<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------- -----------
COMMISSION FILE NUMBER 1-6402-1
--------------------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
TEXAS 74-1488375
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the registrant's common stock as of
November 8, 1996, was 235,691,716 (excluding treasury shares).
<PAGE> 2
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
Part I. Financial Information
<S> <C> <C>
Consolidated Statement of Income (Unaudited) -
Three Months Ended and Nine Months Ended September 30, 1996 and 1995 3
Consolidated Balance Sheet -
September 30, 1996 (Unaudited) and December 31, 1995 4
Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 1996 6
Notes to the Consolidated Financial Statements (Unaudited) 7-13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-24
Part II. Other Information 25
Signature 25
</TABLE>
2
<PAGE> 3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
(All common stock and per share data has been Three Months Ended Nine Months Ended
restated for a two-for-one common stock split September 30, September 30,
on August 30, 1996) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 544,500 $ 403,491 $ 1,684,702 $1,105,253
Costs and expenses ............................. (413,122) (297,767) (1,249,093) (776,872)
--------- --------- ----------- ----------
Gross profit ................................... 131,378 105,724 435,609 328,381
General and administrative expenses ............ (12,296) (12,206) (40,837) (35,677)
--------- --------- ----------- ----------
Income from operations ......................... 119,082 93,518 394,772 292,704
Interest expense ............................... (35,995) (32,254) (102,926) (85,063)
Dividends on preferred securities of SCI
Finance LLC ................................ (2,695) (2,695) (8,086) (8,086)
Other income ................................... 8,382 3,453 15,805 6,526
--------- --------- ----------- ----------
(30,308) (31,496) (95,207) (86,623)
--------- --------- ----------- ----------
Income before income taxes ..................... 88,774 62,022 299,565 206,081
Provision for income taxes ..................... (31,379) (22,886) (108,023) (78,925)
--------- --------- ----------- ----------
Net income ..................................... $ 57,395 $ 39,136 $ 191,542 $ 127,156
========= ========= =========== ==========
Earnings per share:
Primary .................................... $ .24 $ .20 $ .80 $ .65
========= ========= =========== ==========
Fully diluted .............................. $ .23 $ .18 $ .77 $ .61
========= ========= =========== ==========
Dividends per share ............................ $ .06 $ .055 $ .18 $ .165
========= ========= =========== ==========
Weighted average number of shares
and equivalents ............................ 241,875 197,094 240,843 194,670
========= ========= =========== ==========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
(Dollars in thousands, except per share amounts) 1996 December 31,
(All common stock data has been restated for a two-for-one common stock split on August 30, 1996) (Unaudited) 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 16,436 $ 29,735
Receivables, net of allowances ............................................................. 451,351 448,941
Inventories ................................................................................ 140,627 120,805
Other ...................................................................................... 43,343 32,371
---------- ----------
Total current assets ................................................................... 651,757 631,852
---------- ----------
Investments - insurance subsidiary .............................................................. 581,198 557,335
Prearranged funeral contracts ................................................................... 2,053,080 1,811,597
Long-term receivables ........................................................................... 767,067 762,891
Cemetery property, at cost ...................................................................... 1,300,776 1,162,556
Property, plant and equipment, at cost (net) .................................................... 1,375,138 1,273,722
Deferred charges and other assets ............................................................... 357,636 312,053
Names and reputations (net) ..................................................................... 1,252,526 1,152,215
---------- ----------
$8,339,178 $7,664,221
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................................... $ 356,053 $ 393,191
Income taxes ............................................................................... 74,945 68,574
Current maturities of long-term debt ....................................................... 65,969 122,237
---------- ----------
Total current liabilities ............................................................. 496,967 584,002
---------- ----------
Long-term debt .................................................................................. 1,953,333 1,732,047
Deferred income taxes ........................................................................... 478,405 437,840
Other liabilities ............................................................................... 469,237 400,434
Deferred prearranged funeral contract revenues .................................................. 2,625,523 2,362,053
Company obligated, mandatorily redeemable, convertible preferred securities
of SCI Finance LLC, whose principal asset is a 6.25%,
$216,315 note from the Company ............................................................. 172,500 172,500
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
235,642,346 and 234,542,172, respectively, issued and outstanding ..................... 235,642 234,542
Capital in excess of par value ............................................................. 1,222,573 1,214,708
Retained earnings .......................................................................... 668,540 518,562
Foreign translation adjustment and other ................................................... 16,458 7,533
---------- ----------
Total stockholders' equity ............................................................ 2,143,213 1,975,345
---------- ----------
$8,339,178 $7,664,221
========== ==========
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 191,542 $ 127,156
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................... 101,101 67,886
Provision for deferred income taxes ......................................... 38,058 17,689
(Gain) from dispositions (net) .............................................. (7,587) (1,029)
Change in assets and liabilities net of effects from acquisitions:
(Increase) in receivables ................................................. (77,447) (125,863)
Net activity in prearranged funeral contracts and deferred revenues ....... (62,139) (66,044)
(Increase) in other assets ............................................... (58,428) (10,451)
Increase (decrease) in other liabilities .................................. (25,767) 70,228
Other ..................................................................... 439 (6,209)
--------- ---------
Net cash provided by operating activities ....................................... 99,772 73,363
--------- ---------
Cash flows from investing activities:
Capital expenditures ........................................................ (110,675) (75,259)
Proceeds from sales of property and equipment ............................... 22,646 4,137
Acquisitions, net of cash acquired .......................................... (212,850) (588,314)
Loans issued by finance subsidiary .......................................... (64,945) (23,572)
Principal payments received on loans by finance subsidiary .................. 153,716 17,334
Change in investments and other ............................................. (27,146) (12,635)
--------- ---------
Net cash (used in) investing activities ......................................... (239,254) (678,309)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving credit agreements ......... (32,387) 543,534
Long-term debt issued ....................................................... 300,000 300,000
Payments of debt ............................................................ (104,584) (278,158)
Common stock issued ......................................................... - 19,266
Dividends paid .............................................................. (41,123) (31,196)
Exercise of stock options and other ......................................... 4,277 3,304
--------- ---------
Net cash provided by financing activities ....................................... 126,183 556,750
--------- ---------
Net (decrease) in cash and cash equivalents ..................................... (13,299) (48,196)
Cash and cash equivalents at beginning of period ................................ 29,735 218,341
--------- ---------
Cash and cash equivalents at end of period.............. ........................ $ 16,436 $ 170,145
========= =========
Cash paid for:
Interest .................................................................... $ 91,027 $ 89,974
========= =========
Taxes ....................................................................... $ 61,122 $ 41,212
========= =========
Non cash transactions:
Common stock issued under restricted stock plans ............................ $ 1,278 $ 1,809
========= =========
Common stock issued in acquisitions ......................................... $ 3,277 $ 5,598
========= =========
Debt issued in acquisitions ................................................. $ 7,500 $ 46,385
========= =========
Debenture conversions to common stock ....................................... $ 790 $ 44,852
========= =========
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE> 6
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Foreign
(Dollars in thousands, except per share amounts) Capital in translation
(All common stock and per share data has been restated for a Common excess of Retained adjustment
two-for-one common stock split on August 30, 1996) stock par value earnings and other
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ................................ $234,542 $1,214,708 $518,562 $ 7,533
Net income ................................................. - - 191,542 -
Common stock issued:
Stock option exercises and stock grants .................. 651 4,247 - -
Acquisitions ............................................. 378 2,899 796 -
Debenture conversion 71 719 - -
Dividends on common stock ($.18 per share) - - (42,360) -
Foreign translation adjustment and other ................... - - - 8,925
-------- ---------- -------- -------
Balance at September 30, 1996 ............................... $235,642 $1,222,573 $668,540 $16,458
======== ========== ======== =======
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE> 7
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. NATURE OF OPERATIONS
The Company is the largest provider of death care services in the world. At
September 30, 1996, the Company operated 2,864 funeral service locations, 335
cemeteries and 147 crematoria located in North America, Europe and the Pacific
Rim.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses.
Company personnel at the funeral service locations provide all professional
services relating to funerals, including the use of funeral facilities and
motor vehicles. Funeral related merchandise is sold at funeral service
locations and certain locations contain crematoria. The Company markets
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on both an atneed or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also contain crematoria.
The Company's financial services segment consists of a finance subsidiary,
Provident Services, Inc. ("Provident"). Provident provides capital financing
to independent funeral home and cemetery operators.
2. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements for the three and nine months ended
September 30, 1996 and 1995 include the accounts of Service Corporation
International and all majority-owned subsidiaries (the "Company") and are
unaudited but include all adjustments, consisting of normal recurring accruals
and any other adjustments which management considers necessary for a fair
presentation of the results for these periods. These financial statements have
been prepared consistent with the accounting policies described in the annual
report on Form 10-K filed with the Securities and Exchange Commission (the
"Commission") for the year ended December 31, 1995 and should be read in
conjunction therewith. Certain reclassifications have been made to the prior
period balances to conform to the current period presentation with no effect on
previously reported net income.
Names and Reputations
The excess of purchase price over the fair value of identifiable net assets
acquired in transactions accounted for as a purchase are included in "Names and
reputations" and are generally amortized on a straight line basis over 40 years
which, in the opinion of management, is not necessarily the maximum period
benefited. Fair values determined at the date of acquisition are determined by
management or independent appraisals. Many of the Company's acquired funeral
service locations have been providing high quality service to client families
for many years. Such loyalty often forms the basic valuation of the funeral
businesses. Additionally, the death care industry has historically exhibited
stable cash flows as well as a low failure rate. The Company monitors the
recoverability of names and reputations based on projections of future
undiscounted cash flows of the acquired businesses.
Evaluation of Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (FAS 121). FAS 121 requires the Company to monitor the
recoverability of its long-lived assets on an ongoing basis as events or
circumstances indicate that carrying values may not be recoverable. In
accordance with FAS 121 assets are primarily grouped at the cluster level.
3. ACQUISITIONS
The Company acquired 153 funeral service locations, 25 cemeteries and one
crematory during the nine month period ended September 30, 1996 (1,160 funeral
service locations, 30 cemeteries and 29 crematoria during the nine months ended
September 30, 1995). The consideration for these acquisitions consisted of
combinations of cash, common stock of the Company, issued or assumed debt and
the retirement of loans receivable issued by Provident. The operating results
of all of these acquisitions have been included since their respective dates of
acquisition.
7
<PAGE> 8
The effect of acquisitions on the consolidated balance sheet at September
30, was as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Current assets .................................. $ 25,631 $ 148,790
Investments - insurance subsidiary .............. - 539,924
Prearranged funeral contracts ................... 47,136 34,265
Long-term receivables ........................... 7,610 51,388
Cemetery property ............................... 125,204 78,857
Property, plant and equipment ................... 68,778 360,887
Deferred charges and other assets ............... (4,171) 41,025
Names and reputations ........................... 86,627 282,413
Current liabilities ............................. (25,735) (197,581)
Long-term debt .................................. (12,061) (58,244)
Deferred income taxes and other liabilities ..... (54,653) (143,786)
Deferred prearranged funeral contract revenues .. (47,594) (544,026)
Stockholders' equity ............................ (3,922) (5,598)
-------- ---------
Cash used for acquisitions ................ $212,850 $ 588,314
======== =========
</TABLE>
During the year ended December 31, 1995 and the nine months ended
September 30, 1996 the Company acquired 1,416 funeral service locations, 124
cemeteries and 31 crematoria. Included in the above acquisitions, in August
1995, the Company acquired two French companies, Omnium de Gestion et de
Financement S.A. and Pompes Funebres Generales S.A. ("OGF/PFG"), which when
combined operated 1,099 funeral service locations, 28 crematoria and Auxia
which primarily sells insurance policies in connection with OGF/PFG's
prearranged funeral business. In October 1995, the Company purchased Gibraltar
Mausoleum Corporation which operated 23 funeral service locations and 54
cemeteries. Additionally, in September 1995, the Company acquired the shares
of Service Corporation International (Canada) Limited ("SCIC") not already
owned by the Company, which made SCIC (formerly an approximate 70% owned
subsidiary) a wholly owned subsidiary of the Company. The following unaudited
condensed pro forma information assumes that the acquisition by the Company of
all of the above operations took place on January 1, 1995. This information
also assumes that the net proceeds from the Company's October 1995 public
offerings of notes and Company common stock were issued at the beginning of
1995 and such proceeds were first applied toward the purchase price of OGF/PFG,
with the excess net proceeds used to repay amounts outstanding under the
Company's existing revolving credit facilities. This unaudited pro forma
information may not be indicative of results that would have actually resulted
if these transactions had occurred on the dates indicated or which may be
obtained in the future.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Revenues ........................... $1,718,038 $1,652,595
Net income ......................... $ 195,993 $ 133,768
Primary earnings per share ......... $ .81 $ .61
Fully diluted earnings per share ... $ .79 $ .58
</TABLE>
On October 3, 1996, subsidiaries of the Company jointly filed a
registration statement on Form S-4 with the Commission (the "Exchange Offer
Registration Statement") pursuant to which such subsidiaries would offer to
acquire the outstanding shares of The Loewen Group Inc. ("Loewen") through an
exchange offer, conditioned upon certain matters. Loewen is a Canadian based
company that as of July 26, 1996, operates 909 funeral homes and 247 cemeteries
in North America. When the Exchange Offer Registration Statement is declared
effective by the Commission and the exchange offer is made, holders of Loewen's
outstanding common shares will be offered the opportunity to exchange their
shares for $45.00 worth of common stock of New Service Corporation
International ("New SCI"), a wholly owned subsidiary of the Company, or, at the
election of each Loewen shareholder, $45.00 worth of exchangeable shares of a
Canadian subsidiary of New SCI, in each case subject to adjustment. Prior to
consummation of the exchange offers, and subject to the approval of the
Company's stockholders, the Company will merge with a wholly owned subsidiary
of New SCI, and as a result thereof New SCI will hold all of the Company's
common stock and shareholders of the Company will become shareholders of New
SCI. New SCI will then be renamed Service Corporation International and will
be a publicly traded entity on the New York Stock Exchange. The exchangeable
shares will be convertible into, and are intended to be the economic and voting
equivalent of, shares of New SCI common stock. Holders of Loewen Series C
Preferred Stock will be offered the opportunity to exchange their shares for
$29.51 worth of New SCI common stock or such exchangeable shares. The value of
the New SCI common stock and exchangeable shares issued in this transaction is
expected to be approximately $2.9 billion. In addition, Loewen has
approximately $1.1 billion of indebtedness as of June 30, 1996.
On October 10, 1996, Loewen's Board of Directors recommended that all
Loewen shareholders reject the exchange offer. As of November 14, 1996, the
Exchange Offer Registration Statement has not yet been declared effective by
the Commission and the exchange offer has not been commenced. The Company
expects that after the Exchange Offer Registration Statement has been declared
effective New SCI and such Canadian subsidiary will proceed with the exchange
offer for the outstanding Loewen shares.
8
<PAGE> 9
4. PREARRANGED FUNERAL ACTIVITIES
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing
when the contract is signed. Payments under these contracts are generally
placed in trust (pursuant to state law) or are used to pay premiums on life
insurance policies issued by third party insurers in North America, the United
Kingdom, Australia, or in France, by the Company's insurance subsidiary,
Auxia. Unperformed price guaranteed prearranged funeral contracts are included
in the consolidated balance sheet as "prearranged funeral contracts" or, in the
case of contracts funded by Auxia, "investments-insurance subsidiary". A
corresponding credit is recorded to "deferred prearranged funeral contract
revenues". Allowances for customer cancellations are provided at the date of
sale. The Company defers accruals of trust earnings and insurance benefits as
they are earned until the performance of the funeral service. Upon performance
of the funeral service, the Company recognizes the fixed contract price as well
as total accumulated trust earnings and increasing insurance benefits as
funeral revenues.
The recognition of future funeral revenues is estimated to occur in the
following years based on actuarial assumptions as follows:
<TABLE>
<S> <C>
1996 (remaining three months) .. $ 60,930
1997 ........................... 255,493
1998 ........................... 237,342
1999 ........................... 220,688
2000 ........................... 204,681
2001 and through 2005 .......... 697,365
2006 and thereafter ............ 949,024
----------
$2,625,523
==========
</TABLE>
5. DEBT
Debt at September 30, 1996, was as follows:
<TABLE>
<S> <C>
Bank revolving credit agreements and commercial paper .................. $ 190,635
6.375% notes due in 2000 ............................................... 150,000
6.75% notes due in 2001 ................................................ 150,000
8.72% amortizing notes due in 2002 ..................................... 165,974
8.375% notes due in 2004 ............................................... 200,000
7.20% notes due in 2006 ................................................ 150,000
6.875% notes due in 2007 ............................................... 150,000
6.95% amortizing notes due in 2010 ..................................... 62,866
7.875% debentures due in 2013 .......................................... 150,000
7.0% notes due in 2015 ................................................. 300,000
Medium term notes ...................................................... 186,040
Convertible debentures issued in connection with various acquisitions .. 31,200
Mortgage notes and other debt .......................................... 154,996
Deferred loan costs .................................................... (22,409)
----------
Total debt .......................................................... 2,019,302
Less current maturities ................................................ (65,969)
----------
Total long-term debt ................................................ $1,953,333
==========
</TABLE>
The Company's primary revolving credit agreements provide for borrowings
up to $800,000. The 364-day portion allows for borrowings up to $450,000, and
is used primarily to support commercial paper. The agreement expires June 27,
1997, but has provisions to be extended for 364-day terms. At the end of any
term, the outstanding balance may be converted into a two year term loan at the
Company's option. Interest rates are based on various indices as determined by
the Company. In addition, a facility fee ranging from .06% to .15% is paid
quarterly on the total commitment amount. At September 30, 1996, there was
$12,350 of commercial paper outstanding
9
<PAGE> 10
backed by this agreement at a weighted average interest rate of 5.53%. In
addition, the Company has a multi-currency revolving credit agreement which
allows for borrowings of up to $350,000, including up to $75,000 each in Pound
Sterling, Canadian Dollar and Australian Dollar. This agreement expires June
30, 2000, but has provisions to extend the termination date each year for
364-day periods. Interest rates are based on various indices as determined by
the Company. In addition, a facility fee ranging from .085% to .15% is paid
quarterly on the total commitment amount. At September 30, 1996, there was
$152,515 outstanding under this agreement at a weighted average interest rate
of 6.28%. These credit agreements disclosed above contain financial compliance
provisions that contain certain restrictions on levels of net worth, debt,
equity, liens, letters of credit and guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at September 30, 1996 are classified as long-term
debt. It is the Company's intent to refinance such borrowings through the use
of its credit agreements or other long-term notes issued under the Company's $1
billion shelf registration.
The Company's French revolving credit agreement allows for borrowings, in
French francs, up to $50,000 and expires in February 1997. Interest rates are
based on various indices as determined by the Company. In addition, a facility
fee of .075% is paid quarterly on the total commitment amount. At September 30,
1996, $17,433 was outstanding under this agreement at a weighted average
interest rate of 3.93%.
In May 1996, the Company issued $300,000 of notes which were sold through
an underwritten public offering. These notes were issued in two tranches of
$150,000 each with maturities in June 2001 and 2006 and interest rates of 6.75%
and 7.20%, respectively. The proceeds of this offering were primarily used to
repay existing debt outstanding under the Company's revolving credit
agreements.
During the three months ended September 30, 1996, pursuant to a shelf
registration filed with the Commission to be used exclusively for future
acquisitions, the Company guaranteed the following promissory notes issued
through subsidiaries in connection with various acquisitions of operations:
<TABLE>
<CAPTION>
SUBSIDIARY AMOUNT
----------------------------------------- ------
<S> <C>
SCI Oklahoma Funeral Services, Inc. ..... $ 275
SCI Funeral Services of New York, Inc. .. 200
SCI New Jersey Funeral Services, Inc. ... 1,000
</TABLE>
6. DERIVATIVES
The Company enters into derivatives in the form of interest rate swaps and
cross-currency interest rate swaps in order to manage its mix of fixed and
floating rate debt and to substantially hedge the Company's net investments in
foreign assets. The Company has procedures in place to monitor and control the
use of derivatives and enters into transactions only with a limited group of
credit worthy financial institutions. The Company does not engage in
derivative transactions for speculative or trading purposes, nor is it a party
to leveraged derivatives. In general, cross-currency swaps are entered into
concurrently with significant foreign acquisitions and convert U.S. dollar debt
into the respective foreign currency of the acquisitions. Such cross-currency
swaps are used in combination with local currency borrowings to substantially
hedge the Company's net investment in foreign operations. The cross-currency
swaps generally include interest rate provisions to enable the Company to
additionally hedge a portion of the earnings of its foreign operations.
Accordingly, movements in currency rates that impact the swap are generally
offset by a corresponding movement in the value of the underlying assets being
hedged. Similarly, currency movements that impact foreign expense due under
the cross-currency interest rate swaps are generally offset by a corresponding
movement in the earnings of the foreign operation.
In January 1996, the Company entered into cross-currency and interest rate
swaps that convert approximately $200 million of U.S. denominated fixed rate
debt into French franc denominated fixed rate debt in order to more fully hedge
the Company's net investment in France on an after-tax basis. Additionally, in
March 1996, as part of the Company's ongoing interest rate management, the
Company entered into interest rate swaps that convert the interest rate indices
on approximately $200 million of debt previously swapped into French francs
from French interest rates to German interest rates, payable in French francs.
In May 1996, the Company used approximately $100,000 of the 7.20% notes
proceeds to repay amounts outstanding under the French revolving credit
agreement. Therefore, the Company entered into a cross-currency interest rate
swap that converted $100,000 of the 7.20% notes proceeds (see note five above)
into French franc denominated floating rate debt in order to maintain the
Company's hedge of its net investment in France. Additionally, in May 1996,
the Company entered into interest rate swaps that convert the interest paid on
$100,000
10
<PAGE> 11
of the 6.75% notes proceeds (see note five above) into U.S. dollar
floating rates.
In July 1996, the Company entered cross-currency and interest rate swaps
that convert approximately $75 million of U.S. denominated fixed rate debt into
Canadian denominated fixed rate debt in order to more fully hedge the Company's
net investment in Canada on an after-tax basis.
The net fair value of the Company's various swap agreements at September
30, 1996, was obtained from counterparties to the agreements. The
counterparties estimate the Company would pay $26,937 to terminate the swap
agreements based upon the existing terms and current market conditions.
7. RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
-------------------------------
<S> <C>
3.19 2.81
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes, less undistributed income of equity
investees which are less than 50% owned, plus the minority interest of
majority-owned subsidiaries with fixed charges and plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense, whether
capitalized or expensed, amortization of debt costs, dividends on preferred
securities of SCI Finance LLC and one-third of rental expense which the Company
considers representative of the interest factor in the rentals.
11
<PAGE> 12
8. SCI INTERNATIONAL LIMITED
SCI International Limited ("International") is a wholly owned subsidiary of the
Company. International, through wholly owned subsidiaries, owns the Company's
foreign operations.
Set forth below is certain summary financial information for International
as of or for the nine months ended September 30:
<TABLE>
<CAPTION>
1996 1995
----------------------
<S> <C> <C>
Revenues ................. $ 650,476 $ 214,775
========== ==========
Gross profit ............. $ 104,307 $ 50,718
========== ==========
Net income ............... $ 31,253 $ 1,980
========== ==========
Current assets ........... $ 224,906 $ 224,619
Non-current assets ....... 2,341,415 1,947,972
---------- ----------
Total assets ............. $2,566,321 $2,172,591
========== ==========
Current liabilities ...... $ 285,799 $ 232,056
Non-current liabilities .. 1,669,771 1,305,416
---------- ----------
Total liabilities ........ $1,955,570 $1,537,472
========== ==========
Stockholder's equity ..... $ 610,751 $ 635,119
========== ==========
</TABLE>
9. STOCKHOLDERS' EQUITY
On June 13, 1996, the Company's Board of Directors approved a two-for-one split
of its common stock to be effected as a stock dividend. On August 8, 1996, the
Company's shareholders approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
200,000,000 to 500,000,000 shares. The stock dividend was paid on August 30,
1996, to shareholders of record as of August 16, 1996. The par value of the new
shares issued totaled approximately $117,838, which was transferred from
capital in excess of par value to the common stock account. All share and per
share data for prior periods presented have been restated to reflect this stock
dividend.
12
<PAGE> 13
10. GEOGRAPHIC SEGMENT INFORMATION
The Company conducts funeral and cemetery operations principally in the United
States, Australia, Canada, France and the United Kingdom. Geographic segment
information was as follows:
<TABLE>
<CAPTION>
United Other Other
States France* European** Foreign*** Consolidated
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Nine months ended September 30:
1996 ........................ $1,034,226 $393,595 $135,337 $121,544 $1,684,702
1995 ........................ 853,045 47,737 107,301 97,170 1,105,253
Three months ended September 30:
1996 ........................ 338,677 121,162 41,386 43,275 544,500
1995 ........................ 285,825 47,737 34,641 35,288 403,491
INCOME FROM OPERATIONS:
Nine months ended September 30:
1996 ........................ $ 292,633 $ 33,188 $ 29,091 $ 39,860 $ 394,772
1995 ........................ 231,267 2,005 26,224 33,208 292,704
Three months ended September 30:
1996 ........................ 89,915 7,227 7,664 14,276 119,082
1995 ........................ 73,130 2,005 6,336 12,047 93,518
FUNERAL SERVICES PERFORMED:
Nine months ended September 30:
1996 ........................ 160,186 112,050 69,719 37,697 379,652
1995 ........................ 146,164 13,760 60,543 33,180 253,647
Three months ended September 30:
1996 ........................ 51,009 34,403 20,809 13,571 119,792
1995 ........................ 46,943 13,760 18,327 11,806 90,836
NUMBER OF LOCATIONS AT SEPTEMBER 30:
1996 ........................ 1,392 1,101 609 244 3,346
1995 ........................ 1,163 1,067 611 227 3,068
</TABLE>
- ------------------------------
* French operations from August 1995.
** Includes United Kingdom operations, and other European operations from
August 1995.
*** Primarily Canadian and Australian operations.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES)
OVERVIEW:
The majority of the Company's funeral service locations and cemeteries are
managed in groups called clusters. Clusters are established primarily in
metropolitan areas to take advantage of operational efficiencies, particularly
the sharing of operating expenses such as service personnel, vehicles,
preparation services, clerical staff and certain building facility costs.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees,
as well as the other costs mentioned, allow the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.
The Company's acquisitions are primarily located within existing cluster areas
or create new cluster area opportunities. The Company has successfully
implemented the cluster strategy in its North American, United Kingdom and
Australian operations and is proceeding with implementation in its French
operations which were acquired in August 1995. The Company has approximately
285 clusters throughout North America, the United Kingdom and Australia, which
range in size from two operations to 60 operations. There may be more than one
cluster in a given metropolitan area, depending upon the level and degree of
shared costs.
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Percentage
September 30, Increase Increase
1996 1995 (Decrease) (Decrease)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral ........................ $1,219,031 $ 761,297 $ 457,734 60.1%
Cemetery ....................... 450,200 328,925 121,275 36.9
Financial services ............. 15,471 15,031 440 2.9
---------- -------------- ----------
1,684,702 1,105,253 579,449 52.4
Costs and expenses:
Funeral ........................ 947,533 556,251 391,282 70.3
Cemetery ....................... 293,741 211,276 82,465 39.0
Financial services ............. 7,819 9,345 (1,526) (16.3)
---------- -------------- ----------
1,249,093 776,872 472,221 60.8
Gross profit and margin percentage:
Funeral ........................ 271,498 22.3% 205,046 26.9% 66,452 32.4
Cemetery ....................... 156,459 34.8 117,649 35.8 38,810 33.0
Financial services ............. 7,652 49.5 5,686 37.8 1,966 34.6
---------- -------------- ----------
$ 435,609 25.9% $ 328,381 29.7% $ 107,228 32.7%
========== ============== ==========
</TABLE>
14
<PAGE> 15
FUNERAL
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Increase Percentage
1996 1995 (Decrease) Increase
---------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States ...................... $ 592,528 $538,089 $ 54,439 10.1%
Other European* .................... 104,979 96,030 8,949 9.3
Other Foreign** .................... 74,818 64,612 10,206 15.8
---------- --------- --------- ---------
772,325 698,731 73,594 10.5
---------- --------- --------- ---------
New clusters:***
United States ...................... 17,719 5,557 12,162
Other European ..................... 19,382 2,217 17,165
Other Foreign ...................... 11,131 1,766 9,365
France ............................. 393,598 47,737 345,861
---------- --------- ---------
441,830 57,277 384,553
---------- --------- ---------
Non-cluster and disposed operations .. 4,876 5,289 (413)
---------- --------- ---------
Total funeral revenues ............. $1,219,031 $761,297 $457,734 60.1%
========== ========= =========
</TABLE>
The $73,594 increase in revenues from existing clusters was the result of
a 5.1% increase in the number of funeral services performed (247,702 compared
to 235,738) and a 5.2% higher average sales price ($3,118 compared to $2,964).
Acquisitions since the beginning of 1995, included in existing clusters,
accounted for $57,763 of the existing cluster revenue increase. The remaining
increase of $15,831 was contributed by existing cluster locations acquired
before 1995. The increase in Other European new cluster revenue is primarily
due to non-French European operations added through the OGF/PFG acquisition
(see note three to the consolidated financial statements). Future growth
through acquisitions is considered likely.
During the nine months ended September 30, 1996, the Company sold $414,893
of prearranged funeral services compared to $263,117 for the same period in
1995. These prearranged funeral services are deferred and will be reflected in
funeral revenues in the periods that the funeral services are performed. The
Company's emphasis on sales of prearranged funerals is expected to continue.
- ------------------------------
* Other European primarily includes United Kingdom operations.
** Other Foreign primarily includes Australian and Canadian operations.
*** Represents new geographic cluster areas entered into since the
beginning of 1995 for the period that those businesses were owned by
the Company.
15
<PAGE> 16
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Percentage
1996 1995 Increase Increase
------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States ............................. $ 386,101 $ 357,455 $ 28,646 8.0%
Other European* ........................... 77,358 73,550 3,808 5.2
Other Foreign** ........................... 48,575 42,352 6,223 14.7
--------- --------- -------- ---------
512,034 473,357 38,677 8.2
--------- --------- -------- ---------
New clusters:***
United States ............................. 13,514 4,271 9,243
Other European ............................ 17,480 2,173 15,307
Other Foreign ............................. 7,698 1,230 6,468
France .................................... 346,329 44,046 302,283
--------- --------- --------
385,021 51,720 333,301
--------- --------- --------
Non-cluster and disposed operations .......... 6,062 6,036 26
Administrative overhead ...................... 44,416 25,138 19,278 76.7
--------- --------- --------
Total funeral costs and expenses .......... $ 947,533 $ 556,251 $391,282 70.3%
========= ========= ========
</TABLE>
The gross profit margin for existing clusters increased to 33.7% from
32.3% in the comparable period in 1995. Acquisitions since the beginning of
1995, included in existing clusters, accounted for $40,463 of the existing
cluster cost increase, while costs from existing cluster locations acquired
before 1995 decreased $1,786 in the comparable nine month period ended
September 30, 1996. Typically, acquisitions will temporarily exhibit slightly
lower gross profit margins than those experienced by the Company's existing
locations at least until such time as these locations are assimilated into the
Company's cluster management strategy.
The overall funeral gross profit margin declined during the nine months
ended September 30, 1996 (22.3% compared to 26.9% for the comparable period
last year). Contributing to this period to period decline were the Company's
French operations which were acquired in August 1995. The French gross profit
margin of 12.0% (before administrative overhead) is consistent with the
Company's expectations for these operations, which have historically produced
lower gross profit margins than the Company's other operations.
Administrative overhead costs increased due primarily to the French
operations. When administrative overhead costs are expressed as a percentage
of total funeral revenues, they increased slightly to 3.6% compared to 3.3%.
- ------------------------------
* Other European primarily includes United Kingdom operations.
** Other Foreign primarily includes Australian and Canadian operations.
*** Represents new geographic cluster areas entered into since the
beginning of 1995 for the period that those businesses were owned by
the Company.
16
<PAGE> 17
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Percentage
1996 1995 Increase Increase
-----------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States ...................... $372,772 $284,708 $ 88,064 30.9%
Other European* .................... 10,025 8,601 1,424 16.6
Other Foreign** .................... 34,328 29,181 5,147 17.6
-------- -------- -------- ---------
417,125 322,490 94,635 29.3
-------- -------- -------- ---------
New clusters:***
United States ...................... 29,751 3,840 25,911
Other European ..................... 951 453 498
Other Foreign ...................... - - -
-------- -------- --------
30,702 4,293 26,409
-------- -------- --------
Non-cluster and disposed operations .. 2,373 2,142 231
-------- -------- --------
Total cemetery revenues ............ $450,200 $328,925 $121,275 36.9%
======== ======== ========
</TABLE>
Revenues from the existing clusters increased $94,635 due primarily to
increased preneed sales of property and merchandise as well as higher average
sales prices for these items. Additionally, increased amounts of earnings and
realization of portfolio gains from cemetery trust funds contributed to the
increase. Included in the existing cluster increase were $72,959 in increased
revenues from cemeteries acquired since the beginning of 1995, while revenues
from existing cluster locations acquired before 1995 increased $21,676. The
Company plans to continue to emphasize the selling of preneed cemetery property
and merchandise by maintaining an active and well-trained sales force. Future
growth through acquisitions is considered likely.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Percentage
1996 1995 Increase Increase
------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States .............................. $225,530 $173,410 $52,120 30.1%
Other European* ............................ 6,060 4,473 1,587 35.5
Other Foreign** ............................ 18,474 15,287 3,187 20.8
-------- -------- ------- -------
250,064 193,170 56,894 29.5
-------- -------- ------- -------
New clusters:***
United States .............................. 18,203 2,811 15,392
Other European ............................. 876 328 548
Other Foreign .............................. - - -
-------- -------- -------
19,079 3,139 15,940
-------- -------- -------
Non-cluster and disposed operations ........... 3,005 1,982 1,023
Administrative overhead ....................... 21,593 12,985 8,608 66.3
-------- -------- -------
Total cemetery costs and expenses .......... $293,741 $211,276 $82,465 39.0%
======== ======== =======
</TABLE>
- ------------------------------
* Other European primarily includes United Kingdom operations.
** Other Foreign primarily includes Australian and Canadian operations.
*** Represents new geographic cluster areas entered into since the
beginning of 1995 for the period that those businesses were owned by
the Company.
17
<PAGE> 18
Costs and expenses from existing clusters increased $56,894 due primarily
to an increase of $43,621 at cemeteries acquired since the beginning of 1995,
while costs from existing cluster cemeteries acquired before 1995 increased
$13,273. The overall cemetery gross profit margin decreased from 35.8% during
the first nine months of 1995 to 34.8%in the comparable period in 1996,
reflecting a planned increase in administrative overhead.
Financial Services
The Company's wholly owned finance subsidiary, Provident Services, Inc.
(Provident), reported a gross profit increase of $1,966 during the nine months
ended September 30, 1996, compared with the same period in 1995. Provident's
average outstanding loan portfolio during the current nine month period
increased to $210,597 compared to $203,597 in the same period in 1995, while
the average interest rate spread increased to 3.81% compared to 3.69%,
respectively.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
declined to 2.4% in the first nine months of 1996 compared to 3.2% in the
comparable period in 1995. These expenses increased $5,160 or 14.5% period to
period primarily from corporate personnel costs.
Interest expense, which excludes the amount incurred through financial
service operations, increased $17,863 or 21.0% period to period. The 1996
increase in interest expense is primarily the result of an increase of
approximately $280,000 in the Company's average debt (excluding debt related to
financial service operations) outstanding during the nine months ended
September 30, 1996 compared to the same period in 1995. The 1996 increase in
the Company's average debt is due primarily to additional debt associated with
acquisitions. The increased interest expense was also impacted by a slightly
higher average interest rate in 1996.
The provision for income taxes reflected a 36.1% effective tax rate for
the year to date period ended September 30, 1996 as compared to a 38.3%
effective tax rate for the comparable period in 1995. The decrease in the
effective tax rate is due primarily to lower taxes from international
operations.
THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Three Months Ended Percentage
September 30, Increase Increase
1996 1995 (Decrease) (Decrease)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral ......................... $389,031 $ 281,328 $ 107,703 38.3%
Cemetery ........................ 150,584 117,128 33,456 28.6
Financial services .............. 4,885 5,035 (150) (3.0)
-------- --------- ---------
544,500 403,491 141,009 34.9
Costs and expenses:
Funeral ......................... 310,646 220,373 90,273 41.0
Cemetery ........................ 100,456 74,425 26,031 35.0
Financial services .............. 2,020 2,969 (949) (32.0)
-------- --------- ---------
413,122 297,767 115,355 38.7
Gross profit and margin percentage:
Funeral ......................... 78,385 20.1% 60,955 21.7% 17,430 28.6
Cemetery ........................ 50,128 33.3 42,703 36.5 7,425 17.4
Financial services .............. 2,865 58.6 2,066 41.0 799 38.7
-------- --------- ---------
$131,378 24.1% $ 105,724 26.2% $ 25,654 24.3%
======== ========= =========
</TABLE>
18
<PAGE> 19
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Increase Percentage
1996 1995 (Decrease) Increase
--------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States ...................... $193,477 $176,167 $ 17,310 9.8%
Other European* .................... 31,194 29,827 1,367 4.6
Other Foreign** .................... 29,146 23,868 5,278 22.1
-------- -------- -------- -------
253,817 229,862 23,955 10.4
-------- -------- -------- -------
New clusters:***
United States ...................... 4,368 10 4,358
Other European ..................... 6,659 1,730 4,929
Other Foreign ...................... 1,664 467 1,197
France ............................. 121,165 47,737 73,428
-------- -------- --------
133,856 49,944 83,912
-------- -------- --------
Non-cluster and disposed operations .. 1,358 1,522 (164)
-------- -------- --------
Total funeral revenues ............. $389,031 $281,328 $107,703 38.3%
======== ======== ========
</TABLE>
The $23,955 increase in revenues from existing clusters was the result of
a 4.2% increase in the number of funeral services performed (79,755 compared to
76,573) and a 6.0% higher average sales price ($3,182 compared to $3,002).
Acquisitions since July 1, 1995, included in existing clusters, accounted for
$20,847 of the existing cluster revenue increase. The remaining increase of
$3,108 was derived from locations acquired before July 1, 1995.
During the three months ended September 30, 1996, the Company sold
$145,880 of prearranged funeral services compared to $91,643 for the same
quarter in 1995.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months Ended Percentage
September 30, Increase Increase
1996 1995 (Decrease) (Decrease)
--------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States ............................. $131,316 $122,020 $ 9,296 7.6%
Other European* ........................... 24,486 24,739 (253) (1.0)
Other Foreign** ........................... 18,723 15,183 3,540 23.3
-------- -------- ------- ------
174,525 161,942 12,583 7.8
-------- -------- ------- ------
New clusters:***
United States ............................. 3,924 85 3,839
Other European ............................ 6,190 1,696 4,494
Other Foreign ............................. 1,161 332 829
France .................................... 109,199 44,046 65,153
-------- -------- -------
120,474 46,159 74,315
-------- -------- -------
Non-cluster and disposed operations .......... 1,520 1,960 (440)
Administrative overhead ...................... 14,127 10,312 3,815 37.0
-------- -------- -------
Total funeral costs and expenses .......... $310,646 $220,373 $90,273 41.0%
======== ======== =======
</TABLE>
- ------------------------------
* Other European primarily includes United Kingdom operations.
** Other Foreign primarily includes Australian and Canadian operations.
*** Represents new geographic cluster areas entered into since July 1, 1995
for the period that those businesses were owned by the Company.
19
<PAGE> 20
The gross profit margin for existing clusters increased to 31.2% from
29.5% period to period. Acquisitions since July 1, 1995, included in existing
clusters, accounted for $15,459 of the existing cluster cost increase, while
existing cluster locations acquired before July 1, 1995, had a cost decrease of
$2,876. Typically, acquisitions will temporarily exhibit slightly lower gross
profit margins than those experienced by the Company's existing locations at
least until such time as these locations are assimilated into the Company's
cluster management strategy.
The overall funeral gross profit margin declined during the third quarter
of 1996 (20.1% compared to 21.7% for the comparable period last year).
Contributing to this quarter to quarter decline were the Company's French
operations which were acquired in August 1995. The French gross profit margin
of 9.9% (before administrative overhead) is consistent with the Company's
expectations for these operations which have historically produced lower gross
profit margins than the Company's other operations.
Administrative overhead costs increased due primarily to the French
operations. When administrative overhead costs are expressed as a percentage
of total funeral revenues, they declined slightly to 3.6% compared to 3.7%
during the three months ended September 30, 1995.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Increase Percentage
1996 1995 (Decrease) Increase
---------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States ...................... $126,351 $102,897 $23,454 22.8%
Other European* .................... 3,533 3,084 449 14.6
Other Foreign** .................... 12,030 10,470 1,560 14.9
-------- -------- ------- ------
141,914 116,451 25,463 21.9
-------- -------- ------- ------
New clusters:***
United States ...................... 8,021 - 8,021
Other European ..................... - - -
Other Foreign ...................... - - -
-------- -------- -------
8,021 - 8,021
-------- -------- -------
Non-cluster and disposed operations .. 649 677 (28)
-------- -------- -------
Total cemetery revenues ............ $150,584 $117,128 $33,456 28.6%
======== ======== =======
</TABLE>
Revenues from the existing clusters increased $25,463 due primarily to
increased preneed sales of property and merchandise as well as higher average
sales prices for these items. Included in the existing cluster increase were
$23,279 in increased revenues from cemeteries acquired since July 1, 1995,
while revenues from existing cluster locations acquired before 1995 increased
$2,184.
- ------------------------------
* Other European primarily includes United Kingdom operations.
** Other Foreign primarily includes Australian and Canadian operations.
*** Represents new geographic cluster areas entered into since July 1, 1995
for the period that those businesses were owned by the Company.
20
<PAGE> 21
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Increase Percentage
1996 1995 (Decrease) Increase
---------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States .............................. $ 77,996 $62,359 $15,637 25.1%
Other European* ............................ 2,479 1,654 825 49.9
Other Foreign** ............................ 6,504 5,355 1,149 21.5
-------- ------- ------- ------
86,979 69,368 17,611 25.4
-------- ------- ------- ------
New clusters:***
United States .............................. 4,792 - 4,792
Other European ............................. - - -
Other Foreign .............................. - - -
-------- ------- -------
4,792 - 4,792
-------- ------- -------
Non-cluster and disposed operations ........... 260 728 (468)
Administrative overhead ....................... 8,425 4,329 4,096 94.6
-------- ------- -------
Total cemetery costs and expenses .......... $100,456 $74,425 $26,031 35.0%
======== ======= =======
</TABLE>
Costs and expenses from existing clusters increased $17,611 due primarily
to an increase of $14,361 at cemeteries acquired since July 1, 1995. The
overall cemetery gross profit margin decreased from 36.5% to 33.3% quarter to
quarter. This margin decrease reflects an anticipated increase in
administrative overhead and to a lesser extent, a non-recurring sale of
undeveloped land included in the third quarter 1995 results.
Financial Services
Provident reported a gross profit increase of $799 in the current quarter
compared with the same quarter in 1995. Provident's average outstanding loan
portfolio during the current quarter decreased to $180,907 compared to $204,406
last year while the average interest rate spread increased to 3.94% compared to
3.67% during the third quarter of 1995. The decrease in Provident's loan
portfolio is primarily due to an August 1996 payoff of approximately $126,000
by two of Provident's largest customers. The early termination fees associated
with the payoffs favorably impacted the gross profit margin for the three
months ended September 30, 1996.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
declined to 2.3% in the third quarter of 1996 compared to 3.0% in the
comparable period in 1995. These expenses increased $90 or 0.7% quarter to
quarter primarily from increased personnel costs.
Interest expense, which excludes the amount incurred through financial
service operations, increased $3,741 or 11.6% quarter to quarter. The 1996
increase is the result of an increase of approximately $230,000 in the
Company's average debt (excluding debt related to financial service operations)
outstanding during the quarter ended September 30, 1996 compared to the same
quarter in 1995. The increased interest associated with the higher debt level
was offset by a slightly lower average interest rate quarter to quarter.
The provision for income taxes reflected a 35.3% effective tax rate for
the quarter ended September 30, 1996 as compared to a 36.9% effective tax rate
for the comparable period last year. The decrease in the effective tax rate is
due primarily to lower taxes from international operations.
- ------------------------------
* Other European primarily includes United Kingdom operations.
** Other Foreign primarily includes Australian and Canadian operations.
*** Represents new geographic cluster areas entered into since July 1, 1995
for the period that those businesses were owned by the Company.
21
<PAGE> 22
FINANCIAL CONDITION AND LIQUIDITY AT SEPTEMBER 30, 1996:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper.
Funding required for the Company's acquisition program has been generated
through public and private offerings of debt and the issuance of equity
securities supplemented by the Company's revolving credit agreements and
additional securities registered with the Commission. The Company believes
cash from operations, additional funds available under its revolving credit
agreements, proceeds from offerings of securities and the other registered
securities will be sufficient to continue its current acquisition program and
operating policies.
At September 30, 1996, the Company had net working capital of $154,790 and
a current ratio of 1.31:1, compared to working capital of $47,850 and a current
ratio of 1.08:1 at December 31, 1995.
Debt
The Company's primary revolving credit agreements allow for borrowings of up to
$800,000. At September 30, 1996, there was $164,865 of borrowings outstanding
under these agreements. In July 1996, the Company's French revolving credit
facility was extended to February 1997 and the borrowing capacity was reduced
to $50,000. At September 30, 1996, there was $17,433 outstanding under this
agreement. After giving effect to the interest rate and cross-currency
interest rate swaps discussed more fully in note six to the consolidated
financial statements, the Company's total debt has been converted into
approximately $1,350,000 fixed interest rate debt at a weighted average rate of
7.7% and approximately $690,000 of floating interest rate debt at a weighted
average rate of 5.73%. In general, interest rates are managed such that 30% to
50% of the total debt (excluding debt which offsets the Provident loan
receivable portfolio) is floating rate and thus is sensitive to interest rate
fluctuations.
SOURCES AND USES OF CASH
Cash flows from operating activities: Net cash provided by operating activities
was $99,772 for the nine months ended September 30, 1996, compared to $73,363
for the same period in 1995, an increase of $26,409. Primary sources of this
increase include $64,386 of increased net income as well as $33,215 and $20,369
of increased non-cash adjustments for depreciation and amortization and
provision for deferred income taxes. The $95,995 negative change in cash flow
impact from changes in other liabilities resulted primarily from the timing of
payments related to interest and operating payables.
Cash flows from investing activities: Net cash used in investing activities was
$239,254 for the nine months ended September 30, 1996, compared to $678,309 for
the same period in 1995. This use of cash primarily reflects the Company's
acquisition of funeral service locations and cemeteries, detailed in note three
to the consolidated financial statements. In May 1996, the Company used
$36,702 of cash to increase its investment in an existing equity investee. In
addition to acquisitions, capital expenditures including new construction of
facilities and major improvements to existing properties continue to require
significant amounts of cash.
Cash flows from financing activities: Net cash provided by financing activities
was $126,183 for the nine months ended September 30, 1996, compared to $556,750
for the same period in 1995. During 1996, cash inflows from financing
activities included a $32,387 net decrease in borrowings under revolving credit
agreements and proceeds from the May 1996 issuance of $300,000 of notes issued
in two tranches of $150,000 each (6.75% and 7.20% due in 2001 and 2006,
respectively). Other cash outflows during 1996 include $41,123 of dividends
paid and $104,584 of debt payments, of which $53,500 were payments of
short-term promissory notes issued in the 1995 Gibraltar acquisition.
The Company believes that debt service is manageable at the current levels
of debt outstanding. As of September 30, 1996, the Company's debt to
capitalization ratio was 46.6% compared to 46.3% at December 31, 1995. The
interest coverage ratio for the nine months ended September 30, 1996 was
3.53:1, compared to 3.04:1 for the same period in 1995. This interest
coverage level has been relatively consistent, despite higher levels of debt
outstanding, for several years. The Company believes that the acquisition of
funeral and cemetery operations funded with debt or Company common stock is a
prudent business strategy given the stable cash flow generated and the low
failure rate exhibited by these types of businesses. The Company believes
these acquired firms are capable of servicing the additional debt and providing
a sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance
its future operations and acquisitions through
22
<PAGE> 23
internally generated funds, borrowings under credit facilities and the issuance
of securities. At September 30, 1996, the Company had approximately $635,000 of
available borrowings under its primary and multi-currency credit facilities. In
June 1996, the Company filed a shelf registration statement with the Commission
to increase the amount of securities available for issuance to $1,000,000. On
September 5, 1996, this registration statement became effective and at September
30, 1996, the Company had the ability to issue $1,000,000 in securities
registered with the Commission. Additionally, the Company has 19,483,718 shares
of common stock and approximately $245,000 of guarantee promissory notes and
convertible debentures registered with the Commission to be used exclusively for
future acquisitions.
Other Matters:
The Company will adopt Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities ("FAS 125") in January 1997. FAS 125 provides standards for
transfers and servicing of financial assets and extinguishments of liabilities
that are based on a financial-components approach that focuses on control. The
Company does not anticipate that FAS 125 will have a material impact, if any,
on the Company's financial position or results of operations.
On October 3, 1996, subsidiaries of the Company jointly filed a
registration statement on Form S-4 with the Commission (the "Exchange Offer
Registration Statement") pursuant to which such subsidiaries would offer to
acquire the outstanding shares of The Loewen Group Inc. ("Loewen") through an
exchange offer, conditioned upon certain matters. Loewen is a Canadian based
company that as of July 26, 1996, operates 909 funeral homes and 247
cemeteries in North America. When the Exchange Offer Registration Statement is
declared effective by the Commission and the exchange offer is made, holders of
Loewen's outstanding common shares will be offered the opportunity to exchange
their shares for $45.00 worth of common stock of New Service Corporation
International ("New SCI"), a wholly owned subsidiary of the Company, or, at the
election of each Loewen shareholder, $45.00 worth of exchangeable shares of a
Canadian subsidiary of New SCI, in each case subject to adjustment. Prior to
consummation of the exchange offers, and subject to the approval of the
Company's stockholders, the Company will merge with a wholly owned subsidiary
of New SCI, and as a result thereof New SCI will hold all of the Company's
common stock and shareholders of the Company will become shareholders of New
SCI. New SCI will then be renamed Service Corporation International and will be
a publicly traded entity on the New York Stock Exchange. The exchangeable
shares will be convertible into, and are intended to be the economic and voting
equivalent of, shares of New SCI common stock. Holders of Loewen Series C
Preferred Stock will be offered the opportunity to exchange their shares for
$29.51 worth of New SCI common stock or such exchangeable shares. The value of
the New SCI common stock and exchangeable shares issued in this transaction is
expected to be approximately $2.9 billion. In addition, Loewen has
approximately $1.1 billion of indebtedness as of June 30, 1996.
On October 10, 1996, Loewen's Board of Directors recommended that all
Loewen shareholders reject the Exchange Offer. As of November 14, 1996, the
Exchange Offer Registration Statement has not yet been declared effective by
the Commission and the exchange offer has not been commenced. The Company
expects that after the Exchange Offer Registration Statement has been declared
effective New SCI and such Canadian subsidiary will proceed with the exchange
offer for the outstanding Loewen shares.
23
<PAGE> 24
Cautionary Statement on Forward-looking Statements
Certain disclosures in this filing on Form 10-Q that are not historical facts
are forward looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These statements are
based on assumptions that the Company believes are reasonable; however many
important factors could cause the Company's actual results in the future to
differ materially from the forward-looking statements made herein and in any
other documents or oral presentations made by, or on behalf of, the Company.
Important factors which could cause actual results to differ materially from
those in forward-looking statements include, among others, the following:
1) Changes in general economic conditions both domestically and
internationally impacting financial markets (e.g.marketable security
values as well as currency and interest rate fluctuations).
2) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax policies.
Changes in regulations may impact the Company's ability to enter or
expand new markets.
3) Changes in consumer demand for the Company's services caused by
several factors such as changes in local death rates, cremation
rates, competitive pressures and local economic conditions.
4) The Company's ability to identify and complete additional acquisitions
on terms that are favorable to the Company, and to successfully
integrate acquisitions into the Company's business. The Company's
future results may be materially impacted by changes in the level of
acquisition activity.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
24
<PAGE> 25
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 8, 1996, the Company held a special meeting of shareholders and the
shareholders approved a proposal to amend the Company's Restated Articles of
Incorporation to increase the number of authorized shares of common stock $1.00
par value, from 200,000,000 to 500,000,000 shares, which proposal is described
in the Company's proxy statement dated July 3, 1996. The shares voting on the
proposal were cast as follows:
<TABLE>
<CAPTION>
Abstentions or Broker
Votes For Votes Against Votes Withheld Non-votes
---------- ------------- -------------- ---------
<S> <C> <C> <C>
98,400,575 3,032,779 187,369 -0-
</TABLE>
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Amendment to the Restated Articles of Incorporation.
11.1 Computation of earnings per share.
12.1 Ratio of earnings to fixed charges for the nine months ended
September 30, 1996 and 1995.
27.1 Financial data schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the three months ended
September 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 1996
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
25
<PAGE> 26
INDEX TO EXHIBITS
EXHIBIT
NUMBER
-------
3.1 Articles of Amendment to the Restated Articles of Incorporation.
11.1 Computation of earnings per share.
12.1 Ratio of earnings to fixed charges for the nine months ended
September 30, 1996 and 1995.
27.1 Financial data schedule.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION
OF
SERVICE CORPORATION INTERNATIONAL
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Restated Articles of Incorporation:
ARTICLE ONE
The name of the corporation is Service Corporation International.
ARTICLE TWO
The following amendment to the Restated Articles of Incorporation was
adopted by the shareholders of the corporation on August 8, 1996 for the
purpose of increasing the number of authorized shares of the corporation's
Common Stock from 200,000,000 shares to 500,000,000 shares.
The amendment alters the first paragraph of Article Four of the Restated
Articles of Incorporation to read, in its entirety, as follows:
"The aggregate number of shares of stock of all classes which the
corporation shall have authority to issue is 501,000,000 shares,
consisting of 1,000,000 shares of preferred stock of the par value of
One Dollar ($1.00) each (hereinafter sometimes called "Preferred
Stock"), and 500,000,000 shares of common stock of the par value of
One Dollar ($1.00) each (hereinafter sometimes called "Common Stock")."
ARTICLE THREE
The number of shares of the corporation outstanding at the record date
established for voting upon such adoption was 117,659,423 shares of Common
Stock; and the number of shares entitled to vote thereon was 117,659,423 shares
of Common Stock.
ARTICLE FOUR
The number of shares of Common Stock of the corporation voted for such
amendment was 98,400,575; the number of shares of Common Stock of the
corporation voted against such amendment was 3,032,779.
By: /s/ James M. Shelger
-----------------------------
James M. Shelger
Senior Vice President
General Counsel and Secretary
<PAGE> 1
EXHIBIT 11.1
SERVICE CORPORATION INTERNATIONAL
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRIMARY:
Net income ............................................ $ 57,395 $ 39,136 $191,542 $127,156
======== ======== ======== ========
Average number of common shares
outstanding ......................................... 235,622 194,085 235,273 192,615
Common stock equivalents applicable to options
outstanding resulting from application of the
"treasury stock method" using average stock price 6,253 3,009 5,570 2,055
-------- -------- -------- --------
Average common and common equivalent shares
used in earnings per share .......................... 241,875 197,094 240,843 194,670
======== ======== ======== ========
Primary Earnings Per Common Share:
Net income .......................................... $ .24 $ .20 $ .80 $ .65
========= ======== ======== ========
FULLY DILUTED:
Net income ............................................ $ 57,395 $ 39,136 $191,542 $127,156
Add after tax interest expense applicable to
convertible debentures .............................. 2,007 2,252 5,892 9,702
-------- -------- -------- --------
$ 59,402 $ 41,388 $197,434 $136,858
======== ======== ======== ========
Average number of common shares
outstanding ......................................... 235,622 194,085 235,273 192,616
Common stock equivalents applicable to options
outstanding resulting from application of the
"treasury stock method" using end of period
stock price (if greater than average stock
price for period) ................................... 6,625 3,850 6,031 2,509
Assuming conversion of convertible debentures ......... 13,676 27,406 13,662 30,137
-------- -------- -------- --------
Average shares used in fully diluted earnings per share 255,923 225,341 254,966 225,262
======== ======== ======== ========
Fully Diluted Earnings Per Common Share:
Net income .......................................... $ .23 $ .18 $ .77 $ .61
======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 12.1
SERVICE CORPORATION INTERNATIONAL
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
- ------------------------------------------------------------------------------------------------------
(Thousands, except ratio amounts)
<S> <C> <C>
Pretax income .................................................... $299,565 $206,081
Undistributed income of less than 50% owned equity investees ..... (4,359) (2,213)
Minority interest in income of majority owned subsidiaries
with fixed charges ............................................ 408 1,713
Add fixed charges as adjusted (from below) ....................... 132,885 113,289
-------- --------
$428,499 $318,870
-------- --------
Fixed charges:
Interest expense:
Corporate .................................................. $101,511 $ 85,063
Financial services ......................................... 7,344 8,032
Capitalized ................................................ 1,565 200
Amortization of debt costs .................................... 1,415 824
Dividends on convertible preferred stock of subsidiary ........ 8,086 8,086
1/3 of rental expense ......................................... 14,529 11,284
-------- --------
Fixed charges ................................................. 134,450 113,489
Less: Capitalized interest .................................... (1,565) (200)
-------- --------
Fixed charges as adjusted ........................................ $132,885 $113,289
======== ========
Ratio (earnings divided by fixed charges) ........................ 3.19 2.81
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SERVICE CORPORATION INTERNATIONAL AS OF SEPTEMBER
30, 1996 AND THE RELATED STATEMENT OF INCOME FOR THE NINE MONTHS THEN ENDED AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 16,436
<SECURITIES> 543,480
<RECEIVABLES> 910,043
<ALLOWANCES> 74,129
<INVENTORY> 140,627
<CURRENT-ASSETS> 651,757
<PP&E> 1,678,282
<DEPRECIATION> 303,144
<TOTAL-ASSETS> 8,339,178
<CURRENT-LIABILITIES> 496,967
<BONDS> 1,953,333
0
0
<COMMON> 235,642
<OTHER-SE> 1,907,571
<TOTAL-LIABILITY-AND-EQUITY> 8,339,178
<SALES> 1,599,126
<TOTAL-REVENUES> 1,684,702
<CGS> 1,241,274
<TOTAL-COSTS> 1,249,093
<OTHER-EXPENSES> 41,045
<LOSS-PROVISION> 7,839
<INTEREST-EXPENSE> 110,270
<INCOME-PRETAX> 299,565
<INCOME-TAX> 108,023
<INCOME-CONTINUING> 191,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,542
<EPS-PRIMARY> .80
<EPS-DILUTED> .77
</TABLE>
