-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, N5d0z6MvDuw2v4PHBt+9Pe1x0pi1o0DF1kT2dfx6hTlU7E11aXRaxX+t8oQp2tyW cOc1xvcAKDxrT6ygHSegsQ== 0000950129-94-000821.txt : 19941208 0000950129-94-000821.hdr.sgml : 19941208 ACCESSION NUMBER: 0000950129-94-000821 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19941207 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE CORPORATION INTERNATIONAL CENTRAL INDEX KEY: 0000089089 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 741488375 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56069 FILM NUMBER: 94563641 BUSINESS ADDRESS: STREET 1: 1929 ALLEN PKWY STREET 2: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219 BUSINESS PHONE: 7135225141 MAIL ADDRESS: STREET 1: P.O. BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219-0548 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCI FINANCE LLC CENTRAL INDEX KEY: 0000931498 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 760449139 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56069-01 FILM NUMBER: 94563642 BUSINESS ADDRESS: STREET 1: 1929 ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77014 BUSINESS PHONE: 7135225141 MAIL ADDRESS: STREET 1: 1929 ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77014 424B5 1 PROSPECTUS SUPPLEMENTS 1 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.
- -------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------- Per Share $25.50 $.80 $24.70 - -------------------------------------------------------------------------------------------------------- Total(3) $196,350,000 $6,160,000 $190,190,000 - --------------------------------------------------------------------------------------------------------
(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. - --------------- * 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 2 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 3 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
Page 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
PROSPECTUS
Page 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
S-3 4 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. S-4 5 THE OFFERING 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.
- --------------- (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. S-5 6 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. S-6 7 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-7 8 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 9 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-9 10 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-10 11 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 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 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.
-------------------------------------- SALE PRICE HIGH LOW DIVIDENDS ---------- ---------- ---------- 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
On December 5, 1994, the reported last sale price of the SCI Common Stock on the NYSE was $25.50 per share. S-13 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.
-------------------------- AT SEPTEMBER 30, 1994 PRO FORMA AND AS Thousands ACTUAL ADJUSTED ---------- ---------- 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 ========== ==========
S-14 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.
---------------------------------------------------------------------------------------------- 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 ---------- ----------- ----------- ----------- ----------- ----------- ----------- 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
- --------------- (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 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 17 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------------------------- HISTORICAL PRO FORMA OTHER ACQUIRED Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL ----------- ---------- -------------- ------------ -------------- 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)
S-17 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 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:
--------------------------------------------------------------------- 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 -------- -------- ----- ------- -------- -------- 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 ======== ======== ===== ======= ======== ========
- --------------- * 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 20 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1994
--------------------------------------------------------------- HISTORICAL PRO FORMA OTHER THE ACQUIRED COMBINED Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL --------- ---------- --------- ----------- --------- 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)
S-20 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 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:
---------------------------------------------------------------------------------- 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 ---------- ---------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== ========== ==========
- --------------- * 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 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:
------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- -------- 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% ========== ========== ==========
S-23 24 Funeral Funeral revenues were generated as follows:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 25 Cemetery Cemetery revenues were generated as follows:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ PERCENTAGE 1994 1993 (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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:
-------------------------------------- YEARS ENDED DECEMBER 31, AS UNAUDITED REPORTED PRO FORMA 1993 1992 1991 ---------- ---------- ---------- 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 ========== ========== ==========
S-26 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 28 Total cemetery revenues increased $63,321 or 29.2% over 1992. Cemetery revenues were as follows:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, PERCENTAGE 1992* 1991* INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, PERCENTAGE 1992* 1991* INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1992* 1991* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1992* 1991* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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 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 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 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:
---------- NUMBER OF SHARES ---------- 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 ==========
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 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 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 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.
- -------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------- Per Share $25.50 $.80 $24.70 - -------------------------------------------------------------------------------------------------------- Total(3) $196,350,000 $6,160,000 $190,190,000 - --------------------------------------------------------------------------------------------------------
(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 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 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
Page 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
PROSPECTUS
Page 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
S-3 40 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. S-4 41 THE OFFERING 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.
- --------------- (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. S-5 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. S-6 43 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-7 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 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 S-9 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. S-10 47 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 48 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 49 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.
-------------------------------------- SALE PRICE HIGH LOW DIVIDENDS ---------- ---------- ---------- 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
On December 5, 1994, the reported last sale price of the SCI Common Stock on the NYSE was $25.50 per share. S-13 50 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.
-------------------------- AT SEPTEMBER 30, 1994 PRO FORMA AND AS Thousands ACTUAL ADJUSTED ---------- ---------- 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 ========== ==========
S-14 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.
---------------------------------------------------------------------------------------------- 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 ---------- ----------- ----------- ----------- ----------- ----------- ----------- 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
- --------------- (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 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 53 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------------------------- HISTORICAL PRO FORMA OTHER ACQUIRED Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL ----------- ---------- -------------- ------------ -------------- 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)
S-17 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 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:
--------------------------------------------------------------------- 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 -------- -------- ----- ------- -------- -------- 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 ======== ======== ===== ======= ======== ========
- --------------- * 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 56 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1994
--------------------------------------------------------------- HISTORICAL PRO FORMA OTHER THE ACQUIRED COMBINED Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL --------- ---------- --------- ----------- --------- 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)
S-20 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 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:
---------------------------------------------------------------------------------- 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 ---------- ---------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== ========== ==========
- --------------- * 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 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:
------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- -------- 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% ========== ========== ==========
S-23 60 Funeral Funeral revenues were generated as follows:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 61 Cemetery Cemetery revenues were generated as follows:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ PERCENTAGE 1994 1993 (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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:
-------------------------------------- YEARS ENDED DECEMBER 31, AS UNAUDITED REPORTED PRO FORMA 1993 1992 1991 ---------- ---------- ---------- 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 ========== ========== ==========
S-26 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 64 Total cemetery revenues increased $63,321 or 29.2% over 1992. Cemetery revenues were as follows:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, PERCENTAGE 1992* 1991* INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, PERCENTAGE 1992* 1991* INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1992* 1991* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1992* 1991* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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 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. S-31 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 S-32 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. S-33 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:
---------- NUMBER OF SHARES ---------- 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 ==========
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 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 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 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. - -------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------
(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 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
PAGE 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
PROSPECTUS
PAGE 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
S-2 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. S-3 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 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 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 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 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 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:
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, - ------------- ---------------------------------------- 1994 1993 1993 1992 1991 1990 1989 - ---- ---- ---- ---- ---- ---- ---- 3.32 3.18 3.19 3.03 2.82 2.88 2.98
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 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.
-------------------------- AT SEPTEMBER 30, 1994 PRO FORMA AND AS Thousands ACTUAL ADJUSTED ---------- ---------- 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 ========== ==========
S-10 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.
----------------------------------------------------------------------------------------------- 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 ----------- ----------- ----------- ----------- ----------- ----------- ----------- 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
- --------------- (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 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 85 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------------------------- HISTORICAL OTHER ACQUIRED PRO FORMA Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL ----------- ---------- -------------- ------------ -------------- 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)
S-13 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 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:
--------------------------------------------------------------------- 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 -------- -------- ----- ------- -------- -------- 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 ======== ======== ===== ======= ======== ========
- --------------- * 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 88 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1994
-------------------------------------------------------------------- Historical Pro Forma OTHER THE ACQUIRED COMBINED Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL ---------- ---------- ---------- ---------- ---------- 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)
S-16 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 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:
---------------------------------------------------------------------------------- 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 ---------- ---------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== ========== ==========
- --------------- * 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 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 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 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:
PRINCIPAL AMOUNT UNDERWRITERS OF NOTES ------------ 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 ============
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 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.
- -------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC (1) COMPENSATION(2) SCI FINANCE (3)(4) - -------------------------------------------------------------------------------------------------------- Per TECONS $50.00 (3) $50.00 - -------------------------------------------------------------------------------------------------------- Total(5) $150,000,000 (3) $150,000,000 - --------------------------------------------------------------------------------------------------------
(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 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. S-2 96 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
Page 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
PROSPECTUS
Page 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
S-3 97 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. S-4 98 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. S-5 99 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 S-6 100 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, S-7 101 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. S-8 102 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. S-9 103 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-10 104 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-11 105 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-12 106 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-13 107 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-14 108 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-15 109 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:
- ----------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, 1994 1993 1993 1992 1991 1990 1989 - ----- ----- ----- ----- ----- ----- ----- 3.32 3.18 3.19 3.03 2.82 2.62 2.38
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-16 110 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.
-------------------------------------- SALE PRICE HIGH LOW DIVIDENDS ---------- ---------- ---------- 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
On December 5, 1994, the reported last sale price of the SCI Common Stock on the NYSE was $25.50 per share. S-17 111 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.
-------------------------- AT SEPTEMBER 30, 1994 PRO FORMA AND AS Thousands ACTUAL ADJUSTED ---------- ---------- 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 ========== ==========
S-18 112 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.
----------------------------------------------------------------------------------------------- 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 ----------- ----------- ----------- ----------- ----------- ----------- ----------- 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
- --------------- (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-19 113 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-20 114 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------------------------- HISTORICAL PRO FORMA OTHER ACQUIRED Thousands, except per share amounts THE COMPANY GSG AND PG COMPANIES ADJUSTMENTS COMBINED TOTAL ----------- ---------- -------------- ------------ -------------- 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)
S-21 115 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-22 116 (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:
--------------------------------------------------------------------- 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 -------- -------- ----- ------- -------- -------- 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 ======== ======== ===== ======= ======== ========
- --------------- * 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-23 117 SERVICE CORPORATION INTERNATIONAL UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1994
--------------------------------------------------------------- HISTORICAL PRO FORMA OTHER THE ACQUIRED COMBINED Thousands, except per share amounts COMPANY GSG AND PG COMPANIES ADJUSTMENTS TOTAL --------- ---------- --------- ----------- --------- 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)
S-24 118 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-25 119 (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:
---------------------------------------------------------------------------------- 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 ---------- ---------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== ========== ==========
- --------------- * 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-26 120 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:
------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- -------- 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% ========== ========== ==========
S-27 121 Funeral Funeral revenues were generated as follows:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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-28 122 Cemetery Cemetery revenues were generated as follows:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE 1994 1993 INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ PERCENTAGE 1994 1993 (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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-29 123 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:
-------------------------------------- YEARS ENDED DECEMBER 31, AS UNAUDITED REPORTED PRO FORMA 1993 1992 1991 ---------- ---------- ---------- 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 ========== ========== ==========
S-30 124 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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-31 125 Total cemetery revenues increased $63,321 or 29.2% over 1992. Cemetery revenues were as follows:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1993 1992* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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-32 126 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, PERCENTAGE 1992* 1991* INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, PERCENTAGE 1992* 1991* INCREASE INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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-33 127 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1992* 1991* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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:
---------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE/ PERCENTAGE 1992* 1991* (DECREASE) INCREASE ---------- ---------- ---------- ---------- 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% ========== ========== ==========
- --------------- * 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-34 128 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-35 129 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-36 130 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"): - --------------------------------------------------------------------------------
REDEMPTION YEAR PRICE ------------------------- ---------- 1999..................... $51.5625 2000..................... 51.2500 2001..................... 50.9375 2002..................... 50.6250 2003..................... 50.3125 2004 and thereafter...... 50.0000
; 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-37 131 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:
----------- 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 ==========
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-38 132 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 -----END PRIVACY-ENHANCED MESSAGE-----