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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 JUNE 30, 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
--------------------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification 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 August
10, 2001 was 289,978,139 (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 and Six Months Ended June 30, 2001 and 2000 3
Consolidated Balance Sheet -
June 30, 2001 and December 31, 2000 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2001 and 2000 5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 2001 6
Notes to Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Part II. Other Information
Item 1. Legal Proceedings 29 - 31
Item 4. Submission of Matters to a Vote of Security Holders 31 - 32
Item 6. Exhibits and Reports on Form 8-K 32 - 33
Signature 33
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
(In thousands, except per share amounts) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues ........................................................ $ 618,711 $ 636,545 $ 1,296,487 $ 1,320,038
Costs and expenses .............................................. (532,141) (564,477) (1,099,029) (1,130,905)
----------- ----------- ----------- -----------
Gross profit .................................................... 86,570 72,068 197,458 189,133
General and administrative expenses ............................. (18,423) (19,734) (36,402) (39,847)
Restructuring and non-recurring charges ......................... (26,223) (13,281) (51,246) (13,281)
----------- ----------- ----------- -----------
Operating income ................................................ 41,924 39,053 109,810 136,005
Interest expense ................................................ (54,152) (73,565) (114,958) (143,114)
Other income .................................................... 10,727 7,647 13,681 11,453
----------- ----------- ----------- -----------
(43,425) (65,918) (101,277) (131,661)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting
changes .................................................... (1,501) (26,865) 8,533 4,344
(Provision) benefit for income taxes ............................ (9,155) 10,422 (15,870) 150
----------- ----------- ----------- -----------
Income (loss) from continuing operations before extraordinary
gains and cumulative effect of accounting changes .......... (10,656) (16,443) (7,337) 4,494
Income from discontinued operations (net of income taxes of
$3,885 and $7,568) .......................................... -- 5,611 -- 10,763
Extraordinary gains on early extinguishments of debt (net of
income taxes of $45, $8,845, $2,952 and $12,630,
respectively) .............................................. 71 15,388 4,618 21,973
Cumulative effect of accounting changes (net of income taxes
of $5,318 and $552,491, respectively) ...................... -- -- (7,601) (909,315)
----------- ----------- ----------- -----------
Net income (loss) ..................................... $ (10,585) $ 4,556 $ (10,320) $ (872,085)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic:
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting changes ........................... $ (.04) $ (.06) $ (.03) $ .02
Income from discontinued operations .................... -- .02 -- .04
Extraordinary gains on early extinguishments of debt ... .00 .06 .02 .08
Cumulative effect of accounting changes ................ -- -- (.03) (3.34)
----------- ----------- ----------- -----------
Net income (loss) ............................ $ (.04) $ .02 $ (.04) $ (3.20)
=========== =========== =========== ===========
Diluted:
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting changes ........................... $ (.04) $ (.06) $ (.03) $ 02
Income from discontinued operations .................... -- .02 -- .04
Extraordinary gains on early extinguishments of debt ... .00 .06 .02 .08
Cumulative effect of accounting changes ................ -- -- (.03) (3.34)
----------- ----------- ----------- -----------
Net income (loss) ............................ $ (.04) $ .02 $ (.04) $ (3.20)
=========== =========== =========== ===========
Basic weighted average number of shares ......................... 284,852 272,093 279,245 272,078
=========== =========== =========== ===========
Diluted weighted average number of shares ....................... 284,852 272,093 279,245 272,801
=========== =========== =========== ===========
</Table>
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
June 30, December 31,
(In thousands, except share and per share amounts) 2001 2000
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 46,745 $ 47,909
Receivables, net of allowances ..................................... 408,713 449,989
Inventories ........................................................ 155,761 170,056
Other .............................................................. 112,857 239,345
------------ ------------
Total current assets ............................................. 724,076 907,299
------------ ------------
Prearranged funeral contracts ........................................... 3,961,959 4,080,367
Long-term receivables, net of allowances ................................ 1,337,773 1,329,375
Cemetery property, at cost .............................................. 1,971,269 2,026,484
Property, plant and equipment, at cost (net) ............................ 1,517,050 1,675,263
Deferred charges and other assets ....................................... 697,168 717,170
Names and reputations (net) ............................................. 2,020,504 2,162,511
------------ ------------
$ 12,229,799 $ 12,898,469
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 450,393 $ 501,355
Current maturities of long-term debt ............................... 444,586 176,782
Income taxes ....................................................... 46,183 6,143
------------ ------------
Total current liabilities ........................................ 941,162 684,280
------------ ------------
Long-term debt .......................................................... 2,331,857 3,114,515
Deferred prearranged funeral contract revenues .......................... 4,423,332 4,537,669
Deferred preneed cemetery contract revenues ............................. 1,820,076 1,815,157
Deferred income taxes ................................................... 459,539 503,292
Other liabilities ....................................................... 235,444 267,735
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
289,744,856 and 272,507,010, issued and outstanding
(net of 2,502,190 treasury shares, at par) .................. 289,745 272,507
Capital in excess of par value ..................................... 2,233,972 2,156,824
Accumulated deficit ................................................ (226,673) (216,353)
Accumulated other comprehensive loss ............................... (278,655) (237,157)
------------ ------------
Total stockholders' equity ...................................... 2,018,389 1,975,821
------------ ------------
$ 12,229,799 $ 12,898,469
============ ============
(See notes to consolidated financial statements)
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SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
June 30,
(In thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................ $ (10,320) $(872,085)
Adjustments to reconcile net loss to net cash provided by operating activities:
Income from discontinued operations, net of taxes .................................. -- (10,763)
Extraordinary gains on early extinguishments of debt, net of taxes ................. (4,618) (21,973)
Cumulative effect of accounting changes, net of taxes .............................. 7,601 909,315
Depreciation and amortization ...................................................... 100,202 116,846
Benefit for deferred income taxes .................................................. (20,420) (26,335)
Restructuring and non-recurring charges ............................................ 51,246 13,281
Payments on restructuring charges .................................................. (13,412) (36,242)
Net effect of interest rate component of swap terminations ......................... -- (32,840)
Gains from dispositions (net) ...................................................... (6,000) (5,625)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease in receivables .......................................................... 29,658 94,427
Decrease (increase) in other assets .............................................. 78,418 (40,662)
Increase (decrease) in payables and other liabilities ............................ 31,619 (47,608)
Other ............................................................................ 1,309 (8,002)
Net effect of prearranged funeral production and maturities ........................ 27,072 71,052
--------- ---------
Net cash provided by continuing operations .............................................. 272,355 102,786
Net cash provided by discontinued operations ............................................ -- 92,269
--------- ---------
Net cash provided by operating activities ............................................... 272,355 195,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................... (36,547) (39,502)
Proceeds from sales of property and equipment ...................................... 46,952 28,302
Proceeds from completion of joint venture .......................................... 106,900 --
Acquisitions, net of cash acquired ................................................. -- 800
Loans issued by lending subsidiary ................................................. -- (3,083)
Principal payments received on loans issued by lending subsidiary .................. -- 20,758
Deposits of restricted funds ....................................................... (10,717) (27,550)
Other .............................................................................. -- (298)
--------- ---------
Net cash provided by (used in) continuing operations .................................... 106,588 (20,573)
Net cash used in discontinued operations ................................................ -- (82,022)
--------- ---------
Net cash provided by (used in) investing activities ..................................... 106,588 (102,595)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under revolving credit agreements ............ (459,022) 4,571
Proceeds from long-term debt issued ................................................ 345,000 --
Payments of debt ................................................................... (156,647) (63,876)
Early extinguishments of debt ...................................................... (99,925) (194,097)
Net effect of cross-currency component of swap terminations ........................ -- 143,498
Bank overdrafts and other .......................................................... 452 2,745
--------- ---------
Net cash used in financing activities ................................................... (370,142) (107,159)
Effect of foreign currency .............................................................. (9,965) (1,842)
--------- ---------
Net decrease in cash and cash equivalents ............................................... (1,164) (16,541)
Adjust for change in cash and cash equivalents associated with discontinued operations .. -- 7,030
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 ..................... $ 46,745 $ 48,303
========= =========
(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 loss ...................................... (10,320) (10,320)
Other comprehensive loss:
Foreign currency translation ............... (62,328) (62,328)
Reclassification adjustment for realized
loss on foreign currency translation ..... 20,830 20,830
-----------
Total other comprehensive loss ...... (41,498)
-----------
Comprehensive loss ........................... (51,818)
Common stock issued:
Stock option exercises and stock grants ...... 515 1,764 2,279
Contribution to employee 401(k) .............. 1,279 3,864 5,143
Debenture conversions ........................ 168 4,576 4,744
Debt extinguished using common stock ......... 15,276 66,944 82,220
----------- ----------- ---------- --------- -----------
Balance at June 30, 2001 ......................... $ 289,745 $ 2,233,972 $ (226,673) $(278,655) $ 2,018,389
=========== =========== ========== ========= ===========
The Company's comprehensive loss for the six months ended June 30, 2000 of
$960,982 consisted of a net loss of $872,085, a foreign currency translation
loss adjustment of $85,610, and an unrealized loss on securities of $3,287.
(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 June 30, 2001, the Company
operated 3,385 funeral service locations, 506 cemeteries and 185 crematoria
located in 17 countries on four continents.
The Company's funeral service locations and cemetery operations consist of
funeral homes, cemeteries, crematoria and related businesses. Funeral service
locations sell funeral related merchandise and provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. 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, columbarium niches, lots, and lawn crypts) and sell cemetery related
merchandise. Cemetery items are sold on an atneed or preneed basis. Company
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 188 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 and
six months ended June 30, 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 U. S. 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 financial statements 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 results
of operations, financial condition or cash flows. The Company has reclassified
certain amounts in the consolidated financial statements and accompanying notes
to the consolidated financial statements in prior years to conform to current
period presentation with no effect on the consolidated financial position,
results of operations or cash flows. The Company has restated prior periods to
conform with the change in accounting policies as a result of implementing Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (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
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations and establishes one
method - the purchase method - for accounting for such transactions. SFAS No.
142 addresses goodwill and other intangible assets and redefines useful lives,
amortization periods and impairment of goodwill. Under the new provision,
goodwill will no longer be amortized, but will be tested for impairment
annually. Currently, the
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Company has $2,020,504 in goodwill presented as Names and reputations in the
Company's consolidated balance sheet. Amortization of goodwill will continue to
be amortized through December 31, 2001 and was $31,086 and $32,861 for the six
months ended June 30, 2001 and 2000, respectively. SFAS No. 142 requires
goodwill to be tested for impairment by assessing the fair value of reporting
units, generally one level below reportable segments. The adoption of SFAS No.
142 may result in a non-cash charge that could have a significant effect on the
Company's financial condition and results of operations. The Company is required
to adopt SFAS No. 141 for any acquisitions subsequent to June 30, 2001 and to
adopt SFAS No. 142 during the first quarter of the year ending December 31,
2002.
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
pronouncements, the Company recognized a cumulative effect of a change in
accounting principle, net of applicable taxes, of $7,601.
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'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 SFAS No. 66, "Accounting for the Sales of Real Estate". 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 SFAS No. 60, "Accounting
and Reporting by Insurance Enterprises". 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 $3.34 per diluted share recorded
on January 1, 2000.
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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.
Summary of operating results of discontinued operations.
<Table>
<Caption>
Three months ended Six months ended
June 30, 2000 June 30, 2000
------------------ ----------------
Revenue .................................................. $ 99,919 $ 203,636
Costs and expenses ....................................... (90,423) (185,305)
--------- ---------
Income from discontinued operations before income taxes .. 9,496 18,331
Provision for income taxes ............................... (3,885) (7,568)
--------- ---------
Income from discontinued operations ...................... $ 5,611 $ 10,763
========= =========
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. Realized 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 contract portfolio.
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 and all costs 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. A receivable from trust for amounts held in cemetery
merchandise and services trusts is 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 consists of the following:
<Table>
<Caption>
June 30, 2001 December 31, 2000
------------- -----------------
Bank revolving credit agreements .......................................... $ 305,238 $ 789,750
6.75% notes due 2001 ...................................................... -- 123,000
8.72% amortizing notes due 2002 ........................................... 22,274 39,149
8.375% notes due 2004 ..................................................... 51,840 51,840
7.375% notes due 2004 ..................................................... 228,000 250,000
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
6.75% convertible subordinated notes due 2008 ............................. 345,000 --
7.7% notes due 2009 ....................................................... 200,000 200,000
6.95% amortizing notes due 2010 ........................................... 47,745 49,202
7.875% debentures due 2013 ................................................ 55,627 55,627
7.0% notes due 2015 (putable 2002) ........................................ 102,265 186,040
6.3% notes due 2020 (putable 2003) ........................................ 251,284 300,000
Medium-term notes, maturities through 2019, fixed average interest
Rate of 9.67% .......................................................... 12,000 35,720
Convertible debentures, maturities through 2013, fixed interest rates
From 4.75% to 5.5%, conversion prices from $11.25 to $50.00 ............ 46,031 49,213
Mortgage notes and other debt, maturities through 2050 .................... 74,967 86,219
Deferred losses on swap terminations and loan costs ....................... (47,378) (16,013)
----------- -----------
Total debt ........................................................... 2,776,443 3,291,297
Less current maturities .............................................. (444,586) (176,782)
----------- -----------
Total long-term debt .......................................... $ 2,331,857 $ 3,114,515
=========== ===========
</Table>
The Company's consolidated debt had a weighted average interest rate of
6.64% at June 30, 2001 compared to 7.08% at December 31, 2000.
The Company's primary bank revolving credit agreements consist of two
committed facilities - a 2-year term loan and a 5-year, multi-currency revolver.
As of June 30, 2001 and December 31, 2000, the 2-year term loan allows for
borrowings up to $269,355 and $296,486 and the 5-year, multi-currency revolver,
allows for borrowings up to $628,496 and $691,801, respectively. The 5-year,
multi-currency facility provides for borrowings up to $500,000 in foreign
currencies, of which $35,883 and $271,263 of the total borrowings were
denominated in various foreign currencies at June 30, 2001 and December 31,
2000, respectively. Both of these facilities are primarily used for general
corporate purposes and will mature in June 2002. Of the $305,238 borrowed under
the credit facilities at June 30, 2001, $269,355 was outstanding on the 2-year
term loan and $35,883 was outstanding on the 5-year, multi-currency revolver.
The covenants associated with the revolving credit agreements will continue
to be calculated using ongoing financial results prior to applying the
provisions of SAB No. 101. Interest rates for these facilities are based on
various indices as determined by the Company. The weighted average interest rate
on the two committed facilities was 5.57% and 7.95% at June 30, 2001 and
December 31, 2000, respectively. 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 June 30, 2001 and December
31, 2000.
In June 2001, the Company issued $345,000 in convertible subordinated
notes. The notes are convertible into common stock at an initial conversion
price of $6.92 and have an interest rate of 6.75%. The notes are noncallable
until June 2004 and mature in June 2008. The proceeds from the convertible
subordinated notes were used to reduce the Company's debt, including borrowings
under the Company's bank revolving credit agreements.
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During the six months ended June 30, 2001, the Company repurchased $23,720
of the Medium-term notes due through 2019 and $83,775 of the 7.00% senior notes
due 2015 (putable 2002) in the open market. In addition, the Company exchanged
15,276 shares of its common stock for $48,716 of the 6.30% Senior Notes due 2020
(putable 2003), $22,000 of the 7.375% Senior Notes due 2004, $10,000 of the
6.00% Senior Notes due 2005 and $3,495 of other notes. As a result of these
transactions, the Company recognized extraordinary gains on early
extinguishments of debt totaling $4,618 (net of tax of $2,952). Subsequent to
the second quarter of 2001, the Company repurchased $12,000 of the Medium-term
notes due through 2019 and $3,000 of the 7.00% senior notes due 2015 (putable
2002) in the open market. As a result of these transactions, the Company will
recognize an extraordinary gain on early extinguishments of debt in the third
quarter of 2001.
The Company had $79,470 and $68,753 at June 30, 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 June 30, 2001 approximately $15,464 was
related to two embedded options associated with the Company's 6.30% notes due
2020 (putable 2003), $53,451 related to letters of credit and the remaining
$10,555 was used to secure various other obligations.
7. 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 reported
as discontinued operations (see note four to the consolidated financial
statements).
The Company's reportable segment information was as follows:
<Table>
<Caption>
Reportable
Funeral Cemetery segments
- ---------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
Three months ended June 30,
2001................................................. $446,571 $172,140 $ 618,711
2000................................................. 458,292 173,976 632,268
Six months ended June 30,
2001................................................. $947,188 $349,299 $1,296,487
2000................................................. 992,732 318,695 1,311,427
- ---------------------------------------------------------------------------------------------------------------------
Gross profit:
Three months ended June 30,
2001................................................. $ 62,886 $ 23,684 $ 86,570
2000................................................. 47,565 23,589 71,154
Six months ended June 30,
2001................................................. $146,797 $ 50,661 $ 197,458
2000................................................. 154,948 32,511 187,459
- ---------------------------------------------------------------------------------------------------------------------
</Table>
11
12
The following table reconciles gross profit from reportable segments to the
Company's consolidated income (loss) from continuing operations before income
taxes, extraordinary gains and cumulative effect of accounting changes:
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit from reportable segments.............................. $ 86,570 $ 71,154 $ 197,458 $ 187,459
Lending subsidiary operating income.......................... - 914 - 1,674
General and administrative expenses.......................... (18,423) (19,734) (36,402) (39,847)
Restructuring and non-recurring charges (see note 9)......... (26,223) (13,281) (51,246) (13,281)
---------------------------------------------------------
Operating income................................................... 41,924 39,053 109,810 136,005
Interest expense............................................. (54,152) (73,565) (114,958) (143,114)
Other income................................................. 10,727 7,647 13,681 11,453
---------------------------------------------------------
Income (loss) from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting
changes.......................................................... $ (1,501) $ (26,865) $ 8,533 $ 4,344
=========================================================
</Table>
The Company's geographic segment information was as follows:
<Table>
<Caption>
North Other
America Europe Foreign Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
Three months ended June 30,
2001.................................................. $437,809 $158,880 $ 22,022 $ 618,711
2000.................................................. 427,998 168,266 40,281 636,545
Six months ended June 30,
2001.................................................. $909,376 $336,543 $ 50,568 $1,296,487
2000.................................................. 872,607 371,924 75,507 1,320,038
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Three months ended June 30,
2001.................................................. $52,456 $ 11,920 $(22,452) $ 41,924
2000.................................................. 29,295 1,423 8,335 39,053
Six months ended June 30,
2001.................................................. $126,692 $ 28,829 $(45,711) $ 109,810
2000.................................................. 92,991 29,946 13,068 136,005
- ----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization :
Three months ended June 30,
2001.................................................. $ 36,325 $ 10,847 $ 2,758 $ 49,930
2000.................................................. 41,300 13,991 3,393 58,684
Six months ended June 30,
2001.................................................. $ 73,128 $ 21,924 $ 5,150 $ 100,202
2000.................................................. 81,162 28,773 6,911 116,846
- ----------------------------------------------------------------------------------------------------------------------
Operating locations at June 30:
2001.................................................. 2,127 1,923 26 4,076
2000.................................................. 2,339 2,063 189 4,591
</Table>
12
13
Included in the North America figures above are the following United States
amounts:
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Revenues from external customers............................. $419,868 $407,656 $870,258 $830,868
Operating income............................................. $ 51,900 $ 26,337 $121,200 $ 85,675
Depreciation and amortization................................ $ 34,490 $ 39,474 $ 69,518 $ 77,405
Operating locations, at June 30,............................. 1,964 2,185
- ------------------------------------------------------------------------------------------------------------------------
</Table>
Included in the European figures above are the following French amounts:
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Revenues from external customers............................. $100,679 $101,247 $208,628 $220,188
Operating income (loss)...................................... $5,173 $(4,379) $9,246 $8,780
Depreciation and amortization................................ $5,830 $5,114 $9,608 $10,433
Operating locations, at June 30,............................. 1,152 1,238
- ------------------------------------------------------------------------------------------------------------------------
</Table>
8. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is presented below:
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (numerator):
Income (loss) from continuing operations before
extraordinary gains and cumulative effect
of accounting changes - basic.......................... $(10,656) $(16,443) $ (7,337) $ 4,494
After tax interest on convertible debentures............... - - - 190
-------- -------- ------- --------
Income (loss) from continuing operations before
extraordinary gains and cumulative effect
of accounting changes - diluted........................ $(10,656) $(16,443) $ (7,337) $ 4,684
- ---------------------------------------------------------------------------------------------------------------------------------
Shares (denominator):
Shares - basic............................................. 284,852 272,093 279,245 272,078
Stock options and warrants............................ - - - 25
Convertible debentures................................ - - - 698
-------- -------- ------- --------
Shares - diluted........................................... 284,852 272,093 279,245 272,801
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share from continuing operations before
extraordinary gains and cumulative effect of accounting changes:
Basic...................................................... $ (.04) $ (.06) $ (.03) $ .02
Diluted.................................................... $ (.04) $ (.06) $ (.03) $ .02
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
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14
9. 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 1999 Charge 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 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 $25,023 of which $25,458 was the 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.
In the second quarter of 2001, the Company recognized a charge of $26,223 of
which $25,710 related to the joint venture transaction involving the Company's
Australian operations recorded in the First Quarter 2001 Charge. Of the $25,710,
the Company recognized a loss of $20,830 for the recognition into earnings of
the cumulative foreign currency translation effect from the Australian
operations, which was previously included as a separate component of Accumulated
other comprehensive loss in the Company's stockholders' equity. The Company
further adjusted the First Quarter 2001 Charge by $4,880 as the result of
changes in Australia's net assets from the First Quarter of 2001 until closing
the transaction. The Company also made adjustments of $513 to increase its
Fourth Quarter 2000 Charge related to the planned divestitures of certain North
America locations. The Company will continue to make adjustments as actual
divestitures are made or better estimates become available throughout future
quarters.
14
15
The utilization of the various charges during the six months ended June 30, 2001
was as follows:
<Table>
<Caption>
Utilization for six months
ended June 30, 2001
--------------------------
Original | Balance at Additions or Balance at
charge | December 31, adjustments June 30,
amount | 2000 during 2001 Cash Non-cash 2001
-------- | ------------ ------------ ------- -------- -------
|
First Quarter 1999 Charge...... $ 89,884 | $ 6,210 $ - $ 987 $ 750 $ 4,473
Fourth Quarter 1999 Charge..... 272,544 | 86,959 - 12,425 (548) 75,082
Fourth Quarter 2000 Charge..... 434,415 | - 78 - 78 -
First Quarter 2001 Charge...... 25,458 | - 51,168 - 51,168 -
-------- | ------- ------- ------- ------- -------
Total..................... $822,301 | $93,169 $51,246 $13,412 $51,448 $79,555
======== | ======= ======= ======= ======= =======
</Table>
Of the remaining total restructuring accrual balance, approximately $78,125
relates to severance costs the majority of which will be paid out through 2007.
In addition, of the $79,555 remaining in reserves, $45,189 is included in
Accounts payable and accrued liabilities and $34,366 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.
The Australian joint venture was completed in May 2001, therefore 2001 operating
results described below reflect one month in the three months ended June 30,
2001 and four months in the six months ended June 30, 2001.
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
------ ------- ------- -------
Revenues
Funeral......................................... $2,957 $12,851 $13,374 $25,512
Cemetery........................................ 1,186 9,466 6,611 15,429
------ ------- ------- -------
$4,143 $22,317 $19,985 $40,941
====== ======= ======= =======
Operating income (loss) (excluding restructuring and
non-recurring charges)
Funeral......................................... $ (463) $ 1,363 $ 469 $ 2,543
Cemetery........................................ 170 3,750 2,037 5,652
------ ------- ------- -------
$ (293) $ 5,113 $ 2,506 $ 8,195
====== ======= ======= =======
</Table>
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 17 countries on four
continents. The Company's largest markets are North America and France, which
when combined, represent approximately 80% of the Company's total operating
locations and approximately 86% of the Company's total revenues.
The funeral and cemetery operations are organized into 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 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,
15
16
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 188 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 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 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 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 second quarter of
2001, the Company's overhead costs were below the levels in the same period of
2000. General and administrative expenses decreased 6.6% in the second 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 rollout
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
generally can 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 and six months ended June 30, 2001 and 2000 is summarized below.
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
------------------------------------------ ------------------------------------------
2001 2000 Increase 2001 2000 Increase
---------- ------------ ------------ ----------- ----------- -----------
Total operating free cash flow............ $63,898 $ 50,439 $13,459 $249,220 $131,350 $117,870
Recurring operating free cash flow........ $57,748 $ (27,032) $84,780 $118,527 $49,850 $68,677
</Table>
Total operating free cash flow reported above includes items of a
non-recurring nature. Included in total operating free cash flow of $249,220 for
the six months ended June 30, 2001 is $130,693 of non-recurring receipts of
funds comprised of an approximate $116,000 income tax refund received in the
first quarter of 2001 and amounts collected from funeral and cemetery trust
funds.
16
17
Included in total operating free cash flow of $131,350 for the six months
ended June 30, 2000 is $81,500 of non-recurring receipts of funds primarily
related to the collection of receivables from funeral and cemetery trust funds.
Improvements in recurring operating free cash flow for the three and six
months ended June 30, 2001 compared to the corresponding periods of 2000 was a
result of (i) less cash taxes paid, (ii) less cash interest paid, (iii)
reductions in capital expenditure levels, (iv) increases in funds received as a
result of the Company's surety bonding programs for prearranged funeral and
preneed cemetery activities, and (v) increases in the Company's cash flows from
operating activities.
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 operations 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. The Company's current cash flow goals are to have RECURRING
operating free cash flow at a run rate between $100,000 and $150,000 by the end
of 2001 and at a run rate between $200,000 and $250,000 by the end of 2002. The
Company remains comfortable with the current recurring operating free cash flow
goals for 2001 and 2002. Several factors in the second half of 2001 are expected
to have a greater impact on recurring operating free cash flow including higher
cash tax payments and capital expenditure levels as well as seasonally weaker
operating profits in the second half of 2001 compared to the first half of 2001.
The Company also expects TOTAL operating free cash flow to be between
$200,000 and $250,000 by the end of 2001. The Company had total operating free
cash flow of $249,220 in the first half of 2001. The Company expects to make
non-recurring cash payments of approximately $19,000 to the Company's U. S. cash
balance plan in the second half of 2001. With the pension plan cash payments and
the factors described above impacting recurring operating free cash flow in the
second half of 2001, the Company remains comfortable with the current total
operating free cash flow goal for 2001.
Long-Term Debt
<Table>
<Caption>
Debt at Debt at
June 30, 2001 December 31, 2000 Change
-------------- ----------------- ---------
Current maturities of long-term debt................. $ 444,586 $ 176,782 $ 267,804
Long-term debt....................................... 2,331,857 3,114,515 (782,658)
---------- ---------- ---------
Total debt...................................... $2,776,443 $3,291,297 $(514,854)
========== ========== =========
</Table>
The execution of the Company's debt reduction initiatives continues to exceed
expectations. During the six months ended June 30, 2001, the Company reduced its
total debt by $514,854. Funds available to achieve this debt reduction were
generated from the completion of the joint venture of the Company's Australian
operations, 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, the
extinguishment of certain debt obligations using the Company's common stock in
transactions with third parties and receipts of non-recurring funds from the
collection of receivables from funeral and cemetery trust funds. Subsequent to
June 30, 2001, the Company announced the joint venture of its Spanish and
Portuguese operations resulting in approximately $93,100 of net after tax cash
proceeds and the sale of its Norwegian operations resulting in approximately
$13,100 of net after tax cash proceeds. Additionally, the Company entered into a
definitive agreement to sell its funeral operations in The Netherlands for
17
18
approximately $18,500 of net after tax cash proceeds. When these transactions
are complete, the Company expects its total debt to be approximately $2,650,000.
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 Establishment of exclusive,
national, branded affinity relationships with employers, social, fraternal
and charitable groups or institutions.
o Implementation of Dignity Memorial(TM)funeral packages.
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.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the
three and six months ended June 30, 2001 and 2000. These results of operations
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 purposes of the following discussion, the Company's comparable
results in all periods presented represent financial results excluding
operations that were acquired or constructed after January 1, 2000 or divested
by the Company prior to June 30, 2001.
For the quarter ended June 30, 2001, the Company reported revenues of
$618,711, representing a 2.8% decrease compared to $636,545 in the second
quarter of 2000. Gross profit from continuing operations in the second quarter
of 2001 increased 20.1% to $86,570 compared to $72,068 in the same period of
2000. Gross margin percentage increased 23.9% to 14.0% in the second quarter of
2001 compared to 11.3% in the second quarter of 2000. For the three months ended
June 30, 2001, the Company reported earnings from continuing operations before
restructuring and non-recurring charges of $15,410, net loss of $10,585, diluted
earnings per share from continuing operations before restructuring and
non-recurring charges of $.05 ($.05 basic) and diluted loss per share of $.04
($.04 basic). The Company reported a loss from continuing operations before
restructuring and non-recurring charges of $8,010, net income of $4,556, diluted
loss per share from continuing operations before restructuring and non-recurring
charges of $.03 ($.03 basic) and diluted earnings per share of $.02 ($.02 basic)
for the second quarter of 2000.
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19
Results for the Company's continuing operations by geographic segment are
detailed in the following tables.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2001
COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
THREE MONTHS ENDED JUNE 30, 2001
TOTAL
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $285,971 65.3% $153,686 96.7% $6,914 31.4% $446,571 72.2%
Cemetery........ 151,838 34.7% 5,194 3.3% 15,108 68.6% 172,140 27.8%
------------------------------------------------------------------------------------------------------------
$437,809 100.0% $158,880 100.0% $22,022 100.0% $618,711 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $50,676 17.7% $11,663 7.6% $ 547 7.9% $62,886 14.1%
Cemetery........ 20,115 13.2% 858 16.5% 2,711 17.9% 23,684 13.8%
------------------------------------------------------------------------------------------------------------
$70,791 16.2% $12,521 7.9% $3,258 14.8% $86,570 14.0%
============================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $281,973 65.3% $153,600 96.7% $3,957 22.1% $439,530 72.3%
Cemetery........ 149,510 34.7% 5,194 3.3% 13,922 77.9% 168,626 27.7%
------------------------------------------------------------------------------------------------------------
$431,483 100.0% $158,794 100.0% $17,879 100.0% $608,156 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $50,932 18.1% $11,633 7.6% $1,010 25.5% $63,575 14.5%
Cemetery........ 19,842 13.3% 858 16.5% 2,541 18.3% 23,241 13.8%
------------------------------------------------------------------------------------------------------------
$70,774 16.4% $12,491 7.9% $3,551 19.9% $86,816 14.3%
============================================================================================================
</Table>
19
20
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2000
TOTAL
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $279,091 65.2% $162,062 96.3% $17,139 42.5% $458,292 72.0%
Cemetery........ 144,630 33.8% 6,204 3.7% 23,142 57.5% 173,976 27.3%
Other Services.. 4,277 1.0% - - - - 4,277 0.7%
------------------------------------------------------------------------------------------------------------
$427,998 100.0% $168,266 100.0% $40,281 100.0% $636,545 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $44,028 15.8% $ 1,527 0.9% $2,010 11.7% $47,565 10.4%
Cemetery........ 16,640 11.5% 624 10.1% 6,325 27.3% 23,589 13.6%
Other Services.. 914 21.4% - - - - 914 21.4%
------------------------------------------------------------------------------------------------------------
$61,582 14.4% $ 2,151 1.3% $8,335 20.7% $72,068 11.3%
============================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $270,413 65.6% $159,742 96.3% $4,288 23.9% $434,443 72.9%
Cemetery........ 141,940 34.4% 6,204 3.7% 13,676 76.1% 161,820 27.1%
------------ -------------- ------------- ------------- -------------- ------------ ------------ -----------
$412,353 100.0% $165,946 100.0% $17,964 100.0% $596,263 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $44,724 16.5% $ 1,004 0.6% $ 647 15.1% $46,375 10.7%
Cemetery........ 16,355 11.5% 624 10.1% 2,575 18.8% 19,554 12.1%
------------------------------------------------------------------------------------------------------------
$61,079 14.8% $ 1,628 1.0% $3,222 17.9% $65,929 11.1%
============================================================================================================
</Table>
The following factors contributed to the results for the second quarter of 2001.
o Funeral services performed by the Company's worldwide comparable funeral
service locations were 3.4% above comparable funeral services in the second
quarter of 2000 while total funeral services performed were 1.6% below the
same period in the prior year due primarily to the disposition of Australia
in the second quarter of 2001.
o Total cemetery revenue stabilized during the second quarter of 2001 and on
a comparable basis experienced an increase in revenue and gross margin as a
result of the continued focus on enhancing cash flow. As a result of this
focus, the Company's sales mix is shifting toward more cash flow positive
sales, such as heritage cemetery property sales, which can also 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 $14,000 on revenues and approximately $2,000 on gross
profits primarily as a result of the weakened Euro relative to the U.S.
dollar in the second quarter of 2001 compared to the second quarter of
2000.
Funeral
The increase in comparable North America funeral revenues was primarily the
result of a 3.1% increase in the volume of funeral services performed coupled
with a 1.2% increase in the average revenue per funeral service. In the second
quarter of 2001, comparable North America volume increased to 71,873 cases
compared to 69,737 cases in the second quarter of 2000. The
20
21
comparable average revenue per funeral service increased to $3,923 in the second
quarter of 2001 from $3,878 in the same period prior year primarily as a result
of the continued implementation of the Company's revenue growth initiatives,
such as Dignity Memorial(TM) packaged funeral plans as well as a focus on
training the Company's funeral service personnel in customer satisfaction
initiatives. As a result of increased revenue and positive effects of the
Company's cost rationalization programs, the Company also experienced an
increase in comparable North America funeral gross profit and margin percentage.
Comparable European funeral revenues experienced a decline in the second
quarter of 2001 compared to the second quarter of 2000 as a result of the
negative effect of foreign currency translation primarily related to the Euro.
Despite an increase in volume of 3.8% to 62,164 cases in the second quarter of
2001 from 59,876 cases in the second quarter of 2000, comparable funeral revenue
was impacted $11,200 by the negative effect of the weakening of the Euro against
the U. S. dollar. Comparable gross profit and margin percentage in the European
operations improved as a result of cost rationalization programs as well as
increases in funeral services performed and higher average revenue per funeral
service.
Cemetery
The Company is continuing actions initiated in 2000 to enhance cash flows of
North America cemetery operations. Actions include adjustments to cemetery
compensation plans and concentration on sales of deliverable cemetery property
and merchandise, as defined by applicable state trusting laws. The sale of
deliverable cemetery property and merchandise generally allows for revenue
recognition under the Company's cemetery accounting policies. As a result of the
above focus, the Company's sales mix is shifting, causing an increase in revenue
in the second quarter of 2001 compared to the same period of 2000. Comparable
North America gross profit and margin percentage has also been positively
impacted by the above mentioned increases in revenue coupled with the reduction
in costs as a result of changes in cemetery compensation plans.
Other Income and Expenses
General and administrative expenses decreased $1,311 to $18,423 in the second
quarter of 2001 compared to the second 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
rollout of the Company's Central Processing Centers in its North American
operating clusters. Expressed as a percentage of revenue from continuing
operations, general and administrative expenses were 3.0% for the three months
ended June 30, 2001, compared to 3.1% for the comparable period in 2000.
Interest expense decreased $19,413 or 26.4% to $54,152 in the second
quarter of 2001 compared to the same period of 2000. The decrease in interest
expense for the three months ended June 30, 2001 reflects the decline in the
Company's long-term debt balance compared to the same period in 2000 as well as
lower interest rates in the first quarter of 2001 compared to the first quarter
of 2000. For the three months ended June 30, 2001, the average outstanding debt
was $2,900,000 compared to the average outstanding debt for the three months
ended June 30, 2000 of $3,840,000.
Other income was $10,727 in the quarter ended June 30, 2001 compared to
$7,647 in the same period of 2000. Other income primarily consists of income
from notes receivable remaining subsequent to selling a portion of 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).
Excluding the restructuring and non-recurring charges, the provision for
income taxes reflects a 37.7% effective tax rate for the three months ended June
30, 2001 compared to a 41.0% effective benefit rate for the comparable period in
2000. The restructuring charge in the second quarter of 2001 is primarily
related to the completion of the joint venture of the Company's Australian
operations. The charge represented the earnings recognition of the cumulative
foreign currency translation effect for the Australian operations previously
included as a separate component of the Company's consolidated stockholders'
equity. Because no tax benefit is associated with this charge, the final
provision for income taxes reflects an unusually high effective tax rate in the
second quarter of 2001. The benefit rate calculated in the second quarter of
2000 was the result of a reduction in the effective tax rate due to actual
operating results on a year to date basis contributed by the international and
domestic jurisdictions.
21
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Cremations
There has been a growing trend over the last several 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 second quarter 2001, 37.3% of all funeral services
performed by the Company were cremation cases, compared to 36.8% 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 National Cremation(TM) Service, the Company owned largest single
provider of cremation services in North America, from its existing base in
fourteen states to eighteen states by the end of 2002.
Restructuring and Non-Recurring Charges
In the second quarter of 2001, the Company recorded a non-cash charge of $26,223
primarily related to the recognition into earnings of the cumulative foreign
currency translation effect from the Australian operations, which was previously
included as a separate component of Accumulated other comprehensive loss in the
Company's stockholders' equity (see note nine to the consolidated financial
statements in Item 1 of this Form 10-Q).
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2001
COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
SIX MONTHS ENDED JUNE 30, 2001
TOTAL
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $601,521 66.1% $325,259 96.6% $20,408 40.4% $ 947,188 73.1%
Cemetery........ 307,855 33.9% 11,284 3.4% 30,160 59.6% 349,299 26.9%
------------------------------------------------------------------------------------------------------------
$909,376 100.0% $336,543 100.0% $50,568 100.0% $1,296,487 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $119,050 19.8% $26,691 8.2% $1,056 5.2% $ 146,797 15.5%
Cemetery........ 43,152 14.0% 3,108 27.5% 4,401 14.6% 50,661 14.5%
------------------------------------------------------------------------------------------------------------
$162,202 17.8% $29,799 8.9% $5,457 10.8% $ 197,458 15.2%
============================================================================================================
</Table>
22
23
<Table>
<Caption>
COMPARABLE
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $588,707 66.1% $325,055 96.6% $7,034 23.0% $ 920,796 73.2%
Cemetery........ 302,577 33.9% 11,284 3.4% 23,549 77.0% 337,410 26.8%
------------------------------------------------------------------------------------------------------------
$891,284 100.0% $336,339 100.0% $30,583 100.0% $1,258,206 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $119,414 20.3% $26,626 8.2% $ 587 8.3% $ 146,627 15.9%
Cemetery........ 42,302 14.0% 3,108 27.5% 2,364 10.0% 47,774 14.2%
------------------------------------------------------------------------------------------------------------
$161,716 18.1% $29,734 8.8% $2,951 9.6% $ 194,401 15.5%
============================================================================================================
</Table>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2000
TOTAL
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $602,451 69.0% $357,068 96.0% $33,213 44.0% $ 992,732 75.2%
Cemetery........ 261,545 30.0% 14,856 4.0% 42,294 56.0% 318,695 24.1%
Other Services.. 8,611 1.0% - - - - 8,611 0.7%
------------------------------------------------------------------------------------------------------------
$872,607 100.0% $371,924 100.0% $75,507 100.0% $1,320,038 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $123,600 20.5% $28,065 7.9% $3,283 9.9% $ 154,948 15.6%
Cemetery........ 19,292 7.4% 3,434 23.1% 9,785 23.1% 32,511 10.2%
Other Services.. 1,674 19.4% - - - - 1,674 19.4%
------------------------------------------------------------------------------------------------------------
$144,566 16.6% $31,499 8.5% $13,068 17.3% $ 189,133 14.3%
============================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
------------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
------------------------------------------------------------------------------------------------------------
Revenues:
Funeral......... $584,160 69.4% $351,306 95.9% $7,701 22.3% $ 943,167 75.9%
Cemetery........ 257,670 30.6% 14,856 4.1% 26,865 77.7% 299,391 24.1%
------------------------------------------------------------------------------------------------------------
$841,830 100.0% $366,162 100.0% $34,566 100.0% $1,242,558 100.0%
============================================================================================================
Gross profit and
margin percentage:
Funeral......... $123,929 21.2% $26,487 7.5% $ 740 9.6% $ 151,156 16.0%
Cemetery....... 18,609 7.2% 3,434 23.1% 4,133 15.4% 26,176 8.7%
------------------------------------------------------------------------------------------------------------
$142,538 16.9% $ 29,921 8.2% $4,873 14.1% $ 177,332 14.3%
============================================================================================================
</Table>
23
24
Funeral
For the six months ended June 30, 2001, comparable funeral revenues decreased
2.4% to $920,796 while comparable gross profit declined 3.0% to $146,627. These
decreases are primarily attributed to a decrease in funeral services performed
in the first quarter of 2001 coupled with the negative effect of foreign
currency translation.
Comparable North America funeral revenues increased 0.8% to $588,707 in the
six months ended June 30, 2001 due to an increase in the average revenue per
funeral service despite less funeral services performed during this period.
Comparable volume declined 1.2% to 150,040 cases while the average revenue per
funeral service for comparable sales increased 2.0% to $3,924 during the first
six months of 2001.
Comparable European funeral revenue decreased 7.5% to $325,055 due to the
negative effect of foreign currency translation and a decrease in deaths in the
first six months of 2001 compared to 2000. The negative effect of foreign
currency impacted comparable European funeral revenues approximately $24,000 in
the first six months of 2001. This coupled with a 6.3% decline in volume to
131,050 accounts for the remaining change in comparable European funeral
revenue. Comparable European gross profit improved slightly during the first six
months of 2001 compared to the same period in 2000 as a result of positive
effects of the Company's cost rationalization programs.
Other Foreign comparable revenues and gross profit declined as a result of
2.3% lower volume in the Company's South America operations.
Cemetery
Comparable cemetery revenues increased 12.7% to $337,410 and gross profit
increased 82.5% to $47,774 in the first six months of 2001 compared to 2000
primarily related to increased revenue and gross profit in the Company's North
America operations. Comparable North America cemetery revenues increased 17.4%
to $302,577 while gross profit increased 127.3% to $42,302 in the first six
months of 2001. The Company is continuing actions initiated in 2000 to enhance
cash flows from cemetery operations. Such initiatives include adjustments to
cemetery compensation plans and concentration on sales of cemetery property and
merchandise that can be delivered, as defined by applicable state trusting laws.
The sale of deliverable cemetery property and merchandise generally allows for
revenue recognition under the Company's cemetery accounting policies. As a
result, the Company has experienced increased revenue in the first six months of
2001 compared to the same period of 2000.
The decline in Other Foreign comparable cemetery revenue is the result of
reduced preneed cemetery sales activities as a result of the current instability
of the economy of Argentina.
Other Income and Expenses
General and administrative expenses decreased $3,445 to $36,402 in the first six
months of 2001 compared to the first six months of 2000. The decrease relates to
the reduction in costs after the Company implemented its North America
proprietary point of sale system in 2000 as well as completing the initial
rollout of the Company's Central Processing Centers in its North America
operating clusters. Expressed as a percentage of revenue from continuing
operations, general and administrative expenses were 2.8% and 3.0% for the six
months ended 2001 and 2000, respectively.
Interest expense decreased $28,156 or 19.7% to $114,958 in the first six
months of 2001 compared to the same period in 2000. The decrease in interest
expense is related to the decline in the Company's long-term debt balance in
2001 compared to 2000 as well as lower interest rates in the six months ended
June 30, 2001 compared to the same period prior year. For the six months ended
June 30, 2001, the average outstanding debt was $3,050,000 compared to the
average outstanding debt for the six months ended June 30, 2000 of $3,900,000.
Other Income was $13,681 in the six months ended June 30, 2001 compared to
$11,453 in the same period of 2000. Other income primarily consists of income
from notes receivable remaining subsequent to selling a portion of 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).
24
25
The provision for income taxes before restructuring and non-recurring
charges reflects an effective tax rate of 38.4% for the six months ended June
30, 2001 compared to an effective tax rate of 26.7% for the comparable period in
2000. The increase in the effective tax rate in the first six months of 2001 is
the result of a higher 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. Included in restructuring and
non-recurring charges in the current year is an impairment charge as a result of
the Company completing the joint venture of its Australian operations. Because
the effective benefit associated with the restructuring and non-recurring
charges is 13.9% and therefore lower than the current tax expense on continuing
operations, the consolidated effective tax rate is 186.0%. Similarly in the
prior year, a restructuring and non-recurring charge of $13,281 was recorded
with a tax benefit of 36.5%. As a result, the consolidated effective tax rate is
3.5% in the six months ended June 30, 2000.
Restructuring and Non-Recurring Charges
The Company recorded a non-cash charge of $51,246 primarily related to the joint
venturing of its Australian operations. An impairment charge totaling $30,338
was recorded as a result of joint venturing its Australia operations. Further,
the Company recognized into earnings $20,830 relating to the cumulative foreign
currency translation effect from the Australian operations, which was previously
included as a separate component of Accumulated other comprehensive loss in the
Company's stockholders' equity (see note nine to the consolidated financial
statements in Item 1 of this Form 10-Q).
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 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 targets is as follows:
<Table>
<Caption>
Six Months Ended 2001 Benchmarks and
June 30, 2001 Run Rate Targets 2002 Run Rate Targets
--------------------------------------------------------------------
Consolidated cash flow provided by operating activities.... $272,355
Payments on restructuring charges.......................... 13,412
--------
Adjusted cash flow from operating activities........ 285,767
Capital expenditures................................. (36,547)
--------
TOTAL OPERATING FREE CASH FLOW...................... 249,220 $200,000 to $250,000
Less: Non-recurring receipts of funds, net......... (130,693)
--------
RECURRING OPERATING FREE CASH FLOW.................. $118,527 $100,000 to $150,000 $200,000 to $250,000
========
Estimated after tax proceeds from sales of assets and
non-core businesses................................... $165,152 $200,000 to $500,000
======== ====================
Total cash flow available........................... $414,372 $400,000 to $750,000
======== ====================
</Table>
The net non-recurring receipts of funds totaling $130,693 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
25
26
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 June 30, 2001 was $2,776,443, representing a
decrease in total debt of $514,854 since December 31, 2000. Since September 30,
1999, the peak level of Company debt, the Company has reduced its debt by
$1,423,580 or 33.9%. Subsequent to June 30, 2001, the Company announced the
joint venture of its Spanish and Portuguese operations resulting in
approximately $93,100 of net after tax cash proceeds and the sale of its
Norwegian operations resulting in approximately $13,100 of net after tax cash
proceeds. Additionally, the Company entered into a definitive agreement to sell
its funeral operations in The Netherlands for approximately $18,500 of net after
tax cash proceeds. When these transactions are complete, the Company expects its
total debt to be approximately $2,650,000.
Of the Company's total debt at June 30, 2001 of $2,776,443, debt of
$305,238 is related to the Company's primary bank credit agreements maturing in
June 2002. These credit agreements provide for total borrowings up to $897,851
as of June 30, 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. At June 30, 2001, the Company was in
compliance with the above mentioned covenants.
As mentioned above, the Company's total debt balance after the completion
of the recent joint venture and sales of certain European operations is expected
to be approximately $2,650,000. Approximately $320,000 of the total $2,650,000
will be classified as current maturities of long-term debt. With non-recurring
receipts of funds expected in the second half of 2001 and in 2002, improvements
in recurring operating free cash flow described earlier, proceeds expected from
sales of certain funeral and cemetery operations in North America and possible
proceeds from additional joint venture programs primarily with the Company's
international operations, the Company believes funds will be available to reduce
these current 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 June 30, 2001 and 2000 of
$128,804 and $118,666, respectively. For the six months ended June 30, 2001 and
2000, the Company reported EBITDA before restructuring and non-recurring charges
of $274,939 and $277,585, 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 support 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 June 30, 2001 and
December 31, 2000 was $270,508 and $215,350, respectively.
26
27
Sources and Uses of Cash
Net cash provided by operating activities was $272,355 for the six months ended
June 30, 2001 compared to $195,055 for the same period of 2000. Included in the
$195,055 for the six months ended June 30, 2000 is $92,269 of net cash provided
by discontinued operations. From continuing operations, net cash provided by
operating activities was $102,786 for the six months ended June 30, 2000. The
Company received funds of approximately $33,000 and $81,500 in the first half of
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 $218,069 primarily as a result of
approximately $116,000 of cash received from certain income tax refunds, less
cash taxes paid, increases in funds received from the Company's surety bonding
programs for prearranged funeral and preneed cemetery activities and from
general increases in the Company's cash flows generated from its funeral and
cemetery operations as a result of the Company's current cash flow initiatives.
Net cash provided by investing activities was $106,588 for the six months
ended June 30, 2001 compared to net cash used in investing activities of
$102,595 for the same period of 2000. Included in the $102,595 in the first half
of 2000 is $82,022 of net cash used in investing activities by discontinued
operations. Net cash used in investing activities from continuing operations was
$20,573 for the six months ended June 30, 2000. The increase of $127,161 in net
cash provided by investing activities from continuing operations in the first
six months of 2001 compared to the same period of 2000 is primarily related to
an increase of $18,650 in proceeds received from sales of property and equipment
and from $106,900 of pretax proceeds received in the completion of the joint
venture of the Company's Australian operations in May 2001.
Net cash used in financing activities was $370,142 for the six months ended
June 30, 2001 compared $107,159 for the same period of 2000. Included in the
$107,159 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 source of cash, net cash used in financing activities was
$250,657 for the six months ended June 30, 2000. The increase of $119,485 in net
cash used in financing activities in the first half of 2001 compared to the same
period of 2000 is due to a greater reduction in the Company's debt achieved in
the first half of 2001 compared to the first half of 2000. The Company primarily
used funds from certain income tax refunds, collection of receipts from funeral
and cemetery trust funds, proceeds from sales or property and equipment,
proceeds from the completion of the joint venture of the Company's Australian
operations and its cash flow from operations to reduce its debt in the first
half 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. Realized 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
trust fund 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
contract portfolio. 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
and all costs 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
27
28
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 prearrangement activities. At June 30, 2001, the Company had deferred
revenues of $6,243,408, of which $4,423,332 is Deferred prearranged funeral
contract revenues and $1,820,076 is Deferred preneed cemetery contract revenues,
to be recognized as revenue in future periods. For the six months ended June 30,
2001 and 2000, the percentage of North American funeral services performed which
were previously prearranged was 29.7% and 28.1%, respectively, and is expected
to increase over time. Net prearranged funeral sales were approximately $270,000
for the six months ended June 30, 2001 compared to $295,000 for the six months
ended June 30, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations and establishes one method - the purchase method - for accounting
for such transactions. SFAS No. 142 addresses goodwill and other intangible
assets and redefines useful lives, amortization periods and impairment of
goodwill. Under the provisions, goodwill will no longer be amortized, but will
be tested for impairment annually. Currently, the Company has $2,020,504 in
goodwill presented as Names and reputations in the Company's consolidated
balance sheet. Amortization of goodwill will continue to be amortized through
December 31, 2001 and was $31,086 and $32,861 for the six months ended June 30,
2001 and 2000, respectively. SFAS No. 142 requires goodwill to be tested for
impairment by assessing the fair value of reporting units, generally one level
below reportable segments. The adoption of SFAS No. 142 may result in a non-cash
charge that could have a significant effect on the Company's financial condition
and results of operations. The Company is required to adopt SFAS No. 141 for any
acquisitions subsequent to June 30, 2001 and to adopt SFAS No. 142 during the
first quarter of the year ending December 31, 2002.
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.
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 $3.34
per diluted share.
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:
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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 purchase certain funeral
and cemetery operations and to enter into and consummate alliances and
joint ventures with the Company.
4) 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.
5) 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.
6) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including tax and accounting
policies.
7) 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.
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.
For 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 August 13, 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.
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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.
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 to discuss possible
resolution of the case and to exchange information on each sides' position. The
meeting was held and the parties reported at a status conference on August 3,
2001 to Judge Hughes that they did not resolve the case. The Court indicated
that it would consider the pending motion to dismiss after allowing the parties
to supplement their briefs.
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. In
June 2001, the Court entered orders dismissing two officers, an employee of the
Company and PricewaterhouseCoopers LLP from the case. The Company and the
remaining defendants appealed the denial of their request for arbitration to the
Texas Court of Appeals in Beaumont, but the appeal was denied on June 29, 2001.
On July 19, 2001, the Company appealed this decision to the Texas Supreme Court.
On August 13, 2001 Plaintiffs filed their response.
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.
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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 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. The
trial court issued an order setting the matter for trial on
November 19, 2001.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 10, 2001, the Company held its annual meeting of shareholders and
elected three directors. The shares voting on the director nominees were cast as
follows:
<Table>
<Caption>
Abstentions or
Nominee Votes for votes withheld
- ---------------------------- ---------------- ------------------
B. D. Hunter............... 233,597,454 8,168,402
Victor L. Lund............. 234,437,601 7,328,255
John W. Mecom, Jr.......... 234,384,439 7,381,417
</Table>
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In addition, the shareholders approved the Company's 2001 Stock Plan for
Non-Employee Directors and Director Fee Plan, which plans are described in the
Company's proxy statement dated April 13, 2001. The shares voting were cast as
follows:
<Table>
<Caption>
Abstentions or Broker
Proposal Votes for Votes against votes withheld non-votes
- ------------------------------------------------------ -------------- ---------------- ----------------- ------------
2001 Stock Plan for Non-Employee Directors.......... 226,328,499 13,585,016 1,852,340 0
Director Fee Plan.................................... 230,248,850 10,559,565 957,441 0
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the six months ended
June 30, 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).
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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 June 30, 2001, the Company filed a report
on Form 8-K dated June 27, 2001 reporting (i) under "Item 5. Other
Events" that, among other things, the Company entered into a
Purchase Agreement with underwriters for the public offering of the
Company's 6 3/4% Convertible Subordinated Notes due 2008, and (ii)
under "Item 7. Financial Statements and Exhibits" certain exhibits
related to said public offering.
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.
August 14, 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 six months ended
June 30, 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).