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Filed Pursuant to Rule 424(b)(5)
Registration Nos. 033-56069; 033-56069-01
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 1, 1994)
7,700,000 Shares
(LOGO)
SERVICE CORPORATION INTERNATIONAL
Common Stock
(par value $1 per share)
Of the 7,700,000 shares of Common Stock, $1 par value (the "Common Stock" or the
"SCI Common Stock"), of Service Corporation International, a Texas corporation
(the "Company"), offered hereby, 5,390,000 shares initially are being offered in
the United States and Canada (the "United States Offering") by the U.S.
Underwriters (the "U.S. Underwriters") and 2,310,000 shares initially are being
offered outside the United States and Canada (the "International Offering" and,
together with the United States Offering, the "Offering" or the "Common Stock
Offering") by the International Managers (the "International Managers" and,
together with the U.S. Underwriters, the "Underwriters"). The offering price and
underwriting discount for the United States Offering and the International
Offering are identical. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "SRV." On December 5, 1994, the reported last sale price of the Common
Stock on the NYSE was $25.50 per share.
Concurrently with the Offering, SCI Finance LLC, a subsidiary of the Company, is
offering an aggregate of up to 3,450,000 $3.125 Term Convertible Shares, Series
A ("TECONS"*), pursuant to a separate prospectus supplement. The TECONS will be
convertible into Common Stock initially at a conversion rate of approximately
1.6617 shares of Common Stock for each TECONS.
SEE "CERTAIN INVESTMENT CONSIDERATIONS" FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share $25.50 $.80 $24.70
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Total(3) $196,350,000 $6,160,000 $190,190,000
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $436,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable within
30 days after the date of this Prospectus Supplement, to purchase up to an
additional 1,155,000 shares of Common Stock on the same terms as set forth
above, solely to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $225,802,500, $7,084,000 and $218,718,500, respectively. See
"Underwriting."
The shares of Common Stock offered by this Prospectus Supplement are being
offered by the U.S. Underwriters, subject to prior sale, when, as and if
delivered to and accepted by the U.S. Underwriters, and subject to approval of
certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters,
and certain other conditions. It is expected that delivery of the certificates
representing the shares of Common Stock will be made against payment therefor on
or about December 13, 1994 at the offices of J.P. Morgan Securities Inc., 60
Wall Street, New York, New York 10260.
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* An application has been filed by J.P. Morgan Securities Inc. with the United
States Patent and Trademark Office for the registration of the TECONS service
mark.
J.P. MORGAN SECURITIES INC.
MERRILL LYNCH & CO.
CS FIRST BOSTON
DEAN WITTER REYNOLDS INC.
December 6, 1994
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Artwork showing Major North American Markets Served indicated by Bullets on
Map of the United States, Alaska and Hawaii.
Artwork showing Major International Markets Served indicated by Bullets on
Maps of United Kingdom and Australia.
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IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK,
THE TECONS AND THE COMPANY'S CONVERTIBLE DEBENTURES AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person is authorized to give any information or to make any representations
not contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any Underwriter. Neither this Prospectus Supplement nor the accompanying
Prospectus constitutes an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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Prospectus Summary.................... S-4
The Company........................... S-6
Recent Developments................... S-11
Use of Proceeds....................... S-12
Price Range of Common Stock and
Dividends........................... S-13
Capitalization........................ S-14
Selected Financial Information........ S-15
Unaudited Pro Forma Combined Financial
Information......................... S-16
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. S-23
Certain Federal Income Tax
Consequences to Non-United States
Holders............................. S-32
Underwriting.......................... S-34
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PROSPECTUS
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Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 4
The Company........................... 5
SCI Finance........................... 5
Certain Investment Considerations..... 6
Use of Proceeds....................... 6
Description of Debt Securities........ 7
Description of Preferred Stock........ 22
Description of Common Stock
Warrants............................ 25
Description of the LLC Preferred
Securities.......................... 28
Certain Federal Income Tax
Considerations Regarding the LLC
Preferred Securities................ 45
Plan of Distribution.................. 49
Legal Matters......................... 50
Experts............................... 50
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information included and incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. All
information in this Prospectus Supplement assumes that the Underwriters'
over-allotment option will not be exercised. See "Underwriting." References to
the Company or SCI herein should be read as referring to Service Corporation
International and its subsidiaries, except where the context indicates
otherwise.
THE COMPANY
Service Corporation International (the "Company" or "SCI") is the largest
provider of death care services and products in the world. Giving effect to the
recent acquisitions of Great Southern Group plc ("Great Southern" or "GSG") and
Plantsbrook Group plc ("Plantsbrook" or "PG"), as of September 30, 1994, SCI
owned and operated 1,431 funeral homes, 213 cemeteries (including 92 funeral
home and cemetery combinations) and 99 crematoria located in 40 U.S. states, the
District of Columbia, Australia, Canada and the United Kingdom. See "The
Company -- International Expansion and Recent Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident Services, Inc.
("Provident"), provides financing to independent funeral home and cemetery
operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and
funeral home/cemetery combinations in areas with demographics that SCI
believes to be favorable
- Increase the operating margins of its existing and acquired facilities by
having such facilities share resources pursuant to SCI's cluster strategy
(see "The Company -- Funeral Service Operations -- Cluster Strategy")
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
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THE OFFERING
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Common Stock Offered:
United States Offering..................... 5,390,000 shares
International Offering..................... 2,310,000 shares
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Total Offering..................... 7,700,000 shares
Common Stock Outstanding after
the Offering(1)............................ 93,871,965 shares
USE OF PROCEEDS.............................. The net proceeds of the Common Stock Offering
will be used to repay indebtedness as set
forth under "Use of Proceeds."
NYSE TRADING SYMBOL.......................... "SRV"
CONCURRENT OFFERINGS......................... Concurrently with the Common Stock Offering,
SCI Finance LLC, a subsidiary of the Company
("SCI Finance"), is offering (the "TECONS
Offering") an aggregate of 3,000,000 $3.125
Term Convertible Shares, Series A (the
"TECONS") pursuant to a separate prospectus
supplement (excluding 450,000 TECONS subject
to an underwriters' over-allotment option).
The TECONS will be convertible into Common
Stock initially at a conversion rate of
approximately 1.6617 shares of Common Stock
for each TECONS. In addition, the Company
intends to consummate an offering (the
"Senior Notes Offering") of $200 million
aggregate principal amount of Notes due 2004
pursuant to a separate prospectus supplement
concurrently with the closing of the Common
Stock Offering and the TECONS Offering. The
closing of the Common Stock Offering is not
contingent on the closing of the TECONS
Offering or the Senior Notes Offering.
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(1) Based on shares outstanding as of September 30, 1994. Excludes an aggregate
of 14,769,486 shares of Common Stock issuable upon exercise of stock options
and conversion of convertible securities outstanding as of such date and
5,732,802 shares of Common Stock issuable upon conversion of up to 3,450,000
TECONS (assuming exercise in full of the underwriters' over-allotment
option) that may be sold in the TECONS Offering.
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THE COMPANY
SCI is the largest provider of death care services and products in the world.
Giving effect to the recent acquisitions of Great Southern and Plantsbrook, as
of September 30, 1994, SCI owned and operated 1,431 funeral homes, 213
cemeteries (including 92 funeral home and cemetery combinations) and 99
crematoria located in 40 U.S. states, the District of Columbia, Australia,
Canada and the United Kingdom. See "-- International Expansion and Recent
Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident, provides
financing to independent funeral home and cemetery operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and
funeral home/cemetery combinations in areas with demographics that SCI
believes to be favorable
- Increase the operating margins of its existing and acquired facilities by
having such facilities share resources pursuant to SCI's cluster strategy
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
FUNERAL SERVICE OPERATIONS
The funeral service operations consist of SCI's funeral homes, cemeteries and
related businesses. The operation is organized into six domestic regions and
three foreign regions (Australia, Canada and the United Kingdom), each of which
is under the direction of a regional president with substantial industry
experience. Canadian operations are carried out by a public company which is
approximately 70% owned by SCI. Local funeral home and cemetery managers, under
the direction of the regional presidents, 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.
Death Care Industry
The funeral industry is characterized by a large number of locally-owned,
independent operations. SCI believes that there are in excess of 22,000, 500,
1,200 and 4,000 funeral homes operating in the United States, Australia, Canada
and the United Kingdom, respectively. In order to compete successfully, SCI's
funeral homes must maintain competitive prices, attractive, well-maintained and
conveniently located facilities, a good reputation and high professional
standards. Heritage and tradition can provide an established funeral home or
cemetery with the opportunity for repeat business from client families.
Furthermore, an established firm can generate future volume and revenues by
successfully marketing prearranged, pre-funded funeral services.
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The cemetery industry is also characterized by a large number of locally-owned
independent operations. SCI's cemetery properties compete with other cemeteries
in the same general area. In order to compete successfully, SCI's cemeteries
must maintain competitive prices, attractive and well-maintained properties, a
good reputation, an effective sales force and high professional standards.
The Company and the two other largest North American death care companies
control in the aggregate approximately seven percent of the funeral homes and
approximately four percent of the commercial cemeteries in North America. Based
upon industry estimates, these three companies represented less than 15% of
total 1993 death care industry revenues.
Cluster Strategy
The majority of SCI's funeral homes 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. The cluster strategy recognizes that, as SCI adds operations to
a geographic area in which SCI already operates, it will achieve additional
operating efficiencies through cost-sharing. SCI has successfully implemented
the cluster strategy in its North American and Australian operations and intends
to implement the strategy in the United Kingdom. As of September 30, 1994, SCI
operated approximately 160 clusters in North America and Australia, which range
in size from two operations to 53 operations.
Pre-need Services
SCI is actively engaged in the marketing of prearranged funeral services. The
funds collected from prearranged funeral contracts are generally held in trust
or are used to purchase life insurance or annuity contracts. The principal
amount of a prearranged funeral contract will be received in cash by an SCI
funeral home and recorded as revenue by SCI at the time the funeral is
performed. Earnings on trust funds and increasing benefits under
insurance-funded contracts increase the amount of cash to be received and the
revenue to be recognized at the time the service is performed and historically
have allowed the Company to more than cover increases in the costs of providing
funeral services. At September 30, 1994, SCI's unfulfilled prearranged funeral
contracts amounted to approximately $1.4 billion. SCI's historical cancellation
rate for all prearranged funeral contracts approximates ten percent, for which a
reserve has been established.
Cemetery sales are often made pursuant to installment contracts providing for
monthly payments. The principal amount of these installment contracts is
recognized as revenue by SCI at the time of sale, net of an approximate eight
percent cancellation reserve that is based on historical results. A portion of
the proceeds from cemetery sales is generally required by law to be paid into
perpetual care trust funds. Earnings on perpetual care trust funds are used to
defray the maintenance cost of cemeteries. In addition, a portion of the
proceeds from the pre-need sale of cemetery merchandise may be required by law
to be paid into trust.
Financial Services
In 1988, SCI formed Provident to provide capital 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.
Provident had $243 million in loans outstanding at September 30, 1994. To date,
the amount and number of problem loans have been insignificant. Provident
obtains its funds primarily from SCI bank and commercial paper 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 industry
loans, thereby providing Provident with a competitive advantage in making such
loans.
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Regulation
In April 1984, the U.S. Federal Trade Commission (the "FTC") comprehensive trade
regulation rule for the funeral industry became fully effective. 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. A pre-existing consent order between SCI and the FTC
applicable to certain funeral practices of SCI was amended in 1984 to make the
substantive provisions of the consent order consistent with the funeral trade
regulation rule. From time to time in connection with acquisitions, SCI has
entered into consent orders with the FTC which have required SCI to dispose of
certain operations in order to proceed with the acquisitions and/or have limited
SCI's ability to make acquisitions in specified areas. The trade regulation rule
and the various consent orders have not had a material adverse effect on SCI's
operations.
ACQUISITION STRATEGY
Over the past several years, SCI has made a significant number of acquisitions.
SCI anticipates that it will continue to aggressively pursue acquisition
opportunities, as acquisitions form a critical part of SCI's growth strategy.
SCI will continue to seek acquisitions in geographic areas in which it presently
operates to expand established clusters, as well as acquisitions in new
geographic areas, including those outside North America, to develop new clusters
and to increase volume and revenue. To date SCI has been able to increase the
profitability of its acquired properties by absorbing a significant portion of
their costs, such as transportation and embalming, into SCI's clusters, and by
applying SCI's merchandising programs to the new operations. In addition,
acquisitions increase SCI's ability to benefit from the centralization of
systems, insurance and other financial services. SCI also believes that because
of its size it has been able to negotiate favorable supply arrangements with
volume discounts on supplies, including caskets, and that the terms of such
supply arrangements have enabled it to increase the profitability of its
acquired properties. There can be no assurance that SCI will continue to
successfully absorb future acquisitions, domestic or international, or realize
such cost savings.
SCI typically retains former owners and key managers of acquired businesses in
an effort to assure that service quality is maintained and that the business's
reputation, heritage and local relationships remain intact. Acquired funeral
homes and cemeteries retain their original trade names in substantially all
cases.
In evaluating specific properties for acquisition, SCI considers a number of
factors including demographics, location, reputation, heritage, physical size,
volume of business, profitability, available inventory, name recognition,
aesthetics, potential for development or expansion, competitive position,
pricing structure and quality of operating management. SCI follows a disciplined
approach based on specific financial criteria for determining acquisition prices
and intends to continue an active acquisition program in the future. There can
be no assurance that acquisition prospects will continue to be available in
attractive locations at prices acceptable to SCI.
INTERNATIONAL EXPANSION AND RECENT ACQUISITIONS
Based on its experience in applying its cluster strategy in the North American
market, SCI has targeted several foreign countries that it believes offer
similar opportunities. Effective July 1, 1993, SCI acquired Pine Grove Funeral
Group ("Pine Grove"), Australia's largest funeral and cremation services
provider, for approximately U.S.$70 million. This was SCI's first acquisition
outside of North America. Pine Grove's operations at year-end 1993 consisted of
60 funeral homes and eight cemetery/crematorium facilities located in
Australia's five major population centers of Adelaide, Brisbane, Melbourne,
Perth and Sydney. During its six months of operation in 1993 as an SCI company,
Pine Grove reported revenues of approximately U.S.$17 million. In March 1994,
SCI continued its Australian expansion by acquiring LePine Holdings Proprietary
Limited ("LePine"), a firm with over 100 years of funeral service history. The
LePine acquisition added 20 additional funeral homes in Melbourne with 1993
revenues of approximately U.S.$12 million.
In June 1994, SCI announced an unsolicited offer to acquire 100% of the
outstanding shares of Great Southern, which is among the leading funeral and
cremation services companies in the United Kingdom. Great Southern owns and
operates 157 funeral homes, 13 crematoria and two cemeteries in the United
Kingdom, primarily
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south of London. As of September 30, 1994, SCI owned, or had commitments to
acquire, in excess of 98% of Great Southern's voting shares. It is anticipated
that SCI will acquire the balance of the equity interests in Great Southern in
the coming months. The total purchase price for Great Southern is approximately
U.S.$192.8 million, including the assumption of approximately U.S.$14.8 million
of Great Southern debt. Great Southern reported revenues of approximately
U.S.$48.9 million for the year ended December 31, 1993. See "Unaudited Pro Forma
Combined Financial Information."
In September 1994, SCI announced its offer to acquire 100% of the outstanding
shares of Plantsbrook, which is the largest public funeral company in the United
Kingdom. Plantsbrook owns and operates 380 funeral homes in the United Kingdom,
primarily north of London. As of September 30, 1994, SCI owned, or had
commitments to acquire, in excess of 95% of Plantsbrook's voting shares. It is
anticipated that SCI will acquire the balance of the equity interests in
Plantsbrook in the coming months. The total purchase price for Plantsbrook is
approximately U.S.$312.7 million, including the assumption of approximately
U.S.$13.9 million of Plantsbrook debt. Plantsbrook reported revenues of
approximately U.S.$77.7 million for the year ended December 31, 1993. See
"Unaudited Pro Forma Combined Financial Information." Great Southern and
Plantsbrook together accounted for approximately 15% of the total funerals
performed in the United Kingdom during 1993.
In the context of its international expansion, SCI believes that it can
favorably manage its worldwide effective tax rate by taking advantage of lower
tax rates and other foreign jurisdictional tax structuring opportunities. SCI
has implemented and intends to continue to explore the implementation of various
strategies to take advantage of such opportunities. There can be no assurance
that the implementation of such strategies will actually result in a reduction
of SCI's worldwide effective tax rate.
INDUSTRY TRENDS
Stability
Death rates have been fairly predictable, thereby lending stability to the death
care industry. For example, since 1980, the number of deaths in the United
States has increased at a compound rate of approximately one percent per year.
According to a 1993 report prepared by the U.S. Department of Commerce, Bureau
of the Census, the number of deaths in the United States is expected to increase
by approximately one percent per year between 1993 and 2000 and by 0.9% per year
from 2000 to 2020. Because the industry is relatively stable, non-cyclical and
fairly predictable, business failures are uncommon. As a result, ownership of
funeral home and cemetery businesses has traditionally passed from generation to
generation within a family. The death rate tends to be somewhat higher in the
winter months and funeral and cemetery operations generally experience a higher
volume of business during these months.
Consolidation
In recent years, the pace of acquisition activity in the death care industry has
increased. From the standpoint of individual owners, this appears to result
principally from family succession issues, a desire for liquidity and increasing
tax and estate planning complexities. From the standpoint of the large death
care providers, interest in acquisitions is driven by the benefits anticipated
to be derived from potential operating efficiencies, improved managerial control
and more effective strategic and financial planning. In recent years, several
large death care companies have expanded their operations significantly through
acquisitions. The increased interest in acquisitions of funeral homes and
cemeteries provides a source of potential liquidity that has not been readily
available to individual owners in the past.
Clustered Operations
During the last several years, larger death care companies have increasingly
begun to cluster their funeral home and cemetery operations. Clusters refer to
funeral homes and/or cemeteries that are grouped together in a geographic area.
Clusters provide cost savings to funeral homes and cemeteries through the
sharing of personnel, vehicles and other resources. In addition, the inclusion
of funeral homes and cemeteries in the same cluster
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provides opportunities for a company to cross-sell the full range of death care
services without corresponding increases in incremental overhead expenses.
Combined Operations
Combined operations, referring to funeral home and cemetery operations conducted
on a single site, have become increasingly popular as they provide cost savings
through shared resources and cross-selling opportunities. The ability to offer
the full range of products and services at one location tends to increase the
sales volume and revenues of both the funeral home and cemetery.
Pre-need Marketing
An increasing number of death care products and services are being sold prior to
the time of death (i.e., on a "pre-need" basis). SCI believes that consumers are
becoming more aware of the benefits of advanced planning, such as the financial
assurance and peace of mind achieved by establishing in advance a fixed price
and type of service, and the elimination of the emotional strain on family
members of making death care plans at the time of need.
Cremation
In recent years there has been steady, gradual growth in the number of families
in the United States that have chosen cremation as an alternative to traditional
methods of disposal. According to industry studies, cremations accounted for
approximately 20% of all dispositions of human remains in the United States in
1993. SCI's domestic operations perform substantially more cremations than the
national average. In 1993, just under 29% of all families served by SCI's North
American funeral homes selected the cremation alternative. SCI has a significant
number of operating locations in Florida and all along 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% to 70% of all dispositions of human remains in Australia and in the United
Kingdom.
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RECENT DEVELOPMENTS
The Company is considering the desirability and feasibility of an acquisition of
Pompes Funebres Generales S.A. ("PFG"), which operates approximately 150 funeral
homes or similar facilities and 750 other retail outlets in France and is the
largest operator of funeral homes in France. Although the Company has had, and
intends to continue, exploratory discussions with Lyonnaise des Eaux-Dumez S.A.
("Lyonnaise"), which controls approximately 66% of the stock of PFG, in regard
to various potential transactions, Lyonnaise has advised the Company that it has
no intention of selling its interest in PFG. The balance of the stock of PFG is
publicly traded, and the current total market capitalization of PFG is
approximately U.S. $185 million. For the year ended December 31, 1993, PFG
reported revenues of approximately U.S. $565 million and net income of
approximately U.S. $20 million. Subsequent to December 31, 1993, PFG sold its
46% interest in Plantsbrook to the Company. The results for PFG disclosed above
include all of the revenues of Plantsbrook during such period, and PFG's 46%
interest in Plantsbrook's net income. For the year ended December 31, 1993,
Plantsbrook reported revenues of approximately U.S. $77.7 million and net income
of approximately U.S. $12.3 million. The operating margins of the funeral
business in France historically have been substantially lower than the operating
margins in the funeral business in North America and in the United Kingdom. The
Company has retained an affiliate of J.P. Morgan Securities Inc. to assist it in
its evaluation of PFG. Particularly in light of the statement by Lyonnaise that
it has no intention of selling its interest in PFG, there can be no assurance
that any transaction involving the Company and PFG will ultimately occur or as
to the terms of any such transaction.
In October 1994, the Company announced that it had acquired approximately 8.5%
of the Class A Voting Shares and approximately 19.9% of the Class B Non-Voting
Shares of Arbor Memorial Services Inc. ("Arbor"). Arbor owns 44 cemeteries and
21 crematoria in Canada. The Company, which acquired its position in Arbor as a
strategic investment, is continuing to consider means to build its relationship
with Arbor and may continue to increase its investment in Arbor. Subsequent to
the announcement by the Company of its position in Arbor, the Company was
advised by the Arbor stockholder who owns a majority of the Class A Voting
Shares that he is not interested at this time in a transaction involving a sale
of control of Arbor. For the year ended October 31, 1993, Arbor reported
revenues of approximately U.S. $78.1 million and net income of approximately
U.S. $4.5 million.
The financial data contained herein with respect to PFG, Plantsbrook and Arbor
is derived from such companies' publicly available information. Such data was
not prepared in conformity with United States generally accepted accounting
principles, and the Company makes no representation with respect to the accuracy
of such data or the comparability of such data to financial data of the Company
or other U.S. companies in the death care industry.
S-11
<PAGE> 12
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are estimated
to be $189.8 million ($218.3 million if the Underwriters' over-allotment option
is exercised in full). The Company will contribute $40 million of such proceeds
to SCI Finance ($46 million if the underwriters' over-allotment option in
respect of the TECONS is exercised in full). SCI Finance expects to obtain $150
million from the TECONS Offering ($172.5 million if the underwriters'
over-allotment option in respect of the TECONS is exercised in full).
Substantially all of the aggregate proceeds so obtained by SCI Finance from the
TECONS Offering and such capital contribution from the Company will be loaned by
SCI Finance to SCI International Limited, a wholly-owned subsidiary of SCI ("SCI
Limited"), which will use such proceeds to repay a portion of the amounts
outstanding under the UK Facilities (as defined below). In connection with the
acquisitions of Great Southern and Plantsbrook, a subsidiary of SCI Limited
obtained a L185 million loan facility from Morgan Guaranty Trust Company of New
York (the "Morgan Facility") and a L100 million line of credit from Chemical
Bank (the "Chemical Facility" and, together with the Morgan Facility, the "UK
Facilities"). SCI has guaranteed the UK Facilities. As of November 30, 1994, and
giving effect to the exchange rate as of such date of approximately $1.56 to L1,
approximately $282 million was outstanding under the Morgan Facility at a
weighted average annual interest rate of 6.0% with maturities ranging from five
to 21 days, and approximately $141 million was outstanding under the Chemical
Facility at a weighted average annual interest rate of 5.9% with maturities
ranging from two to 30 days. It is anticipated that after giving effect to the
application of the proceeds of the Common Stock Offering and the TECONS
Offering, an aggregate of approximately $200 million will be outstanding under
the UK Facilities, which the Company intends to refinance with the proceeds from
a note offering (the "UK Note Offering") proposed to be made in the United
Kingdom in early 1995. To the extent that the proceeds of the UK Note Offering,
together with the amount loaned by SCI Finance to SCI Limited, are insufficient
to repay in full the amounts outstanding under the UK Facilities, the Company
intends to use a portion of the proceeds from the Common Stock Offering to
effect such repayment.
The balance of the net proceeds from the sale of the Common Stock offered
hereby, together with the net proceeds from the Senior Notes Offering, will be
used to reduce amounts outstanding under the Company's existing revolving credit
facilities (the "Revolving Credit Facilities") or to retire commercial paper
backed by such facilities or both. As of November 30, 1994, approximately $285
million was outstanding under the Revolving Credit Facilities at a weighted
average annual interest rate of 5.6% with maturities ranging from seven to 16
days, and approximately $272 million of commercial paper was outstanding backed
by such facilities at a weighted average annual interest rate of 5.7% with
maturities ranging from one to 90 days. The Company's borrowings under the
Revolving Credit Facilities and the proceeds from the sale of its commercial
paper are used primarily to fund the Company's acquisition program and to
provide financing to Provident.
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., is the lender under the Morgan Facility. The maximum amount
available under the Morgan Facility is approximately $289 million. The Company
intends to repay the Morgan Facility in full with a combination of proceeds from
the Common Stock Offering, the TECONS Offering and the UK Note Offering. See
"Underwriting."
S-12
<PAGE> 13
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The SCI Common Stock is traded on the NYSE under the symbol "SRV." The following
table sets forth, on a per share basis for the periods shown, the range of high
and low reported sale prices of the SCI Common Stock on the NYSE as well as per
share dividends paid in such periods. SCI has declared 86 consecutive quarterly
dividends on the SCI Common Stock since it began paying dividends in 1974.
<TABLE>
<CAPTION>
--------------------------------------
SALE PRICE
HIGH LOW DIVIDENDS
---------- ---------- ----------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1992:
First Quarter $ 18.38 $ 15.63 $ .09
Second Quarter 18.75 16.13 .10
Third Quarter 18.50 16.38 .10
Fourth Quarter 18.50 16.75 .10
Fiscal Year Ended December 31, 1993:
First Quarter $ 21.63 $ 17.88 $ .10
Second Quarter 22.13 18.50 .10
Third Quarter 25.25 20.75 .10
Fourth Quarter 26.38 23.50 .10
Fiscal Year Ending December 31, 1994:
First Quarter $ 28.00 $ 24.63 $ .105
Second Quarter 25.38 22.50 .105
Third Quarter 26.63 24.88 .105
Fourth Quarter (through December 5, 1994) 26.75 24.13 .105
</TABLE>
On December 5, 1994, the reported last sale price of the SCI Common Stock on the
NYSE was $25.50 per share.
S-13
<PAGE> 14
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of the
Company at September 30, 1994 and on a pro forma basis giving effect to the
acquisitions of Great Southern and Plantsbrook and as adjusted for the Common
Stock Offering and the TECONS Offering (assuming in each case that the
underwriters' over-allotment option is not exercised), the Senior Notes Offering
and the application of the estimated net proceeds from such offerings.
<TABLE>
<CAPTION>
--------------------------
AT SEPTEMBER 30, 1994
PRO FORMA
AND AS
Thousands ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
CURRENT MATURITIES OF LONG-TERM DEBT $ 68,416 $ 59,651
========== ==========
INDEBTEDNESS UNDER UK FACILITIES $ 312,462 $ 200,000
LONG-TERM DEBT:
Indebtedness to banks under the Revolving Credit Facilities and
commercial paper 570,079 312,695
Notes offered in the Senior Notes Offering -- 200,000
Medium term notes 186,040 186,040
6.5% convertible subordinated debentures 172,500 172,500
7.875% debentures 150,000 150,000
Convertible debentures issued in connection with various
acquisitions 23,624 23,624
8% convertible debentures 14,939 14,939
Variable interest rate notes 10,596 10,596
Mortgage notes and other 120,767 114,431
---------- ----------
Total long-term debt 1,248,545 1,184,825
---------- ----------
CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY -- 150,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000 shares authorized; no shares issued and
outstanding -- --
Common stock, 200,000 shares authorized; 86,172 shares issued
and outstanding; 93,872 shares issued and outstanding pro
forma and as adjusted 86,172 93,872
Capital in excess of par value 527,321 709,399
Retained earnings 353,585 353,585
Foreign translation adjustment (3,029) (3,029)
---------- ----------
Total stockholders' equity 964,049 1,153,827
---------- ----------
Total capitalization $2,525,056 $2,688,652
========== ==========
</TABLE>
S-14
<PAGE> 15
SELECTED FINANCIAL INFORMATION
The selected consolidated financial data presented below for each of the five
years in the period ended December 31, 1993 have been derived from the
consolidated financial statements of the Company, which statements, in respect
of the year ended December 31, 1993, have been audited by Coopers & Lybrand,
independent public accountants, and in respect of the four years ended December
31, 1992, have been audited by Ernst & Young, independent public accountants.
The data at and for the nine months ended September 30, 1994 and September 30,
1993 have been derived from the unaudited consolidated financial statements of
the Company for such periods and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the information included therein in accordance with generally accepted
accounting principles for interim financial information. The data should be read
in conjunction with the related notes and other financial information included
and incorporated by reference in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 and the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994, incorporated by reference
herein. Results for the nine months ended September 30, 1994 are not necessarily
indicative of results for any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
AT OR FOR THE NINE
MONTHS ENDED
Thousands, except per share SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,(1)
amounts and Other Data 1994 1993 1993 1992 1991 1990 1989
---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $801,934 $652,852 $899,178 $772,477 $643,248 $563,156 $518,809
Costs and expenses (558,737) (462,864) (635,858) (550,422) (464,740) (413,236) (386,032)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 243,197 189,988 263,320 222,055 178,508 149,920 132,777
General and administrative
expenses (35,530) (28,026) (43,706) (38,693) (35,448) (28,037) (28,423)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations 207,667 161,962 219,614 183,362 143,060 121,883 104,354
Interest expense (53,464) (44,185) (59,631) (53,902) (42,429) (36,095) (32,514)
Other income 7,767 8,111 13,509 9,876 8,241 13,644 12,778
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and
preferred dividend requirements 161,970 125,888 173,492 139,336 108,872 99,432 84,618
Provision for income taxes (65,727) (52,500) (70,400) (52,800) (35,500) (35,900) (31,000)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before cumulative effect of
change in accounting principles
and preferred dividend
requirements 96,243 73,388 103,092 86,536 73,372 63,532 53,618
Cumulative effect of change in
accounting principles (net of
income tax) -- (2,031) (2,031) -- -- -- --
Preferred dividend requirements -- -- -- -- -- (3,314) (6,897)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
available to common
stockholders $ 96,243 $ 71,357 $ 101,061 $ 86,536 $ 73,372 $ 60,218 $ 46,721
========== =========== =========== =========== =========== =========== ===========
Per share:
Primary
Income from continuing
operations before
cumulative effect of change
in accounting principles $1.12 $ .89 $1.24 $1.13 $1.03 $ .85 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.03) (.03) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.12 $ .86 $1.21 $1.13 $1.03 $ .85 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Fully diluted
Income from continuing
operations before
cumulative effect of change
in accounting principles $1.06 $ .85 $1.19 $1.07 $1.00 $ .84 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.02) (.02) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.06 $ .83 $1.17 $1.07 $1.00 $ .84 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Dividends $.315 $ .30 $ .40 $ .39 $ .37 $ .37 $ .36
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $(298,411) $ 171,051 $ 171,901 $ 155,319 $ 156,383 $ 113,391 $ 120,682
Prearranged funeral contracts 1,385,346 1,193,554 1,244,866 -- -- -- --
Total assets 4,839,553 3,502,505 3,683,304 2,611,123 2,123,452 1,653,689 1,601,468
Long-term debt, excluding current
portion 1,248,545 1,021,238 1,062,222 980,029 786,685 577,378 485,669
Deferred prearranged funeral
contract revenues 1,476,178 1,228,376 1,263,407 -- -- -- --
Stockholders' equity 964,049 856,924 884,513 683,097 615,776 434,323 557,777
Total capitalization 2,525,056 1,878,162 1,946,735 1,663,126 1,402,461 1,011,701 1,043,446
OTHER DATA (END OF PERIOD):
Funeral homes 1,431 763 792 674 655 512 551
Cemeteries 213 186 192 176 163 145 126
</TABLE>
- ---------------
(1) The year ended December 31, 1993 reflects the changes in accounting
principles adopted January 1, 1993. The four years ended December 31, 1992
reflect results as historically reported.
S-15
<PAGE> 16
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
In June 1994, the Company announced an unsolicited offer to acquire 100% of the
outstanding shares of GSG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 98% of GSG's voting shares. The Company
anticipates that the total purchase price will approximate $192,777,000,
including the assumption of approximately $14,751,000 of existing debt. GSG is a
funeral provider in the United Kingdom ("UK") and owns 157 funeral homes, 13
crematoria and two cemeteries.
In September 1994, the Company announced its offer to acquire 100% of the
outstanding shares of PG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 95% of PG's voting shares. The Company
anticipates that the total purchase price will approximate $312,690,000,
including the assumption of approximately $13,873,000 of existing debt. PG is a
funeral provider in the UK and owns 380 funeral homes.
In addition to the acquisitions of GSG and PG, during 1993 and the nine months
ended September 30, 1994, the Company continued to acquire funeral and cemetery
operations in the United States, Australia and Canada. Excluding GSG and PG,
during such period the Company acquired 224 funeral homes and 41 cemeteries (the
"Other Acquired Companies") in 89 separate transactions for an aggregate
purchase price of approximately $436,000,000 in the form of combinations of
cash, SCI Common Stock, issued and assumed debt, convertible debentures and
retired loans receivable held by Provident.
The following unaudited pro forma combined statements of income for the year
ended December 31, 1993 and the nine months ended September 30, 1994 have been
prepared assuming the acquisitions by the Company of GSG, PG and the Other
Acquired Companies took place at the beginning of the respective periods. Such
acquisitions are being accounted for under the purchase method of accounting.
The historical revenues and expenses of the Other Acquired Companies represent
amounts recorded by those businesses for the period that they were not owned by
the Company during the year ended December 31, 1993 and the nine months ended
September 30, 1994, respectively. The unaudited pro forma combined financial
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.
The acquisitions of GSG and PG are being financed on an interim basis
principally with borrowings under the UK Facilities, under which the Company may
borrow up to $438,900,000 (based on the exchange rate of one UK pound sterling
equivalent to $1.54 on September 2, 1994) with interest at a rate equal to UK
pound sterling LIBOR plus 20 basis points. The unaudited pro forma combined
financial information presented herein assumes the completion of the Common
Stock Offering, the TECONS Offering and the Senior Notes Offering at the
beginning of the respective periods. The proceeds from the TECONS Offering and a
portion of the net proceeds from the Common Stock Offering are assumed to be
used to repay $238,900,000 of indebtedness under the UK Facilities, and it is
further assumed that $200,000,000 remains outstanding under the UK Facilities at
the beginning of the respective periods. The remaining net proceeds from the
Common Stock Offering and all of the net proceeds from the Senior Notes Offering
are assumed to be used to repay amounts outstanding under the Revolving Credit
Facilities or to retire commercial paper or both (including $37,680,000 which
was assumed to have been borrowed to finance a portion of the purchase price of
GSG and PG).
The historical financial statements of GSG and PG for the year ended December
31, 1993 and for the period not owned by the Company in 1994 were prepared in UK
pound sterling in accordance with the UK Companies Act of 1985 ("UK GAAP"). This
information has been adjusted to present the historical financial statements in
accordance with United States generally accepted accounting principles ("US
GAAP") and translated into U.S. dollars at the average exchange rate for the
respective statement of income periods presented. The Company has not completed
all appraisals and evaluations necessary to finalize GSG's and PG's purchase
price allocation, and accordingly, actual adjustments that reflect appraisals
and other evaluations of the purchased assets and assumed liabilities may differ
from the pro forma adjustments.
S-16
<PAGE> 17
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
HISTORICAL PRO FORMA
OTHER ACQUIRED
Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL
----------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 899,178 $ 126,594 $ 123,380 $ 5,165 (A) $1,154,317
Costs and expenses (635,858) (101,300) (106,778) (3,590)(A) (829,910)
13,665 (B)
7,781 (C)
(70)(D)
(6,611)(E)
3,598 (F)
(437)(G)
(310)(H)
---------- --------- ----------- ----------- -----------
Gross profit 263,320 25,294 16,602 19,191 324,407
General and administrative expenses (43,706) -- -- -- (43,706)
---------- --------- ----------- ----------- -----------
Income from operations 219,614 25,294 16,602 19,191 280,701
Interest expense (59,631) (2,560) (4,111) (686)(A) (87,680)
(6,918)(B)
1,372 (I)
(11,750)(J)
9,034 (K)
(17,140)(L)
4,710 (M)
Dividends on convertible preferred
stock of subsidiary -- -- -- (9,375)(N) (9,375)
Other income 13,509 313 -- -- 13,822
---------- --------- ----------- ----------- -----------
Income before income taxes 173,492 23,047 12,491 (11,562) 197,468
Provision for income taxes (70,400) (8,681) (4,694) 3,634 (O) (80,141)
---------- --------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting
principles $ 103,092 $ 14,366 $ 7,797 $ (7,928) $ 117,327
========== ========= =========== =========== ===========
Earnings per share:
Primary
Income before cumulative effect
of change in accounting
principles $1.24 $1.26
======== ========
Fully diluted
Income before cumulative effect
of change in accounting
principles $1.19 $1.21
======== ========
Primary weighted average number of
shares 83,372 1,915 (P) 92,987
======== 7,700 (Q) ========
Fully diluted weighted average number
of shares 93,878 2,595 (P) 109,158
======== 7,700 (Q) ========
4,985 (R)
</TABLE>
S-17
<PAGE> 18
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(Thousands)
(A) To record the acquisition of 13 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1993. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $16,654, offset in part by
additional costs and expenses of $2,989 resulting from the effect of
applying purchase accounting adjustments, primarily amortization and
depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 3.51%, which represented the weighted average borrowing rate under
the Company's revolving credit facilities and commercial paper for the year
ended December 31, 1993. At November 30, 1994, the borrowing rate under the
revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1993. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.86%) plus 20 basis points for the year ended December 31,
1993. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 3.51%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and the Company's
commercial paper for the year ended December 31, 1993.
S-18
<PAGE> 19
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1993. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $947 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the Common Stock
(in the case of the primary and fully diluted weighted average number of
shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1993
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1993.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
HISTORIC AMOUNTS AS REPORTED IN
CONVERTED TO US UNAUDITED
DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
-------- -------- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $48,885 $77,709 $ -- $ -- $48,885 $77,709
Costs and expenses (38,234) (58,893) (272)(1) (303)(1) (39,078) (62,222)
(572)(2) (3,026)(2)
Interest expense and other (1,372) (875) -- -- (1,372) (875)
Provision for income taxes (3,228) (5,645) 90(1) 102(1) (3,138) (5,543)
-------- -------- ----- ------- -------- --------
Net income $ 6,051 $12,296 $(754) $(3,227) $ 5,297 $ 9,069
======== ======== ===== ======= ======== ========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.493, which represents the average
exchange rate for the period.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-19
<PAGE> 20
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
---------------------------------------------------------------
HISTORICAL PRO FORMA
OTHER
THE ACQUIRED COMBINED
Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL
--------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 801,934 $ 86,198 $ 22,997 $ 1,146 (A) $912,275
Costs and expenses (558,737) (69,938) (20,105) (770)(A) (645,390)
2,878 (B)
3,757 (C)
(47)(D)
(4,407)(E)
2,502 (F)
(291)(G)
(232)(H)
--------- -------- -------- --------- --------
Gross profit 243,197 16,260 2,892 4,536 266,885
General and administrative expenses (35,530) -- -- -- (35,530)
--------- -------- -------- --------- --------
Income from operations 207,667 16,260 2,892 4,536 231,355
Interest expense (53,464) (1,337) (812) (165)(A) (65,064)
(1,679)(B)
731 (I)
(7,278)(J)
8,262 (K)
(12,855)(L)
3,533 (M)
Dividends on convertible preferred stock
of subsidiary -- -- -- (7,031)(N) (7,031)
Other income 7,767 201 -- -- 7,968
--------- -------- -------- --------- --------
Income before income taxes 161,970 15,124 2,080 (11,946) 167,228
Provision for income taxes (65,727) (5,641) (809) 4,207 (O) (67,970)
--------- -------- -------- --------- --------
Net income $ 96,243 $ 9,483 $ 1,271 $ (7,739) $ 99,258
========= ======== ======== ========= ========
Earnings per share:
Primary $1.12 $1.05
===== =====
Fully diluted $1.06 $1.00
===== =====
Primary weighted average number of shares 86,215 272 (P) 94,187
====== ======
7,700 (Q)
Fully diluted weighted average number of
shares 96,386 508 (P) 109,579
====== =======
7,700 (Q)
4,985 (R)
</TABLE>
S-20
<PAGE> 21
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Thousands)
(A) To record the acquisition of 5 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1994. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $3,606, offset in part by
additional costs and expenses of $728 resulting from the effect of applying
purchase accounting adjustments, primarily amortization and depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 4.28%, which represented the weighted average borrowing rate under
the Company's revolving credit facilities and commercial paper for the nine
months ended September 30, 1994. At November 30, 1994, the borrowing rate
under the revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1994. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.33%) plus 20 basis points for the eight months ended August
31, 1994. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 4.28%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and commercial paper
for the nine months ended September 30, 1994.
S-21
<PAGE> 22
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1994. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $710 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the Common Stock
(in the case of the primary and fully diluted weighted average number of
shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1994
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1994.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
HISTORIC AMOUNTS
CONVERTED TO AS REPORTED IN UNAUDITED
US DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $33,714 $52,484 $ -- $ -- $33,714 $52,484
Costs and
expenses (26,682) (40,365) (184)(1) (205)(1) (27,254) (42,684)
(388)(2) (2,114)(2)
Interest expense
and other (731) (405) -- -- (731) (405)
Provision for
income taxes (2,079) (3,689) 60(1) 67(1) (2,019) (3,622)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 4,222 $ 8,025 $ (512) $(2,252) $ 3,710 $ 5,773
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.52, which represents the average
exchange rate for the eight months ended August 31, 1994.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except average sales prices)
OVERVIEW
The majority of the Company's funeral homes 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 operating
expenses such as service personnel, vehicles, preparation services, clerical
staff and certain building facility costs. The Company has approximately 160
clusters in North America and Australia, which range in size from two operations
to 53 operations. There may be more than one cluster in a given metropolitan
area, depending upon the level and degree of shared costs.
The cluster management approach recognizes that, as the Company adds operations
to a geographic area that contains an existing Company presence, additional
economies of scale through cost sharing will be achieved and the Company will
also be in a better position to serve the population that resides within the
area served by the cluster. Funeral service and cemetery operations primarily
depend upon a long-term development of customer relationships and loyalty. Over
time, these client families may relocate within a cluster area which may justify
the relocation or addition of Company locations. The Company attempts to satisfy
this need for convenient locations by either acquiring existing independent
locations within the Company's cluster areas or constructing satellite funeral
homes (sometimes on Company-owned cemeteries) while still maintaining the
sharing of certain expenses within that cluster of operations.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September 30,
1993
Segment information for the Company's three lines of business are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral $535,140 $436,425 $98,715 22.6%
Cemetery 252,413 205,062 47,351 23.1
Financial services 14,381 11,365 3,016 26.5
---------- ---------- ----------
801,934 652,852 149,082 22.8
Costs and expenses:
Funeral 377,445 309,615 67,830 21.9
Cemetery 173,031 146,554 26,477 18.1
Financial services 8,261 6,695 1,566 23.4
---------- ---------- ----------
558,737 462,864 95,873 20.7
Gross profit and
margin percentage:
Funeral 157,695 29.5% 126,810 29.1% 30,885 24.4
Cemetery 79,382 31.4 58,508 28.5 20,874 35.7
Financial services 6,120 42.6 4,670 41.1 1,450 31.0
---------- ---------- ----------
$243,197 30.3% $189,988 29.1% $53,209 28.0%
========== ========== ==========
</TABLE>
S-23
<PAGE> 24
Funeral
Funeral revenues were generated as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $463,276 $409,726 $53,550 13.1%
New clusters* 50,698 7,977 42,721
---------- ---------- ----------
Total clusters 513,974 417,703 96,271 23.0%
Non-cluster and disposed operations 21,166 18,722 2,444
---------- ---------- ----------
Total funeral revenues $535,140 $436,425 $98,715 22.6%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
The $53,550 increase in revenues at existing clusters was the result of 10,258
or 8.5% more funeral services performed and a $142 or 4.2% higher average sales
price. Included in this increase was $35,661 in revenues from locations acquired
since the beginning of 1993. It is anticipated that the Company's revenue growth
will primarily be generated from acquired operations (added to existing clusters
and the creation of new clusters) as well as higher average sales prices.
During the nine months ended September 30, 1994, the Company sold $173,004 of
prearranged funeral services compared to $114,471 for the same period in 1993.
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 were incurred as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $302,606 $268,815 $33,791 12.6%
New clusters* 36,293 6,042 30,251
---------- ---------- ----------
Total clusters 338,899 274,857 64,042 23.3%
Non-cluster and disposed operations 17,086 15,880 1,206
Administrative overhead 21,460 18,878 2,582
---------- ---------- ----------
Total funeral costs $377,445 $309,615 $67,830 21.9%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Total funeral gross profit margin increased to 29.5% compared to 29.1% recorded
last year. This gross profit margin improvement was achieved despite the large
number of acquisitions, added to both existing and new clusters, which have
occurred since the beginning of 1993. Typically, acquisitions will temporarily
exhibit slightly lower gross profit margins than those experienced at the
Company's existing locations. Acquisitions, since the beginning of 1993,
accounted for $27,270 of the existing cluster cost increase. The improved gross
profit margin for existing clusters reflects the increased revenues discussed
above, without a corresponding percentage increase in costs at other funeral
homes included in existing clusters. Administrative overhead costs related to
funeral operations decreased to 4.0% of revenues in 1994 compared to 4.3% of
revenues in 1993. The current period includes approximately $2,400 of gross
profit (representing approximately one month of activity) from the UK
acquisitions.
S-24
<PAGE> 25
Cemetery
Cemetery revenues were generated as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $231,090 $193,839 $37,251 19.2%
New clusters* 12,703 3,461 9,242
---------- ---------- ----------
Total clusters 243,793 197,300 46,493 23.6%
Non-cluster and disposed operations 8,620 7,762 858
---------- ---------- ----------
Total cemetery revenues $252,413 $205,062 $47,351 23.1%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Revenues for the existing clusters increased primarily due to increased sales of
lots, merchandise and services. Included in the existing cluster increase were
$15,740 in increased revenues from cemeteries acquired since the beginning of
1993.
Cemetery costs were incurred as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ PERCENTAGE
1994 1993 (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $149,302 $127,694 $21,608 16.9%
New clusters* 6,154 1,542 4,612
---------- ---------- ----------
Total clusters 155,456 129,236 26,220 20.3%
Non-cluster and disposed operations 5,890 6,044 (154)
Administrative overhead 11,685 11,274 411
---------- ---------- ----------
Total cemetery costs $173,031 $146,554 $26,477 18.1%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Costs at existing clusters increased $21,608 due to an increase of $10,608 from
cemeteries acquired since the beginning of 1993. Costs from other existing
cluster cemeteries increased $11,000 due to the costs associated with the
increased revenues discussed above. The cemetery gross margin increase of 31.4%
this year compared to 28.5% last year reflects the strong revenue growth as well
as continued cost control, particularly in selling expenses. Administrative
overhead costs have decreased to 4.6% of revenues this year compared to 5.5%
last year.
Financial Services
Financial service revenues and costs have increased as a result of increased
loans outstanding. Improved interest rate spreads have increased the gross
margin percentage to 42.6% this year from 41.1% last year. The average
outstanding loan portfolio during the current year was $241,923 with an average
interest rate spread of 3.48% compared to $209,393 and 3.24%, respectively, last
year.
Other Income and Expenses
General and administrative expenses increased by $7,504 or 26.8%. Of the
increase, $4,274 is attributable to personnel expenses primarily in the form of
incentive compensation and restricted stock costs. Professional fees have
increased $2,380 in the current year primarily from legal costs associated with
the ongoing informal
S-25
<PAGE> 26
investigation of the Company by the Securities and Exchange Commission (the
"Commission"). The remainder of the increase is derived primarily from corporate
transportation and travel costs. As a percentage of revenues, general and
administrative expenses were 4.4% this year compared to 4.3% last year.
Interest expense, which excludes the amount incurred through financial service
operations, increased $9,279 or 21.0% during the current year primarily due to
increased borrowings and higher interest rates incurred under the Company's
existing lines of credit and commercial paper primarily used to fund the
Company's acquisition program. Also contributing to the increase in the current
year was the issuance of $150,000 of 7.875% debentures issued by the Company in
February 1993 and the recognition of $2,160 of interest expense associated with
the recent acquisitions in the UK.
The provision for income taxes has decreased to 40.6% from 41.7% last year
primarily due to the enactment of the Omnibus Budget Reconciliation Act of 1993
(the "Act") in August 1993 which increased corporate tax rates retroactively to
January 1, 1993. The 1993 period includes a $3,200 charge due to the Act.
Year to Year Comparisons -- Change in Accounting Principles
Effective January 1, 1993, the Company changed its method of accounting for
prearranged funeral service contracts and cemetery sales. For a more detailed
discussion of these changes, see Note 2 to the consolidated financial statements
in Item 8 of the Form 10-K for the year ended December 31, 1993 (the "Form
10-K"). The cumulative effect of these changes resulted in an after tax charge
of $2,031 or $.03 per share on January 1, 1993. Generally these changes will
result in reduced funeral revenues and funeral operating income, at least in the
near future, due to the deferral of previously recognized prearranged funeral
service trust fund income until performance of the specific funeral.
Additionally, these changes will generally result in higher cemetery revenues
and cemetery operating income because all cemetery sales and costs are recorded
in current income. See Item 3, Legal Proceedings, in the Form 10-K for
information regarding an informal investigation by the Securities and Exchange
Commission and the Company's Form 8-K dated October 18, 1994.
For purposes of management's discussion and analysis of results of operations
and financial condition, all comparisons to 1992 and 1991 reflect the pro forma
effects of applying the new accounting principles as if the changes had occurred
on December 31, 1990. The following table presents the pro forma results for the
years ended 1992 and 1991:
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
AS UNAUDITED
REPORTED PRO FORMA
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Funeral $603,099 $532,914 $430,565
Cemetery 280,421 217,100 194,434
Financial services 15,658 10,741 14,823
---------- ---------- ----------
899,178 760,755 639,822
Costs and expenses:
Funeral (426,008) (379,223) (307,090)
Cemetery (200,682) (164,188) (149,822)
Financial services (9,168) (6,632) (10,666)
---------- ---------- ----------
(635,858) (550,043) (467,578)
---------- ---------- ----------
Gross profit 263,320 210,712 172,244
General and administrative expenses (43,706) (38,693) (35,448)
Interest expense (59,631) (53,902) (42,429)
Other income 13,509 9,876 8,241
---------- ---------- ----------
Income before income taxes 173,492 127,993 102,608
Income taxes (70,400) (48,500) (33,200)
---------- ---------- ----------
Income before cumulative effect of change in accounting
principles $103,092 $79,493 $69,408
========== ========== ==========
</TABLE>
S-26
<PAGE> 27
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
In 1993, total funeral revenues increased $70,185 or 13.2% over 1992. Funeral
revenues were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $548,771 $497,092 $51,679 10.4%
New clusters** 28,376 2,259 26,117
---------- ---------- ----------
Total clusters 577,147 499,351 77,796 15.6%
Non-cluster and disposed operations 25,952 33,563 (7,611)
---------- ---------- ----------
Total funeral revenues $603,099 $532,914 $70,185 13.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
The $51,679 increase in revenues at existing clusters was the result of 10,193
or 6.9% more funeral services performed and a $111 or 3.3% higher average sales
price. Included in this increase were $29,281 in revenues from locations
acquired during the two year period. Overall, funeral services performed are
expected to grow slowly for the near future and it is expected that the
Company's revenue growth will primarily be generated from acquired operations
(added to existing clusters and the creation of new clusters) as well as higher
average sales prices.
During 1993, the Company sold $159,000 of prearranged funeral services compared
to $119,000 for 1992. These prearranged funeral services are deferred and will
be reflected in funeral revenues in the periods that the funeral services are
performed. An increased emphasis on sales of prearranged funerals is expected to
continue.
Total funeral costs increased $46,785 or 12.3% in 1993. Funeral costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $357,118 $324,893 $32,225 9.9%
New clusters** 21,571 1,755 19,816
---------- ---------- ----------
Total clusters 378,689 326,648 52,041 15.9%
Non-cluster and disposed operations 18,838 27,654 (8,816)
Administrative overhead 28,481 24,921 3,560
---------- ---------- ----------
Total funeral costs $426,008 $379,223 $46,785 12.3%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
Existing cluster funeral costs, expressed as a percentage of revenues, were
65.1%, which was slightly lower than the 65.4% recorded in 1992. This gross
profit margin improvement was achieved despite the large number of acquisitions
which occurred during the two year period. Typically, acquisitions will
temporarily exhibit slightly lower gross profit margins than the Company's
existing locations. These acquisitions accounted for $19,548 of the existing
cluster cost increase. The improved gross profit margin reflects increased
revenues, reduced personnel costs (the largest funeral expense item) and
facility costs at other funeral homes included in existing clusters. As a
percentage of revenues, administrative overhead costs related to funeral
operations remained at 4.7% in both years.
S-27
<PAGE> 28
Total cemetery revenues increased $63,321 or 29.2% over 1992. Cemetery revenues
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $254,343 $202,709 $51,634 25.5%
New clusters** 14,818 946 13,872
---------- ---------- ----------
Total clusters 269,161 203,655 65,506 32.2%
Non-cluster and disposed operations 11,260 13,445 (2,185)
---------- ---------- ----------
Total cemetery revenues $280,421 $217,100 $63,321 29.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
Revenues for the existing clusters increased due to increased at-need and
pre-need sales volumes, higher average at-need and pre-need contract prices and
additional earnings from cemetery perpetual care and merchandise and service
trust funds. Included in the existing cluster increase was $40,059 in increased
revenues from cemeteries acquired during the two year period.
Total cemetery costs increased $36,494 or 22.2% over the prior year. Cemetery
costs were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $167,635 $141,178 $26,457 18.7%
New clusters** 8,414 892 7,522
---------- ---------- ----------
Total clusters 176,049 142,070 33,979 23.9%
Non-cluster and disposed operations 8,038 10,437 (2,399)
Administrative overhead 16,595 11,681 4,914
---------- ---------- ----------
Total cemetery costs $200,682 $164,188 $36,494 22.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
The entire increase in existing cluster costs resulted from increased costs at
cemeteries acquired during the two year period. There was no increase in costs
at other cemeteries included in existing clusters despite the sales increase
discussed above. Cost containment in the areas of selling and maintenance
expenses contributed to the lack of increase. Cemetery costs, expressed as a
percentage of revenues, at existing clusters decreased to 65.9% this year from
69.6% in 1992. The Company believes that the gross margins realized in 1993 are
achievable in the future through continued aggressive sales as well as cost
containment programs. Administrative overhead costs have increased slightly,
when expressed as a percentage of revenues, to 5.9% currently from 5.4% in 1992.
Financial service revenues and costs have increased in 1993 as a result of
increased loans outstanding and improved interest rate spreads. The average
outstanding loan portfolio during 1993 was $215,726 with an average interest
rate spread of 3.3% compared to $143,773 and 2.6%, respectively, in 1992.
Financial services are provided through Provident which is a major source of
funding to independent funeral home and cemetery operators. Unlike a commercial
bank, Provident does not have access to low-cost deposit funds so its net
interest margin is lower because it borrows money at market rates. Additionally,
Provident does not incur as much administrative costs as does a commercial bank.
Through Provident's relationships with these borrowers, the Company derives the
benefit of developing a continuing relationship with these entities. The credit
risk for this type of lending is considered minimal to the Company.
S-28
<PAGE> 29
General and administrative expenses increased by $5,013 or 13.0%. The increase
is primarily attributable to compensation expense in connection with
performance-based vesting of restricted stock grants to Company management.
Vesting is based on a formula primarily tied to earnings per share growth.
Interest expense, which excludes the amount incurred through financial service
operations, increased $5,729 or 10.6% during 1993. In February 1993, the Company
issued $150,000 of 7.875% debentures due in 2013. The proceeds were primarily
used to repay existing credit agreement borrowings. Also in February 1993, the
Company called the $100,000 6.5% convertible debentures originally issued in
1986. Holders of the debentures converted $97,164 into Company common stock at
$17.33 per share (5,607,000 shares) with the remaining $2,836 redeemed in cash.
Additionally, interest expense was reduced by decreased average interest rates
on amounts borrowed under the Company's credit agreements during 1993 compared
to 1992.
Other income includes the recognition of gains from the sale of excess real
estate and existing businesses during both periods.
The provision for income taxes has increased to 40.6% from 37.9% during 1992
primarily due to the enactment of the Omnibus Budget Reconciliation Act of 1993
in August 1993 which increased corporate tax rates retroactively to January 1,
1993. As a result of the new law, the Company's 1993 tax expense increased
$2,431 from increased deferred income taxes and $1,700 from the higher corporate
tax rate on 1993 earnings ($.05 earnings per share).
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
In 1992, total funeral revenues increased $102,349 or 23.8% over 1991. Funeral
revenues were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, PERCENTAGE
1992* 1991* INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $456,617 $390,807 $65,810 16.8%
New clusters** 43,377 11,190 32,187
---------- ---------- ----------
Total clusters 499,994 401,997 97,997 24.4%
Non-cluster and disposed operations 32,920 28,568 4,352
---------- ---------- ----------
Total funeral revenues $532,914 $430,565 $102,349 23.8%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
The $65,810 increase in revenues at existing clusters, which included an
increase of $59,598 from acquired operations, was the result of 13,857 or 11.4%
more funeral services performed and a $157 or 4.9% higher average sales price.
Total funeral costs increased $72,133 or 23.5% in 1992. Funeral costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, PERCENTAGE
1992* 1991* INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $292,331 $254,186 $38,145 15.0%
New clusters** 34,972 9,063 25,909
---------- ---------- ----------
Total clusters 327,303 263,249 64,054 24.3%
Non-cluster and disposed operations 26,999 26,032 967
Administrative overhead 24,921 17,809 7,112
---------- ---------- ----------
Total funeral costs $379,223 $307,090 $72,133 23.5%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
S-29
<PAGE> 30
All of the increase in costs at existing clusters was the result of funeral
homes acquired during the two year period. For other funeral homes included in
existing clusters, personnel costs increased primarily as the result of higher
benefit costs. This was offset by decreased merchandise costs, reflecting more
effective purchasing arrangements with vendors and an additional year-end
discount from the revision of a merchandise purchasing contract with one vendor.
Discounts should continue through 1993 based on the provisions of the revised
contract as well as with agreements with other vendors. Facility costs also
declined when compared to 1991.
Total cemetery revenues increased $22,666 or 11.7% over 1991. Cemetery revenues
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1992* 1991* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $186,051 $171,273 $14,778 8.6%
New clusters** 13,823 5,308 8,515
---------- ---------- ----------
Total clusters 199,874 176,581 23,293 13.2%
Non-cluster and disposed operations 17,226 17,853 (627)
---------- ---------- ----------
Total cemetery revenues $217,100 $194,434 $22,666 11.7%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
Revenues at existing clusters, which include an increase of $11,937 from
acquired operations, increased a total of $14,778 or 8.6% due to increased
at-need sales, higher average at-need and pre-need contract prices partially
offset by a slight decline in the number of pre-need contracts sold.
Total cemetery costs increased $14,366 or 9.6% over 1991. Cemetery costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1992* 1991* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $127,626 $116,711 $10,915 9.4%
New clusters** 10,502 4,618 5,884
---------- ---------- ----------
Total clusters 138,128 121,329 16,799 13.8%
Non-cluster and disposed operations 14,379 13,315 1,064
Administrative overhead 11,681 15,178 (3,497)
---------- ---------- ----------
Total cemetery costs $164,188 $149,822 $14,366 9.6%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
Costs at existing clusters, which include an increase of $9,667 from acquired
operations, increased a total of $10,915 or 9.4%. Merchandise and repair and
maintenance expenses increased at other cemeteries included in existing
clusters. Cemetery overhead costs declined in 1992 due to the closing of the San
Diego administrative office in late 1991. These costs were either eliminated or
transferred to general and administrative expense at the Houston corporate
offices.
Financial service revenues and costs decreased during 1992 as a result of a
decrease in the average outstanding loan portfolio and borrowed amounts for
Provident in 1992. Gross profit remained level for both years. For the year
1992, Provident's outstanding loan portfolio averaged $143,773 with an average
interest rate spread of 2.6% compared to $148,652 and 2.4%, respectively, in
1991.
General and administrative expenses increased in 1992 by $3,245 or 9.2%.
Personnel costs, including the cost of restricted stock grants and other
employee benefit accruals, increased $2,141. The remainder of the increase
S-30
<PAGE> 31
resulted primarily from higher facility and administrative costs. A portion of
the additional costs resulted from the relocation of cemetery administrative
offices from San Diego to Houston.
Interest expense, which excludes the amount incurred through financial service
operations, increased $11,473 or 27.0% during 1992. In October 1991, the Company
issued $172,500 of 6.5% convertible debentures due in 2001. Also contributing to
the increase was the interest on debt assumed and not refinanced from various
1991 acquisitions. Lower interest rates in 1992 helped to offset increases in
interest expense from increased average amounts borrowed under the Company's
credit agreements.
Other income increased during 1992 due primarily to the recognition of two gains
in 1992. One resulted from the collection of a note receivable that had
previously been written off, and the other from the sale of an equity
investment. Partially offsetting the increase was less income on corporate
investments. Both years include pretax gains associated with the disposition of
certain excess funeral and cemetery real property.
During the third quarter of 1991, certain Internal Revenue Service audits of the
Company were settled and resulted in the recognition of $4,800 or $.07 per share
of income tax benefits.
FINANCIAL CONDITION AT SEPTEMBER 30, 1994
In connection with the Company's acquisitions of GSG and PG, a subsidiary of the
Company has obtained from separate lenders a UK pound sterling 185,000 loan
facility and a UK pound sterling 100,000 line of credit, both with interest
calculated at a rate equal to UK pound sterling LIBOR plus 20 basis points. The
Company has guaranteed the UK Facilities. The acquisitions of GSG and PG are
being financed on an interim basis principally with borrowings under the UK
Facilities. The Company has borrowed U.S. $312,462 at September 30, 1994 under
the UK Facilities.
At October 31, 1994, the Company had available approximately $271,500 of
borrowing capacity under its various existing lines of credit (including amounts
available under the UK Facilities). In addition to the sources of cash from
operations and credit lines, the Company has 12,149,000 shares of Common Stock,
$70,227 of guarantees of promissory notes and $74,382 of convertible debentures
registered with the Commission to be used exclusively for future acquisitions.
Included in accounts payable and accrued liabilities at September 30, 1994 is
approximately $97,000 representing the estimated future cost of purchasing the
remaining outstanding shares of GSG and PG.
HEDGING TRANSACTIONS
The Company has entered into hedging transactions to reduce its exposure to
adverse fluctuations in interest and foreign exchange rates. While the hedging
transactions are subject to risk of loss from changes in interest rates and
exchange rates, these losses would generally be offset by gains on the exposures
being hedged. The Company has realized U.S. $1,093 of losses on contracts
entered into as hedge transactions since the beginning of 1993. These realized
losses were deferred and are being amortized into income over the remaining
lives of the original transactions.
At September 30, 1994, the Company had outstanding foreign currency and interest
rate swaps in the notional amounts of Australian dollar $142,715 and U.S.
$75,000. As of September 30, 1994, net unrealized losses before taxes from these
hedging agreements were estimated to be U.S. $7,000 (which is the estimated cost
to terminate these hedging agreements). In the opinion of management, such
losses were offset by the increased value of the exposures being hedged.
The Company anticipates entering into a planned cross currency hedging
transaction effectively converting $272,500 of U.S. fixed rate indebtedness into
floating rate UK pound sterling indebtedness, raising the Company's total UK
pound sterling exposure to U.S. $472,500, which is comparable to the size of the
acquisitions of GSG and PG. If such transaction is consummated, the Company
would receive fixed rate interest on U.S. $272,500 and pay UK pound sterling
LIBOR, plus some level of add-on basis points, on U.S. $272,500.
S-31
<PAGE> 32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal income
and estate tax consequences of the ownership and disposition of the Common Stock
by non-United States holders, but does not purport to be a complete analysis of
all the potential tax considerations relating thereto.
As used herein, "non-United States holder" means a corporation, individual or
partnership that is, as to the United States, a foreign corporation, a
non-resident alien individual or a foreign partnership, and it means any estate
or trust which is not subject to United States taxation on income from sources
without the United States that is not effectively connected with the conduct of
a trade or business within the United States.
This discussion is based upon the Code, Treasury Regulations, United States
Internal Revenue Service ("IRS") rulings and judicial decisions now in effect,
all of which are subject to change (possibly with retroactive effect) or
different interpretations. This discussion does not purport to deal with all
aspects of federal income and estate taxation that may be relevant to a
particular non-United States holder's decision to purchase the Common Stock.
ALL PROSPECTIVE NON-UNITED STATES PURCHASERS OF THE COMMON STOCK ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL
AND NON-UNITED STATES TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE COMMON STOCK.
DIVIDENDS
Dividends paid to a non-United States holder of the Common Stock will be subject
to withholding of United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. (Under currently
effective Treasury Regulations, dividends paid to an address in a foreign
country are presumed to be paid to a resident of such country in determining the
applicability of a treaty for such purposes. Proposed Treasury Regulations, if
finally adopted, would require a non-United States holder to file certain forms
to obtain the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends. Such forms would contain the holder's name and
address and an official statement by the competent authority in the foreign
country (as designated in the applicable tax treaty) attesting to the holder's
status as a resident thereof.) However, except as may be otherwise provided in
an applicable income tax treaty, a non-United States holder will be taxed at
ordinary federal income tax rates (on a net income basis) on dividends that are
effectively connected with the conduct of a trade or business of such non-United
States holder within the United States and will not be subject to the
withholding tax described above. If such non-United States holder is a foreign
corporation, it may also be subject to a United States branch profits tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
A non-United States holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
DISPOSITION OF STOCK
Non-United States holders generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of the Common Stock
unless (i) the gain is effectively connected with a trade or business conducted
by the non-United States holder within the United States (in which case the
branch profits tax described under "Dividends" above may also apply if the
holder is a foreign corporation), (ii) in the case of a non-United States holder
who is a non-resident alien individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the disposition and certain other conditions are met, (iii) the
non-United States holder is subject to tax pursuant to the provisions of the
United States federal tax law applicable to certain United States expatriates or
(iv) the Company is or has been a "United States real property holding
corporation" for federal income tax purposes and, in the event
S-32
<PAGE> 33
that the Common Stock is considered "regularly traded," the non-United States
holder held directly or indirectly at any time during the five-year period
ending on the date of disposition more than five percent of the Common Stock.
Generally, this last rule for stock in United States real property holding
corporations takes precedence over relief provided by tax treaties.
FEDERAL ESTATE TAXES
Common Stock that is owned or treated as being owned at the time of death by a
non-United States holder who is a non-resident alien individual will be included
in such holder's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Generally, dividends paid to non-United States holders outside the United States
that are subject to the 30% or treaty-reduced rate of withholding tax will be
exempt from backup withholding tax. As a general matter, information reporting
and backup withholding will not apply to a payment by a foreign office of a
foreign broker of the proceeds of a sale of Common Stock effected outside the
United States. However, information reporting requirements (but not backup
withholding) will apply to a payment by a foreign office of a broker of the
proceeds of a sale of Common Stock effected outside the United States where that
broker (i) is a United States person, (ii) is a foreign person that derives 50%
or more of its gross income for certain periods from the conduct of a trade or
business in the United States or (iii) is a "controlled foreign corporation" as
defined in the Code (generally, a foreign corporation controlled by United
States shareholders), unless the broker has documentary evidence in its records
that the holder is a non-United States holder and certain conditions are met or
the holder otherwise establishes an exemption. Payment by a United States office
of a broker of the proceeds of a sale of Common Stock is subject to both backup
withholding (generally at a rate of 31%) and information reporting unless the
holder certifies to the payor in the manner required as to its non-United States
status under penalties of perjury or otherwise establishes an exemption.
A non-United States holder may obtain a refund of any amounts withheld under the
backup withholding rules by filing an appropriate claim for refund with the IRS.
S-33
<PAGE> 34
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below have severally agreed to purchase, and the Company has agreed to
sell to them, severally, the respective number of shares of Common Stock set
forth opposite their names below:
<TABLE>
<CAPTION>
----------
NUMBER OF
SHARES
----------
<S> <C>
U.S. UNDERWRITERS:
J.P. Morgan Securities Inc. 1,100,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 1,100,000
CS First Boston Corporation 1,100,000
Dean Witter Reynolds Inc. 650,000
The Chicago Corporation 180,000
Raymond James & Associates, Inc. 180,000
William Blair & Company 180,000
A.G. Edwards & Sons, Inc. 180,000
Kidder, Peabody & Co. Incorporated 180,000
Legg Mason Wood Walker, Incorporated 180,000
Montgomery Securities 180,000
Williams Mackay Jordan & Co., Inc. 180,000
----------
Subtotal 5,390,000
----------
INTERNATIONAL MANAGERS:
J.P. Morgan Securities Ltd. 805,000
Merrill Lynch International Limited 805,000
Cazenove & Co. 350,000
ABN AMRO Bank N.V. 50,000
BNP Capital Markets Limited 50,000
Commerzbank Aktiengesellschaft 50,000
Credit Lyonnais Securities 50,000
J. Henry Schroder Wagg & Co. Limited 50,000
Societe Generale 50,000
UBS Limited 50,000
----------
Subtotal 2,310,000
----------
Total 7,700,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken. The
closing of the United States Offering is a condition to the closing of the
International Offering, and the closing of the International Offering is a
condition to the closing of the United States Offering.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, each U.S. Underwriter has represented and agreed that, with certain
exceptions set forth below, (a) it is not purchasing any shares of Common Stock
being sold by it (the "U.S. Shares") for the account of anyone other than a
United States or Canadian Person and (b) it has not offered or sold, and will
not offer or sell, directly or indirectly, any U.S. Shares or distribute any
prospectus relating to the U.S. Shares outside the United States or Canada or to
anyone other than a United States or Canadian Person. Pursuant to the Agreement
Between U.S. and International
S-34
<PAGE> 35
Underwriting Syndicates, each International Manager has represented and agreed
that, with certain exceptions set forth below, (a) it is not purchasing any
shares of Common Stock being sold by it (the "International Shares") for the
account of any United States or Canadian Person and (b) it has not offered or
sold, and will not offer or sell, directly or indirectly, any International
Shares or distribute any prospectus relating to the International Shares within
the United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriting Syndicates. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, sales may be made between the U.S. Underwriters and the
International Managers of any number of shares of Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per share
price and currency of settlement of any shares of Common Stock so sold shall be
the per share public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, each U.S. Underwriter has represented that it has not offered or
sold, and agreed not to offer or sell, any shares of Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of shares of
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in which
such offer is made. Each U.S. Underwriter has further agreed to send to any
dealer who purchases from it any shares of Common Stock a notice stating in
substance that, by purchasing such shares of Common Stock, such dealer
represents and agrees that it has not offered or sold, and will not offer or
sell, directly or indirectly, any of such shares of Common Stock in Canada or
to, or for the benefit of, any resident of Canada in contravention of the
securities laws of Canada or any province or territory thereof and that any
offer of shares of Common Stock in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province of Canada in
which such offer is made, and that such dealer will deliver to any other dealer
to whom it sells any such shares of Common Stock a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, each International Manager has represented and agreed that (i) it
has not offered or sold and will not offer or sell in the United Kingdom, by
means of any document, any shares of Common Stock, other than to a person whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent, or in circumstances which do not constitute an offer to the
public within the meaning of the Companies Act of 1985, (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom, and (iii) it has only issued
or passed on and will only issue or pass on to any person in the United Kingdom
any document received by it in connection with the sale of the shares of Common
Stock if that person is of a kind described in Article 9(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a
person to whom the document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement and in part to certain dealers at such price less
a concession not in excess of $.48 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain other dealers. After the initial public offering of the Common Stock
offered hereby, the public offering price and such concessions may be changed.
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this Prospectus
Supplement, to purchase up to an additional 1,155,000
S-35
<PAGE> 36
shares of Common Stock at the public offering price set forth on the cover page
hereof less the underwriting discount. The U.S. Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Common Stock offered hereby.
To the extent such option is exercised, each U.S. Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such U.S. Underwriter's name in the preceding table bears to the total
number of shares of Common Stock offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
federal securities laws, or to contribute to payments which the Underwriters may
be required to make in respect thereof.
J.P. Morgan Securities Inc. ("JPMS") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are acting as the underwriters in connection with
the TECONS Offering, for which they will receive customary underwriting
compensation. In addition, JPMS, Merrill Lynch, CS First Boston Corporation
("First Boston") and Dean Witter Reynolds Inc. will act as the underwriters in
connection with the Senior Notes Offering, for which they will receive customary
underwriting compensation. As of October 5, 1994, JPMS and certain of its
affiliates beneficially owned (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) approximately 12.09% of the outstanding Common
Stock, such figure representing beneficial ownership in both a fiduciary
capacity on behalf of third parties and for their own accounts. As of such date,
JPMS and such affiliates owned the economic interest in less than 1.00% of the
outstanding Common Stock. JPMS and its affiliates, Merrill Lynch, First Boston
and Cazenove & Co. from time to time provide commercial banking and/or
investment banking services to the Company for which they receive customary fees
and expense reimbursement.
Upon application of the net proceeds of the Offering made hereby as described
under "Use of Proceeds," an affiliate of JPMS may receive in excess of 10% of
the net proceeds of the Offering. Pursuant to paragraph 8 of Article III,
Section 44 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), such receipt by an affiliate of JPMS of
such proceeds requires that the Offering be made in compliance with certain of
the requirements of Schedule E ("Schedule E") to the Bylaws of the NASD. In this
regard, the Offering is being made pursuant to the provisions of such paragraph
8. Pursuant thereto, the Offering will comply with Section 3(c) of Schedule E.
The Company and each of its executive officers have agreed not to effect any
offer, sale or other disposition of any shares of Common Stock or any securities
convertible into or exchangeable for any shares of Common Stock (except, in the
case of the Company, for the shares of Common Stock offered hereby, the issuance
of shares of Common Stock upon conversion of the TECONS and upon conversion of
the Company's presently outstanding convertible securities and pursuant to the
Company's existing employee benefit plans as in effect on the date hereof and,
subject to certain limitations, in connection with acquisitions) for a period of
90 days after the date of this Prospectus Supplement, without the prior consent
of JPMS.
S-36
<PAGE> 37
Filed Pursuant to Rule 424(b)(5)
Registration Nos. 033-56069; 033-56069-01
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 1, 1994)
7,700,000 Shares
(LOGO)
SERVICE CORPORATION INTERNATIONAL
Common Stock
(par value $1 per share)
Of the 7,700,000 shares of Common Stock, $1 par value (the "Common Stock" or the
"SCI Common Stock"), of Service Corporation International, a Texas corporation
(the "Company"), offered hereby, 2,310,000 shares initially are being offered
outside the United States and Canada (the "International Offering") by the
International Managers (the "International Managers") and 5,390,000 shares
initially are being offered in the United States and Canada (the "United States
Offering" and, together with the International Offering, the "Offering" or the
"Common Stock Offering") by the U.S. Underwriters (the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters"). The offering
price and underwriting discount for the International Offering and the United
States Offering are identical. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "SRV." On December 5, 1994, the reported last sale price of the Common
Stock on the NYSE was $25.50 per share.
Concurrently with the Offering, SCI Finance LLC, a subsidiary of the Company, is
offering an aggregate of up to 3,450,000 $3.125 Term Convertible Shares, Series
A ("TECONS"*), pursuant to a separate prospectus supplement. The TECONS will be
convertible into Common Stock initially at a conversion rate of approximately
1.6617 shares of Common Stock for each TECONS.
SEE "CERTAIN INVESTMENT CONSIDERATIONS" FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $25.50 $.80 $24.70
- --------------------------------------------------------------------------------------------------------
Total(3) $196,350,000 $6,160,000 $190,190,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $436,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable within
30 days after the date of this Prospectus Supplement, to purchase up to an
additional 1,155,000 shares of Common Stock on the same terms as set forth
above, solely to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $225,802,500, $7,084,000 and $218,718,500, respectively. See
"Underwriting."
The shares of Common Stock offered by this Prospectus Supplement are being
offered by the International Managers, subject to prior sale, when, as and if
delivered to and accepted by the International Managers, and subject to approval
of certain legal matters by Cahill Gordon & Reindel, counsel for the
Underwriters, and certain other conditions. It is expected that delivery of the
certificates representing the shares of Common Stock will be made against
payment therefor on or about December 13, 1994 at the offices of J.P. Morgan
Securities Inc., 60 Wall Street, New York, New York 10260.
- ---------------
* An application has been filed by J.P. Morgan Securities Inc. with the United
States Patent and Trademark Office for the registration of the TECONS service
mark.
J.P. MORGAN SECURITIES LTD.
MERRILL LYNCH INTERNATIONAL LIMITED
CAZENOVE & CO.
December 6, 1994
<PAGE> 38
Artwork showing Major North American Markets Served indicated by Bullets on
Map of the United States, Alaska and Hawaii.
Artwork showing Major International Markets Served indicated by Bullets on
Maps of United Kingdom and Australia.
S-2
<PAGE> 39
IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK,
THE TECONS AND THE COMPANY'S CONVERTIBLE DEBENTURES AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person is authorized to give any information or to make any representations
not contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any Underwriter. Neither this Prospectus Supplement nor the accompanying
Prospectus constitutes an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................... S-4
The Company........................... S-6
Recent Developments................... S-11
Use of Proceeds....................... S-12
Price Range of Common Stock and
Dividends........................... S-13
Capitalization........................ S-14
Selected Financial Information........ S-15
Unaudited Pro Forma Combined Financial
Information......................... S-16
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. S-23
Certain Federal Income Tax
Consequences to Non-United States
Holders............................. S-32
Underwriting.......................... S-34
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 4
The Company........................... 5
SCI Finance........................... 5
Certain Investment Considerations..... 6
Use of Proceeds....................... 6
Description of Debt Securities........ 7
Description of Preferred Stock........ 22
Description of Common Stock
Warrants............................ 25
Description of the LLC Preferred
Securities.......................... 28
Certain Federal Income Tax
Considerations Regarding the LLC
Preferred Securities................ 45
Plan of Distribution.................. 49
Legal Matters......................... 50
Experts............................... 50
</TABLE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information included and incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. All
information in this Prospectus Supplement assumes that the Underwriters'
over-allotment option will not be exercised. See "Underwriting." References to
the Company or SCI herein should be read as referring to Service Corporation
International and its subsidiaries, except where the context indicates
otherwise.
THE COMPANY
Service Corporation International (the "Company" or "SCI") is the largest
provider of death care services and products in the world. Giving effect to the
recent acquisitions of Great Southern Group plc ("Great Southern" or "GSG") and
Plantsbrook Group plc ("Plantsbrook" or "PG"), as of September 30, 1994, SCI
owned and operated 1,431 funeral homes, 213 cemeteries (including 92 funeral
home and cemetery combinations) and 99 crematoria located in 40 U.S. states, the
District of Columbia, Australia, Canada and the United Kingdom. See "The
Company -- International Expansion and Recent Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident Services, Inc.
("Provident"), provides financing to independent funeral home and cemetery
operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and
funeral home/cemetery combinations in areas with demographics that SCI
believes to be favorable
- Increase the operating margins of its existing and acquired facilities by
having such facilities share resources pursuant to SCI's cluster strategy
(see "The Company -- Funeral Service Operations -- Cluster Strategy")
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
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THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
United States Offering..................... 5,390,000 shares
International Offering..................... 2,310,000 shares
----------------
Total Offering..................... 7,700,000 shares
Common Stock Outstanding after
the Offering(1)............................ 93,871,965 shares
USE OF PROCEEDS.............................. The net proceeds of the Common Stock Offering
will be used to repay indebtedness as set
forth under "Use of Proceeds."
NYSE TRADING SYMBOL.......................... "SRV"
CONCURRENT OFFERINGS......................... Concurrently with the Common Stock Offering,
SCI Finance LLC, a subsidiary of the Company
("SCI Finance"), is offering (the "TECONS
Offering") an aggregate of 3,000,000 $3.125
Term Convertible Shares, Series A (the
"TECONS") pursuant to a separate prospectus
supplement (excluding 450,000 TECONS subject
to an underwriters' over-allotment option).
The TECONS will be convertible into Common
Stock initially at a conversion rate of
approximately 1.6617 shares of Common Stock
for each TECONS. In addition, the Company
intends to consummate an offering (the
"Senior Notes Offering") of $200 million
aggregate principal amount of Notes due 2004
pursuant to a separate prospectus supplement
concurrently with the closing of the Common
Stock Offering and the TECONS Offering. The
closing of the Common Stock Offering is not
contingent on the closing of the TECONS
Offering or the Senior Notes Offering.
</TABLE>
- ---------------
(1) Based on shares outstanding as of September 30, 1994. Excludes an aggregate
of 14,769,486 shares of Common Stock issuable upon exercise of stock options
and conversion of convertible securities outstanding as of such date and
5,732,802 shares of Common Stock issuable upon conversion of up to 3,450,000
TECONS (assuming exercise in full of the underwriters' over-allotment
option) that may be sold in the TECONS Offering.
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<PAGE> 42
THE COMPANY
SCI is the largest provider of death care services and products in the world.
Giving effect to the recent acquisitions of Great Southern and Plantsbrook, as
of September 30, 1994, SCI owned and operated 1,431 funeral homes, 213
cemeteries (including 92 funeral home and cemetery combinations) and 99
crematoria located in 40 U.S. states, the District of Columbia, Australia,
Canada and the United Kingdom. See "-- International Expansion and Recent
Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident, provides
financing to independent funeral home and cemetery operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and
funeral home/cemetery combinations in areas with demographics that SCI
believes to be favorable
- Increase the operating margins of its existing and acquired facilities by
having such facilities share resources pursuant to SCI's cluster strategy
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
FUNERAL SERVICE OPERATIONS
The funeral service operations consist of SCI's funeral homes, cemeteries and
related businesses. The operation is organized into six domestic regions and
three foreign regions (Australia, Canada and the United Kingdom), each of which
is under the direction of a regional president with substantial industry
experience. Canadian operations are carried out by a public company which is
approximately 70% owned by SCI. Local funeral home and cemetery managers, under
the direction of the regional presidents, 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.
Death Care Industry
The funeral industry is characterized by a large number of locally-owned,
independent operations. SCI believes that there are in excess of 22,000, 500,
1,200 and 4,000 funeral homes operating in the United States, Australia, Canada
and the United Kingdom, respectively. In order to compete successfully, SCI's
funeral homes must maintain competitive prices, attractive, well-maintained and
conveniently located facilities, a good reputation and high professional
standards. Heritage and tradition can provide an established funeral home or
cemetery with the opportunity for repeat business from client families.
Furthermore, an established firm can generate future volume and revenues by
successfully marketing prearranged, pre-funded funeral services.
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The cemetery industry is also characterized by a large number of locally-owned
independent operations. SCI's cemetery properties compete with other cemeteries
in the same general area. In order to compete successfully, SCI's cemeteries
must maintain competitive prices, attractive and well-maintained properties, a
good reputation, an effective sales force and high professional standards.
The Company and the two other largest North American death care companies
control in the aggregate approximately seven percent of the funeral homes and
approximately four percent of the commercial cemeteries in North America. Based
upon industry estimates, these three companies represented less than 15% of
total 1993 death care industry revenues.
Cluster Strategy
The majority of SCI's funeral homes 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. The cluster strategy recognizes that, as SCI adds operations to
a geographic area in which SCI already operates, it will achieve additional
operating efficiencies through cost-sharing. SCI has successfully implemented
the cluster strategy in its North American and Australian operations and intends
to implement the strategy in the United Kingdom. As of September 30, 1994, SCI
operated approximately 160 clusters in North America and Australia, which range
in size from two operations to 53 operations.
Pre-need Services
SCI is actively engaged in the marketing of prearranged funeral services. The
funds collected from prearranged funeral contracts are generally held in trust
or are used to purchase life insurance or annuity contracts. The principal
amount of a prearranged funeral contract will be received in cash by an SCI
funeral home and recorded as revenue by SCI at the time the funeral is
performed. Earnings on trust funds and increasing benefits under
insurance-funded contracts increase the amount of cash to be received and the
revenue to be recognized at the time the service is performed and historically
have allowed the Company to more than cover increases in the costs of providing
funeral services. At September 30, 1994, SCI's unfulfilled prearranged funeral
contracts amounted to approximately $1.4 billion. SCI's historical cancellation
rate for all prearranged funeral contracts approximates ten percent, for which a
reserve has been established.
Cemetery sales are often made pursuant to installment contracts providing for
monthly payments. The principal amount of these installment contracts is
recognized as revenue by SCI at the time of sale, net of an approximate eight
percent cancellation reserve that is based on historical results. A portion of
the proceeds from cemetery sales is generally required by law to be paid into
perpetual care trust funds. Earnings on perpetual care trust funds are used to
defray the maintenance cost of cemeteries. In addition, a portion of the
proceeds from the pre-need sale of cemetery merchandise may be required by law
to be paid into trust.
Financial Services
In 1988, SCI formed Provident to provide capital 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.
Provident had $243 million in loans outstanding at September 30, 1994. To date,
the amount and number of problem loans have been insignificant. Provident
obtains its funds primarily from SCI bank and commercial paper 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 industry
loans, thereby providing Provident with a competitive advantage in making such
loans.
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<PAGE> 44
Regulation
In April 1984, the U.S. Federal Trade Commission (the "FTC") comprehensive trade
regulation rule for the funeral industry became fully effective. 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. A pre-existing consent order between SCI and the FTC
applicable to certain funeral practices of SCI was amended in 1984 to make the
substantive provisions of the consent order consistent with the funeral trade
regulation rule. From time to time in connection with acquisitions, SCI has
entered into consent orders with the FTC which have required SCI to dispose of
certain operations in order to proceed with the acquisitions and/or have limited
SCI's ability to make acquisitions in specified areas. The trade regulation rule
and the various consent orders have not had a material adverse effect on SCI's
operations.
ACQUISITION STRATEGY
Over the past several years, SCI has made a significant number of acquisitions.
SCI anticipates that it will continue to aggressively pursue acquisition
opportunities, as acquisitions form a critical part of SCI's growth strategy.
SCI will continue to seek acquisitions in geographic areas in which it presently
operates to expand established clusters, as well as acquisitions in new
geographic areas, including those outside North America, to develop new clusters
and to increase volume and revenue. To date SCI has been able to increase the
profitability of its acquired properties by absorbing a significant portion of
their costs, such as transportation and embalming, into SCI's clusters, and by
applying SCI's merchandising programs to the new operations. In addition,
acquisitions increase SCI's ability to benefit from the centralization of
systems, insurance and other financial services. SCI also believes that because
of its size it has been able to negotiate favorable supply arrangements with
volume discounts on supplies, including caskets, and that the terms of such
supply arrangements have enabled it to increase the profitability of its
acquired properties. There can be no assurance that SCI will continue to
successfully absorb future acquisitions, domestic or international, or realize
such cost savings.
SCI typically retains former owners and key managers of acquired businesses in
an effort to assure that service quality is maintained and that the business's
reputation, heritage and local relationships remain intact. Acquired funeral
homes and cemeteries retain their original trade names in substantially all
cases.
In evaluating specific properties for acquisition, SCI considers a number of
factors including demographics, location, reputation, heritage, physical size,
volume of business, profitability, available inventory, name recognition,
aesthetics, potential for development or expansion, competitive position,
pricing structure and quality of operating management. SCI follows a disciplined
approach based on specific financial criteria for determining acquisition prices
and intends to continue an active acquisition program in the future. There can
be no assurance that acquisition prospects will continue to be available in
attractive locations at prices acceptable to SCI.
INTERNATIONAL EXPANSION AND RECENT ACQUISITIONS
Based on its experience in applying its cluster strategy in the North American
market, SCI has targeted several foreign countries that it believes offer
similar opportunities. Effective July 1, 1993, SCI acquired Pine Grove Funeral
Group ("Pine Grove"), Australia's largest funeral and cremation services
provider, for approximately U.S.$70 million. This was SCI's first acquisition
outside of North America. Pine Grove's operations at year-end 1993 consisted of
60 funeral homes and eight cemetery/crematorium facilities located in
Australia's five major population centers of Adelaide, Brisbane, Melbourne,
Perth and Sydney. During its six months of operation in 1993 as an SCI company,
Pine Grove reported revenues of approximately U.S.$17 million. In March 1994,
SCI continued its Australian expansion by acquiring LePine Holdings Proprietary
Limited ("LePine"), a firm with over 100 years of funeral service history. The
LePine acquisition added 20 additional funeral homes in Melbourne with 1993
revenues of approximately U.S.$12 million.
In June 1994, SCI announced an unsolicited offer to acquire 100% of the
outstanding shares of Great Southern, which is among the leading funeral and
cremation services companies in the United Kingdom. Great Southern owns and
operates 157 funeral homes, 13 crematoria and two cemeteries in the United
Kingdom, primarily
S-8
<PAGE> 45
south of London. As of September 30, 1994, SCI owned, or had commitments to
acquire, in excess of 98% of Great Southern's voting shares. It is anticipated
that SCI will acquire the balance of the equity interests in Great Southern in
the coming months. The total purchase price for Great Southern is approximately
U.S.$192.8 million, including the assumption of approximately U.S.$14.8 million
of Great Southern debt. Great Southern reported revenues of approximately
U.S.$48.9 million for the year ended December 31, 1993. See "Unaudited Pro Forma
Combined Financial Information."
In September 1994, SCI announced its offer to acquire 100% of the outstanding
shares of Plantsbrook, which is the largest public funeral company in the United
Kingdom. Plantsbrook owns and operates 380 funeral homes in the United Kingdom,
primarily north of London. As of September 30, 1994, SCI owned, or had
commitments to acquire, in excess of 95% of Plantsbrook's voting shares. It is
anticipated that SCI will acquire the balance of the equity interests in
Plantsbrook in the coming months. The total purchase price for Plantsbrook is
approximately U.S.$312.7 million, including the assumption of approximately
U.S.$13.9 million of Plantsbrook debt. Plantsbrook reported revenues of
approximately U.S.$77.7 million for the year ended December 31, 1993. See
"Unaudited Pro Forma Combined Financial Information." Great Southern and
Plantsbrook together accounted for approximately 15% of the total funerals
performed in the United Kingdom during 1993.
In the context of its international expansion, SCI believes that it can
favorably manage its worldwide effective tax rate by taking advantage of lower
tax rates and other foreign jurisdictional tax structuring opportunities. SCI
has implemented and intends to continue to explore the implementation of various
strategies to take advantage of such opportunities. There can be no assurance
that the implementation of such strategies will actually result in a reduction
of SCI's worldwide effective tax rate.
INDUSTRY TRENDS
Stability
Death rates have been fairly predictable, thereby lending stability to the death
care industry. For example, since 1980, the number of deaths in the United
States has increased at a compound rate of approximately one percent per year.
According to a 1993 report prepared by the U.S. Department of Commerce, Bureau
of the Census, the number of deaths in the United States is expected to increase
by approximately one percent per year between 1993 and 2000 and by 0.9% per year
from 2000 to 2020. Because the industry is relatively stable, non-cyclical and
fairly predictable, business failures are uncommon. As a result, ownership of
funeral home and cemetery businesses has traditionally passed from generation to
generation within a family. The death rate tends to be somewhat higher in the
winter months and funeral and cemetery operations generally experience a higher
volume of business during these months.
Consolidation
In recent years, the pace of acquisition activity in the death care industry has
increased. From the standpoint of individual owners, this appears to result
principally from family succession issues, a desire for liquidity and increasing
tax and estate planning complexities. From the standpoint of the large death
care providers, interest in acquisitions is driven by the benefits anticipated
to be derived from potential operating efficiencies, improved managerial control
and more effective strategic and financial planning. In recent years, several
large death care companies have expanded their operations significantly through
acquisitions. The increased interest in acquisitions of funeral homes and
cemeteries provides a source of potential liquidity that has not been readily
available to individual owners in the past.
Clustered Operations
During the last several years, larger death care companies have increasingly
begun to cluster their funeral home and cemetery operations. Clusters refer to
funeral homes and/or cemeteries that are grouped together in a geographic area.
Clusters provide cost savings to funeral homes and cemeteries through the
sharing of personnel, vehicles and other resources. In addition, the inclusion
of funeral homes and cemeteries in the same cluster
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<PAGE> 46
provides opportunities for a company to cross-sell the full range of death care
services without corresponding increases in incremental overhead expenses.
Combined Operations
Combined operations, referring to funeral home and cemetery operations conducted
on a single site, have become increasingly popular as they provide cost savings
through shared resources and cross-selling opportunities. The ability to offer
the full range of products and services at one location tends to increase the
sales volume and revenues of both the funeral home and cemetery.
Pre-need Marketing
An increasing number of death care products and services are being sold prior to
the time of death (i.e., on a "pre-need" basis). SCI believes that consumers are
becoming more aware of the benefits of advanced planning, such as the financial
assurance and peace of mind achieved by establishing in advance a fixed price
and type of service, and the elimination of the emotional strain on family
members of making death care plans at the time of need.
Cremation
In recent years there has been steady, gradual growth in the number of families
in the United States that have chosen cremation as an alternative to traditional
methods of disposal. According to industry studies, cremations accounted for
approximately 20% of all dispositions of human remains in the United States in
1993. SCI's domestic operations perform substantially more cremations than the
national average. In 1993, just under 29% of all families served by SCI's North
American funeral homes selected the cremation alternative. SCI has a significant
number of operating locations in Florida and all along 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% to 70% of all dispositions of human remains in Australia and in the United
Kingdom.
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RECENT DEVELOPMENTS
The Company is considering the desirability and feasibility of an acquisition of
Pompes Funebres Generales S.A. ("PFG"), which operates approximately 150 funeral
homes or similar facilities and 750 other retail outlets in France and is the
largest operator of funeral homes in France. Although the Company has had, and
intends to continue, exploratory discussions with Lyonnaise des Eaux-Dumez S.A.
("Lyonnaise"), which controls approximately 66% of the stock of PFG, in regard
to various potential transactions, Lyonnaise has advised the Company that it has
no intention of selling its interest in PFG. The balance of the stock of PFG is
publicly traded, and the current total market capitalization of PFG is
approximately U.S. $185 million. For the year ended December 31, 1993, PFG
reported revenues of approximately U.S. $565 million and net income of
approximately U.S. $20 million. Subsequent to December 31, 1993, PFG sold its
46% interest in Plantsbrook to the Company. The results for PFG disclosed above
include all of the revenues of Plantsbrook during such period, and PFG's 46%
interest in Plantsbrook's net income. For the year ended December 31, 1993,
Plantsbrook reported revenues of approximately U.S. $77.7 million and net income
of approximately U.S. $12.3 million. The operating margins of the funeral
business in France historically have been substantially lower than the operating
margins in the funeral business in North America and in the United Kingdom. The
Company has retained an affiliate of J.P. Morgan Securities Inc. to assist it in
its evaluation of PFG. Particularly in light of the statement by Lyonnaise that
it has no intention of selling its interest in PFG, there can be no assurance
that any transaction involving the Company and PFG will ultimately occur or as
to the terms of any such transaction.
In October 1994, the Company announced that it had acquired approximately 8.5%
of the Class A Voting Shares and approximately 19.9% of the Class B Non-Voting
Shares of Arbor Memorial Services Inc. ("Arbor"). Arbor owns 44 cemeteries and
21 crematoria in Canada. The Company, which acquired its position in Arbor as a
strategic investment, is continuing to consider means to build its relationship
with Arbor and may continue to increase its investment in Arbor. Subsequent to
the announcement by the Company of its position in Arbor, the Company was
advised by the Arbor stockholder who owns a majority of the Class A Voting
Shares that he is not interested at this time in a transaction involving a sale
of control of Arbor. For the year ended October 31, 1993, Arbor reported
revenues of approximately U.S. $78.1 million and net income of approximately
U.S. $4.5 million.
The financial data contained herein with respect to PFG, Plantsbrook and Arbor
is derived from such companies' publicly available information. Such data was
not prepared in conformity with United States generally accepted accounting
principles, and the Company makes no representation with respect to the accuracy
of such data or the comparability of such data to financial data of the Company
or other U.S. companies in the death care industry.
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USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are estimated
to be $189.8 million ($218.3 million if the Underwriters' over-allotment option
is exercised in full). The Company will contribute $40 million of such proceeds
to SCI Finance ($46 million if the underwriters' over-allotment option in
respect of the TECONS is exercised in full). SCI Finance expects to obtain $150
million from the TECONS Offering ($172.5 million if the underwriters'
over-allotment option in respect of the TECONS is exercised in full).
Substantially all of the aggregate proceeds so obtained by SCI Finance from the
TECONS Offering and such capital contribution from the Company will be loaned by
SCI Finance to SCI International Limited, a wholly-owned subsidiary of SCI ("SCI
Limited"), which will use such proceeds to repay a portion of the amounts
outstanding under the UK Facilities (as defined below). In connection with the
acquisitions of Great Southern and Plantsbrook, a subsidiary of SCI Limited
obtained a L185 million loan facility from Morgan Guaranty Trust Company of New
York (the "Morgan Facility") and a L100 million line of credit from Chemical
Bank (the "Chemical Facility" and, together with the Morgan Facility, the "UK
Facilities"). SCI has guaranteed the UK Facilities. As of November 30, 1994, and
giving effect to the exchange rate as of such date of approximately $1.56 to L1,
approximately $282 million was outstanding under the Morgan Facility at a
weighted average annual interest rate of 6.0% with maturities ranging from five
to 21 days, and approximately $141 million was outstanding under the Chemical
Facility at a weighted average annual interest rate of 5.9% with maturities
ranging from two to 30 days. It is anticipated that after giving effect to the
application of the proceeds of the Common Stock Offering and the TECONS
Offering, an aggregate of approximately $200 million will be outstanding under
the UK Facilities, which the Company intends to refinance with the proceeds from
a note offering (the "UK Note Offering") proposed to be made in the United
Kingdom in early 1995. To the extent that the proceeds of the UK Note Offering,
together with the amount loaned by SCI Finance to SCI Limited, are insufficient
to repay in full the amounts outstanding under the UK Facilities, the Company
intends to use a portion of the proceeds from the Common Stock Offering to
effect such repayment.
The balance of the net proceeds from the sale of the Common Stock offered
hereby, together with the net proceeds from the Senior Notes Offering, will be
used to reduce amounts outstanding under the Company's existing revolving credit
facilities (the "Revolving Credit Facilities") or to retire commercial paper
backed by such facilities or both. As of November 30, 1994, approximately $285
million was outstanding under the Revolving Credit Facilities at a weighted
average annual interest rate of 5.6% with maturities ranging from seven to 16
days, and approximately $272 million of commercial paper was outstanding backed
by such facilities at a weighted average annual interest rate of 5.7% with
maturities ranging from one to 90 days. The Company's borrowings under the
Revolving Credit Facilities and the proceeds from the sale of its commercial
paper are used primarily to fund the Company's acquisition program and to
provide financing to Provident.
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., is the lender under the Morgan Facility. The maximum amount
available under the Morgan Facility is approximately $289 million. The Company
intends to repay the Morgan Facility in full with a combination of proceeds from
the Common Stock Offering, the TECONS Offering and the UK Note Offering. See
"Underwriting."
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PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The SCI Common Stock is traded on the NYSE under the symbol "SRV." The following
table sets forth, on a per share basis for the periods shown, the range of high
and low reported sale prices of the SCI Common Stock on the NYSE as well as per
share dividends paid in such periods. SCI has declared 86 consecutive quarterly
dividends on the SCI Common Stock since it began paying dividends in 1974.
<TABLE>
<CAPTION>
--------------------------------------
SALE PRICE
HIGH LOW DIVIDENDS
---------- ---------- ----------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1992:
First Quarter $ 18.38 $ 15.63 $ .09
Second Quarter 18.75 16.13 .10
Third Quarter 18.50 16.38 .10
Fourth Quarter 18.50 16.75 .10
Fiscal Year Ended December 31, 1993:
First Quarter $ 21.63 $ 17.88 $ .10
Second Quarter 22.13 18.50 .10
Third Quarter 25.25 20.75 .10
Fourth Quarter 26.38 23.50 .10
Fiscal Year Ending December 31, 1994:
First Quarter $ 28.00 $ 24.63 $ .105
Second Quarter 25.38 22.50 .105
Third Quarter 26.63 24.88 .105
Fourth Quarter (through December 5, 1994) 26.75 24.13 .105
</TABLE>
On December 5, 1994, the reported last sale price of the SCI Common Stock on the
NYSE was $25.50 per share.
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CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of the
Company at September 30, 1994 and on a pro forma basis giving effect to the
acquisitions of Great Southern and Plantsbrook and as adjusted for the Common
Stock Offering and the TECONS Offering (assuming in each case that the
underwriters' over-allotment option is not exercised), the Senior Notes Offering
and the application of the estimated net proceeds from such offerings.
<TABLE>
<CAPTION>
--------------------------
AT SEPTEMBER 30, 1994
PRO FORMA
AND AS
Thousands ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
CURRENT MATURITIES OF LONG-TERM DEBT $ 68,416 $ 59,651
========== ==========
INDEBTEDNESS UNDER UK FACILITIES $ 312,462 $ 200,000
LONG-TERM DEBT:
Indebtedness to banks under the Revolving Credit Facilities and
commercial paper 570,079 312,695
Notes offered in the Senior Notes Offering -- 200,000
Medium term notes 186,040 186,040
6.5% convertible subordinated debentures 172,500 172,500
7.875% debentures 150,000 150,000
Convertible debentures issued in connection with various
acquisitions 23,624 23,624
8% convertible debentures 14,939 14,939
Variable interest rate notes 10,596 10,596
Mortgage notes and other 120,767 114,431
---------- ----------
Total long-term debt 1,248,545 1,184,825
---------- ----------
CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY -- 150,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000 shares authorized; no shares issued and
outstanding -- --
Common stock, 200,000 shares authorized; 86,172 shares issued
and outstanding; 93,872 shares issued and outstanding pro
forma and as adjusted 86,172 93,872
Capital in excess of par value 527,321 709,399
Retained earnings 353,585 353,585
Foreign translation adjustment (3,029) (3,029)
---------- ----------
Total stockholders' equity 964,049 1,153,827
---------- ----------
Total capitalization $2,525,056 $2,688,652
========== ==========
</TABLE>
S-14
<PAGE> 51
SELECTED FINANCIAL INFORMATION
The selected consolidated financial data presented below for each of the five
years in the period ended December 31, 1993 have been derived from the
consolidated financial statements of the Company, which statements, in respect
of the year ended December 31, 1993, have been audited by Coopers & Lybrand,
independent public accountants, and in respect of the four years ended December
31, 1992, have been audited by Ernst & Young, independent public accountants.
The data at and for the nine months ended September 30, 1994 and September 30,
1993 have been derived from the unaudited consolidated financial statements of
the Company for such periods and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the information included therein in accordance with generally accepted
accounting principles for interim financial information. The data should be read
in conjunction with the related notes and other financial information included
and incorporated by reference in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 and the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994, incorporated by reference
herein. Results for the nine months ended September 30, 1994 are not necessarily
indicative of results for any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
AT OR FOR THE NINE
MONTHS ENDED
Thousands, except per share SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,(1)
amounts and Other Data 1994 1993 1993 1992 1991 1990 1989
---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $801,934 $652,852 $899,178 $772,477 $643,248 $563,156 $518,809
Costs and expenses (558,737) (462,864) (635,858) (550,422) (464,740) (413,236) (386,032)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 243,197 189,988 263,320 222,055 178,508 149,920 132,777
General and administrative
expenses (35,530) (28,026) (43,706) (38,693) (35,448) (28,037) (28,423)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations 207,667 161,962 219,614 183,362 143,060 121,883 104,354
Interest expense (53,464) (44,185) (59,631) (53,902) (42,429) (36,095) (32,514)
Other income 7,767 8,111 13,509 9,876 8,241 13,644 12,778
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and
preferred dividend requirements 161,970 125,888 173,492 139,336 108,872 99,432 84,618
Provision for income taxes (65,727) (52,500) (70,400) (52,800) (35,500) (35,900) (31,000)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before cumulative effect of
change in accounting principles
and preferred dividend
requirements 96,243 73,388 103,092 86,536 73,372 63,532 53,618
Cumulative effect of change in
accounting principles (net of
income tax) -- (2,031) (2,031) -- -- -- --
Preferred dividend requirements -- -- -- -- -- (3,314) (6,897)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
available to common
stockholders $ 96,243 $ 71,357 $ 101,061 $ 86,536 $ 73,372 $ 60,218 $ 46,721
========== =========== =========== =========== =========== =========== ===========
Per share:
Primary
Income from continuing
operations before
cumulative effect of change
in accounting principles $1.12 $ .89 $1.24 $1.13 $1.03 $ .85 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.03) (.03) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.12 $ .86 $1.21 $1.13 $1.03 $ .85 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Fully diluted
Income from continuing
operations before
cumulative effect of change
in accounting principles $1.06 $ .85 $1.19 $1.07 $1.00 $ .84 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.02) (.02) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.06 $ .83 $1.17 $1.07 $1.00 $ .84 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Dividends $.315 $ .30 $ .40 $ .39 $ .37 $ .37 $ .36
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $(298,411) $ 171,051 $ 171,901 $ 155,319 $ 156,383 $ 113,391 $ 120,682
Prearranged funeral contracts 1,385,346 1,193,554 1,244,866 -- -- -- --
Total assets 4,839,553 3,502,505 3,683,304 2,611,123 2,123,452 1,653,689 1,601,468
Long-term debt, excluding current
portion 1,248,545 1,021,238 1,062,222 980,029 786,685 577,378 485,669
Deferred prearranged funeral
contract revenues 1,476,178 1,228,376 1,263,407 -- -- -- --
Stockholders' equity 964,049 856,924 884,513 683,097 615,776 434,323 557,777
Total capitalization 2,525,056 1,878,162 1,946,735 1,663,126 1,402,461 1,011,701 1,043,446
OTHER DATA (END OF PERIOD):
Funeral homes 1,431 763 792 674 655 512 551
Cemeteries 213 186 192 176 163 145 126
</TABLE>
- ---------------
(1) The year ended December 31, 1993 reflects the changes in accounting
principles adopted January 1, 1993. The four years ended December 31, 1992
reflect results as historically reported.
S-15
<PAGE> 52
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
In June 1994, the Company announced an unsolicited offer to acquire 100% of the
outstanding shares of GSG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 98% of GSG's voting shares. The Company
anticipates that the total purchase price will approximate $192,777,000,
including the assumption of approximately $14,751,000 of existing debt. GSG is a
funeral provider in the United Kingdom ("UK") and owns 157 funeral homes, 13
crematoria and two cemeteries.
In September 1994, the Company announced its offer to acquire 100% of the
outstanding shares of PG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 95% of PG's voting shares. The Company
anticipates that the total purchase price will approximate $312,690,000,
including the assumption of approximately $13,873,000 of existing debt. PG is a
funeral provider in the UK and owns 380 funeral homes.
In addition to the acquisitions of GSG and PG, during 1993 and the nine months
ended September 30, 1994, the Company continued to acquire funeral and cemetery
operations in the United States, Australia and Canada. Excluding GSG and PG,
during such period the Company acquired 224 funeral homes and 41 cemeteries (the
"Other Acquired Companies") in 89 separate transactions for an aggregate
purchase price of approximately $436,000,000 in the form of combinations of
cash, SCI Common Stock, issued and assumed debt, convertible debentures and
retired loans receivable held by Provident.
The following unaudited pro forma combined statements of income for the year
ended December 31, 1993 and the nine months ended September 30, 1994 have been
prepared assuming the acquisitions by the Company of GSG, PG and the Other
Acquired Companies took place at the beginning of the respective periods. Such
acquisitions are being accounted for under the purchase method of accounting.
The historical revenues and expenses of the Other Acquired Companies represent
amounts recorded by those businesses for the period that they were not owned by
the Company during the year ended December 31, 1993 and the nine months ended
September 30, 1994, respectively. The unaudited pro forma combined financial
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.
The acquisitions of GSG and PG are being financed on an interim basis
principally with borrowings under the UK Facilities, under which the Company may
borrow up to $438,900,000 (based on the exchange rate of one UK pound sterling
equivalent to $1.54 on September 2, 1994) with interest at a rate equal to UK
pound sterling LIBOR plus 20 basis points. The unaudited pro forma combined
financial information presented herein assumes the completion of the Common
Stock Offering, the TECONS Offering and the Senior Notes Offering at the
beginning of the respective periods. The proceeds from the TECONS Offering and a
portion of the net proceeds from the Common Stock Offering are assumed to be
used to repay $238,900,000 of indebtedness under the UK Facilities, and it is
further assumed that $200,000,000 remains outstanding under the UK Facilities at
the beginning of the respective periods. The remaining net proceeds from the
Common Stock Offering and all of the net proceeds from the Senior Notes Offering
are assumed to be used to repay amounts outstanding under the Revolving Credit
Facilities or to retire commercial paper or both (including $37,680,000 which
was assumed to have been borrowed to finance a portion of the purchase price of
GSG and PG).
The historical financial statements of GSG and PG for the year ended December
31, 1993 and for the period not owned by the Company in 1994 were prepared in UK
pound sterling in accordance with the UK Companies Act of 1985 ("UK GAAP"). This
information has been adjusted to present the historical financial statements in
accordance with United States generally accepted accounting principles ("US
GAAP") and translated into U.S. dollars at the average exchange rate for the
respective statement of income periods presented. The Company has not completed
all appraisals and evaluations necessary to finalize GSG's and PG's purchase
price allocation, and accordingly, actual adjustments that reflect appraisals
and other evaluations of the purchased assets and assumed liabilities may differ
from the pro forma adjustments.
S-16
<PAGE> 53
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
HISTORICAL PRO FORMA
OTHER ACQUIRED
Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL
----------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 899,178 $ 126,594 $ 123,380 $ 5,165 (A) $1,154,317
Costs and expenses (635,858) (101,300) (106,778) (3,590)(A) (829,910)
13,665 (B)
7,781 (C)
(70)(D)
(6,611)(E)
3,598 (F)
(437)(G)
(310)(H)
---------- --------- ----------- ----------- -----------
Gross profit 263,320 25,294 16,602 19,191 324,407
General and administrative expenses (43,706) -- -- -- (43,706)
---------- --------- ----------- ----------- -----------
Income from operations 219,614 25,294 16,602 19,191 280,701
Interest expense (59,631) (2,560) (4,111) (686)(A) (87,680)
(6,918)(B)
1,372 (I)
(11,750)(J)
9,034 (K)
(17,140)(L)
4,710 (M)
Dividends on convertible preferred
stock of subsidiary -- -- -- (9,375)(N) (9,375)
Other income 13,509 313 -- -- 13,822
---------- --------- ----------- ----------- -----------
Income before income taxes 173,492 23,047 12,491 (11,562) 197,468
Provision for income taxes (70,400) (8,681) (4,694) 3,634 (O) (80,141)
---------- --------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting
principles $ 103,092 $ 14,366 $ 7,797 $ (7,928) $ 117,327
========== ========= =========== =========== ===========
Earnings per share:
Primary
Income before cumulative effect
of change in accounting
principles $1.24 $1.26
======== ========
Fully diluted
Income before cumulative effect
of change in accounting
principles $1.19 $1.21
======== ========
Primary weighted average number of
shares 83,372 1,915 (P) 92,987
======== 7,700 (Q) ========
Fully diluted weighted average number
of shares 93,878 2,595 (P) 109,158
======== 7,700 (Q) ========
4,985 (R)
</TABLE>
S-17
<PAGE> 54
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(Thousands)
(A) To record the acquisition of 13 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1993. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $16,654, offset in part by
additional costs and expenses of $2,989 resulting from the effect of
applying purchase accounting adjustments, primarily amortization and
depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 3.51%, which represented the weighted average borrowing rate under
the Company's revolving credit facilities and commercial paper for the year
ended December 31, 1993. At November 30, 1994, the borrowing rate under the
revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1993. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.86%) plus 20 basis points for the year ended December 31,
1993. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 3.51%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and the Company's
commercial paper for the year ended December 31, 1993.
S-18
<PAGE> 55
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1993. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $947 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the Common Stock
(in the case of the primary and fully diluted weighted average number of
shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1993
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1993.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
HISTORIC AMOUNTS AS REPORTED IN
CONVERTED TO US UNAUDITED
DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
-------- -------- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $48,885 $77,709 $ -- $ -- $48,885 $77,709
Costs and expenses (38,234) (58,893) (272)(1) (303)(1) (39,078) (62,222)
(572)(2) (3,026)(2)
Interest expense and other (1,372) (875) -- -- (1,372) (875)
Provision for income taxes (3,228) (5,645) 90(1) 102(1) (3,138) (5,543)
-------- -------- ----- ------- -------- --------
Net income $ 6,051 $12,296 $(754) $(3,227) $ 5,297 $ 9,069
======== ======== ===== ======= ======== ========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.493, which represents the average
exchange rate for the period.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-19
<PAGE> 56
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
---------------------------------------------------------------
HISTORICAL PRO FORMA
OTHER
THE ACQUIRED COMBINED
Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL
--------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 801,934 $ 86,198 $ 22,997 $ 1,146 (A) $912,275
Costs and expenses (558,737) (69,938) (20,105) (770)(A) (645,390)
2,878 (B)
3,757 (C)
(47)(D)
(4,407)(E)
2,502 (F)
(291)(G)
(232)(H)
--------- -------- -------- --------- --------
Gross profit 243,197 16,260 2,892 4,536 266,885
General and administrative expenses (35,530) -- -- -- (35,530)
--------- -------- -------- --------- --------
Income from operations 207,667 16,260 2,892 4,536 231,355
Interest expense (53,464) (1,337) (812) (165)(A) (65,064)
(1,679)(B)
731 (I)
(7,278)(J)
8,262 (K)
(12,855)(L)
3,533 (M)
Dividends on convertible preferred stock
of subsidiary -- -- -- (7,031)(N) (7,031)
Other income 7,767 201 -- -- 7,968
--------- -------- -------- --------- --------
Income before income taxes 161,970 15,124 2,080 (11,946) 167,228
Provision for income taxes (65,727) (5,641) (809) 4,207 (O) (67,970)
--------- -------- -------- --------- --------
Net income $ 96,243 $ 9,483 $ 1,271 $ (7,739) $ 99,258
========= ======== ======== ========= ========
Earnings per share:
Primary $1.12 $1.05
===== =====
Fully diluted $1.06 $1.00
===== =====
Primary weighted average number of shares 86,215 272 (P) 94,187
====== ======
7,700 (Q)
Fully diluted weighted average number of
shares 96,386 508 (P) 109,579
====== =======
7,700 (Q)
4,985 (R)
</TABLE>
S-20
<PAGE> 57
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Thousands)
(A) To record the acquisition of 5 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1994. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $3,606, offset in part by
additional costs and expenses of $728 resulting from the effect of applying
purchase accounting adjustments, primarily amortization and depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 4.28%, which represented the weighted average borrowing rate under
the Company's revolving credit facilities and commercial paper for the nine
months ended September 30, 1994. At November 30, 1994, the borrowing rate
under the revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1994. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.33%) plus 20 basis points for the eight months ended August
31, 1994. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 4.28%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and commercial paper
for the nine months ended September 30, 1994.
S-21
<PAGE> 58
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1994. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $710 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the Common Stock
(in the case of the primary and fully diluted weighted average number of
shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1994
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1994.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
HISTORIC AMOUNTS
CONVERTED TO AS REPORTED IN UNAUDITED
US DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $33,714 $52,484 $ -- $ -- $33,714 $52,484
Costs and
expenses (26,682) (40,365) (184)(1) (205)(1) (27,254) (42,684)
(388)(2) (2,114)(2)
Interest expense
and other (731) (405) -- -- (731) (405)
Provision for
income taxes (2,079) (3,689) 60(1) 67(1) (2,019) (3,622)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 4,222 $ 8,025 $ (512) $(2,252) $ 3,710 $ 5,773
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.52, which represents the average
exchange rate for the eight months ended August 31, 1994.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-22
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except average sales prices)
OVERVIEW
The majority of the Company's funeral homes 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 operating
expenses such as service personnel, vehicles, preparation services, clerical
staff and certain building facility costs. The Company has approximately 160
clusters in North America and Australia, which range in size from two operations
to 53 operations. There may be more than one cluster in a given metropolitan
area, depending upon the level and degree of shared costs.
The cluster management approach recognizes that, as the Company adds operations
to a geographic area that contains an existing Company presence, additional
economies of scale through cost sharing will be achieved and the Company will
also be in a better position to serve the population that resides within the
area served by the cluster. Funeral service and cemetery operations primarily
depend upon a long-term development of customer relationships and loyalty. Over
time, these client families may relocate within a cluster area which may justify
the relocation or addition of Company locations. The Company attempts to satisfy
this need for convenient locations by either acquiring existing independent
locations within the Company's cluster areas or constructing satellite funeral
homes (sometimes on Company-owned cemeteries) while still maintaining the
sharing of certain expenses within that cluster of operations.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September 30,
1993
Segment information for the Company's three lines of business are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral $535,140 $436,425 $98,715 22.6%
Cemetery 252,413 205,062 47,351 23.1
Financial services 14,381 11,365 3,016 26.5
---------- ---------- ----------
801,934 652,852 149,082 22.8
Costs and expenses:
Funeral 377,445 309,615 67,830 21.9
Cemetery 173,031 146,554 26,477 18.1
Financial services 8,261 6,695 1,566 23.4
---------- ---------- ----------
558,737 462,864 95,873 20.7
Gross profit and
margin percentage:
Funeral 157,695 29.5% 126,810 29.1% 30,885 24.4
Cemetery 79,382 31.4 58,508 28.5 20,874 35.7
Financial services 6,120 42.6 4,670 41.1 1,450 31.0
---------- ---------- ----------
$243,197 30.3% $189,988 29.1% $53,209 28.0%
========== ========== ==========
</TABLE>
S-23
<PAGE> 60
Funeral
Funeral revenues were generated as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $463,276 $409,726 $53,550 13.1%
New clusters* 50,698 7,977 42,721
---------- ---------- ----------
Total clusters 513,974 417,703 96,271 23.0%
Non-cluster and disposed operations 21,166 18,722 2,444
---------- ---------- ----------
Total funeral revenues $535,140 $436,425 $98,715 22.6%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
The $53,550 increase in revenues at existing clusters was the result of 10,258
or 8.5% more funeral services performed and a $142 or 4.2% higher average sales
price. Included in this increase was $35,661 in revenues from locations acquired
since the beginning of 1993. It is anticipated that the Company's revenue growth
will primarily be generated from acquired operations (added to existing clusters
and the creation of new clusters) as well as higher average sales prices.
During the nine months ended September 30, 1994, the Company sold $173,004 of
prearranged funeral services compared to $114,471 for the same period in 1993.
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 were incurred as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $302,606 $268,815 $33,791 12.6%
New clusters* 36,293 6,042 30,251
---------- ---------- ----------
Total clusters 338,899 274,857 64,042 23.3%
Non-cluster and disposed operations 17,086 15,880 1,206
Administrative overhead 21,460 18,878 2,582
---------- ---------- ----------
Total funeral costs $377,445 $309,615 $67,830 21.9%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Total funeral gross profit margin increased to 29.5% compared to 29.1% recorded
last year. This gross profit margin improvement was achieved despite the large
number of acquisitions, added to both existing and new clusters, which have
occurred since the beginning of 1993. Typically, acquisitions will temporarily
exhibit slightly lower gross profit margins than those experienced at the
Company's existing locations. Acquisitions, since the beginning of 1993,
accounted for $27,270 of the existing cluster cost increase. The improved gross
profit margin for existing clusters reflects the increased revenues discussed
above, without a corresponding percentage increase in costs at other funeral
homes included in existing clusters. Administrative overhead costs related to
funeral operations decreased to 4.0% of revenues in 1994 compared to 4.3% of
revenues in 1993. The current period includes approximately $2,400 of gross
profit (representing approximately one month of activity) from the UK
acquisitions.
S-24
<PAGE> 61
Cemetery
Cemetery revenues were generated as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $231,090 $193,839 $37,251 19.2%
New clusters* 12,703 3,461 9,242
---------- ---------- ----------
Total clusters 243,793 197,300 46,493 23.6%
Non-cluster and disposed operations 8,620 7,762 858
---------- ---------- ----------
Total cemetery revenues $252,413 $205,062 $47,351 23.1%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Revenues for the existing clusters increased primarily due to increased sales of
lots, merchandise and services. Included in the existing cluster increase were
$15,740 in increased revenues from cemeteries acquired since the beginning of
1993.
Cemetery costs were incurred as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ PERCENTAGE
1994 1993 (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $149,302 $127,694 $21,608 16.9%
New clusters* 6,154 1,542 4,612
---------- ---------- ----------
Total clusters 155,456 129,236 26,220 20.3%
Non-cluster and disposed operations 5,890 6,044 (154)
Administrative overhead 11,685 11,274 411
---------- ---------- ----------
Total cemetery costs $173,031 $146,554 $26,477 18.1%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Costs at existing clusters increased $21,608 due to an increase of $10,608 from
cemeteries acquired since the beginning of 1993. Costs from other existing
cluster cemeteries increased $11,000 due to the costs associated with the
increased revenues discussed above. The cemetery gross margin increase of 31.4%
this year compared to 28.5% last year reflects the strong revenue growth as well
as continued cost control, particularly in selling expenses. Administrative
overhead costs have decreased to 4.6% of revenues this year compared to 5.5%
last year.
Financial Services
Financial service revenues and costs have increased as a result of increased
loans outstanding. Improved interest rate spreads have increased the gross
margin percentage to 42.6% this year from 41.1% last year. The average
outstanding loan portfolio during the current year was $241,923 with an average
interest rate spread of 3.48% compared to $209,393 and 3.24%, respectively, last
year.
Other Income and Expenses
General and administrative expenses increased by $7,504 or 26.8%. Of the
increase, $4,274 is attributable to personnel expenses primarily in the form of
incentive compensation and restricted stock costs. Professional fees have
increased $2,380 in the current year primarily from legal costs associated with
the ongoing informal
S-25
<PAGE> 62
investigation of the Company by the Securities and Exchange Commission (the
"Commission"). The remainder of the increase is derived primarily from corporate
transportation and travel costs. As a percentage of revenues, general and
administrative expenses were 4.4% this year compared to 4.3% last year.
Interest expense, which excludes the amount incurred through financial service
operations, increased $9,279 or 21.0% during the current year primarily due to
increased borrowings and higher interest rates incurred under the Company's
existing lines of credit and commercial paper primarily used to fund the
Company's acquisition program. Also contributing to the increase in the current
year was the issuance of $150,000 of 7.875% debentures issued by the Company in
February 1993 and the recognition of $2,160 of interest expense associated with
the recent acquisitions in the UK.
The provision for income taxes has decreased to 40.6% from 41.7% last year
primarily due to the enactment of the Omnibus Budget Reconciliation Act of 1993
(the "Act") in August 1993 which increased corporate tax rates retroactively to
January 1, 1993. The 1993 period includes a $3,200 charge due to the Act.
Year to Year Comparisons -- Change in Accounting Principles
Effective January 1, 1993, the Company changed its method of accounting for
prearranged funeral service contracts and cemetery sales. For a more detailed
discussion of these changes, see Note 2 to the consolidated financial statements
in Item 8 of the Form 10-K for the year ended December 31, 1993 (the "Form
10-K"). The cumulative effect of these changes resulted in an after tax charge
of $2,031 or $.03 per share on January 1, 1993. Generally these changes will
result in reduced funeral revenues and funeral operating income, at least in the
near future, due to the deferral of previously recognized prearranged funeral
service trust fund income until performance of the specific funeral.
Additionally, these changes will generally result in higher cemetery revenues
and cemetery operating income because all cemetery sales and costs are recorded
in current income. See Item 3, Legal Proceedings, in the Form 10-K for
information regarding an informal investigation by the Securities and Exchange
Commission and the Company's Form 8-K dated October 18, 1994.
For purposes of management's discussion and analysis of results of operations
and financial condition, all comparisons to 1992 and 1991 reflect the pro forma
effects of applying the new accounting principles as if the changes had occurred
on December 31, 1990. The following table presents the pro forma results for the
years ended 1992 and 1991:
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
AS UNAUDITED
REPORTED PRO FORMA
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Funeral $603,099 $532,914 $430,565
Cemetery 280,421 217,100 194,434
Financial services 15,658 10,741 14,823
---------- ---------- ----------
899,178 760,755 639,822
Costs and expenses:
Funeral (426,008) (379,223) (307,090)
Cemetery (200,682) (164,188) (149,822)
Financial services (9,168) (6,632) (10,666)
---------- ---------- ----------
(635,858) (550,043) (467,578)
---------- ---------- ----------
Gross profit 263,320 210,712 172,244
General and administrative expenses (43,706) (38,693) (35,448)
Interest expense (59,631) (53,902) (42,429)
Other income 13,509 9,876 8,241
---------- ---------- ----------
Income before income taxes 173,492 127,993 102,608
Income taxes (70,400) (48,500) (33,200)
---------- ---------- ----------
Income before cumulative effect of change in accounting
principles $103,092 $79,493 $69,408
========== ========== ==========
</TABLE>
S-26
<PAGE> 63
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
In 1993, total funeral revenues increased $70,185 or 13.2% over 1992. Funeral
revenues were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $548,771 $497,092 $51,679 10.4%
New clusters** 28,376 2,259 26,117
---------- ---------- ----------
Total clusters 577,147 499,351 77,796 15.6%
Non-cluster and disposed operations 25,952 33,563 (7,611)
---------- ---------- ----------
Total funeral revenues $603,099 $532,914 $70,185 13.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
The $51,679 increase in revenues at existing clusters was the result of 10,193
or 6.9% more funeral services performed and a $111 or 3.3% higher average sales
price. Included in this increase were $29,281 in revenues from locations
acquired during the two year period. Overall, funeral services performed are
expected to grow slowly for the near future and it is expected that the
Company's revenue growth will primarily be generated from acquired operations
(added to existing clusters and the creation of new clusters) as well as higher
average sales prices.
During 1993, the Company sold $159,000 of prearranged funeral services compared
to $119,000 for 1992. These prearranged funeral services are deferred and will
be reflected in funeral revenues in the periods that the funeral services are
performed. An increased emphasis on sales of prearranged funerals is expected to
continue.
Total funeral costs increased $46,785 or 12.3% in 1993. Funeral costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $357,118 $324,893 $32,225 9.9%
New clusters** 21,571 1,755 19,816
---------- ---------- ----------
Total clusters 378,689 326,648 52,041 15.9%
Non-cluster and disposed operations 18,838 27,654 (8,816)
Administrative overhead 28,481 24,921 3,560
---------- ---------- ----------
Total funeral costs $426,008 $379,223 $46,785 12.3%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
Existing cluster funeral costs, expressed as a percentage of revenues, were
65.1%, which was slightly lower than the 65.4% recorded in 1992. This gross
profit margin improvement was achieved despite the large number of acquisitions
which occurred during the two year period. Typically, acquisitions will
temporarily exhibit slightly lower gross profit margins than the Company's
existing locations. These acquisitions accounted for $19,548 of the existing
cluster cost increase. The improved gross profit margin reflects increased
revenues, reduced personnel costs (the largest funeral expense item) and
facility costs at other funeral homes included in existing clusters. As a
percentage of revenues, administrative overhead costs related to funeral
operations remained at 4.7% in both years.
S-27
<PAGE> 64
Total cemetery revenues increased $63,321 or 29.2% over 1992. Cemetery revenues
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $254,343 $202,709 $51,634 25.5%
New clusters** 14,818 946 13,872
---------- ---------- ----------
Total clusters 269,161 203,655 65,506 32.2%
Non-cluster and disposed operations 11,260 13,445 (2,185)
---------- ---------- ----------
Total cemetery revenues $280,421 $217,100 $63,321 29.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
Revenues for the existing clusters increased due to increased at-need and
pre-need sales volumes, higher average at-need and pre-need contract prices and
additional earnings from cemetery perpetual care and merchandise and service
trust funds. Included in the existing cluster increase was $40,059 in increased
revenues from cemeteries acquired during the two year period.
Total cemetery costs increased $36,494 or 22.2% over the prior year. Cemetery
costs were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $167,635 $141,178 $26,457 18.7%
New clusters** 8,414 892 7,522
---------- ---------- ----------
Total clusters 176,049 142,070 33,979 23.9%
Non-cluster and disposed operations 8,038 10,437 (2,399)
Administrative overhead 16,595 11,681 4,914
---------- ---------- ----------
Total cemetery costs $200,682 $164,188 $36,494 22.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
The entire increase in existing cluster costs resulted from increased costs at
cemeteries acquired during the two year period. There was no increase in costs
at other cemeteries included in existing clusters despite the sales increase
discussed above. Cost containment in the areas of selling and maintenance
expenses contributed to the lack of increase. Cemetery costs, expressed as a
percentage of revenues, at existing clusters decreased to 65.9% this year from
69.6% in 1992. The Company believes that the gross margins realized in 1993 are
achievable in the future through continued aggressive sales as well as cost
containment programs. Administrative overhead costs have increased slightly,
when expressed as a percentage of revenues, to 5.9% currently from 5.4% in 1992.
Financial service revenues and costs have increased in 1993 as a result of
increased loans outstanding and improved interest rate spreads. The average
outstanding loan portfolio during 1993 was $215,726 with an average interest
rate spread of 3.3% compared to $143,773 and 2.6%, respectively, in 1992.
Financial services are provided through Provident which is a major source of
funding to independent funeral home and cemetery operators. Unlike a commercial
bank, Provident does not have access to low-cost deposit funds so its net
interest margin is lower because it borrows money at market rates. Additionally,
Provident does not incur as much administrative costs as does a commercial bank.
Through Provident's relationships with these borrowers, the Company derives the
benefit of developing a continuing relationship with these entities. The credit
risk for this type of lending is considered minimal to the Company.
S-28
<PAGE> 65
General and administrative expenses increased by $5,013 or 13.0%. The increase
is primarily attributable to compensation expense in connection with
performance-based vesting of restricted stock grants to Company management.
Vesting is based on a formula primarily tied to earnings per share growth.
Interest expense, which excludes the amount incurred through financial service
operations, increased $5,729 or 10.6% during 1993. In February 1993, the Company
issued $150,000 of 7.875% debentures due in 2013. The proceeds were primarily
used to repay existing credit agreement borrowings. Also in February 1993, the
Company called the $100,000 6.5% convertible debentures originally issued in
1986. Holders of the debentures converted $97,164 into Company common stock at
$17.33 per share (5,607,000 shares) with the remaining $2,836 redeemed in cash.
Additionally, interest expense was reduced by decreased average interest rates
on amounts borrowed under the Company's credit agreements during 1993 compared
to 1992.
Other income includes the recognition of gains from the sale of excess real
estate and existing businesses during both periods.
The provision for income taxes has increased to 40.6% from 37.9% during 1992
primarily due to the enactment of the Omnibus Budget Reconciliation Act of 1993
in August 1993 which increased corporate tax rates retroactively to January 1,
1993. As a result of the new law, the Company's 1993 tax expense increased
$2,431 from increased deferred income taxes and $1,700 from the higher corporate
tax rate on 1993 earnings ($.05 earnings per share).
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
In 1992, total funeral revenues increased $102,349 or 23.8% over 1991. Funeral
revenues were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, PERCENTAGE
1992* 1991* INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $456,617 $390,807 $65,810 16.8%
New clusters** 43,377 11,190 32,187
---------- ---------- ----------
Total clusters 499,994 401,997 97,997 24.4%
Non-cluster and disposed operations 32,920 28,568 4,352
---------- ---------- ----------
Total funeral revenues $532,914 $430,565 $102,349 23.8%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
The $65,810 increase in revenues at existing clusters, which included an
increase of $59,598 from acquired operations, was the result of 13,857 or 11.4%
more funeral services performed and a $157 or 4.9% higher average sales price.
Total funeral costs increased $72,133 or 23.5% in 1992. Funeral costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, PERCENTAGE
1992* 1991* INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $292,331 $254,186 $38,145 15.0%
New clusters** 34,972 9,063 25,909
---------- ---------- ----------
Total clusters 327,303 263,249 64,054 24.3%
Non-cluster and disposed operations 26,999 26,032 967
Administrative overhead 24,921 17,809 7,112
---------- ---------- ----------
Total funeral costs $379,223 $307,090 $72,133 23.5%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
S-29
<PAGE> 66
All of the increase in costs at existing clusters was the result of funeral
homes acquired during the two year period. For other funeral homes included in
existing clusters, personnel costs increased primarily as the result of higher
benefit costs. This was offset by decreased merchandise costs, reflecting more
effective purchasing arrangements with vendors and an additional year-end
discount from the revision of a merchandise purchasing contract with one vendor.
Discounts should continue through 1993 based on the provisions of the revised
contract as well as with agreements with other vendors. Facility costs also
declined when compared to 1991.
Total cemetery revenues increased $22,666 or 11.7% over 1991. Cemetery revenues
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1992* 1991* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $186,051 $171,273 $14,778 8.6%
New clusters** 13,823 5,308 8,515
---------- ---------- ----------
Total clusters 199,874 176,581 23,293 13.2%
Non-cluster and disposed operations 17,226 17,853 (627)
---------- ---------- ----------
Total cemetery revenues $217,100 $194,434 $22,666 11.7%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
Revenues at existing clusters, which include an increase of $11,937 from
acquired operations, increased a total of $14,778 or 8.6% due to increased
at-need sales, higher average at-need and pre-need contract prices partially
offset by a slight decline in the number of pre-need contracts sold.
Total cemetery costs increased $14,366 or 9.6% over 1991. Cemetery costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1992* 1991* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $127,626 $116,711 $10,915 9.4%
New clusters** 10,502 4,618 5,884
---------- ---------- ----------
Total clusters 138,128 121,329 16,799 13.8%
Non-cluster and disposed operations 14,379 13,315 1,064
Administrative overhead 11,681 15,178 (3,497)
---------- ---------- ----------
Total cemetery costs $164,188 $149,822 $14,366 9.6%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
Costs at existing clusters, which include an increase of $9,667 from acquired
operations, increased a total of $10,915 or 9.4%. Merchandise and repair and
maintenance expenses increased at other cemeteries included in existing
clusters. Cemetery overhead costs declined in 1992 due to the closing of the San
Diego administrative office in late 1991. These costs were either eliminated or
transferred to general and administrative expense at the Houston corporate
offices.
Financial service revenues and costs decreased during 1992 as a result of a
decrease in the average outstanding loan portfolio and borrowed amounts for
Provident in 1992. Gross profit remained level for both years. For the year
1992, Provident's outstanding loan portfolio averaged $143,773 with an average
interest rate spread of 2.6% compared to $148,652 and 2.4%, respectively, in
1991.
General and administrative expenses increased in 1992 by $3,245 or 9.2%.
Personnel costs, including the cost of restricted stock grants and other
employee benefit accruals, increased $2,141. The remainder of the increase
S-30
<PAGE> 67
resulted primarily from higher facility and administrative costs. A portion of
the additional costs resulted from the relocation of cemetery administrative
offices from San Diego to Houston.
Interest expense, which excludes the amount incurred through financial service
operations, increased $11,473 or 27.0% during 1992. In October 1991, the Company
issued $172,500 of 6.5% convertible debentures due in 2001. Also contributing to
the increase was the interest on debt assumed and not refinanced from various
1991 acquisitions. Lower interest rates in 1992 helped to offset increases in
interest expense from increased average amounts borrowed under the Company's
credit agreements.
Other income increased during 1992 due primarily to the recognition of two gains
in 1992. One resulted from the collection of a note receivable that had
previously been written off, and the other from the sale of an equity
investment. Partially offsetting the increase was less income on corporate
investments. Both years include pretax gains associated with the disposition of
certain excess funeral and cemetery real property.
During the third quarter of 1991, certain Internal Revenue Service audits of the
Company were settled and resulted in the recognition of $4,800 or $.07 per share
of income tax benefits.
FINANCIAL CONDITION AT SEPTEMBER 30, 1994
In connection with the Company's acquisitions of GSG and PG, a subsidiary of the
Company has obtained from separate lenders a UK pound sterling 185,000 loan
facility and a UK pound sterling 100,000 line of credit, both with interest
calculated at a rate equal to UK pound sterling LIBOR plus 20 basis points. The
Company has guaranteed the UK Facilities. The acquisitions of GSG and PG are
being financed on an interim basis principally with borrowings under the UK
Facilities. The Company has borrowed U.S. $312,462 at September 30, 1994 under
the UK Facilities.
At October 31, 1994, the Company had available approximately $271,500 of
borrowing capacity under its various existing lines of credit (including amounts
available under the UK Facilities). In addition to the sources of cash from
operations and credit lines, the Company has 12,149,000 shares of Common Stock,
$70,227 of guarantees of promissory notes and $74,382 of convertible debentures
registered with the Commission to be used exclusively for future acquisitions.
Included in accounts payable and accrued liabilities at September 30, 1994 is
approximately $97,000 representing the estimated future cost of purchasing the
remaining outstanding shares of GSG and PG.
HEDGING TRANSACTIONS
The Company has entered into hedging transactions to reduce its exposure to
adverse fluctuations in interest and foreign exchange rates. While the hedging
transactions are subject to risk of loss from changes in interest rates and
exchange rates, these losses would generally be offset by gains on the exposures
being hedged. The Company has realized U.S. $1,093 of losses on contracts
entered into as hedge transactions since the beginning of 1993. These realized
losses were deferred and are being amortized into income over the remaining
lives of the original transactions.
At September 30, 1994, the Company had outstanding foreign currency and interest
rate swaps in the notional amounts of Australian dollar $142,715 and U.S.
$75,000. As of September 30, 1994, net unrealized losses before taxes from these
hedging agreements were estimated to be U.S. $7,000 (which is the estimated cost
to terminate these hedging agreements). In the opinion of management, such
losses were offset by the increased value of the exposures being hedged.
The Company anticipates entering into a planned cross currency hedging
transaction effectively converting $272,500 of U.S. fixed rate indebtedness into
floating rate UK pound sterling indebtedness, raising the Company's total UK
pound sterling exposure to U.S. $472,500, which is comparable to the size of the
acquisitions of GSG and PG. If such transaction is consummated, the Company
would receive fixed rate interest on U.S. $272,500 and pay UK pound sterling
LIBOR, plus some level of add-on basis points, on U.S. $272,500.
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<PAGE> 68
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal income
and estate tax consequences of the ownership and disposition of the Common Stock
by non-United States holders, but does not purport to be a complete analysis of
all the potential tax considerations relating thereto.
As used herein, "non-United States holder" means a corporation, individual or
partnership that is, as to the United States, a foreign corporation, a
non-resident alien individual or a foreign partnership, and it means any estate
or trust which is not subject to United States taxation on income from sources
without the United States that is not effectively connected with the conduct of
a trade or business within the United States.
This discussion is based upon the Code, Treasury Regulations, United States
Internal Revenue Service ("IRS") rulings and judicial decisions now in effect,
all of which are subject to change (possibly with retroactive effect) or
different interpretations. This discussion does not purport to deal with all
aspects of federal income and estate taxation that may be relevant to a
particular non-United States holder's decision to purchase the Common Stock.
ALL PROSPECTIVE NON-UNITED STATES PURCHASERS OF THE COMMON STOCK ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL
AND NON-UNITED STATES TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE COMMON STOCK.
DIVIDENDS
Dividends paid to a non-United States holder of the Common Stock will be subject
to withholding of United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. (Under currently
effective Treasury Regulations, dividends paid to an address in a foreign
country are presumed to be paid to a resident of such country in determining the
applicability of a treaty for such purposes. Proposed Treasury Regulations, if
finally adopted, would require a non-United States holder to file certain forms
to obtain the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends. Such forms would contain the holder's name and
address and an official statement by the competent authority in the foreign
country (as designated in the applicable tax treaty) attesting to the holder's
status as a resident thereof.) However, except as may be otherwise provided in
an applicable income tax treaty, a non-United States holder will be taxed at
ordinary federal income tax rates (on a net income basis) on dividends that are
effectively connected with the conduct of a trade or business of such non-United
States holder within the United States and will not be subject to the
withholding tax described above. If such non-United States holder is a foreign
corporation, it may also be subject to a United States branch profits tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
A non-United States holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
DISPOSITION OF STOCK
Non-United States holders generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of the Common Stock
unless (i) the gain is effectively connected with a trade or business conducted
by the non-United States holder within the United States (in which case the
branch profits tax described under "Dividends" above may also apply if the
holder is a foreign corporation), (ii) in the case of a non-United States holder
who is a non-resident alien individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the disposition and certain other conditions are met, (iii) the
non-United States holder is subject to tax pursuant to the provisions of the
United States federal tax law applicable to certain United States expatriates or
(iv) the Company is or has been a "United States real property holding
corporation" for federal income tax purposes and, in the event
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<PAGE> 69
that the Common Stock is considered "regularly traded," the non-United States
holder held directly or indirectly at any time during the five-year period
ending on the date of disposition more than five percent of the Common Stock.
Generally, this last rule for stock in United States real property holding
corporations takes precedence over relief provided by tax treaties.
FEDERAL ESTATE TAXES
Common Stock that is owned or treated as being owned at the time of death by a
non-United States holder who is a non-resident alien individual will be included
in such holder's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Generally, dividends paid to non-United States holders outside the United States
that are subject to the 30% or treaty-reduced rate of withholding tax will be
exempt from backup withholding tax. As a general matter, information reporting
and backup withholding will not apply to a payment by a foreign office of a
foreign broker of the proceeds of a sale of Common Stock effected outside the
United States. However, information reporting requirements (but not backup
withholding) will apply to a payment by a foreign office of a broker of the
proceeds of a sale of Common Stock effected outside the United States where that
broker (i) is a United States person, (ii) is a foreign person that derives 50%
or more of its gross income for certain periods from the conduct of a trade or
business in the United States or (iii) is a "controlled foreign corporation" as
defined in the Code (generally, a foreign corporation controlled by United
States shareholders), unless the broker has documentary evidence in its records
that the holder is a non-United States holder and certain conditions are met or
the holder otherwise establishes an exemption. Payment by a United States office
of a broker of the proceeds of a sale of Common Stock is subject to both backup
withholding (generally at a rate of 31%) and information reporting unless the
holder certifies to the payor in the manner required as to its non-United States
status under penalties of perjury or otherwise establishes an exemption.
A non-United States holder may obtain a refund of any amounts withheld under the
backup withholding rules by filing an appropriate claim for refund with the IRS.
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<PAGE> 70
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below have severally agreed to purchase, and the Company has agreed to
sell to them, severally, the respective number of shares of Common Stock set
forth opposite their names below:
<TABLE>
<CAPTION>
----------
NUMBER OF
SHARES
----------
<S> <C>
U.S. UNDERWRITERS:
J.P. Morgan Securities Inc. 1,100,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 1,100,000
CS First Boston Corporation 1,100,000
Dean Witter Reynolds Inc. 650,000
The Chicago Corporation 180,000
Raymond James & Associates, Inc. 180,000
William Blair & Company 180,000
A.G. Edwards & Sons, Inc. 180,000
Kidder, Peabody & Co. Incorporated 180,000
Legg Mason Wood Walker, Incorporated 180,000
Montgomery Securities 180,000
Williams Mackay Jordan & Co., Inc. 180,000
----------
Subtotal 5,390,000
----------
INTERNATIONAL MANAGERS:
J.P. Morgan Securities Ltd. 805,000
Merrill Lynch International Limited 805,000
Cazenove & Co. 350,000
ABN AMRO Bank N.V. 50,000
BNP Capital Markets Limited 50,000
Commerzbank Aktiengesellschaft 50,000
Credit Lyonnais Securities 50,000
J. Henry Schroder Wagg & Co. Limited 50,000
Societe Generale 50,000
UBS Limited 50,000
----------
Subtotal 2,310,000
----------
Total 7,700,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken. The
closing of the United States Offering is a condition to the closing of the
International Offering, and the closing of the International Offering is a
condition to the closing of the United States Offering.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, each U.S. Underwriter has represented and agreed that, with certain
exceptions set forth below, (a) it is not purchasing any shares of Common Stock
being sold by it (the "U.S. Shares") for the account of anyone other than a
United States or Canadian Person and (b) it has not offered or sold, and will
not offer or sell, directly or indirectly, any U.S. Shares or distribute any
prospectus relating to the U.S. Shares outside the United States or Canada or to
anyone other than a United States or Canadian Person. Pursuant to the Agreement
Between U.S. and International
S-34
<PAGE> 71
Underwriting Syndicates, each International Manager has represented and agreed
that, with certain exceptions set forth below, (a) it is not purchasing any
shares of Common Stock being sold by it (the "International Shares") for the
account of any United States or Canadian Person and (b) it has not offered or
sold, and will not offer or sell, directly or indirectly, any International
Shares or distribute any prospectus relating to the International Shares within
the United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriting Syndicates. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, sales may be made between the U.S. Underwriters and the
International Managers of any number of shares of Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per share
price and currency of settlement of any shares of Common Stock so sold shall be
the per share public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, each U.S. Underwriter has represented that it has not offered or
sold, and agreed not to offer or sell, any shares of Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of shares of
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in which
such offer is made. Each U.S. Underwriter has further agreed to send to any
dealer who purchases from it any shares of Common Stock a notice stating in
substance that, by purchasing such shares of Common Stock, such dealer
represents and agrees that it has not offered or sold, and will not offer or
sell, directly or indirectly, any of such shares of Common Stock in Canada or
to, or for the benefit of, any resident of Canada in contravention of the
securities laws of Canada or any province or territory thereof and that any
offer of shares of Common Stock in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province of Canada in
which such offer is made, and that such dealer will deliver to any other dealer
to whom it sells any such shares of Common Stock a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement Between U.S. and International Underwriting
Syndicates, each International Manager has represented and agreed that (i) it
has not offered or sold and will not offer or sell in the United Kingdom, by
means of any document, any shares of Common Stock, other than to a person whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent, or in circumstances which do not constitute an offer to the
public within the meaning of the Companies Act of 1985, (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom, and (iii) it has only issued
or passed on and will only issue or pass on to any person in the United Kingdom
any document received by it in connection with the sale of the shares of Common
Stock if that person is of a kind described in Article 9(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a
person to whom the document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement and in part to certain dealers at such price less
a concession not in excess of $.48 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain other dealers. After the initial public offering of the Common Stock
offered hereby, the public offering price and such concessions may be changed.
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this Prospectus
Supplement, to purchase up to an additional 1,155,000
S-35
<PAGE> 72
shares of Common Stock at the public offering price set forth on the cover page
hereof less the underwriting discount. The U.S. Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Common Stock offered hereby.
To the extent such option is exercised, each U.S. Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such U.S. Underwriter's name in the preceding table bears to the total
number of shares of Common Stock offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
federal securities laws, or to contribute to payments which the Underwriters may
be required to make in respect thereof.
J.P. Morgan Securities Inc. ("JPMS") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are acting as the underwriters in connection with
the TECONS Offering, for which they will receive customary underwriting
compensation. In addition, JPMS, Merrill Lynch, CS First Boston Corporation
("First Boston") and Dean Witter Reynolds Inc. will act as the underwriters in
connection with the Senior Notes Offering, for which they will receive customary
underwriting compensation. As of October 5, 1994, JPMS and certain of its
affiliates beneficially owned (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) approximately 12.09% of the outstanding Common
Stock, such figure representing beneficial ownership in both a fiduciary
capacity on behalf of third parties and for their own accounts. As of such date,
JPMS and such affiliates owned the economic interest in less than 1.00% of the
outstanding Common Stock. JPMS and its affiliates, Merrill Lynch, First Boston
and Cazenove & Co. from time to time provide commercial banking and/or
investment banking services to the Company for which they receive customary fees
and expense reimbursement.
Upon application of the net proceeds of the Offering made hereby as described
under "Use of Proceeds," an affiliate of JPMS may receive in excess of 10% of
the net proceeds of the Offering. Pursuant to paragraph 8 of Article III,
Section 44 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), such receipt by an affiliate of JPMS of
such proceeds requires that the Offering be made in compliance with certain of
the requirements of Schedule E ("Schedule E") to the Bylaws of the NASD. In this
regard, the Offering is being made pursuant to the provisions of such paragraph
8. Pursuant thereto, the Offering will comply with Section 3(c) of Schedule E.
The Company and each of its executive officers have agreed not to effect any
offer, sale or other disposition of any shares of Common Stock or any securities
convertible into or exchangeable for any shares of Common Stock (except, in the
case of the Company, for the shares of Common Stock offered hereby, the issuance
of shares of Common Stock upon conversion of the TECONS and upon conversion of
the Company's presently outstanding convertible securities and pursuant to the
Company's existing employee benefit plans as in effect on the date hereof and,
subject to certain limitations, in connection with acquisitions) for a period of
90 days after the date of this Prospectus Supplement, without the prior consent
of JPMS.
S-36
<PAGE> 73
Filed Pursuant to Rule 424(b)(5)
Registration Nos. 033-56069; 033-56069-01
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 1, 1994)
SERVICE CORPORATION INTERNATIONAL
$200,000,000
8 3/8% Notes due December 15, 2004
Interest payable June 15 and December 15
ISSUE PRICE: 99.247%
Interest on the Notes of Service Corporation International ("SCI" or the
"Company") offered hereby is payable semiannually on June 15 and December 15 of
each year, commencing June 15, 1995. The Notes are not redeemable prior to
maturity and will not be subject to any sinking fund. The Notes will be
represented by one or more global securities registered in the name of a nominee
of The Depository Trust Company, as Depositary (the "Depositary"). Beneficial
interests in the Notes will be shown on, and transfers thereof will be effected
only through, records maintained by the Depositary and its participants. Except
as described herein, Notes will not be issued in definitive form. See
"Description of Notes."
SEE "CERTAIN INVESTMENT CONSIDERATIONS" FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------------------------------
Per Note 99.247% .650% 98.597%
- --------------------------------------------------------------------------------------------------------
Total $198,494,000 $1,300,000 $197,194,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from December 13, 1994.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $436,000.
The Notes offered by this Prospectus Supplement are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters, and certain other conditions. It
is expected that delivery of the Notes will be made on or about December 13,
1994 through the facilities of the Depositary, against payment therefor in next
day funds.
J.P. MORGAN SECURITIES INC.
CS FIRST BOSTON
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
December 6, 1994
<PAGE> 74
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person is authorized to give any information or to make any representations
not contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any Underwriter. Neither this Prospectus Supplement nor the accompanying
Prospectus constitutes an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Company........................................................................... S-3
Recent Developments................................................................... S-8
Use of Proceeds....................................................................... S-9
Concurrent Offerings.................................................................. S-9
Ratio of Earnings to Fixed Charges.................................................... S-9
Capitalization........................................................................ S-10
Selected Financial Information........................................................ S-11
Unaudited Pro Forma Combined Financial Information.................................... S-12
Description of Notes.................................................................. S-19
Underwriting.......................................................................... S-21
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................................................................. 3
Incorporation of Certain Documents by Reference....................................... 4
The Company........................................................................... 5
SCI Finance........................................................................... 5
Certain Investment Considerations..................................................... 6
Use of Proceeds....................................................................... 6
Description of Debt Securities........................................................ 7
Description of Preferred Stock........................................................ 22
Description of Common Stock Warrants.................................................. 25
Description of the LLC Preferred Securities........................................... 28
Certain Federal Income Tax Considerations Regarding the LLC Preferred Securities...... 45
Plan of Distribution.................................................................. 49
Legal Matters......................................................................... 50
Experts............................................................................... 50
</TABLE>
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<PAGE> 75
THE COMPANY
SCI is the largest provider of death care services and products in the world.
Giving effect to the recent acquisitions of Great Southern Group plc ("Great
Southern" or "GSG") and Plantsbrook Group plc ("Plantsbrook" or "PG"), as of
September 30, 1994, SCI owned and operated 1,431 funeral homes, 213 cemeteries
(including 92 funeral home and cemetery combinations) and 99 crematoria located
in 40 U.S. states, the District of Columbia, Australia, Canada and the United
Kingdom. See "--International Expansion and Recent Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident, provides
financing to independent funeral home and cemetery operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and funeral
home/cemetery combinations in areas with demographics that SCI believes to
be favorable
- Increase the operating margins of its existing and acquired facilities by
having such facilities share resources pursuant to SCI's cluster strategy
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
FUNERAL SERVICE OPERATIONS
The funeral service operations consist of SCI's funeral homes, cemeteries and
related businesses. The operation is organized into six domestic regions and
three foreign regions (Australia, Canada and the United Kingdom), each of which
is under the direction of a regional president with substantial industry
experience. Canadian operations are carried out by a public company which is
approximately 70% owned by SCI. Local funeral home and cemetery managers, under
the direction of the regional presidents, 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.
Death Care Industry
The funeral industry is characterized by a large number of locally-owned,
independent operations. SCI believes that there are in excess of 22,000, 500,
1,200 and 4,000 funeral homes operating in the United States, Australia, Canada
and the United Kingdom, respectively. In order to compete successfully, SCI's
funeral homes must maintain competitive prices, attractive, well-maintained and
conveniently located facilities, a good reputation and high professional
standards. Heritage and tradition can provide an established funeral home or
cemetery with the opportunity for repeat business from client families.
Furthermore, an established firm can generate future volume and revenues by
successfully marketing prearranged, pre-funded funeral services.
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<PAGE> 76
The cemetery industry is also characterized by a large number of locally-owned
independent operations. SCI's cemetery properties compete with other cemeteries
in the same general area. In order to compete successfully, SCI's cemeteries
must maintain competitive prices, attractive and well-maintained properties, a
good reputation, an effective sales force and high professional standards.
The Company and the two other largest North American death care companies
control in the aggregate approximately seven percent of the funeral homes and
approximately four percent of the commercial cemeteries in North America. Based
upon industry estimates, these three companies represented less than 15% of
total 1993 death care industry revenues.
Cluster Strategy
The majority of SCI's funeral homes 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. The cluster strategy recognizes that, as SCI adds operations to
a geographic area in which SCI already operates, it will achieve additional
operating efficiencies through cost-sharing. SCI has successfully implemented
the cluster strategy in its North American and Australian operations and intends
to implement the strategy in the United Kingdom. As of September 30, 1994, SCI
operated approximately 160 clusters in North America and Australia, which range
in size from two operations to 53 operations.
Pre-need Services
SCI is actively engaged in the marketing of prearranged funeral services. The
funds collected from prearranged funeral contracts are generally held in trust
or are used to purchase life insurance or annuity contracts. The principal
amount of a prearranged funeral contract will be received in cash by an SCI
funeral home and recorded as revenue by SCI at the time the funeral is
performed. Earnings on trust funds and increasing benefits under
insurance-funded contracts increase the amount of cash to be received and the
revenue to be recognized at the time the service is performed and historically
have allowed the Company to more than cover increases in the costs of providing
funeral services. At September 30, 1994, SCI's unfulfilled prearranged funeral
contracts amounted to approximately $1.4 billion. SCI's historical cancellation
rate for all prearranged funeral contracts approximates ten percent, for which a
reserve has been established.
Cemetery sales are often made pursuant to installment contracts providing for
monthly payments. The principal amount of these installment contracts is
recognized as revenue by SCI at the time of sale, net of an approximate eight
percent cancellation reserve that is based on historical results. A portion of
the proceeds from cemetery sales is generally required by law to be paid into
perpetual care trust funds. Earnings on perpetual care trust funds are used to
defray the maintenance cost of cemeteries. In addition, a portion of the
proceeds from the pre-need sale of cemetery merchandise may be required by law
to be paid into trust.
Financial Services
In 1988, SCI formed Provident to provide capital 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.
Provident had $243 million in loans outstanding at September 30, 1994. To date,
the amount and number of problem loans have been insignificant. Provident
obtains its funds primarily from SCI bank and commercial paper 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 industry
loans, thereby providing Provident with a competitive advantage in making such
loans.
S-4
<PAGE> 77
Regulation
In April 1984, the U.S. Federal Trade Commission (the "FTC") comprehensive trade
regulation rule for the funeral industry became fully effective. 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. A pre-existing consent order between SCI and the FTC
applicable to certain funeral practices of SCI was amended in 1984 to make the
substantive provisions of the consent order consistent with the funeral trade
regulation rule. From time to time in connection with acquisitions, SCI has
entered into consent orders with the FTC which have required SCI to dispose of
certain operations in order to proceed with the acquisitions and/or have limited
SCI's ability to make acquisitions in specified areas. The trade regulation rule
and the various consent orders have not had a material adverse effect on SCI's
operations.
ACQUISITION STRATEGY
Over the past several years, SCI has made a significant number of acquisitions.
SCI anticipates that it will continue to aggressively pursue acquisition
opportunities, as acquisitions form a critical part of SCI's growth strategy.
SCI will continue to seek acquisitions in geographic areas in which it presently
operates to expand established clusters, as well as acquisitions in new
geographic areas, including those outside North America, to develop new clusters
and to increase volume and revenue. To date SCI has been able to increase the
profitability of its acquired properties by absorbing a significant portion of
their costs, such as transportation and embalming, into SCI's clusters, and by
applying SCI's merchandising programs to the new operations. In addition,
acquisitions increase SCI's ability to benefit from the centralization of
systems, insurance and other financial services. SCI also believes that because
of its size it has been able to negotiate favorable supply arrangements with
volume discounts on supplies, including caskets, and that the terms of such
supply arrangements have enabled it to increase the profitability of its
acquired properties. There can be no assurance that SCI will continue to
successfully absorb future acquisitions, domestic or international, or realize
such cost savings.
SCI typically retains former owners and key managers of acquired businesses in
an effort to assure that service quality is maintained and that the business's
reputation, heritage and local relationships remain intact. Acquired funeral
homes and cemeteries retain their original trade names in substantially all
cases.
In evaluating specific properties for acquisition, SCI considers a number of
factors including demographics, location, reputation, heritage, physical size,
volume of business, profitability, available inventory, name recognition,
aesthetics, potential for development or expansion, competitive position,
pricing structure and quality of operating management. SCI follows a disciplined
approach based on specific financial criteria for determining acquisition prices
and intends to continue an active acquisition program in the future. There can
be no assurance that acquisition prospects will continue to be available in
attractive locations at prices acceptable to SCI.
INTERNATIONAL EXPANSION AND RECENT ACQUISITIONS
Based on its experience in applying its cluster strategy in the North American
market, SCI has targeted several foreign countries that it believes offer
similar opportunities. Effective July 1, 1993, SCI acquired Pine Grove Funeral
Group ("Pine Grove"), Australia's largest funeral and cremation services
provider, for approximately U.S.$70 million. This was SCI's first acquisition
outside of North America. Pine Grove's operations at year-end 1993 consisted of
60 funeral homes and eight cemetery/crematorium facilities located in
Australia's five major population centers of Adelaide, Brisbane, Melbourne,
Perth and Sydney. During its six months of operation in 1993 as an SCI company,
Pine Grove reported revenues of approximately U.S.$17 million. In March 1994,
SCI continued its Australian expansion by acquiring LePine Holdings Proprietary
Limited ("LePine"), a firm with over 100 years of funeral service history. The
LePine acquisition added 20 additional funeral homes in Melbourne with 1993
revenues of approximately U.S.$12 million.
In June 1994, SCI announced an unsolicited offer to acquire 100% of the
outstanding shares of Great Southern, which is among the leading funeral and
cremation services companies in the United Kingdom. Great Southern owns and
operates 157 funeral homes, 13 crematoria and two cemeteries in the United
Kingdom, primarily
S-5
<PAGE> 78
south of London. As of September 30, 1994, SCI owned, or had commitments to
acquire, in excess of 98% of Great Southern's voting shares. It is anticipated
that SCI will acquire the balance of the equity interests in Great Southern in
the coming months. The total purchase price for Great Southern is approximately
U.S.$192.8 million, including the assumption of approximately U.S.$14.8 million
of Great Southern debt. Great Southern reported revenues of approximately
U.S.$48.9 million for the year ended December 31, 1993. See "Unaudited Pro Forma
Combined Financial Information."
In September 1994, SCI announced its offer to acquire 100% of the outstanding
shares of Plantsbrook, which is the largest public funeral company in the United
Kingdom. Plantsbrook owns and operates 380 funeral homes in the United Kingdom,
primarily north of London. As of September 30, 1994, SCI owned, or had
commitments to acquire, in excess of 95% of Plantsbrook's voting shares. It is
anticipated that SCI will acquire the balance of the equity interests in
Plantsbrook in the coming months. The total purchase price for Plantsbrook is
approximately U.S.$312.7 million, including the assumption of approximately
U.S.$13.9 million of Plantsbrook debt. Plantsbrook reported revenues of
approximately U.S.$77.7 million for the year ended December 31, 1993. See
"Unaudited Pro Forma Combined Financial Information." Great Southern and
Plantsbrook together accounted for approximately 15% of the total funerals
performed in the United Kingdom during 1993.
In the context of its international expansion, SCI believes that it can
favorably manage its worldwide effective tax rate by taking advantage of lower
tax rates and other foreign jurisdictional tax structuring opportunities. SCI
has implemented and intends to continue to explore the implementation of various
strategies to take advantage of such opportunities. There can be no assurance
that the implementation of such strategies will actually result in a reduction
of SCI's worldwide effective tax rate.
INDUSTRY TRENDS
Stability
Death rates have been fairly predictable, thereby lending stability to the death
care industry. For example, since 1980, the number of deaths in the United
States has increased at a compound rate of approximately one percent per year.
According to a 1993 report prepared by the U.S. Department of Commerce, Bureau
of the Census, the number of deaths in the United States is expected to increase
by approximately one percent per year between 1993 and 2000 and by 0.9% per year
from 2000 to 2020. Because the industry is relatively stable, non-cyclical and
fairly predictable, business failures are uncommon. As a result, ownership of
funeral home and cemetery businesses has traditionally passed from generation to
generation within a family. The death rate tends to be somewhat higher in the
winter months and funeral and cemetery operations generally experience a higher
volume of business during these months.
Consolidation
In recent years, the pace of acquisition activity in the death care industry has
increased. From the standpoint of individual owners, this appears to result
principally from family succession issues, a desire for liquidity and increasing
tax and estate planning complexities. From the standpoint of the large death
care providers, interest in acquisitions is driven by the benefits anticipated
to be derived from potential operating efficiencies, improved managerial control
and more effective strategic and financial planning. In recent years, several
large death care companies have expanded their operations significantly through
acquisitions. The increased interest in acquisitions of funeral homes and
cemeteries provides a source of potential liquidity that has not been readily
available to individual owners in the past.
Clustered Operations
During the last several years, larger death care companies have increasingly
begun to cluster their funeral home and cemetery operations. Clusters refer to
funeral homes and/or cemeteries that are grouped together in a geographic area.
Clusters provide cost savings to funeral homes and cemeteries through the
sharing of personnel, vehicles and other resources. In addition, the inclusion
of funeral homes and cemeteries in the same cluster
S-6
<PAGE> 79
provides opportunities for a company to cross-sell the full range of death care
services without corresponding increases in incremental overhead expenses.
Combined Operations
Combined operations, referring to funeral home and cemetery operations conducted
on a single site, have become increasingly popular as they provide cost savings
through shared resources and cross-selling opportunities. The ability to offer
the full range of products and services at one location tends to increase the
sales volume and revenues of both the funeral home and cemetery.
Pre-need Marketing
An increasing number of death care products and services are being sold prior to
the time of death (i.e., on a "pre-need" basis). SCI believes that consumers are
becoming more aware of the benefits of advanced planning, such as the financial
assurance and peace of mind achieved by establishing in advance a fixed price
and type of service, and the elimination of the emotional strain on family
members of making death care plans at the time of need.
Cremation
In recent years there has been steady, gradual growth in the number of families
in the United States that have chosen cremation as an alternative to traditional
methods of disposal. According to industry studies, cremations accounted for
approximately 20% of all dispositions of human remains in the United States in
1993. SCI's domestic operations perform substantially more cremations than the
national average. In 1993, just under 29% of all families served by SCI's North
American funeral homes selected the cremation alternative. SCI has a significant
number of operating locations in Florida and all along 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% to 70% of all dispositions of human remains in Australia and in the United
Kingdom.
S-7
<PAGE> 80
RECENT DEVELOPMENTS
The Company is considering the desirability and feasibility of an acquisition of
Pompes Funebres Generales S.A. ("PFG"), which operates approximately 150 funeral
homes or similar facilities and 750 other retail outlets in France and is the
largest operator of funeral homes in France. Although the Company has had, and
intends to continue, exploratory discussions with Lyonnaise des Eaux-Dumez S.A.
("Lyonnaise"), which controls approximately 66% of the stock of PFG, in regard
to various potential transactions Lyonnaise has advised the Company that it has
no intention of selling its interest in PFG. The balance of the stock of PFG is
publicly traded, and the current total market capitalization of PFG is
approximately U.S. $185 million. For the year ended December 31, 1993, PFG
reported revenues of approximately U.S. $565 million and net income of
approximately U.S. $20 million. Subsequent to December 31, 1993, PFG sold its
46% interest in Plantsbrook to the Company. The results for PFG disclosed above
include all of the revenues of Plantsbrook during such period, and PFG's 46%
interest in Plantsbrook's net income. For the year ended December 31, 1993,
Plantsbrook reported revenues of approximately U.S. $77.7 million and net income
of approximately U.S. $12.3 million. The operating margins of the funeral
business in France historically have been substantially lower than the operating
margins in the funeral business in North America and in the United Kingdom. The
Company has retained an affiliate of J.P. Morgan Securities Inc. to assist it in
its evaluation of PFG. Particularly in light of the statement by Lyonnaise that
it has no intention of selling its interest in PFG, there can be no assurance
that any transaction involving the Company and PFG will ultimately occur or as
to the terms of any such transaction.
In October 1994, the Company announced that it had acquired approximately 8.5%
of the Class A Voting Shares and approximately 19.9% of the Class B Non-Voting
Shares of Arbor Memorial Services Inc. ("Arbor"). Arbor owns 44 cemeteries and
21 crematoria in Canada. The Company, which acquired its position in Arbor as a
strategic investment, is continuing to consider means to build its relationship
with Arbor and may continue to increase its investment in Arbor. Subsequent to
the announcement by the Company of its position in Arbor, the Company was
advised by the Arbor stockholder who owns a majority of the Class A Voting
Shares that he is not interested at this time in a transaction involving a sale
of control of Arbor. For the year ended October 31, 1993, Arbor reported
revenues of approximately U.S. $78.1 million and net income of approximately
U.S. $4.5 million.
The financial data contained herein with respect to PFG, Plantsbrook and Arbor
is derived from such companies' publicly available information. Such data was
not prepared in conformity with United States generally accepted accounting
principles, and the Company makes no representation with respect to the accuracy
of such data or the comparability of such data to financial data of the Company
or other U.S. companies in the death care industry.
S-8
<PAGE> 81
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby are estimated to be
$196.8 million. The Company will use such proceeds to reduce amounts outstanding
under the Company's existing revolving credit facilities (the "Revolving Credit
Facilities") or to retire commercial paper backed by such facilities or both. As
of November 30, 1994, approximately $285 million was outstanding under the
Revolving Credit Facilities at a weighted average annual interest rate of 5.6%
with maturities ranging from seven to 16 days, and approximately $272 million of
commercial paper was outstanding backed by such facilities at a weighted average
annual interest rate of 5.7% with maturities ranging from one to 90 days. The
Company's borrowings under the Revolving Credit Facilities and the proceeds from
the sale of its commercial paper are used primarily to fund the Company's
acquisition program and to provide financing to Provident.
CONCURRENT OFFERINGS
Concurrently with the offering made hereby, the Company is offering (the "Common
Stock Offering") an aggregate of 7,700,000 shares of Common Stock, $1 par value
(the "SCI Common Stock") (excluding 1,155,000 shares subject to an underwriters'
over-allotment option) and SCI Finance LLC, a subsidiary of the Company, is
offering (the "TECONS Offering") an aggregate of 3,000,000 $3.125 Term
Convertible Shares, Series A (excluding 450,000 TECONS subject to an
underwriters' over-allotment option), in each case pursuant to a separate
prospectus supplement. A portion of the net proceeds from the Common Stock
Offering and substantially all of the proceeds from the TECONS Offering will be
applied to repay a portion of the amounts outstanding under the credit
facilities obtained in connection with the acquisitions of Great Southern and
Plantsbrook. The balance of the net proceeds from the Common Stock Offering will
be used to reduce amounts outstanding under the Revolving Credit Facilities or
to retire commercial paper backed by such facilities or both.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth SCI's consolidated ratio of earnings to fixed
charges for the periods shown:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
- ------------- ----------------------------------------
1994 1993 1993 1992 1991 1990 1989
- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
3.32 3.18 3.19 3.03 2.82 2.88 2.98
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, less
undistributed income of equity investees which are less than 50% owned, plus the
minority interest of majority-owned subsidiaries with fixed charges and plus
fixed charges (excluding capitalized interest). Fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt costs
and one-third of rental expense which the Company considers representative of
the interest factor in the rentals.
S-9
<PAGE> 82
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of the
Company at September 30, 1994 and on a pro forma basis giving effect to the
acquisitions of Great Southern and Plantsbrook and as adjusted for the offering
made hereby and the Common Stock Offering and the TECONS Offering (assuming in
the case of the Common Stock Offering and the TECONS Offering that the
underwriters' over-allotment option is not exercised), and the application of
the estimated net proceeds from such offerings.
<TABLE>
<CAPTION>
--------------------------
AT SEPTEMBER 30, 1994
PRO FORMA
AND AS
Thousands ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
CURRENT MATURITIES OF LONG-TERM DEBT $ 68,416 $ 59,651
========== ==========
INDEBTEDNESS UNDER UK FACILITIES $ 312,462 $ 200,000
LONG-TERM DEBT:
Indebtedness to banks under the Revolving Credit Facilities and
commercial paper 570,079 312,695
Notes offered in the Senior Notes Offering -- 200,000
Medium term notes 186,040 186,040
6.5% convertible subordinated debentures 172,500 172,500
7.875% debentures 150,000 150,000
Convertible debentures issued in connection with various
acquisitions 23,624 23,624
8% convertible debentures 14,939 14,939
Variable interest rate notes 10,596 10,596
Mortgage notes and other 120,767 114,431
---------- ----------
Total long-term debt 1,248,545 1,184,825
---------- ----------
CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY -- 150,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000 shares authorized; no shares issued and
outstanding -- --
Common stock, 200,000 shares authorized; 86,172 shares issued
and outstanding; 93,872 shares issued and outstanding pro
forma and as adjusted 86,172 93,872
Capital in excess of par value 527,321 709,399
Retained earnings 353,585 353,585
Foreign translation adjustment (3,029) (3,029)
---------- ----------
Total stockholders' equity 964,049 1,153,827
---------- ----------
Total capitalization $2,525,056 $2,688,652
========== ==========
</TABLE>
S-10
<PAGE> 83
SELECTED FINANCIAL INFORMATION
The selected consolidated financial data presented below for each of the five
years in the period ended December 31, 1993 have been derived from the
consolidated financial statements of the Company, which statements, in respect
of the year ended December 31, 1993, have been audited by Coopers & Lybrand,
independent public accountants, and in respect of the four years ended December
31, 1992, have been audited by Ernst & Young, independent public accountants.
The data at and for the nine months ended September 30, 1994 and September 30,
1993 have been derived from the unaudited consolidated financial statements of
the Company for such periods and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the information included therein in accordance with generally accepted
accounting principles for interim financial information. The data should be read
in conjunction with the related notes and other financial information included
and incorporated by reference in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 and the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994, incorporated by reference
herein. Results for the nine months ended September 30, 1994 are not necessarily
indicative of results for any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
AT OR FOR THE NINE MONTHS
Thousands, except per share ENDED SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,(1)
amounts and Other Data 1994 1993 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $801,934 $652,852 $899,178 $772,477 $643,248 $563,156 $518,809
Costs and expenses (558,737) (462,864) (635,858) (550,422) (464,740) (413,236) (386,032)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 243,197 189,988 263,320 222,055 178,508 149,920 132,777
General and administrative
expenses (35,530) (28,026) (43,706) (38,693) (35,448) (28,037) (28,423)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations 207,667 161,962 219,614 183,362 143,060 121,883 104,354
Interest expense (53,464) (44,185) (59,631) (53,902) (42,429) (36,095) (32,514)
Other income 7,767 8,111 13,509 9,876 8,241 13,644 12,778
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before income taxes
and preferred dividend
requirements 161,970 125,888 173,492 139,336 108,872 99,432 84,618
Provision for income taxes (65,727) (52,500) (70,400) (52,800) (35,500) (35,900) (31,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before cumulative
effect of change in accounting
principles and preferred
dividend requirements 96,243 73,388 103,092 86,536 73,372 63,532 53,618
Cumulative effect of change in
accounting principles (net of
income tax) -- (2,031) (2,031) -- -- -- --
Preferred dividend requirements -- -- -- -- -- (3,314) (6,897)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations available to common
stockholders $ 96,243 $ 71,357 $ 101,061 $ 86,536 $ 73,372 $ 60,218 $ 46,721
=========== =========== =========== =========== =========== =========== ===========
Per share:
Primary
Income from continuing
operations before
cumulative effect of
change in accounting
principles $1.12 $ .89 $1.24 $1.13 $1.03 $ .85 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.03) (.03) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.12 $ .86 $1.21 $1.13 $1.03 $ .85 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Fully diluted
Income from continuing
operations before
cumulative effect of
change in accounting
principles $1.06 $ .85 $1.19 $1.07 $1.00 $ .84 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.02) (.02) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.06 $ .83 $1.17 $1.07 $1.00 $ .84 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Dividends $.315 $ .30 $ .40 $ .39 $ .37 $ .37 $ .36
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ (298,411) $ 171,051 $ 171,901 $ 155,319 $ 156,383 $ 113,391 $ 120,682
Prearranged funeral contracts 1,385,346 1,193,554 1,244,866 -- -- -- --
Total assets 4,839,553 3,502,505 3,683,304 2,611,123 2,123,452 1,653,689 1,601,468
Long-term debt, excluding
current portion 1,248,545 1,021,238 1,062,222 980,029 786,685 577,378 485,669
Deferred prearranged funeral
contract revenues 1,476,178 1,228,376 1,263,407 -- -- -- --
Stockholders' equity 964,049 856,924 884,513 683,097 615,776 434,323 557,777
Total capitalization 2,525,056 1,878,162 1,946,735 1,663,126 1,402,461 1,011,701 1,043,446
OTHER DATA (END OF PERIOD):
Funeral homes 1,431 763 792 674 655 512 551
Cemeteries 213 186 192 176 163 145 126
</TABLE>
- ---------------
(1) The year ended December 31, 1993 reflects the changes in accounting
principles adopted January 1, 1993. The four years ended December 31, 1992
reflect results as historically reported.
S-11
<PAGE> 84
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
In June 1994, the Company announced an unsolicited offer to acquire 100% of the
outstanding shares of GSG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 98% of GSG's voting shares. The Company
anticipates that the total purchase price will approximate $192,777,000,
including the assumption of approximately $14,751,000 of existing debt. GSG is a
funeral provider in the United Kingdom ("UK") and owns 157 funeral homes, 13
crematoria and two cemeteries.
In September 1994, the Company announced its offer to acquire 100% of the
outstanding shares of PG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 95% of PG's voting shares. The Company
anticipates that the total purchase price will approximate $312,690,000,
including the assumption of approximately $13,873,000 of existing debt. PG is a
funeral provider in the UK and owns 380 funeral homes.
In addition to the acquisitions of GSG and PG, during 1993 and the nine months
ended September 30, 1994, the Company continued to acquire funeral and cemetery
operations in the United States, Australia and Canada. Excluding GSG and PG,
during such period the Company acquired 224 funeral homes and 41 cemeteries (the
"Other Acquired Companies") in 89 separate transactions for an aggregate
purchase price of approximately $436,000,000 in the form of combinations of
cash, SCI Common Stock, issued and assumed debt, convertible debentures and
retired loans receivable held by Provident.
The following unaudited pro forma combined statements of income for the year
ended December 31, 1993 and the nine months ended September 30, 1994 have been
prepared assuming the acquisitions by the Company of GSG, PG and the Other
Acquired Companies took place at the beginning of the respective periods. Such
acquisitions are being accounted for under the purchase method of accounting.
The historical revenues and expenses of the Other Acquired Companies represent
amounts recorded by those businesses for the period that they were not owned by
the Company during the year ended December 31, 1993 and the nine months ended
September 30, 1994, respectively. The unaudited pro forma combined financial
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.
The acquisitions of GSG and PG are being financed on an interim basis
principally with borrowings under the UK Facilities, under which the Company may
borrow up to $438,900,000 (based on the exchange rate of one UK pound sterling
equivalent to $1.54 on September 2, 1994) with interest at a rate equal to UK
pound sterling LIBOR plus 20 basis points. The unaudited pro forma combined
financial information presented herein assumes the completion of the Common
Stock Offering, the TECONS Offering and the Senior Notes Offering at the
beginning of the respective periods. The proceeds from the TECONS Offering and a
portion of the net proceeds from the Common Stock Offering are assumed to be
used to repay $238,900,000 of indebtedness under the UK Facilities, and it is
further assumed that $200,000,000 remains outstanding under the UK Facilities at
the beginning of the respective periods. The remaining net proceeds from the
Common Stock Offering and all of the net proceeds from the Senior Notes Offering
are assumed to be used to repay amounts outstanding under the Revolving Credit
Facilities or to retire commercial paper or both (including $37,680,000 which
was assumed to have been borrowed to finance a portion of the purchase price of
GSG and PG).
The historical financial statements of GSG and PG for the year ended December
31, 1993 and for the period not owned by the Company in 1994, were prepared in
UK pound sterling in accordance with the UK Companies Act of 1985 ("UK GAAP").
This information has been adjusted to present the historical financial
statements in accordance with United States generally accepted accounting
principles ("US GAAP") and translated into U.S. dollars at the average exchange
rate for the respective statement of income periods presented. The Company has
not completed all appraisals and evaluations necessary to finalize GSG's and
PG's purchase price allocation, and accordingly, actual adjustments that reflect
appraisals and other evaluations of the purchased assets and assumed liabilities
may differ from the pro forma adjustments.
S-12
<PAGE> 85
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
HISTORICAL
OTHER ACQUIRED PRO FORMA
Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL
----------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 899,178 $ 126,594 $ 123,380 $ 5,165 (A) $1,154,317
Costs and expenses (635,858) (101,300) (106,778) (3,590)(A) (829,910)
13,665 (B)
7,781 (C)
(70)(D)
(6,611)(E)
3,598 (F)
(437)(G)
(310)(H)
---------- --------- ----------- ---------- -----------
Gross profit 263,320 25,294 16,602 19,191 324,407
General and administrative expenses (43,706) -- -- -- (43,706)
---------- --------- ----------- ---------- -----------
Income from operations 219,614 25,294 16,602 19,191 280,701
Interest expense (59,631) (2,560) (4,111) (686)(A) (87,680)
(6,918)(B)
1,372 (I)
(11,750)(J)
9,034 (K)
(17,140)(L)
4,710 (M)
Dividends on convertible preferred
stock of subsidiary -- -- -- (9,375)(N) (9,375)
Other income 13,509 313 -- -- 13,822
---------- --------- ----------- ---------- -----------
Income before income taxes 173,492 23,047 12,491 (11,562) 197,468
Provision for income taxes (70,400) (8,681) (4,694) 3,634 (O) (80,141)
---------- --------- ----------- ---------- -----------
Income before cumulative effect
of change in accounting
principles $ 103,092 $ 14,366 $ 7,797 $ (7,928) $ 117,327
========== ========= =========== =========== ===========
Earnings per share:
Primary
Income before cumulative effect
of change in accounting
principles $1.24 $1.26
======== ========
Fully diluted
Income before cumulative effect
of change in accounting
principles $1.19 $1.21
======== ========
Primary weighted average number of
shares 83,372 1,915 (P) 92,987
======== 7,700 (Q) ========
Fully diluted weighted average number
of shares 93,878 2,595 (P) 109,158
======== 7,700 (Q) ========
4,985 (R)
</TABLE>
S-13
<PAGE> 86
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(Thousands)
(A) To record the acquisition of 13 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1993. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $16,654, offset in part by
additional costs and expenses of $2,989 resulting from the effect of
applying purchase accounting adjustments, primarily amortization and
depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 3.51%, which represented the weighted average borrowing rate under
the Revolving Credit Facilities and the Company's commercial paper for the
year ended December 31, 1993. At November 30, 1994, the borrowing rate
under the revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1993. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.86%) plus 20 basis points for the year ended December 31,
1993. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Company's
Revolving Credit Facilities and/or the Company's commercial paper. The
$257,384 reflects the financing of a portion of the purchase price of GSG
and PG ($37,680) and the use of $96,800 of net proceeds of the Common Stock
Offering and all of the $198,264 net proceeds of the Senior Notes Offering
to repay such indebtedness. The reduction was calculated using a weighted
average annual interest rate of 3.51%, which represents the Company's
weighted average borrowing rate under the Revolving Credit Facilities and
the Company's commercial paper for the year ended December 31, 1993.
S-14
<PAGE> 87
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1993. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $947 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the SCI Common
Stock (in the case of the primary and fully diluted weighted average number
of shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1993
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1993.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
HISTORIC AMOUNTS AS REPORTED IN
CONVERTED TO US UNAUDITED
DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
-------- -------- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $48,885 $77,709 $ -- $ -- $48,885 $77,709
Costs and expenses (38,234) (58,893) (272)(1) (303)(1) (39,078) (62,222)
(572)(2) (3,026)(2)
Interest expense and other (1,372) (875) -- -- (1,372) (875)
Provision for income taxes (3,228) (5,645) 90(1) 102(1) (3,138) (5,543)
-------- -------- ----- ------- -------- --------
Net income $ 6,051 $12,296 $(754) $(3,227) $ 5,297 $ 9,069
======== ======== ===== ======= ======== ========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.493, which represents the average
exchange rate for the period.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-15
<PAGE> 88
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Historical Pro Forma
OTHER
THE ACQUIRED COMBINED
Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 801,934 $ 86,198 $ 22,997 $ 1,146 (A) $ 912,275
Costs and expenses (558,737) (69,938) (20,105) (770)(A) (645,390)
2,878 (B)
3,757 (C)
(47)(D)
(4,407)(E)
2,502 (F)
(291)(G)
(232)(H)
---------- ---------- ---------- ---------- ----------
Gross profit 243,197 16,260 2,892 4,536 266,885
General and administrative expenses (35,530) -- -- -- (35,530)
---------- ---------- ---------- ---------- ----------
Income from operations 207,667 16,260 2,892 4,536 231,355
Interest expense (53,464) (1,337) (812) (165)(A) (65,064)
(1,679)(B)
731 (I)
(7,278)(J)
8,262 (K)
(12,855)(L)
3,533 (M)
Dividends on convertible preferred
stock of subsidiary -- -- -- (7,031)(N) (7,031)
Other income 7,767 201 -- -- 7,968
---------- ---------- ---------- ---------- ----------
Income before income taxes 161,970 15,124 2,080 (11,946) 167,228
Provision for income taxes (65,727) (5,641) (809) 4,207 (O) (67,970)
---------- ---------- ---------- ---------- ----------
Net income $ 96,243 $ 9,483 $ 1,271 $ (7,739) $ 99,258
========== ========== ========== ========== ==========
Earnings per share:
Primary $1.12 $1.05
======== ========
Fully Diluted $1.06 $1.00
======== ========
Primary weighted average number of
shares 86,215 272 (P) 94,187
======== 7,700 (Q) ========
Fully diluted weighted average number
of shares 96,386 508 (P) 109,579
======== 7,700 (Q) ========
4,985 (R)
</TABLE>
S-16
<PAGE> 89
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Thousands)
(A) To record the acquisition of 5 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1994. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $3,606, offset in part by
additional costs and expenses of $728 resulting from the effect of applying
purchase accounting adjustments, primarily amortization and depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 4.28%, which represented the weighted average borrowing rate under
the Revolving Credit Facilities and the Company's commercial paper for the
nine months ended September 30, 1994. At November 30, 1994, the borrowing
rate under the revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1994. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.33%) plus 20 basis points for the eight months ended August
31, 1994. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 4.28%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and the Company's
commercial paper for the nine months ended September 30, 1994.
S-17
<PAGE> 90
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1994. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $710 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the SCI Common
Stock (in the case of the primary and fully diluted weighted average number
of shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1994
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1994.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
HISTORIC AMOUNTS
CONVERTED TO AS REPORTED IN UNAUDITED
US DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $33,714 $52,484 $ -- $ -- $33,714 $52,484
Costs and
expenses (26,682) (40,365) (184)(1) (205)(1) (27,254) (42,684)
(388)(2) (2,114)(2)
Interest expense
and other (731) (405) -- -- (731) (405)
Provision for
income taxes (2,079) (3,689) 60(1) 67(1) (2,019) (3,622)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 4,222 $ 8,025 $ (512) $(2,252) $ 3,710 $ 5,773
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.52, which represents the average
exchange rate for the eight months ended August 31, 1994.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-18
<PAGE> 91
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered hereby
(referred to herein as the "Notes") supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Senior Debt Securities set forth in the accompanying Prospectus, to which
description reference is hereby made. The Notes are Senior Debt Securities as
defined in the accompanying Prospectus. Except as otherwise defined herein,
capitalized terms used herein have the meanings specified in the accompanying
Prospectus or in the Senior Debt Indenture referred to therein.
The maximum aggregate principal amount of Notes which may be issued is limited
to $200,000,000. Interest at the annual rate set forth on the cover page of this
Prospectus Supplement is to accrue from December 13, and is to be payable
semiannually on June 15 and December 15, commencing June 15, 1995, to the
persons in whose names the Notes are registered at the close of business on the
preceding June 1 or December 1, respectively. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
The Notes will mature on December 15, 2004. The Notes will not be redeemable by
the Company prior to maturity. There is no sinking fund applicable to the Notes.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be issued in the form of one or more fully registered Global
Notes (the "Global Notes") which will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York, as Depositary (the "Depositary"),
and registered in the name of Cede & Co., the Depositary's nominee. Except as
set forth below, the Global Notes may be transferred, in whole and not in part,
only to another nominee of the Depositary or to a successor of the Depositary or
its nominee.
The Depositary has advised as follows: It is a limited-purpose trust company
which holds securities for its participating organizations (the "Participants")
and facilitates the settlement among Participants of securities transactions in
such securities through electronic book-entry changes in its Participants'
accounts. Participants include securities brokers and dealers (including the
Underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants"). Persons who are not Participants may
beneficially own securities held by the Depositary only through Participants or
indirect participants.
The Depositary advises that its established procedures provide that (i) upon
issuance of the Notes by the Company, the Depositary will credit the accounts of
Participants designated by the Underwriters with the principal amounts of the
Notes purchased by the Underwriters and (ii) ownership of interests in the
Global Notes will be shown on, and the transfer of the ownership will be
effected only through, records maintained by the Depositary, the Participants
and the indirect participants. The laws of some states require that certain
persons take physical delivery in definitive form of securities which they own.
Consequently, the ability to transfer beneficial interests in the Global Notes
is limited to such extent.
So long as a nominee of the Depositary is the registered owner of the Global
Notes, such nominee for all purposes will be considered the sole owner or holder
of such Global Notes under the Senior Debt Indenture. Except as provided below,
owners of beneficial interests in the Global Notes will not be entitled to have
Notes registered in their names, will not receive or be entitled to receive
physical delivery of Notes in definitive form and will not be considered the
owners or holders thereof under the Senior Debt Indenture.
Neither the Company, the Trustee, any Paying Agent nor the Security Registrar
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Notes, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Principal and interest payments on the Notes registered in the name of the
Depositary's nominee will be made by the Trustee to the Depositary. Under the
terms of the Senior Debt Indenture, the Company and the Trustee will treat the
persons in whose names the Notes are registered as the owners of such Notes for
the purpose of
S-19
<PAGE> 92
receiving payment of principal and interest on the Notes and for all other
purposes whatsoever. Therefore, neither the Company, the Trustee nor any Paying
Agent has any direct responsibility or liability for the payment of principal or
interest on the Notes to owners of beneficial interests in the Global Notes. The
Depositary has advised the Company and the Trustee that its present practice is
to credit the accounts of the Participants on the appropriate payment date in
accordance with their respective holdings in principal amount of beneficial
interests in the Global Notes as shown on the records of the Depositary, unless
the Depositary has reason to believe that it will not receive payment on such
payment date. Payments by Participants and indirect participants to owners of
beneficial interests in the Global Notes will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of the Participants or indirect participants.
If the Depositary is at any time unwilling or unable to continue as depositary
and a successor depositary is not appointed by the Company within 90 days, the
Company will issue Notes in definitive form in exchange for the Global Notes. In
addition, the Company may at any time determine not to have the Notes
represented by Global Notes and, in such event, will issue Notes in definitive
form in exchange for the Global Notes. In either instance, an owner of a
beneficial interest in the Global Notes will be entitled to have Notes equal in
principal amount to such beneficial interest registered in its name and will be
entitled to physical delivery of such Notes in definitive form. Notes so issued
in definitive form will be issued in denominations of $1,000 and integral
multiples thereof and will be issued in registered form only, without coupons.
S-20
<PAGE> 93
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below have severally agreed to purchase, and the Company has agreed to
sell to them, severally, the respective principal amount of Notes set forth
opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITERS OF NOTES
------------
<S> <C>
J.P. Morgan Securities Inc........................................ $ 50,000,000
CS First Boston Corporation....................................... 50,000,000
Dean Witter Reynolds Inc.......................................... 50,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................... 50,000,000
------------
Total $200,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are committed to take and pay for all of the
Notes offered hereby if any are taken. The closing of each of the Common Stock
Offering and the TECONS Offering is a condition to the closing of the offering
of the Notes.
The Underwriters initially propose to offer the Notes directly to the public at
the public offering price set forth on the cover page of this Prospectus
Supplement and in part to certain dealers at such price less a concession not in
excess of .40% of the principal amount of the Notes. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of .25% of the
principal amount of the Notes to certain other dealers. After the initial public
offering of the Notes, the public offering price and such concessions may be
changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
J.P. Morgan Securities Inc. ("JPMS") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are acting as the underwriters in connection with
the TECONS Offering, which is scheduled to close concurrently with the closing
of the offering of the Notes, for which they will receive customary underwriting
compensation. In addition, JPMS, Merrill Lynch, CS First Boston Corporation
("First Boston"), Dean Witter Reynolds Inc. and affiliates of JPMS and Merrill
Lynch are acting as underwriters in connection with the Common Stock Offering,
which also is scheduled to close concurrently with the closing of the offering
of the Notes, for which they will receive customary underwriting compensation.
As of October 5, 1994, JPMS and certain of its affiliates beneficially owned (as
defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended)
approximately 12.09% of the outstanding SCI Common Stock, such figure
representing beneficial ownership in both a fiduciary capacity on behalf of
third parties and for their own accounts. As of such date, JPMS and such
affiliates owned the economic interest in less than 1.00% of the outstanding SCI
Common Stock. JPMS and its affiliates, Merrill Lynch and First Boston from time
to time provide commercial banking and/or investment banking services to the
Company for which they receive customary fees and expense reimbursement.
Prior to the offering made hereby, there has been no public market for the
Notes. The Company does not intend to list the Notes on any securities exchange.
The Company has been advised by the Underwriters that the Underwriters currently
intend to make a market in the Notes; however, the Underwriters are not
obligated to do so and any Underwriter may discontinue any such market making at
any time without notice.
S-21
<PAGE> 94
Filed Pursuant to Rule 424(b)(5)
Registration Nos. 033-56069; 033-56069-01
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 1, 1994)
3,000,000 Shares
SCI FINANCE LLC
$3.125 Term Convertible Shares, Series A ("TECONS"*)
(liquidation preference $50 per share) guaranteed to the extent set forth herein
by, and convertible
into Common Stock of,
(LOGO)
SERVICE CORPORATION INTERNATIONAL
The $3.125 Term Convertible Shares, Series A (the "TECONS" or "LLC Preferred
Securities"), liquidation preference $50 per share, offered hereby are being
issued by SCI Finance LLC, a special purpose limited liability company organized
under the laws of the State of Texas ("SCI Finance"). SCI Finance is a
subsidiary of Service Corporation International, a Texas corporation ("SCI").
The TECONS have been approved for listing on the New York Stock Exchange
("NYSE") under the symbol "SRV prT," subject to official notice of issuance.
(continued on following page)
SEE "CERTAIN INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) COMPENSATION(2) SCI FINANCE (3)(4)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Per TECONS $50.00 (3) $50.00
- --------------------------------------------------------------------------------------------------------
Total(5) $150,000,000 (3) $150,000,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the date of initial issuance.
(2) SCI Finance and SCI have agreed jointly and severally to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(3) The Underwriting Agreement provides that SCI will pay to the Underwriters,
as compensation for their services, $1.25 per TECONS (or $3,750,000 in the
aggregate). See "Underwriting."
(4) SCI will pay expenses of the offering made hereby estimated at $328,000.
(5) SCI Finance and SCI have granted the Underwriters an option, exercisable
within 30 days after the date of this Prospectus Supplement, to purchase up to
an additional 450,000 TECONS on the same terms as set forth above, solely to
cover over-allotments, if any. If such over-allotment option is exercised in
full, the total Price to Public, Underwriting Compensation and Proceeds to SCI
Finance will be $172,500,000, $4,312,500 and $172,500,000,
respectively. See "Underwriting."
The TECONS offered by this Prospectus Supplement are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters, and certain other conditions. It
is expected that delivery of the TECONS will be made only in book-entry form
through the facilities of The Depository Trust Company, as Depositary, on or
about December 13, 1994, against payment therefor in next day funds.
- ---------------
* An application has been filed by J.P. Morgan Securities Inc. with the United
States Patent and Trademark Office for the registration of the TECONS service
mark.
J.P. MORGAN SECURITIES INC. MERRILL LYNCH & CO.
December 6, 1994
<PAGE> 95
Concurrently with the offering made hereby, SCI is offering an aggregate of
7,700,000 shares of Common Stock, $1 par value, of SCI (the "SCI Common Stock")
(excluding 1,155,000 shares subject to an underwriters' over-allotment option),
pursuant to separate prospectus supplements covering an offering in the United
States and Canada and an international offering.
Dividends on the TECONS will accrue at the annual rate of $3.125 per TECONS, are
cumulative from the date of initial issuance and are payable on the last day of
each calendar month, commencing December 31, 1994, except as described herein.
TECONS are convertible at the option of the holder at any time, unless
previously redeemed, into shares of SCI Common Stock at an initial conversion
rate of approximately 1.6617 shares of SCI Common Stock for each TECONS
(equivalent to a conversion price of $30.09 per share of SCI Common Stock),
subject to adjustment upon certain events. The outstanding SCI Common Stock is
listed on the NYSE under the symbol "SRV." On December 5, 1994, the reported
last sale price of the SCI Common Stock on the NYSE was $25.50 per share.
On and after June 5, 1997 and prior to December 5, 1999, the TECONS will be
redeemable at the option of SCI Finance, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid dividends if for 20 trading days
within any period of 30 consecutive trading days (including the last trading day
of such period) ending on the trading day immediately prior to the notice of
redemption, the closing price of the SCI Common Stock on the NYSE equals or
exceeds 125% of the then effective conversion price (initially $37.6125 per
share of SCI Common Stock) and if all dividends on the TECONS for all dividend
periods ending on or prior to the notice of redemption have been paid in full or
declared and set aside for payment in full. On and after December 5, 1999, the
TECONS are redeemable at the option of SCI Finance, in whole or in part,
initially at a redemption price of $51.5625 per TECONS, and thereafter at prices
decreasing ratably and annually to $50 per TECONS on and after December 1, 2004,
plus accrued and unpaid dividends. In addition, in the event a Tax Event (as
defined herein) shall occur and be continuing, the TECONS will be redeemable, in
whole but not in part, at the option of SCI Finance at the then applicable
redemption price as set forth herein. See "Certain Terms of the
TECONS -- Redemption" and "Description of the LLC Preferred
Securities -- Optional Redemption."
The payment of dividends and the payments on liquidation or redemption with
respect to the TECONS are guaranteed by SCI (the "Guarantee") to the extent
described herein. In addition, SCI will agree to issue the SCI Common Stock
issuable upon conversion of the TECONS. The Guarantee will be unsecured and will
be subordinated to all liabilities of SCI. See "Description of the LLC Preferred
Securities -- Miscellaneous," "-- Description of the Guarantee" and
"-- Description of the Loans" for a description of various contractual backup
undertakings of SCI. The Guarantee requires that SCI make the payment of
dividends only under circumstances in which SCI Finance shall have theretofore
declared the dividend out of funds legally available therefor and shall have
failed to make the dividend payment. The proceeds of the offering made hereby of
the TECONS will be loaned by SCI Finance to SCI International Limited, a
wholly-owned subsidiary of SCI ("SCI Limited"), on a senior secured basis
pursuant to the Loan Agreement having the terms described herein. If SCI Limited
fails to make interest payments on its indebtedness under the Loan Agreement and
SCI fails to make such interest payments under its loan guarantee described
below, SCI Finance will have insufficient funds to pay dividends on the TECONS.
SCI Limited will have the right to extend interest payments on the indebtedness
under the Loan Agreement for up to 60 monthly interest payment periods in the
aggregate over the term of the loans. SCI will guarantee SCI Limited's
obligations under the Loan Agreement, which guarantee will be subordinated to
all Senior Indebtedness of SCI to the extent described herein.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE TECONS, THE
SCI COMMON STOCK AND SCI'S CONVERTIBLE DEBENTURES AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person is authorized to give any information or to make any representation
not contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by SCI Finance,
SCI or any Underwriter. Neither this Prospectus Supplement nor the accompanying
Prospectus constitutes an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
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Prospectus Summary.................... S-5
The Company........................... S-9
Recent Developments................... S-14
Certain Investment Considerations..... S-15
Use of Proceeds....................... S-16
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend
Requirements........................ S-16
Price Range of Common Stock and
Dividends........................... S-17
Capitalization........................ S-18
Selected Financial Information........ S-19
Unaudited Pro Forma Combined Financial
Information......................... S-20
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. S-27
Certain Terms of the TECONS........... S-36
Underwriting.......................... S-38
</TABLE>
PROSPECTUS
<TABLE>
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Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 4
The Company........................... 5
SCI Finance........................... 5
Certain Investment Considerations..... 6
Use of Proceeds....................... 6
Description of Debt Securities........ 7
Description of Preferred Stock........ 22
Description of Common Stock
Warrants............................ 25
Description of the LLC Preferred
Securities.......................... 28
Certain Federal Income Tax
Considerations Regarding the
LLC Preferred Securities............ 45
Plan of Distribution.................. 49
Legal Matters......................... 50
Experts............................... 50
</TABLE>
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Artwork showing Major North American Markets Served indicated by Bullets on
Map of United States, Alaska and Hawaii.
Artwork showing Major International Markets Served indicated by Bullets on
Maps of United Kingdom and Australia.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information included and incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. All
information in this Prospectus Supplement assumes that the Underwriters'
over-allotment option will not be exercised. See "Underwriting." References to
the Company or SCI herein should be read as referring to Service Corporation
International and its subsidiaries, except where the context indicates
otherwise.
THE COMPANY
Service Corporation International (the "Company" or "SCI") is the largest
provider of death care services and products in the world. Giving effect to the
recent acquisitions of Great Southern Group plc ("Great Southern" or "GSG") and
Plantsbrook Group plc ("Plantsbrook" or "PG"), as of September 30, 1994, SCI
owned and operated 1,431 funeral homes, 213 cemeteries (including 92 funeral
home and cemetery combinations) and 99 crematoria located in 40 U.S. states, the
District of Columbia, Australia, Canada and the United Kingdom. See "The
Company -- International Expansion and Recent Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident Services, Inc.
("Provident"), provides financing to independent funeral home and cemetery
operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and
funeral home/cemetery combinations in areas with demographics that
SCI believes to be favorable
- Increase the operating margins of its existing and acquired facilities
by having such facilities share resources pursuant to SCI's cluster
strategy (see "The Company -- Funeral Service Operations -- Cluster
Strategy")
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
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THE OFFERING
SECURITIES OFFERED......... 3,000,000 $3.125 Term Convertible Shares, Series A
("TECONS" or "LLC Preferred Securities").
ISSUER..................... SCI Finance LLC ("SCI Finance"), a special purpose
Texas limited liability company, which is a
subsidiary of Service Corporation International
(the "Company" or "SCI").
GUARANTOR.................. SCI.
LIQUIDATION PREFERENCE..... $50 per TECONS, plus accumulated and unpaid
dividends.
DIVIDENDS.................. Cumulative from the date of issuance at the annual
rate of $3.125 per TECONS, payable monthly in
arrears on the last day of each calendar month,
commencing December 31, 1994, except as described
herein. The principal source of funds to pay such
dividends on the TECONS will be interest payments
on the Loans (as defined below) made to SCI
Limited. SCI Limited will have the right to extend
interest payments on such Loans for up to 60
monthly interest payment periods in the aggregate
over the term of the Loans. See "Description of the
LLC Preferred Securities -- Dividends" and
"-- Description of the Loans -- Extended Interest
Payment Period."
CONVERSION RIGHTS.......... TECONS are convertible at the option of the holder,
unless previously redeemed, at any time at an
initial conversion rate of approximately 1.6617
shares of SCI Common Stock for each TECONS
(equivalent to a conversion price of $30.09 per
share of SCI Common Stock), subject to adjustment
in certain circumstances. See "Description of the
LLC Preferred Securities -- Conversion Rights."
REDEMPTION................. On and after June 5, 1997 and prior to December 5,
1999, the TECONS will be redeemable at the option
of SCI Finance, in whole or in part, at the
redemption prices set forth herein plus accrued and
unpaid dividends if for 20 trading days within any
period of 30 consecutive trading days (including
the last trading day of such period) ending on the
trading day immediately prior to the notice of
redemption, the closing price of the SCI Common
Stock on the NYSE equals or exceeds 125% of the
then effective conversion price (initially $37.6125
per share of SCI Common Stock) and if all dividends
on the TECONS for all dividend periods ending on or
prior to the notice of redemption have been paid in
full or declared and set aside for payment in full.
On and after December 5, 1999, the TECONS are
redeemable at the option of SCI Finance, in whole
or in part, initially at a redemption price of
$51.5625 per TECONS, and thereafter at prices
decreasing ratably and annually to $50 per TECONS
on and after December 1, 2004, plus accrued and
unpaid dividends. In addition, in the event a Tax
Event (as defined herein) shall occur and be
continuing, the TECONS will be redeemable, in whole
but not in part, at the option of SCI Finance at
the then applicable redemption price as set forth
herein. See "Certain Terms of the
TECONS -- Redemption" and "Description of the LLC
Preferred Securities -- Optional Redemption" and
-- "Tax Event Redemption."
USE OF PROCEEDS............ The proceeds to SCI Finance from the sale of the
TECONS will be loaned by SCI Finance to SCI Limited
(the "Loans") which will use such
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proceeds to repay indebtedness incurred in
connection with SCI's foreign acquisition program.
See "Use of Proceeds."
PAYMENT, GUARANTEE AND
CONVERSION AGREEMENT
OBLIGATIONS OF SCI....... Pursuant to the payment, guarantee and conversion
agreement (the "Guarantee"), SCI will irrevocably
and unconditionally guarantee the payment by SCI
Finance of: (i) any accumulated and unpaid
dividends which have been theretofore declared on
the TECONS out of monies legally available
therefor, (ii) the redemption price (including all
accumulated and unpaid dividends) to the date of
payment payable with respect to TECONS called for
redemption by SCI Finance out of monies legally
available therefor and (iii) upon a liquidation of
SCI Finance, the lesser of (a) the aggregate
liquidation preference per TECONS plus accumulated
and unpaid dividends to the date of payment and (b)
the amount of remaining assets of SCI Finance
legally available to holders of TECONS. The
Guarantee is directly enforceable by the holders of
TECONS and is subordinate to all other liabilities
of SCI. The Guarantee also requires SCI to deliver
upon conversion of any TECONS all shares of SCI
Common Stock or other property into which such
TECONS are convertible. See "Description of the LLC
Preferred Securities -- Description of the
Guarantee -- General."
LOAN AGREEMENT OBLIGATIONS;
SCI GUARANTEE OF LOAN
AGREEMENT OBLIGATIONS.... Under the Loan Agreement, SCI Limited is obligated
to pay (i) interest at 6.25% per annum (which will
be in an amount and at such times sufficient to
permit timely and full payment of all dividends on
the TECONS), subject to certain rights of extension
described under "Description of the LLC Preferred
Securities -- Description of the Loans -- Extended
Interest Payment Period", and (ii) principal and
applicable premium, if any, in amounts and at times
sufficient to permit timely and full payment of all
amounts payable by SCI Finance to holders of TECONS
on account of mandatory or optional redemption of
TECONS or the dissolution, winding-up or
liquidation of SCI Finance. SCI will guarantee on a
subordinated basis all of SCI Limited's obligations
under the Loan Agreement. The obligations of SCI
Limited under the Loan Agreement and of SCI under
the guarantee in respect thereof are enforceable by
SCI Finance, and the holders of TECONS will have
the right under certain circumstances to appoint a
trustee to enforce SCI Finance's rights thereunder.
The obligations of SCI Limited under the Loan
Agreement are senior secured obligations of SCI
Limited, secured by 50% of the outstanding capital
stock of Service Corporation International plc, the
principal assets of which are the capital stock of
Great Southern and Plantsbrook. The obligations of
SCI under its guarantee of the Loan Agreement are
subordinate to all existing and future Senior
Indebtedness of SCI to the extent described herein.
The loans to be made under the Loan Agreement
mature on December 1, 2024. See "Description of the
LLC Preferred Securities -- Description of the
Loans."
RELATED GUARANTEE AND
LOAN AGREEMENT
COVENANTS................ Under the Guarantee and the Loan Agreement, SCI
covenants, among other things, (i) to maintain
direct 100% ownership of all interests in SCI
Finance other than LLC Preferred Shares, (ii) not
to voluntarily dissolve,
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wind-up or liquidate SCI Finance so long as the
Loans (and any TECONS) are outstanding and (iii) to
remain the Manager of SCI Finance and timely
perform its duties as Manager (including the duty
to declare and pay dividends on the TECONS). See
"Description of the LLC Preferred
Securities -- Description of the
Guarantee -- Certain Covenants of SCI" and
" -- Description of the Loans -- Covenants."
VOTING RIGHTS.............. The holders of the TECONS will have no voting
rights except in certain circumstances described
herein. See "Description of the LLC Preferred
Securities -- Voting Rights."
NYSE TRADING SYMBOL........ "SRV prT"
CONCURRENT OFFERINGS....... Concurrently with the offering made hereby, SCI is
offering (the "Common Stock Offering") an aggregate
of 7,700,000 shares of SCI Common Stock (excluding
1,155,000 shares subject to an underwriters' over-
allotment option) pursuant to a separate prospectus
supplement. In addition, SCI intends to consummate
an offering (the "Senior Notes Offering") of $200
million aggregate principal amount of Notes due
2004, pursuant to a separate prospectus supplement,
concurrently with the closing of the offering made
hereby and the Common Stock Offering. The closing
of the offering made hereby is not contingent on
the closing of the Common Stock Offering or the
Senior Notes Offering.
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THE COMPANY
SCI is the largest provider of death care services and products in the world.
Giving effect to the recent acquisitions of Great Southern and Plantsbrook, as
of September 30, 1994, SCI owned and operated 1,431 funeral homes, 213
cemeteries (including 92 funeral home and cemetery combinations) and 99
crematoria located in 40 U.S. states, the District of Columbia, Australia,
Canada and the United Kingdom. See "-- International Expansion and Recent
Acquisitions."
SCI provides all professional services relating to funerals, burials and
cremations, including the use of funeral homes and motor vehicles, the
performance of cemetery interment services and the management and maintenance of
cemetery grounds. It sells caskets, burial vaults and garments, cemetery
interment rights, including mausoleum spaces and lawn crypts, stone and bronze
memorials, cremation receptacles and related merchandise. Additionally, SCI
operates 52 flower shops in connection with its funeral and cemetery operations.
SCI sells its services and products to client families both at and prior to the
time of need. In addition, SCI's finance subsidiary, Provident, provides
financing to independent funeral home and cemetery operators.
SCI's strategy is to:
- Continue to expand through the acquisition and construction, both
domestically and internationally, of funeral homes, cemeteries and
funeral home/cemetery combinations in areas with demographics that
SCI believes to be favorable
- Increase the operating margins of its existing and acquired facilities by
having such facilities share resources pursuant to SCI's cluster strategy
- Increase revenue per location through the merchandising of a broad line
of death care products and services
- Increase future volume and revenues through the sale of prearranged
funeral services
SCI's acquisition strategy focuses on acquiring premier funeral homes and
cemeteries in metropolitan areas with demographics that SCI believes to be
favorable and in which the cluster strategy can be applied. SCI typically
retains former owners and key managers of acquired businesses in an effort to
assure that service quality is maintained and that the business's reputation,
heritage and local relationships remain intact. Acquired funeral homes and
cemeteries retain their original trade names in substantially all cases.
During the nine months ended September 30, 1994, SCI acquired 637 funeral homes,
22 cemeteries and 22 crematoria worldwide for a total of approximately $703
million in cash, stock and other securities.
FUNERAL SERVICE OPERATIONS
The funeral service operations consist of SCI's funeral homes, cemeteries and
related businesses. The operation is organized into six domestic regions and
three foreign regions (Australia, Canada and the United Kingdom), each of which
is under the direction of a regional president with substantial industry
experience. Canadian operations are carried out by a public company which is
approximately 70% owned by SCI. Local funeral home and cemetery managers, under
the direction of the regional presidents, 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.
Death Care Industry
The funeral industry is characterized by a large number of locally-owned,
independent operations. SCI believes that there are in excess of 22,000, 500,
1,200 and 4,000 funeral homes operating in the United States, Australia, Canada
and the United Kingdom, respectively. In order to compete successfully, SCI's
funeral homes must maintain competitive prices, attractive, well-maintained and
conveniently located facilities, a good reputation and high professional
standards. Heritage and tradition can provide an established funeral home or
cemetery with the opportunity for repeat business from client families.
Furthermore, an established firm can generate future volume and revenues by
successfully marketing prearranged, pre-funded funeral services.
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The cemetery industry is also characterized by a large number of locally-owned
independent operations. SCI's cemetery properties compete with other cemeteries
in the same general area. In order to compete successfully, SCI's cemeteries
must maintain competitive prices, attractive and well-maintained properties, a
good reputation, an effective sales force and high professional standards.
The Company and the two other largest North American death care companies
control in the aggregate approximately seven percent of the funeral homes and
approximately four percent of the commercial cemeteries in North America. Based
upon industry estimates, these three companies represented less than 15% of
total 1993 death care industry revenues.
Cluster Strategy
The majority of SCI's funeral homes 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. The cluster strategy recognizes that, as SCI adds operations to
a geographic area in which SCI already operates, it will achieve additional
operating efficiencies through cost-sharing. SCI has successfully implemented
the cluster strategy in its North American and Australian operations and intends
to implement the strategy in the United Kingdom. As of September 30, 1994, SCI
operated approximately 160 clusters in North America and Australia, which range
in size from two operations to 53 operations.
Pre-need Services
SCI is actively engaged in the marketing of prearranged funeral services. The
funds collected from prearranged funeral contracts are generally held in trust
or are used to purchase life insurance or annuity contracts. The principal
amount of a prearranged funeral contract will be received in cash by an SCI
funeral home and recorded as revenue by SCI at the time the funeral is
performed. Earnings on trust funds and increasing benefits under
insurance-funded contracts increase the amount of cash to be received and the
revenue to be recognized at the time the service is performed and historically
have allowed the Company to more than cover increases in the costs of providing
funeral services. At September 30, 1994, SCI's unfulfilled prearranged funeral
contracts amounted to approximately $1.4 billion. SCI's historical cancellation
rate for all prearranged funeral contracts approximates ten percent, for which a
reserve has been established.
Cemetery sales are often made pursuant to installment contracts providing for
monthly payments. The principal amount of these installment contracts is
recognized as revenue by SCI at the time of sale, net of an approximate eight
percent cancellation reserve that is based on historical results. A portion of
the proceeds from cemetery sales is generally required by law to be paid into
perpetual care trust funds. Earnings on perpetual care trust funds are used to
defray the maintenance cost of cemeteries. In addition, a portion of the
proceeds from the pre-need sale of cemetery merchandise may be required by law
to be paid into trust.
Financial Services
In 1988, SCI formed Provident to provide capital 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.
Provident had $243 million in loans outstanding at September 30, 1994. To date,
the amount and number of problem loans have been insignificant. Provident
obtains its funds primarily from SCI bank and commercial paper 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 industry
loans, thereby providing Provident with a competitive advantage in making such
loans.
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Regulation
In April 1984, the U.S. Federal Trade Commission (the "FTC") comprehensive trade
regulation rule for the funeral industry became fully effective. 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. A pre-existing consent order between SCI and the FTC
applicable to certain funeral practices of SCI was amended in 1984 to make the
substantive provisions of the consent order consistent with the funeral trade
regulation rule. From time to time in connection with acquisitions, SCI has
entered into consent orders with the FTC which have required SCI to dispose of
certain operations in order to proceed with the acquisitions and/or have limited
SCI's ability to make acquisitions in specified areas. The trade regulation rule
and the various consent orders have not had a material adverse effect on SCI's
operations.
ACQUISITION STRATEGY
Over the past several years, SCI has made a significant number of acquisitions.
SCI anticipates that it will continue to aggressively pursue acquisition
opportunities, as acquisitions form a critical part of SCI's growth strategy.
SCI will continue to seek acquisitions in geographic areas in which it presently
operates to expand established clusters, as well as acquisitions in new
geographic areas, including those outside North America, to develop new clusters
and to increase volume and revenue. To date SCI has been able to increase the
profitability of its acquired properties by absorbing a significant portion of
their costs, such as transportation and embalming, into SCI's clusters, and by
applying SCI's merchandising programs to the new operations. In addition,
acquisitions increase SCI's ability to benefit from the centralization of
systems, insurance and other financial services. SCI also believes that because
of its size it has been able to negotiate favorable supply arrangements with
volume discounts on supplies, including caskets, and that the terms of such
supply arrangements have enabled it to increase the profitability of its
acquired properties. There can be no assurance that SCI will continue to
successfully absorb future acquisitions, domestic or international, or realize
such cost savings.
SCI typically retains former owners and key managers of acquired businesses in
an effort to assure that service quality is maintained and that the business's
reputation, heritage and local relationships remain intact. Acquired funeral
homes and cemeteries retain their original trade names in substantially all
cases.
In evaluating specific properties for acquisition, SCI considers a number of
factors including demographics, location, reputation, heritage, physical size,
volume of business, profitability, available inventory, name recognition,
aesthetics, potential for development or expansion, competitive position,
pricing structure and quality of operating management. SCI follows a disciplined
approach based on specific financial criteria for determining acquisition prices
and intends to continue an active acquisition program in the future. There can
be no assurance that acquisition prospects will continue to be available in
attractive locations at prices acceptable to SCI.
INTERNATIONAL EXPANSION AND RECENT ACQUISITIONS
Based on its experience in applying its cluster strategy in the North American
market, SCI has targeted several foreign countries that it believes offer
similar opportunities. Effective July 1, 1993, SCI acquired Pine Grove Funeral
Group ("Pine Grove"), Australia's largest funeral and cremation services
provider, for approximately U.S.$70 million. This was SCI's first acquisition
outside of North America. Pine Grove's operations at year-end 1993 consisted of
60 funeral homes and eight cemetery/crematorium facilities located in
Australia's five major population centers of Adelaide, Brisbane, Melbourne,
Perth and Sydney. During its six months of operation in 1993 as an SCI company,
Pine Grove reported revenues of approximately U.S.$17 million. In March 1994,
SCI continued its Australian expansion by acquiring LePine Holdings Proprietary
Limited ("LePine"), a firm with over 100 years of funeral service history. The
LePine acquisition added 20 additional funeral homes in Melbourne with 1993
revenues of approximately U.S.$12 million.
In June 1994, SCI announced an unsolicited offer to acquire 100% of the
outstanding shares of Great Southern, which is among the leading funeral and
cremation services companies in the United Kingdom. Great Southern owns and
operates 157 funeral homes, 13 crematoria and two cemeteries in the United
Kingdom, primarily
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south of London. As of September 30, 1994, SCI owned, or had commitments to
acquire, in excess of 98% of Great Southern's voting shares. It is anticipated
that SCI will acquire the balance of the equity interests in Great Southern in
the coming months. The total purchase price for Great Southern is approximately
U.S.$192.8 million, including the assumption of approximately U.S.$14.8 million
of Great Southern debt. Great Southern reported revenues of approximately
U.S.$48.9 million for the year ended December 31, 1993. See "Unaudited Pro Forma
Combined Financial Information."
In September 1994, SCI announced its offer to acquire 100% of the outstanding
shares of Plantsbrook, which is the largest public funeral company in the United
Kingdom. Plantsbrook owns and operates 380 funeral homes in the United Kingdom,
primarily north of London. As of September 30, 1994, SCI owned, or had
commitments to acquire, in excess of 95% of Plantsbrook's voting shares. It is
anticipated that SCI will acquire the balance of the equity interests in
Plantsbrook in the coming months. The total purchase price for Plantsbrook is
approximately U.S.$312.7 million, including the assumption of approximately
U.S.$13.9 million of Plantsbrook debt. Plantsbrook reported revenues of
approximately U.S.$77.7 million for the year ended December 31, 1993. See
"Unaudited Pro Forma Combined Financial Information." Great Southern and
Plantsbrook together accounted for approximately 15% of the total funerals
performed in the United Kingdom during 1993.
In the context of its international expansion, SCI believes that it can
favorably manage its worldwide effective tax rate by taking advantage of lower
tax rates and other foreign jurisdictional tax structuring opportunities. SCI
has implemented and intends to continue to explore the implementation of various
strategies to take advantage of such opportunities. There can be no assurance
that the implementation of such strategies will actually result in a reduction
of SCI's worldwide effective tax rate.
INDUSTRY TRENDS
Stability
Death rates have been fairly predictable, thereby lending stability to the death
care industry. For example, since 1980, the number of deaths in the United
States has increased at a compound rate of approximately one percent per year.
According to a 1993 report prepared by the U.S. Department of Commerce, Bureau
of the Census, the number of deaths in the United States is expected to increase
by approximately one percent per year between 1993 and 2000 and by 0.9% per year
from 2000 to 2020. Because the industry is relatively stable, non-cyclical and
fairly predictable, business failures are uncommon. As a result, ownership of
funeral home and cemetery businesses has traditionally passed from generation to
generation within a family. The death rate tends to be somewhat higher in the
winter months and funeral and cemetery operations generally experience a higher
volume of business during these months.
Consolidation
In recent years, the pace of acquisition activity in the death care industry has
increased. From the standpoint of individual owners, this appears to result
principally from family succession issues, a desire for liquidity and increasing
tax and estate planning complexities. From the standpoint of the large death
care providers, interest in acquisitions is driven by the benefits anticipated
to be derived from potential operating efficiencies, improved managerial control
and more effective strategic and financial planning. In recent years, several
large death care companies have expanded their operations significantly through
acquisitions. The increased interest in acquisitions of funeral homes and
cemeteries provides a source of potential liquidity that has not been readily
available to individual owners in the past.
Clustered Operations
During the last several years, larger death care companies have increasingly
begun to cluster their funeral home and cemetery operations. Clusters refer to
funeral homes and/or cemeteries that are grouped together in a geographic area.
Clusters provide cost savings to funeral homes and cemeteries through the
sharing of personnel, vehicles and other resources. In addition, the inclusion
of funeral homes and cemeteries in the same cluster
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provides opportunities for a company to cross-sell the full range of death care
services without corresponding increases in incremental overhead expenses.
Combined Operations
Combined operations, referring to funeral home and cemetery operations conducted
on a single site, have become increasingly popular as they provide cost savings
through shared resources and cross-selling opportunities. The ability to offer
the full range of products and services at one location tends to increase the
sales volume and revenues of both the funeral home and cemetery.
Pre-need Marketing
An increasing number of death care products and services are being sold prior to
the time of death (i.e., on a "pre-need" basis). SCI believes that consumers are
becoming more aware of the benefits of advanced planning, such as the financial
assurance and peace of mind achieved by establishing in advance a fixed price
and type of service, and the elimination of the emotional strain on family
members of making death care plans at the time of need.
Cremation
In recent years there has been steady, gradual growth in the number of families
in the United States that have chosen cremation as an alternative to traditional
methods of disposal. According to industry studies, cremations accounted for
approximately 20% of all dispositions of human remains in the United States in
1993. SCI's domestic operations perform substantially more cremations than the
national average. In 1993, just under 29% of all families served by SCI's North
American funeral homes selected the cremation alternative. SCI has a significant
number of operating locations in Florida and all along 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% to 70% of all dispositions of human remains in Australia and in the United
Kingdom.
S-13
<PAGE> 107
RECENT DEVELOPMENTS
The Company is considering the desirability and feasibility of an acquisition of
Pompes Funebres Generales S.A. ("PFG"), which operates approximately 150 funeral
homes or similar facilities and 750 other retail outlets in France and is the
largest operator of funeral homes in France. Although the Company has had, and
intends to continue, exploratory discussions with Lyonnaise des Eaux-Dumez S.A.
("Lyonnaise"), which controls approximately 66% of the stock of PFG, in regard
to various potential transactions, Lyonnaise has advised the Company that it has
no intention of selling its interest in PFG. The balance of the stock of PFG is
publicly traded, and the current total market capitalization of PFG is
approximately U.S. $185 million. For the year ended December 31, 1993, PFG
reported revenues of approximately U.S. $565 million and net income of
approximately U.S. $20 million. Subsequent to December 31, 1993, PFG sold its
46% interest in Plantsbrook to the Company. The results for PFG disclosed above
include all of the revenues of Plantsbrook during such period, and PFG's 46%
interest in Plantsbrook's net income. For the year ended December 31, 1993,
Plantsbrook reported revenues of approximately U.S.$77.7 million and net income
of approximately U.S. $12.3 million. The operating margins of the funeral
business in France historically have been substantially lower than the operating
margins in the funeral business in North America and in the United Kingdom. The
Company has retained an affiliate of J.P. Morgan Securities Inc. to assist it in
its evaluation of PFG. Particularly in light of the statement by Lyonnaise that
it has no intention of selling its interest in PFG, there can be no assurance
that any transaction involving the Company and PFG will ultimately occur or as
to the terms of any such transaction.
In October 1994, the Company announced that it had acquired approximately 8.5%
of the Class A Voting Shares and approximately 19.9% of the Class B Non-Voting
Shares of Arbor Memorial Services Inc. ("Arbor"). Arbor owns 44 cemeteries and
21 crematoria in Canada. The Company, which acquired its position in Arbor as a
strategic investment, is continuing to consider means to build its relationship
with Arbor and may continue to increase its investment in Arbor. Subsequent to
the announcement by the Company of its position in Arbor, the Company was
advised by the Arbor stockholder who owns a majority of the Class A Voting
Shares that he is not interested at this time in a transaction involving a sale
of control of Arbor. For the year ended October 31, 1993, Arbor reported
revenues of approximately U.S. $78.1 million and net income of approximately
U.S. $4.5 million.
The financial data contained herein with respect to PFG, Plantsbrook and Arbor
is derived from such companies' publicly available information. Such data was
not prepared in conformity with United States generally accepted accounting
principles, and the Company makes no representation with respect to the accuracy
of such data or the comparability of such data to financial data of the Company
or other U.S. companies in the death care industry.
S-14
<PAGE> 108
CERTAIN INVESTMENT CONSIDERATIONS
In evaluating an investment in the TECONS, prospective purchasers should
carefully consider the following factors, together with (i) information included
elsewhere in this Prospectus and (ii) information incorporated herein by
reference (which may modify or supersede the factors set forth below).
SUBORDINATION
SCI's obligations under the Guarantee relating to the TECONS are subordinate and
junior in right of payment to all other liabilities of SCI (see "Description of
the LLC Preferred Securities -- Description of the Guarantee -- Status of the
Guarantee"), and its guarantee of SCI Limited's obligations under the Loan
Agreement pursuant to which the proceeds of this offering of TECONS will be
loaned by SCI Finance to SCI Limited (the "Loan Agreement") is subordinate and
junior in right of payment to Senior Indebtedness (as defined under "Description
of the LLC Preferred Securities -- Description of the Loans -- Subordination")
of SCI. At September 30, 1994, SCI had approximately $3.9 billion of
consolidated total liabilities, of which approximately $1.4 billion would have
constituted secured debt or Senior Indebtedness. Substantially all of the rest
of such obligations constituted liabilities of subsidiaries of SCI as to which
the Guarantee and SCI's guarantee under the Loan Agreement are effectively
subordinated with respect to the assets of such subsidiaries.
RIGHT TO EXTEND INTEREST PAYMENTS
SCI Limited has the right under the Loan Agreement to extend interest payments
for up to 60 monthly interest payment periods in the aggregate over the term of
the Loans, and, as a consequence, monthly dividends on the TECONS can be
deferred (but will continue to accumulate) by SCI Finance during any such
extended interest payment period. In the event that SCI Limited exercises this
right, SCI may not declare dividends on any share of its preferred or common
stock. Should an extended interest payment period occur, SCI Finance will
continue to accrue income for U.S. federal income tax purposes which will be
allocated, but not distributed, to record holders of the TECONS. As a result,
such holders will include interest in gross income for U.S. federal income tax
purposes in advance of the receipt of cash, and any such holders who dispose of
the TECONS prior to the record date for payment of dividends following such
period will also include interest in gross income but will not receive cash
related thereto.
CERTAIN UNITED STATES TAX CONSEQUENCES
A holder of the TECONS will recognize gain or loss upon conversion of TECONS
into SCI Common Stock. By contrast, a holder of an issuer's conventional
convertible preferred shares or debt generally does not recognize gain or loss
until disposing of such issuer's common stock received on conversion of such
preferred shares or debt. See "Certain Federal Income Tax Considerations
Regarding the LLC Preferred Securities -- Conversion of LLC Preferred
Securities." No portion of the income from the TECONS will be eligible for the
dividends received deduction for purposes of United States federal income
taxation.
ABSENCE OF PRIOR PUBLIC MARKET
There is currently no trading market for the TECONS. If the TECONS are traded
after their initial issuance, they may trade at a discount from their initial
offering price depending upon the current market price of the SCI Common Stock,
the market for similar securities and other factors. No assurance can be given
that any market for the TECONS will develop or, if any such market develops, as
to the liquidity of such market. In addition, no assurance can be given that a
holder of such TECONS will be able to sell such TECONS in the future or that
such sale will be at a price equal to or higher than the initial offering price
of such TECONS. Furthermore, announcements and disclosures regarding SCI and/or
SCI Finance could affect the market prices for the TECONS.
S-15
<PAGE> 109
USE OF PROCEEDS
The proceeds to SCI Finance from the sale of the TECONS offered hereby are
estimated to be $150 million ($172.5 million if the Underwriters' over-allotment
option is exercised in full). The net proceeds from the Common Stock Offering
are estimated to be $189.8 million ($218.3 million if the underwriters'
over-allotment option in respect of the Common Stock is exercised in full). The
Company will contribute $40 million of the net proceeds from the Common Stock
Offering to SCI Finance ($46 million if the underwriters' over-allotment in
respect of the TECONS is exercised in full). Substantially all of the aggregate
proceeds so obtained by SCI Finance from the Company and from the sale of the
TECONS offered hereby will be loaned by SCI Finance to SCI International
Limited, a wholly-owned subsidiary of SCI ("SCI Limited"), which will use such
proceeds to repay a portion of the amounts outstanding under the UK Facilities
(as defined below). In connection with the acquisitions of Great Southern and
Plantsbrook, a subsidiary of SCI Limited obtained a L185 million loan facility
from Morgan Guaranty Trust Company of New York (the "Morgan Facility") and a
L100 million line of credit from Chemical Bank (the "Chemical Facility" and,
together with the Morgan Facility, the "UK Facilities"). SCI has guaranteed the
UK Facilities. As of November 30, 1994, and giving effect to the exchange rate
as of such date of approximately $1.56 to L1, approximately $282 million was
outstanding under the Morgan Facility at a weighted average annual interest rate
of 6.0% with maturities ranging from five to 21 days, and approximately $141
million was outstanding under the Chemical Facility at a weighted average annual
interest rate of 5.9% with maturities ranging from two to 30 days. It is
anticipated that after giving effect to the application of the proceeds of the
TECONS Offering and the Common Stock Offering, an aggregate of approximately
$200 million will be outstanding under the UK Facilities, which the Company
intends to refinance with the proceeds from a note offering (the "UK Note
Offering") proposed to be made in the United Kingdom in early 1995. To the
extent that the proceeds of the UK Note Offering are less than $200 million, the
Company intends to use a portion of the proceeds from the Common Stock Offering
to effect the repayment of additional amounts outstanding under the UK
Facilities.
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., is the lender under the Morgan Facility. The maximum amount
available under the Morgan Facility is approximately $289 million. The Company
intends to repay the Morgan Facility in full with a combination of proceeds from
the TECONS Offering, the Common Stock Offering and the UK Note Offering. See
"Underwriting."
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS
The following table sets forth SCI's consolidated ratio of earnings to combined
fixed charges and preferred stock dividend requirements for the periods shown:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
3.32 3.18 3.19 3.03 2.82 2.62 2.38
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges and
preferred stock dividend requirements, earnings consist of income from
continuing operations before income taxes, less undistributed income of equity
investees which are less than 50% owned, plus the minority interest of
majority-owned subsidiaries with fixed charges and plus fixed charges (excluding
capitalized interest and preferred dividends). Combined fixed charges consist of
interest expense, whether capitalized or expensed, amortization of debt costs,
one-third of rental expense which SCI considers representative of the interest
factor in the rentals and preferred dividend requirements. For purposes of
determining combined fixed charges and preferred stock dividend requirements,
preferred dividends are calculated on the basis of the amount of pre-tax income
required to pay preferred dividends.
S-16
<PAGE> 110
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The SCI Common Stock is traded on the NYSE under the symbol "SRV." The following
table sets forth, on a per share basis for the periods shown, the range of high
and low reported sale prices of the SCI Common Stock on the NYSE as well as per
share dividends paid in such periods. SCI has declared 86 consecutive quarterly
dividends on the SCI Common Stock since it began paying dividends in 1974.
<TABLE>
<CAPTION>
--------------------------------------
SALE PRICE
HIGH LOW DIVIDENDS
---------- ---------- ----------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1992:
First Quarter $ 18.38 $ 15.63 $ .09
Second Quarter 18.75 16.13 .10
Third Quarter 18.50 16.38 .10
Fourth Quarter 18.50 16.75 .10
Fiscal Year Ended December 31, 1993:
First Quarter $ 21.63 $ 17.88 $ .10
Second Quarter 22.13 18.50 .10
Third Quarter 25.25 20.75 .10
Fourth Quarter 26.38 23.50 .10
Fiscal Year Ending December 31, 1994:
First Quarter $ 28.00 $ 24.63 $ .105
Second Quarter 25.38 22.50 .105
Third Quarter 26.63 24.88 .105
Fourth Quarter (through December 5, 1994) 26.75 24.13 .105
</TABLE>
On December 5, 1994, the reported last sale price of the SCI Common Stock on the
NYSE was $25.50 per share.
S-17
<PAGE> 111
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of the
Company at September 30, 1994 and on a pro forma basis giving effect to the
acquisitions of Great Southern and Plantsbrook and as adjusted for the TECONS
Offering and the Common Stock Offering (assuming in each case that the
underwriters' over-allotment option is not exercised), the Senior Notes Offering
and the application of the estimated net proceeds from such offerings.
<TABLE>
<CAPTION>
--------------------------
AT SEPTEMBER 30, 1994
PRO FORMA
AND AS
Thousands ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
CURRENT MATURITIES OF LONG-TERM DEBT $ 68,416 $ 59,651
========= =========
INDEBTEDNESS UNDER UK FACILITIES $ 312,462 $ 200,000
LONG-TERM DEBT:
Indebtedness to banks under the Revolving Credit Facilities and
commercial paper 570,079 312,695
Notes offered in the Senior Notes Offering -- 200,000
Medium term notes 186,040 186,040
6.5% convertible subordinated debentures 172,500 172,500
7.875% debentures 150,000 150,000
Convertible debentures issued in connection with various
acquisitions 23,624 23,624
8% convertible debentures 14,939 14,939
Variable interest rate notes 10,596 10,596
Mortgage notes and other 120,767 114,431
--------- ---------
Total long-term debt 1,248,545 1,184,825
--------- ---------
CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY -- 150,000
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000 shares authorized; no shares issued and
outstanding -- --
Common stock, 200,000 shares authorized; 86,172 shares issued
and outstanding; 93,872 shares issued and outstanding pro
forma and as adjusted 86,172 93,872
Capital in excess of par value 527,321 709,399
Retained earnings 353,585 353,585
Foreign translation adjustment (3,029) (3,029)
--------- ---------
Total stockholders' equity 964,049 1,153,827
--------- ---------
Total capitalization $2,525,056 $2,688,652
========== ==========
</TABLE>
S-18
<PAGE> 112
SELECTED FINANCIAL INFORMATION
The selected consolidated financial data presented below for each of the five
years in the period ended December 31, 1993 have been derived from the
consolidated financial statements of the Company, which statements, in respect
of the year ended December 31, 1993, have been audited by Coopers & Lybrand,
independent public accountants, and in respect of the four years ended December
31, 1992, have been audited by Ernst & Young, independent public accountants.
The data at and for the nine months ended September 30, 1994 and September 30,
1993 have been derived from the unaudited consolidated financial statements of
the Company for such periods and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the information included therein in accordance with generally accepted
accounting principles for interim financial information. The data should be read
in conjunction with the related notes and other financial information included
and incorporated by reference in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 and the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994, incorporated by reference
herein. Results for the nine months ended September 30, 1994 are not necessarily
indicative of results for any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
AT OR FOR THE NINE MONTHS
Thousands, except per share ENDED SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,(1)
amounts and Other Data 1994 1993 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $801,934 $652,852 $899,178 $772,477 $643,248 $563,156 $518,809
Costs and expenses (558,737) (462,864) (635,858) (550,422) (464,740) (413,236) (386,032)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 243,197 189,988 263,320 222,055 178,508 149,920 132,777
General and administrative
expenses (35,530) (28,026) (43,706) (38,693) (35,448) (28,037) (28,423)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations 207,667 161,962 219,614 183,362 143,060 121,883 104,354
Interest expense (53,464) (44,185) (59,631) (53,902) (42,429) (36,095) (32,514)
Other income 7,767 8,111 13,509 9,876 8,241 13,644 12,778
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before income taxes
and preferred dividend
requirements 161,970 125,888 173,492 139,336 108,872 99,432 84,618
Provision for income taxes (65,727) (52,500) (70,400) (52,800) (35,500) (35,900) (31,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before cumulative
effect of change in accounting
principles and preferred
dividend requirements 96,243 73,388 103,092 86,536 73,372 63,532 53,618
Cumulative effect of change in
accounting principles (net of
income tax) -- (2,031) (2,031) -- -- -- --
Preferred dividend requirements -- -- -- -- -- (3,314) (6,897)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations available to common
stockholders $ 96,243 $ 71,357 $ 101,061 $ 86,536 $ 73,372 $ 60,218 $ 46,721
=========== =========== =========== =========== =========== =========== ===========
Per share:
Primary
Income from continuing
operations before
cumulative effect of
change in accounting
principles $1.12 $ .89 $1.24 $1.13 $1.03 $ .85 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.03) (.03) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.12 $ .86 $1.21 $1.13 $1.03 $ .85 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Fully diluted
Income from continuing
operations before
cumulative effect of
change in accounting
principles $1.06 $ .85 $1.19 $1.07 $1.00 $ .84 $ .65
Cumulative effect of change
in accounting principles
(net of income tax) -- (.02) (.02) -- -- -- --
---- ---- ---- ---- ---- ---- ----
Income from continuing
operations available to
common stockholders $1.06 $ .83 $1.17 $1.07 $1.00 $ .84 $ .65
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Dividends $.315 $ .30 $ .40 $ .39 $ .37 $ .37 $ .36
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ (298,411) $ 171,051 $ 171,901 $ 155,319 $ 156,383 $ 113,391 $ 120,682
Prearranged funeral contracts 1,385,346 1,193,554 1,244,866 -- -- -- --
Total assets 4,839,553 3,502,505 3,683,304 2,611,123 2,123,452 1,653,689 1,601,468
Long-term debt, excluding
current portion 1,248,545 1,021,238 1,062,222 980,029 786,685 577,378 485,669
Deferred prearranged funeral
contract revenues 1,476,178 1,228,376 1,263,407 -- -- -- --
Stockholders' equity 964,049 856,924 884,513 683,097 615,776 434,323 557,777
Total capitalization 2,525,056 1,878,162 1,946,735 1,663,126 1,402,461 1,011,701 1,043,446
OTHER DATA (END OF PERIOD):
Funeral homes 1,431 763 792 674 655 512 551
Cemeteries 213 186 192 176 163 145 126
</TABLE>
- ---------------
(1) The year ended December 31, 1993 reflects the changes in accounting
principles adopted January 1, 1993. The four years ended December 31, 1992
reflect results as historically reported.
S-19
<PAGE> 113
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
In June 1994, the Company announced an unsolicited offer to acquire 100% of the
outstanding shares of GSG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 98% of GSG's voting shares. The Company
anticipates that the total purchase price will approximate $192,777,000,
including the assumption of approximately $14,751,000 of existing debt. GSG is a
funeral provider in the United Kingdom ("UK") and owns 157 funeral homes, 13
crematoria and two cemeteries.
In September 1994, the Company announced its offer to acquire 100% of the
outstanding shares of PG. As of September 30, 1994, the Company owned, or had
commitments to acquire, in excess of 95% of PG's voting shares. The Company
anticipates that the total purchase price will approximate $312,690,000,
including the assumption of approximately $13,873,000 of existing debt. PG is a
funeral provider in the UK and owns 380 funeral homes.
In addition to the acquisitions of GSG and PG, during 1993 and the nine months
ended September 30, 1994, the Company continued to acquire funeral and cemetery
operations in the United States, Australia and Canada. Excluding GSG and PG,
during such period the Company acquired 224 funeral homes and 41 cemeteries (the
"Other Acquired Companies") in 89 separate transactions for an aggregate
purchase price of approximately $436,000,000 in the form of combinations of
cash, SCI Common Stock, issued and assumed debt, convertible debentures and
retired loans receivable held by Provident.
The following unaudited pro forma combined statements of income for the year
ended December 31, 1993 and the nine months ended September 30, 1994 have been
prepared assuming the acquisitions by the Company of GSG, PG and the Other
Acquired Companies took place at the beginning of the respective periods. Such
acquisitions are being accounted for under the purchase method of accounting.
The historical revenues and expenses of the Other Acquired Companies represent
amounts recorded by those businesses for the period that they were not owned by
the Company during the year ended December 31, 1993 and the nine months ended
September 30, 1994, respectively. The unaudited pro forma combined financial
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.
The acquisitions of GSG and PG are being financed on an interim basis
principally with borrowings under the UK Facilities, under which the Company may
borrow up to $438,900,000 (based on the exchange rate of one UK pound sterling
equivalent to $1.54 on September 2, 1994) with interest at a rate equal to UK
pound sterling LIBOR plus 20 basis points. The unaudited pro forma combined
financial information presented herein assumes the completion of the Common
Stock Offering, the TECONS Offering and the Senior Notes Offering at the
beginning of the respective periods. The proceeds from the TECONS Offering and a
portion of the net proceeds from the Common Stock Offering are assumed to be
used to repay $238,900,000 of indebtedness under the UK Facilities, and it is
further assumed that $200,000,000 remains outstanding under the UK Facilities at
the beginning of the respective periods. The remaining net proceeds from the
Common Stock Offering and all of the net proceeds from the Senior Notes Offering
are assumed to be used to repay amounts outstanding under the Revolving Credit
Facilities or to retire commercial paper or both (including $37,680,000 which
was assumed to have been borrowed to finance a portion of the purchase price of
GSG and PG).
The historical financial statements of GSG and PG for the year ended December
31, 1993 and for the period not owned by the Company in 1994 were prepared in UK
pound sterling in accordance with the UK Companies Act of 1985 ("UK GAAP"). This
information has been adjusted to present the historical financial statements in
accordance with United States generally accepted accounting principles ("US
GAAP") and translated into U.S. dollars at the average exchange rate for the
respective statement of income periods presented. The Company has not completed
all appraisals and evaluations necessary to finalize GSG's and PG's purchase
price allocation, and accordingly, actual adjustments that reflect appraisals
and other evaluations of the purchased assets and assumed liabilities may differ
from the pro forma adjustments.
S-20
<PAGE> 114
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
HISTORICAL PRO FORMA
OTHER ACQUIRED
Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL
----------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 899,178 $ 126,594 $ 123,380 $ 5,165 (A) $1,154,317
Costs and expenses (635,858) (101,300) (106,778) (3,590)(A) (829,910)
13,665 (B)
7,781 (C)
(70)(D)
(6,611)(E)
3,598 (F)
(437)(G)
(310)(H)
----------- ---------- -------------- ------------ --------------
Gross profit 263,320 25,294 16,602 19,191 324,407
General and administrative expenses (43,706) -- -- -- (43,706)
----------- ---------- -------------- ------------ --------------
Income from operations 219,614 25,294 16,602 19,191 280,701
Interest expense (59,631) (2,560) (4,111) (686)(A) (87,680)
(6,918)(B)
1,372 (I)
(11,750)(J)
9,034 (K)
(17,140)(L)
4,710 (M)
Dividends on convertible preferred
stock of subsidiary -- -- -- (9,375)(N) (9,375)
Other income 13,509 313 -- -- 13,822
----------- ---------- -------------- ------------ --------------
Income before income taxes 173,492 23,047 12,491 (11,562) 197,468
Provision for income taxes (70,400) (8,681) (4,694) 3,634 (O) (80,141)
----------- ---------- -------------- ------------ --------------
Income before cumulative effect
of change in accounting
principles $ 103,092 $ 14,366 $ 7,797 $ (7,928) $ 117,327
========== ========= =========== =========== ===========
Earnings per share:
Primary
Income before cumulative effect
of change in accounting
principles $1.24 $1.26
======== ========
Fully diluted
Income before cumulative effect
of change in accounting
principles $1.19 $1.21
======== ========
Primary weighted average number of
shares 83,372 1,915 (P) 92,987
======== 7,700 (Q) ========
Fully diluted weighted average number
of shares 93,878 2,595 (P) 109,158
======== 7,700 (Q) ========
4,985 (R)
</TABLE>
S-21
<PAGE> 115
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(Thousands)
(A) To record the acquisition of 13 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1993. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $16,654, offset in part by
additional costs and expenses of $2,989 resulting from the effect of
applying purchase accounting adjustments, primarily amortization and
depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 3.51%, which represented the weighted average borrowing rate under
the Revolving Credit Facilities and the Company's commercial paper for the
year ended December 31, 1993. At November 30, 1994, the borrowing rate
under the revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1993. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.86%) plus 20 basis points for the year ended December 31,
1993. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 3.51%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and the Company's
commercial paper for the year ended December 31, 1993.
S-22
<PAGE> 116
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1993. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $947 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the SCI Common
Stock (in the case of the primary and fully diluted weighted average number
of shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1993
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1993.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
HISTORIC AMOUNTS AS REPORTED IN
CONVERTED TO US UNAUDITED
DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
-------- -------- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $48,885 $77,709 $ -- $ -- $48,885 $77,709
Costs and expenses (38,234) (58,893) (272)(1) (303)(1) (39,078) (62,222)
(572)(2) (3,026)(2)
Interest expense and other (1,372) (875) -- -- (1,372) (875)
Provision for income taxes (3,228) (5,645) 90(1) 102(1) (3,138) (5,543)
-------- -------- ----- ------- -------- --------
Net income $ 6,051 $12,296 $(754) $(3,227) $ 5,297 $ 9,069
======== ======== ===== ======= ======== ========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.493, which represents the average
exchange rate for the period.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-23
<PAGE> 117
SERVICE CORPORATION INTERNATIONAL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
---------------------------------------------------------------
HISTORICAL PRO FORMA
OTHER
THE ACQUIRED COMBINED
Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL
--------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 801,934 $ 86,198 $ 22,997 $ 1,146 (A) $912,275
Costs and expenses (558,737) (69,938) (20,105) (770)(A) (645,390)
2,878 (B)
3,757 (C)
(47)(D)
(4,407)(E)
2,502 (F)
(291)(G)
(232)(H)
--------- -------- -------- --------- --------
Gross profit 243,197 16,260 2,892 4,536 266,885
General and administrative expenses (35,530) -- -- -- (35,530)
--------- -------- -------- --------- --------
Income from operations 207,667 16,260 2,892 4,536 231,355
Interest expense (53,464) (1,337) (812) (165)(A) (65,064)
(1,679)(B)
731 (I)
(7,278)(J)
8,262 (K)
(12,855)(L)
3,533 (M)
Dividends on convertible preferred stock
of subsidiary -- -- -- (7,031)(N) (7,031)
Other income 7,767 201 -- -- 7,968
--------- -------- -------- --------- --------
Income before income taxes 161,970 15,124 2,080 (11,946) 167,228
Provision for income taxes (65,727) (5,641) (809) 4,207 (O) (67,970)
--------- -------- -------- --------- --------
Net income $ 96,243 $ 9,483 $ 1,271 $ (7,739) $ 99,258
========= ======== ======== ========= ========
Earnings per share:
Primary $1.12 $1.05
===== =====
Fully Diluted $1.06 $1.00
===== =====
Primary weighted average number of shares 86,215 272 (P) 94,187
====== ======
7,700 (Q)
Fully diluted weighted average number of
shares 96,386 508 (P) 109,579
====== =======
7,700 (Q)
4,985 (R)
</TABLE>
S-24
<PAGE> 118
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Thousands)
(A) To record the acquisition of 5 separate businesses acquired at various
dates by PG between January 1, 1993 and August 31, 1994 as if such
acquisitions had occurred on January 1, 1994. Internally generated funds
were used for the purchase of these businesses; however, for purposes of
the unaudited pro forma combined statement of income, imputed interest
expense, calculated on the purchase price, has been included at a rate of
6%, which approximates the Company's UK borrowing rate.
(B) To record a reduction to costs and expenses for the Other Acquired
Companies based on results actually achieved by the Company for the periods
subsequent to acquisition in the amount of $3,606, offset in part by
additional costs and expenses of $728 resulting from the effect of applying
purchase accounting adjustments, primarily amortization and depreciation.
Interest expense was added for debt and convertible debentures, issued in
the purchase of the Other Acquired Companies, at stated rates. In addition,
interest expense has been added for the cash portion of the purchase price
assumed to be borrowed by the Company at a weighted average annual interest
rate of 4.28%, which represented the weighted average borrowing rate under
the Revolving Credit Facilities and the Company's commercial paper for the
nine months ended September 30, 1994. At November 30, 1994, the borrowing
rate under the revolving credit facilities and commercial paper was 5.63%.
(C) To eliminate corporate expenses, consisting primarily of duplicate
personnel expenses, related to the acquisitions of GSG and PG.
(D) To record the depreciation expense (based on a 50 year useful life and
straight-line depreciation) on GSG's funeral home buildings resulting from
the estimated change in fair value over historical cost.
(E) To record the amortization of names and reputations (based on a 40 year
straight-line amortization) created from the acquisition of PG by the
Company.
(F) To eliminate the historical GSG and PG goodwill amortization expense.
(G) To record the cost of GSG's cemetery and cremation memorialization
interment rights sold.
(H) To record the estimated amortization expense expected to result from the
costs and expenses associated with the TECONS Offering and the Senior Notes
Offering.
(I) To eliminate the interest expense on GSG debt to be repaid by the Company.
(J) To record the estimated interest expense on the net amount borrowed under
the UK Facilities in connection with the acquisitions of GSG and PG
($200,000) as if such amount had been borrowed on January 1, 1994. This
reflects the assumed repayment of a portion of the UK Facilities ($238,900)
from the proceeds from the TECONS Offering ($150,000) and a portion of the
net proceeds from the Common Stock Offering ($88,900). The estimated
interest expense reflects a rate equal to the average UK pound sterling
LIBOR rate (5.33%) plus 20 basis points for the eight months ended August
31, 1994. At November 30, 1994, the UK pound sterling LIBOR rate was 5.69%.
(K) To record the estimated reduction in interest expense resulting from the
expected repayment of $257,384 of indebtedness under the Revolving Credit
Facilities and/or the Company's commercial paper. The $257,384 reflects the
financing of a portion of the purchase price of GSG and PG ($37,680) and
the use of $96,800 of net proceeds of the Common Stock Offering and all of
the $198,264 net proceeds of the Senior Notes Offering to repay such
indebtedness. The reduction was calculated using a weighted average annual
interest rate of 4.28%, which represents the Company's weighted average
borrowing rate under the Revolving Credit Facilities and the Company's
commercial paper for the nine months ended September 30, 1994.
S-25
<PAGE> 119
(L) To record the estimated interest expense on the $200,000 notes being issued
in the Senior Notes Offering at an assumed annual interest rate of 8.57%.
(M) To record the estimated reduction in net interest expense achieved from a
planned cross currency hedging transaction as if such transaction had been
entered into on January 1, 1994. This transaction will effectively convert
$272,500 of U.S. fixed rate indebtedness into floating rate UK pound
sterling indebtedness, raising SCI's total UK pound sterling exposure to
$472,500, which is comparable to the size of the acquisitions of GSG and PG.
Such transaction is assumed to allow the Company to receive fixed rate
interest on the $272,500 at a weighted average rate of 8.43% and pay UK
pound sterling LIBOR plus 53 basis points on $200,000 and pay UK pound
sterling LIBOR on $72,500.
(N) To record the dividends on the securities being issued in the TECONS
Offering.
(O) To record the tax effect of the pro forma adjustments, including a $710 tax
benefit from the amortization of deferred taxes resulting from indexed
increases in the tax basis of UK assets.
(P) To give effect to the additional time period during which the SCI Common
Stock (in the case of the primary and fully diluted weighted average number
of shares) and convertible debt (in the case of the fully diluted weighted
average number of shares) issued during the period between January 1, 1994
and September 30, 1994 in respect to the acquisition of the Other Acquired
Companies would have been outstanding if all of such acquisitions had
occurred as of January 1, 1994.
(Q) To reflect the issuance of 7,700 shares in the Common Stock Offering.
(R) To record the impact on the fully diluted weighted average number of shares
of the TECONS Offering.
The following adjustments were made to the historical financials of GSG and PG
in order to restate historical financial statements to US GAAP:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
HISTORIC AMOUNTS
CONVERTED TO AS REPORTED IN UNAUDITED
US DOLLARS ADJUSTMENTS TO PRO FORMA COMBINED
IN UK GAAP* US GAAP STATEMENT OF INCOME
GSG PG GSG PG GSG PG
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $33,714 $52,484 $ -- $ -- $33,714 $52,484
Costs and
expenses (26,682) (40,365) (184)(1) (205)(1) (27,254) (42,684)
(388)(2) (2,114)(2)
Interest expense
and other (731) (405) -- -- (731) (405)
Provision for
income taxes (2,079) (3,689) 60(1) 67(1) (2,019) (3,622)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 4,222 $ 8,025 $ (512) $(2,252) $ 3,710 $ 5,773
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
* One UK pound sterling equivalent to $1.52, which represents the average
exchange rate for the eight months ended August 31, 1994.
(1) To depreciate buildings straight-line over 50 years for GSG and PG.
(2) To amortize PG's historical goodwill balance straight-line over 40 years.
S-26
<PAGE> 120
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except average sales prices)
OVERVIEW
The majority of the Company's funeral homes 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 operating
expenses such as service personnel, vehicles, preparation services, clerical
staff and certain building facility costs. The Company has approximately 160
clusters in North America and Australia, which range in size from two operations
to 53 operations. There may be more than one cluster in a given metropolitan
area, depending upon the level and degree of shared costs.
The cluster management approach recognizes that, as the Company adds operations
to a geographic area that contains an existing Company presence, additional
economies of scale through cost sharing will be achieved and the Company will
also be in a better position to serve the population that resides within the
area served by the cluster. Funeral service and cemetery operations primarily
depend upon a long-term development of customer relationships and loyalty. Over
time, these client families may relocate within a cluster area which may justify
the relocation or addition of Company locations. The Company attempts to satisfy
this need for convenient locations by either acquiring existing independent
locations within the Company's cluster areas or constructing satellite funeral
homes (sometimes on Company-owned cemeteries) while still maintaining the
sharing of certain expenses within that cluster of operations.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September 30,
1993
Segment information for the Company's three lines of business are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral $535,140 $436,425 $98,715 22.6%
Cemetery 252,413 205,062 47,351 23.1
Financial services 14,381 11,365 3,016 26.5
---------- ---------- ----------
801,934 652,852 149,082 22.8
Costs and expenses:
Funeral 377,445 309,615 67,830 21.9
Cemetery 173,031 146,554 26,477 18.1
Financial services 8,261 6,695 1,566 23.4
---------- ---------- ----------
558,737 462,864 95,873 20.7
Gross profit and
margin percentage:
Funeral 157,695 29.5% 126,810 29.1% 30,885 24.4
Cemetery 79,382 31.4 58,508 28.5 20,874 35.7
Financial services 6,120 42.6 4,670 41.1 1,450 31.0
---------- ---------- ----------
$243,197 30.3% $189,988 29.1% $53,209 28.0%
========== ========== ==========
</TABLE>
S-27
<PAGE> 121
Funeral
Funeral revenues were generated as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $463,276 $409,726 $53,550 13.1%
New clusters* 50,698 7,977 42,721
---------- ---------- ----------
Total clusters 513,974 417,703 96,271 23.0%
Non-cluster and disposed operations 21,166 18,722 2,444
---------- ---------- ----------
Total funeral revenues $535,140 $436,425 $98,715 22.6%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
The $53,550 increase in revenues at existing clusters was the result of 10,258
or 8.5% more funeral services performed and a $142 or 4.2% higher average sales
price. Included in this increase was $35,661 in revenues from locations acquired
since the beginning of 1993. It is anticipated that the Company's revenue growth
will primarily be generated from acquired operations (added to existing clusters
and the creation of new clusters) as well as higher average sales prices.
During the nine months ended September 30, 1994, the Company sold $173,004 of
prearranged funeral services compared to $114,471 for the same period in 1993.
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 were incurred as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $302,606 $268,815 $33,791 12.6%
New clusters* 36,293 6,042 30,251
---------- ---------- ----------
Total clusters 338,899 274,857 64,042 23.3%
Non-cluster and disposed operations 17,086 15,880 1,206
Administrative overhead 21,460 18,878 2,582
---------- ---------- ----------
Total funeral costs $377,445 $309,615 $67,830 21.9%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Total funeral gross profit margin increased to 29.5% compared to 29.1% recorded
last year. This gross profit margin improvement was achieved despite the large
number of acquisitions, added to both existing and new clusters, which have
occurred since the beginning of 1993. Typically, acquisitions will temporarily
exhibit slightly lower gross profit margins than those experienced at the
Company's existing locations. Acquisitions, since the beginning of 1993,
accounted for $27,270 of the existing cluster cost increase. The improved gross
profit margin for existing clusters reflects the increased revenues discussed
above, without a corresponding percentage increase in costs at other funeral
homes included in existing clusters. Administrative overhead costs related to
funeral operations decreased to 4.0% of revenues in 1994 compared to 4.3% of
revenues in 1993. The current period includes approximately $2,400 of gross
profit (representing approximately one month of activity) from the UK
acquisitions.
S-28
<PAGE> 122
Cemetery
Cemetery revenues were generated as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE
1994 1993 INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $231,090 $193,839 $37,251 19.2%
New clusters* 12,703 3,461 9,242
---------- ---------- ----------
Total clusters 243,793 197,300 46,493 23.6%
Non-cluster and disposed operations 8,620 7,762 858
---------- ---------- ----------
Total cemetery revenues $252,413 $205,062 $47,351 23.1%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Revenues for the existing clusters increased primarily due to increased sales of
lots, merchandise and services. Included in the existing cluster increase were
$15,740 in increased revenues from cemeteries acquired since the beginning of
1993.
Cemetery costs were incurred as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ PERCENTAGE
1994 1993 (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $149,302 $127,694 $21,608 16.9%
New clusters* 6,154 1,542 4,612
---------- ---------- ----------
Total clusters 155,456 129,236 26,220 20.3%
Non-cluster and disposed operations 5,890 6,044 (154)
Administrative overhead 11,685 11,274 411
---------- ---------- ----------
Total cemetery costs $173,031 $146,554 $26,477 18.1%
========== ========== ==========
</TABLE>
- ---------------
* Represents new geographic areas entered into since the beginning of 1993 for
the period that those businesses were owned by the Company.
Costs at existing clusters increased $21,608 due to an increase of $10,608 from
cemeteries acquired since the beginning of 1993. Costs from other existing
cluster cemeteries increased $11,000 due to the costs associated with the
increased revenues discussed above. The cemetery gross margin increase of 31.4%
this year compared to 28.5% last year reflects the strong revenue growth as well
as continued cost control, particularly in selling expenses. Administrative
overhead costs have decreased to 4.6% of revenues this year compared to 5.5%
last year.
Financial Services
Financial service revenues and costs have increased as a result of increased
loans outstanding. Improved interest rate spreads have increased the gross
margin percentage to 42.6% this year from 41.1% last year. The average
outstanding loan portfolio during the current year was $241,923 with an average
interest rate spread of 3.48% compared to $209,393 and 3.24%, respectively, last
year.
Other Income and Expenses
General and administrative expenses increased by $7,504 or 26.8%. Of the
increase, $4,274 is attributable to personnel expenses primarily in the form of
incentive compensation and restricted stock costs. Professional fees have
increased $2,380 in the current year primarily from legal costs associated with
the ongoing informal
S-29
<PAGE> 123
investigation of the Company by the Securities and Exchange Commission (the
"Commission"). The remainder of the increase is derived primarily from corporate
transportation and travel costs. As a percentage of revenues, general and
administrative expenses were 4.4% this year compared to 4.3% last year.
Interest expense, which excludes the amount incurred through financial service
operations, increased $9,279 or 21.0% during the current year primarily due to
increased borrowings and higher interest rates incurred under the Company's
existing lines of credit and commercial paper primarily used to fund the
Company's acquisition program. Also contributing to the increase in the current
year was the issuance of $150,000 of 7.875% debentures issued by the Company in
February 1993 and the recognition of $2,160 of interest expense associated with
the recent acquisitions in the UK.
The provision for income taxes has decreased to 40.6% from 41.7% last year
primarily due to the enactment of the Omnibus Budget Reconciliation Act of 1993
(the "Act") in August 1993 which increased corporate tax rates retroactively to
January 1, 1993. The 1993 period includes a $3,200 charge due to the Act.
Year to Year Comparisons -- Change in Accounting Principles
Effective January 1, 1993, the Company changed its method of accounting for
prearranged funeral service contracts and cemetery sales. For a more detailed
discussion of these changes, see Note 2 to the consolidated financial statements
in Item 8 of the Form 10-K for the year ended December 31, 1993 (the "Form
10-K"). The cumulative effect of these changes resulted in an after tax charge
of $2,031 or $.03 per share on January 1, 1993. Generally these changes will
result in reduced funeral revenues and funeral operating income, at least in the
near future, due to the deferral of previously recognized prearranged funeral
service trust fund income until performance of the specific funeral.
Additionally, these changes will generally result in higher cemetery revenues
and cemetery operating income because all cemetery sales and costs are recorded
in current income. See Item 3, Legal Proceedings, in the Form 10-K for
information regarding an informal investigation by the Securities and Exchange
Commission and the Company's Form 8-K dated October 18, 1994.
For purposes of management's discussion and analysis of results of operations
and financial condition, all comparisons to 1992 and 1991 reflect the pro forma
effects of applying the new accounting principles as if the changes had occurred
on December 31, 1990. The following table presents the pro forma results for the
years ended 1992 and 1991:
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
AS UNAUDITED
REPORTED PRO FORMA
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Funeral $603,099 $532,914 $430,565
Cemetery 280,421 217,100 194,434
Financial services 15,658 10,741 14,823
---------- ---------- ----------
899,178 760,755 639,822
Costs and expenses:
Funeral (426,008) (379,223) (307,090)
Cemetery (200,682) (164,188) (149,822)
Financial services (9,168) (6,632) (10,666)
---------- ---------- ----------
(635,858) (550,043) (467,578)
---------- ---------- ----------
Gross profit 263,320 210,712 172,244
General and administrative expenses (43,706) (38,693) (35,448)
Interest expense (59,631) (53,902) (42,429)
Other income 13,509 9,876 8,241
---------- ---------- ----------
Income before income taxes 173,492 127,993 102,608
Income taxes (70,400) (48,500) (33,200)
---------- ---------- ----------
Income before cumulative effect of change in accounting
principles $103,092 $79,493 $69,408
========== ========== ==========
</TABLE>
S-30
<PAGE> 124
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
In 1993, total funeral revenues increased $70,185 or 13.2% over 1992. Funeral
revenues were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $548,771 $497,092 $51,679 10.4%
New clusters** 28,376 2,259 26,117
---------- ---------- ----------
Total clusters 577,147 499,351 77,796 15.6%
Non-cluster and disposed operations 25,952 33,563 (7,611)
---------- ---------- ----------
Total funeral revenues $603,099 $532,914 $70,185 13.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
The $51,679 increase in revenues at existing clusters was the result of 10,193
or 6.9% more funeral services performed and a $111 or 3.3% higher average sales
price. Included in this increase were $29,281 in revenues from locations
acquired during the two year period. Overall, funeral services performed are
expected to grow slowly for the near future and it is expected that the
Company's revenue growth will primarily be generated from acquired operations
(added to existing clusters and the creation of new clusters) as well as higher
average sales prices.
During 1993, the Company sold $159,000 of prearranged funeral services compared
to $119,000 for 1992. These prearranged funeral services are deferred and will
be reflected in funeral revenues in the periods that the funeral services are
performed. An increased emphasis on sales of prearranged funerals is expected to
continue.
Total funeral costs increased $46,785 or 12.3% in 1993. Funeral costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $357,118 $324,893 $32,225 9.9%
New clusters** 21,571 1,755 19,816
---------- ---------- ----------
Total clusters 378,689 326,648 52,041 15.9%
Non-cluster and disposed operations 18,838 27,654 (8,816)
Administrative overhead 28,481 24,921 3,560
---------- ---------- ----------
Total funeral costs $426,008 $379,223 $46,785 12.3%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
Existing cluster funeral costs, expressed as a percentage of revenues, were
65.1%, which was slightly lower than the 65.4% recorded in 1992. This gross
profit margin improvement was achieved despite the large number of acquisitions
which occurred during the two year period. Typically, acquisitions will
temporarily exhibit slightly lower gross profit margins than the Company's
existing locations. These acquisitions accounted for $19,548 of the existing
cluster cost increase. The improved gross profit margin reflects increased
revenues, reduced personnel costs (the largest funeral expense item) and
facility costs at other funeral homes included in existing clusters. As a
percentage of revenues, administrative overhead costs related to funeral
operations remained at 4.7% in both years.
S-31
<PAGE> 125
Total cemetery revenues increased $63,321 or 29.2% over 1992. Cemetery revenues
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $254,343 $202,709 $51,634 25.5%
New clusters** 14,818 946 13,872
---------- ---------- ----------
Total clusters 269,161 203,655 65,506 32.2%
Non-cluster and disposed operations 11,260 13,445 (2,185)
---------- ---------- ----------
Total cemetery revenues $280,421 $217,100 $63,321 29.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
Revenues for the existing clusters increased due to increased at-need and
pre-need sales volumes, higher average at-need and pre-need contract prices and
additional earnings from cemetery perpetual care and merchandise and service
trust funds. Included in the existing cluster increase was $40,059 in increased
revenues from cemeteries acquired during the two year period.
Total cemetery costs increased $36,494 or 22.2% over the prior year. Cemetery
costs were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1993 1992* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $167,635 $141,178 $26,457 18.7%
New clusters** 8,414 892 7,522
---------- ---------- ----------
Total clusters 176,049 142,070 33,979 23.9%
Non-cluster and disposed operations 8,038 10,437 (2,399)
Administrative overhead 16,595 11,681 4,914
---------- ---------- ----------
Total cemetery costs $200,682 $164,188 $36,494 22.2%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1992 for
the period that those businesses were owned by the Company.
The entire increase in existing cluster costs resulted from increased costs at
cemeteries acquired during the two year period. There was no increase in costs
at other cemeteries included in existing clusters despite the sales increase
discussed above. Cost containment in the areas of selling and maintenance
expenses contributed to the lack of increase. Cemetery costs, expressed as a
percentage of revenues, at existing clusters decreased to 65.9% this year from
69.6% in 1992. The Company believes that the gross margins realized in 1993 are
achievable in the future through continued aggressive sales as well as cost
containment programs. Administrative overhead costs have increased slightly,
when expressed as a percentage of revenues, to 5.9% currently from 5.4% in 1992.
Financial service revenues and costs have increased in 1993 as a result of
increased loans outstanding and improved interest rate spreads. The average
outstanding loan portfolio during 1993 was $215,726 with an average interest
rate spread of 3.3% compared to $143,773 and 2.6%, respectively, in 1992.
Financial services are provided through Provident which is a major source of
funding to independent funeral home and cemetery operators. Unlike a commercial
bank, Provident does not have access to low-cost deposit funds so its net
interest margin is lower because it borrows money at market rates. Additionally,
Provident does not incur as much administrative costs as does a commercial bank.
Through Provident's relationships with these borrowers, the Company derives the
benefit of developing a continuing relationship with these entities. The credit
risk for this type of lending is considered minimal to the Company.
S-32
<PAGE> 126
General and administrative expenses increased by $5,013 or 13.0%. The increase
is primarily attributable to compensation expense in connection with
performance-based vesting of restricted stock grants to Company management.
Vesting is based on a formula primarily tied to earnings per share growth.
Interest expense, which excludes the amount incurred through financial service
operations, increased $5,729 or 10.6% during 1993. In February 1993, the Company
issued $150,000 of 7.875% debentures due in 2013. The proceeds were primarily
used to repay existing credit agreement borrowings. Also in February 1993, the
Company called the $100,000 6.5% convertible debentures originally issued in
1986. Holders of the debentures converted $97,164 into Company common stock at
$17.33 per share (5,607,000 shares) with the remaining $2,836 redeemed in cash.
Additionally, interest expense was reduced by decreased average interest rates
on amounts borrowed under the Company's credit agreements during 1993 compared
to 1992.
Other income includes the recognition of gains from the sale of excess real
estate and existing businesses during both periods.
The provision for income taxes has increased to 40.6% from 37.9% during 1992
primarily due to the enactment of the Omnibus Budget Reconciliation Act of 1993
in August 1993 which increased corporate tax rates retroactively to January 1,
1993. As a result of the new law, the Company's 1993 tax expense increased
$2,431 from increased deferred income taxes and $1,700 from the higher corporate
tax rate on 1993 earnings ($.05 earnings per share).
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
In 1992, total funeral revenues increased $102,349 or 23.8% over 1991. Funeral
revenues were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, PERCENTAGE
1992* 1991* INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $456,617 $390,807 $65,810 16.8%
New clusters** 43,377 11,190 32,187
---------- ---------- ----------
Total clusters 499,994 401,997 97,997 24.4%
Non-cluster and disposed operations 32,920 28,568 4,352
---------- ---------- ----------
Total funeral revenues $532,914 $430,565 $102,349 23.8%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
The $65,810 increase in revenues at existing clusters, which included an
increase of $59,598 from acquired operations, was the result of 13,857 or 11.4%
more funeral services performed and a $157 or 4.9% higher average sales price.
Total funeral costs increased $72,133 or 23.5% in 1992. Funeral costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, PERCENTAGE
1992* 1991* INCREASE INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $292,331 $254,186 $38,145 15.0%
New clusters** 34,972 9,063 25,909
---------- ---------- ----------
Total clusters 327,303 263,249 64,054 24.3%
Non-cluster and disposed operations 26,999 26,032 967
Administrative overhead 24,921 17,809 7,112
---------- ---------- ----------
Total funeral costs $379,223 $307,090 $72,133 23.5%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
S-33
<PAGE> 127
All of the increase in costs at existing clusters was the result of funeral
homes acquired during the two year period. For other funeral homes included in
existing clusters, personnel costs increased primarily as the result of higher
benefit costs. This was offset by decreased merchandise costs, reflecting more
effective purchasing arrangements with vendors and an additional year-end
discount from the revision of a merchandise purchasing contract with one vendor.
Discounts should continue through 1993 based on the provisions of the revised
contract as well as with agreements with other vendors. Facility costs also
declined when compared to 1991.
Total cemetery revenues increased $22,666 or 11.7% over 1991. Cemetery revenues
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1992* 1991* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $186,051 $171,273 $14,778 8.6%
New clusters** 13,823 5,308 8,515
---------- ---------- ----------
Total clusters 199,874 176,581 23,293 13.2%
Non-cluster and disposed operations 17,226 17,853 (627)
---------- ---------- ----------
Total cemetery revenues $217,100 $194,434 $22,666 11.7%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
Revenues at existing clusters, which include an increase of $11,937 from
acquired operations, increased a total of $14,778 or 8.6% due to increased
at-need sales, higher average at-need and pre-need contract prices partially
offset by a slight decline in the number of pre-need contracts sold.
Total cemetery costs increased $14,366 or 9.6% over 1991. Cemetery costs were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED
DECEMBER 31, INCREASE/ PERCENTAGE
1992* 1991* (DECREASE) INCREASE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing clusters $127,626 $116,711 $10,915 9.4%
New clusters** 10,502 4,618 5,884
---------- ---------- ----------
Total clusters 138,128 121,329 16,799 13.8%
Non-cluster and disposed operations 14,379 13,315 1,064
Administrative overhead 11,681 15,178 (3,497)
---------- ---------- ----------
Total cemetery costs $164,188 $149,822 $14,366 9.6%
========== ========== ==========
</TABLE>
- ---------------
* Unaudited pro forma.
** Represents new geographic areas entered into since the beginning of 1991 for
the period that those businesses were owned by the Company.
Costs at existing clusters, which include an increase of $9,667 from acquired
operations, increased a total of $10,915 or 9.4%. Merchandise and repair and
maintenance expenses increased at other cemeteries included in existing
clusters. Cemetery overhead costs declined in 1992 due to the closing of the San
Diego administrative office in late 1991. These costs were either eliminated or
transferred to general and administrative expense at the Houston corporate
offices.
Financial service revenues and costs decreased during 1992 as a result of a
decrease in the average outstanding loan portfolio and borrowed amounts for
Provident in 1992. Gross profit remained level for both years. For the year
1992, Provident's outstanding loan portfolio averaged $143,773 with an average
interest rate spread of 2.6% compared to $148,652 and 2.4%, respectively, in
1991.
General and administrative expenses increased in 1992 by $3,245 or 9.2%.
Personnel costs, including the cost of restricted stock grants and other
employee benefit accruals, increased $2,141. The remainder of the increase
S-34
<PAGE> 128
resulted primarily from higher facility and administrative costs. A portion of
the additional costs resulted from the relocation of cemetery administrative
offices from San Diego to Houston.
Interest expense, which excludes the amount incurred through financial service
operations, increased $11,473 or 27.0% during 1992. In October 1991, the Company
issued $172,500 of 6.5% convertible debentures due in 2001. Also contributing to
the increase was the interest on debt assumed and not refinanced from various
1991 acquisitions. Lower interest rates in 1992 helped to offset increases in
interest expense from increased average amounts borrowed under the Company's
credit agreements.
Other income increased during 1992 due primarily to the recognition of two gains
in 1992. One resulted from the collection of a note receivable that had
previously been written off, and the other from the sale of an equity
investment. Partially offsetting the increase was less income on corporate
investments. Both years include pretax gains associated with the disposition of
certain excess funeral and cemetery real property.
During the third quarter of 1991, certain Internal Revenue Service audits of the
Company were settled and resulted in the recognition of $4,800 or $.07 per share
of income tax benefits.
FINANCIAL CONDITION AT SEPTEMBER 30, 1994
In connection with the Company's acquisitions of GSG and PG, a subsidiary of the
Company has obtained from separate lenders a UK pound sterling 185,000 loan
facility and a UK pound sterling 100,000 line of credit, both with interest
calculated at a rate equal to UK pound sterling LIBOR plus 20 basis points. The
Company has guaranteed the UK Facilities. The acquisitions of GSG and PG are
being financed on an interim basis principally with borrowings under the UK
Facilities. The Company has borrowed U.S. $312,462 at September 30, 1994 under
the UK Facilities.
At October 31, 1994, the Company had available approximately $271,500 of
borrowing capacity under its various existing lines of credit (including amounts
available under the UK Facilities). In addition to the sources of cash from
operations and credit lines, the Company has 12,149,000 shares of Common Stock,
$70,227 of guarantees of promissory notes and $74,382 of convertible debentures
registered with the Commission to be used exclusively for future acquisitions.
Included in accounts payable and accrued liabilities at September 30, 1994 is
approximately $97,000 representing the estimated future cost of purchasing the
remaining outstanding shares of GSG and PG.
HEDGING TRANSACTIONS
The Company has entered into hedging transactions to reduce its exposure to
adverse fluctuations in interest and foreign exchange rates. While the hedging
transactions are subject to risk of loss from changes in interest rates and
exchange rates, these losses would generally be offset by gains on the exposures
being hedged. The Company has realized U.S. $1,093 of losses on contracts
entered into as hedge transactions since the beginning of 1993. These realized
losses were deferred and are being amortized into income over the remaining
lives of the original transactions.
At September 30, 1994, the Company had outstanding foreign currency and interest
rate swaps in the notional amounts of Australian dollar $142,715 and U.S.
$75,000. As of September 30, 1994, net unrealized losses before taxes from these
hedging agreements were estimated to be U.S. $7,000 (which is the estimated cost
to terminate these hedging agreements). In the opinion of management, such
losses were offset by the increased value of the exposures being hedged.
The Company anticipates entering into a planned cross currency hedging
transaction effectively converting $272,500 of U.S. fixed rate indebtedness into
floating rate UK pound sterling indebtedness, raising the Company's total UK
pound sterling exposure to U.S. $472,500, which is comparable to the size of the
acquisitions of GSG and PG. If such transaction is consummated, the Company
would receive fixed rate interest on US $272,500 and pay UK pound sterling
LIBOR, plus some level of add-on basis points, on U.S. $272,500.
S-35
<PAGE> 129
CERTAIN TERMS OF THE TECONS
GENERAL
The following summary of certain terms and provisions of the TECONS supplements
the description of certain terms and provisions of the LLC Preferred Securities
of any series set forth in the accompanying Prospectus under the heading
"Description of the LLC Preferred Securities," to which description reference is
hereby made. Capitalized terms used and not defined in this Prospectus
Supplement shall have the meanings ascribed to them in the accompanying
Prospectus unless otherwise defined in this Prospectus Supplement. The TECONS
constitute a series of Preferred Shares of SCI Finance, which Preferred Shares
may be issued from time to time in one or more series with such dividend rights,
liquidation preferences, redemption provisions, voting rights, conversion or
exchange rights and other rights, preferences, privileges, limitations and
restrictions as are established by the Regulations of SCI Finance (the
"Regulations"), the Articles of Organization of SCI Finance (the "Articles") and
the amendment to the Regulations (the "Amendment") adopted, or to be adopted, by
the Manager prior to the closing of the sale of the TECONS offered hereby. The
Amendment will provide that so long as any TECONS are outstanding, SCI Finance
may not issue any interests of SCI Finance ranking, as to participation in the
profits or assets of SCI Finance, senior to the TECONS. The summary of certain
terms and provisions of the TECONS set forth below does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
Regulations, the Articles and the Amendment adopted by the Manager establishing
the rights, preferences, privileges, limitations and restrictions relating to
the TECONS. A copy of the Amendment will be included as an exhibit to a Current
Report on Form 8-K to be filed by SCI.
DIVIDENDS
The holders of the TECONS shall be entitled to receive, when and as declared by
SCI Finance by action of the Manager out of funds held by SCI Finance and
legally available therefor, cumulative cash dividends at the annual rate of
$3.125 per TECONS, and no more. See "Description of the LLC Preferred
Securities -- Dividends."
LIQUIDATION PREFERENCE
The liquidation preference per TECONS is $50 plus accrued and unpaid dividends.
REDEMPTION
Subject to the second following paragraph, the TECONS may not be redeemed by SCI
Finance prior to June 5, 1997. On and after June 5, 1997 and prior to December
5, 1999, the TECONS will be redeemable at the option of SCI Finance, in whole or
in part, upon not fewer than 30 or more than 60 days' prior notice, at the
redemption price per TECONS equal to: $52.5000, if such redemption is effected
on or after June 5, 1997 and prior to December 1, 1997; $52.1875 if such
redemption is effected on or after December 1, 1997 and prior to December 1,
1998; and $51.8750 if such redemption is effected on or after December 1, 1998
and prior to December 5, 1999, in each case plus accrued and unpaid dividends
(whether or not declared) to the date fixed for redemption (each such redemption
price set forth in this sentence, the "Conditional Redemption Price"). SCI
Finance may exercise the option set forth in the foregoing sentence only if (A)
for 20 Trading Days within any period of 30 consecutive Trading Days (including
the last Trading Day of such period) ending on the Trading Day immediately prior
to the date of the giving of the notice of redemption the Closing Price of the
SCI Common Stock exceeds 125% of the Conversion Price (as defined below), (B)
all dividends on the TECONS for all dividend periods ending on or prior to the
date of the giving of the notice of redemption have been paid in full or
declared and set aside for payment in full and (C) SCI Finance shall have issued
prior to 9:00 A.M. New York City time on the second Trading Day after such 30
Trading Day period a press release announcing the redemption and specifying the
date on which such redemption will be effective.
S-36
<PAGE> 130
On and after December 5, 1999, the TECONS are redeemable, at the option of SCI
Finance, in whole or in part from time to time, out of proceeds received by SCI
Finance from the prepayment or repayment by SCI Limited or SCI of the Loans,
upon not fewer than 30 or more than 60 days' prior notice, at the respective
prices per TECONS set forth below, if redeemed during the 12-month period
beginning December 1 of the years indicated below (December 5 in the case of
1999), in each case plus accrued and unpaid dividends (whether or not declared)
to the date fixed for redemption (the "Optional Redemption Price"):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------- ----------
<S> <C>
1999..................... $51.5625
2000..................... 51.2500
2001..................... 50.9375
2002..................... 50.6250
2003..................... 50.3125
2004 and thereafter...... 50.0000
</TABLE>
; provided, however, that if the TECONS are listed on any national securities
exchange or quoted on the Nasdaq NM, then SCI Finance shall redeem the TECONS in
whole if a partial redemption thereof would result in a delisting of the TECONS
from such national securities exchange or suspension from the Nasdaq NM.
If a Tax Event shall occur and be continuing, the TECONS will be subject to
redemption, in whole but not in part, at the option of SCI Finance upon notice
given within 90 days following the occurrence of such Tax Event, at a redemption
price per TECONS equal to: $53.1250 if such redemption is effected after the
date of issuance of the TECONS and prior to December 1, 1995; $52.8125 if such
redemption is effected on or after December 1, 1995 and prior to December 1,
1996; $52.5000 if such redemption is effected on or after December 1, 1996 and
prior to June 5, 1997, plus in each case accrued and unpaid dividends (whether
or not declared) to the date fixed for redemption; and if such redemption is
effected at any time on or after June 5, 1997, the applicable Conditional
Redemption Price (whether or not SCI Finance could otherwise then redeem the
TECONS pursuant to the second preceding paragraph above) or the applicable
Optional Redemption Price, as the case may be.
CONVERSION RIGHTS
The TECONS are convertible at the option of the holder, unless previously
redeemed, at any time at an initial conversion rate of approximately 1.6617
shares of SCI Common Stock for each TECONS (equivalent to a conversion price
(the "Conversion Price") of $30.09 per share of SCI Common Stock), subject to
adjustment in certain circumstances. See "Description of the LLC Preferred
Securities -- Conversion Rights."
ADJUSTMENTS TO CONVERSION PRICE IN THE EVENT OF CERTAIN NON-STOCK FUNDAMENTAL
CHANGES OCCURRING PRIOR TO JUNE 5, 1997
If a Non-Stock Fundamental Change occurs after the date of issuance of the
TECONS and prior to June 5, 1997, the Conversion Price immediately following
such Non-Stock Fundamental Change will be the lower of (A) the Conversion Price
in effect immediately prior to such Non-Stock Fundamental Change, but after
giving effect to any other adjustments effected pursuant to the provisions of
the Amendment and (B) the product of (1) the greater of the Applicable Price or
the then applicable Reference Market Price and (2) a fraction, the numerator of
which will be $50 and the denominator of which will be $53.1250 if such
Non-Stock Fundamental Change occurs after the issuance of the TECONS and prior
to December 1, 1995; $52.8125, if such Non-Stock Fundamental Change occurs on or
after December 1, 1995 and prior to December 1, 1996; and $52.5000 if such
Non-Stock Fundamental Change occurs on or after December 1, 1996 and prior to
June 5, 1997.
REFERENCE MARKET PRICE
The Reference Market Price for the TECONS shall initially be $17.00 (subject to
adjustment as provided in the Amendment).
S-37
<PAGE> 131
OPTIONAL PREPAYMENT OF THE LOANS
SCI Limited shall have the right to prepay the Loans, in whole or in part
(together with any accrued but unpaid interest on the portion being prepaid), at
any time (A) that SCI Finance shall have given a notice of redemption of the
TECONS in connection with a Tax Event as contemplated by the Amendment and (B)
otherwise, on or after June 5, 1997; provided, however, that SCI Limited may not
prepay all or any portion of the Loans unless SCI Finance has the right under
the Amendment concurrently therewith to redeem the TECONS. The prepayment price
of the Loans will include a premium over the principal amount thereof equal to
the then applicable premium over the liquidation preference of the TECONS to be
redeemed.
SCI Limited shall have the right to prepay the Loans at any time by transfer to
SCI Finance of TECONS and the aggregate amount of the Loans then outstanding
shall be reduced in an amount equal to the Liquidation Preference per TECONS
(valued at 100% of the amount thereof) transferred to SCI Finance. Upon any such
prepayment, SCI Limited shall be deemed to represent and warrant to SCI Finance
that (i) the transfer of such shares has been duly authorized by all necessary
corporate action on the part of SCI Limited, (ii) SCI Limited has good and
marketable title to such shares, (iii) such shares are not subject to any lien,
charge or other encumbrance or defect in title and (iv) such transfer will not
conflict with or result in a breach or default under any contract or other
instrument binding upon SCI Limited or violate any law, rule or regulation, or
order or decree of any court of competent jurisdiction, binding upon SCI
Limited.
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement (the "Underwriting Agreement") dated the date hereof, the Underwriters
named below have severally agreed to purchase, and SCI Finance has agreed to
sell to them, severally, the respective number of TECONS set forth opposite
their names below:
<TABLE>
<CAPTION>
<S> <C>
-----------
NUMBER OF
TECONS
-----------
UNDERWRITERS:
J.P. Morgan Securities Inc. 1,500,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 1,500,000
-----------
Total 3,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the TECONS offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are committed to take and pay for all of the
TECONS offered hereby (other than those covered by the over-allotment option
described below) if any are taken.
The Underwriters initially propose to offer the TECONS in part directly to the
public at the public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain dealers at such price less a
concession not in excess of $.75 per TECONS. After the initial public offering
of the TECONS offered hereby, the public offering price and such concession may
be changed.
In view of the fact that substantially all of the proceeds of the sale of the
TECONS will be loaned by SCI Finance to SCI Limited, a wholly-owned subsidiary
of SCI, the Underwriting Agreement provides that SCI will pay to the
Underwriters the underwriters' compensation set forth on the cover page of this
Prospectus Supplement and will pay all expenses of the offering made hereby.
Pursuant to the Underwriting Agreement, SCI Finance and SCI have granted to the
Underwriters an option, exercisable for 30 days from the date of this Prospectus
Supplement, to purchase up to an additional 450,000 TECONS at the public
offering price set forth on the cover page of this Prospectus Supplement. The
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the TECONS
offered hereby. To the extent such option is exercised, each
S-38
<PAGE> 132
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional TECONS as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of TECONS offered hereby.
In the Underwriting Agreement, SCI Finance and SCI have agreed jointly and
severally to indemnify the Underwriters against certain liabilities, including
liabilities under the federal securities laws, or to contribute to payments
which the Underwriters may be required to make in respect thereof.
J.P. Morgan Securities Inc. ("JPMS"), Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and affiliates of JPMS and Merrill Lynch are
acting as underwriters in connection with the Common Stock Offering, for which
they will receive customary underwriting compensation. In addition, JPMS and
Merrill Lynch are acting as underwriters in connection with the Senior Notes
Offering, for which they will receive customary underwriting compensation. As of
October 5, 1994, JPMS and certain of its affiliates beneficially owned (as
defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended)
approximately 12.09% of the outstanding SCI Common Stock, such figure
representing beneficial ownership in both a fiduciary capacity on behalf of
third parties and for their own accounts. As of such date, JPMS and such
affiliates owned the economic interest in less than 1.00% of the outstanding SCI
Common Stock. JPMS and its affiliates and Merrill Lynch from time to time
provide commercial banking and/or investment banking services to SCI for which
they receive customary fees and expense reimbursement.
Upon application of the net proceeds of the offering made hereby as described
under "Use of Proceeds," an affiliate of JPMS will receive in excess of 10% of
the net proceeds of this offering. Pursuant to paragraph 8 of Article III,
Section 44 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), such receipt by an affiliate of JPMS of
such proceeds requires that the offering made hereby be made in compliance with
certain of the requirements of Schedule E ("Schedule E") to the Bylaws of the
NASD. In this regard, the offering made hereby is being made pursuant to such
paragraph 8. Pursuant thereto, the offering made hereby will comply with Section
3(c) of Schedule E.
SCI Finance, SCI and each of SCI's executive officers have agreed not to effect
any offer, sale or other disposition of any LLC Preferred Securities, any shares
of SCI Common Stock or any securities convertible into or exchangeable for any
shares of SCI Common Stock (except for the TECONS offered hereby, the SCI Common
Stock issuable upon conversion of the TECONS and upon conversion of SCI's
presently outstanding convertible securities, pursuant to SCI's existing
employee benefit plans as in effect on the date hereof, the offering and sale of
up to 8,855,000 shares of SCI Common Stock in the Common Stock Offering and,
subject to certain limitations, in connection with acquisitions) for a period of
90 days after the date of this Prospectus Supplement, without the prior consent
of JPMS.
Prior to the offering made hereby, there has been no public market for the
TECONS. The TECONS have been approved for listing on the NYSE under the symbol
"SRV prT," subject to official notice of issuance.
S-39
