FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 identification
incorporation or organization) number)
1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the registrant's common stock as of
November 9, 2001 was 291,691,481 (net of treasury shares).
SERVICE CORPORATION INTERNATIONAL
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 2001 and 2000 3
Consolidated Balance Sheet -
September 30, 2001 and December 31, 2000 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 5
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 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 - 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Part II. Other Information
Item 1. Legal Proceedings 31 - 32
Item 6. Exhibits and Reports on Form 8-K 32 - 33
Signature 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
(In thousands, except per share amounts) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues......................................................... $ 582,979 $615,703 $1,879,466 $1,935,741
Costs and expenses................................................ (515,960) (543,841) (1,614,989) (1,674,746)
------------ ------------ -------------- -------------
Gross profit...................................................... 67,019 71,862 264,477 260,995
General and administrative expenses............................... (17,049) (20,185) (53,451) (60,031)
Restructuring and non-recurring charges........................... (6,185) - (57,431) (13,281)
------------ ------------ -------------- -------------
Operating income.................................................. 43,785 51,677 153,595 187,683
Interest expense.................................................. (49,432) (73,256) (164,390) (216,370)
Other income...................................................... 4,967 6,068 12,648 11,902
Gains from dispositions........................................... 5,543 141 11,543 5,759
------------ ------------ -------------- -------------
(38,922) (67,047) (140,199) (198,709)
------------ ------------ -------------- -------------
Income (loss) from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting
changes........................................................ 4,863 (15,370) 13,396 (11,026)
(Provision) benefit for income taxes.............................. (681) 4,524 (16,551) 4,674
------------ ------------ -------------- -------------
Income (loss) from continuing operations before extraordinary
gains and cumulative effect of accounting changes.............. 4,182 (10,846) (3,155) (6,352)
Income from discontinued operations (net of income taxes of
$3,257 and $10,825, respectively).............................. - 4,953 - 15,716
Loss on disposal of discontinued operations (net of income taxes
of $73,839).................................................... - (43,733) - (43,733)
Extraordinary gains on early extinguishments of debt (net of
income taxes of $63, $3,015 and $12,630, respectively)......... 99 - 4,717 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)....................................... $ 4,281 $(49,626) $ (6,039) $ (921,711)
============ ============ ============= =============
Earnings (loss) per share:
Basic:
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting changes..................................... $ .02 $ (.04) $ (.01) $ (.02)
Income from discontinued operations....................... - .02 - .06
Loss on disposal of discontinued operations............... - (.16) - (.16)
Extraordinary gains on early extinguishments of debt...... .00 - .02 .08
Cumulative effect of accounting changes................... - - (.03) (3.34)
------------ ----------- ------------- -------------
Net income (loss)............................... $ .02 $ (.18) $ (.02) $ (3.38)
============ ============ ============== =============
Diluted:
Income (loss) from continuing operations before
extraordinary gains and cumulative effect of
accounting changes..................................... $ .02 $ (.04) $ (.01) $ (.02)
Income from discontinued operations....................... - .02 - .06
Loss on disposal of discontinued operations............... - (.16) - (.16)
Extraordinary gains on early extinguishments of debt...... .00 - .02 .08
Cumulative effect of accounting changes................... - - (.03) (3.34)
------------ ------------ -------------- -------------
Net income (loss)............................... $ .02 $ (.18) $ (.02) $ (3.38)
============ ============ ============= =============
Basic weighted average number of shares............................ 290,258 272,210 282,916 272,122
============ =========== ============= =============
Diluted weighted average number of shares.......................... 293,763 272,210 282,916 272,122
============ =========== ============= =============
</Table>
(See notes to consolidated financial statements)
3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
September 30, December 31,
(In thousands, except share amounts) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 43,262 $ 47,909
Receivables, net of allowances................................................. 384,066 449,989
Inventories.................................................................... 178,580 170,056
Other ......................................................................... 110,351 239,345
--------------- --------------
Total current assets......................................................... 716,259 907,299
--------------- --------------
Prearranged funeral contracts ...................................................... 4,050,429 4,080,367
Long-term receivables, net of allowances ........................................... 1,308,503 1,329,375
Cemetery property, at cost.......................................................... 1,945,430 2,026,484
Property, plant and equipment, at cost (net)........................................ 1,478,955 1,675,263
Deferred charges and other assets................................................... 695,821 693,975
Names and reputations (net)......................................................... 1,950,814 2,162,511
--------------- --------------
$ 12,146,211 $ 12,875,274
=============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 458,249 $ 501,355
Current maturities of long-term debt........................................... 208,793 176,782
Income taxes .................................................................. 50,433 6,143
--------------- --------------
Total current liabilities.................................................... 717,475 684,280
--------------- --------------
Long-term debt...................................................................... 2,313,901 3,091,320
Deferred prearranged funeral contract revenues ..................................... 4,537,578 4,537,669
Deferred preneed cemetery contract revenues......................................... 1,793,964 1,815,157
Deferred income taxes............................................................... 450,000 503,292
Other liabilities .................................................................. 193,810 267,735
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
291,371,930 and 272,507,010, issued and outstanding
(net of 2,502,190 treasury shares, at par)................................... 291,372 272,507
Capital in excess of par value................................................. 2,242,694 2,156,824
Accumulated deficit............................................................ (222,392) (216,353)
Accumulated other comprehensive loss........................................... (172,191) (237,157)
-------------- --------------
Total stockholders' equity.................................................. 2,139,483 1,975,821
--------------- --------------
$ 12,146,211 $ 12,875,274
=============== ==============
(See notes to consolidated financial statements)
4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
Nine months ended
September 30,
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................................... $ (6,039) $ (921,711)
Adjustments to reconcile net loss to net cash provided by operating activities:
Income from discontinued operations, net of taxes........................................ - (15,716)
Loss on disposal of discontinued operations, net of tax.................................. - 43,733
Extraordinary gains on early extinguishments of debt, net of taxes....................... (4,717) (21,973)
Cumulative effect of accounting changes, net of taxes.................................... 7,601 909,315
Depreciation and amortization............................................................ 148,155 167,920
Benefit for deferred income taxes........................................................ (36,307) (31,613)
Restructuring and non-recurring charges.................................................. 57,431 13,281
Payments on restructuring and non-recurring charges...................................... (18,895) (41,020)
Net effect of interest rate component of swap terminations............................... - (32,840)
Gains from dispositions.................................................................. (11,543) (5,759)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease in receivables................................................................ 43,004 130,055
Decrease (increase) in other assets.................................................... 111,954 (55,697)
Decrease in payables and other liabilities ............................................ (11,944) (57,134)
Other.................................................................................. 9,495 (9,211)
Net effect of prearranged funeral production and maturities.............................. 44,132 90,179
---------- ----------
Net cash provided by continuing operations .................................................. 332,327 161,809
Net cash provided by discontinued operations ................................................ - 147,033
---------- ----------
Net cash provided by operating activities ................................................... 332,327 308,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................................... (54,325) (58,392)
Proceeds from sales of property and equipment............................................ 88,091 38,623
Proceeds from completion of joint ventures and sales of equity investments............... 285,688 278,025
Acquisitions, net of cash acquired....................................................... - 800
Proceeds from sale of loans by lending subsidiary........................................ - 84,803
Loans issued by lending subsidiary....................................................... - (5,104)
Principal payments received on loans issued by lending subsidiary........................ - 21,649
Deposits of restricted funds, net........................................................ (20,073) (32,155)
Other.................................................................................... (1,007) 158
---------- ----------
Net cash provided by continuing operations................................................... 298,374 328,407
Net cash used in discontinued operations..................................................... - (122,966)
---------- ----------
Net cash provided by investing activities.................................................... 298,374 205,441
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in borrowings under revolving credit agreements............................. (656,426) (427,540)
Proceeds from long-term debt issued...................................................... 345,000 -
Payments of debt......................................................................... (178,724) (44,324)
Early extinguishments of debt............................................................ (139,902) (194,097)
Net effect of cross-currency component of swap terminations.............................. - 143,498
Bank overdrafts and other................................................................ (6,308) (1,601)
---------- ----------
Net cash used in financing activities........................................................ (636,360) (524,064)
Effect of foreign currency................................................................... 1,012 (2,759)
---------- ----------
Net decrease in cash and cash equivalents.................................................... (4,647) (12,540)
Adjust for change in cash and cash equivalents associated with discontinued operations....... - (6,619)
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.......................... $ 43,262 $ 38,655
========== ==========
(See notes to consolidated financial statements)
5
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 income:
Net loss................................... (6,039) (6,039)
Other comprehensive income:
Foreign currency translation............ 25,976 25,976
Reclassification adjustment for realized
loss on foreign currency translation.. 38,990 38,990
------------ ----------
Total other comprehensive income... 64,966
----------
Comprehensive income...................... 58,927
Common stock issued:
Stock option exercises and stock grants... 1,597 7,551 9,148
Contribution to employee 401(k)........... 1,824 7,014 8,838
Debenture conversions..................... 244 5,284 5,528
Debt extinguished using common stock...... 15,200 66,021 81,221
-------- ---------- ---------- ----------- ----------
Balance at September 30, 2001................. $291,372 $2,242,694 $ (222,392) $ (172,191) $2,139,483
======== ========== ========== =========== ==========
The Company's comprehensive loss for the nine months ended September 30, 2000 of
$1,038,322 consisted of a net loss of $921,711, a foreign currency translation
loss adjustment of $154,877, an unrealized loss on securities of $4,792, a
reclassification adjustment for realized loss on securities of $27,014, and a
reclassification adjustment for realized loss on foreign currency translation of
$16,044.
(See notes to consolidated financial statements)
6
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 September 30, 2001, the Company
operated 3,188 funeral service locations, 485 cemeteries and 178 crematoria
located in 12 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. The
Company's 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 189 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
nine months ended September 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 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: Preparation of the
consolidated 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. As a result, actual results could differ
from these estimates.
The Company has $1,793,964 of deferred preneed cemetery contract revenues
recognized on the consolidated balance sheet primarily relating to obligations
to delivery cemetery merchandise and services to consumers at a future time (see
note three to the consolidated financial statements). In connection with the
Company's ongoing review of these obligations in order to collect funds due to
the Company from the applicable cemetery trust funds, the Company recognized in
the third quarter a change in estimate of approximately $30,000 or 1.7% in
addition to the normal quarterly activity recognized in deferred preneed
cemetery contract revenues. As part of its ongoing cash flow initiatives, the
Company intends to continue the review of these obligations, however, the impact
recognized in future periods will depend on the outcome of such reviews.
7
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 Company has $1,950,814 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 $45,315
and $49,002 for the nine months ended September 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 is expected to result in a non-cash charge that could
have a significant effect on the Company's consolidated balance sheet and
consolidated statement 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.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under the new provision, the fair value of a
liability for an asset retirement obligation should be recognized in the period
in which it is incurred, if a reasonable estimate can be made. The associated
costs are capitalized as part of the carrying amount of the long-lived asset and
allocated to expense over the useful life of the asset. The Company does not
expect the adoption of SFAS No. 143 to have a significant effect on the
Company's consolidated balance sheet, consolidated statement of operations, or
consolidated statement of cash flows. The Company is required to adopt
SFAS No. 143 during the first quarter of the year ending December 31, 2003.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121, and addresses impairment or disposal of long-lived
assets. The Company is currently assessing the impact of this statement on the
Company's consolidated balance sheet and consolidated statement of operations,
and does not believe it will have a significant impact on the consolidated
statement of cash flows. The Company is required to adopt SFAS No. 144 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.
8
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.
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 Nine months ended
September 30, 2000 September 30, 2000
---------------------- -----------------------
Revenue............................................................. $ 91,426 $ 295,062
Costs and expenses.................................................. (83,216) (268,521)
--------------------- ----------------------
Income from discontinued operations before income taxes............. 8,210 26,541
Provision for income taxes.......................................... (3,257) (10,825)
--------------------- ----------------------
Income from discontinued operations................................. $ 4,953 $ 15,716
===================== ======================
9
5. DEBT
Debt consists of the following:
<Table>
<Caption>
September 30, 2001 December 31, 2000
---------------------- --------------------------
Bank revolving credit agreements.......................................... $ 106,454 $ 789,750
6.75% notes due 2001...................................................... - 123,000
8.72% amortizing notes due 2002........................................... 12,897 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)........................................ 74,125 186,040
6.3% notes due 2020 (putable 2003)........................................ 251,284 300,000
Medium-term notes, maturities through 2019, fixed average interest
Rate of 9.67%............................................................ - 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.................... 68,199 86,219
Deferred losses on swap terminations and loan costs....................... (46,058) (39,208)
--------------------- -------------------------
Total debt........................................................... 2,522,694 3,268,102
Less current maturities.............................................. (208,793) (176,782)
--------------------- -------------------------
Total long-term debt.......................................... $2,313,901 $3,091,320
===================== =========================
</Table>
The Company's consolidated debt had a weighted average interest rate of
6.64% at September 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 September 30, 2001 and December 31, 2000, the 2-year term loan allows for
borrowings up to $106,454 and $296,486, respectively, and the 5-year,
multi-currency revolver, allows for borrowings up to $542,764 and $691,801,
respectively. The 5-year, multi-currency facility provides for borrowings up to
$500,000 in foreign currencies, of which $0 and $271,263 of the total borrowings
were denominated in various foreign currencies at September 30, 2001 and
December 31, 2000, respectively. Both of these facilities are primarily used for
general corporate purposes and will mature in June 2002. All of the $106,454
outstanding at September 30, 2001 was borrowed on the 2-year term loan.
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 4.27% and 7.95% at September 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 September 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.
10
During the nine months ended September 30, 2001, the Company repurchased
$35,720 of the Medium-term notes due through 2019 and $111,915 of the 7.00%
senior notes due 2015 (putable 2002) in the open market. In addition, the
Company exchanged 15,200 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 $2,995 of other notes. As a
result of these transactions, the Company recognized extraordinary gains on
early extinguishments of debt totaling $4,717 (net of tax of $3,015).
The Company had $88,826 and $68,753 at September 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 September 30, 2001
approximately $23,856 was related to two embedded options associated with the
Company's 6.30% notes due 2020 (putable 2003), $43,727 related to letters of
credit and the remaining $21,243 was used to secure various other obligations.
6. 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). In 2001, the Company sold its operations in Netherlands, Norway and
Belgium and completed joint ventures with its Australia, Spain and Portugal
operations (see note eight to 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 September 30,
2001.................................................. $ 409,960 $173,019 $ 582,979
2000.................................................. $ 445,520 $167,300 $ 612,820
Nine months ended September 30,
2001.................................................. $1,357,148 $522,318 $1,879,466
2000.................................................. $1,438,252 $485,995 $1,924,247
- --------------------------------------------------------------------------------------------------------------------
Gross profit:
Three months ended September 30,
2001.................................................. $ 40,939 $ 26,080 $ 67,019
2000.................................................. $ 54,249 $ 16,992 $ 71,241
Nine months ended September 30,
2001.................................................. $ 187,736 $ 76,741 $ 264,477
2000.................................................. $ 209,197 $ 49,503 $ 258,700
- --------------------------------------------------------------------------------------------------------------------
</Table>
11
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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit from reportable segments................................... $ 67,019 $ 71,241 $ 264,477 $ 258,700
Lending subsidiary operating income............................... - 621 - 2,295
General and administrative expenses............................... (17,049) (20,185) (53,451) (60,031)
Restructuring and non-recurring charges (see note 8).............. (6,185) - (57,431) (13,281)
----------------------------------------------------------
Operating income........................................................ 43,785 51,677 153,595 187,683
Interest expense.................................................. (49,432) (73,256) (164,390) (216,370)
Other income...................................................... 4,967 6,068 12,648 11,902
Gains from dispositions........................................... 5,543 141 11,543 5,759
----------------------------------------------------------
Income (loss) from continuing operations before income taxes,
extraordinary gains and cumulative effect of accounting changes..... $ 4,863 $(15,370) $ 13,396 $ (11,026)
==========================================================
</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 September 30,
2001.................................................. $ 419,905 $146,761 $ 16,313 $ 582,979
2000.................................................. $ 426,166 $150,965 $ 38,572 $ 615,703
Nine months ended September 30,
2001.................................................. $1,329,282 $483,304 $ 66,880 $1,879,466
2000.................................................. $1,298,773 $522,889 $114,079 $1,935,741
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Three months ended September 30,
2001.................................................. $ 30,700 $ 10,631 $ 2,454 $ 43,785
2000.................................................. $ 39,914 $ 3,354 $ 8,409 $ 51,677
Nine months ended September 30,
2001.................................................. $ 157,392 $ 39,460 $(43,257) $ 153,595
2000.................................................. $ 132,906 $ 33,300 $ 21,477 $ 187,683
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization :
Three months ended September 30,
2001.................................................. $ 35,749 $ 10,386 $ 1,818 $ 47,953
2000.................................................. $ 39,929 $ 7,351 $ 3,794 $ 51,074
Nine months ended September 30,
2001.................................................. $ 108,877 $ 32,310 $ 6,968 $ 148,155
2000.................................................. $ 121,091 $ 36,124 $ 10,705 $ 167,920
- --------------------------------------------------------------------------------------------------------------------
Operating locations at September 30:
2001.................................................. 2,080 1,745 26 3,851
2000.................................................. 2,332 2,016 185 4,533
- --------------------------------------------------------------------------------------------------------------------
</Table>
12
Included in the North America figures above are the following United States
amounts:
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $ 401,429 $ 407,632 $ 1,271,687 $ 1,238,500
Operating income.......................................... $ 19,163 $ 38,312 $ 140,363 $ 123,987
Depreciation and amortization............................. $ 34,152 $ 38,100 $ 103,670 $ 115,505
Operating locations, at September 30,..................... 1,922 2,178
- -------------------------------------------------------------------------------------------------------------------------
</Table>
Included in the European figures above are the following French amounts:
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $ 100,213 $ 91,254 $ 308,841 $ 311,442
Operating income.......................................... $ 8,439 $ 1,647 $ 17,685 $ 10,427
Depreciation and amortization............................. $ 5,428 $ 3,316 $ 15,036 $ 13,749
Operating locations, at September 30,..................... 1,143 1,226
- -------------------------------------------------------------------------------------------------------------------------
</Table>
7. 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 Nine months ended
September 30, September 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 $ 4,182 $(10,846) $ (3,155) $ (6,352)
Income (loss) from continuing operations before extraordinary
gains and cumulative effect of accounting changes -
diluted................................................ $ 4,182 $(10,846) $ (3,155) $ (6,352)
- ---------------------------------------------------------------------------------------------------------------------------------
Shares (denominator):
Shares - basic............................................. 290,258 272,210 282,916 272,122
Stock options and warrants............................ 3,505 - - -
-------- -------- -------- --------
Shares - diluted........................................... 293,763 272,210 282,916 272,122
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share from continuing operations before
extraordinary gains and cumulative effect of accounting changes:
Basic...................................................... $ .02 $ (.04) $ (.01) $ (.02)
Diluted.................................................... $ .02 $ (.04) $ (.01) $ (.02)
- ---------------------------------------------------------------------------------------------------------------------------------
8. 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 2001
(2001 Charges).
The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999. The remaining reserve relates to
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.
13
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.
Severance costs related to 316 former owners 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.
In 2001, the Company recognized impairment and non-recurring charges of
$57,431. Of the total charge, $51,780 related to the joint venture of the
Company's Australia operations; $26,519 related to the sales of the Company's
operations in Netherlands, Norway and Belgium; offset by a $20,868 reduction
related to changes in estimates to previously recorded charges of certain
divested North American funeral homes and cemeteries and its equity investment
in a Canadian funeral home and cemetery company. In connection with dispositions
of the international operations discussed above, the Company received net pretax
proceeds of approximately $148,807 and securities with a face value of $24,400,
which includes a 20% equity interest in the Australia operations and a 12%
subordinated convertible note. Included in the charges, the Company recognized
$38,781 of the cumulative foreign currency translation effect into earnings,
previously included as a separate component of Accumulated other comprehensive
loss in the Company's stockholder's equity. The changes in estimates of
previously recorded charges is the result of better than anticipated market
values when these previously impaired properties were sold. The Company will
continue to make adjustments as actual divestitures are consummated or better
estimates become available. The Company received pretax proceeds of
approximately $35,799 related to the sale of its equity investment in a
Canadian funeral home and cemetery company.
In August 2001, the Company sold 85% of its operations in Spain and
Portugal. In connection with this transaction, the Company received net pretax
proceeds of approximately $101,082 and recorded a gain of $2,062 which is
included in Gains from dispositions in the consolidated statement of operations.
Included in the gain, the Company recognized $209 of the cumulative foreign
currency translation effect into earnings, previously included as a separate
component of Accumulated other comprehensive loss in the Company's stockholder's
equity.
The utilization of the various charges during the nine months ended
September 30, 2001 was as follows:
<Table>
<Caption>
Utilization for nine months
ended September 30, 2001
------------------------------
Original Balance at Additions or Balance at
charge amount December 31, adjustments September 30,
2000 during 2001 Cash Non-cash 2001
-------------- ----------------- --------------- -------------- --------------- --------------
First Quarter 1999 Charge.......... $ 89,884 $ 6,210 $ - $ 1,545 $ 1,822 $ 2,843
Fourth Quarter 1999 Charge......... 272,544 86,959 - 17,350 1,540 68,069
Fourth Quarter 2000 Charge......... 434,415 - (20,868) - (20,868) -
2001 Charges....................... 78,299 - 78,299 - 78,299 -
-------- ------- -------- ------- --------- -------
Total......................... $875,142 $93,169 $ 57,431 $18,895 $ 60,793 $70,912
======== ======= ======== ======= ========= =======
</Table>
Of the remaining total restructuring accrual balance, approximately $67,540
relates to severance costs, the majority of which will be paid out through 2007.
In addition, of the $70,912 remaining in reserves, $36,547 is included in
Accounts payable and accrued liabilities and $34,365 is included in Other
liabilities in the consolidated balance sheet based on the expected timing of
payments.
14
Summary operating results of the Company's divested international operations are
as follows. Results of operations for Australia have been included through April
2001; Netherlands, Norway, Spain and Portugal through July 2001; and Belgium
through September 2001.
<Table>
<Caption>
AUSTRALIA
-------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------- --------------- --------------
Revenues:
Funeral...................................... $ - $13,728 $13,375 $39,240
Cemetery..................................... - 6,637 6,610 22,066
------------ ------------- --------------- --------------
$ - $20,365 $19,985 $61,306
============ ============= =============== ==============
Operating Income (excluding restructuring and
non-recurring charges)
Funeral...................................... $ - $ 2,657 $ 469 $ 5,200
Cemetery..................................... - 2,650 2,037 8,302
------------ ------------- --------------- --------------
$ - $ 5,307 $ 2,506 $13,502
============ ============= =============== ==============
OTHER EUROPEAN COUNTRIES
-------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
Revenues: 2001 2000 2001 2000
------------ ------------- --------------- --------------
Funeral...................................... $4,710 $13,344 $37,497 $46,199
Cemetery..................................... - 1,490 1,327 4,848
------------ ------------- --------------- --------------
$4,710 $14,834 $38,824 $51,047
============ ============= =============== ==============
Operating Income (excluding restructuring and
non-recurring charges)
Funeral...................................... $ 555 $ 1,115 $ 7,824 $ 8,150
Cemetery..................................... - 573 596 1,945
------------ ------------- --------------- --------------
$ 555 $ 1,688 $ 8,420 $10,095
============ ============= =============== ==============
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 12 countries on four
continents. The Company's largest markets are North America and France, which
when combined, represent approximately 84% of the Company's total operating
locations and approximately 87% 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
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 189 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. The
Company continues to expand this network through its Affiliate program
initiative whereby the Company will expand the Dignity Memorial(TM) network
through franchise agreements with third party providers. 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 third quarter of
2001, the Company's overhead costs were below the levels in the same period of
2000. General and administrative expenses decreased 15.5% in the third 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.
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 nine months ended September 30, 2001 and 2000 is summarized below.
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------ ---------------------------------------
2001 2000 Increase 2001 2000 Increase
---------- ------------ ------------ ----------- ----------- -----------
Total operating free cash flow............ $47,677 $45,927 $ 1,750 $296,897 $177,277 $119,620
Recurring operating free cash flow........ $45,914 $30,877 $15,037 $164,441 $ 80,727 $ 83,714
</Table>
16
Total operating free cash flow reported above includes items of a
non-recurring nature. Included in total operating free cash flow of $296,897 for
the nine months ended September 30, 2001 is $132,456 of non-recurring receipts
of funds comprised of an approximate $116,000 income tax refund received in the
first quarter of 2001, approximately $41,100 of amounts collected from funeral
and cemetery trust funds, offset by non-recurring payments of approximately
$27,900 related to the Company's curtailed pension plans and non-recurring
capital expenditures. Included in total operating free cash flow of $177,277 for
the nine months ended September 30, 2000 is $96,550 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 nine
months ended September 30, 2001 compared to the corresponding periods of 2000
was a result of (i) increases in the Company's cash flow from operating
activities primarily as a result of working capital improvement initiatives,
(ii) reductions in capital expenditure levels, (iii) increases in funds received
as a result of the Company's surety bonding programs for prearranged funeral and
preneed cemetery activities, (iv) decreases in payment of cash interest, and (v)
reduction in cash taxes paid.
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 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 has adjusted its current cash flow goals to have
recurring operating free cash flow between $150,000 and $175,000 by the end of
2001 and at a run rate between $200,000 and $250,000 by the end of 2002. The
Company also expects total operating free cash flow to be between $285,000 and
$310,000 by the end of 2001.
Long-Term Debt
<Table>
<Caption>
Debt at Debt at
September 30, 2001 December 31, 2000 Change
---------------------- --------------------- --------------------
Current maturities of long-term debt.............. $ 208,793 $ 176,782 $ 32,011
Long-term debt.................................... 2,313,901 3,091,320 (777,419)
---------------------- --------------------- --------------------
Total debt................................... $2,522,694 $3,268,102 $(745,408)
====================== ===================== ====================
The execution of the Company's debt reduction initiatives continues to exceed
expectations. During the nine months ended September 30, 2001, the Company
reduced its total debt by $745,408. Funds available to achieve this debt
reduction were generated from (i) the Company's recurring operating free cash
flow, (ii) receipts of non-recurring funds from certain income tax refunds and
from the collection of receivables from funeral and cemetery trust funds, (iii)
proceeds from the sales of certain non-strategic funeral and cemetery operations
in North America, (iv) the extinguishment of certain debt obligations using the
Company's common stock in transactions with third parties, (v) the completion of
the joint ventures of the Company's operations in Australia, Spain and Portugal,
(vi) proceeds from the sale of the Company's equity interest in a Canadian
funeral home and cemetery company, and (vii) proceeds from the sales of the
Company's operations in Norway, Netherlands and Belgium.
17
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 home 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 Use of the Company's seamless national brand of funeral service
locations under Dignity Memorial(TM) and expansion of the network
through the Company's Affiliate program.
o Establishment of exclusive, local and national, branded affinity
relationships with employers, social, fraternal and charitable groups or
institutions.
o Implementation and increased marketing 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 nine months ended September 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 September 30, 2001.
For the quarter ended September 30, 2001, the Company reported revenues of
$582,979, representing a 5.3% decrease compared to $615,703 in the third quarter
of 2000. Gross profit from continuing operations in the third quarter of 2001
decreased 6.7% to $67,019 compared to $71,862 in the same period of 2000. For
the three months ended September 30, 2001, the Company reported earnings from
continuing operations before restructuring and non-recurring charges of $4,571,
net income of $4,281, diluted earnings per share from continuing operations
before restructuring and non-recurring charges of $.02 ($.02 basic) and diluted
earnings per share of $.02 ($.02 basic). The Company reported a loss from
continuing operations before restructuring and non-recurring charges of $10,846,
net loss of $49,626, diluted loss per share from continuing operations before
restructuring and non-recurring charges of $.04 ($.04 basic) and diluted loss
per share of $.18 ($.18 basic) for the third quarter of 2000.
18
Results for the Company's continuing operations by geographic segment are
detailed in the following tables.
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000
THREE MONTHS ENDED SEPTEMBER 30, 2001
TOTAL
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral............... $267,080 63.6% $140,953 96.0% $ 1,927 11.8% $409,960 70.3%
Cemetery.............. 152,825 36.4% 5,808 4.0% 14,386 88.2% 173,019 29.7%
--------------------------------------------------------------------------------------------------------
$419,905 100.0% $146,761 100.0% $16,313 100.0% $582,979 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 31,325 11.7% $ 9,468 6.7% $ 146 7.6% $ 40,939 10.0%
Cemetery.............. 21,475 14.1% 1,685 29.0% 2,920 20.3% 26,080 15.1%
--------------------------------------------------------------------------------------------------------
$ 52,800 12.6% $ 11,153 7.6% $ 3,066 18.8% $ 67,019 11.5%
========================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral............... $262,486 63.6% $136,137 95.9% $ 3,009 17.3% $401,632 70.2%
Cemetery.............. 150,463 36.4% 5,808 4.1% 14,385 82.7% 170,656 29.8%
--------------------------------------------------------------------------------------------------------
$412,949 100.0% $141,945 100.0% $17,394 100.0% $572,288 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 32,173 12.3% $ 8,899 6.5% $ 462 15.4% $ 41,534 10.3%
Cemetery.............. 21,396 14.2% 1,685 29.0% 2,920 20.3% 26,001 15.2%
--------------------------------------------------------------------------------------------------------
$ 53,569 13.0% $ 10,584 7.5% $ 3,382 19.4% $ 67,535 11.8%
========================================================================================================
</Table>
19
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2000
TOTAL
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------------------------------------------------------------------- ------------ ------------ -------
Revenues:
Funeral............... $282,224 66.2% $144,808 95.9% $18,488 47.9% $445,520 72.3%
Cemetery.............. 141,059 33.1% 6,157 4.1% 20,084 52.1% 167,300 27.2%
Other Services........ 2,883 0.7% - - - - 2,883 0.5%
--------------------------------------------------------------------------------------------------------
$426,166 100.0% $150,965 100.0% $38,572 100.0% $615,703 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 47,277 16.8% $ 3,493 2.4% $ 3,479 18.8% $ 54,249 12.2%
Cemetery.............. 11,066 7.8% 996 16.2% 4,930 24.5% 16,992 10.2%
Other Services........ 621 21.5% - - - - 621 21.5%
--------------------------------------------------------------------------------------------------------
$ 58,964 13.8% $ 4,489 3.0% $ 8,409 21.8% $ 71,862 11.7%
========================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
---------------------------------------------------------------------- ------------ ------------ -------
Revenues:
Funeral............... $268,532 66.2% $131,137 96.6% $ 3,130 18.9% $402,799 72.2%
Cemetery.............. 136,942 33.8% 4,668 3.4% 13,447 81.1% 155,057 27.8%
--------------------------------------------------------------------------------------------------------
$405,474 100.0% $135,805 100.0% $16,577 100.0% $557,856 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 48,368 18.0% $ 2,383 1.8% $ 749 23.9% $ 51,500 12.8%
Cemetery.............. 11,284 8.2% 423 9.1% 2,280 17.0% 13,987 9.0%
--------------------------------------------------------------------------------------------------------
$ 59,652 14.7% $ 2,806 2.1% $ 3,029 18.3% $ 65,487 11.7%
========================================================================================================
</Table>
The following factors contributed to the results for the third quarter of 2001.
o Comparable worldwide funeral revenues were consistent in the third
quarter of 2001 with the third quarter of 2000 due primarily to a
consistent number of funeral services performed period over period.
Total worldwide funeral services performed were below the same period in
the prior year as a result of dispositions and joint ventures completed
by the Company, both domestically and internationally.
o Cemetery revenue increased in the third quarter of 2001 compared to the
same period in 2000 on both a consolidated and comparable basis. The
increase is the result of the Company's ongoing cash flow initiatives to
concentrate on sales and delivery of cemetery merchandise and property.
o The Company experienced a negative effect of foreign currency
translations of approximately $3,400 on revenues and approximately $900
on gross profits in the third quarter of 2001 compared to the third
quarter of 2000.
20
Funeral
<Table>
<Caption>
TOTAL FUNERAL SERVICES PERFORMED
-------------------------------------------------------------
North Other
Three months ended September 30, America Europe Foreign Total
------------ ------------ ------------ -----------
2001.................................. 68,084 53,621 1,055 122,760
2000.................................. 71,080 58,218 8,592 137,890
</Table>
<Table>
<Caption>
COMPARABLE FUNERAL SERVICES PERFORMED
-------------------------------------------------------------
North Other
Three months ended September 30, America Europe Foreign Total
------------ ------------ ------------ -----------
2001.................................. 66,813 51,198 1,055 119,066
2000.................................. 67,462 50,013 1,092 118,567
</Table>
The decrease in comparable North America funeral revenues was the result of
a 1.0% decline in the volume of funeral services performed coupled with a change
in the Company's sales mix. In the third quarter of 2001, North America funeral
services performed which were previously prearranged were 29.8% compared to
27.8% in the third quarter of 2000. The average revenue per funeral service of
previously prearranged funerals is historically lower than the average revenue
per funeral service of atneed funerals. The average revenue per funeral service
of $3,923 in the third quarter of 2001 compared to $3,886 in the third quarter
of 2000 continues to increase as the result of the 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.
The decrease in comparable North America gross profit and margin percentage
is the result of increased costs related primarily to training, compensation and
facilities costs. The Company has committed to training funeral service
personnel and improving customer satisfaction, and as a result of this customer
satisfaction commitment, has experienced increased personnel costs in the third
quarter of 2001 compared to the same period of 2000. These training initiatives
are targeted at expanding market share and future revenue growth from the
Company's North America funeral operations. Facility costs increased as a result
of higher utility and building maintenance costs. This increase in costs coupled
with the negative impact of North America funeral services performed resulted in
the decline in margin percentage to 12.3% in the third quarter of 2001 compared
to 18.0% in the third quarter of 2000.
Comparable European funeral revenues increased in the third quarter of 2000
as a result of a 2.4% increase in the number of funeral services performed as
well as an increase in monument sales in the Company's French operations. This
positive growth was slightly offset by the negative impact of foreign currency
translation on revenue. Comparable gross profit and margin percentage in the
European operations improved as a result of the positive impact of revenue
enhancing initiatives which have increased the average price per funeral
service.
Comparable revenue and gross profit margin percentage in the Other Foreign
operations have been impacted by lower volume in the Company's Argentina
operations.
Cemetery
The increase in comparable North America cemetery revenues and gross profit is
the result of the Company's ongoing cash flow initiatives to concentrate on
sales of cemetery merchandise and property that can be delivered, as defined by
applicable state trusting laws. The Company generally recognizes revenue based
on evidence of the delivery of such cemetery property and merchandise. In the
third quarter of 2001, North America revenues were favorably impacted by revenue
and related gross profits from the Company's initiative to review remaining
obligations for the delivery of cemetery merchandise. If these reviews had not
been completed, cemetery margins for the third quarter of 2001 would have been
approximately 500 to 800 basis points lower than reported. Concurrently, North
America cemetery operations were negatively impacted by reduced levels of
preneed cemetery sales as a result of the disasters on September 11, 2001. After
these disasters occurred, the Company ceased all preneed cemetery solicitation
activities for a week and sales were slower through the end of the quarter. The
events of September 11, 2001 and the transactions recognized as a result of the
21
ongoing review of cemetery merchandise obligations generally offset each other
in the results of cemetery operations in the third quarter of 2001.
Other Foreign cemetery revenues and gross profit are being negatively
impacted by the instability in the Argentina economy. This negative impact has
been offset in the current period by positive growth in the Company's Chile
operations.
Other Income and Expense
General and administrative expenses decreased $3,136 to $17,049 in the third
quarter of 2001 compared to the same quarter in 2000. The decrease relates to
the reduction in costs after implementing the Company's North America
proprietary point of sale system. Expressed as a percentage of revenue from
continuing operations, general and administrative expenses were 2.9% for the
three months ended September 30, 2001, compared to 3.3% for the comparable
period in 2000.
Interest expense decreased $23,824 or 32.5% to $49,432 in the third quarter
of 2001 compared to the third quarter of 2000. The decrease in interest expense
reflects the decline in the Company's long-term debt balance coupled with lower
effective interest rates in the third quarter of 2001 compared to the same
period in 2000. For the three months ended September 30, 2001, the average
outstanding debt was $2,700,000 compared to $3,600,000 for the three months
ended September 30, 2000.
Other income was $4,967 in the quarter ended September 30, 2001 compared to
$6,068 in the same period of 2000. Other income primarily consists of interest
income from various investments and prearranged funeral sales 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).
Gains from dispositions were $5,543 in the third quarter of 2001 compared
to $141 in the same period of 2000. Included in gains from dispositions are
asset sales not associated with previously recognized impairment charges. In the
third quarter of 2001, the Company recognized a gain on the sale of its 85%
interest in Spain and Portugal operations.
Excluding Restructuring and non-recurring charges and Gains from
dispositions, the provision for income taxes reflects a 35.2% effective tax rate
for the three months ended September 30, 2001 compared to a 29.4% effective
benefit rate for the comparable period in 2000. The effective tax rate is
increasing as a result of a larger percentage of the Company's earnings coming
from its North America operations. The Restructuring and non-recurring charges
and Gains from dispositions are primarily associated with sales of the Company's
international operations and its equity investment in a Canadian funeral home
and cemetery company. Each transaction has specific tax expense or benefit
associated with it based on the relative tax basis to sales price. After
considering these transactions, the effective tax rate for the three months
ended September 30, 2001 is 14.0% compared to an effective benefit of 29.4% for
the three months ended September 30, 2000.
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 third quarter 2001, 36.9% 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 third quarter of 2001, the Company recorded a non-cash charge of $6,185
primarily related to losses from the disposition of operations in Netherlands,
Norway and Belgium, partially offset by a reduction related to changes in
estimates of previously recorded charges of certain divested North American
funeral homes and cemeteries and its equity investment in a Canadian funeral
home and
22
cemetery company. Associated with the dispositions of the Company's
international operations during 2001, the Company recognized the related
cumulative foreign currency translation effect into earnings, previously
included as a separate component of Accumulated other comprehensive loss in the
Company's stockholder's equity. The changes in estimates of previously recorded
charges are the result of better than anticipated market values when these
previously impaired properties were sold. The Company will continue to make
adjustments as actual divestitures are consummated or better estimates become
available. (See note eight to the consolidated financial statements in Item 1 of
this Form 10-Q.)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000
NINE MONTHS ENDED SEPTEMBER 30, 2001
TOTAL
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral............... $ 868,601 65.3% $466,211 96.5% $ 22,336 33.4% $1,357,148 72.2%
Cemetery.............. 460,681 34.7% 17,093 3.5% 44,544 66.6% 522,318 27.8%
--------------------------------------------------------------------------------------------------------
$1,329,282 100.0% $483,304 100.0% $ 66,880 100.0% $1,879,466 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 150,375 17.3% $ 36,159 7.8% $ 1,202 5.4% $ 187,736 13.8%
Cemetery.............. 64,627 14.0% 4,793 28.0% 7,321 16.4% 76,741 14.7%
--------------------------------------------------------------------------------------------------------
$ 215,002 16.2% $ 40,952 8.5% $ 8,523 12.7% $ 264,477 14.1%
========================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral............... $ 844,444 65.2% $428,467 96.5% $ 8,699 18.7% $1,281,610 71.7%
Cemetery.............. 451,452 34.8% 15,766 3.5% 37,934 81.3% 505,152 28.3%
--------------------------------------------------------------------------------------------------------
$1,295,896 100.0% $444,233 100.0% $46,633 100.0% $1,786,762 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 151,607 18.0% $ 28,280 6.6% $ 1,842 21.2% $ 181,729 14.2%
Cemetery.............. 63,292 14.0% 4,197 26.6% 5,284 13.9% 72,773 14.4%
--------------------------------------------------------------------------------------------------------
$ 214,899 16.6% $ 32,477 7.3% $ 7,126 15.3% $ 254,502 14.2%
========================================================================================================
</Table>
23
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2000
TOTAL
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral............... $ 884,675 68.1% $501,876 96.0% $ 51,701 45.3% $1,438,252 74.3%
Cemetery.............. 402,604 31.0% 21,013 4.0% 62,378 54.7% 485,995 25.1%
Other Services........ 11,494 0.9% - - - - 11,494 0.6%
--------------------------------------------------------------------------------------------------------
$1,298,773 100.0% $522,889 100.0% $114,079 100.0% $1,935,741 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 170,877 19.3% $ 31,558 6.3% $ 6,762 13.1% $ 209,197 14.5%
Cemetery.............. 30,358 7.5% 4,430 21.1% 14,715 23.6% 49,503 10.2%
Other Services........ 2,295 20.0% - - - - 2,295 20.0%
--------------------------------------------------------------------------------------------------------
$ 203,530 15.7% $ 35,988 6.9% $ 21,477 18.8% $ 260,995 13.5%
========================================================================================================
</Table>
<Table>
<Caption>
COMPARABLE
--------------------------------------------------------------------------------------------------------
NORTH % OF % OF OTHER % OF % OF
AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE
--------------------------------------------------------------------------------------------------------
Revenues:
Funeral............... $ 843,078 68.2% $450,217 96.5% $ 9,009 18.3% $1,302,304 74.3%
Cemetery.............. 393,060 31.8% 16,165 3.5% 40,312 81.7% 449,537 25.7%
--------------------------------------------------------------------------------------------------------
$1,236,138 100.0% $466,382 100.0% $49,321 100.0% $1,751,841 100.0%
========================================================================================================
Gross profit and
margin percentage:
Funeral............... $ 172,094 20.4% $ 22,006 4.9% $ 2,210 24.5% $ 196,310 15.1%
Cemetery.............. 29,601 7.5% 2,485 15.4% 6,413 15.9% 38,499 8.6%
--------------------------------------------------------------------------------------------------------
$ 201,695 16.3% $ 24,491 5.3% $ 8,623 17.5% $ 234,809 13.4%
========================================================================================================
</Table>
The following factors contributed to the results for the nine months of 2001.
o Funeral services performed by the Company's worldwide funeral service
locations were 1.9% and 7.7% below comparable and total funeral services
performed, respectively, in the nine months of 2001 compared to the same
period of 2000.
o Cemetery revenue on a comparable basis increased 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 generally be
recognized as revenue under the Company's accounting policies after the
implementation of SAB No. 101.
o The Company experienced a negative effect of foreign currency
translations of approximately $34,700 on revenues and approximately
$4,800 on gross profits primarily as a result of the weakened Euro
relative to the U.S. dollar in the nine months ended September 30, 2001
compared to the nine months ended September 30, 2000.
24
Funeral
<Table>
<Caption>
TOTAL FUNERAL SERVICES PERFORMED
--------------------------------------------------------------
North Other
Nine months ended September 30, America Europe Foreign Total
------------ ------------ ------------ ------------
2001.................................. 221,410 184,725 10,978 417,113
2000.................................. 227,754 200,454 23,464 451,672
</Table>
<Table>
<Caption>
COMPARABLE FUNERAL SERVICES PERFORMED
--------------------------------------------------------------
North Other
Nine months ended September 30, America Europe Foreign Total
------------ ------------ ------------ ------------
2001.................................. 215,047 164,180 3,120 382,347
2000.................................. 216,443 170,236 3,206 389,885
</Table>
For the nine months ended September 30, 2001, comparable North America
revenues increased 0.2% over the same period of the prior year. Although volume
has decreased 0.6% in the nine months ended September 30, 2001, the average
revenue per funeral service has increased 1.5% to $3,923. The average revenue
per funeral service continues to increase as the result of the Company's revenue
growth initiatives, such as Dignity Memorial(TM) packaged funeral plans.
The decrease in comparable North America gross profit and margin percentage
is the result of increased costs related primarily to training, compensation and
facilities costs. The Company has committed to training personnel and improving
customer satisfaction, and as a result of this customer satisfaction commitment,
has experienced increased personnel costs in the nine months of 2001 compared to
the same period of 2000. These training initiatives are targeted at expanding
market share and future revenue growth from the Company's North America funeral
operations. Facility costs increased as a result of higher utility and building
maintenance costs. These increases resulted in the decline in the comparable
North America margin percentage to 18.0% for the nine months of 2001 compared to
20.4% for the nine months of 2000.
Comparable European funeral revenue decreased 4.8% due to the negative
effect of foreign currency translation and lower volume offset by an increase in
monument sales in the Company's French operations. The negative effect of
foreign currency, primarily related to the weakened Euro relative to the U.S.
dollar, impacted comparable European funeral revenues approximately $23,500 in
the nine months of 2001. For the nine months of 2001, volume for comparable
European funeral locations declined 3.6% compared to the same period in 2000.
Comparable European gross profit and margin percentage improved during the nine
months of 2001 compared to the same period in 2000 as a result of positive
effects of the Company's cost rationalization programs as well as revenue
enhancing initiatives. Such revenue enhancing initiatives have increased the
average revenue per funeral service, excluding the effect of currency,
approximately 4.4% in the nine months ended September 30, 2001 compared to the
same period in 2000.
Other Foreign comparable revenues, gross profit and margin percentage
declined as a result of lower volume in the Company's Argentina operations.
Cemetery
Comparable cemetery revenues, gross profit and margin percentage increased in
the Company's North America operations from continued initiatives to enhance
cash flows from cemetery operations and increase revenue recognition and margin
percentages. 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 Company's financial
results have been favorably impacted in the third quarter of 2001 by revenues
and related gross profits from its ongoing initiative to review remaining
obligations for delivery of cemetery merchandise. If these reviews had not been
completed, cemetery margins for the nine months of 2001 would have been 100 to
300 basis points lower due to the third quarter 2001 activity.
The decline in Other Foreign cemetery revenues, gross profit and margin
percentage is the result of reduced preneed cemetery sales activities due to the
instability in the Argentina economy.
25
Other Income and Expenses
General and administrative expenses decreased 11.0% to $53,451 in the nine
months of 2001 compared to the nine months of 2000. The decrease relates to the
reduction in costs after implementing the Company's North America proprietary
point of sale system in 2000 as well as completing the initial roll out 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 3.1% for the nine months ending September
30, 2001 and 2000, respectively.
Interest expense decreased $51,980 or 24.0% to $164,390 in the nine months
of 2001 compared to the nine months of 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 nine months ended September 30,
2001 compared to the same period prior year. The average outstanding debt
balance was $2,900,000 for the nine months of 2001 compared to the average debt
outstanding of $3,800,000 in the nine months of 2000.
Other income was $12,648 for the nine months of 2001 compared to $11,902 in
the same period of 2000. Other income primarily consists of interest income from
various investments and prearranged funeral sales 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).
Gains from dispositions were $11,543 in the nine months of 2001 compared to
$5,759 in the same period of 2000. Included in gains from dispositions are asset
sales not associated with previously recognized impairment charges. Also
included is the gain recognized on the sale of 85% of the Company's Spain and
Portugal operations in August 2001.
The provision for income taxes excluding Restructuring and non-recurring
charges and Gains from dispositions reflects an effective tax rate of 37.9% for
the nine months ended September 30, 2001 compared to an effective tax rate of
7.7% for the comparable period in 2000. The increase in the effective tax rate
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. In 2000, the effective tax rate was the
result of taxes on international operating results reduced by a benefit in the
Company's North America operations. In the current year, Restructuring and
non-recurring charges and Gains from dispositions are primarily associated with
sales of the Company's international operations and its equity investment in a
Canadian funeral home and cemetery company. Each transaction has specific tax
expense or benefit associated with it based on the relative tax basis to sales
price. If special tax considerations were not made, the items would have been
taxed at a consolidated rate of 39%. In the prior year, a tax benefit associated
with the change in estimate of previously recorded restructuring charges was
recorded at 36.5%. After considering all of these transactions, the consolidated
effective tax rate for the nine months ending September 30, 2001 is 123.6%
compared to an effective benefit of 42.4% in the same period of 2000.
Restructuring and Non-Recurring Charges
The Company recorded restructuring and non-cash charges of $57,431 related to
(i) the joint venturing of its Australia operations, (ii) losses from the
disposition of operations in Netherlands, Norway and Belgium, partially offset
by (iii) a reduction related to changes in estimates of previously recorded
charges of certain divested North American funeral homes and cemeteries and its
equity investment in a Canadian funeral home and cemetery company. Associated
with the dispositions of the Company's international operations during 2001, the
Company recognized the related cumulative foreign currency translation effect
into earnings, previously included as a separate component of Accumulated other
comprehensive loss in the Company's stockholder's equity. The changes in
estimates of previously recorded charges are the result of better than
anticipated market values when these previously impaired properties were sold.
The Company will continue to make adjustments as actual divestitures are
consummated or better estimates become available. (See note eight 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
26
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>
Revised
Nine Months Ended 2001 Benchmarks
September 30, 2001 and Targets 2002 Run Rate Targets
-----------------------------------------------------------------------
Consolidated cash flow provided by operating activities $ 332,327
Payments on restructuring charges ..................... 18,895
---------
Adjusted cash flow from operating activities ... 351,222
Capital expenditures .................................. (54,325)
---------
TOTAL OPERATING FREE CASH FLOW ................. 296,897 $285,000 to $310,000
Less: Non-recurring receipts of funds, net .... (132,456)
---------
RECURRING OPERATING FREE CASH FLOW ............. $ 164,441 $150,000 to $175,000 $200,000 to $250,000
========= ==================== ====================
Estimated after tax proceeds from sales of assets and
non-core businesses .............................. $ 387,544 $200,000 to $500,000
========= ====================
</Table>
The net non-recurring receipts of funds totaling $132,456 relates primarily to
certain income tax refunds and the collection of receivables due to the Company
from funeral and cemetery trust funds offset by non-recurring payments related
to the Company's curtailed pension plans. The Company continues to implement
initiatives in 2001 to increase its recurring operating free cash flow from 2000
levels. These cash flow initiatives are categorized as (i) revenue growth
initiatives, (ii) working capital improvement, (iii) cost reduction initiatives,
(iv) asset redeployment and (v) enhanced funeral and cemetery trust
administration and management. The Company is currently in various stages of
executing the above cash flow initiatives and, along with other cash flow
initiatives currently under development, expects recurring operating free cash
flow to be between $150,000 to $175,000 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 September 30, 2001 was $2,522,694, representing
a decrease in total debt of $745,408 since December 31, 2000. Since
September 30, 1999, the peak level of Company debt, the Company has reduced its
debt by $1,677,329 or 40.0%.
Of the Company's total debt at September 30, 2001 of $2,522,694, debt of
$106,454 is related to the Company's primary bank credit agreements maturing in
June 2002. These credit agreements provide for total borrowings up to $649,218
as of September 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 September 30, 2001,
the Company was in compliance with the above mentioned covenants. All of the
above amount of $106,454 is outstanding under the 2-year term loan.
27
At September 30, 2001, the Company had $208,793 classified as current
maturities of long-term debt. With non-recurring receipts of funds expected in
the fourth quarter 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 September 30, 2001 and 2000 of
$108,433 and $108,960, respectively. For the nine months ended September 30,
2001 and 2000, the Company reported EBITDA before restructuring and
non-recurring charges of $383,372 and $386,545, 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. Taking into
account the Company's dispositions of funeral service and cemetery operations,
the Company believes its current annual run rate of EBITDA is approximately
$460,000 to $470,000.
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 September 30, 2001
and December 31, 2000 was $274,114 and $215,350, respectively.
Sources and Uses of Cash
Net cash provided by operating activities was $332,327 for the nine months ended
September 30, 2001 compared to $308,842 for the same period of 2000. Included in
the $308,842 for the nine months ended September 30, 2000 is $147,033 of net
cash provided by discontinued operations. From continuing operations, net cash
provided by operating activities was $161,809 for the nine months ended
September 30, 2000. The Company received funds of approximately $50,700 and
$96,500 in the nine months ended September 30, 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 $216,318 primarily as a result of (i) approximately $116,000 of
cash received from certain income tax refunds, (ii) increases in funds received
from the Company's surety bonding programs for prearranged funeral and preneed
cemetery activities, (iii) 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, and (iv) less cash taxes and cash interest paid.
Net cash provided by investing activities was $298,374 for the nine months
ended September 30, 2001 compared to net cash provided by investing activities
of $205,441 for the same period of 2000. Included in the $205,441 in the nine
months ended September 30, 2000 is $122,966 of net cash used in investing
activities by discontinued operations. Net cash provided by investing activities
from continuing operations was $328,407 for the nine months ended September 30,
2000. The decrease of $30,033 in net cash provided by investing activities from
continuing operations in the nine months ended September 30, 2001 compared to
the same period of 2000 is primarily related to approximately $50,000 less of
proceeds received in 2001 compared to the same period of 2000 related to the
Company's asset sales and joint venturing programs.
Net cash used in financing activities was $636,360 for the nine months
ended September 30, 2001 compared $524,064 for the same period of 2000. Included
in the $524,064 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
$667,562 for the nine months ended September 30, 2000. The net cash that was
used in financing activities in the first
28
three quarters of 2001 and 2000 is related to the Company's debt reduction
initiatives. The Company primarily used funds from certain income tax refunds,
collection of receipts from funeral and cemetery trust funds, proceeds from
sales of property and equipment, proceeds from the completion of joint ventures
and sales of certain international operations and its cash flow from operations
to reduce its debt in both periods.
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 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. Begun in 2000 and continuing into 2001, 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 and bonding
sources creating general agency revenue, overrides and increased cash flow 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 September 30, 2001, the Company had deferred revenues of
$6,331,542, of which $4,537,578 is Deferred prearranged funeral contract
revenues and $1,793,964 is Deferred preneed cemetery contract revenues, to be
recognized as revenue in future periods. For the nine months ended September 30,
2001 and 2000, the percentage of North American funeral services performed which
were previously prearranged was 29.8% and 28.0%, respectively, and is expected
to increase over time. Worldwide net prearranged funeral sales were
approximately $400,000 for the nine months ended September 30, 2001 and 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 new provision, goodwill will no longer be amortized, but
will be tested for impairment annually. Currently, the Company has $1,950,814 in
goodwill presented as
29
Names and reputations in the Company's consolidated balance sheet. Amortization
of goodwill will continue to be amortized through December 31, 2001 and was
$45,315 and $49,002 for the nine months ended September 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 is expected to result in a
non-cash charge that could have a significant effect on the Company's
consolidated balance sheet and consolidated statement 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.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under the new provision, the fair value of a
liability for an asset retirement obligation should be recognized in the period
in which it is incurred, if a reasonable estimate can be made. The associated
costs are capitalized as part of the carrying amount of the long-lived asset and
allocated to expense over the useful life of the asset. The Company does not
expect the adoption of SFAS No. 143 to have a significant effect on the
Company's consolidated balance sheet, consolidated statement of operations, or
consolidated statement of cash flows. The Company is required to adopt SFAS No.
143 during the first quarter of the year ending December 31, 2003.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121, and addresses impairment or disposal of long-lived
assets. The Company is currently assessing the impact of this statement on the
Company's consolidated balance sheet and consolidated statement of operations,
and does not believe it will have a significant impact on the consolidated
statement of cash flows. The Company is required to adopt SFAS No. 144 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 in this Form 10-Q that are not historical facts are
forward-looking statements made in reliance on the "safe harbor" protections
provided under 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 others, the following:
1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g., marketable security
values, as well as currency and interest rate fluctuations) 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 for the year ended December 31, 2000,
including:
o the continuation of cost reduction initiatives,
o the continuation of actions to improve operating free cash flow,
including the sale of certain funeral and cemetery operations,
o the continuation of debt reduction initiatives,
30
o the implementation of strategic revenue and marketing initiatives
resulting in increased volume through its existing facilities, and
o the interest of third parties 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 general or local economic
conditions.
5) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including potential changes in
tax and accounting policies.
6) The Company's ability to successfully exploit its substantial purchasing
power with certain of the Company's vendors.
7) The outcomes of pending class action lawsuits against the Company involving
alleged violations of securities laws.
For further information on these and other risks and uncertainties, see the
Company's Securities and Exchange Commission filings, including the Company's
2000 Annual Report on Form 10-K. 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, whether as a result of new
information, future events or otherwise.
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 five
to the consolidated financial statements in Item 1 of this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following discussion describes certain litigation as of November 8,
2001, which has been previously reported by the Company:
In Re Service Corporation International; Cause No. H-99-0280; In the United
States District Court for the Southern District of Texas, Houston Division (the
Consolidated Lawsuit). The Consolidated Lawsuit was filed in January 1999 and
includes numerous separate lawsuits that were filed in various United States
District Courts in Texas. The Consolidated Lawsuit has been certified as a class
action and names as defendants the Company and three of the Company's current or
former executive officers or directors (the Individual Defendants).
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 the 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 class definition 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 (with one amendment by the Court to include
James P. Hunter, III as a class member). Mr. Hunter was the Chairman, President
and Chief Executive Officer of ECI at the time of its merger with a wholly-owned
subsidiary of the Company.
The plaintiffs in the Consolidated Lawsuit allege 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
31
outcome of the litigation. However, the Company believes that the allegations in
the Consolidated Lawsuit do not provide a basis for the recovery of damages
because the Company made all required disclosures on a timely basis. The Company
intends to aggressively defend this lawsuit. At the Court's direction, meetings
have been held between the parties and their insurers to discuss possible
resolution of the case, but no progress has been made. A Motion to Dismiss the
Consolidated Lawsuit filed by the Company and the Individual Defendants is
pending before the Court.
Several other lawsuits have been filed against the Company, the Individual
Defendants and other defendants, including, in the second and third lawsuits
listed below, the Company's independent accountants, PricewaterhouseCoopers,
LLP, in Texas state courts by former ECI shareholders, officers and directors.
These lawsuits include the following matters:
No. 32548-99-11; James P. Hunter, III, et al. v. Service Corporation
International, et al.; In the District Court of Angelina County, Texas
("Hunter" matter);
No. 2000-63917; Jack T. Hammer v. Service Corporation International, et
al.; In the 165th Judicial District Court of Harris County, Texas ("Hammer"
matter);
No. 33701-01-01; Jack D. Rottman v. Service Corporation International, et
al.; In the District Court of Angelina County, Texas ("Rottman" matter);
and
No. 31820-99-2; Charles Fredrick, Individually, and as a Representative of
the Class v. Service Corp. International; In the District Court of Angelina
County, Texas ("Frederick" matter).
These lawsuits allege, among other things, violations of Texas securities
law and statutory and common law fraud, and seek unspecified compensatory and
exemplary damages. Since these lawsuits are in their 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 these lawsuits.
However, the Company believes the allegations in these lawsuits, 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 Company is seeking
arbitration in the Hunter, Hammer, and Rottman matters.
In the Hunter matter, the Texas state district court denied the motion to
compel arbitration filed by the Company and the Individual Defendants. This
decision is currently on appeal to the Texas Supreme Court (Cause No. 01-0650;
In re Service Corporation International, et al.). In the Hammer matter, the
Texas state district court recently ordered the case to arbitration.
Additional information concerning the lawsuits in Texas federal and state
courts, including the dates instituted, the principal parties thereto, and the
allegations made by the plaintiffs are set forth in, and copies of certain
pleadings in these cases have been filed as exhibits to, the Company's prior
Form 10-K and Form 10-Q filings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the nine months
ended September 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).
32
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).
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended
September 30, 2001.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2001 SERVICE CORPORATION INTERNATIONAL
By: /s/ JEFFREY E. CURTISS
-------------------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
34
INDEX TO EXHIBITS
Exhibit
-------
12.1 Ratio of earnings to fixed charges for the nine months
ended September 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).