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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER 1-6402-1
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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
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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
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 $7,482,259,803 based upon a closing market price of $32.125 on
March 21, 1997 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 21, 1997 was 238,757,934 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 1997
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, 1996, the Company operated 2,882 funeral service locations, 345
cemeteries and 150 crematoria located in North America, Europe and the Pacific
Rim. 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 1996, the Company acquired 210 funeral service locations, 35
cemeteries and 9 crematoria. The Company has acquired most of its present
operations through acquisitions. For information regarding acquisitions, see
Note 3 to the consolidated financial statements in Item 8 of this Form 10-K.
For financial information about the Company's industry segments, including
the identifiable assets of the Company by industry segments, see Note 14 to the
consolidated financial statements in Item 8 of this Form 10-K.
FUNERAL AND CEMETERY OPERATIONS
The Funeral and Cemetery Operations consist of the Company's funeral
service locations, cemeteries and related businesses. The operations are
organized into five North American divisions covering the United States and
Canada, a European division which includes the Company's French and United
Kingdom operations, and a Pacific Rim 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 140 funeral
service location/cemetery combinations and operates 53 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, 1996, the Company's unfulfilled
prearranged funeral contracts, including accumulated trust fund earnings and
increased benefits on insurance products, amounted to $2,726 million of which
$239 million is estimated, based on actuarial assumptions, to be fulfilled in
1997. The unfulfilled prearranged funeral contracts at December 31, 1995 were
$2,362 million. For additional informa-
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tion concerning prearranged funeral activities, see Note 4 to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses and generally continue to be
operated under the same name as before acquisition.
The death rate tends to be somewhat higher in the winter months and the
Company's funeral service locations generally experience a higher volume of
business during those months.
Since 1984, the Company has operated under the Federal Trade Commission's
("FTC") comprehensive trade regulation rule for the funeral industry. The rule
contains minimum guidelines for funeral industry practices, requires extensive
price and other affirmative disclosures and imposes mandatory itemization of
funeral goods and services. From time to time in connection with acquisitions,
the Company has entered into consent orders with the FTC that have required the
Company to dispose of certain operations to proceed with acquisitions or have
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a materially adverse
effect on the Company's operations.
Cemeteries. The Company's cemeteries sell cemetery interment rights
(including mausoleum spaces and lawn crypts) and certain merchandise including
stone and bronze memorials and burial vaults. The Company's cemeteries also
perform interment services and provide management and maintenance of cemetery
grounds. Certain cemeteries also operate crematoria.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery sales is generally required by law to be paid into perpetual care trust
funds. Earnings of perpetual care trust funds are used to defray the maintenance
cost of cemeteries. In addition, all or a portion of the proceeds from the sale
of preneed cemetery merchandise may be required by law to be paid into trust
until the merchandise is purchased on behalf of the customer. For additional
information regarding cemetery trust funds, see Notes 2 and 5 to the
consolidated financial statements in Item 8 of this Form 10-K.
Death Care Industry. The funeral industry is characterized by a large
number of locally owned, independent operations. The Company believes that based
on the total number of funeral services performed in 1996, the Company,
including companies acquired by it, performed approximately 10%, 29%, 14% and
24% of the funeral services in North America, France, the United Kingdom and
Australia, respectively.
To compete successfully, the Company's funeral service locations must
maintain competitive prices, attractive, well-maintained and conveniently
located facilities, a good reputation and high professional standards. In
addition, heritage and tradition can provide an established funeral home with
the opportunity for repeat business from client families. Furthermore, an
established firm can generate future volume and revenues by marketing
prearranged funeral services.
The cemetery industry is also characterized by a large number of locally
owned independent operations. The Company's cemetery properties compete with
other cemeteries in the same general area. To compete successfully, the
Company's cemeteries must maintain competitive prices, attractive and
well-maintained properties, a good reputation, an effective sales force and high
professional standards.
FINANCIAL SERVICES OPERATION
Since 1988, the Company's wholly owned subsidiary, Provident Services, Inc.
("Provident"), has provided secured financing to independent funeral home and
cemetery operators. The majority of Provident's loans are made to clients
seeking to finance funeral home or cemetery acquisitions. Additionally,
Provident provides construction loans for funeral home or cemetery improvement
and expansion. Loan packages take traditional forms of secured financing
comparable to arrangements offered by leading commercial banks. Provident's
loans are generally made at interest rates which float with the prime lending
rate.
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Provident had $146 million in loans outstanding at December 31, 1996 and
unfunded loan commitments amounting to $55 million. Such loans outstanding
decreased from $214 million in loans outstanding at December 31, 1995. 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, 1996, the Company employed 22,607 (13,987 in the United
States) persons on a full time basis and 10,776 (7,422 in the United States)
persons on a part time basis. Of the full time employees, 22,009 were in the
Funeral and Cemetery Operations, eight were in Financial Services and 590 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.
In 1997, this matter was settled and SCI is divesting 12 funeral service
locations in ten localities. The Company believes the 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
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one-half interest. The Company owns and utilizes a three-story building at 1919
Allen Parkway, Houston, Texas 77019 containing 43,000 square feet of office
space.
At December 31, 1996, the Company owned the real estate and buildings of
2,307 of its funeral service and cemetery locations and leased facilities in
connection with 1,070 of such operations. In addition, the Company leased four
aircraft pursuant to cancelable leases. At December 31, 1996, the Company
operated 10,987 vehicles, of which 7,505 were owned and 3,482 were leased. For
additional information regarding leases, see Note 10 to the consolidated
financial statements in Item 8 of this Form 10-K.
The Company's 345 cemeteries contain an aggregate of approximately 25,751
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 21, 1997 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................................ (66) Chairman of the Board and Chief 1962
Executive Officer
L. William Heiligbrodt....................... (55) President and Chief Operating Officer 1988
W. Blair Waltrip............................. (42) Executive Vice President Operations 1980
John W. Morrow, Jr. ......................... (61) Executive Vice President 1989
Corporate Development
Jerald L. Pullins............................ (55) Executive Vice President 1992
European Operations
George R. Champagne.......................... (43) Senior Vice President 1989
Chief Financial Officer
Glenn G. McMillen............................ (54) Senior Vice President Operations 1993
Richard T. Sells............................. (57) Senior Vice President Prearranged 1987
Sales
James M. Shelger............................. (47) Senior Vice President General Counsel 1987
and Secretary
Jack L. Stoner............................... (51) Senior Vice President Administration 1992
T. Craig Benson.............................. (35) Vice President International 1990
Operations
Gregory L. Cauthen........................... (39) Vice President Treasurer 1995
W. Mark Hamilton............................. (32) Vice President Finance 1996
European Operations
Lowell A. Kirkpatrick, Jr. .................. (38) Vice President Corporate Development 1994
Todd A. Matherne............................. (42) Vice President Investor Relations 1996
Vincent L. Visosky........................... (49) Vice President Operational Controller 1989
Henry M. Nelly, III.......................... (52) President -- Provident Services, Inc., 1989
a subsidiary of the Company
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(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. Matherne joined the Company in April 1995 as Managing Director Investor
Relations and was promoted in May 1996 to Vice President Investor Relations.
Prior thereto, Mr. Matherne was Vice President and General Manager of Baker
Hughes Treatment Services, an environmental services business.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary. There is no family
relationship between any of the
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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 EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 1996, there were 7,730 holders of record of
the Company's common stock.
The Company has declared 95 consecutive quarterly dividends on its common
stock since it began paying dividends in 1974. The dividend rate is currently
$.075 per share per quarter, or an indicated annual rate of $.30 per share. For
the three years ended December 31, 1996, dividends per share were $.24, $.22 and
$.21, respectively.
The table below shows the Company's quarterly high and low common stock
prices:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
First................................ $24.75 $19.44 $14.56 $13.13 $14.00 $12.38
Second............................... 30.13 24.13 15.81 13.44 12.94 11.25
Third................................ 29.44 27.63 19.75 15.19 13.32 12.44
Fourth............................... 30.75 26.50 22.00 18.81 13.88 12.07
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.
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,*
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1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
Revenues......................... $2,294,194 $1,652,126 $1,117,175 $ 899,178 $ 772,477
Income before income taxes....... 413,881 294,211 219,021 173,492 139,336
Income before cumulative effect
of change in accounting
principles..................... 265,298 183,588 131,045 103,092 86,536
Net income....................... 265,298 183,588 131,045 101,061 86,536
Earnings per share:
Primary........................ 1.10 .90 .75 .61 .56
Fully diluted.................. 1.07 .85 .72 .58 .53
Dividends per share.............. .24 .22 .21 .20 .20
Total assets..................... 8,869,770 7,672,387 5,161,888 3,683,304 2,611,123
Long-term debt................... 2,048,737 1,712,464 1,330,177 1,062,222 980,029
Convertible preferred securities
of SCI Finance LLC............. 172,500 172,500 172,500 -- --
Stockholders' equity............. 2,235,317 1,975,345 1,196,622 884,513 683,097
Shares outstanding............... 236,193 234,542 189,714 169,718 153,810
Ratio of earnings to fixed
charges**...................... 3.24 2.84 3.13 3.19 3.03
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* All common stock and per share data has been restated for a two-for-one
common stock split on August 30, 1996. The year ended December 31, 1993
reflects a change in accounting principles adopted January 1, 1993. The year
ended December 31, 1992 reflect results as historically reported.
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** For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus
the minority interest of majority-owned subsidiaries with fixed charges and
plus fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt
costs, dividends on preferred securities of SCI Finance LLC and one-third of
rental expense which the Company considers representative of the interest
factor in the rentals.
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 substantially all of the Company's foreign operations.
Set forth below is certain summary financial information for International.
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
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(DOLLARS IN THOUSANDS)
Revenues............................................... $ 883,203 $ 439,750 $ 99,033
---------- ---------- ----------
Gross profit........................................... $ 143,924 $ 88,551 $ 30,068
---------- ---------- ----------
Net income............................................. $ 55,748 $ 21,163 $ 4,353
---------- ---------- ----------
Current assets......................................... $ 223,930 $ 207,411 $ 215,104
Non-current assets..................................... 2,520,118 2,218,977 885,417
---------- ---------- ----------
Total assets........................................... $2,744,048 $2,426,388 $1,100,521
---------- ---------- ----------
Current liabilities.................................... $ 303,304 $ 257,682 $ 258,723
Non-current liabilities................................ $2,198,718 1,584,979 805,939
---------- ---------- ----------
Total liabilities...................................... $2,502,022 $1,842,661 $1,064,662
---------- ---------- ----------
Stockholder's equity................................... $ 242,026 $ 583,727 $ 35,859
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
The Company's primary objective is to maximize shareholder value. To
accomplish this goal, the Company's strategy has been to provide consistent
growth in earnings per share. The growth strategy initiates with the Company
producing significant cash flow from its existing cluster operations, then grows
by using that cash to expand clusters through add-on acquisitions, new
construction, and improvements to existing locations. The Company also expands
its network through strategic acquisition of larger, multi-location death care
companies, typically funding these transactions by accessing the debt and equity
markets when appropriate. All businesses are continuously improved by further
leveraging operating and overhead costs; enhancing buying power; expanding
preneed sales; and improving products, services and systems.
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established in and around
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allow the Company to more efficiently utilize
its operating facilities during 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 French operations which
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were acquired in August 1995. The Company has approximately 311 clusters in
North America, the United Kingdom and Australia, which range in size from two
operations to 63 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 1996 compared to 1995
Segment information for the Company's three lines of business was as
follows:
YEARS ENDED DECEMBER 31, PERCENTAGE
-------------------------------------------------- INCREASE INCREASE
1996 1995 (DECREASE) (DECREASE)
----------------------- ----------------------- ---------- ----------
Revenues:
Funeral....................... $ 1,663,387 $ 1,166,247 $497,140 42.6%
Cemetery...................... 612,421 463,754 148,667 32.1
Financial services............ 18,386 22,125 (3,739) (16.9)
----------- ----------- -------- -----
2,294,194 1,652,126 642,068 38.9
Costs and expenses:
Funeral....................... (1,282,546) (871,096) 411,450 47.2
Cemetery...................... (397,700) (303,312) 94,388 31.1
Financial services............ (9,496) (12,497) (3,001) (24.0)
----------- ----------- -------- -----
(1,689,742) (1,186,905) 502,837 42.4
Gross profit margin and
percentage:
Funeral....................... 380,841 22.9% 295,151 25.3% 85,690 29.0
Cemetery...................... 214,721 35.1% 160,442 34.6% 54,279 33.8
Financial services............ 8,890 48.4% 9,628 43.5% (738) (7.7)
----------- ----------- -------- -----
$ 604,452 26.3% $ 465,221 28.2% $139,231 29.9%
=========== =========== ========
FUNERAL
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- ---------- ----------
Existing clusters:
United States............................... $ 807,829 $ 730,053 $ 77,776 10.7%
Other European.............................. 141,969 130,849 11,120 8.5
Other foreign*.............................. 99,951 87,044 12,907 14.8
---------- ---------- -------- ----
1,049,749 947,946 101,803 10.7
New clusters:**
United States............................... 25,203 10,999 14,204
Other European.............................. 27,691 6,980 20,711
Other foreign*.............................. 15,450 4,278 11,172
France...................................... 537,079 190,091 346,988
---------- ---------- --------
605,423 212,348 393,075
---------- ---------- -------- ----
Total clusters...................... 1,655,172 1,160,294 494,878 42.7
Non-cluster and disposed operations........... 8,215 5,953 2,262
---------- ---------- -------- ----
Total funeral revenues.............. $1,663,387 $1,166,247 $497,140 42.6%
========== ========== ======== ====
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* Other foreign primarily includes Australian and Canadian operations.
** Represents new geographic cluster areas entered into since the beginning of
1995 for the period that those businesses were owned by the Company.
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The $101,803 increase in revenues at existing clusters was primarily the
result of a 7.7% increase in North American funeral services performed at
existing cluster locations (226,822 compared to 210,611) and a 3.0% higher
average sales price ($3,745 compared to $3,635). Included in this increase were
$79,290 in increased revenues from locations acquired since the beginning of
1995. The remaining existing cluster revenue increase of $22,513 was contributed
by operations acquired before 1995. The 1995 results for France represent
approximately four months of Company ownership. The increase in Other European
new cluster revenue is primarily due to non-French European operations added
through the August 1995 OGF/PFG acquisition (See note three to the consolidated
financial statements).
The death rate in the Company's primary markets has remained relatively
constant for several years and is expected to remain at this rate for at least
the near future; however, due to the increasing proportion of people over age 65
in the Company's primary markets, demand for funeral services could increase in
the decades to come. It is anticipated that the Company's near term revenue
growth will continue to be primarily generated from acquired operations (added
to existing clusters and the creation of new clusters) as well as from
potentially higher average sales prices from improved merchandising of funeral
services and products and periodic price increases. The Company is the world's
largest in the funeral service industry and currently performs approximately
10%, 29%, 14% and 24% of the funeral services in North America, France, the
United Kingdom and Australia, respectively. The Company believes that there are
approximately 8,000 potential acquisition candidates in North America that meet
its current metropolitan acquisition criteria and numerous other candidates
outside of North America. The Company plans to continue to aggressively seek to
acquire these potential candidates.
During the year ended December 31, 1996, the Company sold (net of
cancellations) approximately $523,000 of prearranged funeral services compared
to approximately $367,000 for the same period in 1995. The obligations are
funded through both trust funded and insurance backed contracts. These
prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed. The current
emphasis on sales of prearranged funerals is expected to continue.
Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
----------- --------- -------- ----------
Existing clusters:
United States............................... $ 520,864 $482,497 $ 38,367 8.0%
Other European.............................. 104,176 101,327 2,849 2.8
Other foreign*.............................. 65,549 57,650 7,899 13.7
---------- -------- -------- ----
690,589 641,474 49,115 7.7
New clusters:**
United States............................... 18,431 8,148 10,283
Other European.............................. 24,978 6,986 17,992
Other foreign............................... 10,855 3,396 7,459
France...................................... 466,136 165,778 300,358
---------- -------- --------
520,400 184,308 336,092
---------- -------- -------- ----
Total clusters...................... 1,210,989 825,782 385,207 46.6
Non-cluster and disposed operations........... 9,237 7,582 1,655
Administrative overhead....................... 62,320 37,732 24,588 65.2
---------- -------- -------- ----
Total funeral costs and expenses.... $1,282,546 $871,096 $411,450 47.2%
========== ======== ======== ====
The total gross profit for existing clusters increased to $359,160 in 1996
from $306,472 in 1995, and the related gross profit percentage for existing
clusters increased to 34.2% from 32.3% last year. Acquisitions since the
beginning of 1995, included in existing clusters, accounted for $23,980 of the
existing gross profit increase. 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
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cluster management strategy. The gross profit margin for those funeral
operations in existing clusters that were acquired before 1995 increased to
35.0% in 1996 from 32.7% 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 (22.9%
compared to 25.3% last year) was the Company's French operations. French
operations had an increased gross profit margin of 13.2% in 1996, compared to
12.8% in 1995, however 1996 reflects a full years results compared to the four
months of ownership in 1995. The French margin is consistent with the Company's
expectations for these operations which have historically produced lower gross
margins than the Company's operations in North America and Australia.
Administrative overhead costs expressed as a percentage of revenues increased in
1996 to 3.7%, compared to 3.2% last year. This administrative overhead cost
increase was primarily attributable to the addition of the French operations as
well as the Company's realignment of its North American operating structure.
This realignment is expected to enhance the clusters' ability to manage
increased levels of business.
CEMETERY
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States................................ $506,330 $395,821 $110,509 27.9%
Other European............................... 13,978 11,307 2,671 23.6
Other foreign*............................... 46,485 39,979 6,506 16.3
-------- -------- -------- ----
566,793 447,107 119,686 26.8
-------- -------- -------- ----
New clusters:**
United States................................ 41,221 12,972 28,249
Other European............................... 1,307 796 511
-------- -------- --------
42,528 13,768 28,760
-------- -------- -------- ----
Total clusters....................... 609,321 460,875 148,446 32.2
Non-cluster and disposed operations............ 3,100 2,879 221
-------- -------- -------- ----
Total cemetery revenues.............. $612,421 $463,754 $148,667 32.1%
======== ======== ======== ====
Revenues for existing clusters increased due to an increased volume of
sales and higher average sales prices for property and merchandise. Included in
the existing cluster increase were $82,470 in increased revenues from cemeteries
acquired since the beginning of 1995. This increase was primarily due to the
impact of reporting a full years' results from the Gibraltar acquisition in
October 1995 (see note three to the consolidated financial statements). A
majority of the Gibraltar properties were additions to existing clusters. The
remaining existing cluster revenue increase of $37,216 was contributed by
operations acquired before 1995. 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.
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Cemetery costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1996 1995 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States................................ $304,732 $246,790 $ 57,942 23.5%
Other European............................... 8,404 5,799 2,605 44.9
Other foreign*............................... 25,322 20,227 5,095 25.2
-------- -------- -------- ----
338,458 272,816 65,642 24.1
New clusters:**
United States................................ 24,547 8,581 15,966
Other European............................... 1,181 570 611
-------- -------- --------
25,728 9,151 16,577
-------- -------- -------- ----
Total clusters....................... 364,186 281,967 82,219 29.2
Non-cluster and disposed operations............ 4,129 3,509 620
Administrative overhead........................ 29,385 17,836 11,549 64.8
-------- -------- -------- ----
Total cemetery costs and expenses.... $397,700 $303,312 $ 94,388 31.1%
======== ======== ======== ====
Costs at existing clusters increased $65,642 due primarily to an increase
of $48,846 from cemeteries acquired since the beginning of 1995, while costs
from existing cluster cemeteries acquired before 1995 increased $16,796. The
overall cemetery gross profit margin increased to 35.1% in 1996 from 34.6% last
year. This increase reflects strong growth in sales of preneed cemetery property
and merchandise as well as continued cost control in all major expense
categories. Administrative overhead costs have increased to 4.8% of revenues
this year compared to 3.8% last year. This administrative overhead cost increase
was primarily attributable to increased costs from additional infrastructure
added in the Company's United Kingdom operations as well as the Company's
realignment of its North American operating structure which should enhance the
clusters' ability to manage increased levels of business. 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") increased its gross margin percentage to 48.4% from 43.5%. This
was primarily attributable to early termination fees associated with the payoff
of outstanding loans in August 1996, by two of Provident's largest customers.
These payoffs reduced the average outstanding loan portfolio during the current
year to approximately $191,000 with an average interest rate spread of 3.6%
compared to approximately $206,000 and 3.7%, respectively, last year.
OTHER INCOME AND EXPENSES
Expressed as a percentage of revenues, general and administrative expenses
were 2.8% in 1996 compared to 3.2% last year. These expenses increased by
approximately $9,600 or 17.9% during the year primarily due to the recognition
of $6,000 in costs relating to the Loewen transaction (see below) as well as
increases in personnel costs. On October 3, 1996, the Company filed a
registration statement with the Securities and Exchange Commission ("SEC") with
regard to a proposed acquisition of the outstanding shares of Loewen Group Inc.
("Loewen"), a publicly traded death care company, through an exchange offer. On
January 7, 1997, the Company announced that it had withdrawn its proposed
exchange offer for Loewen.
Interest expense, which excludes the amount incurred through financial
service operations, increased $20,409 or 17.3% during the current year primarily
from incremental borrowings incurred to fund the Company's acquisition program.
The 1996 increase is the result of an increase of approximately $296,875 in the
Company's average debt (excluding debt related to Provident) outstanding during
the year ended
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December 31, 1996, compared to the prior year. The increased interest associated
with the higher debt level was offset by a slightly lower average interest rate
for the year.
The provision for income taxes reflected a 35.9% effective tax rate for
1996 as compared to a 37.6% effective tax rate in the prior year. The decrease
in the effective tax rate is due primarily to lower taxes from international
operations.
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%
=========== =========== ========
FUNERAL
Funeral revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ INCREASE PERCENTAGE
1995 1994 (DECREASE) INCREASE
----------- --------- ---------- ----------
Existing clusters:
United States............................... $ 720,608 $633,569 $ 87,039 13.7%
Other foreign*.............................. 83,441 68,166 15,275 22.4
---------- -------- -------- ----
804,049 701,735 102,314 14.6
New clusters:**
United States............................... 20,975 4,450 16,525
Other foreign*.............................. 6,146 1,631 4,515
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 European..................... 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%
========== ======== ======== ====
- ---------------
* Other foreign primarily includes Australian and Canadian operations.
** 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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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 France and other European 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 (net of
cancellations) approximately $367,000 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.
Funeral costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ INCREASE PERCENTAGE
1995 1994 (DECREASE) INCREASE
---------- ---------- ---------- ----------
Existing clusters:
United States................................ $473,991 $413,663 $ 60,328 14.6%
Other foreign*............................... 54,227 44,725 9,502 21.2
-------- -------- -------- ----
528,218 458,388 69,830 15.2
New clusters:**
United States................................ 16,292 3,679 12,613
Other foreign*............................... 4,762 1,286 3,476
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 European...................... 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% in 1994. 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% in 1994 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% in 1994) 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). France and other European 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% in 1994.
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CEMETERY
Cemetery revenues were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1995 1994 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States................................ $392,949 $310,211 $ 82,738 26.7%
Other foreign*............................... 39,979 27,876 12,103 43.4
-------- -------- -------- ----
432,928 338,087 94,841 28.1
New clusters:**
United States................................ 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.
Cemetery costs and expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------ PERCENTAGE
1995 1994 INCREASE INCREASE
---------- ---------- -------- ----------
Existing clusters:
United States.................................. $244,550 $197,189 $47,361 24.0%
Other foreign*................................. 20,227 14,107 6,120 43.4
-------- -------- ------- ----
264,777 211,296 53,481 25.3
New clusters:**
United States.................................. 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% in
1994. 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 decreased to 3.8% of revenues in 1995
compared to 5.1% in 1994.
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FINANCIAL SERVICES
Provident reported an improved interest rate spread offset by higher
administrative expenses. The average outstanding loan portfolio during 1995 was
approximately $206,000 with an average interest rate spread of 3.7% compared to
approximately $235,000 and 3.4%, respectively, in 1994.
OTHER INCOME AND EXPENSES
Expressed as a percentage of revenues, general and administrative expenses
were 3.2% in 1995 compared to 4.6% in 1994. 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 1995 primarily from
incremental borrowings incurred to fund the Company's international acquisition
program. Of the 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 1994. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1996:
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, 1996, the Company had net working capital of $106,497 and a
current ratio of 1.18:1, compared to working capital of $47,850 and a current
ratio of 1.08:1 at December 31, 1995.
1996 PUBLIC OFFERINGS
In May 1996, the Company issued $300,000 of notes which were sold through
an underwritten public offering. These notes were issued in two tranches of
$150,000 each with maturities in June 2001 and 2006 and interest rates of 6.75%
and 7.20%, respectively. The proceeds of this offering were primarily used to
repay existing debt outstanding under the Company's revolving credit agreements.
REVOLVING CREDIT AGREEMENTS
The Company has various revolving credit facilities and lines of credit
which provide for aggregate borrowings of up to $850,000. At December 31, 1996,
$544,852 of these facilities and lines was available.
INTEREST RATE AND CURRENCY MANAGEMENT
The Company uses derivatives primarily in the form of interest rate swaps
and cross-currency interest rate swaps in combination with local currency
borrowings in order to manage its mix of fixed and floating rate debt and to
substantially hedge the Company's net investment in foreign assets. Accordingly,
movements in currency rates that impact the swaps are generally offset by a
corresponding movement in the value of the underlying assets being hedged and
movements in interest rates that impact the fair value of the interest rate
15
17
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 30% 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 swaps discussed more fully in note eight to the
Company's consolidated financial statements, the Company's total debt has been
converted into approximately $1,174,000 of fixed interest rate debt at a
weighted average rate of 8.00% and approximately $1,052,000 of floating interest
rate debt at a weighted average rate of 5.28%. At December 31, 1996, a one
percent increase in the various floating rate indices referenced in the debt and
swaps would cause a $10,520 net increase in interest expense. However, the
Company's overall sensitivity to floating interest rate fluctuations on amounts
owed would be partially mitigated by a corresponding higher interest rate on the
receivables issued by Provident (approximately $146,000 in receivables at
December 31, 1996). Further interest rate risk is diversified in that
approximately 42% of the Company's floating rate exposure is based in four
markets other than the United States. In the first quarter of 1997, the Company
initiated the repurchase of three issues of its outstanding notes and intends to
refinance such repurchased notes in a manner that should reduce future interest
expense (see note eighteen to the consolidated financial statements).
In general, the Company hedges up to 100% of its net investment in foreign
assets when such investment is considered significant and when it is reasonably
cost efficient to do so. The death care industries in countries where the
Company has foreign operations are generally stable and have had predictable
cash flows. In addition, those countries have not had highly inflationary
economies. Approximately one-third of the Company's net assets and one-quarter
of its operating income are denominated in foreign currencies. Due to the
cross-currency hedges described above, only about 10% of the Company's net
assets and operating earnings are subject to translation risk. At December 31,
1996 the increase in the "Foreign currency translation adjustment" of $20.6
million, is primarily the result of the U.S. dollar appreciation against the
British pound.
SOURCES AND USES OF CASH
Cash Flows from Operating Activities: Net cash provided by operating
activities was $209,857 for the year ended December 31, 1996, compared to
$171,498 for the same period in 1995, an increase of $38,359. This increase was
primarily due to improved operating results in 1996. Significant uses of
operating cash include an increase in net receivables resulting from increased
sales of funeral services and cemetery products and merchandise.
Cash Flows from Investing Activities: Net cash used in investing activities
was $480,126 for the year ended December 31, 1996, compared to $925,135 for the
same period in 1995, a decrease of $445,009. This decrease was primarily due to
a $414,307 decrease in cash used in acquisitions. The difference primarily
relates to the significant French acquisition during 1995. Additionally the
Company received approximately $126,000 in early principal payments on loans
issued by Provident from two of its largest customers during 1996. These were
partially offset by increased capital expenditures including new construction of
facilities and major improvements to existing properties which continue to
require significant amounts of cash. Cash used for capital expenditures was
$193,152 during the year ended December 31, 1996. Additionally, cash used
relating to prearranged funeral activities increased due to the timing of cash
payments to and withdrawals from trusts as well as increased cash outlays on
marketing efforts.
Cash Flows from Financing Activities: Net cash provided by financing
activities was $256,916 for the year ended December 31, 1996, compared to
$592,780 for the same period in 1995, a decrease of $335,864. The decrease in
1996 compared to 1995 is mainly due to the significant French acquisition in
1995 for which the Company raised equity (approximately $313,000) as well as
debt.
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, 1996, the Company's debt to capitalization ratio was 47.3%
compared to 46.1% at December 31, 1995. The interest rate coverage ratio for the
year ended
16
18
December 31, 1996 was 3.62:1, compared to 3.11:1 for the same period in 1995.
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, 1996, the Company had approximately $544,852 of available borrowings under
its revolving credit facilities. In addition, as of December 31, 1996, the
Company had the ability to issue $1,000,000 in securities registered with the
SEC under a shelf registration as well as 19,338,000 shares of common stock and
a total of $222,378 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 as well as
any selling costs. The Company has recently completed a review of the
prearranged trust investment process which included an asset/liability study.
This has resulted in a new investment program which entails the consolidation of
multiple trustees, the use of institutional managers with differing investing
styles and consolidated performance monitoring and tracking. This new program
targets a real return in excess of the amount necessary to cover future
increases in the cost of providing a price guaranteed funeral service as well as
any selling costs. This is accomplished by allocating the portfolio mix to the
appropriate investments that more accurately match the anticipated maturity of
the policies. This has resulted in a new asset allocation policy of
approximately 65% equity and 35% fixed income which the Company intends to
implement in the first half of 1997.
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. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
adds 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. In 1996, nearly 33% of all families served by the
Company's North American funeral service locations selected the cremation
alternative, substantially more than the 20% national average according to
industry studies. The Company has a significant number of operating locations in
Florida and the west coast of North America where the cremation alternative
continues to gain acceptance. Based on industry studies, the Company believes
that cremations account for approximately 60-70% of all dispositions of human
remains in Australia and the United Kingdom. It is estimated that cremations
account for approximately 12% of all dispositions of human remains in France.
Though a cremation typically results in less sales dollars than a traditional
funeral service, the Company
17
19
believes that funeral operations which are predominantly cremation businesses
typically have higher gross profit margin percentages than those exhibited at
traditional funeral operations. Cremation memorialization has long been a
tradition in the Australian and United Kingdom markets. The Company has expanded
its product alternatives in these markets which has resulted in higher average
sales. The Company has also established markets in select areas within North
America and believes that memorialization of cremated remains represents a
source of revenue growth.
OTHER MATTERS
The Company will adopt Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("FAS 125"), which was amended by FAS 127, in January 1997. The
Company will adopt FAS 128 "Earnings Per Share" and FAS 129 "Disclosures of
Information About Capital Structure" for the year ended December 31, 1997. The
Company does not anticipate that the adoption of these standards will have a
material impact on the consolidated financial statements. See note sixteen to
the consolidated financial statements.
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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, 1996......................................... 21
Consolidated Balance Sheet as of December 31, 1996 and
1995...................................................... 22
Consolidated Statement of Cash Flows for the three years
ended December 31, 1996................................... 23
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1996............................. 24
Notes to Consolidated Financial Statements.................. 25
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts..................... 49
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. We have also audited
the financial statement schedule for the three years ended December 31, 1996,
listed in the index at item 8 of this Form 10-K. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Service
Corporation International as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 21, 1997
20
22
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues........................................... $ 2,294,194 $ 1,652,126 $ 1,117,175
Costs and expenses................................. (1,689,742) (1,186,905) (775,980)
----------- ----------- -----------
Gross profit....................................... 604,452 465,221 341,195
General and administrative expenses................ (63,215) (53,600) (51,700)
----------- ----------- -----------
Income from operations............................. 541,237 411,621 289,495
Interest expense................................... (138,557) (118,148) (80,123)
Dividends on preferred securities of SCI Finance
LLC.............................................. (10,781) (10,781) (539)
Other income....................................... 21,982 11,519 10,188
----------- ----------- -----------
(127,356) (117,410) (70,474)
----------- ----------- -----------
Income before income taxes......................... 413,881 294,211 219,021
Provision for income taxes......................... (148,583) (110,623) (87,976)
----------- ----------- -----------
Net income......................................... $ 265,298 $ 183,588 $ 131,045
=========== =========== ===========
Earnings per share:
Primary.......................................... $ 1.10 $ .90 $ .75
=========== =========== ===========
Fully diluted.................................... $ 1.07 $ .85 $ .72
=========== =========== ===========
Weighted average number of shares and
equivalents...................................... 241,178 204,148 173,852
=========== =========== ===========
(All common stock and per share data has been restated for a
two-for-one common stock split on August 30, 1996)
(See notes to consolidated financial statements)
21
23
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Current assets:
Cash and cash equivalents................................. $ 44,131 $ 57,484
Receivables, net of allowances............................ 494,576 448,941
Inventories............................................... 139,019 120,805
Other..................................................... 36,314 32,371
---------- ----------
Total current assets.............................. 714,040 659,601
---------- ----------
Investments -- insurance subsidiary......................... 601,565 557,335
Prearranged funeral contracts............................... 2,159,348 1,811,597
Long-term receivables....................................... 809,287 762,891
Cemetery property, at cost.................................. 1,380,213 1,162,556
Property, plant and equipment, at cost (net)................ 1,457,075 1,273,722
Deferred charges and other assets........................... 371,608 292,470
Names and reputations (net)................................. 1,376,634 1,152,215
---------- ----------
$8,869,770 $7,672,387
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 440,797 $ 420,940
Current maturities of long-term debt...................... 113,876 122,237
Income taxes.............................................. 52,870 68,574
---------- ----------
Total current liabilities......................... 607,543 611,751
---------- ----------
Long-term debt.............................................. 2,048,737 1,712,464
Deferred income taxes....................................... 527,460 437,840
Other liabilities........................................... 552,443 400,434
Deferred prearranged funeral contract revenues.............. 2,725,770 2,362,053
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, 500,000,000 shares
authorized, 236,193,427 and 234,542,172, respectively,
issued and outstanding................................. 236,193 234,542
Capital in excess of par value............................ 1,237,783 1,214,708
Retained earnings......................................... 728,108 518,562
Foreign currency translation adjustment................... 22,315 1,747
Unrealized gain on securities available for sale, net of
tax.................................................... 10,918 5,786
---------- ----------
Total stockholders' equity.................................. 2,235,317 1,975,345
---------- ----------
$8,869,770 $7,672,387
========== ==========
(All common stock data has been restated for a
two-for-one common stock split on August 30, 1996)
(See notes to consolidated financial statements)
22
24
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income........................................ $ 265,298 $ 183,588 $ 131,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 129,819 92,541 68,993
Provision for deferred income taxes............ 56,902 45,164 27,490
Gains from dispositions (net).................. (9,930) (1,024) (2,143)
Change in assets and liabilities net of effects
from acquisitions:
(Increase) in receivables.................... (167,338) (115,888) (103,935)
(Increase) in other assets................... (36,781) (36,496) (35,983)
Increase (decrease) in other liabilities..... (26,365) 7,473 27,606
Other........................................ (1,748) (3,860) (159)
----------- ----------- -----------
Net cash provided by operating activities........... 209,857 171,498 112,914
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures.............................. (193,152) (125,231) (81,090)
Changes in prearranged funeral balances........... (86,291) (80,794) 49,530
Proceeds from sales of property and equipment..... 30,121 12,655 13,294
Acquisitions, net of cash acquired................ (279,320) (693,627) (711,357)
Loans issued by finance subsidiary................ (86,858) (38,184) (48,320)
Principal payments received on loans by finance
subsidiary..................................... 156,064 24,312 76,288
Change in investments and other................... (20,690) (24,266) (5,042)
----------- ----------- -----------
Net cash used in investing activities............... (480,126) (925,135) (706,697)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving
credit agreements.............................. 96,441 (453,959) 295,570
Long-term debt issued............................. 300,000 862,848 200,000
Payment of debt................................... (109,458) (135,960) (31,896)
Convertible preferred shares of SCI Finance LLC
issued......................................... -- -- 172,500
Common stock issued............................... -- 331,063 189,726
Dividends paid.................................... (55,262) (43,676) (36,013)
Bank overdrafts and other......................... 25,195 32,464 1,415
----------- ----------- -----------
Net cash provided by financing activities........... 256,916 592,780 791,302
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (13,353) (160,857) 197,519
Cash and cash equivalents at beginning of period.... 57,484 218,341 20,822
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 44,131 $ 57,484 $ 218,341
=========== =========== ===========
(See notes to consolidated financial statements)
23
25
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CAPITAL IN FOREIGN UNREALIZED
COMMON EXCESS OF RETAINED CURRENCY GAIN ON
STOCK PAR VALUE EARNINGS TRANSLATION SECURITIES
------------------ --------------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1993......... $ 169,718 $ 433,043 $ 284,879 $ (3,127) $ --
Add (deduct):
Net income......................... 131,045
Retirement of common stock......... (64) (741)
Common stock issued:
Common stock offering........... 15,400 174,326
Stock option exercises and stock
grants........................ 452 3,449
Acquisitions.................... 4,066 5,425 2,729
Debenture conversion............ 142 1,151
Dividends on common stock ($.21 per
share).......................... (37,144)
Foreign currency translation....... 4,525
Gain on sale of subsidiary stock
and other....................... 7,348
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994......... 189,714 624,001 381,509 1,398 --
Add (deduct):
Net income......................... 183,588
Common stock issued:
Common stock offerings.......... 18,350 312,713
Stock option exercises and stock
grants........................ 696 5,792
Acquisitions.................... 7,310 101,967
Debenture conversions........... 18,472 170,235
Dividends on common stock ($.22 per
share).......................... (46,535)
Foreign currency translation....... 349
Unrealized gain on securities...... 5,786
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995......... 234,542 1,214,708 518,562 1,747 5,786
Add (deduct):
Net income......................... 265,298
Common Stock issued:
Stock option exercises and stock
grants........................ 723 6,940
Acquisitions.................... 811 15,012 796
Debenture conversions........... 117 1,123
Dividends on common stock ($.24 per
share).......................... (56,548)
Foreign currency translation....... 20,568
Unrealized gain on securities...... 5,132
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996......... $ 236,193 $1,237,783 $ 728,108 $ 22,315 $ 10,918
========== ========== ========== ========== ==========
(All common stock and per share data has been restated for a
two-for-one common stock split on August 30, 1996)
(See notes to consolidated financial statements)
24
26
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world. At
December 31, 1996, the Company operated 2,882 funeral service locations, 345
cemeteries and 150 crematoria located in North America, Europe and the Pacific
Rim.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also operate crematoria.
The Company's financial services operations consist of a finance
subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital
financing to independent funeral home and cemetery operators.
NOTE TWO
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Service Corporation International and all majority-owned
subsidiaries (the "Company"). Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories and Cemetery Property: Funeral merchandise and cemetery
property and merchandise, are stated at the lower of average cost or market.
Depreciation and Amortization: Depreciation of property, plant and
equipment is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property and plant are depreciated over
a period ranging from seven to 50 years, while equipment is depreciated over a
period from three to 20 years. For the three years ended December 31, 1996,
depreciation expense was $74,854, $52,828 and $35,546, respectively. Maintenance
and repairs are charged to expense whereas renewals and major replacements are
capitalized. Prepaid management, consultative and non-competition agreements,
primarily with former owners and key employees of businesses acquired are
amortized on a straight-line basis over the lives of the respective contracts.
Funeral Operations: Funeral revenue is recognized when the funeral service
is performed. The Company's trade receivables consist primarily of funeral
services already performed. An allowance for doubtful accounts has been provided
based on historical experience.
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreement is signed. Revenues associated with sales of prearranged funeral
contracts (which include accumulated trust earnings and increasing insurance
benefits) are deferred and later recognized when the funeral service is
performed. The Company considers price
25
27
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
guaranteed prearranged funeral contracts to be investments made to retain and
expand future market share. Accordingly, cash flows related to price guaranteed
prearranged funeral contracts that have not been performed have been
reclassified from cash flows from operating activities to cash flows from
investing activities. For comparative purposes, reclassification was made to the
1995 and 1994 consolidated statement of cash flows.
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, 1996 and 1995 were $390,534 and $330,470 (see note
five). The Company recognizes realized trust income on these merchandise trusts
in current cemetery revenues as trust earnings accrue to defray inflation costs
recognized related to the unpurchased cemetery merchandise. Additionally, a
portion of the proceeds from the sale of cemetery property is required by state
law to be paid into perpetual care trust funds. Earnings from these trusts are
recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs. Perpetual care funds trusted at December 31, 1996 and 1995
were $318,868 and $242,449, 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, 1996, the earnings recognized from all
cemetery trusts were $51,601, $33,795 and $24,456, respectively.
Names and Reputations: The excess of purchase price over the fair value of
identifiable net assets acquired in transactions accounted for as a purchase are
included in "Names and reputations" and generally amortized on a straight line
basis over 40 years which, in the opinion of management, is not necessarily the
maximum period benefited. Fair values determined at the date of acquisition are
determined by management or independent appraisals. Many of the Company's
acquired funeral service locations have been providing high quality service to
client families for many years. Such loyalty often forms the basic valuation of
the funeral business. Additionally, the death care industry has historically
exhibited stable cash flows as well as a low failure rate. The Company monitors
the recoverability of names and reputations based on projections of future
undiscounted cash flows of the acquired businesses. The amortization charged
against income was $33,836, $25,226 and $15,495 for the three years ended
December 31, 1996, respectively. Accumulated amortization of names and
reputations as of December 31, 1996 and 1995 was $101,426 and $77,855,
respectively.
Evaluation of Long-Lived Assets: Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Assets to be Disposed Of" (FAS 121). FAS
121 requires the Company to monitor the recoverability of its long-lived assets
on an ongoing basis as events or circumstances indicate that carrying values may
not be recoverable. Adoption of FAS 121 did not have a material effect on the
Company's financial position or results of operations. In accordance with FAS
121, assets are primarily grouped at the cluster level.
Derivatives: Amounts to be paid or received under interest rate swaps,
including the interest rate provisions of the cross-currency swaps, are recorded
on the accrual basis over the life of the swap agreements as an adjustment to
interest expense. The related net amounts payable to, or receivable from, the
counterparties are included in accrued liabilities or current receivables,
respectively. Gains and losses resulting from currency movements on the
cross-currency swaps that hedge the Company's net foreign investments are
reflected in stockholders' equity, with the related net amounts due to, or from,
the counterparties included in other liabilities, or other assets, respectively.
Net deferred gains and losses on early termination of interest rate
26
28
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
swaps are being amortized into interest expense over the remaining lives of the
original agreements ($1,808 net unamortized loss at December 31, 1996).
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
In August 1995, the Company acquired two French companies, Omnium de
Gestion et de Financement S.A. and Pompes Funebres Generales S.A. ("OGF/PFG"),
which when combined operated 1,099 funeral service locations, 28 crematoria and
Auxia which primarily sells insurance policies in connection with OGF/PFG's
prearranged funeral business throughout France and several other countries. The
total purchase price for OGF/PFG was approximately $577,000. Permanent financing
was provided by issuances of notes and Company common stock in October 1995 (see
note twelve). OGF/PFG was accounted for as a purchase and the results of
operations have been consolidated with the Company's since August 1995.
In October 1995, the Company purchased Gibraltar Mausoleum Corporation
which operated 23 funeral service locations and 54 cemeteries in the United
States. 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.
In addition to the acquisitions disclosed above, the Company acquired
certain other funeral and cemetery operations both domestically and
internationally during the years ended December 31, 1996 and 1995. 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, 1996:
1996 1995
-------- ----------
Number acquired:
Funeral service locations................................. 210 1,263
Cemeteries................................................ 35 99
Crematoria................................................ 9 30
Purchase price.............................................. $362,651 $1,145,777
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 which made SCIC (formerly an approximate 70% owned subsidiary) a
wholly owned subsidiary of the Company. The purchase price of approximately
$62,578 was financed through the issuance of a 6.95% amortizing note in December
1995.
27
29
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the above acquisitions on the consolidated balance sheet at
December 31, was as follows:
1996 1995
-------- ---------
Current assets.............................................. $ 30,542 $ 171,431
Investments-insurance subsidiary............................ -- 541,784
Prearranged funeral contracts............................... 61,994 132,158
Long-term receivables....................................... (10,559) 155,013
Cemetery property........................................... 210,507 423,852
Property, plant and equipment............................... 93,482 379,616
Deferred charges and other assets........................... (1,244) 42,949
Names and reputations....................................... 164,414 363,506
Current liabilities......................................... (62,817) (320,158)
Long-term debt.............................................. (32,532) (89,724)
Deferred income taxes and other liabilities................. (85,635) (341,070)
Deferred prearranged funeral contract revenues.............. (72,213) (656,453)
Stockholders' equity........................................ (16,619) (109,277)
-------- ---------
Cash used for acquisitions........................ $279,320 $ 693,627
======== =========
The following unaudited pro forma information assumes that the acquisition
by the Company of all operations acquired during the years ended December 31,
1996 and 1995 took place on January 1, 1995 (1,473 funeral service locations,
134 cemeteries and 39 crematoria acquired in 208 separate transactions). This
information also assumes that the October 1995 public offerings of notes and
Company common stock (disclosed in note twelve) were issued at the beginning of
1995. 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,
------------------------
1996 1995
---------- ----------
(UNAUDITED)
Revenues.................................................... $2,358,704 $2,263,992
========== ==========
Net income.................................................. $ 265,341 $ 204,713
========== ==========
Primary earnings per share.................................. $ 1.10 $ .90
========== ==========
Fully diluted earnings per share............................ $ 1.07 $ .85
========== ==========
NOTE FOUR
PREARRANGED FUNERAL ACCOUNTING
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreement is signed. Payments under these contracts are generally placed in
trust (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers in North America, the United Kingdom and
Australia or the Company's French prearranged funeral service life insurance
subsidiary ("Auxia") which was acquired in the 1995 French 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
28
30
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contract revenues." Allowances for customer cancellations are provided at the
date of sale based on historical experience.
Amounts paid by the customer pursuant to the prearranged funeral contracts
are recognized in funeral revenue at the time the funeral is performed. Trust
earnings and increasing insurance benefits are accrued and deferred until the
service is performed at which time these funds are also recognized in funeral
revenues and are intended to cover future increases in the cost of providing a
price guaranteed funeral service. Included in deferred prearranged funeral
contract revenues are net obtaining costs, including sales commissions and
certain other direct marketing costs, applicable to prearranged funeral
contracts which are deferred and will be expensed over a period representing the
actuarially determined average life of the prearranged contract.
PREARRANGED FUNERAL CONTRACTS
At December 31, 1996, $962,389 due from trust funded contracts (which
includes $235,433 of amounts that have not yet been collected from customers)
and $1,196,959 due from third party insurance funded contracts will be available
to the Company at the time the funeral services are performed. These amounts are
shown net of estimated customer cancellations. The allowance for cancellation is
based on historical experience and is equivalent to approximately 8% of the
total balance. Accumulated realized earnings from trust funds and increasing
insurance benefits have been included to the extent that they have accrued
through December 31, 1996. The cumulative total has been reduced by allowable
cash withdrawals for realized trust earnings and amounts retained by the Company
pursuant to various state laws.
The cost and market value associated with the assets held in the trust
funds underlying the Company's prearranged funeral contracts are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Debt securities:
Government................................... $245,736 $259,910 $ 94,645 $106,927
Corporate.................................... 121,887 122,322 259,907 265,864
Equity securities.............................. 164,630 208,082 173,500 191,773
Money market/other............................. 274,949 275,581 190,448 190,813
-------- -------- -------- --------
$807,202 $865,895 $718,500 $755,377
======== ======== ======== ========
Investments -- Insurance subsidiary
As part of the Company's funding of prearranged funeral contracts, Auxia
invests in securities which are considered as "available-for-sale" 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.
29
31
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost, market value and unrealized gains or losses related to Auxia's
and certain other European debt and equity securities were as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
UNREALIZED
UNREALIZED GAINS
COST MARKET GAINS COST MARKET (LOSSES)
-------- -------- ---------- -------- -------- ----------
Debt securities:
Foreign government.... $220,256 $236,443 $16,187 $171,480 $179,840 $ 8,360
Corporate............. 210,235 210,428 193 123,156 123,564 408
Equity securities....... 96,157 96,735 578 69,734 67,695 (2,039)
Mutual funds:
Money market/other.... 27,749 27,942 193 113,743 115,947 2,204
Debt.................. 61,471 61,471 -- 41,800 42,003 203
-------- -------- ------- -------- -------- -------
$615,868 $633,019 $17,151 $519,913 $529,049 $ 9,136
======== ======== ======= ======== ======== =======
At December 31, 1996, gross unrealized gains were $22,932 and gross
unrealized losses were $5,781.
The contractual maturities of Auxia's debt securities (at fair value) as of
December 31, 1996, were as follows:
Within one year............................................. $ 69,564
After one year through five years........................... 240,875
After five years through ten years.......................... 107,334
After ten years............................................. 29,098
--------
$446,871
========
The following table summarizes the activity in prearranged funeral
contracts and investments -- insurance subsidiary during the years ended
December 31, 1996 and 1995:
1996 1995
---------- ----------
Beginning balance.......................................... $2,368,932 $1,418,104
Net sales................................................ 513,882 358,103
Acquisitions............................................. 61,994 673,942
Realized earnings and increasing insurance benefits...... 111,950 60,502
Maturities............................................... (249,705) (148,241)
Increase in cancellation reserve......................... (36,694) (38,132)
Distributed earnings and other........................... (9,446) 44,654
---------- ----------
Ending balance............................................. $2,760,913 $2,368,932
========== ==========
Deferred Prearranged Funeral Contract Revenues
"Deferred prearranged funeral contract revenues" on the consolidated
balance sheet includes the contract amount of all price guaranteed prearranged
funeral service contracts as well as the accrued trust earnings and increasing
insurance benefits. Also included in deferred prearranged funeral contract
revenues are net obtaining costs applicable to prearranged funeral contracts.
The aggregate net costs deferred as of December 31, 1996 and 1995 were $151,008
and $96,595, respectively. 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.
30
32
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarized the activity in deferred prearranged funeral
contract revenues during the years ended December 31, 1996 and 1995:
1996 1995
---------- ----------
Beginning balance.......................................... $2,362,053 $1,519,582
Net sales................................................ 523,229 366,835
Acquisitions............................................. 72,213 656,453
Realized earnings and increasing insurance benefits...... 111,950 60,502
Maturities............................................... (252,603) (150,382)
Increase in cancellation reserve......................... (36,694) (38,132)
Net deferred obtaining costs............................. (61,421) (43,663)
Other.................................................... 7,043 (9,142)
---------- ----------
Ending balance............................................. $2,725,770 $2,362,053
========== ==========
The recognition of future funeral revenues is estimated to occur in the
following years based on actuarial assumptions as follows:
1997........................................................ $ 239,145
1998........................................................ 208,534
1999........................................................ 192,264
2000........................................................ 178,823
2001........................................................ 166,037
2002 through 2006........................................... 680,850
2007 and thereafter......................................... 1,060,117
----------
$2,725,770
==========
NOTE FIVE
CEMETERY MERCHANDISE TRUST FUNDS
The cost and market value associated with the assets held in the cemetery
merchandise trust funds (included in current and long-term receivables, at cost)
were as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Debt securities:
Government................................... $ 72,394 $ 72,101 $ 24,910 $ 25,244
Corporate.................................... 35,060 34,560 136,730 139,343
Equity securities.............................. 71,239 75,297 85,117 91,428
Money market/other............................. 211,841 211,896 83,713 83,800
-------- -------- -------- --------
$390,534 $393,854 $330,470 $339,815
======== ======== ======== ========
31
33
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIX
INCOME TAXES
The provision for income taxes includes United States income taxes,
determined on a consolidated return basis, foreign and state and local income
taxes.
Income before income taxes:
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
United States...................................... $309,431 $257,318 $198,961
Foreign............................................ 104,450 36,893 20,060
-------- -------- --------
$413,881 $294,211 $219,021
======== ======== ========
Income tax expense (benefit) consisted of the
following:
Current:
United States.................................... $ 65,709 $ 43,396 $ 43,290
Foreign.......................................... 14,158 12,949 9,443
State and local.................................. 11,814 9,114 7,753
-------- -------- --------
91,681 65,459 60,486
-------- -------- --------
Deferred:
United States.................................... 45,330 39,767 25,282
Foreign.......................................... 3,238 (1,498) (219)
State and local.................................. 8,334 6,895 2,427
-------- -------- --------
56,902 45,164 27,490
-------- -------- --------
Total provision.................................... $148,583 $110,623 $ 87,976
======== ======== ========
The Company made income tax payments of approximately $99,377, $65,859 and
$69,555, in 1996, 1995, and 1994, respectively.
The differences between the U.S. federal statutory tax rate and the
Company's effective rate were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
Computed tax provision at the applicable U.S.
federal statutory income tax rate................. $144,858 $102,974 $76,658
State and local taxes, net of federal income tax
benefits.......................................... 13,097 10,406 6,617
Dividends received deduction and tax exempt
interest.......................................... (2,108) (1,939) (1,425)
Amortization of names and reputations............... 4,765 4,554 3,807
Foreign jurisdiction tax rate difference............ (11,849) (5,309) 2,144
Other............................................... (180) (63) 175
-------- -------- -------
Provision for income taxes........................ $148,583 $110,623 $87,976
======== ======== =======
Total effective tax rate............................ 35.9% 37.6% 40.2%
======== ======== =======
32
34
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and carry-forwards that give rise
to significant portions of deferred tax assets and liabilities consisted of the
following:
1996 1995
-------- --------
Receivables, principally due to sales of cemetery interment
rights and related products............................... $152,069 $128,755
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... 383,687 317,937
Property, plant and equipment, principally due to
depreciation and to purchase accounting adjustments....... 110,907 110,755
Other....................................................... -- 5,519
-------- --------
Deferred tax liabilities.................................. 646,663 562,966
-------- --------
Deferred revenue on prearranged funeral contracts,
principally due to earnings from trust funds.............. (34,092) (49,889)
Accrued liabilities......................................... (38,337) (20,273)
Carry-forwards and foreign tax credits...................... (7,484) (10,888)
Other....................................................... (4,367) --
-------- --------
Deferred tax assets....................................... (84,280) (81,050)
-------- --------
Valuation allowance....................................... 6,128 8,729
-------- --------
Net deferred income taxes................................. $568,511 $490,645
======== ========
During the three years ended December 31, 1996, tax expense resulting from
allocating certain tax benefits directly to capital in excess of par totaled
$2,410, $1,165 and $1,223, 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 $153,598 of
undistributed earnings of foreign subsidiaries since it is the Company's
intention to reinvest such earnings indefinitely.
As of December 31, 1996 the Company has United States foreign tax credit
carry-forwards of $556 which will expire in the years 1999 through 2001.
Various subsidiaries have state operating loss carry-forwards of $45,442
with expiration dates through 2011.
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 decrease in the valuation allowance is primarily attributable to
loss carry-forwards and foreign tax credits that were realized in the current
year.
33
35
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SEVEN
DEBT
Debt at December 31, was as follows:
1996 1995
---------- ----------
Bank revolving credit agreements and commercial paper...... $ 325,875 $ 226,611
6.375% notes due in 2000................................... 150,000 150,000
6.75% notes due in 2001.................................... 150,000 --
8.72% amortizing notes due in 2002......................... 165,761 178,866
8.375% notes due in 2004................................... 200,000 200,000
7.2% notes due in 2006..................................... 150,000 --
6.875% notes due in 2007................................... 150,000 150,000
6.95% amortizing notes due in 2010......................... 61,576 63,837
7.875% debentures due in 2013.............................. 150,000 150,000
7.0% notes due in 2015 (putable in 2000)................... 300,000 300,000
Medium term notes, maturities through 2019, fixed average
interest rate of 9.6%.................................... 186,040 186,040
Convertible debentures, interest rates range from
5% -- 5.5%, due through 2006, conversion price ranges
from $11.25 -- $36.72.................................... 44,140 27,090
Mortgage and other notes payable with maturities through
2013, average interest rate of 7.64%..................... 151,836 221,840
Deferred loan costs........................................ (22,615) (19,583)
---------- ----------
Total debt................................................. 2,162,613 1,834,701
Less current maturities.................................... (113,876) (122,237)
---------- ----------
Total long-term debt............................. $2,048,737 $1,712,464
========== ==========
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 27, 1997,
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, 1996, there was $202,571 of
commercial paper outstanding backed by this agreement at a weighted average
interest rate of 5.57%. These commercial paper borrowings and revolving notes
generally have maturities ranging from one to 90 days. 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 United Kingdom 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, 1996, there was $85,234 outstanding
under this agreement at a weighted average interest rate of 5.43%. 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, 1996 are classified as long-term debt.
The Company uses these revolving credit agreements primarily to finance the
Company's ongoing acquisition programs. From time to time, the Company raises
debt and/or equity in the public markets to reduce its revolving credit facility
balances. The timing of these public debt or equity offerings is dependent on
numerous factors including market conditions, long and short term interest
rates, the Company's capitalization ratios and the outstanding balances under
the revolving credit facilities. Therefore, the Company has classified these
borrowings as long-term debt. Additionally, the
34
36
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has excluded these borrowings from the five-year maturity of long-term
debt disclosure due to the uncertainty of the eventual term of the related debt.
It is the Company's intent to refinance such borrowings through the use of its
credit agreements or other long-term notes issued under the Company's $1,000,000
shelf registration.
The Company's French revolving credit agreement allows for borrowings, in
French francs, up to $50,000 and expires in August 1997. 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,
1996, $17,343 was outstanding under this agreement at a weighted average
interest rate of 3.55%.
The Company also has a bank line of credit for $100,000 (no borrowings
outstanding at December 31, 1996) 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 $88,933 in lines of credit
with several international banks and at December 31, 1996, $21,454 was
outstanding under these international lines of credit.
In May 1996, the Company issued $300,000 of notes which were sold through
an underwritten public offering. These notes were issued in two tranches of
$150,000 each with maturities in June 2001 and 2006 and interest rates of 6.75%
and 7.2%, respectively. The proceeds of this offering were primarily used to
repay existing debt outstanding under the Company's revolving credit agreements.
During the first quarter of 1997, the Company initiated the repurchase of
three issues of its outstanding notes and intends to refinance such repurchased
notes in a manner that should reduce future interest expense. (See note eighteen
to the consolidated financial statements).
Approximately $80,000 of the Company's facilities and cemetery properties
are pledged as collateral for the mortgage notes at December 31, 1996.
Additionally, at December 31, 1996, the Company had $41,738 in letters of
credit outstanding primarily to guarantee funding of certain insurance claims.
The aggregate principal payments on debt for the five years subsequent to
December 31, 1996, excluding amounts due to banks under revolving credit loan
agreements are: 1997-$113,876; 1998-$55,217; 1999-$53,243; 2000-$191,843 and
2001-$204,747.
Cash interest payments for the three years ended December 31, 1996 totaled
$150,961, $111,609 and $77,334, respectively.
Approximately $1,386,000 of total debt has essentially been converted to
foreign currencies as a result of cross-currency swaps. Similarly, the stated
coupons described above have substantially been modified through the use of
interest rate and cross-currency interest rate swaps used in the management of
interest rates within defined targets for fixed and floating interest rate
exposure. See note eight below.
During the three months ended December 31, 1996, pursuant to a shelf
registration filed with the SEC to be used exclusively for future acquisitions,
the Company guaranteed the following promissory notes issued through
subsidiaries in connection with various acquisitions of operations:
SUBSIDIARY AMOUNT
---------- --------
SCI Funeral Services of New York, Inc. ..................... $ 60
Hubbard Funeral Home, Inc. ................................. 1,500
SCI Arizona Funeral Services, Inc. ......................... 4,061
SCI Texas Funeral Services, Inc. ........................... 1,150
SCI Iowa Funeral Services, Inc. ............................ 825
Affiliated Family Funeral Services, Inc. ................... 1,846
35
37
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE EIGHT
DERIVATIVES
The Company enters into derivatives primarily 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
creditworthy financial institutions. The Company does not engage in derivative
transactions for speculative or trading purposes, nor is it a party to leveraged
derivatives.
In general, cross-currency swaps are entered into concurrently with
significant foreign acquisitions and convert US dollar debt into the respective
foreign currency of the acquisitions. Such cross-currency swaps are used in
combination with local currency borrowings to substantially hedge the Company's
net investment in foreign operations. The cross-currency swaps generally include
interest rate provisions to enable the Company to additionally hedge a portion
of the earnings of its foreign operations. Accordingly, movements in currency
rates that impact the swap are generally offset by a corresponding movement in
the value of the underlying assets being hedged. Similarly, currency movements
that impact foreign expense due under the cross-currency interest rate swaps are
generally offset by a corresponding movement in the earnings of the foreign
operation.
CARRYING WEIGHTED AVERAGE
AMOUNT INTEREST RATE
NOTIONAL ASSET -----------------
DECEMBER 31, 1996 AMOUNT (LIABILITY) MATURITY RECEIVE PAY
----------------- ---------- ----------- --------- --------- -----
Interest Rate Swaps:
US dollar fixed to US dollar floating........ $ 575,000 $ -- 1999-2006 6.37% 5.56%
Canadian dollar floating to Canadian dollar
fixed..................................... 40,134 -- 1999 2.94 7.57
French franc floating to German mark
floating.................................. 94,808 -- 2006 3.50 3.47
Cross-Currency Interest Rate Swaps:
US dollar fixed to French franc fixed........ 500,000 24,123 2000-2007 6.20 5.94
US dollar fixed to French franc floating..... 100,000 (599) 2006 7.20 3.74
US dollar fixed to British pound fixed....... 405,109 (40,394) 2002-2004 8.47 7.98
US dollar fixed to British pound floating.... 33,152 (3,477) 2002 8.72 6.56
US dollar floating to British pound
floating.................................. 76,375 (4,113) 1997 5.50 6.30
US dollar floating to Australian dollar
fixed..................................... 67,568 (10,881) 1999-2000 5.63 7.02
US dollar floating to Australian dollar
floating.................................. 29,436 (5,531) 2000 5.63 5.93
US dollar fixed to Canadian dollar fixed..... 75,000 133 1999 6.66 6.64
US dollar fixed to Canadian dollar
floating.................................. 100,000 1,089 2010 6.95 3.54
---------- --------
$2,096,582 $(39,650)
========== ========
CARRYING WEIGHTED AVERAGE
AMOUNT INTEREST RATE
NOTIONAL ASSET -----------------
DECEMBER 31, 1995 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....... 300,000 (2,221) 2000-2007 6.75 6.96
US dollar fixed to British pound fixed...... 252,170 753 2002-2004 8.63 9.22
US dollar fixed to British pound floating... 208,728 916 2002-2004 8.35 6.85
US dollar floating to Australian dollar
fixed.................................... 67,568 (5,827) 1999-2000 5.56 7.03
US dollar floating to Australian dollar
floating................................. 29,436 (3,278) 2000 5.56 7.35
US dollar fixed to Canadian dollar
floating................................. 100,000 655 2010 6.95 6.58
---------- --------
$1,073,212 $ (9,002)
========== ========
36
38
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company entered into $200,000 of French Franc and $75,000
of Canadian dollar cross-currency interest rate swaps to further hedge its net
investment in related foreign assets on an after-tax basis. In May 1996, a
$100,000 French Franc cross-currency swap was executed to maintain the Company's
existing hedge of net assets in French operations upon repayment of balances
outstanding under the French bridge facility. In March 1996, the Company
converted $94,808 of floating French rates to floating German rates and in
December 1996, the Company entered into US dollar fixed to floating interest
rate swaps on $500,000 notional in connection with its ongoing management of
interest rates.
Interest rate swap settlements are generally semiannual and match the
coupons of the underlying debt or related intercompany loan payments on the
foreign operations being hedged. In the cross-currency swaps, the notional
amounts are exchangeable in accordance with the terms of the swaps: at maturity
for nonamortizing swaps or according to defined amortization tables. Maturities
of derivative financial instruments held on December 31, 1996, are as follows:
1997 -- $76,375; 1998 -- $0; 1999 -- $213,548; 2000 -- $323,590; 2001 --
$150,000; and thereafter -- $1,333,069.
NOTE NINE
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. The carrying amounts of
cash and cash equivalents, trade receivables and accounts payable approximate
fair values due to the short-term maturities of these instruments. The carrying
value of Provident's receivables approximates fair value as the majority of the
loan portfolio carries market rates of interest. It is not practicable to
estimate the fair value of receivables due on cemetery contracts or prearranged
funeral contracts (other than cemetery merchandise trust funds and prearranged
funeral trust funds, see notes four and five) without incurring excessive costs
because of the large number of individual contracts with varying terms. The
investments of the Company's insurance subsidiary are reported at fair value in
the consolidated balance sheet.
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Interest rate and cross currency swap
agreements.............................. $ 39,650 $ 50,102 $ 9,002 $ (34,905)
Long-term debt (including current
maturities)............................. 2,162,613 2,220,377 1,834,701 1,980,599
6.25% convertible preferred securities of
SCI Finance LLC......................... 172,500 323,438 172,500 252,243
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). The net fair value of the Company's
various swap agreements at December 31, 1996 is a payable of $50,102. Fair
values were obtained from counterparties to the agreements and represent their
estimate of the amount the Company would pay to terminate the swap agreements
based upon the existing terms and current market conditions. At December 31,
1995, the net fair value was a receivable owed to the Company of $34,905. The
fair value of the Company's swap agreements may vary substantially with changes
in interest and currency rates. The Company's credit exposure is limited to the
sum of the fair value of positions that have become favorable to the Company and
any accrued interest receivable due from counterparties. Potential credit
exposure is dependent upon the maximum adverse impact of interest and currency
movement. Such potential credit exposure is minimized by selection of
counterparties from a limited group of high quality institutions and inclusion
of certain contract provisions. Management believes that any credit exposure
with respect to its favorable positions at December 31, 1996 is remote (see note
eight).
37
39
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the fixed rate long-term borrowings was estimated by
discounting the future cash flows, including interest payments, using rates
currently available for debt of similar terms and maturity, based on the
Company's credit standing and other market factors. The carrying value of
convertible securities has been estimated based on the respective shares of SCI
stock into which such securities may be converted. The carrying value of the
Company's revolving credit agreements approximate fair value because the rates
on such agreements are variable, based on current market conditions.
Provident is a party to financial instruments with potential credit risk.
The financial instruments result from loans made in the normal course of
business to meet the financing needs of borrowers who are principally
independent funeral home and cemetery operators. These financial instruments
also include loan commitments of $55,017 at December 31, 1996 ($28,319 at
December 31, 1995) to extend credit. Provident's total loans outstanding at
December 31, 1996 were approximately $146,000. 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.
NOTE TEN
COMMITMENTS
The annual payments for operating leases (primarily for funeral home
facilities and transportation equipment) are as follows:
1997....................................................... $67,717
1998....................................................... 55,840
1999....................................................... 41,561
2000....................................................... 25,042
2001....................................................... 15,485
Thereafter................................................. 80,776
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, 1996, rental expense was $64,073, $47,848 and $36,244,
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, 1996, $55,688, $55,419 and $48,053, respectively, were
charged to expense. At December 31, 1996, the maximum estimated future expense
under all agreements with a remaining term in excess of one year is $249,654,
including $14,985 with certain officers of the Company.
The Company has entered into a minimum purchase agreement with a major
casket manufacturer for its North American operations. The agreement contains
provisions to increase the minimum annual purchases for normal price increases
and for the maintenance of product quality. The agreement expires in 1998 and
38
40
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contains a remaining purchase commitment of $108,834. During the three years
ended December 31, 1996, the Company purchased caskets for $54,431, $48,828 and
$47,098, respectively, under this agreement.
Included in the Company's acquisition of OGF/PFG was 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 $26,513. During the year ended December 31, 1996, the Company purchased
caskets for $5,432 under this agreement.
NOTE ELEVEN
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 cumulative 6.25%
convertible preferred shares. These shares are non-voting, carry a liquidation
value of $50 per share plus accumulated and unpaid dividends and are convertible
into Company common stock at a conversion price of $15.05 per share at any time
unless previously redeemed. Liquidation may occur after December 5, 1999 unless
earlier redemption (beginning in June 1997) is permitted based on Company common
stock price performance (20 trading days above $18.81 per share within a period
of 30 consecutive trading days immediately prior to notice of redemption). The
proceeds from this offering were used in 1995 to repay bank debt incurred in
connection with the United Kingdom acquisitions.
NOTE TWELVE
STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock, $1
per share par value. No shares were issued as of December 31, 1996. At December
31, 1996, 500,000,000 common shares of $1 par value were authorized, 236,193,427
shares were issued and outstanding (234,542,172 at December 31, 1995), net of
9,813 shares held, at cost, in treasury (40,226 at December 31, 1995).
On June 13, 1996, the Company's Board of Directors approved a two-for-one
split of its common stock to be effected as a stock dividend. On August 8, 1996,
the Company's shareholders approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
200,000,000 to 500,000,000 shares. The stock dividend was paid on August 30,
1996, to shareholders of record as of August 16, 1996. The par value of the new
shares issued totaled $117,838, which was transferred from capital in excess of
par value to the common stock account. All share and per share data for prior
periods presented have been restated to reflect this stock dividend.
In October 1995, the Company issued 16,790,000 shares of common stock at a
net price of $18.65 per share through an underwritten public offering. 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 6,573,518 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 16,634,522 shares of Company common
stock.
In December 1994 and January 1995 the Company sold, through an underwritten
public offering, 16,960,000 common shares at a net $12.35 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.
39
41
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has benefit plans whereby shares of the Company's common stock
may be issued pursuant to the exercise of stock options granted to officers and
key employees. The plans allow for options to be granted as either non-qualified
or incentive stock options. The options are granted with an exercise price equal
to the then current market price of the Company's common stock. The options are
generally exercisable at a rate of 33 1/3% each year unless, at the discretion
of the Company's Compensation Committee of the Board of Directors, alternative
vesting methods are allowed. At December 31, 1996, 9,965,000 options had been
granted to officers and key employees of the Company which contain alternative
vesting methods. Under the alternative vesting methods, partial or full
accelerated vesting will occur when the price of Company common stock reaches
pre-determined prices 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 thirteen years from date of
grant. At December 31, 1996 and 1995, 14,802,500 and 3,428,656 shares,
respectively, were reserved for future option grants under all stock option
plans.
The following sets forth certain stock option information:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at December 31, 1993............................ 2,212,910 $ 7.73
Granted................................................... 8,571,500 12.89
Exercised................................................. (342,404) 7.21
Canceled.................................................. (67,954) 8.41
---------- -------
Outstanding at December 31, 1994............................ 10,374,052 12.01
---------- -------
Granted................................................... 2,854,000 16.35
Exercised................................................. (668,552) 7.53
Canceled.................................................. (977,668) 12.81
---------- -------
Outstanding at December 31, 1995............................ 11,581,832 13.27
---------- -------
Granted................................................... 2,239,200 22.63
Exercised................................................. (724,425) 8.82
Canceled.................................................. (47,338) 20.45
---------- -------
Outstanding at December 31, 1996............................ 13,049,269 $15.09
========== =======
Exercisable at December 31, 1996............................ 1,055,435 $11.01
========== =======
At December 31, 1995 and 1994, 1,206,762 and 1,467,696 options were
exercisable, respectively. For the two years ended December 31, 1996, 2,239,200
and 2,854,000 options were awarded to average fair values of $9.18 and $7.24,
respectively.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 5.04 -- 7.25 142,810 1.0 $ 6.50 142,810 $ 6.50
8.33 -- 9.41 405,854 2.6 8.96 405,854 8.96
12.88 -- 18.38 10,274,905 9.8 13.83 496,771 13.80
20.09 -- 29.59 2,225,700 6.8 22.59 10,000 20.09
- --------------- ---------- --- ------- --------- -------
$ 5.04 -- 29.59 13,049,269 9.0 $15.09 1,055,435 $11.01
=============== ========== === ======= ========= =======
40
42
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1996, shareholders approved the 1996 Incentive Plan. This plan
reserves 12,000,000 shares of common stock for future awards of stock options,
restricted stock and other stock based awards to officers and key employees of
the Company and replaced all shares of common stock available for future grant
under previously existing stock option and restricted stock plans. In November
1996, the Company approved the 1996 Nonqualified Incentive Plan. This plan
reserves 4,000,000 shares of common stock for future awards of nonqualified
stock options to employees who are not officers of the Company. Under the
Company's 1995 Stock Plan for Non-Employee Directors, non-employee directors
automatically receive yearly awards of restricted stock through the year 2000.
Each award is for 3,000 shares of common stock and vests after one year of
service.
For the two years ended December 31, 1996, 49,600 and 128,600 shares of
restricted stock were awarded at average fair values of $25.76 and $14.60,
respectively.
The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the rights holders to purchase certain securities of the Company or the
acquiring company. The rights, which are redeemable by the Company for $.01 per
right, expire in July 1998 unless extended.
The Company has adopted the disclosure-only provisions of FAS 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans. If
the Company had elected to recognize compensation cost for its option plans
based on the fair value at the grant dates for awards under those plans,
consistent with the method prescribed by FAS 123, net income and earnings per
share would have been changed to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
Net income:
As reported............................................... $265,298 $183,588
Pro forma................................................. 252,929 181,285
Primary earnings per share:
As reported............................................... $ 1.10 $ .90
Pro forma................................................. 1.05 .89
Fully diluted earnings per share:
As reported............................................... $ 1.07 $ .85
Pro forma................................................. 1.02 .84
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1996 and 1995, respectively: dividend yield of
1.0% and 1.0%; expected volatility of 25.3% and 25.3%; a risk free interest rate
of 6.8% and 5.8%; and an expected holding period of 9 and 7 years.
FAS 123 only applies to options granted in 1995 and 1996. Accordingly, as
most of the options vest over three years, the full impact of the pro forma
disclosure will not be reflected until 1997.
41
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THIRTEEN
RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all United States employees, a supplemental retirement plan for
certain current and former key employees (SERP), a supplemental retirement plan
for officers and certain key employees (Senior SERP), and a retirement plan for
non-employee directors (Directors' Plan).
For the pension plan, retirement benefits are generally based on years of
service and compensation. The Company annually contributes to the pension plan
an actuarially determined amount consistent with the funding requirements of the
Employee Retirement Income Security Act of 1974. Assets of the pension plan
consist primarily of bank money market funds, fixed income investments,
marketable equity securities and mortgage notes. The marketable equity
securities include shares of Company common stock with a value of $9,250 at
December 31, 1996. 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,
-----------------------------
1996 1995 1994
------- ------- -------
Service cost--benefits earned during the period............. $ 8,550 $ 6,996 $ 6,179
Interest cost on projected benefit obligation............... 9,400 9,114 7,686
Return on plan assets....................................... (13,341) (15,752) (5,252)
Net amortization and deferral of gain....................... 9,747 12,189 2,056
------- ------- -------
$14,356 $12,547 $10,669
======= ======= =======
The plans' funded status at December 31, was as follows:
1996 1995
---------------------- ---------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
-------- ---------- ------- ----------
Vested benefit obligation...................... $ 76,701 $ 40,130 $75,586 $ 38,205
-------- -------- ------- --------
Accumulated benefit obligation................. $ 80,228 $ 40,245 $80,897 $ 38,308
======== ======== ======= ========
Projected benefit obligation................... $ 88,080 $ 40,280 $89,363 $ 38,341
Plans' assets at fair value.................... 103,603 -- 91,058 --
-------- -------- ------- --------
Plans' assets in excess (deficit) of projected
benefit obligation........................... 15,523 (40,280) 1,695 (38,341)
Unrecognized net loss from past experience and
effects of changes in assumptions............ 1,634 7,484 14,005 8,121
Prior service cost not yet recognized in net
periodic pension cost........................ (2,035) 10,749 (2,395) 12,345
-------- -------- ------- --------
Accrued pension cost........................... 15,122 (22,047) 13,305 (17,875)
Adjustment for additional minimum liability.... -- (18,198) -- (20,433)
-------- -------- ------- --------
Retirement plan asset (liability).............. $ 15,122 $(40,245) $13,305 $(38,308)
======== ======== ======= ========
42
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assumed rates were used in the determination of the plans'
funded status:
1996 1995
-------------------- --------------------
FUNDED NON-FUNDED FUNDED NON-FUNDED
PLAN PLANS PLAN PLANS
------ ---------- ------ ----------
Discount rate used to determine
obligations................................ 7.5% 7.5% 7.25% 7.25%
Assumed rate of compensation increase........ 5.5 5.5 5.5 5.5
Assumed rate of return on plan assets........ 8.5 -- 8.0 --
NOTE FOURTEEN
MAJOR SEGMENTS OF BUSINESS
The Company conducts funeral and cemetery operations principally in North
America, Europe and the Pacific Rim and offers financial services in the United
States.
FINANCIAL
FUNERAL CEMETERY SERVICES CORPORATE CONSOLIDATED
---------- ---------- --------- --------- ------------
Revenues:
1996....................... $1,663,387 $ 612,421 $ 18,386 $ -- $2,294,194
1995....................... 1,166,247 463,754 22,125 -- 1,652,126
1994....................... 754,408 343,521 19,246 -- 1,117,175
Income from operations:
1996....................... $ 380,841 $ 214,721 $ 8,890 $(63,215) $ 541,237
1995....................... 295,151 160,442 9,628 (53,600) 411,621
1994....................... 222,605 110,226 8,364 (51,700) 289,495
Identifiable assets:
1996....................... $5,905,246 $2,638,775 $148,193 $177,556 $8,869,770
1995....................... 5,110,145 2,157,906 218,963 185,373 7,672,387
1994....................... 3,115,053 1,417,081 213,257 416,497 5,161,888
Depreciation and
amortization:
1996....................... $ 103,696 $ 18,601 $ 9 $ 7,513 $ 129,819
1995....................... 72,477 11,772 33 8,259 92,541
1994....................... 46,944 9,969 120 11,960 68,993
Capital expenditures:(1)
1996....................... $ 234,673 $ 268,039 $ -- $ 11,582 $ 514,294
1995....................... 442,227 480,372 10 6,090 928,699
1994....................... 212,660 384,402 -- 2,950 600,012
Number of operating locations
at year end:
1996....................... 2,882 495 -- -- 3,377
1995....................... 2,836 360 -- -- 3,196
1994....................... 1,534 259 -- -- 1,793
- ---------------
(1) Includes $321,142, $803,468 and $518,922 for the three years ended December
31, 1996, respectively, for purchases of property, plant, and equipment and
cemetery property of acquired businesses.
43
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic segment information was as follows:
UNITED OTHER OTHER
STATES FRANCE* EUROPEAN** FOREIGN*** CONSOLIDATED
---------- ---------- -------- -------- ----------
Revenues:
1996....................... $1,409,409 $ 537,079 $184,943 $162,763 $2,294,194
1995....................... 1,178,407 190,091 151,225 132,403 1,652,126
1994....................... 975,971 -- 42,613 98,591 1,117,175
Income from operations:
1996....................... $400,622 $ 52,204 $ 37,376 $ 51,035 $ 541,237
1995....................... 314,698 18,743 34,214 43,966 411,621
1994....................... 245,230 -- 10,266 33,999 289,495
Identifiable assets:
1996....................... $6,135,950 $1,252,738 $923,692 $557,390 $8,869,770
1995....................... 5,256,876 1,169,484 777,247 468,780 7,672,387
1994....................... 4,168,636 -- 683,612 309,640 5,161,888
Number of operating locations
at year end:
1996....................... 1,441 1,056 631 249 3,377
1995....................... 1,274 1,067 618 237 3,196
1994....................... 1,043 -- 549 201 1,793
- ---------------
* French operations from August 1995.
** Includes United Kingdom operations from September 1994, and other European
operations from August 1995.
*** Includes Canadian and Australian operations.
44
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIFTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts at December 31, was as
follows:
1996 1995
-------- --------
Cash and cash equivalents:
Cash...................................................... $ 41,344 $ 46,999
Commercial paper and temporary investments................ 2,787 10,485
-------- --------
$ 44,131 $ 57,484
======== ========
Receivables and allowances:
Current:
Trade accounts......................................... $273,696 $242,268
Cemetery contracts..................................... 236,578 196,091
Loans and other........................................ 69,174 82,151
-------- --------
579,448 520,510
Less:
Allowance for contract cancellations and doubtful
accounts.............................................. 45,155 34,147
Unearned finance charges and valuation discounts....... 39,717 37,422
-------- --------
84,872 71,569
-------- --------
$494,576 $448,941
======== ========
Long-term:
Cemetery contracts..................................... $311,847 $258,253
Loans and other notes.................................. 206,897 257,415
Trusted cemetery merchandise sales..................... 371,400 314,400
-------- --------
890,144 830,068
Less:
Allowance for contract cancellations and doubtful
accounts.............................................. 29,951 23,298
Unearned finance charges and valuation discounts....... 50,906 43,879
-------- --------
80,857 67,177
-------- --------
$809,287 $762,891
======== ========
Interest rates on cemetery contracts and loans and other notes receivable
range from 1.5% to 18.0% at December 31, 1996. Included in loans and other notes
receivable are $18,228 in notes with officers and employees of the Company, the
majority of which are collateralized by real estate, and $19,523 in notes with
other related parties.
45
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------------
1996 1995
---------- ----------
Cemetery property:
Undeveloped land......................................... $1,003,961 $ 839,797
Developed land, lawn crypts and mausoleums............... 376,252 322,759
---------- ----------
$1,380,213 $1,162,556
========== ==========
Property, plant and equipment:
Land..................................................... $ 355,017 $ 314,185
Buildings and improvements............................... 1,017,334 884,178
Operating equipment...................................... 358,577 279,560
Leasehold improvements................................... 45,606 42,844
---------- ----------
1,776,534 1,520,767
Less: accumulated depreciation........................... (319,459) (247,045)
---------- ----------
$1,457,075 $1,273,722
========== ==========
Accounts payable and accrued liabilities:
Trade payables........................................... $ 68,912 $ 98,984
Dividends................................................ 14,189 12,902
Payroll.................................................. 78,233 93,375
Unpaid acquisition cost.................................. -- 19,493
Interest................................................. 28,984 24,633
Insurance................................................ 33,263 44,848
Bank overdraft........................................... 48,312 27,749
Other.................................................... 168,904 98,956
---------- ----------
$ 440,797 $ 420,940
========== ==========
NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- -------- -------
Common stock issued under restricted stock plans............ $ 1,278 $ 1,868 $ 1,724
Minimum liability under retirement plans.................... (2,235) 4,213 (382)
Debenture conversions to common stock....................... 1,240 188,707 1,293
Property distributed from prearranged funeral trust......... -- -- 9,920
Common stock issued in acquisitions......................... 15,823 109,277 9,491
Debt issued in acquisitions................................. 26,467 114,609 36,567
NOTE SIXTEEN
PROSPECTIVE ACCOUNTING CHANGES
The Company will adopt Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("FAS 125"), which was amended by FAS 127, in January 1997. FAS
125 provides standards for transfers and servicing of financial assets and
extinguishments of liabilities that are based on a financial components approach
that focuses on control. The Company does not anticipate that FAS 125 will have
a material impact on the Company's consolidated financial statements. The
Company will adopt FAS 128 "Earnings Per Share" and FAS 129 "Disclosures of
Information About Capital Structure" for the year ended December 31, 1997. FAS
128
46
48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. FAS 129
contains new capital structure disclosure requirements.
NOTE SEVENTEEN
RELATED PARTY TRANSACTIONS
As of February 12, 1997, subsidiaries of J. P. Morgan & Co. Incorporated
("Morgan") beneficially own approximately 1.7% of the Company's common stock.
Morgan and the Company have entered into various foreign currency and/or
interest rate swap agreements during the three years ended December 31, 1996.
During 1996 and 1995, Morgan participated as lead underwriter on public
offerings in 1995 and acted as an advisor in a private offering of debt. Morgan
also acted as an advisor in the 1995 acquisition of OGF/PFG. During 1994, Morgan
participated as lead underwriter in public offerings. Additionally in the 1994
acquisition of a United Kingdom company. Morgan acted as an advisor as well as
provided a loan used by the Company (repaid in 1995) in the acquisitions of two
United Kingdom companies. For the three years ended December 31, 1996, Morgan
received $3,000, $14,062 and $10,747, respectively in fees from the Company.
NOTE EIGHTEEN
SUBSEQUENT EVENTS
In January 1997, the Company sold its interest in Equity Corporation
International (approximately 7,994,000 shares) and received sale proceeds of
approximately $148,000 producing a gain of approximately $68,000 ($42,000
after-tax), which will be included in the financial results for the quarter
ended March 31, 1997.
Additionally, in the first quarter of 1997, the Company initiated the
repurchase of the 8.375% notes due 2004, the 7.875% debentures due 2013 and the
Company's medium term notes. This will result in an after-tax loss which will be
recorded as an extraordinary item in the financial results for the quarter ended
March 31, 1997. It is the Company's intention to refinance these notes to reduce
future interest expense.
47
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE NINETEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
Revenues:
1996................................ $575,453 $564,749 $544,500 $609,492 $2,294,194
1995................................ 348,113 353,649 403,491 546,873 1,652,126
Gross profit:
1996................................ 160,168 144,063 131,378 168,843 604,452
1995................................ 116,675 105,982 105,724 136,840 465,221
Net income:
1996................................ 71,897 62,250 57,395 73,756 265,298
1995................................ 47,380 40,640 39,136 56,432 183,588
Primary earnings per share:
1996................................ .30 .26 .24 .30 1.10
1995................................ .24 .21 .20 .25 .90
Fully diluted earnings per share:
1996................................ .29 .25 .23 .30 1.07
1995................................ .23 .20 .18 .24 .85
48
50
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996
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, 1996....... $34,147 $14,187 $ 6,638 $(9,817) $45,155
Year ended December 31, 1995....... 20,156 8,853 10,904 (5,766) 34,147
Year ended December 31, 1994....... 14,786 7,658 4,155 (6,443) 20,156
Due After One Year --
Allowance for contract cancellations
and doubtful accounts:
Year ended December 31, 1996....... $23,298 $ 3,072 $ 3,581 $ -- $29,951
Year ended December 31, 1995....... 16,086 2,999 4,689 (476) 23,298
Year ended December 31, 1994....... 14,054 1,969 1,830 (1,767) 16,086
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily acquisitions and dispositions of operations.
49
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by PART III (Items 10, 11, 12 and 13) has been
omitted as the Company intends to file with the Commission not later than 120
days after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement (i) with
respect to Item 10 under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance", (ii) with respect to Items 11 and 13
under the captions "Certain Information with Respect to Officers and Directors",
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" and (iii) with respect to Item 12 under the caption "Voting
Securities and Principal Holders." The information as specified in the preceding
sentence is incorporated herein by reference. Notwithstanding anything set forth
in this Form 10-K, the information under the caption "Compensation Committee
Report on Executive Compensation" and under the captions "Overview of Executive
Compensation" and "Performance 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 Schedule:
The financial statements and schedules are listed in the accompanying
Index to Financial Statements and Related Schedule on page 19 of this
report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 52-54
are filed as part of this report.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the Company filed a Form
8-K dated October 9, 1996 reporting under "Item 5. Other Events" a press
release announcing a proposed exchange offer by the Company to acquire the
outstanding shares of The Loewen Group, Inc.
(c) Included in (a) above.
(d) Included in (a) above.
50
52
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 28, 1997 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
(George R. Champagne) Officer (Principal Financial
Officer)
WESLEY T. McRAE Corporate Controller of SCI
- ----------------------------------------------------- Management Corporation, a
(Wesley T. McRae) subsidiary of the Registrant
(Principal Accounting Officer)
ANTHONY L. COELHO* Directors
(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.*
(James J. Gavin, Jr.)
JAMES H. GREER*
(James H. Greer)
L. WILLIAM HEILIGBRODT*
(L. William Heiligbrodt)
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)
March 28, 1997
51
53
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to Registration Statement No.
333-10867 on Form S-4).
3.2 -- Articles of Amendment to Restated Articles of
Incorporation. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended September 30,
1997).
3.3 -- Statement of Resolution Establishing Series of Shares of
Series C Junior Participating Preferred Stock, dated
August 5, 1988. (Incorporated by reference to Exhibit 3.1
to Form 10-Q for the fiscal quarter ended July 31, 1988).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.7 to Form 10-K for the fiscal year ended December 31,
1991).
4.1 -- Rights Agreement dated as of July 18, 1988 between the
Company and Texas Commerce Bank National Association.
(Incorporated by reference to Exhibit 1 to Form 8-K dated
July 18, 1988).
4.2 -- Amendment, dated as of May 10, 1990, to the Rights
Agreement, dated as of July 18, 1988, between the Company
and Texas Commerce Bank National Association.
(Incorporated by reference to Exhibit 1 to Form 8-K dated
May 10, 1990).
4.3 -- Agreement Appointing a Successor Rights Agent under
Rights Agreement, dated as of June 1, 1990, by the
Company and Ameritrust Company National Association.
(Incorporated by reference to Exhibit 4.1 to Form 10-Q
for the fiscal quarter ended June 30, 1990).
4.4 -- Undertaking to furnish instruments related to long-term
debt.
10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated
by reference to Exhibit 10.1 to Form 10-K for the fiscal
year ended December 31, 1991).
10.2 -- Agreement dated May 14, 1992 between the Company, R. L.
Waltrip and related parties relating to life insurance.
(Incorporated by reference to Exhibit 10.4 to Form 10-K
for the fiscal year ended December 31, 1992).
10.3 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1997, between SCI Executive
Services, Inc. and R. L. Waltrip.
10.4 -- Non-Competition Agreement and Amendment to Employment
Agreement, dated November 11, 1991, among the Company, R.
L. Waltrip and Claire Waltrip. (Incorporated by reference
to Exhibit 10.9 to Form 10-K for the fiscal year ended
December 31, 1992).
10.5 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1997, between SCI Executive
Services, Inc. and L. William Heiligbrodt.
10.6 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1997, between SCI Executive
Services, Inc. and W. Blair Waltrip.
52
54
EXHIBIT NO. DESCRIPTION
----------- -----------
10.7 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, and further amended and
restated as of January 1, 1997, between SCI Executive
Services, Inc. and John W. Morrow, Jr.
10.8 -- Employment Agreement, dated November 11, 1991, as amended
and restated as of August 12, 1992, further amended and
restated as of May 12, 1993, further amended and restated
as of January 1, 1995, and further amended and restated
as of January 1, 1997, between SCI Executive Services,
Inc. and Jerald L. Pullins.
10.9 -- Form of Employment Agreement pertaining to officers
(other than the officers identified in the preceding
exhibits).
10.10 -- Form of 1986 Stock Option Plan. (Incorporated by
reference to Exhibit 10.21 to Form 10-K for the fiscal
year ended December 31, 1991).
10.11 -- Amendment to 1986 Stock Option Plan.
10.12 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.13 -- 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).
10.14 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 4.12 to Registration Statement
No. 333-00179 on Form S-8).
10.15 -- Amendment to 1993 Long-Term Incentive Stock Option Plan.
10.16 -- 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).
10.17 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.18 -- Amendment to 1995 Incentive Equity Plan.
10.19 -- 1995 Stock Plan for Non-Employee Directors. (Incorporated
by reference to Annex A to Proxy Statement dated April
17, 1995).
10.20 -- 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).
10.21 -- 1996 Incentive Plan. (Incorporated by reference to Annex
A to Proxy Statement dated April 15, 1996).
10.22 -- Amendment to 1996 Incentive Plan.
10.23 -- Split Dollar Life Insurance Plan. (Incorporated by
reference to Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 1995).
10.24 -- 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).
10.25 -- 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).
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EXHIBIT NO. DESCRIPTION
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10.26 -- 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).
10.27 -- 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).
10.28 -- 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).
10.29 -- Letter, dated December 2, 1994 amending the ISDA Master
Agreement (filed in Exhibit 10.31 above) and a note
agreement and guaranty, 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).
10.30 -- 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).
10.31 -- 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. (Incorporated by reference to Exhibit 10.35 to
Form 10-K for the fiscal year ended December 31, 1995).
10.32 -- Confirmation dated March 15, 1996; Confirmation dated May
23, 1996; Confirmation dated May 30, 1996; all of which
are between Morgan and the Company.
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 -- 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 10.23, 10.26 and 10.27.
54