ITEM 1. BUSINESS.
Service Corporation International was incorporated in Texas on July 5, 1962. The term "Company" includes the registrant and its subsidiaries, unless the context indicates otherwise.
The Company is the largest publicly-held funeral/cemetery company in North America. At December 31, 1993, the Company operated 792 funeral homes and 192 cemeteries located in 39 states, the District of Columbia, four provinces in Canada and five Australian states, and other funeral and cemetery related businesses. In addition, the Company provides capital financing to independent funeral home and cemetery operators.
In 1993, the Company acquired an Australian funeral/cemetery company. This was the Company's first acquisition of a firm located outside of North America. Including this acquisition, the Company in 1993 acquired 124 funeral homes and 21 cemeteries through acquisitions. The Company has acquired most of its present operations through acquisitions and has from time to time divested itself of certain properties and/or operations previously acquired. The Company continues to review the possible acquisition of various related businesses. For information regarding acquisitions of funeral home and cemetery operations in 1993, see Note 3 to the consolidated financial statements in Item 8 of this Form 10-K.
For financial information about the Company's industry segments, including the identifiable assets of the Company by industry segments, see Note 14 to the consolidated financial statements in Item 8 of this Form 10-K.
FUNERAL SERVICES OPERATION
The Funeral Services Operation consists of the Company's funeral homes, cemeteries and related businesses. The operation is organized into six domestic and two foreign (Australia and Canada) regional groups, each of which is under the direction of a regional president. Canadian operations are carried out by a public company which is approximately 70% owned by the Company. Local funeral home and cemetery managers, under the direction of the regional presidents, receive support and resources from Houston headquarters and have substantial autonomy with respect to the manner in which services are conducted.
To enhance operational efficiency, the majority of the Company's funeral homes and cemeteries within a region are managed in groups called clusters. The clusters, primarily designated in metropolitan areas, allow funeral homes and cemeteries to share operating expenses such as service personnel, vehicles, preparation services, clerical staff and certain building facility costs.
Funeral Homes. The funeral homes provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral homes sell caskets, burial vaults, cremation receptacles, flowers and burial garments and also operate 75 crematories. The Funeral Services Operation owns 84 funeral home/cemetery combinations and operates 50 flower shops engaged principally in the design and sale of funeral floral arrangements. These flower shops provide floral arrangements to some of the Company's funeral homes and cemeteries.
The Company markets prearranged funeral services. Funeral prearrangement is a means through which a customer contractually agrees to the terms of a funeral to be performed in the future. Payments on prearranged funerals currently offered by the Company are deposited into trust funds or are used to purchase life insurance or annuity contracts issued primarily by third party insurers. Funds paid on prearranged funerals may not be withdrawn until death or cancellation by the customer. For additional information concerning prearranged funeral activities, see Notes 4 and 8 to the consolidated financial statements in Item 8 of this Form 10-K.
The Funeral Services Operation has multiple funeral homes and cemeteries in a number of metropolitan areas. Within individual metropolitan areas, the funeral homes and cemeteries operate under various names because most operations were acquired as going businesses and continue to be operated under the same name as before acquisition.
The death rate tends to be somewhat higher in the winter months and the funeral homes generally experience a higher volume of business during those months.
The funeral home industry is characterized by a large number of independent operations, the vast majority of which are locally owned and operated. The Company believes that there are in excess of 22,000 funeral homes operating in the United States. There are many entities operating multiple branches, but none have as many funeral homes or cover as many geographic areas as the Company. In order to compete successfully, each of the Company's funeral homes must maintain competitive prices, attractive, well-maintained and conveniently located facilities, a good reputation and high professional standards.
In April 1984, the Federal Trade Commission (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 the Company and the FTC applicable to certain funeral practices of the Company was amended in 1984 to make the consent order consistent with the funeral trade regulation rule. From time to time in connection with acquisitions, the Company has entered into consent orders with the FTC which limit the Company's ability to make acquisitions in specified areas and/or which require the Company to dispose of certain operations. The trade regulation rule and the consent orders have not had a materially adverse effect on the Company's operations.
Cemeteries. The Company's cemeteries sell cemetery interment rights (including mausoleum spaces and lawn crypts) and certain merchandise including stone and bronze memorials and burial vaults. The Company's cemeteries also perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries also include crematory operations.
Cemetery sales are often made on a pre-need basis pursuant to installment contracts providing for monthly payments. A portion of the proceeds from cemetery sales is generally required by law to be paid into perpetual care trust funds. Earnings of perpetual care trust funds are used to defray the maintenance cost of cemeteries. In addition, a portion of the proceeds from the sale of pre-need cemetery merchandise and services may be required to be paid into trust funds. For additional information regarding cemetery trust funds, see Note 1 to the consolidated financial statements in Item 8 of this Form 10-K.
The cemetery industry is characterized by a large number of independent operations, the vast majority of which are locally owned and operated. Each of the Company's cemeteries competes with other firms in the same general area. In order to compete successfully, each of the Company's cemeteries must maintain competitive prices, attractive and well kept properties, a good reputation and an effective sales force.
FINANCIAL SERVICES OPERATION
In 1988, the Company formed Provident Services, Inc. ("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. Additionally, Provident provides construction loans for funeral home or cemetery improvement and expansion. Loan packages take traditional forms of secured financing comparable to arrangements offered by leading commercial banks. Provident's loans are generally made at interest rates which fluctuate with the prime lending rate.
Provident had $250,000,000 in loans outstanding at December 31, 1993 and unfunded loan commitments amounting to $19,499,000. Such loans outstanding increased from $187,000,000 in loans outstanding at December 31, 1992. Provident obtains its funds primarily from the Company's bank borrowings.
Provident is in competition with banks and other lending institutions, many of which have substantially greater resources than Provident. However, Provident believes that its knowledge of the death care industry provides it with the ability to make more accurate assessments of funeral home and cemetery industry loans, thereby providing Provident a competitive advantage in the industry.
EMPLOYEES
At December 31, 1993, the Company employed 8,985 persons on a full time basis and 3,731 persons on a part time basis. Of the full time employees 427 were in corporate services, 8,550 were in the Funeral Services Operation, and eight were in Financial Services. All of the Company's eligible employees who so elect are covered by the Company's group health and life insurance plans, and all eligible employees are participants in retirement plans of the Company or various subsidiaries.
At December 31, 1993, 747 employees were covered by collective bargaining agreements. Although disputes are experienced from time to time, in general, relations with employees are considered satisfactory.
REGULATION
The Company's various operations are subject to regulations, supervision and licensing under various federal, state, local and Canadian and Australian statutes, ordinances and regulations. The Company believes that it is in substantial compliance with the significant provisions of such statutes, ordinances and regulations. See discussion of FTC funeral industry trade regulation and consent orders in "Funeral Homes" above.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's executive headquarters and the offices of management personnel of the Funeral and Financial Service Operations are located at 1929 Allen Parkway, Houston, Texas 77019, in a 12-story office building. A wholly-owned subsidiary of the Company owns an undivided one-half interest in the underlying fee to the building and its parking garage. The property consists of approximately 1.3 acres, 250,000 square feet of office space in the building and 160,000 square feet of parking space in the garage. The Company leases all of the office space in the building pursuant to a lease that expires June 30, 1995 providing for monthly rent of $87,000. The rent is subject to escalation for all operating expenses above base year operating expenses. One half of the rent is paid to the wholly-owned subsidiary and the other half is paid to the owner of the remaining undivided one-half interest. The Company owns and utilizes a three-story building at 1919 Allen Parkway, Houston, Texas 77019 containing 43,000 square feet of office space. The Company owns the facilities of certain closed casket manufacturing operations.
At December 31, 1993, the Company owned the real estate and buildings of 803 of its funeral home and cemetery locations and leased facilities in connection with 181 of such operations. In addition, the Company leased two aircraft pursuant to a cancellable lease. At December 31, 1993, the Company operated 3,831 vehicles, of which 1,805 were owned and 2,026 were leased. For additional information regarding leases, see Note 9 to the consolidated financial statements in Item 8 of this Form 10-K.
The Company's 192 cemeteries contain an aggregate of approximately 14,600 acres of which approximately 58% are developed.
The specialized nature of the Company's businesses requires that its facilities be well maintained and kept in good condition. Management believes that these standards are met.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The staff of the Securities and Exchange Commission (the "Commission") is conducting an informal private investigation relating to the change in the Company's principal independent accountants and the Company's Current Report on Form 8-K dated March 31, 1993, as amended, filed with the Commission reporting such change, as well as the Company's current accounting and reporting of pre-need sales. The Commission staff has advised the Company that the investigation should not be construed as an indication by the Commission or its staff that any violations of law have occurred, or as a reflection upon any person, entity or security. The investigation is continuing. Also see Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure in this Form 10-K.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding executive officers of the Company called for by Item 401 of Regulation S-K is hereby included in Part I of this report.
The following table sets forth as of March 25, 1994 the name and age of each executive officer of the Company, the office held, and the date first elected an officer.
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(1) Indicates the year a person was first elected as an officer although there were subsequent periods when certain persons ceased being officers of the Company.
Unless otherwise indicated below, the persons listed above have been executive officers or employees for more than five years.
Mr. Morrow was elected as an executive Vice President in May 1991. From May 1990 to May 1991, Mr. Morrow was President of SCI Funeral Services, Inc., a subsidiary of the Company. From February 1990 to May 1990, Mr. Morrow was President and Chief Operating Officer of the Funeral Service Division of the Company. From August 1989 to February 1990, Mr. Morrow was an officer of the Company serving as Executive Vice President. Prior thereto, Mr. Morrow was President and owner of J. W. Morrow Investment Company, a funeral home business, and also provided consulting services to the Company.
Mr. Pullins joined the Company in September 1991 and was elected to his present position in February 1992. Prior thereto from January 1987 through August 1991, Mr. Pullins was President, Chief Executive Officer and Chief Operating Officer of Sentinel Group, Inc., a funeral service company.
Mr. Stoner joined the Company in September 1991 and was elected to his present position in August 1992. Prior thereto for more than five years, Mr. Stoner was a general partner and Director of Tax of Ernst & Young (formerly Arthur Young & Company), certified public accountants.
Each officer of the Company is elected by the Board of Directors and holds his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner prescribed in the Bylaws of the Company. Each officer of a subsidiary of the Company is elected by the subsidiary's board of directors and holds his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner prescribed in the bylaws of the subsidiary. There is no family relationship between any of the persons in the preceding table except that W. Blair Waltrip is a son of R. L. Waltrip, that T. Craig Benson is a son-in-law to R. L. Waltrip and that T. Craig Benson is a brother-in-law to W. Blair Waltrip.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the New York Stock Exchange since May 14, 1974. On March 21, 1994, there were approximately 8,700 holders of record of the Company's common stock.
The Company has declared 83 consecutive quarterly dividends on its common stock since it began paying dividends in 1974. The dividend rate is $.105 per quarter, or an indicated annual rate of $.42. For the three years ended December 31, 1993, dividends were $.40, $.39 and $.37, respectively.
The table below shows the Company's quarterly high and low common stock prices:
SRV is the New York Stock Exchange ticker symbol for the common stock of Service Corporation International.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
(See notes on following page)
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* The year ended December 31, 1993 reflects the change in accounting principles adopted January 1, 1993. The four years ended December 31, 1992 reflect results as historically reported.
** For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes from continuing operations, 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). Fixed charges consist of interest expense, whether capitalized or expensed, amortization of debt costs, one-third of rental expense which the Company considers representative of the interest factor in the rentals and preferred dividends.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ORGANIZATION
The majority of the Company's funeral homes and cemeteries are managed in groups called clusters. Clusters are primarily designated 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 165 clusters which range in size from two to 46 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 has attempted 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.
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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULES
All other schedules have been omitted because the required information is not applicable or is not present in amounts sufficient to require submission or because the information required is included in the consolidated financial statements or the related notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Service Corporation International
We have audited the consolidated financial statements and the financial statement schedules of Service Corporation International listed in the index on page 14 of this Form 10-K as of December 31, 1993 and for the year then ended. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Service Corporation International as of December 31, 1993, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
As discussed in Notes Two and Six to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for prearranged funeral contracts and cemetery sales and income taxes.
COOPERS & LYBRAND
Houston, Texas February 8, 1994
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders Service Corporation International
We have audited the accompanying consolidated balance sheet of Service Corporation International as of December 31, 1992 and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1992. Our audits also included the financial statement schedules for the years ended December 31, 1992 and 1991 listed in the index at Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Service Corporation International at December 31, 1992 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules for the years ended December 31, 1992 and 1991, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG
Houston, Texas February 8, 1993
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(See notes)
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
ASSETS
(See notes)
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(See notes)
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(See notes)
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the accounts of Service Corporation International and all wholly-owned subsidiaries (the Company). Significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years have been made to conform to current period classifications.
Cash equivalents: The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents and the carrying amount approximates fair value because of the short maturity.
Inventories: Inventories, consisting of funeral merchandise and cemetery space and merchandise, are stated at cost, which is not in excess of market, determined using average cost.
Depreciation and amortization: Depreciation and amortization of property, plant and equipment is provided using the straight line method over the estimated useful lives of the various classes of assets. Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized.
Cemetery trust funds: Generally, a portion of the proceeds from the sale of cemetery lots is required by state law to be paid into perpetual care trust funds. Earnings from these trusts are recognized in current cemetery revenues and are intended to defray cemetery maintenance costs. The amount of perpetual care funds trusted at December 31, 1993 and 1992 was $197,969,000 and $183,206,000, respectively, and such principal generally cannot be withdrawn by the Company (see Note 2). Additionally, pursuant to state law, a portion of the proceeds from the sale of preneed cemetery merchandise and services may also be required to be paid into trust funds. Merchandise and service trusts, which were previously included in investments on the Consolidated Balance Sheet, are now classified as long-term receivables. The Company recognizes income on these merchandise and service trusts in current cemetery revenues as trust earnings accrue to defray inflation costs recognized related to the unpurchased cemetery merchandise. For the three years ended December 31, 1993, the earnings on trusts recognized for all cemetery trusts was $23,721,000, $18,910,000 and $17,843,000, respectively.
Deferred obtaining costs: Included in "Deferred prearranged funeral contract revenues" on the Consolidated Balance Sheet are obtaining costs, including sales commissions and certain other direct marketing costs, applicable to prearranged funeral contracts which are deferred and will be expensed when the service is performed. The aggregate costs deferred as of December 31, 1993 and 1992 were $32,518,000 and $23,934,000, respectively.
Names and reputations: The excess of purchase price over the fair value of identifiable net tangible assets acquired in transactions accounted for as a purchase are included in "Names and reputations" and generally amortized on a straight line basis over 40 years which, in the opinion of management, is not necessarily the maximum period benefited. Many of the Company's acquired funeral homes have been providing high quality service to client families for many decades and such loyalty often forms the basic valuation of a funeral business. The amortization charged against income was $10,339,000, $9,601,000 and $4,785,000 for the three years ended December 31, 1993, respectively. Fair values are determined by management or independent appraisals.
NOTE TWO
CHANGE IN ACCOUNTING PRINCIPLES
The Company changed the following accounting principles effective January 1, 1993.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) All price guaranteed prearranged funeral sales contracts are included in the accompanying balance sheet as a long-term asset with a corresponding credit to deferred prearranged funeral contract revenues. Insurance funded contracts were previously disclosed in a note to the financial statements and certain trust funded contracts were previously included under investments and prearranged funeral obligations. This change has no effect on the existing policy of recognizing revenue when the funeral service is performed.
(B) Prearranged funeral trust earnings previously recognized as current income are now deferred until the funeral service is performed. Increasing benefits under insurance funded contracts are now accrued and deferred until the funeral service is performed.
(C) Preneed sales of cemetery interment rights and other related products and services are recorded as revenues when customer contracts are signed with concurrent recognition of related costs. Allowances for customer cancellations and refunds are provided at the date of sale based upon historical experience. Previously, such sales were generally deferred under accounting principles prescribed for sales of real estate. Under the Company's application of this method of accounting for sales of real estate, revenues and costs were deferred until 20% of the contract amount had been collected.
(D) Funds held in perpetual care cemetery trusts were previously included on the Consolidated Balance Sheet in investments and cemetery perpetual care obligations, whereas now such amounts are excluded.
The accounting changes were made principally for the following reasons and are described below in the order referred to above.
(A) The Company believes this accounting is more informative and provides better disclosure of the future economic events because the activity is all reported on the Consolidated Balance Sheet.
(B) Funeral trust earnings and increasing benefits under insurance contracts are intended to cover increases in the future costs of providing price guaranteed funeral services. Accrued trust earnings were previously recognized in current income and a provision was made for the estimated effect of inflation on the costs of merchandise purchased by the Company. Trust earnings are now deferred until performance of the funeral service and increasing benefits under insurance funded contracts will be accounted for similarly. The Company believes this policy will better match revenues and costs because the total funds (principal and accrued earnings) available to satisfy the contract will be included in revenues when the funeral service is performed together with all costs related to performance of the service.
(C) This method of cemetery accounting has been adopted because all significant remaining obligations of the Company have been satisfied in the period the contract is signed. Related costs are provided based on actual costs incurred, firm commitments or reliable estimates. Historical experience is the basis for making appropriate allowances for customer cancellations and will be adjusted when required.
(D) Cemetery perpetual care trusts are excluded from the Consolidated Balance Sheet because the Company generally does not have the right to withdraw the principal.
The cumulative effect, through December 31, 1992, of changing these accounting principles resulted in a charge to first quarter 1993 net income of $2,031,000 (net of a $1,354,000 tax benefit), or $.03 per share. For the year ended December 31, 1993, the effect of the change in accounting principles resulted in a decrease in
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income of $1,608,000, or $.02 per share. The following table shows the unaudited pro forma effects of retroactive application using the changed accounting principles for the two years ended December 31, 1992:
Effective January 1, 1993, the Company adopted FAS 109, "Accounting for Income Taxes" (see Note 6).
NOTE THREE
ACQUISITIONS
The following table is a summary of acquisitions made during the years ended December 31, 1993 and 1992 accounted for as purchases:
The purchase price in both years consisted primarily of combinations of cash, Company stock, issued and assumed debt and the retirement of loans receivable issued by the Company's finance subsidiary. The effect of acquisitions on the Consolidated Balance Sheet at December 31, was as follows:
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results of each acquisition are included in consolidated net income from the date of acquisition. The following represents the unaudited pro forma results of operations as if all of the above noted business combinations had occurred at the beginning of 1992.
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* After change in accounting principles discussed in Note 2.
The pro forma information given above does not purport to be indicative of the results that actually would have been obtained if the acquisitions had been in effect for the entire periods presented, and is not intended to be a projection of future results or trends.
NOTE FOUR
PREARRANGED FUNERAL CONTRACTS
The Company sells prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreement is signed. Payments under these contracts are generally placed in trust (pursuant to state law) or are used to pay premiums on life insurance policies. Life insurance policies are issued by third party insurers.
At December 31, 1993, trust and insurance funds of $1,244,866,000 (net of cancellation reserve) included in the Consolidated Balance Sheet as "Prearranged funeral contracts" are available to the Company for previously sold guaranteed price contracts. Of this amount, $554,879,000 will be funded by trusts and $689,987,000 will be funded by insurance policies. Accumulated earnings from trust funds and increasing insurance benefits have been included to the extent that they have accrued through December 31, 1993. The cumulative total has been reduced by allowable cash withdrawals for trust earning distributions and amounts retained by the Company pursuant to various state laws. In addition, a reserve, based on historical experience, equivalent to approximately 10% of the total balance has been provided for contract cancellations.
NOTE FIVE
INVESTMENTS
At December 31, 1992, investments include $363,971,000 and $297,817,000 of prearranged funeral and cemetery perpetual care and merchandise and service obligations, respectively, held in trust. These investments are carried at the lower of cost or market and include unrealized gains of $31,496,000 and unrealized losses of $18,327,000 (see Notes 1 and 2).
NOTE SIX
INCOME TAXES
The Company adopted FAS 109 "Accounting for Income Taxes" effective January 1, 1993. The adoption had no material impact on the Company's results of operations or financial position. FAS 109 is an asset and liability approach requiring recognition of deferred tax assets and liabilities for the expected future tax consequences of events recognized in the Company's financial statements or tax returns. Under FAS 109, all expected future events other than changes in the law or tax rates, are considered in estimating future tax
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consequences. The Company previously had followed FAS 96, which was superseded by FAS 109, and gave no recognition to future events other than recovery of assets and settlement of liabilities at their carrying amounts.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was enacted and among other changes, the Act increased the top United States corporate income tax rate to 35% from 34% effective January 1, 1993. The provision for income taxes for the year ended December 31, 1993 includes an adjustment to deferred taxes under FAS 109 of $2,431,000 related to this increase in the corporate tax rate.
The provision for income taxes includes United States income taxes, determined on a consolidated return basis, foreign and state and local income taxes.
During the three years ended December 31, 1993, tax expense resulting from allocating certain tax benefits directly to capital in excess of par totaled $1,197,000, $339,000 and $419,000, respectively.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the U.S. federal statutory tax rate and the Company's effective rate was as follows:
Deferred tax assets and liabilities as of December 31 was as follows:
Current refundable income taxes and foreign current deferred tax assets are included in other current assets, with current taxes payable and current deferred taxes being reflected as "Income taxes" on the Consolidated Balance Sheet.
United States income taxes have not been provided on $51,765,000 of undistributed earnings of foreign subsidiaries since it is the Company's intention to reinvest such earnings indefinitely.
As of December 31, 1993, the Company has United States federal net operating loss carry-forwards of $12,375,000 principally related to acquired subsidiaries which will expire in the years 1998 through 2008.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Various subsidiaries have state operating loss carry-forwards of $72,375,000 with expiration dates through 2008. Included in "Carry-forwards and other" is a valuation allowance of $1,748,000 which has been provided primarily for loss carry-forwards not expected to be realized.
Actual cash disbursements for income taxes and other tax assessments during the three years ended December 31, 1993, totaled $46,557,000, $33,973,000 and $25,845,000, respectively.
During the third quarter of 1991, the Company settled certain United States federal tax audits resulting in a $4,800,000 credit to the provision for income taxes. All of the Company's United States federal tax audits for years ended through April 30, 1988 have now been completed.
NOTE SEVEN
DEBT
Debt at December 31, was as follows:
Under terms of the bank revolving credit agreements, the Company may borrow up to $600,000,000. One agreement for $350,000,000 expires on November 8, 1994 and contains provisions for renewals. At the end of any term, the outstanding balance may be converted into a two year term loan. Another agreement for $250,000,000 expires November 3, 1996. The Company may in November of each year, commencing in 1994, extend the term of the $250,000,000 agreement for a year with the consent of all the banks. The interest rates are based generally on various indices determined by the Company. In addition, the Company pays a quarterly facility fee ranging from .125% to .1875% on the commitment amount. The terms of the revolving credit agreements include various covenants which provide, among other things, for the maintenance of a certain level of consolidated net worth, the maintenance of certain ratios and restrictions on certain payments. These
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit agreements are to be used for general corporate purposes, including acquisitions, and support for the Company's selling of commercial paper.
The Company has outstanding $248,000,000 in medium term notes with maturities from 6 months to 26 years which are not callable prior to maturity. The average remaining maturity for the notes is approximately 13 years.
In October 1991, the Company issued $172,500,000 of convertible subordinated debentures with a conversion price of $20.74 and subordinated to certain present and future indebtedness of the Company.
The $150,000,000 of debt was issued in February 1993 and is considered senior debt and is not redeemable prior to maturity.
In 1988, the Company assumed $16,082,000 of convertible subordinated debentures from an acquired company, with a conversion price of $18.
In 1986, the Company issued $100,000,000 of convertible debentures. In February 1993, $97,164,000 of these debentures were converted into 5,607,000 common shares at $17.33 per share pursuant to a redemption call. The remaining $2,836,000 of debentures were redeemed for cash plus a 2.6% call premium and interest through the redemption date.
The Company also has two bank lines of credit, one for $75,000,000 and one for $15,000,000 (both of these lines were available at December 31, 1993) at rates similar to the revolving credit agreement. The $75,000,000 line may be withdrawn at any time at the option of the bank. The $15,000,000 line requires the payment of a .25% commitment fee on the unused balance and expires in July, 1995.
Some of the Company's facilities and cemetery properties are pledged as collateral for the mortgage notes. Additionally, at December 31, 1993, the Company had $34,595,000 letters of credit outstanding primarily to guarantee funding of certain insurance claims.
The aggregate principal payments on debt for the five years subsequent to December 31, 1993, excluding amounts due to banks under revolving credit loan agreements are: 1994 -- $24,982,000; 1995 -- $57,731,000; 1996 -- $18,845,000; 1997 -- $47,945,000; and 1998 -- $13,961,000. Cash interest payments for the three years ended December 31, 1993 totaled $61,062,000, $60,590,000 and $47,692,000, respectively.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE EIGHT
DEFERRED PREARRANGED FUNERAL CONTRACT REVENUES
"Deferred prearranged funeral contract revenues" on the Consolidated Balance Sheet includes the contract amount of all price guaranteed prearranged funeral service contracts as well as the accrued trust earnings and increasing insurance benefits earned through December 31, 1993. The Company will continue to defer additional accruals of trust earnings and insurance benefits as they are earned until the performance of the funeral service. Upon performance of the funeral service, the Company will recognize the fixed contract price as well as total accumulated trust earnings and increasing insurance benefits as funeral service revenues.
The recognition in future funeral revenues is estimated to occur in the following years based on actuarial assumptions as follows:
NOTE NINE
COMMITMENTS AND CONTINGENCIES
The annual payments for operating leases (primarily for funeral home facilities and transportation equipment) are as follows:
The majority of these leases contain one of the following options: (a) purchase the property at the fair value at date of exercise, (b) purchase the property for a value determined at the inception of the lease or (c) renew for the fair rental value at end of the primary term of the lease. Some of the equipment leases contain residual value exposures. For the three years ended December 31, 1993, rental expense was $33,590,000, $25,583,000 and $22,531,000, respectively.
The Company has entered into management, consultative and noncompetition agreements (generally for five to 10 years) with certain officers of the Company and former owners and key employees of businesses acquired. During the three years ended December 31, 1993, $31,957,000, $27,594,000 and $21,662,000, respectively, were charged to expense. At December 31, 1993, the maximum estimated future expense under all remaining agreements is $139,887,000 including $4,693,000 with certain officers of the Company.
In 1990, the Company entered into a five year minimum purchase agreement with a major casket manufacturer. The agreement contains provisions to increase the minimum annual purchases for normal price
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increases and the maintenance of product quality. The agreement was amended in 1992 to provide for an extension to 1998 with a cumulative minimum purchase commitment of $228,000,000 required. During the three years ended December 31, 1993, the Company purchased $41,200,000, $36,656,000 and $35,149,000, respectively, under this agreement.
NOTE TEN
STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock, $1 par value. No shares were issued as of December 31, 1993. At December 31, 1993, 200,000,000 common shares of $1 par value were authorized, 84,859,110 shares were issued and outstanding (76,904,954 at December 31, 1992), net of 18,830 shares held, at cost, in treasury (521,455 at December 31, 1992).
During the two years ended December 31, 1993, the Company purchased 66,319 and 398,400 shares of its common stock for $1,637,000 and $6,569,000, respectively.
The fully diluted earnings per share calculation assumes full conversion into common stock of the Company's various convertible debenture issues.
The Company has a stockholder approved plan whereby shares of the Company's common stock may be issued pursuant to the exercise of stock options granted to officers and key employees. The plan allows for options to be granted as either non-qualified or incentive stock options. The options are granted with an exercise price equal to the then current market price of the Company's common stock and are generally exercisable at a rate of 33 1/3% each year (generally starting one year from grant date). At December 31, 1993 and 1992, 729,267 and 971,515 shares, respectively, were reserved for future option grants under this existing plan.
On November 10, 1993, the Board of Directors approved the 1993 Long-Term Incentive Stock Option Plan (maximum of 4,650,000 shares) and granted options for 4,000,000 shares of common stock at an exercise price of $25.75 per share (fair market value at date of grant). This plan is subject to stockholder approval at the annual meeting of stockholders on May 12, 1994. Such shares are excluded in the table below.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tabulation sets forth certain stock option information:
At December 31, 1993, the Company has reserved 1,480,731 shares of its common stock under stockholder approved plans for restricted stock grants to be awarded to key employees and non-employee directors. These plans contain a restriction period of not less than six months and not more than five years, during which time the recipient will be prohibited from disposition of the awarded common stock and also a requirement that the employee recipient remain employed by the Company and the non-employee director continue to serve as a director prior to lapse of the restricted period. For the three years ended December 31, 1993, 652,481, 405,925 and 16,500 shares were awarded under these plans, respectively.
In July 1988, the Board of Directors adopted a preferred share purchase rights plan and also declared a dividend of one preferred share purchase right for each share of common stock. The rights become exercisable in the event of certain attempts to acquire 20% or more of the common stock of the Company and entitle the rights holders to purchase certain securities of the Company or the acquiring company. The rights, which are redeemable by the Company for $.01 per right, expire in July, 1998 unless extended. Holders of the medium term notes and 6.5% subordinated debentures may accelerate repayment or redemption in certain circumstances involving a change in control.
NOTE ELEVEN
EMPLOYEE RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering substantially all employees, a supplemental retirement plan for certain executives (SERP), a supplemental retirement plan for officers and certain executives (Senior SERP), and a retirement plan for non-employee directors (Directors' Plan).
For the pension plan, retirement benefits are generally based on years of service and compensation for the current year. The Company annually contributes to the pension plan an actuarially determined amount consistent with the funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the pension plan consist primarily of bank money market funds, fixed income investments, marketable equity securities and mortgage notes. The marketable equity securities include shares of Company common stock with a value of $3,534,000 at December 31, 1993.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Retirement benefits under the SERP are based on years of service and average monthly compensation, reduced by benefits under the pension plan and Social Security. The Senior SERP provides retirement benefits for officers and certain executives based on their years of service and position. The Directors' Plan will provide an annual benefit to directors following their retirement, based on a vesting schedule. The Company purchased various life insurance policies on the participants in the SERP, Senior SERP and Directors' Plan with the intent to use the proceeds and any cash value buildup from such policies to fund, at least to the extent of such assets, these plans' funding requirements.
The net cost for all plans was as follows:
The plans' funded status at December 31, was as follows:
The following assumed rates were used in the determination of the plans' funded status:
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE TWELVE
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Swap agreements:
The Company periodically enters into swap agreements to hedge exposure to fluctuations in interest and foreign exchange rates. Such agreements are with major financial institutions and the Company does not anticipate any credit risk from these transactions because of nonperformance. The amounts to be paid or received are accrued in accordance with terms of the agreement and market interest rates.
On August 31, 1993, the Company entered a currency swap agreement with a bank that hedged the borrowings for the Company's initial investment in its Australian subsidiary. As part of this agreement, the Company pays the bank a blended interest rate (6.28% at December 31, 1993) on $110,000,000 Australian dollars and receives a floating interest rate (3.5% at December 31, 1993) on $73,590,000 United States dollars. This agreement expires December 29, 2000.
The Company has entered into an interest rate swap agreement with a bank having a notional amount of $150,000,000 effective February 1, 1994. Under this agreement, the Company will pay a floating interest rate on $150,000,000 and will receive a 5.36% fixed interest rate on $150,000,000. This agreement terminates February 1, 1999 subject to an option, exercisable by the bank, to terminate on August 1, 1994.
Credit risk:
Provident is a party to financial instruments with off-balance sheet risk. The financial instruments result from loans made in the normal course of business to meet the financing needs of borrowers who are principally independent funeral home and cemetery operators. These financial instruments also include loan commitments of $19,499,000 at December 31, 1993 ($33,656,000 at December 31, 1992) to extend credit. Provident evaluates each borrower's credit worthiness and the amount loaned and collateral obtained, if any, is determined by this evaluation.
The Company grants customers credit in the normal course of business and the credit risk with respect to these trade receivables are generally considered minimal because of the wide geographic area served. Procedures are in effect to monitor the credit worthiness of customers and bad debts have not been significant in relation to the volume of revenues.
Prearranged funeral contracts generally do not subject the Company to collection risk because customer payments are either placed in state supervised trusts or used to pay premiums on life insurance contracts. Insurance funded contracts are subject to supervision by state insurance departments and are protected in the majority of states by insurance guaranty acts.
Fair Value of Financial Instruments:
The following disclosure of the estimated fair value of financial instruments was made in accordance with the requirements of FAS 107. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair values due to the short term maturities of these instruments. The carrying amounts and fair values of the Company's fixed rate long-term borrowings are as follows:
The fair value of the above long-term borrowings was estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors. The carrying value of the revolving credit agreements approximate fair value because the rates on such agreements are variable, based on current market. Substantially all of the Company's remaining long-term debt and receivables carry variable interest rates and their carrying amount approximates fair value. It is not practicable to estimate the fair value of the installment contracts receivable.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE THIRTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts at December 31, was as follows:
Interest rates on installment contracts and notes receivable range from 3.0% to 12.5% at December 31, 1993. Included in loans and other notes receivable are $12,479,000 in notes with officers and employees of the Company, the majority of which are collateralized by real estate, and $25,548,000 in notes with other related parties.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-CASH TRANSACTIONS
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FOURTEEN
MAJOR SEGMENTS OF BUSINESS
SCI conducts funeral and cemetery operations in the United States, Canada and Australia and offers financial services in the United States.
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(1) Includes $218,110,000, $120,646,000 and $142,568,000 for the three years ended December 31, 1993, respectively, for purchases of property, plant and equipment and cemetery property of acquired businesses.
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FIFTEEN
PROSPECTIVE ACCOUNTING CHANGES
In 1994, FAS 112 "Employer's Accounting for Postemployment Benefits" becomes effective. This FAS requires the Company to accrue for estimated future postemployment benefits during the years employees are working and earning these benefits. Also in 1994, FAS 115 "Accounting for Certain Investments in Debt and Equity Securities" becomes effective. This FAS addresses the accounting for investments in equity and debt securities held by the Company. In 1995, FAS 114 "Accounting by Creditors for Impairment of a Loan" becomes effective. This FAS requires present value computations for impaired loans when determining allowances for loan losses. Adoption of these three standards is not expected to materially affect the Company's financial position or results of operations.
NOTE SIXTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
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(1) The first quarter of 1993 includes a charge to net income of $2,031,000 or $.03 per share for the cumulative effect of the change in accounting principles.
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES -- (CONTINUED)
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES -- (CONTINUED)
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(1) On August 10, 1993, the Company loaned: R. L. Waltrip, Chairman of the Board and Chief Executive Officer of the Company, $1,700,000; L. W. Heiligbrodt, President and Chief Operating Officer of the Company, $1,000,000; W. B. Waltrip, Executive Vice President/Operations of the Company, $600,000; S. W. Rizzo, Executive Vice President, Chief Financial Officer/Treasurer of the Company, $525,000; and J. W. Morrow, Jr., Executive Vice President/Corporate Development, $525,000. Such loans were made to enable such officers to pay the estimated federal income taxes resulting from their receipt of Company stock on August 10, 1993 pursuant to a grant of restricted stock under the Company's Amended 1987 Stock Plan. Each of the loans is due August 10, 2003, bears interest at 6.5% per annum and is supported by the restricted stock. In the event that the fair market value of all restricted stock held by an officer is less than his outstanding loan balance as of any loan anniversary date, the officer will be obligated to provide acceptable collateral for the difference between such loan balance and such fair market value.
(2) Provident had provided a line of credit of $2,500,000 to R. L. Waltrip for personal use. The line of credit matured, and the outstanding balance was repaid by Waltrip in 1992.
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES -- (CONTINUED)
(3) Provident has provided secured loans to E. K. Payne, former Senior Vice President of the Company, in connection with the exercise of Company stock options, the purchase of a home and personal use. The loans provide for interest at the prime rate (6% at December 31, 1993) and are collateralized by shares of Company common stock. The stock option loan matures in November 1994. The home and personal use loan was repaid in 1992.
(4) Provident has provided secured loans to G. K. Guinn, former Senior Vice President and Treasurer of the Company, to finance the exercise of Company stock options and for the purchase of a home. The loans are collateralized by the stock purchased and a deed of trust on the home, and bear interest at the prime rate and 7.55%, respectively. The stock option loan matured and was repaid in 1993 and the home loan matures in 2021.
(5) In December 1989, the Company sold its trust subsidiary, Southwest Guaranty Trust Company and its investment services department to W. E. Mercer for $1,000,000. Mercer is a former director and Executive Vice President Finance and Administration of the Company. Mercer executed a promissory note in payment of the purchase price of $1,000,000 with interest at 10% payable quarterly. During 1991, Mercer repaid the balance of the note.
(6) Provident offers employees and directors of the Company mortgage loans. These loans have been issued at fixed rates ranging from 6.5% to 9.6%, which are comparable to current market rates. These loans mature 15 to 30 years from date of issuance and are collateralized by a deed of trust on the real estate and for one individual, Company stock and other publicly traded securities.
(7) In addition to mortgage loans discussed in note 6 above, Provident has provided secured loans to finance the exercise of Company stock options to the individuals noted. These loans are collateralized by the stock purchased, bear interest at the prime rate and mature in 1994.
(8) Provident has provided financing to G. A. Pullins, Senior Vice President / Corporate Development of the Company, to finance the purchase of a home. The loan is collateralized by Company stock, bears interest at the prime rate and matures in 1994.
(9) B. D. Hunter is a director of the Company and former Chairman of AMEDCO Inc. (AMEDCO) which was acquired by the Company on September 26, 1986. In connection with the Company's purchase of AMEDCO certain operations of AMEDCO were purchased by a company controlled by Hunter immediately before the acquisition of AMEDCO by the Company. Part of the consideration paid by the Hunter controlled company to AMEDCO were promissory notes of $8,000,000 and $5,000,000. During 1990, Hunter repaid $4,300,000 of the $8,000,000 promissory note. During 1991, Hunter repaid the remaining balances of the two notes.
(10) In its normal course of business, primarily through Provident, the Company has made loans to certain entities in which the Company has equity investments. These loans had a balance of $25,548,000 at December 31, 1993. All of these loans carry interest rates ranging from a defined savings rate plus 2% (5.22% at December 31, 1993) up to 12% and mature in 1994 through 2000. These loans are collateralized by combinations of common stock of the debtor entities, deeds of trust on the debtors' real estate and certain other collateral.
SERVICE CORPORATION INTERNATIONAL
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1993
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(1) Uncollected receivables written off, net of recoveries
(2) Primarily acquisitions and dispositions of operations
(3) Includes the cumulative effect of changing accounting principles effective January 1, 1993.
SERVICE CORPORATION INTERNATIONAL
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION THREE YEARS ENDED DECEMBER 31, 1993
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Ernst & Young, Certified Public Accountants ("E&Y"), served as the independent accountants for the Company for the fiscal year ended December 31, 1992. E&Y was dismissed as the independent accounting firm for the Company effective March 25, 1993, with Coopers & Lybrand, Certified Public Accountants ("Coopers"), having been so engaged as of that date. The decision to change the independent accounting firm for the Company was recommended by management and by the Audit Committee of the Board of Directors of the Company and was approved by the Board of Directors.
The report of E&Y dated February 8, 1993 on the consolidated financial statements of the Company as of December 31, 1992 and 1991 and for the three years in the period ended December 31, 1992 contained no adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principle. Similarly, the report of Coopers dated February 8, 1994 on the consolidated financial statements of the Company as of December 31, 1993 and for the year then ended contained no adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principle.
From time to time during the several years preceding January 1, 1993, meetings were held between members of senior management of the Company and local and national office partners of E&Y regarding potential accounting policies for reporting pre-need funeral and cemetery sales. As previously reported by the Company in, among other places, its Form 8-K dated March 31, 1993, the Company and E&Y did not reach agreement on any new method of accounting for such sales. In the Company's opinion, such meetings did not result in a "disagreement" between it and E&Y within the meaning of the rules promulgated by the Securities and Exchange Commission (the "SEC"). Thus, as previously reported by the Company in, among other places, such Form 8-K, while there was a failure to reach agreement, in the Company's opinion, during the two years ended December 31, 1992, there was no reportable "disagreement" between the Company and E&Y regarding any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of E&Y, would have caused E&Y to make reference to the subject of the disagreement in connection with its report.
As also previously reported by the Company in, among other places, an amendment, dated April 6, 1993, to the Company's Form 8-K, dated March 31, 1993, E&Y, however, has stated that it believes that a reportable "disagreement" occurred between it and the Company. Accordingly, at the request of E&Y, the Company included the following (references to E&Y and the Company have been conformed to the usage in this Form 10-K) in its proxy statement dated April 12, 1993 for the last annual meeting of stockholders.
"On several occasions over the years, the Company has proposed that its accounting policy for pre-need funeral services be changed to a method whereby revenue would be recognized at the date a pre-need funeral contract is signed, accompanied by appropriate provision for the estimated cost of providing such services. E&Y's consistent position has been that the Company's proposed accounting policy would not be acceptable under generally accepted accounting principles.
"At a meeting on April 1, 1992 held to discuss this issue, a reportable disagreement occurred in that Company management stated that if E&Y would not support the Company's proposed accounting they would find another firm that would. This disagreement was communicated to the Company's Audit Committee at its August 13, 1992 meeting.
"Moreover, on February 19, 1993 (after completion of the 1992 audit), Company management presented the accounting proposal set forth in a December 28, 1992 'Invitation to Comment' prepared by Patrick B. Collins, CPA, and asked E&Y to support this proposed accounting method. That 'Invitation to Comment' advocates recognition of revenue for pre-need funeral services at the time of sale rather than when the services are performed, and solicits comments from interested parties concerning this and other matters. On February 26, 1993 and again on March 2, 1993, E&Y informed Company management that it would be unable to support the proposal presented in the 'Invitation to Comment.'
"On March 16, 1993, management informed E&Y that the Company was no longer pursuing the accounting method advocated in the 'Invitation to Comment' but rather was considering a modified
approach. E&Y informed management that at least one element of the modified approach -- amortization of a portion of deferred revenue that would be associated with the fixed cost of maintaining funeral homes -- was, in E&Y's view, not acceptable under generally accepted accounting principles."
The modified approach referred to above by E&Y is also referred to in the next to last paragraph of this Item 9, except that at the time of its discussion with Coopers the element E&Y noted as being objectionable was no longer being considered.
As indicated above, E&Y's position was also disclosed in an amendment dated April 6, 1993 to a Form 8-K dated March 31, 1993 filed by the Company. Following such disclosure, the Company filed a second amendment to such Form 8-K, in which the Company set forth its belief that the references to "disagreements" by E&Y, as well as other matters, were factually inaccurate. Further, the Company disputes that a reportable "disagreement" was communicated by E&Y to the Audit Committee on August 13, 1992. In response to the second amendment to such Form 8-K, E&Y responded (which response was included in a third amendment) that there was nothing in the second amendment of which E&Y was unaware at the time it stated its position disclosed in the April 6, 1993 amendment.
The staff of the SEC is conducting an informal private investigation relating to the change in the Company's independent accountants, and the Company's Form 8-K dated March 31, 1993, as amended in April 1993, reporting such change, as well as the Company's current accounting and reporting of pre-need sales. The staff has advised the Company that the investigation should not be construed as an indication by the Commission or its staff that any violations of law have occurred, or as a reflection upon any person, entity or security. The investigation is continuing.
On March 25, 1993, the Company's Board of Directors approved the recommendation of management and the Audit Committee that Coopers be engaged as the Company's new independent accountants. During the two fiscal years ended December 31, 1992 and the interim period of 1993, Coopers was not consulted by the Company on the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the financial statements of the Company. During the interim period of 1993, as part of the proposal process, Coopers indicated its general agreement with the Company's desire to modify its accounting policies for pre-need funeral and cemetery sales so that such policies more accurately reflect the economics of these sales. In this connection, the Company expressed to Coopers its desire to improve the financial reporting for pre-need funeral sales by including in the balance sheet, as a long term asset and corresponding deferred revenue, all pre-need funeral contracts whether funded by insurance or trust funds. Revenue from funeral services would be recognized when the services are performed, which is consistent with the Company's then and current policy. The Company also discussed with Coopers deferring funeral trust earnings until the service is performed. Under the Company's prior policy, these trust earnings were recognized in current income. Additionally, the Company expressed its views that accounting for pre-need cemetery sales using the accounting principles prescribed for sales of real estate may not be the most appropriate method of accounting. Coopers orally expressed their general agreement with these concepts but were not asked to and did not express an opinion on any specific transaction or accounting change, either orally or in writing.
The accounting principles adopted by the Company in 1993 for reporting pre-need funeral and cemetery sales are set forth, among other places, in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 filed with the SEC. Coopers has issued a preferability letter with respect to such principles. A copy of such letter is filed as an Exhibit to the Company's Form 10-Q for the quarter ended March 31, 1993. As indicated above, Coopers has issued an unqualified opinion with respect to the Company's consolidated financial statements as at and for the period ended December 31, 1993.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by PART III (Items 10, 11, 12 and 13) has been omitted as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year a definitive Proxy Statement pursuant to Regulation 14A. Such information is set forth in such Proxy Statement (i) with respect to Item 10 under the captions "Election of Directors" and "Compliance with Section 16(a) of the Exchange Act", (ii) with respect to Items 11 and 13 under the captions "Cash Compensation", "Stock Options", "Retirement Plans", "Executive Employment Agreements", "Other Compensation", "Director Compensation", "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" and (iii) with respect to Item 12 under the caption "Voting Securities and Principal Holders." The information as specified in the preceding sentence is incorporated herein by reference. Notwithstanding anything set forth in this Form 10-K, the information under the caption "Compensation Committee Report on Executive Compensation" and under the captions "Overview of Executive Compensation" and "Performance Graphs" in such Proxy Statement are not incorporated by reference into this Form 10-K.
The Information regarding the Company's executive officers called for by Item 401 of Regulation S-K has been included in PART I of this report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedules:
The financial statements and schedules are listed in the accompanying Index to Financial Statements and Related Schedules at page 14 of this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index at pages 50-52 are filed as part of this report.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1993, the Company filed a Form 8-K dated December 21, 1993 reporting under "Item 7. Financial Statements and Exhibits" certain exhibits being filed concerning an amendment to the Company's Employee Stock Purchase Plan.
(c) Included in (a) above.
(d) Included in (a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Service Corporation International, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SERVICE CORPORATION INTERNATIONAL
Dated: March 30, 1994 By: JAMES M. SHELGER (James M. Shelger, Senior Vice President, General Counsel and Secretary)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
In the above list, the management contracts or compensatory plans or arrangements are set forth in Exhibits 10.1 through 10.13, 10.15 through 10.17, 10.21 and 10.23.