and earnings per share growth are
not met in the required time period the options will fully vest in periods
ranging from eight to 13 years from date of grant. At December 31, 1995 and
1994, 1,714,328 and 477,494 shares, respectively, were reserved for future
option grants under all stock option plans.
The following sets forth certain stock option information:
OPTION PRICE
OPTIONS PER SHARE
-------- ------------
Outstanding at December 31, 1992.................................... 1,265,594 $ 8.00-17.17
Granted........................................................... 267,250 14.17-26.00
Exercised......................................................... (401,387) 9.25-18.81
Cancelled......................................................... (25,002) 14.17-18.81
--------- ------------
Outstanding at December 31, 1993.................................... 1,106,455 8.00-26.00
--------- ------------
Granted........................................................... 4,285,750 10.08-26.94
Exercised......................................................... (171,202) 8.75-18.81
Cancelled......................................................... (33,977) 8.00-26.94
--------- ------------
Outstanding at December 31, 1994.................................... 5,187,026 9.25-26.94
--------- ------------
Granted........................................................... 1,427,000 27.81-40.19
Exercised......................................................... (334,276) 9.25-28.44
Cancelled......................................................... (488,834) 14.17-28.44
--------- ------------
Outstanding at December 31, 1995.................................... 5,790,916 $ 9.25-40.19
========= ============
Exercisable at December 31, 1995.................................... 603,381 $ 9.25-26.94
========= ============
At December 31, 1995, the Company has reserved 1,476,683 shares of its
common stock under stockholder approved plans for restricted stock grants to be
awarded to key employees and non-employee directors. These plans contain a
restriction period of not less than six months and not more than 10 years,
during which time the recipient will be prohibited from disposition of the
awarded common stock and also a requirement that the employee recipient remain
employed by the Company and the non-employee director continue to serve as a
director prior to lapse of the restricted period. For the three years ended
December 31, 1995, 64,300, 66,100 and 652,481 shares were awarded under these
plans, respectively.
In May 1996, subject to shareholder approval, the Company will initiate the
1996 Incentive Plan. This plan reserves 6,000,000 shares of common stock for
future awards of stock options and/or restricted stock to officers and key
employees of the Company and will replace all shares of common stock available
for future grant under existing stock option and restricted stock plans.
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.
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE TWELVE
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,
marketable equity securities and mortgage notes. The marketable equity
securities include shares of Company common stock with a value of $7,268 at
December 31, 1995. 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:
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
Service cost -- benefits earned during the period............ $ 6,996 $ 6,179 $ 6,719
Interest cost on projected benefit obligation................ 9,114 7,686 6,886
Return on plan assets........................................ (15,752) (5,252) (4,311)
Net amortization and deferral of gain........................ 12,189 2,056 1,201
-------- ------- -------
$ 12,547 $10,669 $10,495
======== ======= =======
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plans' funded status at December 31, was as follows:
1995 1994
---------------------- ----------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------- ---------- ------- ----------
Vested benefit obligation........................ $75,586 $ 38,205 $64,022 $ 30,010
======= ======= ======= ========
Accumulated benefit obligation................... $80,897 $ 38,308 $67,675 $ 30,128
======= ======= ======= ========
Projected benefit obligation..................... $89,363 $ 38,341 $74,280 $ 30,144
Plans' assets at fair value...................... 91,058 -- 69,030 --
------- ------- ------- --------
Plans' assets in excess (deficit) of projected
benefit obligation............................. 1,695 (38,341) (5,250) (30,144)
Unrecognized net loss from past experience and
effects of changes in assumptions.............. 14,005 8,121 15,668 2,296
Prior service cost not yet recognized in net
periodic pension cost.......................... (2,395) 12,345 (2,755) 13,940
------- ------- ------- --------
Accrued pension cost............................. 13,305 (17,875) 7,663 (13,908)
Adjustment for additional minimum liability...... -- (20,433) -- (16,220)
------- ------- ------- --------
Retirement plan asset (liability)................ $13,305 $(38,308) $ 7,663 $(30,128)
======= ======= ======= ========
The following assumed rates were used in the determination of the plans'
funded status:
1995 1994
--------------------- ---------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------ ---------- ------ ----------
Discount rate used to determine obligations......... 7.25% 7.25% 8.5% 8.5%
Assumed rate of compensation increase............... 5.5 5.5 5.5 5.5
Assumed rate of return on plan assets............... 8.0 -- 8.0 --
40
42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THIRTEEN
MAJOR SEGMENTS OF BUSINESS
The Company conducts funeral and cemetery operations principally in the
United States, Australia, Canada, France and the United Kingdom and offers
financial services in the United States.
FINANCIAL
FUNERAL CEMETERY SERVICES CORPORATE CONSOLIDATED
--------- --------- --------- --------- ------------
Revenues:
1995.............................. $1,166,247 $ 463,754 $ 22,125 $ -- $ 1,652,126
1994.............................. 754,408 343,521 19,246 -- 1,117,175
1993.............................. 603,099 280,421 15,658 -- 899,178
Income from operations:
1995.............................. $ 295,151 $ 160,442 $ 9,628 $ (53,600) $ 411,621
1994.............................. 222,605 110,226 8,364 (51,700) 289,495
1993.............................. 177,091 79,739 6,490 (43,706) 219,614
Identifiable assets:
1995.............................. $5,112,283 $2,152,627 $ 219,009 $ 179,892 $ 7,663,811
1994.............................. 3,115,053 1,417,081 213,257 416,497 5,161,888
1993.............................. 2,299,177 952,844 253,314 177,969 3,683,304
Depreciation and amortization:
1995.............................. $ 78,368 $ 11,772 $ 33 $ 8,259 $ 98,432
1994.............................. 54,028 9,969 120 11,960 76,077
1993.............................. 37,130 8,506 197 12,381 58,214
Capital expenditures:(1)
1995.............................. $ 442,227 $ 480,372 $ 10 $ 6,090 $ 928,699
1994.............................. 212,660 384,402 -- 2,950 600,012
1993.............................. 107,046 165,408 -- 5,241 277,695
Number of operating locations at
year end:
1995.............................. 2,836 360 -- -- 3,196
1994.............................. 1,534 259 -- -- 1,793
1993.............................. 835 224 -- -- 1,059
- ---------------
(1) Includes $803,468, $518,922 and $218,110 for the three years ended December
31, 1995, respectively, for purchases of property, plant, and equipment and
cemetery property of acquired businesses.
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic segment information was as follows:
UNITED OTHER OTHER
STATES FRANCE* EUROPEAN* FOREIGN** CONSOLIDATED
---------- ---------- --------- -------- ------------
Revenues:
1995............................. $1,178,407 $ 188,844 $ 151,917 $132,958 $ 1,652,126
1994............................. 975,971 -- 42,613 98,591 1,117,175
1993............................. 848,534 -- -- 50,644 899,178
Income from operations:
1995............................. $ 314,698 $ 18,743 $ 34,214 $ 43,966 $ 411,621
1994............................. 245,230 -- 10,266 33,999 289,495
1993............................. 202,845 -- -- 16,769 219,614
Identifiable assets:
1995............................. $5,243,756 $1,169,484 $ 780,483 $470,088 $ 7,663,811
1994............................. 4,168,636 -- 683,612 309,640 5,161,888
1993............................. 3,495,056 -- -- 188,248 3,683,304
Number of operating locations at
year end:
1995............................. 1,274 1,067 618 237 3,196
1994............................. 1,043 -- 549 201 1,793
1993............................. 920 -- -- 139 1,059
- ---------------
* French operations began in September 1995, United Kingdom operations began
in September 1994.
** Includes Canadian and Australian operations.
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FOURTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts at December 31, was as
follows:
1995 1994
-------- --------
Cash and cash equivalents:
Cash.................................................................. $ 19,250 $ 24,976
Commercial paper and temporary investments............................ 10,485 193,365
-------- --------
$ 29,735 $218,341
======== ========
Receivables and allowances:
Current:
Trade accounts..................................................... $242,268 $132,211
Cemetery contracts................................................. 193,768 124,873
Loans and other notes.............................................. 82,151 76,093
-------- --------
518,187 333,177
Less:
Allowance for contract cancellations and doubtful accounts......... 34,147 20,156
Unearned finance charges and valuation discounts................... 37,422 21,886
-------- --------
71,569 42,042
-------- --------
$446,618 $291,135
======== ========
Long-term:
Cemetery contracts................................................. $255,297 $153,212
Loans and other notes.............................................. 257,415 245,017
Trusted cemetery merchandise sales................................. 314,400 176,071
-------- --------
827,112 574,300
Less:
Allowance for contract cancellations and doubtful accounts......... 23,298 16,086
Unearned finance charges and valuation discounts................... 43,879 28,371
-------- --------
67,177 44,457
-------- --------
$759,935 $529,843
======== ========
Interest rates on cemetery contracts and loans and other notes receivable
range from 3.0% to 12.5% at December 31, 1995. Included in loans and other notes
receivable are $15,390 in notes with officers and employees of the Company, the
majority of which are collateralized by real estate, and $20,164 in notes with
other related parties.
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------------
1995 1994
--------- ----------
Cemetery property:
Undeveloped land................................................... $ 839,797 $ 450,722
Developed land, lawn crypts and mausoleums......................... 322,759 297,917
---------- --------
$1,162,556 $ 748,639
========== ========
Property, plant and equipment:
Land............................................................... $ 314,185 $ 245,285
Buildings and improvements......................................... 884,178 587,180
Operating equipment................................................ 279,560 173,369
Leasehold improvements............................................. 42,844 30,351
---------- --------
1,520,767.. 1,036,185
Less: accumulated depreciation..................................... (247,045) (203,784)
---------- --------
$1,273,722 $ 832,401
========== ========
Accounts payable and accrued liabilities:
Trade payables..................................................... $ 98,984 $ 25,988
Dividends.......................................................... 12,902 10,044
Payroll............................................................ 93,375 33,051
Unpaid acquisition cost............................................ 19,493 --
Interest........................................................... 24,633 22,706
Insurance.......................................................... 44,848 17,765
Other.............................................................. 98,956 45,216
---------- --------
$ 393,191 $ 154,770
========== ========
NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
Common stock issued under restricted stock plans.............. $ 1,868 $ 1,724 $14,393
Notes receivable exchanged for preferred stock investment..... -- -- 2,520
Minimum liability under retirement plans...................... 4,213 (382) 12,642
Debenture conversions to common stock......................... 188,707 1,293 97,164
Cumulative effect of change in accounting principles.......... -- -- 2,031
Property distributed from prearranged funeral trust........... -- 9,920 --
Common stock issued in acquisitions........................... 109,277 9,491 18,850
Debt issued in acquisitions................................... 114,609 36,567 20,651
44
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIFTEEN
CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1993, the Company changed the following accounting
principles:
(a) All price guaranteed prearranged funeral contracts are included in
the consolidated balance sheet as a long-term asset with a corresponding
credit to deferred prearranged funeral contract revenues. Insurance funded
contracts were previously disclosed in a note to the consolidated financial
statements and certain trust funded contracts were previously included
under other captions in the consolidated balance sheet. This change had no
effect on the existing policy of recognizing revenue until the funeral
service is performed.
(b) Prearranged funeral trust earnings previously recognized as
current income are now deferred until the funeral service is performed.
Increasing benefits under insurance funded contracts are now accrued and
deferred until the funeral service is performed.
(c) All sales of cemetery interment rights and other related products
are recorded as revenues when customer contracts are signed with concurrent
recognition of related costs. Allowances for customer cancellations are
provided at the date of sale based upon historical experience. Previously,
certain sales were generally deferred under accounting principles
prescribed for sales of real estate. Under the Company's application of
this method of accounting for sales of real estate, revenues and costs were
deferred until 20% of the contract amount had been collected.
(d) Funds held in perpetual care cemetery trusts were previously
included on the consolidated balance sheet, whereas now such amounts are
excluded.
The cumulative effect of these changes resulted in an after tax charge of
$2,031 or $.03 per share on January 1, 1993.
NOTE SIXTEEN
PROSPECTIVE ACCOUNTING CHANGES
FAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and FAS 123 "Accounting for Stock-Based
Compensation" become effective in 1996. FAS 121 attempts to standardize methods
used to determine whether the costs of long-lived assets will be recovered, and
how such costs should be tested for value impairment. FAS 123 establishes
financial accounting and reporting standards for stock based employee
compensation plans. Adoption of these standards are not expected to materially
affect the Company's financial position or results of operations.
NOTE SEVENTEEN
RELATED PARTY TRANSACTIONS
As of February 1, 1996, subsidiaries of J. P. Morgan & Co. Incorporated
("Morgan") beneficially own approximately 8% of the Company's common stock.
Morgan and the Company have entered into (and in certain instances, unwound)
various foreign currency and/or interest rate swap agreements during 1995 and
1994. During 1995, Morgan participated as lead underwriter on the June 1995 and
October 1995 public offerings of notes and the October 1995 public offering of
common stock. Morgan acted as an advisor in the January 1995 private offering of
debt related to the United Kingdom acquisitions and December 1995 private
offering of debt related to the SCIC minority interest purchase. Morgan also
acted as an advisor in the 1995 acquisition of OGF/PFG. During 1994, Morgan
participated as lead underwriter in the December 1994 public offerings of common
stock, notes and the convertible preferred securities of SCI Finance LLC. In the
1994 acquisition of one of the United Kingdom acquisitions, Morgan acted as an
advisor and also provided a loan
45
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
used by the Company (repaid in 1995) in the acquisitions of both United Kingdom
acquisitions. For the years ended December 31, 1995 and 1994, Morgan received
$14,062 and $10,747, respectively in fees from the Company. During the year
ended December 31, 1993 Morgan paid the Company a net $2,551 primarily relating
to payments received to unwind certain interest rate swap agreements.
NOTE EIGHTEEN
ACCOUNTING FOR INVESTMENTS
As part of the Company's funding of prearranged funeral contracts, Auxia
invests in securities which are considered as "available-for-sale" in accordance
with the classification of investments defined in Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These securities are reported at fair value, 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
investments as of December 31, 1995, were as follows:
UNREALIZED
GAINS
COST MARKET (LOSSES)
-------- -------- ----------
Debt securities............................................. $294,572 $303,429 $ 8,857
Equity securities........................................... 69,835 67,699 (2,136)
Mutual funds................................................ 155,506 157,921 2,415
-------- -------- --------
$519,913 $529,049 $ 9,136
======== ======== ========
The contractual maturities of Auxia's debt securities as of December 31,
1995, were as follows:
Within one year................................................................... $ 10,890
After one year through five years................................................. 71,035
After five years through ten years................................................ 211,913
After ten years................................................................... 9,591
--------
$303,429
========
NOTE NINETEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
Revenues:
1995.................................. $348,113 $353,649 $403,491 $546,873 $1,652,126
1994.................................. 261,258 262,862 277,814 315,241 1,117,175
Gross profit:
1995.................................. 116,675 105,982 105,724 136,840 465,221
1994.................................. 89,542 76,741 76,914 97,998 341,195
Net income:
1995.................................. 47,380 40,640 39,136 56,432 183,588
1994.................................. 37,445 30,195 28,603 34,802 131,045
Primary earnings per common share:
1995.................................. .49 .42 .40 .49 1.80
1994.................................. .44 .35 .33 .39 1.51
Fully diluted earnings per share:
1995.................................. .46 .39 .37 .48 1.70
1994.................................. .41 .33 .32 .37 1.43
46
48
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1995
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) OF PERIOD
- ------------------------------------- ---------- ---------- ----------- ------------- ---------
(THOUSANDS)
Current --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 1995.... $ 20,156 $8,853 $10,904 $(5,766) $ 34,147
Year ended December 31, 1994.... 14,786 7,658 4,155 (6,443) 20,156
Year ended December 31, 1993.... 7,778 9,983(3) 1,725 (4,700) 14,786
Due After One Year --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 1995.... $ 16,086 $2,999 $ 4,689 $ (476) $ 23,298
Year ended December 31, 1994.... 14,054 1,969 1,830 (1,767) 16,086
Year ended December 31, 1993.... 5,001 6,858(3) 3,935 (1,740) 14,054
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily acquisitions and dispositions of operations.
(3) Includes the cumulative effect of changing accounting principles effective
January 1, 1993.
47
49
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 "Compliance
with Section 16(a) of the Exchange Act", (ii) with respect to Items 11 and 13
under the captions "Cash Compensation", "Stock Options", "Aggregated Option
Exercises in Last Fiscal Year and December 31, 1995 Option Values", "Long-Term
Incentive Plan", "Retirement Plans", "Executive Employment Agreements", "Other
Compensation", "Director Compensation", "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 Graphs" 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedules:
The financial statements and schedules are listed in the accompanying
Index to Financial Statements and Related Schedules at page 19 of this
report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index at pages 50-53
are filed as part of this report.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1995, the Company filed a Form
8-K dated December 4, 1995 reporting under "Item 5. Other Events" unaudited
proforma combined financial information concerning, among other matters,
the Company's acquisitions of OGF, PFG, Gibraltar and the minority interest
of SCIC.
(c) Included in (a) above.
(d) Included in (a) above.
48
50
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 29, 1996 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.
SIGNATURE TITLE DATE
--------- ----- ----
R. L. WALTRIP* Chairman of the Board and Chief }
(R. L. Waltrip) Executive Officer }
}
GEORGE R. CHAMPAGNE Senior Vice President Chief }
- ------------------------------------------------- Financial Officer (Principal }
(George R. Champagne) Financial Officer) }
}
WESLEY T. McRAE Managing Director -- Financial }
- ------------------------------------------------- Reporting of SCI Management }
(Wesley T. McRae) Corporation, a subsidiary of }
the Registrant (Principal }
Accounting Officer) }
ANTHONY L. COELHO* } }
(Anthony L. Coelho) } }
} }
DOUGLAS M. CONWAY* } }
(Douglas M. Conway) } }
} }
JACK FINKELSTEIN* } }
(Jack Finkelstein) } }
} }
A. J. FOYT, JR.* } }
(A. J. Foyt, Jr.) } }
} }
JAMES J. GAVIN, JR.* } } March 29, 1996
(James J. Gavin, Jr.) } }
} }
JAMES H. GREER* } }
(James H. Greer) } }
} }
L. WILLIAM HEILIGBRODT* } }
(L. William Heiligbrodt) } Directors }
} }
B. D. HUNTER* } }
(B. D. Hunter) } }
} }
JOHN W. MECOM, JR.* } }
(John W. Mecom, Jr.) } }
} }
CLIFTON H. MORRIS, JR.* } }
(Clifton H. Morris, Jr.) } }
} }
E. H. THORNTON, JR.* } }
(E. H. Thornton, Jr.) } }
} }
W. BLAIR WALTRIP* } }
(W. Blair Waltrip) } }
} }
EDWARD E. WILLIAMS* } }
(Edward E. Williams) } }
*By JAMES M. SHELGER
- -------------------------------------------------
(James M. Shelger, as Attorney-In-Fact
for each of the Persons indicated)
51
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
3.1 -- Restated Articles of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to Registration Statement No. 2-50721 on
Form S-1).
3.2 -- Articles of Amendment to Restated Articles of Incorporation.
(Incorporated by reference to Exhibit (4)(i)l to Form 10-Q for the
fiscal quarter ended July 31, 1982).
3.3 -- Articles of Amendment to Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal
quarter ended July 31, 1983).
3.4 -- Articles of Amendment to Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 4.7 to Registration Statement
No. 33-8727 on Form S-3).
3.5 -- Articles of Amendment to Restated Articles of Incorporation, dated
September 11, 1987. (Incorporated by reference to Exhibit 4.1 to
Amendment No. 3 to Registration Statement No. 33-16678 on Form S-4).
3.6 -- 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).
3.7 -- Articles of Amendment to Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 3.8 to Registration Statement
No. 33-47097 on Form S-4).
3.8 -- 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 -- Supplemental Executive Retirement Plan, and form of Supplemental
Executive Retirement Plan Trust. (Incorporated by reference to
Exhibit 19.1 to Form 10-Q for the fiscal quarter ended March 31,
1989).
10.3 -- First Amendment to the Supplemental Executive Retirement Plan; Second
Amendment to the Supplemental Executive Retirement Plan; and Third
Amendment to the Supplemental Executive Retirement Plan.
(Incorporated by reference to Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1991).
10.4 -- 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).
50
52
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
10.5 -- Employment Agreement, dated November 11, 1991, as amended and
restated as of August 12, 1992, and further amended as of May 12,
1993, between the Company and R. L. Waltrip. (Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the fiscal quarter ended
September 30, 1993).
10.6 -- 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).
10.7 -- Employment Agreement, dated November 11, 1991, as amended and
restated as of August 12, 1992, and further amended as of May 12,
1993, between the Company and L. William Heiligbrodt. (Incorporated
by reference to Exhibit 10.2 to Form 10-Q for the fiscal quarter
ended September 30, 1993).
10.8 -- Employment Agreement, dated November 11, 1991, as amended and
restated as of August 12, 1992, and further amended as of May 12,
1993, between the Company and Samuel W. Rizzo. (Incorporated by
reference to Exhibit 10.3 to Form 10-Q for the fiscal quarter ended
September 30, 1993).
10.9 -- Supplemental Agreement, dated February 16, 1995, between the Company
and Samuel W. Rizzo. (Incorporated by reference to Exhibit 10.9 to
Form 10-K for the fiscal year ended December 31, 1994).
10.10 -- Termination Agreement, dated October 6, 1995, between the Company and
Samuel W. Rizzo; Consultation Agreement, dated October 6, 1995,
between the Company and Samuel W. Rizzo.
10.11 -- Employment Agreement, dated November 11, 1991, as amended and
restated as of August 12, 1992, and further amended as of May 12,
1993, between the Company and W. Blair Waltrip. (Incorporated by
reference to Exhibit 10.4 to Form 10-Q for the fiscal quarter ended
September 30, 1993).
10.12 -- Employment Agreement, dated November 11, 1991, as amended and
restated as of August 12, 1992, and further amended as of May 12,
1993, between the Company and John W. Morrow, Jr. (Incorporated by
reference to Exhibit 10.5 to Form 10-Q for the fiscal quarter ended
September 30, 1993).
10.13 -- Employment Agreement, dated December 1, 1991, as amended and restated
as of August 12, 1992, and further amended as of May 12, 1993 and
further amended and restated as of January 1, 1995, between the
Company and Jerald L. Pullins.
10.14 -- Form of Employment Agreement pertaining to officers (other than the
officers identified in the preceding exhibits). (Incorporated by
reference to Exhibit 10.6 to Form 10-Q for the fiscal quarter ended
September 30, 1993).
10.15 -- Salary Continuation Agreement dated April 1, 1991 between the Company
and Robert L. Waltrip. (Incorporated by reference to Exhibit 10.17 to
Form 10-K for the fiscal year ended December 31, 1991).
10.16 -- Forms of two Salary Continuation Agreements applicable to officers of
the Company (other than the officer referenced in the preceding
exhibit). (Incorporated by reference to Exhibit 10.19 to Form 10-K
for the fiscal year ended December 31, 1991).
10.17 -- Form of First Amendment to Salary Continuation Agreement (amending
the Salary Continuation Agreements of L. William Heiligbrodt, W.
Blair Waltrip, Samuel W. Rizzo and John W. Morrow). (Incorporated by
reference to Exhibit 10.2 to Form 10-Q for the fiscal quarter ended
September 30, 1994).
51
53
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
10.18 -- 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).
10.19 -- Amended 1987 Stock Plan. (Incorporated by reference to Appendix A to
Proxy Statement dated April 1, 1991).
10.20 -- 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).
10.21 -- Service Corporation International (Canada) Limited Stock Option Plan.
(Incorporated by reference to Exhibit 10.17 to Form 10-K for the
fiscal year ended December 31, 1993).
10.22 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 4.12 to Registration Statement No. 333-00179 on
Form S-8).
10.23 -- 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).
10.24 -- 1995 Incentive Equity Plan. (Incorporated by reference to Annex B to
Proxy Statement dated April 17, 1995).
10.25 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated by
reference to Annex A to Proxy Statement dated April 17, 1995).
10.26 -- Summary of 1995 Long Term Cash Performance Plan. (Incorporated by
reference to Exhibit 10.22 to Form 10-K for the fiscal year ended
December 31, 1994).
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 -- Casket Supply and Requirements Agreement, dated October 31, 1990,
between York Acquisition Corp. and SCI Funeral Services, Inc., and;
First Amendment to Casket Supply and Requirements Agreement, dated
December 30, 1992. (Incorporated by reference to Exhibit 10.27 to
Form 10-K for the fiscal year ended December 31, 1992).
10.29 -- 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).
10.30 -- 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).
10.31 -- ISDA Master Agreement dated February 4, 1993; Amendment to the Master
Agreement dated August 12, 1993; Confirmation dated August 13, 1993;
Confirmation dated November 1, 1993 and Notice of Exercise; all of
which are between Morgan Guaranty Trust Company of New York
("Morgan") and the Company. (Incorporated by reference to Exhibit
10.22 to Form 10-K for the fiscal year ended December 31, 1993).
10.32 -- Sterling Note, dated September 2, 1994, issued by Service Corporation
International plc to Morgan; guaranty, dated September 2, 1994,
between the Company and Morgan. (Incorporated by reference to Exhibit
10.28 to Form 10-K for the fiscal year ended December 31, 1994).
52
54
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
10.33 -- Letter, dated December 2, 1994 amending the ISDA Master Agreement
(filed in Exhibit 10.31 above) and the Sterling Note and guaranty
(filed as Exhibit 10.32 above), between the Company and Morgan;
Letter dated December 13, 1994 regarding the ISDA Master Agreement
(filed in Exhibit 10.31 above). (Incorporated by reference to Exhibit
10.29 to Form 10-K for the fiscal year ended December 31, 1994).
10.34 -- Confirmation dated May 18, 1995; Confirmation dated January 18, 1995;
Confirmation dated January 18, 1995; Confirmation dated January 18,
1995; all of which are between Morgan and the Company. (Incorporated
by reference to Exhibit 10.30 to Form 10-K for the fiscal year ended
December 31, 1994).
10.35 -- Confirmation dated September 14, 1995; and Confirmation dated January
12, 1996, between Morgan and the Company; Confirmation dated January
18, 1996 between J P Morgan Canada and Service Corporation
International (Canada) Limited.
10.36 -- Split Dollar Life Insurance Plan.
11.1 -- Computation of Earnings Per Share.
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 -- Directors' Powers of Attorney.
27.1 -- Financial Data Schedule.
In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.26, 10.29, 10.30 and
10.36.
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