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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _____
COMMISSION FILE NUMBER 1-6402-1
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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
TEXAS 74-1488375
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the registrant's common stock as of May 11,
2001 was 284,124,372 (excluding treasury shares).
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SERVICE CORPORATION INTERNATIONAL
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
Three Months Ended March 31, 2001 and 2000 3
Consolidated Balance Sheet -
March 31, 2001 and December 31, 2000 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2001 and 2000 5
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 2001 6
Notes to Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Part II. Other Information
Item 1. Legal Proceedings 25 - 27
Item 6. Exhibits and Reports on Form 8-K 27 - 28
Signature 28
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
March 31,
(In thousands, except per share amounts) 2001 2000
- ------------------------------------------------------------------- ------------- --------------
Revenues........................................................... $ 677,776 $ 683,493
Costs and expenses................................................. (566,888) (566,428)
------------- --------------
Gross profit....................................................... 110,888 117,065
General and administrative expenses................................ (17,979) (20,113)
Restructuring and non-recurring charges............................ (25,023) -
------------- --------------
Operating income................................................... 67,886 96,952
Interest expense................................................... (60,806) (69,549)
Other income....................................................... 2,954 3,806
------------- --------------
(57,852) (65,743)
------------- --------------
Income from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting changes 10,034 31,209
Provision for income taxes......................................... (6,715) (10,272)
------------- --------------
Income from continuing operations before extraordinary gains
and cumulative effect of accounting changes.................... 3,319 20,937
Income from discontinued operations (net of income taxes of
$3,683)........................................................ - 5,152
Extraordinary gains on early extinguishments of debt
(net of income taxes of $2,907 and $3,785, respectively)....... 4,547 6,585
Cumulative effect of accounting changes (net of income taxes of
$5,318 and $552,491, respectively)............................. (7,601) (909,315)
------------- --------------
Net income (loss)........................................ $ 265 $ (876,641)
============= ==============
Earnings per share:
Basic:
Income from continuing operations before extraordinary
gains and cumulative effect of accounting changes $ .01 $ .08
Income from discontinued operations....................... - .02
Extraordinary gains on early extinguishments of debt...... .02 .02
Cumulative effect of accounting changes................... (.03) (3.34)
------------- --------------
Net income (loss)............................... $ .00 $ (3.22)
============= ==============
Diluted:
Income from continuing operations before extraordinary
gains and cumulative effect of accounting changes $ .01 $ .08
Income from discontinued operations....................... - .02
Extraordinary gains on early extinguishments of debt...... .02 .02
Cumulative effect of accounting changes................... (.03) (3.33)
------------- --------------
Net income (loss)............................... $ .00 $ (3.21)
============= ==============
Basic weighted average number of shares............................ 273,637 272,063
============= ==============
Diluted weighted average number of shares.......................... 273,966 273,501
============= ==============
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
March 31, December 31,
(In thousands, except share amounts) 2001 2000
- ------------------------------------------------------------------------------------ -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 40,221 $ 47,909
Receivables, net of allowances................................................. 445,445 449,989
Inventories.................................................................... 160,999 170,056
Other ......................................................................... 144,928 239,345
-------------- --------------
Total current assets......................................................... 791,593 907,299
--------------- --------------
Prearranged funeral contracts ...................................................... 4,005,493 4,080,367
Long-term receivables, net of allowances ........................................... 1,311,078 1,329,375
Cemetery property, at cost.......................................................... 1,994,027 2,026,484
Property, plant and equipment, at cost (net)........................................ 1,599,564 1,675,263
Deferred charges and other assets................................................... 712,116 717,170
Names and reputations (net)......................................................... 2,086,024 2,162,511
-------------- --------------
$ 12,499,895 $ 12,898,469
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 462,709 $ 501,355
Current maturities of long-term debt........................................... 171,023 176,782
Income taxes .................................................................. 77,940 6,143
-------------- --------------
Total current liabilities.................................................... 711,672 684,280
-------------- --------------
Long-term debt...................................................................... 2,861,287 3,114,515
Deferred prearranged funeral contract revenues ..................................... 4,484,800 4,537,669
Deferred preneed cemetery contract revenues......................................... 1,808,608 1,815,157
Deferred income taxes............................................................... 457,083 503,292
Other liabilities .................................................................. 261,740 267,735
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
277,787,105 and 272,507,010, issued and outstanding
(net of 2,468,012 and 2,502,190 treasury shares, at par).................... 277,787 272,507
Capital in excess of par value................................................. 2,171,212 2,156,824
Accumulated deficit............................................................ (216,088) (216,353)
Accumulated other comprehensive loss........................................... (318,206) (237,157)
-------------- --------------
Total stockholders' equity.................................................. 1,914,705 1,975,821
-------------- --------------
$ 12,499,895 $ 12,898,469
============== ==============
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended
March 31,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................................ $ 265 $ (876,641)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Income from discontinued operations, net of taxes....................................... - (5,152)
Extraordinary gains on early extinguishments of debt, net of taxes...................... (4,547) (6,585)
Cumulative effect of accounting changes, net of taxes................................... 7,601 909,315
Depreciation and amortization........................................................... 50,272 58,162
Benefit for deferred income taxes....................................................... (74,898) (10,932)
Restructuring and non-recurring charges................................................. 25,023 -
Payments on restructuring charges....................................................... (6,510) (16,149)
Net effect of interest rate component of swap terminations.............................. - (32,840)
Loss (gain) from dispositions (net)..................................................... 509 (1,583)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease in receivables............................................................... 3,235 44,586
Decrease (increase) in other assets................................................... 109,020 (3,303)
Increase in payables and other liabilities ........................................... 78,123 19,904
Other................................................................................. (1,206) (17,449)
Net effect of prearranged funeral production and maturities............................. 19,552 (8,837)
---------- ----------
Net cash provided by continuing operations .................................................. 206,439 52,496
Net cash provided by discontinued operations ................................................ - 48,963
---------- ----------
Net cash provided by operating activities ................................................... 206,439 101,459
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (27,627) (20,574)
Proceeds from sales of property and equipment........................................... 25,887 4,499
Loans issued by lending subsidiary...................................................... - (1,196)
Principal payments received on loans issued by lending subsidiary....................... - 13,715
Deposits of restricted funds............................................................ (29,884) (21,054)
Other................................................................................... 5,695 2,941
---------- ----------
Net cash used in continuing operations....................................................... (25,929) (21,669)
Net cash used in discontinued operations..................................................... - (61,810)
---------- ----------
Net cash used in investing activities........................................................ (25,929) (83,479)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in borrowings under revolving credit agreements............................ (160,501) (3,699)
Payments of debt........................................................................ (11,802) (15,604)
Early extinguishments of debt........................................................... (20,299) (84,030)
Net effect of cross-currency component of swap terminations............................. - 143,498
Repurchase of common stock.............................................................. - (55)
Bank overdrafts and other............................................................... 9,167 2,438
---------- ----------
Net cash (used in) provided by financing activities.......................................... (183,435) 42,548
Effect of foreign currency................................................................... (4,763) (1,591)
---------- ----------
Net (decrease) increase in cash and cash equivalents......................................... (7,688) 58,937
Adjust for change in cash and cash equivalents associated with discontinued operations....... - 12,847
Cash and cash equivalents of continuing operations at beginning of period.................... 47,909 57,814
---------- ----------
Cash and cash equivalents of continuing operations at end of period.......................... $ 40,221 $ 129,598
========== ==========
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Capital in other
Common excess Accumulated comprehensive
(In thousands) stock of par value deficit loss Total
- -------------------------------------------- --------- ------------ ----------- ------------- ----------
Balance at December 31, 2000................ $ 272,507 $2,156,824 $ (216,353) $ (237,157) $1,975,821
Comprehensive loss:
Net income............................... 265 265
Other comprehensive loss:
Foreign currency translation.......... (81,049) (81,049)
----------
Comprehensive loss....................... (80,784)
Common stock issued:
Stock option exercises and stock grants. 336 923 1,259
Contribution to employee 401(k)......... 742 1,700 2,442
Debt extinguished using common stock.... 4,202 11,765 15,967
--------- ---------- ---------- ------------ ----------
Balance at March 31, 2001................... $ 277,787 $2,171,212 $ (216,088) $ (318,206) $1,914,705
========= ========== ========== ============ ==========
The Company's comprehensive loss for the three months ended March 31, 2000 of
$915,429 consisted of a net loss of $876,641, a foreign currency translation
loss adjustment of $42,841, and an unrealized gain on securities of $4,053.
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS
Service Corporation International (the Company) is the largest provider of
funeral and cemetery services in the world. At March 31, 2001, the Company
operated 3,558 funeral service locations, 517 cemeteries and 200 crematoria
located in 18 countries on five continents.
The Company's funeral service locations and cemetery operations consist of
funeral homes, cemeteries, crematoria and related businesses. Company personnel
at the funeral service locations provide all professional services relating to
funerals, including the use of funeral facilities and motor vehicles. Funeral
related merchandise is sold at funeral locations and certain funeral service
locations contain crematoria. The Company sells prearranged funeral services
whereby a customer contractually agrees to the terms of a funeral to be
performed in the future. The Company's cemeteries provide cemetery interment
rights (including mausoleum spaces, lots, and lawn crypts) and sell cemetery
related merchandise. Cemetery items are sold on an atneed or preneed basis.
Company personnel at cemeteries perform interment services and provide
management and maintenance of cemetery grounds. Both funeral service locations
and cemeteries can contain crematoria facilities. The Company has approximately
190 combination facilities in which a funeral service location is contained
within a cemetery.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements for the three
months ended March 31, 2001 and 2000 include the accounts of the Company and all
majority-owned subsidiaries and are unaudited but include all adjustments,
consisting of normal recurring accruals and any other adjustments which
management considers necessary for a fair presentation of the results for these
periods. These consolidated financial statements have been prepared in a manner
consistent with the accounting policies described in the annual report on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2000, unless otherwise disclosed herein, and should be read in
conjunction therewith. The accompanying year-end consolidated balance sheet was
derived from the audited consolidated balance sheet but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year period. Certain
reclassifications have been made to the prior period to conform to the current
period presentation with no effect on previously reported net income, financial
condition or cash flows. The Company has reclassified certain amounts in the
consolidated financial statements and accompanying notes to the consolidated
financial statements to reflect the effect of discontinued operations on all
periods and segments presented. The Company has restated prior periods to
conform with the change in accounting policies as a result of implementing SAB
No. 101 (see note three to the consolidated financial statements).
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. As a result, actual results could differ from these estimates.
3. ACCOUNTING CHANGES
During the first quarter of 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities: An Amendment of FASB Statement No.
133." In accordance with these pronouncements, the Company recognized a
cumulative effect of a change in accounting principle, net of applicable taxes,
of $7,601.
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In 2000, the Company implemented Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB No. 101) which changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. The implementation of SAB No. 101 had no effect on the
consolidated cash flows of the Company. As a result of the required change, the
Company's preneed sales activities are affected as follows:
o Preneed sales of cemetery interment rights (cemetery burial property) -
revenue and all costs associated with the sales of preneed cemetery
interment rights are recognized in accordance with the retail land sales
provisions of Statement of Financial Accounting Standards No. 66,
"Accounting for the Sales of Real Estate" (SFAS No. 66). Under SFAS No.
66, recognition of revenue and associated costs from constructed cemetery
property are deferred until a minimum percentage of the sales price has
been collected. Revenues related to the preneed sale of unconstructed
cemetery property are deferred until such property is constructed and
meets the criteria of SFAS No. 66 described above. Previously, the preneed
interment rights and associated costs were recognized at the time the
contract was signed with the customer.
o Preneed sales of cemetery merchandise (primarily markers and vaults) -
revenue and all costs associated with the sales of preneed cemetery
merchandise are deferred until the merchandise is delivered. Previously,
the preneed cemetery merchandise revenue and associated costs were
recognized at the time the contract was signed with the customer.
o Preneed sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) - revenue and all
costs associated with the sales of preneed cemetery services are deferred
until the services are performed. Previously, the revenue and associated
costs were recognized at the time the contract was signed with the
customer.
o Prearranged funeral and preneed cemetery customer obtaining costs - costs
incurred related to obtaining new preneed cemetery and prearranged funeral
business are accounted for under the provisions of Statement of Financial
Accounting Standards No. 60, "Accounting and Reporting by Insurance
Enterprises" (SFAS No. 60). Under SFAS No. 60, obtaining costs, which
include only costs that vary with and are primarily related to the
acquisition of new preneed cemetery and prearranged funeral business, are
deferred. Previously, with respect to the prearranged funeral business,
deferred obtaining costs included variable and fixed direct obtaining
costs as well as direct marketing costs. With respect to the preneed
cemetery business, obtaining costs were previously expensed as incurred.
o Cemetery merchandise and services trust investment earnings - investment
earnings generated by assets included in merchandise and services trusts
are deferred until the associated merchandise is delivered or services
performed. Previously, the trust earnings were recognized as earned in the
trust.
The change in the Company's accounting policies resulting from
implementation of SAB No. 101 has been reported as a change in accounting
principle effective as of January 1, 2000. The cumulative effect of the
accounting change through December 31, 1999 resulted in a charge to net income
of $909,315 (net of a $552,491 tax benefit), or $3.33 per diluted share recorded
on January 1, 2000.
4. DISCONTINUED OPERATIONS
In the third quarter of 2000, the Company completed the sales of its wholly
owned insurance operations, Auxia and American Memorial Life Insurance Company.
The financial statements have been reclassified to reflect these operations as
discontinued.
Summary of operating results of discontinued operations.
Three months ended
March 31, 2000
-------------------------
Revenue................................................................ $103,717
Costs and expenses..................................................... 94,882
----------
Income from discontinued operations before income taxes................ 8,835
Provision for income taxes............................................. 3,683
----------
Income from discontinued operations.................................... $ 5,152
==========
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5. PREARRANGED FUNERAL AND PRENEED CEMETERY ACTIVITIES
The Company sells price guaranteed prearranged funeral contracts through various
programs providing for future funeral services at prices prevailing when the
agreements are signed. Payments under these contracts are generally placed into
trust accounts (pursuant to applicable law) or are used to pay premiums on life
insurance or annuity contracts.
The balance in Prearranged funeral contracts represents amounts due from
trust funds, customer receivables or third party insurance companies related to
unperformed, price guaranteed prearranged funeral contracts. A corresponding
credit is recorded in Deferred prearranged funeral contract revenues. The
balance in Deferred prearranged funeral contract revenues represents the
original contract price, trust earnings and increasing insurance benefits on
unperformed funeral contracts generally funded by trust or third party insurance
companies.
Funeral revenue is recognized on prearranged funeral contracts at the time
the funeral service is performed. Trust earnings and increasing insurance
benefits are accrued and deferred until the services are performed, at which
time these funds are also recognized in funeral revenues. Such amounts are
intended to cover future increases in the cost of providing a price guaranteed
funeral service. Net obtaining costs incurred pursuant to the sales of
prearrangements are included in Deferred charges and other assets. These
obtaining costs, which include sales commissions and certain other direct costs
that vary with and are primarily related to the acquisition of new prearranged
funeral business, are deferred and amortized over 20 years, a period
representing the estimated life of the prearranged funeral contracts. Previous
to the implementation of SAB No. 101, deferred obtaining costs included variable
and fixed direct costs as well as direct marketing costs.
Pursuant to the implementation of SAB No. 101 in 2000, the Company changed
its accounting policies regarding the manner in which it records preneed
cemetery sales activities. As discussed in note three to the consolidated
financial statements, the Company defers revenues associated with certain
preneed cemetery sales activities until cemetery burial property is constructed
and meets the criteria of SFAS No. 66, merchandise is delivered or services are
performed. Amounts held in cemetery merchandise and services trusts are included
in Long-term receivables, at cost. As a result of implementing SAB No. 101, all
realized investment earnings related to these cemetery merchandise and services
trust funds are deferred until the associated merchandise is delivered or
services performed.
Realized investment earnings from perpetual care trust funds are intended
to defray cemetery maintenance costs and are recognized in current cemetery
revenues.
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6. DEBT
Debt at March 31, 2001 and December 31, 2000 was as follows:
March 31, 2001 December 31, 2000
---------------------- --------------------------
Bank revolving credit agreements.......................................... $ 609,590 $789,750
6.75% notes due 2001...................................................... 123,000 123,000
8.72% amortizing notes due 2002........................................... 30,519 39,149
8.375% notes due 2004..................................................... 51,840 51,840
7.375% notes due 2004..................................................... 247,000 250,000
6.0% notes due 2005....................................................... 581,550 591,550
7.2% notes due 2006....................................................... 150,000 150,000
6.875% notes due 2007..................................................... 150,000 150,000
6.5% notes due 2008....................................................... 200,000 200,000
7.7% notes due 2009....................................................... 200,000 200,000
6.95% amortizing notes due 2010........................................... 48,327 49,202
7.875% debentures due 2013................................................ 55,627 55,627
7.0% notes due 2015 (putable 2002)........................................ 186,040 186,040
6.3% notes due 2020 (putable 2003)........................................ 293,000 300,000
Medium-term notes, maturities through 2019, fixed average interest
rate of 9.67%.......................................................... 12,000 35,720
Convertible debentures, maturities through 2008, fixed interest rates
From 4.75% to 5.5%, conversion prices from $11.25 to $50.00............ 49,213 49,213
Mortgage notes and other debt, maturities through 2050.................... 83,209 86,219
Deferred losses on swap terminations and loan costs....................... (38,605) (16,013)
---------------------- --------------------------
Total debt........................................................... 3,032,310 3,291,297
Less current maturities................................................... (171,023) (176,782)
---------------------- --------------------------
Total long-term debt...................................................... $2,861,287 $3,114,515
====================== ==========================
As of March 31, 2000, the Company's primary bank revolving credit
agreements provided for borrowings up to $970,251 and consisted of two committed
facilities - a 2-year term loan and a 5-year, multi-currency facility. These
facilities are primarily used for general corporate purposes. Under the terms of
the amended credit agreements, the covenants will continue to be calculated
using ongoing financial results prior to applying the provisions of SAB No. 101,
until such time as the Company and its lenders agree to revised covenants.
The commitment for the 2-year term loan, originally $300,000, was $291,075
at March 31, 2001 ($296,486 at December 31, 2000). The commitment for the
5-year, multi-currency revolving facility, originally $700,000, was $679,176 at
March 31, 2001 ($691,801 at December 31, 2000), which includes provisions for
borrowings up to $500,000 in various currencies. Both facilities mature in June
2002. Approximately $609,590 was outstanding under the above facilities at March
31, 2001, with a weighted average interest rate of 6.76% ($789,750 at December
31, 2000, with a weighted average interest rate of 7.95%). Approximately
$253,515 of these borrowings was denominated in various foreign currencies under
the 5-year facility at March 31, 2001 ($271,263 at December 31, 2000).
Interest rates on these facilities are based on various indices as
determined by the Company. For each facility, a fee is paid quarterly on the
total commitment amount ranging from 0.25% to 0.50% based on the Company's
senior debt ratings. The facility fee was 0.50% at March 31, 2001 and December
31, 2000.
The Company's consolidated debt had a weighted average interest rate of
6.78% at March 31, 2001, compared to 7.08% at December 31, 2000. At March 31,
2001, the Company's outstanding debt consisted of approximately 20% of floating
interest rate debt at a weighted average interest rate of 6.75% and 80% fixed
interest rate debt at a weighted average interest rate of 6.78%.
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At December 31, 2000, the Company's outstanding debt consisted of 24% of
floating interest rate debt at a weighted average interest rate of 7.94% and
approximately 76% of fixed interest rate debt at a weighted average interest
rate of 6.81%.
The Company has $98,637 and $68,753 at March 31, 2001 and December 31,
2000, respectively, deposited in interest bearing restricted accounts as
security for various credit instruments, which is included in the consolidated
balance sheet in Deferred charges and other assets. At March 31, 2001
approximately $26,113 was related to two embedded options associated with the
Company's 6.30% notes due 2020 (putable 2003), $55,804 related to letters of
credit and the remaining $16,720 was used to secure various other obligations.
During the three months ended March 31, 2001, the Company repurchased
$23,720 of the Medium-term notes due through 2019. In addition, the Company
exchanged 4,202 shares of its common stock for $20,000 aggregate face value of
certain bonds. As a result of these transactions, the Company recognized an
extraordinary gain on early extinguishments of debt totaling $4,547 (net of tax
of $2,907). Subsequent to the first quarter of 2001, the Company repurchased
$32,750 of the 7.0% notes due 2015 (putable 2002) in the open market. In
addition, the Company engaged in additional debt for equity transactions,
exchanging 6,129 shares of its common stock for $31,495 aggregate face value of
certain bonds. As a result of these transactions, the Company will recognize
extraordinary gains on early extinguishments of debt in the second quarter of
2001.
7. RATIO OF EARNINGS TO FIXED CHARGES
Three months
ended March 31,
2001 2000
---------------------
1.14 1.38
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, extraordinary
gains and cumulative effect of accounting changes; (1) less undistributed income
of equity investees which are less than 50% owned; (2) plus the minority
interest of majority-owned subsidiaries with fixed charges and (3) 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.
8. SEGMENT REPORTING
The Company's operations are both product and geographically based and the
primary reportable operating segments presented below include funeral and
cemetery operations. The Company's geographic segments include North America,
Europe and Other Foreign. The Company conducts funeral and cemetery operations
in all geographical regions. In 2000, the Company completed the sales of its
wholly owned insurance operations. As such, these operations have been
reclassified and reported as discontinued operations (see note four to the
consolidated financial statements).
The Company's reportable segment information was as follows:
Reportable
Funeral Cemetery segments
- --------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
Three months ended March 31,
2001................................................. $500,617 $177,159 $677,776
2000................................................. 534,440 144,719 679,159
- --------------------------------------------------------------------------------------------------------------------
Gross profit:
Three months ended March 31,
2001................................................. $ 83,911 $26,977 $110,888
2000................................................. 107,383 8,922 116,305
- --------------------------------------------------------------------------------------------------------------------
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The following table reconciles reportable segment gross profit to the Company's
consolidated income from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting changes:
Three months ended
March 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Gross profit from reportable segments....................................... $110,888 $116,305
Lending subsidiary operating income................................... - 760
General and administrative expenses................................... (17,979) (20,113)
Restructuring and non-recurring charges (see note 10)................. (25,023) -
--------------------- ---------------------
Operating income............................................................ 67,886 96,952
Interest expense...................................................... (60,806) (69,549)
Other income.......................................................... 2,954 3,806
--------------------- ---------------------
Income from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting changes......... $10,034 $31,209
===================== =====================
The Company's geographic segment information was as follows:
North Other
America Europe Foreign Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
Three months ended March 31,
2001.................................................. $471,567 $177,663 $28,546 $677,776
2000.................................................. 444,609 203,658 35,226 683,493
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Three months ended March 31,
2001.................................................. $74,236 $16,909 $(23,259) $67,886
2000.................................................. 63,696 28,524 4,732 96,952
- -----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization :
Three months ended March 31,
2001.................................................. $36,803 $11,077 $2,392 $50,272
2000.................................................. 39,862 14,782 3,518 58,162
- -----------------------------------------------------------------------------------------------------------------------
Operating locations at March 31:
2001.................................................. 2,171 1,923 181 4,275
2000.................................................. 2,288 2,070 186 4,544
- -----------------------------------------------------------------------------------------------------------------------
Included in the North America figures above are the following United States
amounts:
Three months ended
March 31,
2001 2000
- ------------------------------------------------------------------------------------------------
Revenues from external customers............................... $ 450,390 $ 423,212
Operating income............................................... $ 69,300 $ 59,338
Depreciation and amortization.................................. $ 35,028 $ 37,931
Operating locations............................................ 2,000 2,134
- ------------------------------------------------------------------------------------------------
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Included in the European figures above are the following French amounts:
Three months ended
March 31,
2001 2000
- --------------------------------------------------------------------------------------------------
Revenues from external customers............................... $ 107,949 $ 118,941
Operating income............................................... $ 4,073 $ 13,959
Depreciation and amortization.................................. $ 3,778 $ 5,319
Operating locations............................................ 1,152 1,236
- --------------------------------------------------------------------------------------------------
9. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is presented below:
Three months ended
March 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Income (numerator):
Income from continuing operations before extraordinary gains
and cumulative effect of accounting changes - basic.... $ 3,319 $ 20,937
After tax interest on convertible debentures............... - 190
-------- --------
Income from continuing operations before extraordinary gains
and cumulative effect of accounting changes - diluted.. $ 3,319 $ 21,127
- --------------------------------------------------------------------------------------------------------------------------
Shares (denominator):
Shares - basic............................................. 273,637 272,063
Stock options and warrants............................ 329 42
Convertible debentures................................ - 1,396
-------- --------
Shares - diluted........................................... 273,966 273,501
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations before
extraordinary gains and cumulative effect of accounting changes:
Basic...................................................... $ .01 $ .08
Diluted.................................................... $ .01 $ .08
- --------------------------------------------------------------------------------------------------------------------------
10. RESTRUCTURING AND NON-RECURRING CHARGES
The Company recorded restructuring and nonrecurring charges in the first quarter
of 1999 (First Quarter 1999 Charge), the fourth quarter of 1999 (Fourth Quarter
1999 Charge), the fourth quarter of 2000 (Fourth Quarter 2000 Charge) and the
first quarter of 2001 (First Quarter 2001 Charge).
The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999 and consisted of the following: (1)
severance costs of $56,757; (2) a charge of $19,123 for terminated projects
representing costs associated with certain construction projects that have been
cancelled ($2,153) and costs associated with acquisition due diligence which
will no longer be pursued ($16,970); (3) a $7,245 charge for business and
facility closures, primarily in the Company's European operations; and (4) a
remaining charge of $6,759 consisting of various other cost initiatives. The
$56,757 for severance costs is related to the termination of five executive
contractual relationships and the involuntary termination of approximately 800
employees throughout the Company's global operations. The remaining severance
costs related to the executive contractual relationships will be paid out
according to the terms of the respective agreements and will extend through
2005.
The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The Fourth Quarter Charge 1999 consisted of the following: (1)
severance costs of $150,675; (2) asset impairment of $73,728 associated with
assets held for sale which were written down to estimated fair value; (3) asset
impairment of $18,245 associated with loans made by the Company's lending
subsidiary held for sale which were written down
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to estimated fair value; (4) $12,719 of informational technology costs
associated with projects that will no longer be pursued by the Company; (5)
$6,554 of costs to terminate certain lease obligations related to facility
closures; and (6) $10,623 of various other items.
The $150,675 of severance costs is related to the involuntary termination
of 1,141 employees throughout the Company's global operations, including eight
executive officers of the Company. Included in this total are 316 individuals
that were former owners of independent funeral homes and cemeteries that were
purchased by the Company and represent approximately $92,180 of the $150,675 of
severance costs. Such individuals will continue to be paid by the Company
pursuant to the terms of their contracts, the majority of which will be paid by
2007. The remaining severance costs are expected to be paid out through 2001.
The severance costs associated with the executive officers will be paid in
accordance with the terms of the respective agreements and will extend through
2005.
The Fourth Quarter 2000 Charge totaled $447,491 and related to planned
divestitures as a result of a North American facility review, the reduction of
the carrying value of an equity investment in North America and certain
additional changes to estimates in the Company's restructuring and non-recurring
charges recorded in 1999. Of the total Fourth Quarter 2000 Charge, $351,159 of
charges related to the planned divestitures of 230 funeral service locations
anticipated to be sold as funeral businesses, 174 funeral service locations
anticipated to be sold as real estate and 105 cemeteries; $83,256 of charges to
reduce the carrying value of the Company's equity investment in Arbor Memorial
Services Inc.; and $13,376 of net charges as a result of changes in estimates to
the Company's 1999 charges. The changes primarily consisted of $5,739 to further
write down to estimated fair value certain remaining loans made by the Company's
lending subsidiary, $12,000 to write down to fair value assets held in the
Company's European operations, offset by a reduction of $4,363 in previously
estimated severance costs in the Company's international operations.
In the First Quarter 2001 Charge, the Company recorded an impairment charge
of $25,458 as a result of the decision to joint venture its Australia
operations. In connection with the transaction, the Company received net pretax
proceeds of approximately $106,900 and securities with a face value of $24,400,
which includes a 20% equity interest in the Australian operations and a 12%
subordinated convertible note. The Company also made adjustments of $435 to
reduce its Fourth Quarter 2000 Charge related to the planned divestitures of
certain North American locations. The Company will continue to make adjustments
as actual divestitures are made or better estimates are available throughout
future quarters.
Additionally, the Company will recognize a one-time, non-cash charge of
approximately $22,000 to $28,000 on a pretax basis in the second quarter of 2001
relating to the recognition into earnings of the cumulative foreign currency
translation effect from the Australian operations, which is currently included
as a separate component of Accumulated other comprehensive loss in the Company's
stockholders' equity. The charge cannot be recognized under applicable
accounting rules until the actual consummation of the transaction, which
occurred in May 2001.
The utilization of the First Quarter 1999 Charge, the Fourth Quarter 1999 and
2000 Charges and the First Quarter 2001 Charge during the three months ended
March 31, 2001 was as follows:
Utilization for three months
ended March 31, 2001
----------------------------
Original Balance at Additions or Balance at
charge December 31, adjustments March 31,
amount 2000 during 2001 Cash Non-cash 2001
------ ---- ----------- ---- -------- ----
First Quarter 1999 Charge........... $ 89,884 $ 6,210 $ - $ 550 $ 750 $ 4,910
Fourth Quarter 1999 Charge.......... 272,544 86,959 - 5,960 1,147 79,852
Fourth Quarter 2000 Charge.......... 434,415 - (435) - (435) -
First Quarter 2001 Charge........... 25,458 - 25,458 - 25,458 -
-------- ------- ------- ------ ------- -------
Total.......................... $822,301 $93,169 $25,023 $6,510 $26,920 $84,762
======== ======= ======= ====== ======= =======
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Of the remaining total restructuring accrual balance, approximately $83,720
relates to severance costs. In addition, of the $84,762 remaining in reserves,
$44,896 is included in Accounts payable and accrued liabilities and $39,866 is
included in Other liabilities in the consolidated balance sheet based on the
expected timing of payments.
Summary operating results of the Company's Australian operations are as follows:
March 31,
2001 2000
-------- -----------
Revenues
Funeral..................................... $10,417 $12,661
Cemetery.................................... 5,425 5,963
---------- -----------
$15,842 $18,624
========== ===========
Operating income (excluding restructuring and
non-recurring charges)
Funeral..................................... 932 1,180
Cemetery.................................... 1,867 1,902
---------- -----------
$ 2,799 $ 3,082
========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
OVERVIEW
The Company is the largest provider of death care services in the world
conducting funeral services and cemetery operations in 18 countries on five
continents. The Company's largest markets are North America and France, which
when combined, represent approximately 78% of the Company's total operating
locations and approximately 86% of the Company's total revenues.
The funeral and cemetery operations are organized with a North America
division covering the United States and Canada, a European division responsible
for all operations in Europe and other international operations managed in the
Pacific Rim and South America. The majority of these operations are managed in
groups called clusters. Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual overhead costs by sharing
common resources such as operating personnel, preparation services, clerical
staff, limousines, hearses and preneed sales personnel. Personnel costs, the
largest of the operating expenses for the Company, are the cost components most
beneficially affected by clustering. The sharing of employees, as well as the
other costs mentioned, allows the Company to more efficiently utilize its
operating facilities.
The funeral service and cemetery operations consist of the Company's
funeral homes, cemeteries, crematoria and related businesses. Both funeral
service locations and cemeteries can contain crematoria facilities. The Company
has approximately 190 combination facilities in which a funeral service location
is contained within a cemetery. Included in other services operations in 2000
are the activities of the Company's lending subsidiary. In August 2000, the
Company sold a substantial portion of the loan portfolio of its lending
subsidiary. Subsequent to this sale date, all activity on remaining loans is
recorded in Other income and Interest expense in the Company's consolidated
statement of operations. In 2000, the Company completed the sales of its
wholly owned insurance operations. As such, these operations have been
reclassified and reported as discontinued operations for all periods presented
(see note four to the consolidated financial statements in Item 1 of this Form
10-Q).
STRATEGIC INITIATIVES
Historically, the Company's growth has been largely attributable to acquiring
funeral and cemetery businesses which resulted in creating the world's largest
network of funeral service locations and cemeteries. The Company believes this
network forms the foundation of its growth initiatives going forward. During the
mid-1990s, the market to acquire funeral service locations and cemeteries became
extremely competitive which resulted in increased acquisition prices and
substantially reduced returns on invested capital. In early 1999, the Company
announced plans to significantly reduce the level of its acquisition activity
and pursue other
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means to create meaningful growth from its existing operations. As a result, the
Company's current strategic plan is focused on reducing overhead costs,
increasing cash flow and reducing debt while at the same time developing key
revenue initiatives designed to drive future internal growth in the Company's
core funeral and cemetery operations without the outlay of significant capital.
Overhead Costs
The Company's overhead costs include corporate general and administrative
expenses, regional field overhead costs and other home office costs related to
functions directly supporting field operations. During the first quarter of
2001, the Company's overhead costs were below the levels in the same period of
2000. General and administrative expenses decreased 10.4% in the first quarter
of 2001 compared to the same period of 2000. This decrease in general and
administrative expenses is principally attributable to the reduction in costs
after the Company completed the implementation of its North America proprietary
point of sale system in 2000 and due to the completion of the initial roll-out
of the Company's Central Processing Centers in its North America operating
clusters.
Operating Free Cash Flow
The Company's strategic plan includes the execution of several cash flow
initiatives that are designed to increase the Company's operating free cash
flow. The Company considers operating free cash flow to be cash funds that can
generally be used to reduce the Company's debt and is defined more specifically
in the Financial Condition, Liquidity and Capital Resources section in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company's total and recurring operating free cash flow for the
three months ended March 31, 2001 and 2000 is summarized below.
Three months ended March 31,
2001 2000 Change
------------- ------------- --------------
Total operating free cash flow........................... $185,322 $80,911 $104,411
Recurring operating free cash flow....................... $60,779 $76,882 ($16,103)
The Company's improvement of $104,411 in total operating free cash flow was
primarily a result of non-recurring receipts of funds offset by a reduction in
recurring operating free cash in the first quarter of 2001 compared to the same
period of 2000. Included in total operating free cash flow of $185,322 for the
first quarter of 2001 is $124,543 in net non-recurring receipts of funds
primarily from certain income tax refunds and from the collection of receivables
from funeral and cemetery trust funds. The Company's recurring operating free
cash flow of $60,779 for the three months ended March 31, 2001 was less than the
same period of 2000 primarily due to the reduction in cash operating receipts as
a result of significantly fewer funeral services performed, approximately
$11,000 more cash interest paid related to the timing of cash interest payments
and $7,053 more in funds expended for expected capital expenditure purposes, all
in the first quarter of 2001 compared to the same period of 2000.
The Company continues to implement existing and additional initiatives in
2001 to increase its recurring operating free cash flow. These cash flow
initiatives are categorized as revenue growth initiatives, working capital
improvements, cost reduction initiatives, asset redeployment and enhanced
funeral and cemetery trust administration and management. Revenue initiatives
include such programs as the Company's Dignity Memorial(TM) packaged funeral
plans and the development of affinity relationships. Working capital
improvements include programs to accelerate customer collections and deliver
pre-sold merchandise to customers to satisfy trusting requirements. Cost
reduction initiatives include changes to the Company's employee benefit plans
and other overhead reductions primarily related to information technology costs.
The Company's recurring operating free cash flow is also expected to increase
related to assets being redeployed and managed more efficiently such as cash
override payments that will be received as a result of marketing agreements
entered in connection with the sale of its insurance subsidiaries and interest
savings as a result of proceeds received from the Company's divestitures and
joint venturing programs. Enhanced cemetery and funeral trust administration and
management will allow the Company to increase operating free cash flow by
reducing processing times for trust claims and accelerate trust distributions as
well as the continuation of the Company's surety bond program for additional
financial assurance.
The Company is in various stages of executing the above cash flow
initiatives and, along with other cash flow initiatives currently under
development, expects these initiatives to increase the Company's operating free
cash flow to a run rate between $100,000 and
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$150,000 by the end of 2001. The Company also expects its recurring operating
free cash flow to have a run rate between $200,000 and $250,000 by the end of
2002. The calculation of the Company's recurring operating free cash flow
deducts cash interest paid during the period. Due to high scheduled cash
interest payments in the second and fourth quarters of 2001, it is inappropriate
to annualize the Company's recurring operating free cash flow of $60,779 for the
three months ended March 31, 2001.
Long-Term Debt
Debt at Debt at
March 31, 2001 December 31, 2000 Debt Reduction
----------------- --------------------- --------------------
Current maturities of long-term debt................. $ 171,023 $ 176,782 ($ 5,759)
Long-term debt....................................... 2,861,287 3,114,515 (253,228)
----------------- --------------------- --------------------
Total debt...................................... $3,032,310 $3,291,297 ($258,987)
================= ===================== ====================
During the first quarter of 2001, the Company reduced its total debt by
$258,987. Funds available to achieve this debt reduction were generated from the
Company's recurring operating free cash flow, proceeds from the sales of certain
non-strategic funeral and cemetery operations in North America, receipts of
non-recurring funds from certain income tax refunds and receipts of
non-recurring funds from the collection of receivables from funeral and cemetery
trust funds. During the first quarter of 2001, the Company also extinguished
certain debt obligations using the Company's common stock in transactions with
third parties who owned such debt obligations.
The execution of the Company's debt reduction initiatives continues to meet
the Company's expectations. The Company is continuing discussions with various
parties concerning the possibility of joint venturing primarily its
international operations. Proceeds from any investments made by strategic
partners will be used by the Company to reduce its debt. Subsequent to March 31,
2001, the Company announced the completion of the joint venture with its
Australian operations that produced approximately $118,200 in net after tax cash
proceeds. With the addition of these cash proceeds after the first quarter of
2001, the Company's debt is below $3,000,000. With the proceeds from other
possible joint venture programs and from the continued sales of certain
non-strategic funeral and cemetery operations in North America, as well as from
improvements expected in recurring operating free cash flow, the Company's goal
is to reduce its debt from its current level to a range of $2,000,000 to
$2,500,000 by the end of 2002.
Revenue Growth Initiatives
Due to the Company possessing the largest network of funeral homes and
cemeteries in the world, the Company has unique opportunities to leverage its
network by adding new products and services, attracting new customers to its
existing facilities and to aggressively expand its current market share in its
funeral and cemetery markets. The Company plans to expand its market share and
generate future revenue growth through the execution of several initiatives
without the outlay of significant additional capital. Six of the Company's most
important revenue growth initiatives primarily being implemented in North
America are listed below:
o Creation of a seamless, national brand of funeral service locations under
the Dignity Memorial(TM) brand name.
o Implementation of Dignity Memorial(TM)funeral packages.
o Establishment of exclusive, national, branded affinity relationships with
employers, social, fraternal and charitable groups or institutions.
o Improvement of standards in customer service.
o Continued commitment to funeral and cemetery prearrangement.
o Expansion of cremation marketing, merchandising and services.
These revenue growth initiatives are currently in various stages of
development and implementation. If implemented successfully, the Company
believes the above initiatives will allow the Company to generate future revenue
growth as well as to expand its market share.
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RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the
three months ended March 31, 2001 and 2000. These results of operations for the
first quarter of 2001 and 2000 reflect the implementation of SAB No. 101 as of
January 1, 2000, as discussed in note three to the consolidated financial
statements included in Item 1 of this Form 10-Q.
For the quarter ended March 31, 2001, the Company reported revenues of
$677,776, representing a 0.8% decrease compared to $683,493 in the first quarter
of 2000. Gross profit from continuing operations in the first quarter of 2001
decreased 5.3% to $110,888 compared to $117,065 in the same period of 2000.
Gross margin percentage decreased 4.1% to 16.4% compared to 17.1% in the first
quarter 2000. For the three months ended March 31, 2001, the Company reported
earnings from continuing operations before restructuring and non-recurring
charges of $21,384, net income of $265, diluted earnings per share from
continuing operations before restructuring and non-recurring charges of $.08
($.08 basic) and diluted earnings per share of $.00 ($.00 basic). The Company
reported earnings from continuing operations before restructuring and
non-recurring charges of $20,937, net loss of $876,641, diluted earnings per
share from continuing operations before restructuring and non-recurring charges
of $.08 ($.08 basic) and diluted loss per share of $3.21 ($3.22 basic) for the
first quarter of 2000.
Results for the Company's continuing operations by geographic segment are
detailed in the following tables.
THREE MONTHS ENDED MARCH 31, 2001
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral................ $315,550 66.9% $171,573 96.6% $13,494 47.3% $ 500,617 73.9%
Cemetery............... 156,017 33.1% 6,090 3.4% 15,052 52.7% 177,159 26.1%
-------------------------------------------------------------------------------------------------------
$471,567 100.0% $177,663 100.0% $28,546 100.0% $677,776 100.0%
=======================================================================================================
Gross profit and margin
percentage:
Funeral................ $68,374 21.7% $15,028 8.8% $ 509 3.8% $ 83,911 16.8%
Cemetery............... 23,037 14.8% 2,250 36.9% 1,690 11.2% 26,977 15.2%
-------------------------------------------------------------------------------------------------------
$91,411 19.4% $17,278 9.7% $2,199 7.7% $110,888 16.4%
=======================================================================================================
THREE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral................ $323,360 72.7% $195,006 95.8% $16,074 45.6% $534,440 78.2%
Cemetery............... 116,915 26.3% 8,652 4.2% 19,152 54.4% 144,719 21.2%
Other Services......... 4,334 1.0% - - - - 4,334 0.6%
-------------------------------------------------------------------------------------------------------
$444,609 100.0% $203,658 100.0% $35,226 100.0% $683,493 100.0%
=======================================================================================================
Gross profit and margin
percentage:
Funeral................ $79,572 24.6% $26,538 13.6% $1,273 7.9% $107,383 20.1%
Cemetery............... 2,652 2.3% 2,810 32.5% 3,460 18.1% 8,922 6.2%
Other Services......... 760 17.5% - - - - 760 17.5%
-------------------------------------------------------------------------------------------------------
$82,984 18.7% $29,348 14.4% $4,733 13.4% $117,065 17.1%
=======================================================================================================
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The following factors contributed to the results for the first quarter of 2001.
o Total funeral services performed by the Company's worldwide funeral service
locations were 9.9% below total funeral services performed in the first
quarter of 2000, primarily due to the weak death trends in all of the
Company's funeral service markets.
o The Company experienced an increase in cemetery revenue as a result of an
increased focus on enhancing cash flow. As a result, the Company's sales mix
shifted toward cash flow positive sales which could be recognized as revenue
under accounting rules after the implementation of SAB No. 101.
o The Company experienced a negative effect of foreign currency translations
of approximately $17,000 on revenues and approximately $2,000 of gross
profits primarily as a result of the weakened Euro relative to the U.S.
dollar in the first quarter of 2001 compared to the first quarter of 2000.
Funeral
The decrease in North American funeral revenues was primarily the result of a
decrease in the volume of funeral services performed. In the first quarter of
2001, total volume in North America declined approximately 5.0% to 80,379 cases
compared to the first quarter of 2000. While volume declined, the average
revenue per funeral service increased 2.7% to $3,926 in the first quarter of
2001 compared to $3,823 in the first quarter of 2000. This increase was the
result of the continued implementation of the Company's revenue growth
initiatives, such as the Dignity Memorial (TM) packaged funeral plans and
continued concentration on customer satisfaction training of funeral service
personnel. The decrease in North American funeral gross profit and margin
percentage was the result of the above mentioned decline in funeral services
performed as well as increases in vehicle and facility costs.
The decrease in European funeral revenues is related to a negative effect
of foreign currency translation of approximately $13,100 and fewer funeral
services performed in the first quarter 2001 compared to the first quarter of
2000. In the first quarter of 2001, the number of funeral services performed
declined approximately 15.3% to 68,907 cases compared to the first quarter of
2000. The decline in funeral services performed was slightly offset by an
increase in the average revenue per funeral service of 2.9% over the same period
of the prior year. The decrease in European funeral gross profit and margin
percentage is the result of the continuation of the decline in the number of
deaths in the Company's European funeral service markets coupled with slight
declines in the Company's market share in these markets. A decrease in revenue
does not equate to a similar decrease in costs because of the high fixed cost
structure of the European locations.
The decrease in Other Foreign revenues is primarily the result of the
negative effect of foreign currency translation of approximately $2,100 coupled
with a decline in funeral services performed of 6.1% to 7,045 cases in the first
quarter of 2001 compared to the first quarter of 2000.
Cemetery
The increase in North American cemetery revenues was primarily the result of
initiatives begun in 2000 to enhance cash flow of its cemetery operations.
Changes include adjustments to cemetery compensation plans and concentration on
sales of deliverable cemetery property and merchandise. Deliverable cemetery
property and merchandise includes property with a 10% down payment and
previously developed cemetery property. As a result of the above focus during
the first quarter of 2001, the Company's sales mix shifted causing an increase
in revenue compared to the same period of 2000.
The increase in North American cemetery gross profit and margin percentage
is the result of increased revenue as mentioned above. Fixed costs related to
preneed cemetery property and merchandise are recognized when incurred while
direct costs which vary with and are related to the acquisition of new sales are
deferred and recognized in conjunction with revenue. As incremental revenues are
generated, higher gross profit and operating margins result.
Other Income and Expenses
General and administrative expenses decreased $2,134 to $17,979 in the first
quarter of 2001 compared to the first quarter of 2000. The decrease was related
to the anticipated reduction in costs after the Company implemented its North
America proprietary point of sale system and to the completion of the initial
roll-out of the Company's Central Processing Centers in its North American
operating
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clusters. Expressed as a percentage of revenue from continuing operations,
general and administrative expenses were 2.7% for the three months ended March
31, 2001, compared to 2.9% for the comparable period in 2000.
Interest expense decreased $8,743 or 12.6% to $60,806 in the first quarter
of 2001 compared to the same period of 2000. The decrease in interest expense
for the three months ended March 31, 2001 reflects the decline in the Company's
long-term debt balance compared to the same period in 2000. For the three months
ended March 31, 2001, the average outstanding debt was $3,191,881 compared to
the average outstanding debt for the three months ended March 31, 2000 of
$3,973,503.
Other income was $2,954 as of March 31, 2001 compared to $3,806 in the same
period of 2000. Other income primarily consists of income from notes receivable
remaining subsequent to selling the portfolio of the Company's lending
subsidiary in August 2000, equity from earnings of investments in certain
companies, gains and losses from the sales of businesses that are disposed of
for strategic or government mandated purposes (which are not included in the
Company's restructuring and non-recurring charges) and prearranged funeral sales
cash overrides received from the Company's formerly owned insurance operations
(see note four to the consolidated financial statements in Item 1 of this Form
10-Q).
The provision for income taxes reflects a 66.9% effective tax rate for the
three months ended March 31, 2001 compared to a 32.9% effective rate for the
comparable period in 2000. The increase in the effective tax rate is the result
of the Company recognizing an impairment charge related to the sale of its
Australian operations and a greater percentage of the Company's operating
results being contributed by North America, which carries a higher effective tax
rate than the Company's international jurisdictions. The Company's consolidated
effective tax rate at March 31, 2001 before restructuring and non-recurring
charges was 39.0%. The tax benefit related to the impairment charge recognized
in the first quarter of 2001 by the Company's Australian operations was 28.0%
resulting in an effective tax rate from continuing operations of 66.9%.
Cremations
There has been a growing trend in the death care industry in recent years in the
number of cremations performed in North America as an alternative to traditional
funeral service dispositions. Outside of North America, the cremation rate is
more stable. While cremations performed by the Company in North America
typically have higher gross profit margins than traditional funeral services,
cremations usually result in lower revenue and gross profit dollars to the
Company. In North America, for the first quarter 2001, 36.8% of all funeral
services performed by the Company were cremation cases, compared to 35.2% in the
same period of 2000. The Company's strategy for cremation trends in North
America is to continue the movement towards performing cremations with
memorialization services as well as to offer enhanced and additional cremation
products and services to North American cremation consumers. This is being
accomplished through programs such as the Company's Dignity Memorial(TM)
cremation memorialization packaged funeral plans, which offer the consumer a
broad array of choices of products and services for memorialization. The Company
also has plans to expand the Company owned largest single provider of cremation
services in North America, National Cremation Service(R), from its existing base
in ten states to seven additional states by the end of 2002.
Restructuring and Non-Recurring Charges
In the first quarter of 2001, the Company recorded a non-cash impairment charge
of $25,458 related to the joint venturing of its Australian operations.
Additionally, the Company will recognize a one-time, non-cash charge of
approximately $22,000 to $28,000 on a pretax basis in the second quarter of 2001
relating to the recognition into earnings of the cumulative foreign currency
translation effect from the Australian operations, which is currently included
as a separate component of Accumulated other comprehensive loss in the Company's
stockholders' equity. This charge cannot be recognized under applicable
accounting rules until the actual consummation of the transaction, which
occurred in May 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
As previously described, the Company's strategic plan currently focuses on
reducing overhead costs, increasing cash flow and reducing its debt. The
Company's current strategic plan is fully described in the section Strategic
Initiatives included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations. The Company's strategic initiatives are
designed to allow
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the Company to achieve its goals relating to operating free cash flow and debt
reduction, while at the same time generating revenue growth without the outlay
of significant capital.
The Company defines operating free cash flow as adjusted cash flow from
operating activities, less capital expenditures and dividends paid. Adjusted
cash flow from operating activities includes cash flow provided by operating
activities as reflected in the consolidated statement of cash flows adjusted to
exclude (i) cash payments associated with the Company's restructuring and
non-recurring charges and (ii) other proceeds or payments (included in cash flow
provided by operating activities) which are of a non-recurring operational
nature. Generally, operating free cash flow is cash funds that can be used to
reduce the Company's debt.
The Company's progress towards its cash flow run rate targets is as
follows:
Three Months Ended 2001 Benchmarks and 2002 Benchmarks and
March 31, 2001 Run Rate Targets Run Rate Targets
-------------------- ------------------------ ------------------------
Consolidated cash flow provided by operating activities.... $206,439
Payments on restructuring charges.......................... 6,510
------------
Adjusted cash flow from operating activities........ 212,949
Capital expenditures................................. (27,627)
------------
TOTAL OPERATING FREE CASH FLOW...................... 185,322 $200,000 to $250,000
Less: Non-recurring receipts of funds, net......... (124,543)
------------
RECURRING OPERATING FREE CASH FLOW.................. $ 60,779 $100,000 to $150,000 $200,000 to $250,000
============
Estimated after tax proceeds from sales of assets and
non-core businesses................................... $ 25,887 $200,000 to $500,000
============ ====================
Total cash flow available........................... $211,209 $400,000 to $750,000
============ ====================
The net non-recurring receipts of funds totaling $124,543 relates primarily to
certain income tax refunds and from the collection of receivables due to the
Company from funeral and cemetery trust funds. The Company continues to
implement initiatives in 2001 to increase its recurring operating free cash flow
from 2000 levels. These cash flow initiatives are categorized as (i) revenue
growth initiatives, (ii) working capital improvement, (iii) cost reduction
initiatives, (iv) asset redeployment and (v) enhanced funeral and cemetery trust
administration and management. The Company is currently in various stages of
executing the above cash flow initiatives and, along with other cash flow
initiatives currently under development, expects recurring operating free cash
flow to have a run rate between $100,000 to $150,000 by the end of 2001 and to
have a run rate between $200,000 to $250,000 by the end of 2002.
The Company's total debt at March 31, 2001 was $3,032,310, representing a
decrease in total debt of $258,987 since December 31, 2000. Since September 30,
1999, the Company has reduced its debt by $1,167,713 or 27.8%. Subsequent to
March 31, 2001, the Company announced the completion of the joint venture with
its Australian operations that produced approximately $118,200 in net after tax
cash proceeds. With the addition of these cash proceeds after the first quarter
of 2001, the Company's debt is currently below $3,000,000.
Of the Company's total long-term debt at March 31, 2001 of $3,032,310, the
largest component is $609,590 related to the Company's primary bank credit
agreements maturing in June 2002. These credit agreements provide for total
borrowings up to $970,251 as of March 31, 2001 and consist of two committed
facilities - a 2-year term loan and a 5-year, multi-currency revolving facility,
both due in June 2002. These credit agreements were amended effective November
2000. Significant terms of the amendments include certain agreements made by the
Company to reduce commitment amounts on the credit facilities based upon net
cash proceeds generated from joint venture and asset sale transactions closed
after November 2000; changes to definitions and calculations of financial
covenants related to a maximum debt-to-capitalization ratio, a minimum interest
coverage ratio and a minimum net worth requirement; limits on the amount of
Company assets that could be joint ventured or sold; and certain restrictions on
future acquisition activity without lender approval. Under the terms of the
amended credit agreements, the covenants will continue to be calculated using
ongoing financial results prior to applying the provisions of SAB No. 101, until
such time as the Company and its lenders agree to revised
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covenants. As of May 11, 2001, the credit agreements provided for borrowings up
to $904,869, of which the Company had drawn down $510,406.
As mentioned above, the Company has achieved significant debt reduction
since September 1999. This reduction of debt has been achieved primarily through
funds received from the Company's total operating free cash flow and the sale of
certain assets and non-core businesses. The Company is continuing to sell
certain funeral and cemetery operations in North America in 2001 that are not
well aligned with the Company's long-term strategy. The Company will also
continue discussions with various parties concerning the possibility of joint
venturing primarily its international operations. Alliances and joint ventures
with strategic partners could include groups that offer unique competitive
advantages not previously available to the Company, such as access to customer
databases, marketing services and prearrangement financing. Proceeds from any
investments made by strategic partners will be used by the Company to reduce its
debt. With non-recurring receipts of funds expected in 2001 and 2002,
improvements in recurring operating free cash flow described earlier, proceeds
expected from sales of certain funeral and cemetery operations in North America
and proceeds from joint venture programs primarily with the Company's
international operations, the Company believes funds will be available to reduce
these maturities due in 2002 to a level allowing for the refinancing of
remaining balances outstanding, if any.
EBITDA
The Company reported EBITDA from continuing operations before restructuring and
non-recurring charges for the three months ended March 31, 2001 and 2000 of
$146,135 and $158,918, respectively. EBITDA was calculated by adding
depreciation and amortization expense and interest expense to the Company's
Income from continuing operations before income taxes, extraordinary gains and
cumulative effect of accounting changes.
Financial Assurances
In support of the Company's operations, the Company has entered into
arrangements with certain insurance companies whereby such insurance companies
agree to issue surety bonds on behalf of the Company, as financial assurance
and/or as required by existing state and local regulations. The surety bonds are
used for various business purposes; however, the majority of the surety bonds
issued and outstanding have been issued to support the Company's prearranged
funeral and preneed cemetery activities. The underlying obligations that such
surety bonds insure are recorded in the Company's consolidated balance sheet as
Deferred prearranged funeral contract revenues and Deferred preneed cemetery
contract revenues. The total surety bonds outstanding as of March 31, 2001 and
December 31, 2000 was $275,372 and $215,350, respectively.
Sources and Uses of Cash
Net cash provided by operating activities was $206,439 for the three months
ended March 31, 2001 compared to $101,459 for the same period of 2000. Included
in the $101,459 for the first quarter of 2000 is $48,963 of net cash provided by
discontinued operations. From continuing operations, net cash provided by
operating activities was $52,496 for the first quarter of 2000. The Company
received funds of $15,442 and $4,029 for the three months ended March 31, 2001
and 2000, respectively, relating to the collection of receivables from certain
funeral and cemetery trust funds which are included in net cash provided by
continuing operations. Excluding these receipts of funds, net cash provided by
continuing operations increased by $142,530 primarily due to approximately
$116,000 of cash received from certain income tax refunds.
Net cash used in investing activities was $25,929 for the three months
ended March 31, 2001 compared to $83,479 for the same period of 2000. Included
in the $83,479 is $61,810 of net cash used in investing activities by
discontinued operations for the first quarter of 2000. Net cash used in
investing activities from continuing operations was $21,669 for the three months
ended March 31, 2000. The increase in net cash used in investing activities from
continuing operations in the first quarter of 2001 compared to the same period
of 2000 is due to an increase in capital expenditures and deposits of restricted
funds offset by increases in proceeds received from sales of property and
equipment.
Net cash used in financing activities was $183,435 for the three months
ended March 31, 2001 compared to net cash provided by financing activities of
$42,548 for the same period of 2000. Included in the $42,548 is a source of cash
of $143,498 related to the cross-currency components of certain swaps the
Company terminated in the first quarter of 2000. Excluding the $143,498, net
cash
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used in financing activities was $100,950 for the three months ended March
31, 2000. The increase in net cash used in financing activities in the first
quarter of 2001 compared to the same period of 2000 is due to a greater
reduction in the Company's borrowings under its credit agreements achieved in
the first quarter of 2001 compared to the first quarter of 2000. The Company
primarily used funds from certain income tax refunds, collection of receipts
from funeral and cemetery trust funds and its cash flow from operations to
reduce its debt under the credit agreements in the first quarter of 2001.
PREARRANGED FUNERAL AND PRENEED CEMETERY ACTIVITIES
The Company sells price guaranteed prearranged funeral contracts through various
programs providing for future funeral services at prices prevailing when the
agreements are signed. Payments under these contracts are generally placed into
trust accounts (pursuant to applicable law) or are used to pay premiums on life
insurance or annuity contracts.
Funeral revenues are recognized on prearranged funeral contracts at the
time the funeral services are performed. Trust earnings and increasing insurance
benefits are accrued and deferred until the services are performed, at which
time these funds are also recognized in funeral revenues. The Company's
investment program targets a return in excess of the amount necessary to cover
future increases in the cost of providing price guaranteed funeral services as
well as any selling costs. This is accomplished by allocating the portfolio mix
to investments that match the anticipated maturity of the contracts. Direct
costs incurred with the sale of prearranged funeral contracts are a current use
of cash which is partially offset with cash retained, pursuant to state laws,
from amounts trusted and certain general agency commissions earned by the
Company for sales of insurance products. Net obtaining costs incurred pursuant
to the sales of prearrangements are included in Deferred charges and other
assets. These obtaining costs, which include sales commissions and certain other
direct costs that vary with and are primarily related to the acquisition of new
prearranged funeral business, are deferred and amortized over 20 years, a period
representing the estimated life of the prearranged funeral contracts. Previous
to the implementation of SAB No. 101, deferred obtaining costs included variable
and fixed direct costs as well as direct marketing costs.
Pursuant to the implementation of SAB No. 101 in 2000, the Company changed
its accounting policies regarding the manner in which it records preneed
cemetery sales activities. As discussed in note three to the consolidated
financial statements in Item 1 of this Form 10-Q, the Company defers revenues
associated with certain preneed cemetery sales activities until cemetery burial
property is constructed and meets the criteria of SFAS No. 66, merchandise is
delivered or services are performed. Amounts held in cemetery merchandise and
services trusts are included in Long-term receivables, at cost. As a result of
implementing SAB No. 101, all realized investment earnings related to these
cemetery merchandise and services trust funds are deferred until the associated
merchandise is delivered or services are performed.
The Company remains committed to prearrangement programs with consumers for
funeral and cemetery products and services as the Company believes these
programs can increase future market share in its funeral service and cemetery
markets. During 2000, the Company restructured its prearranged organization and
compensation plans to improve the cash flows from the Company's prearrangement
activities. Such initiatives include (i) funding the majority of prearranged
funeral contracts through insurance sources creating general agency revenue and
cash overrides and (ii) introducing direct-to-consumer prearranged marketing in
North America to open new marketing channels and expand the scope of the
Company's prearragement activities. At March 31, 2001, the Company had deferred
revenues of $6,293,408, of which $4,484,800 is Deferred prearranged funeral
contract revenues and $1,808,608 is Deferred preneed cemetery contract revenues,
to be recognized as revenue in future periods. For the three months ended March
31, 2001 and 2000, the percentage of North American funeral services performed
which were previously prearranged was 29.6% and 28.4%, respectively, and is
expected to increase over time. Total prearranged funeral sales were
approximately $150,000 for the first quarter of 2001 and 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities: An Amendment
of FASB Statement No. 133." In accordance with these Standards, the Company
recognized a cumulative effect of a change in accounting principle, net of
applicable taxes, of $7,601.
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In 2000, the Company implemented SAB No. 101 which changes the Company's
accounting policies regarding the manner in which the Company records preneed
sales activities. The implementation of SAB No. 101 had no effect on the
consolidated cash flows of the Company. As a result of the required change, the
Company recognized a cumulative effect of a change in accounting principle,
effective January 1, 2000, of $909,315 (net of a $552,491 tax benefit), or $3.33
per diluted share.
The Financial Accounting Standards Board recently announced a proposed
change that would affect the accounting treatment related to business
combinations and goodwill. This pronouncement, if adopted, could affect the
accounting for future acquisitions. Additionally, the pronouncement proposes
that goodwill be reviewed for impairment rather than amortized, as is the
current accounting practice. Rules to be implemented by the proposed standard
are not final and no definitive date has been established for issuance or
adoption.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be accompanied by words such
as "believe", "estimate", "project", "expect", "anticipate" or "predict", that
convey the uncertainty of future events or outcomes. These statements are based
on assumptions that the Company believes are reasonable; however, many important
factors could cause the Company's actual results in the future to differ
materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. Important
factors which could cause actual results of the Company to differ materially
from those in forward-looking statements include, among other, the following:
1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g. marketable security
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly but not limited to, levels
of interest expense and negative currency translation effects.
2) Changes in credit relationships impacting the availability of credit
and the general availability of credit in the marketplace.
3) The Company's ability to successfully implement its strategic plan as
defined in the Company's Form 10-K as of December 31, 2000 and in this
Form 10-Q, including the interest of third parties to enter into and
consummate alliances and joint ventures with the Company.
4) The Company's ability to generate expected proceeds from the sale of
certain funeral and cemetery operations and to implement plans to
improve recurring operating free cash flow.
5) Changes in consumer demand and/or pricing for the Company's products
and services caused by several factors, such as changes in local death
rates, cremation rates, competitive pressures and local economic
conditions.
6) The Company's ability to successfully implement ongoing cost reduction
initiatives, as well as changes in domestic and international economic,
political and/or regulatory environments, which could negatively effect
the implementation of the Company's cost reduction initiatives.
7) The Company's ability to successfully implement certain strategic
revenue and marketing initiatives resulting in increased volume through
its existing facilities.
8) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and
accounting policies.
9) The Company's ability to successfully exploit its substantial
purchasing power with certain of the Company's vendors.
The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to certain market risks, see
Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the
Company's Form 10-K for the year ended December 31, 2000. There have been no
material changes to the disclosure on this matter made in such Form 10-K.
Further information regarding the Company's debt exposure see note six to
the consolidated financial statements in Item 1 of this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Previously Reported Litigation. The following discussion describes certain
litigation as of May 11, 2001, which was previously reported:
Civil Action H-99-0280; In Re Service Corporation International; In the
United States District Court for the Southern District of Texas, Houston
Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before
Judge Lynn N. Hughes and includes 21 class action lawsuits that were filed in
the United States District Court of the Southern District of Texas, two class
action lawsuits that were originally brought in the United States District Court
for the Eastern District of Texas, and a lawsuit brought in the United States
District Court for the Southern District of Texas by an individual who sold his
funeral home to the Company. The Consolidated Lawsuit names as defendants the
Company and three of the Company's current or former executive officers or
directors: Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne
(the Individual Defendants). The plaintiffs have filed a Consolidated Class
Action Complaint in the Consolidated Lawsuit alleging that defendants violated
federal securities laws by making materially false and misleading statements and
failing to disclose material information concerning the Company's prearranged
funeral business. The Consolidated Lawsuit seeks to recover an unspecified
amount of monetary damages. Since the litigation is in its preliminary stages
and no discovery has occurred, the Company cannot quantify its ultimate
liability, if any, for the payment of damages or predict the outcome of the
litigation. However, the Company moved to dismiss all of the allegations in the
Consolidated Lawsuit and believes that they do not provide a basis for the
recovery of damages because the Company made all required disclosures on a
timely basis. The Company and the Individual Defendants have also filed an
Answer to the Consolidated Class Action Complaint, and the Company intends to
aggressively defend this lawsuit.
The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly owned subsidiary of Company into Equity Corporation International (ECI);
(ii) purchased shares of Company common stock in the open market during the
period from July 17, 1998, through January 26, 1999 (the Class Period); (iii)
purchased Company call options in the open market during the Class Period; (iv)
sold Company put options in the open market during the Class Period; (v) held
employee stock options in ECI that became options to purchase Company common
stock pursuant to the merger, and (vi) held Company employee stock options to
purchase Company common stock under a stock plan during the Class Period.
Excluded from the foregoing categories are the Individual Defendants, the
members of their immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any time during
the Class Period. Judge Hughes has certified the Consolidated Lawsuit as a class
action. On May 10, 2000, Judge Hughes signed an order amending the class
definition to include James P. Hunter, III as a class member. Mr. Hunter was
Chairman, President and Chief Executive Officer of ECI at the time of its merger
with a wholly-owned subsidiary of the Company. Mr. Hunter and a related family
trust filed a separate lawsuit in state court in Angelina County, Texas, which
is discussed below.
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The Company and the Individual Defendants have filed a Motion to Dismiss
the Consolidated Lawsuit; the plaintiffs have filed their Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the
Individual Defendants have filed a Reply to Plaintiffs' Opposition to
Defendants' Motion to Dismiss the Consolidated Lawsuit. The foregoing pleadings
will be considered by Judge Hughes in due course. On April 4, 2001, Judge Hughes
scheduled a meeting between the parties and the insurers for May 31, 2001 to
discuss possible resolution of the case and to exchange information on each
sides' position. The parties are to report the results of this meeting to Judge
Hughes by June 8, 2001, at which time the Court may consider pending motions and
requests for discovery.
Copies of the complaint in the Consolidated Lawsuit and the pleadings that
have been filed in response thereto and that are referred to herein are filed as
exhibits to this Quarterly Report on Form 10-Q.
Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation
International et al; In the __________ Judicial District Court of Angelina
County, Texas. On November 10, 1999, James P. Hunter, III and a related family
trust filed a lawsuit against the Company, the Individual Defendants, two other
officers, an employee of the Company and PricewaterhouseCoopers LLP, the
Company's independent accountants, in state District Court in Angelina County,
Texas (Hunter Litigation). The plaintiffs allege, among other things, violations
of Texas securities law and statutory and common law fraud, and seek unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hunter Litigation denying the plaintiffs' allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hunter Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
On May 10, 2000, Judge Hughes entered an order in the Consolidated Lawsuit
in the federal district court staying the further prosecution of the Hunter
Litigation in state court. Hunter and the related family trust appealed this
order, and the United States Court of Appeals for the Fifth Circuit lifted the
stay in an order of September 13, 2000. Following this appeal, Judge Hughes then
signed an order on October 5, 2000, prohibiting Mr. Hunter and the related
family trust from pursuing discovery in the Hunter Litigation. Judge Hughes
entered the order pursuant to the authority vested to him by the Securities
Litigation Uniform Standards Act of 1998. Hunter and the related family trust
filed a motion for a trial setting in the state district court. The court has
not ruled on this motion.
The Company and the other defendants moved to compel arbitration and stay
proceedings. On May 7, 2001, the presiding judge entered an order denying the
request to compel arbitration of the Company and the Individual Defendants. The
Company may appeal the ruling on this issue.
A copy of the Plaintiff's Original Petition in the Hunter Litigation and
the defendants' original answer in that proceeding are filed as exhibits to this
Quarterly Report on Form 10-Q.
Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International; In
the __________ Judicial District Court of Angelina County, Texas (Fredrick
Litigation). This additional securities fraud case has been brought against the
Company by a former shareholder of ECI alleging causes of action exclusively
under Texas statutory and common law. The Company has filed an answer denying
plaintiff's allegations. Since the litigation is in its preliminary stages, the
Company cannot quantify its ultimate liability, if any, for the payment of
damages or predict the outcome of the litigation. However, the Company believes
that the allegations in the Fredrick Litigation do not provide a basis for the
recovery of damages. The Company intends to vigorously defend this litigation.
Cause No. 33701-01-01; Jack D. Rottman v. Service Corporation
International, et al; In the __________ Judicial District Court of Angelina
County, Texas. On December 28, 2000, Jack Rottman filed a lawsuit against the
Company, the Individual Defendants, two other officers, an employee of the
Company, and PricewaterhouseCoopers LLP, the Company's independent accountants,
in state District Court in Angelina County, Texas (Rottman Litigation). The
plaintiff, a former officer of ECI, alleges, among other things, violations of
Texas securities law and statutory and common law fraud, and seeks unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Rottman Litigation denying the plaintiff's allegations. The
Company and other defendants moved to compel arbitration of this case. The court
has not yet ruled on these motions. Since the litigation is in its very
preliminary stages, the Company cannot quantify its ultimate liability, if any,
for the payment of damages or predict the outcome
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of the litigation. However, the Company believes that the allegations in the
Rottman Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
A copy of the Plaintiff's Original Petition in the Rottman Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to this
Quarterly Report on Form 10-Q.
Cause No. 2000-63917; Jack T. Hammer v. Service Corporation International,
et al; In the 165th Judicial District Court of Harris County, Texas. On December
15, 2000, Jack T. Hammer filed a lawsuit against the Company, the Individual
Defendants, two other officers, an employee of the Company, and
PricewaterhouseCoopers LLP, the Company's independent accountants, in state
District Court in Harris County, Texas (Hammer Litigation). The plaintiff, a
former director of ECI, alleges, among other things, violations of Texas
securities law and statutory and common law fraud, and seeks unspecified
compensatory and exemplary damages. The Company and the other defendants filed
an answer in the Hammer Litigation denying the plaintiff's allegations. Since
the litigation is in its very preliminary stages, the Company cannot quantify
its ultimate liability, if any, for the payment of damages or predict the
outcome of the litigation. However, the Company believes that the allegations in
the Hammer Litigation, like those in the Consolidated Lawsuit, do not provide a
basis for the recovery of damages because all required disclosures were made on
a timely basis. The Company intends to aggressively defend this litigation.
A copy of the Plaintiff's Original Petition in the Hammer Litigation and
the Defendants' original answer in that proceeding are filed as exhibits to the
Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the three months
ended March 31, 2001 and 2000.
99.1 Consolidated Class Action Complaint filed September 3, 1999
in Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.1
to Form 10-Q for the fiscal quarter ended September 30,
1999).
99.2 Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q for
the fiscal quarter ended September 30, 1999).
99.3 Defendants' motion to Dismiss the Consolidated Class Action
Complaint filed October 8, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q for
the fiscal quarter ended September 30, 1999).
99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the
Consolidated Class Action Complaint filed November 5, 1999
in Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.4
to Form 10-Q for the fiscal quarter ended September 30,
1999).
99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants'
Motion to Dismiss the Consolidated Class Action Complaint
filed November 24, 1999 in Civil Action No. H-99-280, In re
Service Corporation International. (Incorporated by
reference to Exhibit 99.12 to Form 10-K for the fiscal year
ended December 31, 1999).
99.6 Plaintiffs' Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James
P.Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers LLP; in the
Judicial District Court of Angelina County, Texas.
(Incorporated by reference to Exhibit 99.5 to Form 10-Q for
the fiscal quarter ended September 30, 1999).
99.7 Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.6. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal year
ended December 31, 1999).
99.8 Plaintiff's Original Petition filed December 28, 2000 in
Cause No. 33701-01-01, Jack D. Rottman vs. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair
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Waltrip, James M. Shelger, Wesley T. McRae and
PricewaterhouseCoopers LLP; in the __________ Judicial
District Court of Angelina County, Texas. (Incorporated by
reference to Exhibit 99.16 to Form 10-K for the fiscal year
ended December 31, 2000).
99.9 Defendants' Motion to Transfer Venue and Original Answer in
response to the Original Petition referred to in Exhibit
99.8. (Incorporated by reference to Exhibit 99.17 to Form
10-K for the fiscal year ended December 31, 2000).
99.10 Plaintiff's Original Petition filed December 15, 2000, in
Cause No. 2000-63917, Jack T. Hammer v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers LLP; in the
165th Judicial District Court of Harris County, Texas.
(Incorporated by reference to Exhibit 99.18 to Form 10-K
for the fiscal year ended December 31, 2000).
99.11 Defendants' Original Answer to the Original Petition
referred to in Exhibit 99.10. (Incorporated by reference to
Exhibit 99.19 to Form 10-K for the fiscal year ended
December 31, 2000).
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, the Company filed a report
on Form 8-K dated March 12, 2001 reporting (i) under "Item 5. Other
Events" the Company's finalization of conclusions regarding the
application of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements", and (ii) under "Item 7.
Financial Statements and Exhibits", the exhibit comprised of the
Company's letter to the Securities and Exchange Commission
regarding the Company's conclusions regarding the application of
SAB No. 101.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2001 SERVICE CORPORATION INTERNATIONAL
By: /s/ Jeffrey E. Curtiss
------------------------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
12.1 Ratio of earnings to fixed charges for the three months
ended March 31, 2001 and 2000.
99.1 Consolidated Class Action Complaint filed September 3, 1999
in Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.1
to Form 10-Q for the fiscal quarter ended September 30,
1999).
99.2 Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q for
the fiscal quarter ended September 30, 1999).
99.3 Defendants' motion to Dismiss the Consolidated Class Action
Complaint filed October 8, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q for
the fiscal quarter ended September 30, 1999).
99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the
Consolidated Class Action Complaint filed November 5, 1999
in Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.4
to Form 10-Q for the fiscal quarter ended September 30,
1999).
99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants'
Motion to Dismiss the Consolidated Class Action Complaint
filed November 24, 1999 in Civil Action No. H-99-280, In re
Service Corporation International. (Incorporated by
reference to Exhibit 99.12 to Form 10-K for the fiscal year
ended December 31, 1999).
99.6 Plaintiffs' Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James
P.Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers LLP; in the
Judicial District Court of Angelina County, Texas.
(Incorporated by reference to Exhibit 99.5 to Form 10-Q for
the fiscal quarter ended September 30, 1999).
99.7 Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.6. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal year
ended December 31, 1999).
99.8 Plaintiff's Original Petition filed December 28, 2000 in
Cause No. 33701-01-01, Jack D. Rottman vs. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair
Waltrip, James M. Shelger, Wesley T. McRae and
PricewaterhouseCoopers LLP; in the __________ Judicial
District Court of Angelina County, Texas. (Incorporated by
reference to Exhibit 99.16 to Form 10-K for the fiscal year
ended December 31, 2000).
99.9 Defendants' Motion to Transfer Venue and Original Answer in
response to the Original Petition referred to in Exhibit
99.8. (Incorporated by reference to Exhibit 99.17 to Form
10-K for the fiscal year ended December 31, 2000).
99.10 Plaintiff's Original Petition filed December 15, 2000, in
Cause No. 2000-63917, Jack T. Hammer v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers LLP; in the
165th Judicial District Court of Harris County, Texas.
(Incorporated by reference to Exhibit 99.18 to Form 10-K
for the fiscal year ended December 31, 2000).
99.11 Defendants' Original Answer to the Original Petition
referred to in Exhibit 99.10. (Incorporated by reference to
Exhibit 99.19 to Form 10-K for the fiscal year ended
December 31, 2000).