- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
---------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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 its charter)
<Table>
TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip code)
</Table>
Registrant's telephone number, including area code: 713/522-5141
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock ($1 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
6 3/4% Convertible Subordinated Notes Due 2008 New York Stock Exchange
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Securities Exchange Act of 1934 Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $862,198,386 based upon a closing market price of $2.94 on
March 10, 2003 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape. At June 28, 2002, the aggregate market
value of the Common Stock held by non-affiliates was $1,399,185,466 based upon a
closing market price of $4.83 per share.
The number of shares outstanding of the registrant's common stock as of
March 10, 2003 was 298,119,717 (net of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement in connection with its 2003 Annual
Meeting of Shareholders (Part III)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SERVICE CORPORATION INTERNATIONAL
INDEX
<Table>
<Caption>
PAGE
------
PART I
Item 1. Business.................................................... 2-5
Item 2. Properties.................................................. 5-6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matter to Vote of Security Holders............ 6-7
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters......................................... 7-8
Item 6. Selected Financial Data..................................... 8-9
Item 7. Management's Discussion and Analysis of Financial Conditions
and Result of Operations.................................... 9-36
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 36-37
Item 8. Financial Statements and Supplementary Data................. 38-91
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 92
PART III
Item 10. Directors and Executive Officers of the Company............. 92
Item 11. Executive Compensation...................................... 92
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 92
Item 13. Certain Relationships and Related Transactions.............. 92-93
Item 14. Controls and Procedures..................................... 93
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 93
Signatures............................................................ 94-95
Certification of Chief Executive Officer.............................. 96
Certification of Principal Financial Officer.......................... 97
Exhibit Index......................................................... 98-101
</Table>
1
PART I
ITEM 1. BUSINESS
(DOLLARS IN MILLIONS)
Service Corporation International is the largest funeral and cemetery
company in the world. The terms SCI or the Company include the registrant and
its subsidiaries, unless the context indicates otherwise. As of December 31,
2002, the Company operated 2,393 funeral service locations, 451 cemeteries and
189 crematoria located in eight countries. The Company also has minority
interest investments in funeral and cemetery operations in certain countries
outside of North America. As of December 31, 2002, the Company's North America
operations represented approximately 77% of the Company's consolidated revenues,
84% of consolidated gross profits and 62% of the Company's total operating
locations.
The Company's operations consist of funeral service locations, cemeteries,
crematoria and related businesses. The Company's funeral service locations
provide all professional services related to funerals, including the use of
funeral facilities and motor vehicles. Funeral service locations sell caskets,
coffins, burial vaults, cremation receptacles, flowers, burial garments and
other ancillary products and services. The Company's cemeteries sell interment
rights associated with cemetery property (including mausoleum spaces, lots and
lawn crypts) and cemetery merchandise (including stone and bronze memorials,
burial vaults, caskets and cremation memorialization products). The Company's
cemeteries also perform interment services and provide management and
maintenance of cemetery grounds. Certain cemeteries operate crematoria and
certain cemeteries contain gardens specifically for the purpose of cremation
memorialization. The Company owns 190 funeral service/cemetery combination
locations and 37 flower shops engaged principally in the design and sale of
funeral floral arrangements. With the aging of the population in North America,
the Company believes the death care industry possesses attractive
characteristics, and the Company is uniquely positioned, with its unparalleled
network of funeral service locations and cemeteries, to benefit from these
demographic trends.
The Company was incorporated in Texas in July of 1962. The Company's
principal corporate offices are located at 1929 Allen Parkway, Houston, Texas
77019 and its telephone number is (713) 522-5141. The Company's website is
http:/www.sci-corp.com. The Company makes available free of charge, on or
through its website, its annual, quarterly and current reports, and any
amendments to those reports, as soon as reasonably practicable after
electronically filing such reports with the Securities and Exchange Commission.
Information contained on the Company's website is not part of this report.
FUNERAL AND CEMETERY OPERATIONS
GENERAL
The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries, crematoria and related businesses. As of December
31, 2002, the Company's operations are organized into a North America division
covering the United States and Canada, a European division primarily responsible
for the Company's French operations and an Other Foreign division relating to
operations managed in the Pacific Rim and South America. Each division is under
the direction of divisional executive management with substantial industry
experience. Local funeral service location and cemetery managers, under the
direction of the divisional management, receive support and resources from the
Company's headquarters in Houston, Texas and have substantial autonomy with
respect to the manner in which services are conducted. The Company's operations
in its North America division are segregated into Eastern and Western
operations. The Eastern and Western operations in North America are managed by
separate operational and financial management teams. Within these Eastern and
Western operations in North America, the majority of the Company's funeral
service locations and cemeteries are managed in groups called clusters. These
clusters are geographical groups of funeral service locations and cemeteries
that can share common resources such as operating personnel, preparation
services, clerical and accounting staff, limousines, hearses and preneed sales
activity.
2
The death care industry in North America is characterized by a large number
of locally owned, independent operations. To compete successfully, the Company's
funeral service locations and cemeteries must maintain good reputations and high
professional standards in the industry, as well as offer attractive products and
services at competitive prices. The Company believes it has an unparalleled
network of funeral service locations and cemeteries that offer high quality
products and services at prices that are competitive with local competing
funeral homes, cemeteries and retail locations.
The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses. Some of the Company's funeral
service locations in its international operations operate under certain brand
names specific for a general area or country. The Company has branded its
funeral operations in North America under the Dignity Memorial(R) brand name. A
national brand name is new and unique to the death care industry in North
America. While this branding process is intended to emphasize the Company's
seamless national network of funeral service locations and cemeteries in North
America, the original names associated with acquired operations with their
inherent goodwill and heritage will generally remain the same.
In the death care industry, there has been a growing trend in the number of
cremations performed in North America as an alternative to traditional funeral
service dispositions. The west coast of the United States and the State of
Florida have the highest concentration of cremation consumers in North America.
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 than traditional
funeral services. In North America during 2002, 38.2% of all funeral services
performed by the Company were cremation cases, compared to 37.0% performed in
2001. The Company has expanded its cremation memorialization products and
services in several North American markets, which has resulted in higher average
sales for cremation cases compared to historical levels. The Company also
continues to expand its nationally branded cremation service locations called
National Cremation(R) Service (NCS). NCS currently operates in fourteen high
cremation states and has plans to expand to eighteen states by the end of 2003.
The Company believes that the NCS consumer would not have chosen traditional
funeral service locations as an alternative to NCS, and therefore is considered
an incremental customer to the Company.
Since its inception in the 1960's, the Company had been focused on the
acquisition and consolidation of independent funeral homes and cemeteries in the
very fragmented death care industry. During the 1990's, the Company also
expanded its operations through acquisitions in Europe, Australia, South America
and the Pacific Rim. In 1999, the Company, as well as other consolidators in the
death care industry, significantly reduced the level of acquisition activity and
focused on identifying and addressing underperforming businesses. This focus
resulted in the Company divesting of several North American and international
operations. During 2002 and 2001, the Company completed joint ventures of its
operations in Australia, United Kingdom, Spain and Portugal; and divested of its
operations in the Netherlands, Norway, Italy and Belgium. The Company has also
implemented plans to sell certain funeral service locations and cemeteries in
North America as going concerns or as real estate. The Company is currently in
discussions with various third parties concerning the joint venturing of its
remaining international operations and intends to operate a core business of
high quality funeral service locations and cemeteries in North America.
FUNERAL SERVICE LOCATIONS
The Company's 2,393 funeral service locations provide all professional
services relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral service locations sell caskets, coffins, burial vaults,
cremation receptacles, flowers, burial garments, and other ancillary products
and services. The Company's funeral service locations generally experience a
greater demand for their services in the winter months primarily related to
higher incidents of deaths from pneumonia and influenza.
In addition to selling its products and services to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets. Funeral prearrangement is a means through which a customer
contractually agrees to the terms of a funeral to be performed in the future.
All or a portion
3
of the funds collected from prearranged funeral contracts are placed in trust
accounts, pursuant to applicable law, or are used to pay premiums on life
insurance policies from third party insurers. In certain situations pursuant to
applicable laws, the Company will post a surety bond as financial assurance for
a certain amount of the preneed funeral contract in lieu of placing certain
funds in trust accounts. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K
for further details on the Company's practice of posting such surety bonds. At
December 31, 2002, the Company's Deferred prearranged funeral contract revenues
amounted to approximately $4.7 billion. For additional information regarding
prearranged funeral activities, see the Prearranged Funeral and Cemetery
Activities section in Financial Condition, Liquidity and Capital Resources in
Item 7 and notes two, three and four to the consolidated financial statements in
Item 8 of this Form 10-K.
CEMETERIES
The Company's cemeteries sell interment rights associated with cemetery
property such as mausoleum spaces, lots and lawn crypts, and sells cemetery
merchandise such as stone and bronze memorials, burial vaults, caskets and
cremation memorialization products. The Company's cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries operate crematoria and certain cemeteries contain gardens
specifically for the purpose of cremation memorialization.
Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery contracts is generally required by law to be paid into perpetual care
trust funds. Earnings from perpetual care trust funds are used to defray the
maintenance costs of cemeteries. Additionally, all or a portion of the proceeds
from the sale of preneed cemetery merchandise and services may be required by
law to be paid into merchandise and services trusts until the merchandise is
delivered or the service is provided. In certain situations pursuant to
applicable laws, the Company will post a surety bond as financial assurance for
a certain amount of the preneed cemetery contract in lieu of placing certain
funds into trust accounts. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K
for further details on the Company's practice of posting such surety bonds. At
December 31, 2002, the Company's Deferred preneed cemetery contract revenue
amounted to approximately $1.7 billion. For additional information regarding
cemetery preneed activities, see the Prearranged Funeral and Cemetery Activities
section in Financial Condition, Liquidity and Capital Resources in Item 7 of
this Form 10-K and notes two, three and five to the consolidated financial
statements in Item 8 of this Form 10-K.
COMBINED FUNERAL SERVICE LOCATIONS AND CEMETERIES
The Company currently owns 190 funeral service/cemetery combination
locations in North America in which a funeral service location is physically
located within or adjoining a Company cemetery. Combination locations allow
certain facility, personnel and equipment costs to be shared between the funeral
service location and cemetery and typically have a higher gross margin than if
the funeral and cemetery operations were operated separately. Combination
locations also create synergies between funeral and cemetery sales force
personnel and give consumers added convenience to purchase both funeral and
cemetery products and services at a single location.
DISCONTINUED OPERATIONS
The Company formerly owned two insurance companies: a French life insurance
company (Auxia) and a U.S. life insurance company (American Memorial Life
Insurance Company or AMLIC). These insurance operations assisted in the funding
of prearranged funeral contracts sold by Company-owned or affiliated funeral
service locations. During 2000, the Company completed the sales of both
insurance companies. Accordingly, the consolidated financial statements in this
Form 10-K have been reclassified to reflect these operations as discontinued.
Operating results from Auxia have been included through August 31, 2000 and the
operating results from AMLIC have been included through September 30, 2000, the
disposition dates of the respective companies. See note seventeen to the
consolidated financial statements in Item 8 of this Form 10-K.
4
EMPLOYEES
At December 31, 2002, the Company employed 21,088 (13,427 in the United
States) individuals on a full time basis and 7,836 (6,678 in the United States)
individuals on a part time basis. Of the full time employees, 20,452 were in the
funeral and cemetery operations and 636 were in corporate or other overhead
activities and services. All of the Company's eligible United States employees
who so elect are covered by the Company's group health and life insurance plans.
Eligible United States employees are participants in retirement plans of the
Company or various subsidiaries, while foreign employees are covered by other
Company defined or government mandated benefit plans. Although labor disputes
are experienced from time to time, relations with employees are generally
considered favorable.
REGULATION
The Company's operations are subject to regulations, supervision and
licensing under various U.S. federal, state, local and foreign statutes,
ordinances and regulations. The Company believes that it is in substantial
compliance with the significant provisions of such statutes, ordinances and
regulations. Since 1984, the Company has operated in the United States under the
Federal Trade Commission (FTC) comprehensive trade regulation rule for the
funeral industry. The rule contains requirements for funeral industry practices,
including extensive price and other affirmative disclosures and imposes
mandatory itemization of funeral goods and services. From time to time in
connection with the Company's former strategy of growth through acquisitions,
the Company entered into consent orders with the FTC that required the Company
to dispose of certain operations in order to proceed with such acquisitions, or
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a material adverse
effect on the Company's operations.
The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry had
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that has generally ended municipal control of the French
funeral service business and has allowed free competition among funeral service
providers. Under such legislation, the Exclusive Municipal Authority was
abolished in January 1996, and the Municipal Monopoly was eliminated in January
1998. Cemeteries in France are currently controlled by municipalities and
religious organizations. The Company sells cemetery merchandise such as markers
and monuments to consumers for use in these cemeteries.
ITEM 2. PROPERTIES
(DOLLARS IN MILLIONS)
The Company's executive headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and parking
garage. The other undivided one-half interest is owned by an unrelated third
party. The Company plans to acquire the building at the end of the lease in July
2005 for $2 million. The property consists of approximately 127,000 square feet
of office space and 185,000 square feet of parking space. The Company leases all
of the office space in the building for $59 thousand per month. The Company pays
all operating expenses. One half of the rent is paid to the wholly owned
subsidiary and the other half is paid to the owners of the remaining undivided
one-half interest. The Company owns and utilizes two additional buildings
located in Houston, Texas for corporate activities containing a total of
approximately 167,000 square feet of office space.
At December 31, 2002, the Company owned approximately 63% of the real
estate and buildings used by its 3,033 funeral service locations, cemeteries and
crematoria, and 37% of such facilities are leased. In addition, the Company
leased two aircraft pursuant to cancelable operating leases. At December 31,
2002, the Company operated 10,331 vehicles, of which 43% were owned and 57% were
leased. For additional
5
information regarding leases, see the Contractual, Commercial and Contingent
Commitments section in Financial Condition, Liquidity and Capital Resources in
Item 7 and note ten to the consolidated financial statements in Item 8 of this
Form 10-K.
At December 31, 2002, the Company's 451 cemeteries contained a total of
approximately 30,763 acres, of which approximately 55% was developed.
The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition and management of the
Company believes that these standards are met.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is set forth in note ten to the
consolidated financial statements in Item 8 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth as of March 14, 2003 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.
<Table>
<Caption>
YEAR FIRST
BECAME
OFFICER NAME AGE POSITION OFFICER(1)
- ------------ --- -------- ----------
R. L. Waltrip............................. 72 Chairman of the Board and Chief 1962
Executive Officer
B. D. Hunter.............................. 73 Vice Chairman of the Board 1986
Thomas L. Ryan............................ 37 President and Chief Operating 1999
Officer
Michael R. Webb........................... 44 Executive Vice President 1998
Jeffrey E. Curtiss........................ 54 Senior Vice President Chief 2000
Financial Officer and Treasurer
Stephen M. Mack........................... 51 Senior Vice President Eastern 1998
Operations
James M. Shelger.......................... 53 Senior Vice President General 1987
Counsel and Secretary
J. Daniel Garrison........................ 51 Vice President Operations 1998
Services
W. Cardon Gerner.......................... 48 Vice President Accounting 1999
Frank T. Hundley.......................... 43 Vice President Finance 2000
Eric D. Tanzberger........................ 34 Vice President and Corporate 2000
Controller
Stephen J. Uthoff......................... 51 Vice President Chief Information 2000
Officer
Sumner J. Waring, III..................... 34 Vice President Western Operations 2002
</Table>
- ---------------
(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.
6
Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.
Mr. Hunter was appointed Vice Chairman of the Board in January 2000. For
more than five years, prior to February 2002, Mr. Hunter had been the Chairman
of Huntco, Inc., an intermediate steel processor, and was also its Chief
Executive Officer prior to May 2000. In February 2002, Huntco, Inc., filed a
petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code
during a severe downturn in the steel industry. Mr. Hunter has been a director
of the Company since 1986 and also served as Vice Chairman of the Board of the
Company from September 1986 to May 1989.
Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. In August 2002, Mr. Curtiss' responsibilities changed
to include the responsibilities of Treasurer of the Company. From January 1992
until July 1999, Mr. Curtiss served as Senior Vice President and Chief Financial
Officer of Browning-Ferris Industries, Inc., a waste services company.
Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of Equity Corporation International (ECI) and in March 1999 was
promoted to Vice President Corporate Controller. In August 2002, Mr. Gerner's
responsibilities and position changed to Vice President Accounting. Before the
acquisition, Mr. Gerner had been Senior Vice President and Chief Financial
Officer of ECI since March 1995. Prior thereto, Mr. Gerner was a partner with
Ernst & Young LLP.
Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
In August 2002, Mr. Hundley's responsibilities and position changed to Vice
President Finance. Prior thereto, Mr. Hundley served for more than five years in
various capacities at Banc of America Securities, LLC, its predecessors and
affiliates, including as Managing Director.
Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President -- Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.
Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 2002, there were 6,984 holders of record of
the Company's common stock.
In October 1999, the Company suspended payment of regular quarterly cash
dividends on its outstanding common stock in order to focus on improving cash
flow and reducing existing debt. Under the Company's bank credit agreement, the
Company is restricted from paying dividends and making other distributions.
The table below shows the Company's quarterly high and low common stock
prices for the two years ended December 31, 2002:
<Table>
<Caption>
2002 2001
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First quarter.......................................... $5.50 $4.55 $4.75 $1.56
Second quarter......................................... 5.15 3.60 7.23 4.22
Third quarter.......................................... 4.64 2.25 7.90 5.82
Fourth quarter......................................... 3.71 2.42 6.45 4.64
</Table>
7
SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.
On May 9, 2002, the Company issued 10,000 shares of common stock to each of
ten non-employee directors pursuant to the 2001 Stock Plan for Non-Employee
Directors. On May 10, 2002, the Company issued 5,012 shares of common stock to
each of nine directors and, pursuant to deferrals, became obligated to issue
5,012 to each of three directors in the future pursuant to the Director Fee
Plan. The Company did not receive any monetary consideration for the issuances.
These issuances were unregistered because they did not constitute a "sale"
within the meaning of Section 2(3) of the Securities Act of 1933, as amended.
For equity compensation plan information, see Part III of this report on
pages 92 and 93.
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following selected consolidated financial data for the years December
31, 1998 through 2002 is derived from the Company's audited consolidated
financial statements. This data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes to the consolidated
financial statements included in Item 8 of this Form 10-K.
In 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses
accounting for goodwill and other intangible assets and redefines useful lives,
amortization periods and impairment of goodwill. Under the new pronouncement,
goodwill is no longer amortized, but is tested for impairment annually by
assessing the fair value of reporting units, generally one level below
reportable segments. As a result of the adoption of SFAS No. 142, the Company
recognized a non-cash charge reflected as a cumulative effect of accounting
change of $135.6 million, net of applicable taxes, related to the impairment of
goodwill in its North American cemetery reporting unit.
In 2000, the Company implemented Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). See note three to
the consolidated financial statements in Item 8 of this Form 10-K for more
details on the implementation of SAB No. 101. As a result of this
implementation, the Company changed certain of its accounting policies regarding
prearranged sales activities. The Company recorded a non-cash charge reflected
as a cumulative affect of accounting change of $909.3 million, net of applicable
taxes, as of January 1, 2000.
The selected consolidated statement of operations data presented below is
reported on a pro forma basis to reflect the application of SFAS No. 142 and SAB
No. 101 to the financial data for the four years ended December 31, 2001 and the
two years ended December 31, 1999, respectively. Further, results of operations
have been reclassified for all periods presented to separately reflect results
of discontinued operations. See note seventeen to the consolidated financial
statements of Item 8 of this Form 10-K for further discussion of discontinued
operations.
8
SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
PRO FORMA
AS REPORTED ---------------------------------------------
2002 2001 2000 1999 1998
----------- --------- --------- --------- ---------
SELECTED CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue from continuing
operations...................... $ 2,272.4 $ 2,510.3 $ 2,564.7 $ 2,745.1 $ 2,354.8
(Loss) income from continuing
operations before extraordinary
items and cumulative effects of
accounting changes.............. $ (101.2) $ (549.2) $ (372.7) $ (157.2) $ 183.8
Net (loss) income.................. (231.9) (550.3) (1,289.9) (137.7) 194.9
Earnings per share:
(Loss) income from continuing
operations before extraordinary
items and cumulative effects of
accounting changes
Basic........................... $ (.34) $ (1.92) $ (1.37) $ (.58) $ .72
Diluted......................... (.34) (1.92) (1.37) (.58) .70
Net (loss) income
Basic........................... $ (.79) $ (1.93) $ (4.74) $ (.51) $ .76
Diluted......................... (.79) (1.93) (4.74) (.51) .75
Cash dividends per share........... -- -- -- .27 .36
SELECTED CONSOLIDATED BALANCE SHEET
DATA (AS REPORTED):
Total assets....................... $10,723.8 $11,579.9 $12,875.3 $12,978.2 $11,729.8
Long-term debt, less current
maturities...................... 1,884.5 2,314.0 3,091.3 3,636.1 3,764.6
Stockholders' equity............... 1,303.8 1,432.9 1,975.8 3,495.3 3,154.1
</Table>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)
INTRODUCTION
The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 2002, the Company operated 2,393 funeral service
locations, 451 cemeteries and 189 crematoria located in eight countries. The
Company also has minority interest investments in funeral and cemetery
operations in certain countries outside of North America. As of December 31,
2002, the Company's North America operations represented approximately 77% of
the Company's consolidated revenues, 84% of consolidated gross profits and 62%
of the Company's total operating locations.
The Company's funeral and cemetery operations are organized into a North
America division covering the United States and Canada, a European division
primarily responsible for the Company's French operations and an Other Foreign
division relating to operations in the Pacific Rim and South America. The
Company's operations in its North America division are segregated into Eastern
and Western operations. The Eastern and Western operations in North America are
managed by separate operational and financial management teams. Within these
Eastern and Western operations in North America, the majority of the Company's
funeral service locations and cemeteries are managed in groups called clusters.
These clusters are geographical groups of funeral service locations and
cemeteries that can share common resources such as operating personnel,
preparation services, clerical and accounting staff, limousines, hearses and
preneed sales activity.
9
STRATEGIC INITIATIVES
Historically, the Company's growth was largely attributable to acquiring
funeral and cemetery businesses. This acquisition program created the world's
largest network of funeral service locations and cemeteries. During the
mid-1990s, the funeral and cemetery acquisition market became extremely
competitive resulting 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 growth
from its existing operations. As a result, the Company's strategic plan became
focused on reducing overhead costs, increasing cash flow and reducing debt,
while at the same time developing key revenue initiatives designed to drive
future growth in the Company's funeral and cemetery operations without the
significant outlay of capital. At the end of 2002, the Company's capital
structure and cash flows were dramatically improved compared to 1999 levels. At
December 31, 2002, net debt was $1.78 billion and recurring operating free cash
flow was $210 million during 2002. These results, related to net debt and
recurring operating free cash flow, were better than guidance ranges previously
communicated by the Company. Net debt is defined as total debt less cash and
cash equivalents and recurring operating free cash flow is defined in Financial
Condition, Liquidity and Capital Resources within Item 7 of this Form 10-K.
The Company's operational goals during 2003 are to establish new avenues to
grow its existing base of funeral and cemetery revenues while diligently
managing its cash expenses. The Company will also examine during 2003 other
opportunities to grow its North America funeral and cemetery operations
primarily using its strong cash flows from operations. These potential growth
opportunities could include acquisitions of high-quality funeral service
locations and cemeteries in large or strategic North America markets, additional
construction of funeral service locations on Company-owned cemeteries and the
construction of high-end cemetery property development projects. The Company's
financial objectives in 2003 focus on continued stabilization of the Company's
capital structure by generating strong cash flows, completing asset divestitures
and further debt reduction. A goal of the Company is to obtain a stable "BB"
credit rating from Standard & Poor's and a stable "Ba2" credit rating from
Moody's, with general access to the capital markets.
The death care industry in North America is facing several challenges that
need to be mitigated in order for the Company to grow its core funeral and
cemetery revenues. Such challenges in North America include an increasing trend
towards cremation, a lack of near-term projected growth in the number of deaths,
pricing competition and the ability to attract and retain high quality
individuals to the industry. Additionally, the Company's expectations of
valuations related to potential acquisitions of high-quality funeral service
locations and cemeteries in North America may be below current seller's
expectations.
In order to grow its existing base of funeral and cemetery revenues in
North America and report near-term improvement in these operations, the Company
believes it must be successful in executing certain tactical initiatives. The
Company believes the following tactical initiatives will solidify the
foundational base and create a cultural environment on which to build and grow
these operations in the near-term.
- Increasing the impact of the Company's Dignity Memorial(R) branded
funeral and cremation packages.
- Redesigning the Company's sales processes and organization.
- Improving the Company's business and financial processes.
- Developing the appropriate organizational structure in order to promote
better teamwork, accountability and execution.
- Developing other initiatives including the implementation of local market
action plans.
In addition to the Company's national brand name for its operations in
North America, Dignity Memorial(R) also represents a unique set of packaged
funeral and cremation plans offered exclusively for the Company's network. The
Dignity Memorial(R) funeral and cremation packages are designed to simplify
customer decision-making and include new products and services, which have
traditionally not been available through funeral service locations. The
Company's goal is to continue to increase in 2003 the customer selection rate of
the Dignity Memorial(R) packaged plans, which on average have a $2,000 higher
average revenue per funeral service compared to non-Dignity Memorial(R) sales.
10
The Company has recently implemented significant changes to the
organizational structure, processes and quality of its sales efforts. These
changes are expected to reduce costs and improve cash flows in 2003 in the
Company's North America funeral and cemetery operations. Examples of these
changes to the Company's sales processes and organization include eliminating
ineffective lead procurement programs and shifting to personal referrals,
restructuring and aligning compensation and incentive programs, reducing sales
management positions and reducing turnover and other unproductive sales
activities.
The Company is currently in the process of improving business and financial
processes and systems that support its North America funeral and cemetery
operations. These changes are designed to ultimately reduce the Company's costs
supporting the core funeral and cemetery operations. Examples of these business
and financial processes and system improvements include the implementation of a
new point of sale system at the individual funeral home or cemetery level,
outsourcing certain accounting functions, redesigning reporting systems and
focusing remaining support services to be aligned with the field operational
objectives.
The Company is also currently in the process of streamlining its
organizational structure and focusing its near-term training programs on
leadership and development of key field management. These changes are designed
to foster an environment with the management of its funeral and cemetery
operations in North America that promotes teamwork, accountability and execution
of the Company's strategic initiatives. Other initiatives the Company is
developing include the implementation of local market action plans designed to
grow funeral and cemetery revenues and aligning all compensation programs within
the Company with clear and definable goals.
In addition to the Company's tactical initiatives to improve its North
America funeral and cemetery operations in the near-term, the Company is
currently developing its long-term strategic plan with an emphasis on three
concepts that will be addressed and developed to create a strategic framework
for future growth in shareholder value.
- Growing core funeral and cemetery profits by attracting new business to
existing locations.
- Expansion in large or strategic markets in North America.
- Investing in the Company's human capital.
The Company believes it must attract new customers and business in order to
grow core funeral and cemetery profits over the long-term. Actions by the
Company to attract new customers over the long-term include developing a more
contemporary marketing model that incorporates market segmentation such as
targeting traditional versus cremation consumers, leveraging and developing the
power of the Company's Dignity Memorial(R) national brand in North America and
continuing to develop affinity relationships with organizations containing large
groups of individuals to whom the Company could exclusively market its products
and services.
The Company's long-term strategic plan being developed will also address
Company plans to expand its funeral and cemetery network in large or strategic
markets in North America. The Company will address in this plan the criteria for
such expansion, including future capital deployment through acquisition,
construction or franchising of funeral and cemetery operations.
The Company also believes it must invest in its human capital and
resources. Attracting, hiring, developing and retaining high quality management
and employees will be a key long-term objective of the Company as it develops
this long-term strategic plan.
OUTLOOK FOR 2003
The Company's outlook for 2003 projects strong cash flows and further
improvements in its capital structure compared to 2002. As disclosed earlier in
this section, the Company's operational goals during 2003 are to establish new
avenues to grow its existing base of funeral and cemetery revenues while
diligently managing its cash expenses. The Company will also examine during 2003
other opportunities to grow its North America funeral and cemetery operations
primarily using its strong cash flows from operations. These potential growth
opportunities could include acquisitions of high-quality funeral service
locations and
11
cemeteries in large or strategic North America markets, additional construction
of funeral service locations on Company-owned cemeteries and the construction of
high-end cemetery property development projects.
The Company intends to operate a core business of high-quality funeral
service locations and cemeteries in North America. Due to the uncertain timing
of the Company's expectation to joint venture its French operations during 2003,
the Company's 2003 outlook includes its French operating results for the full
year of 2003. If the Company executes such a transaction during 2003, the
Company's 2003 outlook would be affected accordingly. The Company's French
operations are projected to have gross profits of approximately $55-$65 million,
cash flows from operating activities of approximately $40-$50 million and
capital expenditures of approximately $15-$20 million.
Due to the uncertainty surrounding the possibility or timing of certain
events during 2003, the Company's 2003 outlook does not contain earnings per
share guidance calculated in accordance with accounting principles generally
accepted in the United States of America (GAAP). Events which the Company
believes could possibly occur during 2003 and could have an effect on the
Company's 2003 earnings per share include, among others, the following:
- The possibility of the completion of a joint venture transaction with the
Company's French operations.
- The possibility of gains or losses related to the Company disposing of
funeral homes, cemeteries or undeveloped cemetery property associated
with previously announced asset disposition programs or in the normal
course of its business.
- The possibility of gains or losses from early extinguishments of debt.
- The possibility of the recognition of a cumulative effect of an
accounting change from the adoption of newly required accounting
pronouncements.
- The possibility of the recognition of costs associated with settlements
of litigation to which the Company is currently a party.
The Company's outlook for 2003 contains only operating and liquidity
measures that are calculated in accordance with GAAP. The Company's results to
be reported publicly in the future will primarily contain financial results that
are GAAP figures. The Company will continue to report results from comparable or
"same store" North America funeral and cemetery operations.
2003 FULL YEAR FORECASTED GAAP MEASURES
<Table>
<Caption>
2003 FULL YEAR FORECAST
-----------------------
Operating Measures
North America Comparable (or "Same Store") Operations:
Funeral Revenues.......................................... $1,090-$1,150
Cemetery Revenues......................................... $500-$550
Funeral Gross Margin Percentage........................... 18%-22%
Cemetery Gross Margin Percentage.......................... 9%-13%
International Operations:
Revenues.................................................. $500-$550
Gross Margin Percentage................................... 10%-14%
General and Administrative Expenses......................... $75-$85
Interest Expense............................................ $140-$155
Other Income................................................ $10-$20
Consolidated Effective Tax Rate............................. 36%-38%
Liquidity Measures
Depreciation and Amortization............................... $145-$165
Cash Flows From Operating Activities........................ $350-$400
Capital Expenditures........................................ $110-$130
</Table>
12
The following qualitative commentary describes the Company's assumptions,
estimates and beliefs supporting its 2003 outlook.
Operating Measures
- The Company's 2003 outlook for North America comparable funeral revenues
assumes an equivalent amount to slightly fewer funeral services performed
offset by projected low single digit percentage increases in the average
revenue per funeral service compared to 2002 levels. The North America
comparable funeral gross margin percentage should be positively impacted
in 2003 by reductions in costs related to changes in the Company's sales
structure and processes. This positive impact will be somewhat offset by
increased personnel (including pension) and insurance costs.
- The Company's 2003 outlook for North America comparable cemetery revenues
is projected to be below 2002 levels resulting from more normalized
levels of completion of cemetery property development projects in 2003
compared to 2002 as well as from projected reductions in revenues
resulting from changes in the Company's sales structure and processes.
The North America comparable cemetery gross margin percentage should be
flat to slightly down in 2003 as a result of the lower projected cemetery
revenues as well as from higher expected cemetery maintenance costs.
These negative impacts should be partially offset by cash savings
resulting from the changes in the Company's sales structure and processes
described earlier.
- Revenues and the gross margin percentage from international operations
are expected to be flat to above 2002 levels primarily related to a
projected improvement in operating performance in 2003 from the Company's
French operations. In addition to projected operating improvement, the
Company's French operations will not incur depreciation expense in 2003
in anticipation of the completion of the joint venture of such operations
in 2003. Approximately $8.9 million of depreciation expense was
recognized in 2002 related to the Company's French operations.
Significant movements in foreign currency, particularly the Euro, could
affect these projected results from the Company's international
operations.
- General and administrative expenses in 2003 are projected to be below
2002 levels. This projection includes approximately $4 million of new
expenses anticipated in 2003 resulting from the Company's decision to
utilize a new long-term incentive compensation program, which will
recognize expenses currently as compared to the utilization of stock
options in previous periods. As in 2002, the Company will incur in 2003
approximately $13.5 million of accelerated non-cash amortization expense
related to existing capitalized system costs as a result of the Company's
decision to implement new information systems.
- Interest expense is projected to be lower in 2003 compared to 2002 levels
as the Company believes it will continue to reduce its debt levels.
- Other income in 2003 is projected to primarily consist of interest income
and income from the Company's cash override agreement with a third party
insurance company that funds prearranged funeral contracts for consumers.
- The Company's consolidated effective tax rate is projected to increase to
approximately 37% in 2003 primarily related to the utilization in
previous years of the Company's net operating loss carry-forwards related
to its French operations.
Liquidity Measures
- As stated above, the Company's 2003 outlook for depreciation and
amortization assumes no depreciation expense related to the Company's
French operations in anticipation by the Company of the completion of the
joint venture of such operations in 2003. Approximately $8.9 million of
depreciation expense was recognized in 2002 related to the Company's
French operations. Amortization expense of approximately $40 million is
included in the Company's 2003 outlook related to preneed cemetery
deferred selling costs in North America.
13
- Cash flows from operating activities in 2003 is expected to be above 2002
levels. Approximately $85-$95 million of net non-recurring sources of
cash flows, primarily related to a $92 million cash tax refund received
in February 2003, is projected to be included in cash flows from
operating activities during 2003. In 2002, the Company had net
non-recurring sources of cash flows of $82.1 million included in cash
flows from operating activities. The Company also does not expect to pay
U.S. federal income taxes for the next several years due to tax loss
carry-forwards.
- Capital expenditures are projected to be slightly higher in 2003 as the
Company expects to invest more growth capital into projects that are
expected to increase future revenues. Of the Company's total projected
capital expenditures in 2003 of $110-$130 million, the Company expects to
spend approximately $75-$85 million in capital expenditures deemed
reasonably necessary to maintain the Company's funeral homes, cemeteries,
crematoria and other facilities in a condition consistent with Company
standards.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING CHANGES
The Company's consolidated financial statements are impacted by the
accounting policies used and the estimates and assumptions made by management
during their preparation. The following is a discussion of the Company's
critical accounting policies pertaining to revenue recognition, the impairment
or disposal of long-lived assets, and the use of estimates.
REVENUE RECOGNITION
Funeral revenue is recognized when funeral services are performed. The
Company's trade receivables primarily consist of amounts due for funeral
services already performed. The Company sells price guaranteed prearranged
funeral contracts through various programs providing for future funeral services
at prices prevailing when the agreements are signed. Revenues associated with
sales of prearranged funeral contracts, which include accumulated trust earnings
and increasing insurance benefits, are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements
in Item 8 of this Form 10-K).
Sales of atneed cemetery interment rights, merchandise and services are
recognized when the service is performed or merchandise delivered. Preneed
cemetery interment sales of constructed cemetery burial property are not
recognized until a minimum of 10% of the sales price has been collected. Once
10% of the sales price is collected, all of the constructed interment sale
revenue is recognized. Revenues related to the preneed sale of unconstructed
cemetery burial property is deferred until such property is constructed and the
minimum percentage of the sales price has been collected. Currently, the Company
defers certain direct selling costs, primarily commissions and fringe benefits,
associated with preneed cemetery sales and then expenses those costs as the
associated revenue is recognized. (See notes three and five to the consolidated
financial statements in Item 8 of this Form 10-K.)
Costs related to the sales of interment rights are the accumulation of
property costs and development costs specifically identified by project. At the
completion of the project, costs are charged to operations as revenue is
recognized. Costs related to sales of merchandise and services are based on
actual costs incurred.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets to
be held and used be reported at the lower of their carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of their carrying
amount or fair value less estimated cost to sell.
In 2002, the Company ceased depreciation of operating assets held for sale
during the year. During the year, the Company determined transactions to sell or
joint venture certain assets would be delayed until after
14
2002. As a result, the Company resumed normal depreciation of those assets held
in France and Chile in the third quarter of 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. These estimates and
assumptions affect the carrying values of assets and liabilities and disclosures
of contingent assets and liabilities at the balance sheet date and the amounts
of revenues and expenses recognized during the period. Actual results could
differ from such estimates. Key estimates used by management, among others,
include:
Allowance for doubtful accounts -- The Company estimates its allowance
for doubtful accounts based on analysis of historical collection activity.
These estimates could be impacted by changes in the economy, among other
things.
Depreciation of long-lived assets -- The Company depreciates its
long-lived assets over their estimated useful lives. These estimates of
useful lives may be affected by such factors as changing market conditions
or changes in regulatory requirements. In 2002, the Company changed the
estimated useful life of its existing information technology systems as a
result of the decision to implement a new North America point of sale
system and an upgraded general ledger system. The Company recognized
approximately $13.5 million of additional amortization expense relate to
this change in estimate.
Amortization of deferred selling costs -- The Company changed the
amortization period of its deferred prearranged funeral selling costs from
20 years to 12 years, a period representing the estimated life of the
prearranged funeral contracts. The change in estimate was made in order to
more accurately reflect current trends regarding the timeframe from when a
prearranged contract is sold to when it is serviced atneed. This change in
estimate reduced funeral gross profit by approximately $6.7 million. In
future years, this estimate could be further impacted by changes in
mortality rates and changes in the demographics of the Company's customers.
Taxes -- The Company's ability to realize the benefit of its deferred
tax assets requires the Company to achieve certain future earnings levels.
The Company has established a valuation allowance against a portion of its
deferred tax assets and could be required to further adjust that valuation
allowance if market conditions change materially and future earnings are,
or are projected to be, significantly different from its current estimates.
The Company intends to permanently reinvest the unremitted earnings of
certain of its foreign subsidiaries in those businesses outside the United
States and, therefore, has not provided for deferred federal income taxes
on such unremitted foreign earnings.
Preneed cemetery revenues -- The Company recognizes revenues
associated with preneed cemetery merchandise and services upon evidence of
delivery of such merchandise and services. The Company has an ongoing
review program of its obligations for delivery of cemetery merchandise and
services. Included in the Company's backlog of preneed cemetery contract
revenues of approximately $1.7 billion are estimates made by management
related to the status of delivery of cemetery merchandise and services. Any
changes in these estimates in future periods and resulting revenue
recognition of these obligations will vary and depend upon the outcome of
such continuous obligation reviews.
Pension cost -- The Company's pension costs and liabilities are
actuarily determined based on certain assumptions including expected
long-term rates of return on plan assets and the discount rate used to
compute future benefit obligations. The Company's policy is to use a
discount rate comparable to rates of return on high-quality fixed income
investments available and expected to be available during the period to
maturity of the Company's pension benefits. Actuarial gains and losses
resulting from changes in the assumptions, or experience different from
those assumptions, are amortized over the remaining service period of
active employees expected to receive benefits under the plans.
15
ACCOUNTING CHANGES
In 2002, the Company adopted 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 established the
purchase method for accounting for such transactions. SFAS No. 142 addresses
accounting for goodwill and other intangible assets and redefines useful lives,
amortization periods and impairment of goodwill. Under the new pronouncement,
goodwill is no longer amortized, but is tested for impairment annually by
assessing the fair value of reporting units, generally one level below
reportable segments. As a result of the adoption of SFAS No. 142, the Company
recognized a charge reflected as a cumulative effect of accounting change of
$135.6 million or $.46 per diluted share related to the impairment of goodwill
in its North American cemetery reporting unit.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which superceded SFAS No. 121. SFAS No. 144
requires that long-lived assets to be held and used be written down to fair
value when it is concluded that the carrying value of such assets are not
recoverable on an undiscounted cash flow basis. Assets to be disposed of by sale
are required to be recorded at the lower of their carrying amounts or fair value
less estimated cost to sell. The Company adopted SFAS No. 144 during the first
quarter of 2002 with no impact on the results of operations, financial position
or cash flows.
In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain
Derivatives Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133." In accordance with these pronouncements, the Company
recognized a cumulative effect of accounting change of $7.6 million or $.03 per
diluted share. The charge primarily related to the recognition of net deferred
charges from interest rate gains and losses realized on the termination of swap
agreements designated as cash flow hedges. These charges were previously
amortized into interest expense over the terms of the swap agreements, whereas
the new standards require recognition as the derivative gains and losses are
incurred.
In 2000, the Company implemented SAB No. 101 which changed the Company's
accounting policies regarding the manner in which it records prearranged sales
activities. The implementation of SAB No. 101 had no effect on the consolidated
cash flows of the Company. The accounting change, which occurred as a result of
the required implementation of SAB No. 101, has been treated as a change in
accounting principle effective as of the beginning of 2000. For a more detailed
discussion of these changes, see note three to the consolidated financial
statements in Item 8 of this Form 10-K. As a result of the implementation of SAB
No. 101, the Company recognized a cumulative effect of accounting change of
$909.3 million or $3.34 per diluted share.
RESULTS OF OPERATIONS
For the year ended December 31, 2002, the Company reported total revenues
from continuing operations of $2,272.4 million, representing a 9.5% decrease
compared to total revenues from continuing operations for 2001 of $2,510.3
million. Gross profit from continuing operations improved 1.3% to $363.9 million
and the gross margin percentage increased in 2002 to 16.0% from 14.3% in 2001.
The decline in revenues is primarily attributable to operations disposed in 2001
and 2002, while the improvement in gross profit and margin percentage is the
result of the cost reduction initiatives and reduced changes in estimates of
previously deferred cemetery revenue during the year. Excluding non-recurring
items and including pro forma adjustments to 2001, the Company reported $92.1
million ($.31 per diluted share) and $114.7 million ($.39 per diluted share) of
earnings before non-recurring items for the full year of 2002 and 2001,
respectively.
In 2002, the Company ceased amortization of goodwill as required by SFAS
No. 142; changed the amortization period of deferred prearranged funeral
obtaining costs from 20 to 12 years; changed the allocation methodology of
overhead costs in North America to be based on funeral and cemetery reporting
unit revenues; began recognizing revenues associated with delivered caskets
previously prearranged on cemetery contracts as part of funeral operations
instead of cemetery operations; and ceased depreciation of operating assets held
for sale during 2002. In 2002, the Company determined transactions to sell or
joint venture certain assets would be delayed until after 2002. As a result, the
Company resumed normal depreciation of those assets held in
16
France and Chile in the third quarter of 2002. For purposes of the following
discussion, the Company has presented the financial information for 2001 and
2000 on a pro forma basis as if these changes had been implemented in all years
presented. Further, results in all periods presented are representative of the
Company's comparable results, which excludes operations that were acquired or
constructed after January 1, 2001 and divested by the Company prior to December
31, 2002. As a result, some acquisitions entered into in 2000 may not be
included for the full year depending on the timing of the acquisition.
Comparable financial results are meant to be reflective of the Company's "same
store" results of operations. For further information, refer to Non-GAAP
Financial Measures in Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-K. The following is a
discussion of the Company's results of comparable operations by geographic
segment:
<Table>
<Caption>
COMPARABLE YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------------------------------------------------------
NORTH AMERICA % OF REVENUE EUROPE % OF REVENUE OTHER FOREIGN % OF REVENUE TOTAL % OF REVENUE
------------- ------------ ------ ------------ ------------- ------------ -------- ------------
Revenues:
Funeral............ $1,111.8 64.9% $479.9 100.0% $ 6.9 19.9% $1,598.6 71.7%
Cemetery........... 602.4 35.1% -- --% 27.8 80.1% 630.2 28.3%
-------- ----- ------ ----- ----- ----- -------- -----
$1,714.2 100.0% $479.9 100.0% $34.7 100.0% $2,228.8 100.0%
======== ===== ====== ===== ===== ===== ======== =====
Gross profit and
margin percentage:
Funeral............ $ 227.4 20.5% $ 47.4 10.0% $ 2.8 40.6% $ 277.6 17.4%
Cemetery........... 77.4 12.8% -- --% 4.7 16.9% 82.1 13.0%
-------- ----- ------ ----- ----- ----- -------- -----
$ 304.8 17.8% $ 47.4 10.0% $ 7.5 21.6% $ 359.7 16.1%
======== ===== ====== ===== ===== ===== ======== =====
</Table>
<Table>
<Caption>
COMPARABLE PRO FORMA YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------------------------------------------
NORTH AMERICA % OF REVENUE EUROPE % OF REVENUE OTHER FOREIGN % OF REVENUE TOTAL % OF REVENUE
------------- ------------ ------ ------------ ------------- ------------ -------- ------------
Revenues:
Funeral............ $1,099.8 65.1% $431.3 100.0% $11.3 18.5% $1,542.4 70.7%
Cemetery........... 590.1 34.9% -- --% 49.9 81.5% 640.0 29.3%
-------- ----- ------ ----- ----- ----- -------- -----
$1,689.9 100.0% $431.3 100.0% $61.2 100.0% $2,182.4 100.0%
======== ===== ====== ===== ===== ===== ======== =====
Gross profit and
margin percentage:
Funeral............ $ 236.7 21.5% $ 36.5 8.5% $ 2.7 23.9% $ 275.9 17.9%
Cemetery........... 90.0 15.3% -- -- 12.4 24.8% 102.4 16.0%
-------- ----- ------ ----- ----- ----- -------- -----
$ 326.7 19.3% $ 36.5 8.5% $15.1 24.7% $ 378.3 17.3%
======== ===== ====== ===== ===== ===== ======== =====
</Table>
<Table>
<Caption>
COMPARABLE PRO FORMA YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------------------
NORTH AMERICA % OF REVENUE EUROPE % OF REVENUE OTHER FOREIGN % OF REVENUE TOTAL % OF REVENUE
------------- ------------ ------ ------------ ------------- ------------ -------- ------------
Revenues:
Funeral............ $1,086.6 68.4% $422.3 100.0% $11.9 20.6% $1,520.8 73.5%
Cemetery........... 502.1 31.6% -- --% 45.9 79.4% 548.0 26.5%
-------- ----- ------ ----- ----- ----- -------- -----
$1,588.7 100.0% $422.3 100.0% $57.8 100.0% $2,068.8 100.0%
======== ===== ====== ===== ===== ===== ======== =====
Gross profit and
margin percentage:
Funeral............ $ 244.5 22.5% $ 26.9 6.4% $ 3.6 30.3% $ 275.0 18.1%
Cemetery........... 46.3 9.2% -- --% 7.8 17.0% 54.1 9.9%
-------- ----- ------ ----- ----- ----- -------- -----
$ 290.8 18.3% $ 26.9 6.4% $11.4 19.7% $ 329.1 15.9%
======== ===== ====== ===== ===== ===== ======== =====
</Table>
17
FUNERAL
<Table>
<Caption>
COMPARABLE FUNERAL SERVICES PERFORMED
-------------------------------------------------
NORTH AMERICA EUROPE OTHER FOREIGN TOTAL
------------- ------- ------------- -------
December 31:
2002........................................... 272,792 137,668 4,069 414,529
2001........................................... 274,684 138,475 4,104 417,263
2000........................................... 274,147 142,387 4,286 420,820
</Table>
Comparable North America funeral revenues increased in 2002 compared to
2001 and 2000 despite a decline in the comparable number of funeral services
performed over those same periods. The decline in the number of funeral services
performed was offset by an increase in the average revenue per funeral service.
The average revenue per funeral service for comparable revenues was $4,042 in
2002, $3,976 in 2001 and $3,938 in 2000. This average revenue per funeral
service continues to be positively impacted by the Company's Dignity Memorial(R)
packaged funeral plans. The decline in the number of funeral services performed
is consistent with trends in mortality information, accumulated by the Company,
experienced throughout North America.
Comparable North America gross profit and margin percentage declined in
2002 compared to 2001 and 2000 as a result of increased costs associated with
full-time personnel. The gross margin percentage was within the Company's annual
2002 targeted range of 18% to 23% despite these increases in costs. In both 2002
and 2001, the Company has recorded reductions in the allowance for doubtful
accounts associated with funeral receivables in North America as collections
have improved.
In the death care industry, there has been a growing trend in the number of
cremations performed in North America as an alternative to traditional funeral
service dispositions. The west coast of the United States and the state of
Florida have the highest concentration of cremation consumers in North America.
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 than traditional
funeral services. In North America during 2002, 38.2% of all funeral services
performed by the Company were cremation cases, compared to 37.0% and 36.3%
performed in 2001 and 2000. In recent years the Company has continued to expand
its cremation memorialization products and services in several North America
markets which has resulted in higher average sales for cremation cases compared
to historical levels. The Company's cremation memorialization products and
services include providing memorial services, several options in memorialization
gardens built in certain sections of the Company's cemeteries, urns, and niches
in mausoleums or columbariums in which to place remains. The Company also
continues to expand its nationally branded cremation service company called
National Cremation(R) Service (NCS). NCS currently operates in fourteen states
with high cremation rates and has plans to continue to expand to eighteen states
by the end of 2003. The Company believes that the NCS consumer would not have
chosen the Company's traditional funeral service locations as an alternative to
NCS, and therefore is considered an incremental customer to the Company.
Comparable international funeral revenues also increased in 2002 compared
to 2001 and 2000 despite a decline in the number of funeral services performed.
The effect of foreign currency positively impacted 2002 by approximately $20.2
million and $6.0 million when compared to foreign currency exchange rates in
effect during 2001 and 2000, respectively, as a result in the strengthening of
the Euro relative to the U.S. dollar. Excluding this effect, revenues increased
as a result of increases in the average revenue per funeral service, incremental
products and services offered to client families and delivery of burial
monuments in France. Comparable international gross profit and margin percentage
improved in 2002 compared to 2001 and 2000. The increase in the gross profit and
margin percentage was the result of improved results in the Company's French
operations, as discussed above.
CEMETERY
Comparable North America cemetery revenues increased in 2002 compared to
2001 and 2000 as a result of increases in completed cemetery property
development projects and increases in the amount of cash
18
receipts and down payments received from preneed property sales. Preneed
cemetery property revenues are recognized when development of the property is
completed and customer payments are at least 10% of the total contract amount.
Comparable North America cemetery gross profit and margin percentage
declined in 2002 compared to 2001, but increased compared to 2000 as a result of
the Company's ongoing review of obligations to deliver cemetery merchandise and
services to customers in order to collect funds due to the Company from
applicable cemetery trust funds. As a result of these reviews, the Company
recognized revenue related to changes in estimates of previously Deferred
preneed cemetery contract revenues. This change in estimate increased revenues
and gross profits $23.4 million and $18.3 million, respectively, in 2002 and
$68.5 million and $54.9 million in 2001. The Company will continue to review
these obligations to deliver cemetery merchandise and services to customers,
however, the impact recognized in future periods may not be as significant as
prior years.
Comparable international cemetery revenues decreased in 2002 compared to
2001 and 2000 as a result of the effect of foreign currency translation, which
negatively impacted revenues in 2002 by approximately $21.3 million and $25.0
million when compared to foreign currency exchange rates in effect during 2001
and 2000, respectively. In January 2002, the Argentine peso, which previously
exchanged at a rate of one peso to one U.S. dollar, was converted to a free
floating currency. As a result, the Company's South America operations have
experienced negative adjustments in foreign currency translation. Comparable
international cemetery gross profit and margin percentage decreased also as a
result of the above mentioned currency effects.
OTHER INCOME AND EXPENSES
The Company's corporate general and administrative expenses increased in
2002 to $89.8 million from $70.3 million in 2001 and $79.9 million in 2000.
Included in the 2002 amount of $89.8 million is $13.5 million of accelerated
non-cash amortization expense related to existing capitalized system costs as a
result of the Company's decision in 2002 to implement new information systems.
The prior periods did not include any such accelerated non-cash amortization
expense. In addition to the $13.5 million of accelerated non-cash amortization
expense in 2002, general and administrative expenses increased primarily related
to approximately $12 million of professional fees and increases in the Company's
reserves for litigation matters recognized in the fourth quarter of 2002.
Expressed as a percentage of revenue from continuing operations, general and
administrative expenses were 3.9%, 2.8% and 3.1% for the years ended December
31, 2002, 2001 and 2000, respectively.
Impairment losses and other operating expenses, previously disclosed as
Restructuring and non-recurring charges, were $289.1 million in 2002 and
consisted of (i) $158.5 million for impairment losses from certain funeral and
cemetery operations being held for sale, (ii) $40.8 million to adjust the market
value of certain options associated with the Company's 6.3% Senior notes due
2020 (putable in 2003), (iii) $39.3 million from relieving certain individuals
from their consulting and/or covenant-not-to-compete contractual obligations,
(iv) $16.2 million related to the additional estimated reduction in the value of
the Company's businesses in Argentina due to the continued economic decline, (v)
$18.7 million related to the permanent reduction in value of equity investments
in North American companies, (vi) $12.9 million of severance costs for former
employees and (vii) $2.7 million primarily related to changes in estimates of
previously recorded charges for impaired operations. The Company will continue
to make adjustments as actual divestitures are consummated or better estimates
become available. For further information detailing these non-recurring items,
see note sixteen to the consolidated financial statements in Item 8 of this Form
10-K.
Impairment losses and other operating expenses recorded in 2001 were $644.1
million and consisted of $663.5 million in charges related to (i) the loss on
joint venturing the Company's Australian operations, (ii) losses from the
disposition of operations in the Netherlands, Norway and Belgium, and (iii) the
impairment of certain international operations held for sale. These charges were
offset by $19.4 million consisting of favorable changes in estimates of
previously recorded charges of certain divested North America funeral homes and
cemeteries and the Company's equity investment in a Canadian funeral home and
19
cemetery company. In 2000, the Company recorded impairment losses and other
operating expenses of $517.8 million which consisted of (i) $351.2 million of
impairment losses related to the planned divestitures of certain North America
businesses, (ii) $139.9 million related to the permanent reduction in the
carrying value of equity investments, and (iii) $26.7 million in changes in
estimates of previously recorded charges.
The Company recorded certain additional non-recurring items during 2002,
2001 and 2000, related to extraordinary gains on early extinguishments of debt,
net losses associated with the sales of the Company's discontinued operations
and cumulative effects of accounting changes. For a detailed discussion of these
and other non-recurring items, see Non-GAAP Financial Measures included in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this Form 10-K.
Interest expense decreased to $161.5 million in 2002 compared to $211.6
million and $281.5 million in 2001 and 2000, respectively. The decrease in
interest expense reflects the successful reduction in the Company's debt
balance. The Company's average outstanding debt was $2.2 billion in 2002
compared to $2.8 billion and $3.7 billion in 2001 and 2000, respectively.
Other income was $19.0 million in 2002 compared to $15.1 million and $17.5
million in 2001 and 2000, respectively. Other income primarily consists of
income from various notes receivable and cash investments, equity earnings of
investments in certain companies and cash overrides from prearranged funeral
sales with third party insurance companies. Other income increased in 2002 as a
result of increased income on cash investments offset by an increase in bad debt
reserves on a loan to an international crematory made by the Company.
Gains from dispositions were $16.4 million in 2002 compared to $16.2
million and $17.2 million in 2001 and 2000, respectively. Included in gains from
dispositions are asset sales not associated with previously recognized
impairment charges. Also included in 2001 was a $2.1 million gain recognized on
the sale of 85% of the Company's Spain and Portugal operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
<Table>
<Caption>
DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Cash and cash equivalents.............................. $ 200.6 $ 29.3 $ 47.9
Total debt............................................. 1,984.8 2,534.6 3,268.1
-------- -------- --------
Net debt (total debt less cash)........................ $1,784.2 $2,505.3 $3,220.2
======== ======== ========
</Table>
The Company continued to improve its balance sheet and liquidity in 2002.
The Company's total debt less cash and cash equivalents decreased by $721.1
million or 28.8% during 2002 as a result of strong cash flows and a successful
asset divestiture/joint venture program that produced approximately $325 million
of net pretax cash proceeds for the Company. The majority of these net pretax
cash proceeds resulted from the completion of a joint venture transaction in
2002 related to the Company's operations in the United Kingdom, which generated
approximately $273 million of net pretax cash proceeds. Additionally, the
Company's debt balance at December 31, 2001 included $113.5 million of debt
associated with the financial restructuring of the Company's French subsidiary,
which was satisfied with non-cash French financial assets during 2002. In the
third quarter of 2002, the Company completed an exchange of $172.2 million of
the Company's 6.0% senior notes due 2005 for 7.7% senior notes due 2009. In
addition to extending $172.2 million of debt maturities an additional four
years, this transaction had the non-cash effect of reducing the Company's net
debt by $21.1 million.
The Company's 2003 outlook discussed in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contains liquidity
measures that are calculated in accordance with GAAP. The Company's results to
be reported publicly in the future will primarily contain financial results that
are GAAP financial measures. In 2002 and 2001, the Company has reported the
liquidity measure EBITDA before non-recurring items and recurring operating free
cash flow. These measures should be considered non-GAAP financial measures and
are provided to more clearly present the financial results that management uses
20
to manage its funeral and cemetery businesses. Reconciliations of these non-GAAP
financial measures to the most directly comparable financial measures calculated
in accordance with GAAP are presented in the section Non-GAAP Financial Measures
included in this Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company calculates the non-GAAP financial measure EBITDA before
non-recurring items for each period presented by adding interest, tax,
depreciation and amortization expenses back to earnings before non-recurring
items. The term earnings before non-recurring items is a non-GAAP financial
measure representing earnings excluding certain non-recurring items. The
reconciliation of earnings before non-recurring items to the net losses reported
by the Company under GAAP in 2002 and 2001 are contained in the section Non-
GAAP Financial Measures included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Reductions in EBITDA before
non-recurring items in 2002 compared to 2001 are primarily related to the
Company's asset divestiture and joint venture transactions that have occurred.
Calculations for EBITDA before non-recurring items for 2002 and 2001 are as
follows:
<Table>
<Caption>
FULL YEAR
---------------
2002 2001
------ ------
Earnings before non-recurring items......................... $ 92.1 $114.7
Add: Interest expense....................................... 161.5 211.6
Tax expense not associated with non-recurring items... 39.6 54.8
Depreciation and amortization(1)...................... 128.5 116.9
------ ------
EBITDA before non-recurring items........................... $421.7 $498.0
====== ======
</Table>
- ---------------
(1) 2001 depreciation and amortization is presented in this table pro forma as
if certain accounting changes made in 2002 were implemented in 2001 to
provide a more relevant comparison to the 2002 results.
The Company calculates the non-GAAP financial measure recurring operating
free cash flow by adjusting cash flows from operating activities to exclude (i)
cash payments associated with the Company's restructuring and non-recurring
charges and (ii) other cash receipts or payments (included in cash flows from
operating activities) which are of a non-recurring operational nature, and then
subtracting maintenance capital expenditures. Total operating free cash flow is
calculated in the same manner as above except the amount includes all
non-recurring cash payments and receipts and non-recurring or growth capital
expenditures. The Company's total operating free cash flow does not include
proceeds from business sales or joint ventures. The Company defines maintenance
capital expenditures as capital expenditures considered reasonably necessary to
maintain the Company's funeral service locations, cemeteries, crematoria and
other facilities in a condition consistent with Company standards. Growth
capital expenditures are considered expenditures made for the purpose of
generating additional or incremental revenues. The reconciliation of recurring
operating free cash flow to cash flows from operating activities calculated
under GAAP are contained in the Section Non-GAAP Financial Measures included in
this Management's Discussion and Analysis of Financial Condition and
21
Results of Operations. The following table details the calculation described
above for the Company's total and recurring operating free cash for 2002 and
2001.
<Table>
<Caption>
FULL YEAR
-----------------
2002 2001
------- -------
Operating free cash flow:
Consolidated cash flow provided by operating activities... $ 352.2 $ 383.3
Payments on restructuring charges......................... 12.8 22.8
------- -------
Adjusted cash flow from operating activities........... 365.0 406.1
------- -------
Capital Expenditures...................................... (100.1) (74.1)
------- -------
TOTAL OPERATING FREE CASH FLOW.............................. 264.9 332.0
Less: Net non-recurring receipts.......................... (54.9) (161.5)
------- -------
RECURRING OPERATING FREE CASH FLOW.......................... $ 210.0 $ 170.5
======= =======
</Table>
Net non-recurring receipts for 2002 consist of $57.1 million of
non-recurring tax refunds, $25.0 million of net non-recurring receipts primarily
related to non-recurring funeral and cemetery trust receipts and escrow amounts
received related to divestitures, offset by $27.1 million of growth or
non-recurring capital expenditures. The $161.5 million of net non-recurring cash
receipts in 2001 includes $116.3 million of non-recurring tax refunds and the
collection of receivables from funeral and cemetery trust funds of approximately
$79.8 million, offset by non-recurring payments of approximately $27.9 million
related to the Company's curtailed pension plans and $6.7 million of other
non-recurring cash payments.
The Company's objectives in 2003 focus on continued stabilization of the
Company's capital structure by generating strong cash flows, completing asset
divestitures and further debt reduction. A goal of the Company is to obtain a
stable "BB" credit rating from Standard and Poor's and a stable "Ba2" credit
rating from Moody's, with general access to the capital markets.
The Company believes it currently has strong liquidity. As of February 26,
2003, the Company had liquidity of approximately $350 million, comprised of a
cash balance of approximately $250 million and approximately $100 million of
availability under the Company's $185 million credit facility. The Company has
no cash borrowings under this credit facility, but has issued approximately $85
million of letters of credit under the credit facility. At December 31, 2002,
the Company had current maturities of long-term debt of $100.3 million primarily
consisting of approximately $84 million of 6.3% Senior Notes due in March 2003.
Based on the Company's current cash balances, the Company believes it has
adequate means to meet its current maturities of long-term debt.
At February 26, 2003, the Company's maturity schedule for certain of its
outstanding senior public notes due in the near and intermediate term is as
follows:
<Table>
<Caption>
OUTSTANDING AT
FEBRUARY 26, 2003
-----------------
(IN MILLIONS)
6.3% senior notes due March 2003............................ $ 76
7.375% senior notes due April 2004.......................... $111
8.375% senior notes due December 2004....................... $ 51
6.0% senior notes due December 2005......................... $366
</Table>
Based on the Company's current cash balance, its expectation of future
annual cash flows, its expectation of future asset divestiture/joint venture
proceeds of approximately $300-$400 million, and its current borrowing capacity
under its credit facility, the Company believes it has adequate means to meet
its near and intermediate maturities of current and long-term debt.
22
CONTRACTUAL, COMMERCIAL AND CONTINGENT COMMITMENTS
The Company has assumed various financial obligations and commitments in
the ordinary course of conducting its business. The Company has contractual
obligations requiring future cash payments under existing contractual
arrangements, such as management, consultative and non-competition agreements.
The Company also has commercial and contingent obligations which result in cash
payments only if certain contingent events occur requiring the Company's
performance pursuant to a funding commitment.
The following table details the Company's known future cash payments (on an
undiscounted basis) related to various contractual obligations as of December
31, 2002.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004-2005 2006-2007 THEREAFTER
- ----------------------- -------- ------ --------- --------- ----------
Current maturities of long-term debt(1)..... $ 100.3 $100.3 $ -- $ -- $ --
Long-term debt(1)........................... 1,884.5 -- 604.7 348.9 930.9
Casket purchase agreement(2)................ 380.0 87.0 293.0 -- --
Operating and capital lease agreements(3)... 210.8 52.9 84.3 38.9 34.7
Contingent purchase obligation(4)........... 40.0 -- 40.0 -- --
Management, consultative and non-competition
agreements(5)............................. 218.7 80.2 77.2 41.8 19.5
-------- ------ -------- ------ ------
TOTAL CONTRACTUAL OBLIGATIONS............. $2,834.3 $320.4 $1,099.2 $429.6 $985.1
======== ====== ======== ====== ======
</Table>
- ---------------
(1) The Company's outstanding indebtedness contains standard provisions
including defaults on scheduled principal and interest payments and changes
of control clauses. In addition, the Company's bank credit agreement
contains a maximum leverage ratio and a minimum interest coverage ratio. For
further information see note seven to the consolidated financial statements
in Item 8 of this Form 10-K.
(2) The Company has a purchase agreement with a major casket manufacturer for
its North American operations with an original minimum commitment of $750
million over a six-year period expiring at the end of 2004. At December 31,
2002, the Company's remaining maximum commitment under the purchase
agreement was $380.0 million. The agreement contains provisions for annual
price adjustments. Additionally, the agreement provides for a one-year
extension period to 2005 in which the Company is allowed to satisfy any
remaining commitment that exists at the end of the original term.
(3) The majority of the Company's operating leases contain options to (i)
purchase the property at fair value on the exercise date, (ii) purchase the
property for a value determined at the inception of the leases, or (iii)
renew for the fair rental value at the end of the primary lease term. The
Company's operating leases primarily relate to funeral service locations,
automobiles, limousines, hearses, cemetery operating and maintenance
equipment and two aircraft. The Company has residual value exposures related
to certain operating leases of approximately $7.5 million. The Company
believes it is unlikely that it will have to make future cash payments
related to these residual value exposures.
(4) In connection with certain acquisitions related to the Company's South
America operations, the Company entered into contingent purchase obligations
with certain former owners of those businesses. These obligations require
the Company to pay additional consideration if cumulative earnings
thresholds, as defined in such agreements, are met between 2003 and 2005. As
of December 31, 2002, the contingent consideration is estimated to be
approximately $40 million. This additional consideration can be paid
partially in stock at the discretion of the former owners.
(5) The Company has entered into management employment, consultative and
non-competition agreements which contractually require the Company to make
cash payments over the contractual period. The agreements have been
primarily entered into with certain officers and employees of the Company
and former owners of businesses acquired. The contractual obligation amounts
pertain to the total commitment outstanding under these agreements and may
not be indicative of future expenses to be incurred related to these
agreements due to cost rationalization programs completed by the Company.
See note
23
sixteen to the consolidated financial statements in Item 8 of this Form 10-K
for further discussion regarding these cost rationalization programs.
The following table details the Company's known potential or possible
future cash payments (on an undiscounted basis) related to various commercial
and contingent obligations as of December 31, 2002.
<Table>
<Caption>
EXPIRATION BY PERIOD
----------------------------------------------------
COMMERCIAL AND CONTINGENT OBLIGATIONS TOTAL 2003 2004-2005 2006-2007 THEREAFTER
- ------------------------------------- ------ ------ --------- --------- ----------
Surety obligations(1)......................... $214.1 $214.1 $ -- $ -- $ --
Letters of credit(2).......................... 85.8 85.8 -- -- --
Lending commitment(3)......................... 9.6 9.6 -- -- --
Representations and warranties(4)............. 30.3 4.3 13.8 3.7 8.5
------ ------ ----- ---- ----
TOTAL COMMERCIAL AND CONTINGENT
OBLIGATIONS.............................. $339.8 $313.8 $13.8 $3.7 $8.5
====== ====== ===== ==== ====
</Table>
- ---------------
(1) In support of the Company's operations, the Company has entered into
arrangements with certain high quality surety companies whereby such
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 these surety bonds assure are appropriately recorded
on the Company's consolidated balance sheet as Deferred prearranged funeral
contract revenues and Deferred preneed cemetery contract revenues. The total
surety bonds outstanding at December 31, 2002 was $314.7 million ($303.7
million related to prearranged funeral and preneed cemetery obligations). In
the event all of the high quality surety companies cancelled or did not
renew the Company's outstanding surety bonds (generally renewed on a rolling
twelve-month basis), the Company would be required to obtain replacement
assurance or fund an estimate of $214.1 million as of December 31, 2002,
primarily into state mandated trust accounts. At this time, the Company does
not believe it will be required to fund material future amounts related to
these surety bonds.
(2) The Company is occasionally required to post letters of credit, issued by a
financial institution, to secure certain insurance programs or other
obligations. Letters of credit generally authorize the financial institution
to make a payment to the beneficiary upon the satisfaction of a certain
event or the failure of the Company to satisfy an obligation. The letters of
credit are generally posted for 1-year terms and are usually automatically
renewed upon maturity until such time as the Company has satisfied the
commitment secured by the letter of credit. The Company is obligated to
reimburse the issuer only if the beneficiary collects on the letter of
credit. The Company believes that it is unlikely it will be required to fund
a claim under its outstanding letters of credit. In 2002, the full amount of
the letters of credit were supported by the Company's credit facility which
expires July 2005.
(3) The Company's lending subsidiary had previously participated in a syndicated
credit facility which continues to be outstanding through June 2004. The
borrower, Carriage Services, Inc., has the ability to draw upon this undrawn
portion of its credit line at any time through maturity, and the Company is
required to provide the funding requested up to its total commitment amount,
which is $14.4 million.
(4) In addition to letters of credit described above, the Company currently has
contingent obligations of $30.3 million related to the Company's asset
sale/joint venture transactions. The Company has agreed to guarantee certain
representations and warranties associated with such disposition transactions
with letters of credit or interest bearing cash investments. The Company has
interest bearing cash investments of $15.3 million included in Deferred
charges and other assets collateralizing these contingent obligations. The
Company does not believe it will ultimately be required to fund to third
parties any claims against these representations and warranties.
24
SOURCES AND USES OF CASH
Net cash provided by operating activities was $352.2 million in 2002
compared to $383.3 million in 2001, a decrease of $31.1 million. The decrease is
primarily the result of (1) lower tax refunds and (2) less cash received from
the collection of receivables related to certain cemetery and funeral trust
funds, offset by (3) lower cash interest payments and (4) improvements in
working capital. Total cash tax refunds, net of payments, were $54.6 million in
2002 and $100.1 million in 2001. Trust fund receipts from the collection of
receivables from certain funeral and cemetery trust funds were $10.8 million and
$80.5 million in 2002 and 2001, respectively. Cash interest payments were $158.6
million and $218.4 million in 2002 and 2001 respectively. Also included in net
cash provided by operating activities is approximately $95.5 million and $93.0
million of cash receipts from the Company's surety bonding program for 2002 and
2001, respectively. See the further discussion of the Company's surety bonds in
the Financial Assurances section included in this Financial Condition, Liquidity
and Capital Resources.
Net cash provided by investing activities was $326.9 million in 2002
compared to $325.4 million in 2001. Net cash provided by investing activities
was flat in 2002 compared to 2001, despite an increase in capital expenditures
of $25.9 million and lower proceeds from sales and joint ventures of operations
of $44.4 million. These changes were offset by reduced cash collateral
requirements of $70.9 million as a result of settling certain options and
issuing letters of credit under the Company's credit facility.
Net cash used in financing activities was $505.5 million in 2002 compared
to $727.4 million in 2001. Included in 2002 was a use of cash of $57 million
related to the final settlement of certain options associated with the Company's
senior notes due 2020 (putable 2003). Excluding this transaction, net cash used
in financing activities in both periods is related to the Company's continued
debt reduction initiatives. The Company primarily used funds collected during
these periods from tax refunds, receipts from certain funeral and cemetery trust
funds, proceeds from sales and joint ventures of operations and its cash flow
from operations to reduce its debt.
PREARRANGED FUNERAL AND CEMETERY ACTIVITIES
In addition to selling its products and services to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets. Funeral prearrangement is a means through which a customer
contractually agrees to the terms of a funeral to be performed in the future.
All or a portion of the funds collected from prearranged funeral contracts are
placed in trust accounts, pursuant to applicable law, or are used to pay
premiums on life insurance policies from third party insurers. In certain
situations pursuant to applicable laws, the Company will post a surety bond as
financial assurance for a certain amount of the preneed funeral contract in lieu
of placing certain funds in trust accounts. See the Financial Assurances section
within this Financial Condition, Liquidity and Capital Resources section for
further details on the Company's practice of posting such surety bonds.
Cemetery sales are also made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery contracts is generally required by law to be paid into perpetual care
trust funds. Earnings from perpetual care trust funds are used to defray the
maintenance costs of cemeteries. Additionally, all or a portion of the proceeds
from the sale of preneed cemetery merchandise and services may be required by
law to be paid into merchandise and services trusts until the merchandise is
delivered or the service is provided. In certain situations pursuant to
applicable laws, the Company will post a surety bond as financial assurance for
a certain amount of the preneed cemetery contract in lieu of placing certain
funds into trust accounts. See the Financial Assurances section within this
Financial Condition, Liquidity and Capital Resources section for further details
on the Company's practice of posting such surety bonds.
For purposes of discussion in this section, the use of the term
"prearranged" or "prearrangement" refers to funeral programs specifically or
funeral and cemetery programs generally. The use of the term "preneed" refers to
cemetery programs specifically. Prearrangement is a means through which a
customer contractually agrees to the terms of a funeral and/or cemetery burial
to be performed or provided in the future.
25
Revenues associated with prearranged contracts are deferred until such time
that the funeral or cemetery services are performed or merchandise is delivered.
Preneed sales of cemetery interment rights (cemetery burial property) are not
recognized until a minimum of 10% of the sales price has been collected and the
property has been constructed. Compensation costs incurred related to the
acquisition of new prearranged funeral trust contracts, primarily commissions
and fringe benefits, are deferred as selling costs and amortized over 12 years,
a period representing the estimated life of the prearranged funeral contracts.
Prior to 2002, the amortization period was 20 years. As of January 1, 2002, the
Company changed the estimated period to 12 years to more accurately reflect
current trends regarding the timeframe from selling a preneed contract to when
it is serviced atneed. The amount of funeral deferred selling costs amortized in
the consolidated statement of operations for North America was $14.5 million and
$6.4 million in 2002 and 2001, respectively. Had the Company changed the
amortization period in 2001 from 20 to 12 years, the amortization expense would
have been $12.3 million in 2001. Cemetery deferred selling costs, primarily
commissions and fringe benefits, are expensed as the associated revenues are
recognized. Other costs associated with the sales and marketing of prearranged
contracts -- lead procurements costs, brochures and marketing materials,
advertising and administrative costs -- are expensed as incurred.
When prearranged funeral services and merchandise are funded through
insurance policies purchased by customers from third party life insurance
companies, the Company earns a commission on the sale of such policies for
acting as an agent in selling such insurance contracts. Such general agency
revenues are based on a percentage per contract sold and are recognized, net of
related expenses, when the insurance purchase transaction between the customer
and third party insurance provider has been completed. In 2002 and 2001, $13.0
million and $6.0 million, respectively, of net general agency revenues were
recognized. Excluding the related expenses being netted against the associated
general agency commissions, the Company recognized $48.1 million and $43.3
million of general agency revenues in 2002 and 2001, respectively. Additionally,
the Company may receive cash overrides related to life insurance policies sold
as a result of marketing agreements entered into in connection with the sale of
its insurance subsidiaries in 2000. These overrides are recorded in Other income
in the consolidated statement of operations.
The table below details the North America results of funeral and cemetery
prearranged production for the years ended December 31, 2002 and 2001 and the
related deferred selling costs incurred to procure the prearrangements.
Additionally, the table reflects revenues recognized and previously deferred
selling costs recognized in the consolidated statements of operations associated
with previously prearranged production for the years ended December 31, 2002 and
2001.
<Table>
<Caption>
NORTH AMERICA
---------------------------------
FUNERAL CEMETERY
--------------- ---------------
2002 2001 2002 2001
------ ------ ------ ------
ORIGINATION:
Prearranged production............................. $411.1 $398.7 $303.2 $322.7
Deferred selling costs............................. $ 17.0 $ 14.4 $ 44.2 $ 40.9
MATURITY:
Previously prearranged production included in
current period revenues.......................... $314.2 $293.0 $297.1 $288.0
Amortization/recognition of deferred selling costs
in current period(1)............................. $ 14.5 $ 6.4 $ 43.6 $ 37.8
</Table>
- ---------------
(1) The amortization of funeral deferred selling costs reflects the historical
amount recorded in 2001. If the amortization period was changed from 20 to
12 years as of January 1, 2001, the amortization would have been $12.3
million.
As described earlier, prearranged contracts can be funded through several
alternatives. For prearranged funeral or preneed cemetery contracts funded
through trusts, generally all or a certain portion of the funds collected are
required to be placed into trust accounts, pursuant to applicable law. Funds not
required to be placed into trust accounts are retained by the Company and used
for working capital purposes to help alleviate
26
the current cost of those prearrangement programs. Realized investment earnings
on funds placed into trust accounts are generally accumulated and deferred until
the maturity of each prearranged contract. However, in certain states, the
Company is allowed to distribute a portion of the realized investment earnings
before the prearrangement contract matures. When a prearranged trust contract
matures, the Company receives the principal and previously undistributed trust
fund income and any remaining receivable due from the customer. In certain
situations, the Company can post a surety bond as financial assurance pursuant
to applicable law in an amount that would otherwise be required to be trusted.
Funds collected on prearranged contracts where the Company has posted a surety
bond may be retained by the Company creating a source of working capital cash
flow generated from operating activities before the prearranged contract
matures. When the prearranged contract matures, the Company receives any
remaining receivable due from the customer. Finally, the customer may elect to
purchase an insurance contract from a third party life insurance company to fund
a prearranged funeral contract, the funds of which are collected and used to pay
premiums on life insurance or annuity contracts. Increasing death benefits
associated with life insurance contracts are accumulated and deferred until the
maturity of each prearranged contract. When a prearranged insurance contract
matures, the Company receives the proceeds from the third party insurance
companies consisting of the original contract amount and any increasing death
benefits.
Deferred prearranged funeral contract revenue or preneed cemetery contract
revenue is recognized in the consolidated statement of operations at the time
the service is performed or the merchandise is delivered. For trust or bonded
contracts, the revenue recognized is generally greater than the cash received by
the Company at the time a prearranged contract matures and creates a negative
effect on working capital cash flow generated from operating activities.
The cash flow activity from originating funeral production until the
maturity of the prearranged funeral contract is captured in the line item Net
effect of prearranged funeral production and maturities in the consolidated
statement of cash flows. Cash flow is provided by the amount retained from funds
collected from the customer and distributed trust fund earnings. This is reduced
by the payment of deferred selling costs and the use of funds to service matured
contracts.
The cash flow activity from originating the preneed cemetery contract until
recognition of the deferred revenue is reflected through Changes in receivables
and Changes in other assets in the consolidated statement of cash flows. Changes
in receivables is affected by cash flow provided by the amount retained from
funds collected from the customer and distributed trust earnings, and is reduced
by the use of funds to service preneed cemetery contracts. Changes in other
assets is affected by the cash use associated with the payment of deferred
selling costs when the preneed cemetery contracts are originated, offset by the
reduction in deferred selling costs associated with recognition of the preneed
cemetery revenue.
The following table reflects the total North American backlog of deferred
prearranged contract revenues and the prearranged assets associated with the
contracts at December 31. The difference between the amounts of Deferred
prearranged contract revenues and the prearranged assets associated with such
contracts represents future revenues to be recognized in which the associated
cash has already been collected by the Company.
<Table>
<Caption>
NORTH AMERICA
---------------------------------------------------------------
FUNERAL CEMETERY TOTAL
------------------- ------------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Deferred prearranged
contract revenues...... $3,638.3 $3,571.8 $1,671.6 $1,733.7 $5,309.9 $5,305.5
Deferred net selling
costs.................. 90.1 93.8 210.3 210.6 300.4 304.4
Prearranged assets:
Trust related assets... 980.9 984.5 859.3 915.1 1,840.2 1,899.6
Third party insurance
related assets...... 2,175.5 2,075.4 -- -- 2,175.5 2,075.4
</Table>
27
The deferred prearranged contract revenue associated with prearranged
funeral contracts and preneed cemetery contracts are reflected separately in the
consolidated balance sheet. Both funeral and cemetery deferred selling costs
(net of an estimated allowance for cancellation) are included as a component of
Deferred charges and other assets. Prearranged assets associated with
prearranged funeral contracts, which consist of amounts due from trusts,
customer receivables or third party insurance receivables (net of an estimated
allowance for cancellations), are reflected as Prearranged funeral contracts
separately in the consolidated balance sheet. Prearranged assets associated with
preneed cemetery contracts, which consist of amounts due from trusts and
customer receivables (net of an estimated allowance for cancellation) are
reflected in Current and Long term receivables in the consolidated balance
sheet.
The Company estimates that deferred revenue and deferred selling costs to
be recognized in 2003 for North America funeral and cemetery operations are
$322.0 million and $15.5 million for funeral, and $216.0 million and $31.5
million for cemetery, respectively.
FINANCIAL ASSURANCES
In support of operations, the Company has entered into arrangements with
certain high quality surety companies whereby such 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 used to support the Company's prearranged funeral and
preneed cemetery activities. The underlying obligations these surety bonds
assure are appropriately recorded on the Company's consolidated balance sheet as
Deferred prearranged funeral contract revenues and Deferred preneed cemetery
contract revenues (see notes four and five to the consolidated financial
statements in Item 8 and Prearranged Funeral and Cemetery Activities within
Financial Condition, Liquidity and Capital Resources of this Form 10-K for
further details regarding the Company's prearranged funeral and preneed cemetery
activities). The breakdown of bonds between funeral and cemetery
prearrangements, as well as surety bonds for other activities, is as follows:
<Table>
<Caption>
DECEMBER 31, 2002
-----------------
Prearranged funeral......................................... $108.3
Preneed cemetery:
Merchandise and services.................................. 172.8
Preconstruction........................................... 22.6
------
Bonds supporting prearranged funeral and cemetery
obligations........................................... 303.7
------
Bonds supporting prearranged business permits............... 4.9
Other bonds................................................. 6.1
------
Total bonds outstanding........................... $314.7
======
</Table>
As the Company sells prearranged funeral contracts and preneed cemetery
contracts, the Company intends to post surety bonds where allowed by applicable
law. The Company posts the surety bond in lieu of trusting a certain amount of
funds received from the customer. The amount of the bond posted is determined by
the total amount of the prearranged contract that would otherwise be required to
be trusted, in accordance with applicable state law. During 2002 and 2001, the
Company recognized $95.5 million and $93.0 million, respectively, in cash
receipts attributable to bonded sales.
Surety bond premiums are paid annually and are automatically renewable,
unless prior notice of cancellation, until maturity of the underlying
prearranged contracts. Except for cemetery preconstruction bonds (which are
irrevocable), the surety companies generally have the right to cancel the surety
bonds at any time with appropriate notice. In the event a surety company were to
cancel the surety bond, the Company would be required to obtain replacement
assurance or fund a trust for an amount generally less than the posted bond
amount, unless the customer's prearranged contract has been paid in full. A
quantitative detail of this subject is discussed in the Contractual, Commercial
and Contingent Commitments section included within
28
Financial Condition, Liquidity and Capital Resources. The Company does not
believe it will be required to fund material future amounts related to these
surety bonds.
The applicable Florida law which allows posting of surety bonds for
prearranged contracts expires December 31, 2004. Unless the law is otherwise
amended, the Company plans to shift from bonding to either trust or insurance
funding for prearranged funeral and cemetery programs in the state of Florida in
the year 2005. Prearranged contracts entered into prior to December 31, 2004
where the Company posts surety bonds will be allowed to continue to be bonded
for the remaining life of those contracts. Of the total bonding proceeds
received by the Company for 2002 and 2001, approximately $70.3 million and $67.2
million, respectively, were attributable to the state of Florida. Assuming the
Company's prearranged funeral and cemetery sales production in Florida in 2005
is consistent with production for the full year of 2002, the pre-tax forecasted
cash flow impact of shifting to trusting is expected to be approximately $20 to
$25 million lower in that year before considering the cash flow impact of
contracts going atneed. This forecast reduction in pre-tax cash flow involves
assumptions about the mix of preneed sales among property, merchandise and
services and the appropriate levels of trusting required by Florida law. Using
the same general assumptions, there would also be expected an estimated cash
flow decrease in years 2006 through 2009 of approximately $2 to $7 million per
year.
NON-GAAP FINANCIAL MEASURES
The Company has reported certain operating and liquidity financial measures
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations that exclude certain non-recurring items. These figures should be
considered non-GAAP financial measures and are provided to more clearly present
the financial results that management uses to manage its funeral and cemetery
businesses. Non-recurring items excluded from certain financial information are
related to discontinued operations, non-recurring charges for restructuring
activities or planned sales of businesses, cumulative effects of accounting
changes and extraordinary gains on early extinguishments of debt.
The Company has also adjusted the results of operations in 2001 and 2000 to
be consistent with the accounting presentations in 2002. Operating results for
2001 and 2000 have been presented in this Management's Discussion and Analysis
of Financial Condition and Results of Operations in a pro forma format as if
certain changes made in 2002 were implemented in those years to provide a more
relevant comparison to the 2002 results. Such changes include (1) discontinuing
amortization of goodwill pursuant to new accounting standards, (2) changing the
amortization period related to deferred prearranged funeral selling costs from
20 to 12 years, (3) revising the estimated allocation of overhead costs between
the funeral and cemetery segments, (4) recognizing as part of funeral operations
instead of cemetery operations, those revenues associated with delivered caskets
previously prearranged on cemetery contracts and (5) discontinuing the
depreciation of certain operating assets held for sale in 2002.
29
The following two tables reconcile the non-GAAP financial measures earnings
before non-recurring items and diluted EPS before non-recurring items to net
loss and diluted loss per share calculated under GAAP.
<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- ---------
Earnings before non-recurring items.................... $ 92.1 $ 114.7 $ 58.8
Adjust for 2001 pro forma items (after tax):
Goodwill amortization................................ -- (47.4) (52.8)
Amortization of deferred prearranged funeral
obtaining costs................................... -- 3.6 3.8
Depreciation expense related to operations held for
sale in 2002...................................... -- (14.5) (21.5)
Adjust for 2002 and 2001 non-recurring items (after
tax):
Gains from dispositions, impairment losses and other
operating expenses................................ (193.3) (653.0) (413.8)
Income from discontinued operations.................. -- 1.7 13.3
Loss on sale of discontinued operations.............. -- -- (43.7)
Extraordinary gains on early extinguishments of
debt.............................................. 4.9 4.7 21.9
Cumulative effects of accounting changes............. (135.6) (7.6) (909.3)
------- ------- ---------
Net loss............................................... $(231.9) $(597.8) $(1,343.3)
======= ======= =========
</Table>
<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- ---------
Diluted EPS before non-recurring items................. $ .31 $ .39 $ .22
Adjust for 2001 pro forma items (after tax):
Goodwill amortization................................ -- (.17) (.19)
Amortization of deferred prearranged funeral
obtaining costs................................... -- .01 .01
Depreciation expense related to operations held for
sale in 2002...................................... -- (.05) (.08)
Effect of dilution................................... -- .01 --
Adjust for 2002 and 2001 non-recurring items (after
tax):
Gains from dispositions, impairment losses and other
operating expenses................................ (.65) (2.28) (1.52)
Income from discontinued operations.................. -- .00 .05
Loss on sale of discontinued operations.............. -- -- (.16)
Extraordinary gains on early extinguishments of
debt.............................................. .01 .02 .08
Cumulative effects of accounting changes............. (.46) (.03) (3.34)
------- ------- ---------
Diluted loss per share................................. $ (.79) $ (2.10) $ (4.93)
======= ======= =========
</Table>
30
The Company calculates EBITDA for each period by adding interest, tax,
depreciation and amortization expenses back to earnings before non-recurring
items. Reported EBITDA before non-recurring items for the years ended December
31, 2002, 2001 and 2000 is $421.7 million, $498.0 million and $489.3 million,
respectively. The following table reconciles EBITDA before non-recurring items
to the Company's operating loss calculated under GAAP.
<Table>
<Caption>
DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
EBITDA before non-recurring items....................... $ 421.7 $ 498.0 $ 489.3
Less: Depreciation and amortization..................... (128.5) (193.9) (224.1)
Impairment losses and other operating expenses........ (289.1) (644.1) (517.8)
Other income.......................................... (19.0) (15.1) (17.5)
------- ------- -------
Operating loss.......................................... $ (14.9) $(355.1) $(270.1)
======= ======= =======
</Table>
The Company calculates the non-GAAP financial measure recurring operating
free cash flow by adjusting cash flows from operating activities to exclude (i)
cash payments associated with the Company's restructuring and non-recurring
charges and (ii) other cash receipts or payments (included in cash flows from
operating activities) which are of a non-recurring operational nature and then
subtracting maintenance capital expenditures. The Company defines maintenance
capital expenditures as capital expenditures considered reasonably necessary to
maintain the Company's funeral homes, cemeteries, crematoria and other
facilities in a condition consistent with Company standards. The following table
reconciles recurring operating free cash flow to cash flows from operating
activities calculated under GAAP. The following table reconciles recurring
operating free cash flow to cash flows from operating activities calculated
under GAAP.
<Table>
<Caption>
DECEMBER 31,
---------------
2002 2001
------ ------
Recurring operating free cash flow.......................... $210.0 $170.5
Add back: Net non-recurring items........................... 54.9 161.5
------ ------
Total operating free cash flow.............................. 264.9 332.0
Add back: Capital expenditures.............................. 100.1 74.1
Less: Payments on restructuring charges..................... (12.8) (22.8)
------ ------
Cash flows from operating activities........................ $352.2 $383.3
====== ======
</Table>
OTHER MATTERS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities an Interpretation of Accounting
Research Bulletin (ARB) No. 51." FIN No. 46 clarifies the application of ARB No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
defines the terms related to variable interest entities and clarifies if such
entities should be consolidated. The Company is currently assessing the impact
of FIN No. 46 on the Company's results of operations, financial position and
cash flows.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements in this Form 10-K 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 consolidated results in the future to differ materially from
the forward-looking
31
statements made herein and in any other documents or oral presentations made by,
or on behalf of, the Company. These factors are discussed below. 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.
RISKS RELATED TO THE COMPANY'S BUSINESS
The Company's ability to execute its strategic plan depends on many factors,
many of which are beyond the Company's control.
The Company's strategic plan is focused on reducing overhead costs,
increasing cash flow, asset redeployment, and reducing debt while at the same
time developing key revenue initiatives designed to generate future internal
growth in its core funeral and cemetery operations without the outlay of
significant additional capital. Many of the factors necessary for the Company's
execution of its strategic plan are beyond the Company's control. The Company
can give no assurance that it will be able to execute any or all of its
strategic plan. Failure to execute any or all of the strategic plan could have a
material adverse effect on the Company, its financial condition, results of
operations or cash flows.
The Company's indebtedness limits funds available for its operations.
As of December 31, 2002, the Company had approximately $2.0 billion in
debt. The Company's indebtedness may limit its ability to obtain additional
financing, limit its flexibility in planning for, or reacting to, changes in its
markets, require the sale of assets which it would otherwise want to retain and
require the dedication of more cash flow to service its debt than it desires.
The Company's ability to satisfy its indebtedness in a timely manner will be
dependent on the successful execution of its long-term strategic plan and the
resulting improvements in its operating performance.
The Company's bank credit agreement and indentures contain covenants that may
prevent the Company from engaging in certain transactions.
The Company's bank credit agreement and indentures contain, among other
things, various affirmative and negative covenants that may prevent the Company
from engaging in certain transactions that might otherwise be considered
beneficial to the Company. These covenants limit, among other things, the
ability of the Company and its subsidiaries to:
- borrow money;
- pay dividends or distributions;
- purchase or redeem stock;
- make investments;
- engage in transactions with affiliates;
- engage in sale-leaseback transactions; and
- consummate certain liens on assets.
The credit agreement also requires the Company to maintain certain
financial ratios and satisfy other financial condition tests. Although the
maturity of the Company's bank credit agreement brings an end to the
restrictions created by it, any future credit agreements or indentures may
contain terms and conditions that are more or less restrictive than those of the
existing bank credit agreement and indentures.
If the Company lost the ability to use surety bonding to support its
prearranged funeral and preneed cemetery activities, the Company could have to
make material cash payments to fund certain trust funds.
The Company has entered into arrangements with certain high quality surety
companies whereby such 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
32
majority of the surety bonds issued and outstanding have been issued to support
the Company's prearranged funeral and preneed cemetery activities. In the event
the surety companies canceled or did not renew the outstanding surety bonds, the
Company could have to obtain replacement assurance or fund certain trust funds,
which could result in material cash outflows. Furthermore, the Company's future
cash flows could be materially affected if the Company lost access to using
surety bonds for financial assurance in its normal course of business.
The funeral home and cemetery industry is highly competitive.
In North America and most international markets in which the Company
operates, the funeral and cemetery industry is characterized by a large number
of locally owned, independent operations. To compete successfully, the Company's
funeral service locations and cemeteries must maintain good reputations and high
professional standards in the industry, as well as offer attractive products and
services at competitive prices. In addition, the Company must market itself in
such a manner as to distinguish itself from its competitors. If it is unable to
successfully compete, the Company, its financial condition, results of
operations and cash flows could be materially adversely effected.
The Company's affiliated funeral and cemetery trust funds own investments in
equity securities and mutual funds, which are affected by financial market
conditions that are beyond the Company's control.
In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise sales, affiliated funeral and cemetery trust funds own
investments in equity securities and mutual funds. The Company's earnings and
investment gains and losses on these equity securities and mutual funds are
affected by financial market conditions that are beyond the Company's control.
If the Company's earnings from perpetual care trust funds decline, the Company
would experience a decline in current revenues. If the Company's earnings from
other trust funds decline, the Company would likely experience a decline in
future revenues. In addition, if the trust funds experienced investment losses,
there would likely be insufficient funds in the trusts to cover the costs of
delivering services and merchandise or maintaining cemeteries in the future. The
Company would have to cover any such shortfall with cash flows, which could have
a material adverse effect on the Company, its financial condition, results of
operations or cash flows.
As of December 31, 2002, net unrealized depreciation in the prearranged
funeral and cemetery merchandise and services trust funds amounted to $68.7
million and $50.1 million respectively. The perpetual care trust funds had net
unrealized appreciation of $7.0 million as of December 31, 2002. See notes four
and five to the consolidated financial statements in Item 8 of this Form 10-K.
The following table summarizes the investment returns excluding fees on the
Company's trust funds for the last three years.
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Prearranged funeral trust funds............................. (7.6)% 1.7% 2.8%
Cemetery merchandise and services trust funds............... (5.5)% 1.0% 5.3%
Perpetual care trust funds.................................. 5.3% 4.3% 9.4%
</Table>
Increasing insurance benefits related to prearranged funeral contracts funded
through life insurance or annuity contracts may not cover future increases in
the cost of providing a price guaranteed funeral service.
The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreements are signed. For prearranged funeral contracts funded through life
insurance or annuity contracts, the Company receives in cash a general agency
commission of approximately 14% of the total sale from the third party insurance
company. Additionally, the Company accrues an increasing insurance benefit
associated with the contract of approximately 1% per year to be received in cash
by the Company at the time the funeral service is performed. There is no
guarantee that the increasing insurance benefit will cover future increases in
the cost of providing a price guaranteed funeral service, which could materially
adversely affect the Company's future cash flows, revenues and profit margins.
33
The Company may not be able to joint venture or sell its international
operations on acceptable terms or at all.
The Company's long-term strategic plan includes the joint venture or sale
of its remaining international operations outside of North America in order to
create cash proceeds to reduce debt. For example, the Company believes it can
joint venture its French operations in 2003. If the Company is unable to joint
venture or sell these operations on acceptable terms or otherwise, it could
adversely affect the Company's ability to achieve its strategic plan.
The Company's foreign operations and investments involve special risks.
The Company's activities in areas outside the United States are subject to
risks inherent in foreign operations, including:
- Loss of revenue, property and equipment as a result of hazards such as
expropriation, nationalization, wars, insurrection and other political
risks;
- The effects of currency fluctuations and exchange controls, such as
devaluation of foreign currencies and other economic problems; and
- Changes in laws, regulations and policies of foreign governments,
including those associated with changes in the governing parties.
The Company is the subject of lawsuits in Florida that, if decided against it,
could have a negative effect on its financial condition, results of operations
and cash flows and the Company may be subject to additional class action or
other significant lawsuits in the future.
Since December 2001, private plaintiffs and the state of Florida have
brought proceedings against the Company for, among other things, allegedly
deceiving customers by destroying caskets and remains and overselling space in
two south Florida cemeteries owned by a Florida operating subsidiary. The
private lawsuit is a purported class action which has not been certified but
seeks substantial damages. The state actions involve, among other things, the
appointment of an examiner to oversee the remedial actions and burial processes
at the two cemeteries, as well as a criminal investigation by the Florida
Department of Law Enforcement Agency. The ultimate outcome of these cases cannot
be determined at this time. The Company has insurance policies which are
designed to limit cash outflows in the event of a decision adverse to it in
these matters. If the costs or damages awarded against the Company in these
matters exceed the insurance coverage, if the insurance coverage is determined
not to apply to these amounts, or if an insurance carrier is unable to pay, the
Company would have to pay them out of its own funds, which could have a material
adverse effect on the Company, its financial condition, results of operations
and cash flows. In addition, the Company is in the ordinary course of business
involved in other litigation proceedings. There is a risk that one of the
lawsuits that the Company does not view as significant at the moment, or an
additional lawsuit brought in the future, could have a material adverse effect
on the Company, its financial condition, results of operations or cash flows.
The Company is the subject of securities fraud class action lawsuits that, if
decided against it, could have a negative effect on its financial condition,
results of operations and cash flows.
In January 1999, numerous putative class-action lawsuits were filed in the
United States District Courts for the Southern and Eastern Districts of Texas,
on behalf of persons and entities who (1) acquired shares of the Company's
common stock in the merger with Equity Corporation International, or ECI; (2)
purchased shares of the Company's common stock in the open market during the
period from July 17, 1998 through January 26, 1999 (referred to herein as the
class period); (3) purchased call options in the open market during the class
period; (4) sold put options in the open market during the class period; (5)
held employee stock options in ECI that became options to acquire the Company's
stock pursuant to the ECI merger; and (6) held employee stock options to
purchase the Company's common stock under a plan during the class period. These
actions have been consolidated into one lawsuit in the federal court in Houston,
Texas. The consolidated
34
complaint alleges that the Company and three of its current or former executive
officers and directors violated federal securities laws by making false and
misleading statements and failing to disclose material information concerning
the Company's prearranged funeral business and other financial matters,
including in connection with the ECI merger. Plaintiffs allege damages based on
the market loss, during the class period, of the outstanding shares, including
those exchanged in the ECI merger. In October 1999, the Company filed a motion
to dismiss the consolidated complaint that has not been ruled on by the court.
Four similar cases were also brought in the state courts of Texas by former
officers, directors and shareholders of ECI alleging violations of Texas
securities laws and statutory and common law fraud in connection with the ECI
merger.
The ultimate outcome of the stockholder class-action and employee cases
cannot be determined at this time. The plaintiffs have not been required to
quantify their claim of damages, but the Company believes they are likely to
seek substantial amounts. Certain insurance policies held by the Company may
limit the Company's cash outflows in the event of a decision adverse to the
Company in these matters. If the legal costs or the damages awarded against the
Company exceed the insurance coverage, if the insurance coverage is determined
not to apply to these amounts, or if an insurance carrier is unable to pay, the
Company would have to pay them out of its own funds, which could have a material
adverse effect on the Company, its financial condition, results of operations or
cash flows.
RISKS RELATED TO THE DEATH CARE INDUSTRY
If the number of deaths in the Company's markets declines, its cash flows and
revenues may decrease.
The United States Bureau of the Census estimates that the number of deaths
in the United States will increase by approximately one percent per year from
2000 to 2010. However, longer life spans could reduce the number of deaths. If
the number of deaths declines, the number of funeral services and interments
performed by the Company will decrease and the Company, its financial condition,
results of operations and cash flows may be materially adversely effected.
The growing trend in the number of cremations performed in North America could
result in lower revenue and gross profit dollars.
In the death care industry, there has been a growing trend in the number of
cremations performed in North America as an alternative to traditional funeral
service dispositions. 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 than traditional funeral services. In North America during 2002, 38.2%
of all funeral services performed by the Company were cremation cases compared
to 37.0% and 36.3% performed in 2001 and 2000, respectively. In recent years the
Company has continued to expand its cremation memorialization products and
services in several North American markets, which has resulted in higher average
sales for cremation cases compared to historical levels. The Company also
continues to expand its nationally branded cremation service locations called
National Cremation(R) Service. If the Company is unable to successfully expand
its cremation memorialization products and services or its nationally branded
cremation service locations, the Company, its financial condition, results of
operations and cash flows could be materially adversely effected.
The funeral home and cemetery businesses are high fixed-cost businesses.
The majority of the Company's operations throughout the world are managed
in groups called "clusters". Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual overhead costs by sharing
common resources such as operating personnel, preparation services, clerical
staff, motor vehicles and preneed sales personnel. Personnel costs, the largest
of the operating expenses for the company, are the costs components most
beneficially affected by clustering. The Company must incur many of these costs
no matter the number of funeral services or interments performed. Because the
Company cannot necessarily decrease these costs when it experiences declines in
sales, declines in sales can cause margins, profits and cash flows to decline at
a greater rate than the decline in revenues.
35
The funeral home and cemetery industry is highly regulated.
The Company's operations are subject to regulation, supervision and
licensing under numerous foreign, federal, state and local laws, ordinances and
regulations, including extensive regulations concerning trust funds, preneed
sales of funeral and cemetery products and services, and various other aspects
of our business. The impact of such regulations varies depending on the location
of the Company's funeral and cemetery operations. Violations of applicable laws
could result in fines or other sanctions to the Company.
In addition, from time to time, governments and agencies propose to amend
or add regulations, which could increase costs and decrease cash flows. For
example, foreign, federal, state, local and other regulatory agencies have
considered and may enact additional legislation or regulations that could affect
the death care industry. Some states and regulatory agencies have considered or
are considering regulations that could require more liberal refund and
cancellation policies for preneed sales of products and services, limit or
eliminate the ability of the Company to use surety bonding, increase trust
requirements and prohibit the common ownership of funeral homes and cemeteries
in the same market. If adopted by the regulatory authorities of the
jurisdictions in which the Company operates, these and other possible proposals
could have a material adverse effect on the Company, its financial condition,
results of operations and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented below should be read in conjunction with notes
eight and nine to the consolidated financial statements in Item 8 of this Form
10-K.
The Company historically used derivatives primarily in the form of interest
rate swaps and cross-currency interest rate swaps in combination with local
currency borrowings in order to manage its mix of fixed and floating rate debt
and to hedge the Company's net investment in foreign assets. The Company
generally does not participate in derivative transactions that are leveraged or
considered speculative in nature. The Company was not a party to any derivative
transactions at December 31, 2002.
At December 31, 2002 and 2001, 99% of the Company's total debt consisted of
fixed rate debt at a weighted average rate of 6.87% and 6.75%, respectively.
The Company does not have a significant investment in foreign operations
that are in highly inflationary economies. Approximately 8% of the Company's net
investment and 21% of its operating income excluding impairment charges and
other operating expenses are denominated in foreign currencies at December 31,
2002. At December 31, 2001, approximately 16% of the Company's net investment
and 26% of its operating income excluding impairment charges and other operating
expenses were denominated in foreign currencies.
MARKETABLE EQUITY AND DEBT SECURITIES -- PRICE RISK
In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise and service sales, the related funeral and cemetery trust
funds own investments in equity securities and mutual funds, which are sensitive
to current market prices. Cost and market values as of December 31, 2002 and
2001 are presented in notes four and five to the consolidated financial
statements in Item 8 of this Form 10-K.
MARKET-RATE SENSITIVE INSTRUMENTS -- INTEREST RATE AND CURRENCY RISK
The Company performs a sensitivity analysis to assess the impact of
interest rate and exchange rate risks on earnings. This analysis determines the
effect of a hypothetical 10% adverse change in market rates. In actuality,
market rate volatility is dependent on many factors that are impossible to
forecast. Therefore, the adverse changes described below could differ
substantially from the hypothetical 10% change.
At December 31, 2002, the Company was not a party to any derivative
transactions. At December 31, 2001, the Company was party to two derivative
instruments that were subject to interest rate and currency exchange rate
exposures. Although the derivative instruments outstanding at December 31, 2001
were sensitive to market rates, they have been excluded from this analysis since
they qualify and are designated as effective hedges of net foreign investments.
Given this, the changes in the market values of these instruments,
36
caused by market rates, do not affect interest expense. Therefore, the effect of
the sensitivity analysis described below results solely from the Company's debt
instruments.
A sensitivity analysis of debt instruments with variable interest rate
components was modeled to assess the impact that changing interest rates could
have on pretax earnings. The sensitivity analysis assumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pretax earnings, on an annual
basis, would not change in 2002 and would be negatively impacted by
approximately $150 thousand on December 31, 2001.
A similar model was used to assess the impact of changes in exchange rates
for foreign currencies on interest expense. At December 31, 2002, the Company's
debt exposure was primarily associated with the Euro. At December 31, 2001, the
Company's debt exposure was primarily associated with the British pound. A 10%
adverse change in the strength of the U.S. dollar would have negatively affected
the Company's interest expense, on an annual basis, by approximately $190
thousand and $800 thousand on December 31, 2002, and 2001, respectively.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
<Table>
<Caption>
PAGE
----
Financial statements:
Report of Independent Accountants......................... 39
Consolidated Statement of Operations for the three years
ended December 31, 2002................................ 40
Consolidated Balance Sheet as of December 31, 2002 and
2001................................................... 41
Consolidated Statement of Cash Flows for the three years
ended December 31, 2002................................ 42
Consolidated Statement of Stockholders' Equity for the
three years ended December 31, 2002.................... 43
Notes to Consolidated Financial Statements................ 44-90
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts................... 91
</Table>
All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Service Corporation International
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Service Corporation International and its subsidiaries at December
31, 2002 and December 31, 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in note three to the consolidated financial statements, the
Company changed its method of accounting for goodwill on January 1, 2002,
changed its method of accounting for derivative financial instruments and
hedging activities on January 1, 2001 and changed its method of accounting for
prearranged sales activities on January 1, 2000.
PricewaterhouseCoopers LLP
Houston, Texas
March 14, 2003
39
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.............................................. $ 2,272,423 $ 2,510,343 $ 2,564,730
Costs and expenses.................................... (1,908,508) (2,150,957) (2,237,088)
----------- ----------- -----------
Gross profits............................... 363,915 359,386 327,642
General and administrative expenses................... (89,752) (70,309) (79,932)
Impairment losses and other operating expenses........ (289,054) (644,147) (517,776)
----------- ----------- -----------
Operating loss.............................. (14,891) (355,070) (270,066)
Interest expense...................................... (161,494) (211,626) (281,548)
Other income.......................................... 19,021 15,044 17,455
Gains from dispositions............................... 16,401 16,224 17,181
----------- ----------- -----------
Loss from continuing operations before
income taxes, extraordinary items and
cumulative effects of accounting
changes................................... (140,963) (535,428) (516,978)
Benefit (provision) for income taxes.................. 39,740 (61,199) 91,455
----------- ----------- -----------
Loss from continuing operations before extraordinary
items and cumulative effects of accounting
changes............................................. (101,223) (596,627) (425,523)
Income from discontinued operations (net of income tax
expense of $936 and $6,543 respectively)............ -- 1,701 13,347
Loss on disposal of discontinued operations (net of
income tax expense of $73,839)...................... -- -- (43,733)
Extraordinary gains on early extinguishments of debt
(net of income tax expense of $2,880, $3,024, and
$12,630, respectively).............................. 4,903 4,731 21,973
Cumulative effects of accounting changes (net of
income tax benefit of $11,234, $5,318 and $522,491,
respectively)....................................... (135,560) (7,601) (909,315)
----------- ----------- -----------
Net loss.................................... $ (231,880) $ (597,796) $(1,343,251)
=========== =========== ===========
Basic and diluted earnings per share:
Loss from continuing operations before extraordinary
items and cumulative effects of accounting
changes.......................................... $ (.34) $ (2.09) $ (1.56)
Income from discontinued operations................. -- .00 .05
Loss on disposal of discontinued operations......... -- -- (.16)
Extraordinary gains on early extinguishments of
debt............................................. .01 .02 .08
Cumulative effects of accounting changes............ (.46) (.03) (3.34)
----------- ----------- -----------
Net loss.................................... $ (.79) $ (2.10) $ (4.93)
=========== =========== ===========
Basic and diluted weighted average number of shares... 294,533 285,127 272,172
=========== =========== ===========
</Table>
(See notes to consolidated financial statements)
40
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
-------------------------
2002 2001
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 200,625 $ 29,292
Receivables, net of allowances............................ 291,765 386,479
Inventories............................................... 135,529 168,975
Other..................................................... 126,980 245,207
----------- -----------
Total current assets.............................. 754,899 829,953
----------- -----------
Prearranged funeral contracts, net of allowances............ 4,273,790 4,109,195
Long-term receivables, net of allowances.................... 1,156,458 1,249,492
Cemetery property, at cost.................................. 1,567,584 1,924,773
Property, plant and equipment, at cost (net)................ 1,188,340 1,357,410
Deferred charges and other assets........................... 598,536 699,805
Goodwill (net).............................................. 1,184,178 1,409,309
----------- -----------
$10,723,785 $11,579,937
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 361,910 $ 484,150
Current maturities of long-term debt...................... 100,330 220,640
Income taxes.............................................. 2,043 5,812
----------- -----------
Total current liabilities......................... 464,283 710,602
----------- -----------
Long-term debt.............................................. 1,884,508 2,313,973
Deferred prearranged funeral contract revenues.............. 4,659,994 4,596,116
Deferred preneed cemetery contract revenues................. 1,672,661 1,756,041
Deferred income taxes....................................... 522,453 546,747
Other liabilities........................................... 216,115 223,597
Commitments and contingencies (note ten)
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares
authorized, 297,010,237 and 292,153,765 issued and
outstanding (net of 2,516,396 and 2,502,190 treasury
shares at par)......................................... 297,010 292,154
Capital in excess of par value............................ 2,259,936 2,246,055
Accumulated deficit....................................... (1,046,029) (814,149)
Accumulated other comprehensive loss...................... (207,146) (291,199)
----------- -----------
Total stockholders' equity........................ 1,303,771 1,432,861
----------- -----------
$10,723,785 $11,579,937
=========== ===========
</Table>
(See notes to consolidated financial statements)
41
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(231,880) $(597,796) $(1,343,251)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Income from discontinued operations, net of tax.......... -- (1,701) (13,347)
Loss on disposal of discontinued operations, net of
tax.................................................... -- -- 43,733
Extraordinary gains on early extinguishments of debt, net
of tax................................................. (4,903) (4,731) (21,973)
Cumulative effects of accounting changes, net of tax..... 135,560 7,601 909,315
Depreciation and amortization............................ 128,546 193,937 224,031
Provision for deferred income taxes...................... 104,345 72,695 45,039
Impairment losses and other operating expenses........... 289,054 644,147 517,776
Payments on restructuring charges........................ (12,806) (22,794) (46,655)
Gains from dispositions.................................. (16,401) (16,224) (17,181)
Net effect of interest rate component of swap
terminations........................................... -- -- (32,840)
Change in assets and liabilities, net of effects from
acquisitions and dispositions:
Decrease (increase) in receivables..................... 27,972 50,360 191,137
Decrease (increase) in other assets.................... 88,587 100,516 (265,504)
Decrease in other liabilities.......................... (178,126) (106,409) (109,975)
Net effect of prearranged funeral production and
maturities............................................ 19,605 45,979 112,520
Other.................................................. 2,619 17,755 30,775
--------- --------- -----------
Net cash provided by continuing operations.................. 352,172 383,335 223,600
Net cash provided by discontinued operations................ -- -- 144,640
--------- --------- -----------
Net cash provided by operating activities................... 352,172 383,335 368,240
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (100,045) (74,164) (83,370)
Proceeds from joint ventures and sales of equity
investments, net of cash retained........................ 291,795 285,688 278,025
Proceeds from divestitures and sales of property and
equipment................................................ 76,292 126,792 92,593
Net withdrawals (deposits) of restricted funds............. 58,035 (12,874) (68,753)
Proceeds from sales of loans by lending subsidiary......... -- -- 84,803
Principal payments received on loans by lending
subsidiary............................................... -- -- 21,649
Other...................................................... 848 (32) (8,913)
--------- --------- -----------
Net cash provided by continuing operations.................. 326,925 325,410 316,034
Net cash used in discontinued operations.................... -- -- (122,966)
--------- --------- -----------
Net cash provided by investing activities................... 326,925 325,410 193,068
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in borrowings under credit agreements......... (29,061) (734,186) (395,096)
Payments of debt........................................... (75,857) (166,262) (126,342)
Proceeds from long-term debt issued........................ -- 345,000 --
Early extinguishments of debt.............................. (307,232) (155,545) (194,097)
Net effect of cross-currency component of swap
terminations............................................. -- -- 143,498
Settlement of options...................................... (57,000)
Bank overdrafts and other.................................. (36,332) (16,445) 7,574
--------- --------- -----------
Net cash used in financing activities....................... (505,482) (727,438) (564,463)
Effect of foreign currency.................................. (2,282) 76 (131)
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents........ 171,333 (18,617) (3,286)
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........................................ 29,292 47,909 57,814
--------- --------- -----------
Cash and cash equivalents of continuing operations at end of
period..................................................... $ 200,625 $ 29,292 $ 47,909
========= ========= ===========
</Table>
(See notes to consolidated financial statements)
42
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
CAPITAL IN RETAINED OTHER
COMMON EXCESS OF EARNINGS COMPREHENSIVE
STOCK PAR VALUE (DEFICIT) INCOME (LOSS) TOTAL
---------- ---------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balance at December 31, 1999........................... $ 272,064 $2,156,301 $ 1,126,898 $ (59,990) $ 3,495,273
Comprehensive loss:
Net loss............................................. (1,343,251) (1,343,251)
Other comprehensive loss:
Foreign currency translation....................... (202,709) (202,709)
Unrealized loss on securities, net................. (4,792) (4,792)
Minimum pension liability adjustment, net.......... (12,724) (12,724)
Reclassification adjustment for realized loss on
securities....................................... 27,014 27,014
Reclassification adjustment for realized loss on
foreign currency translation..................... 16,044 16,044
-----------
Total other comprehensive loss................... (177,167)
-----------
Comprehensive loss..................................... (1,520,418)
Common Stock issued:
Stock option exercises and stock grants.............. 33 100 133
Acquisitions......................................... 61 186 247
Contributions to employee 401(k)..................... 356 456 812
Repurchase of common stock............................. (7) (219) (226)
---------- ---------- ----------- --------- -----------
Balance at December 31, 2000........................... 272,507 2,156,824 (216,353) (237,157) 1,975,821
Comprehensive loss:
Net loss............................................. (597,796) (597,796)
Other comprehensive loss:
Foreign currency translation....................... (76,403) (76,403)
Minimum pension liability adjustment, net.......... (16,629) (16,629)
Reclassification adjustment for realized loss on
foreign currency translation..................... 38,990 38,990
-----------
Total other comprehensive loss................... (54,042)
-----------
Comprehensive loss..................................... (651,838)
Common Stock issued:
Stock option exercises and stock grants.............. 627 2,367 2,994
Contributions to employee 401(k) and cash balance
plan............................................... 3,576 15,559 19,135
Debenture conversions................................ 244 5,284 5,528
Debenture extinguished using common stock............ 15,200 66,021 81,221
---------- ---------- ----------- --------- -----------
Balance at December 31, 2001........................... 292,154 2,246,055 (814,149) (291,199) 1,432,861
Comprehensive loss:
Net loss............................................. (231,880) (231,880)
Other comprehensive income:
Foreign currency translation....................... 43,776 43,776
Minimum pension liability adjustment, net.......... (7,202) (7,202)
Reclassification adjustment for realized loss on
foreign currency translation..................... 47,479 47,479
-----------
Total other comprehensive income................. 84,053
-----------
Comprehensive loss..................................... (147,827)
Common Stock issued:
Stock option exercises and stock grants.............. 173 414 587
Contributions to employee 401(k)..................... 4,683 13,467 18,150
---------- ---------- ----------- --------- -----------
Balance at December 31, 2002........................... $ 297,010 $2,259,936 $(1,046,029) $(207,146) $ 1,303,771
========== ========== =========== ========= ===========
</Table>
(See notes to consolidated financial statements)
43
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE ONE
NATURE OF OPERATIONS
Service Corporation International (SCI or the Company) is the largest
provider of death care services in the world through its funeral service and
cemetery operations. At December 31, 2002, the Company operated 2,393 funeral
service locations, 451 cemeteries and 189 crematoria located in eight countries.
The Company also has minority interest investments in funeral and cemetery
operations in four countries outside of North America.
The funeral service locations and cemetery operations consist of the
Company's funeral service locations, cemeteries, crematoria and related
businesses. Company personnel at the funeral service locations provide all
professional services relating to funerals, including the use of funeral
facilities and motor vehicles. Funeral related merchandise is sold at funeral
service locations and certain funeral service locations contain crematoria. The
Company sells prearranged funeral services whereby a customer contractually
agrees to the terms of a funeral to be performed in the future. The Company's
cemeteries provide cemetery interment rights (including mausoleum spaces, lots
and lawn crypts) and sell cemetery related merchandise. Cemetery items are sold
on an atneed or preneed basis. Company personnel at cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries also operate crematoria. There are 190 combination locations that
contain a funeral service location within a Company owned cemetery.
NOTE TWO
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of SCI and all
majority-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation with no effect on the
consolidated financial position, results of operations or cash flows.
In 2002, the Company began recognizing revenues associated with delivered
caskets previously prearranged on cemetery contracts as part of funeral
operations. Previously, such casket revenue was recognized in cemetery
operations. The Company reclassified prior year operating results to conform to
the current period presentation with no effect on previously reported results of
operations, financial position or cash flows.
Use of Estimates in the Preparation of Financial Statements
The 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 an ongoing review program of its obligations to deliver
cemetery merchandise and services to customers in order to collect funds from
applicable cemetery trust funds. As a result of this ongoing review, the Company
has recognized changes in estimates of Deferred preneed cemetery contract
revenues which had the effect of increasing revenues and gross profits in 2002
by $23,400 and $18,300, respectively, compared to $68,500 and $54,900,
respectively, in 2001. The Company intends to continue to review these
obligations, however, the impact recognized in future periods will depend on the
outcome of such reviews.
44
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2002, the Company changed the amortization period related to deferred
prearranged funeral selling costs from 20 years to 12 years. This change in
estimate was made in order to more accurately reflect current trends regarding
the timeframe from when a prearranged contract is sold to when it is serviced
atneed. This change in estimate reduced funeral gross profit and net loss by
approximately $6,700 and $4,200, or $.01 per diluted share in 2002.
The Company changed its allocation methodology of overhead costs in North
America to be based on funeral and cemetery reporting unit revenues. The change
in overhead allocation has not impacted the Company's reported results of
operations, financial position or cash flows.
In addition, in 2002, the Company decided to implement new information
technology systems, including a new North America point of sale system and an
upgraded general ledger system. As a result of this decision, the Company
accelerated amortization of its existing capitalized systems costs beginning in
the second quarter of 2002 to reflect the remaining estimated useful lives of
these systems. The Company recognized approximately $13,500 of additional
amortization in 2002 related to this change in estimate. This change in estimate
impacted net loss approximately $8,500 or diluted loss per share $.03 in 2002.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories and Cemetery Property
Funeral merchandise and cemetery burial property and merchandise are stated
at the lower of average cost or market.
Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost. Maintenance and repairs
are charged to expense whereas renewals and major replacements are capitalized.
Costs of property sold or retired and the related accumulated depreciation are
removed from the consolidated balance sheet; resulting gains and losses are
included in the consolidated statement of operations.
Goodwill
The excess of purchase price over the fair value of identifiable net assets
acquired in business combinations accounted for as purchases is included in
Goodwill. Goodwill is tested for impairment annually based on the fair value of
the Company's reporting units pursuant to the provisions of SFAS No. 142 for its
Funeral operations (North America, France, Germany, Singapore and Argentina) and
Cemetery operations (North America, Argentina, Chile and Uruguay). See note
three to the consolidated financial statements for further information.
Depreciation and Amortization
Depreciation of property, plant and equipment is provided using the
straight line method over the estimated useful lives of the various classes of
assets. Property and plant are depreciated over a period ranging from seven to
fifty years, equipment is depreciated over a period from five to twenty years
and leasehold improvements are depreciated over the shorter of the lease term or
a range of five to fifty years. For the years ended December 31, 2002, 2001, and
2000 depreciation expense from continuing operations was $90,036, $100,263, and
$109,995, respectively.
45
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prepaid management, consultative and non-competition agreements, primarily
with former owners and key employees of businesses acquired, are amortized on a
straight-line basis over the lives (generally from five to ten years) of the
respective contracts. Amortization expense associated with these agreements for
the years ended December 31, 2002, 2001, and 2000 was $15,532, $19,715, and
$21,527, respectively.
Deferred selling costs incurred pursuant to the sales of trust funded
prearranged funeral contracts are deferred and amortized over 12 years, a period
representing the estimated life of the prearranged funeral contracts.
Amortization associated with these deferred selling costs for the years ended
December 31, 2002, 2001, and 2000 was $14,592, $7,318, and $7,116, respectively.
See Use of Estimates in the Preparation of Financial Statements within this note
for further information regarding deferred selling costs.
For the years ended December 31, 2001 and 2000, amortization expense of
goodwill from continuing operations was $59,237 and $65,541, respectively. See
note three to the consolidated financial statement for further information
regarding accounting for goodwill. Other miscellaneous amortization from
continuing operations for the years ended December 31, 2002, 2001, and 2000 was
$8,386, $7,404, and $19,852, respectively.
Impairment or Disposal of Long-Lived Assets
The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 requires that long-lived assets to be held and used be
reported at the lower of carrying amount or fair value. Assets to be disposed of
and assets not expected to provide any future service potential to the Company
are recorded at the lower of carrying amount or fair value less estimated cost
to sell.
In January 2002, the Company ceased depreciation of operating assets held
for sale. The Company later determined transactions to sell or joint venture
certain assets would be delayed until after 2002. As a result, the Company
resumed normal depreciation of those assets held in France and Chile in the
third quarter of 2002.
Stock Options
The Company accounts for employee stock-based compensation expense under
the intrinsic value method. Under the intrinsic value method, no compensation
expense is recognized on stock options if the grant price equals the market
value on the date of grant.
If the Company had elected to recognize compensation cost for its option
plans based on the fair value at the grant dates for awards under those plans,
net loss and loss per share would have been changed for the years
46
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31 to the pro forma amounts indicated below. For further
information see note eleven to the consolidated financial statements.
<Table>
<Caption>
2002 2001 2000
--------- --------- -----------
Net loss......................................... $(231,880) $(597,796) $(1,343,251)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
expense........................................ (13,537) (17,680) (24,735)
--------- --------- -----------
Pro forma net loss............................... $(245,417) $(615,476) $(1,367,986)
========= ========= ===========
Basic and diluted net loss per share............. $ (.79) $ (2.10) $ (4.93)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
expense........................................ (.04) (0.06) (0.10)
--------- --------- -----------
Pro forma basic and diluted net loss per share... $ (.83) $ (2.16) $ (5.03)
========= ========= ===========
</Table>
Foreign Currency Translation
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect as of the end of the
reporting period. The resulting translation adjustments are included in
stockholders' equity as a component of Accumulated other comprehensive income
(loss) in the consolidated statement of stockholders' equity. Revenue and
expense items are translated at the average exchange rates for the reporting
period.
With respect to transactions denominated in currencies other than the
functional currencies of the Company's operations, transactional currency gains
and losses are recorded through the consolidated statement of operations.
Funeral Operations
Funeral revenue is recognized when funeral services are performed. The
Company's trade receivables consist of amounts due for funeral services already
performed. An allowance for doubtful accounts has been provided based on
historical experience. The Company sells price guaranteed prearranged funeral
contracts through various programs providing for future funeral services at
prices prevailing when the agreements are signed. Revenues associated with sales
of prearranged funeral contracts, which include accumulated trust earnings and
increasing insurance benefits, are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements).
Cemetery Operations
Sales of atneed cemetery interment rights, merchandise and services are
recognized when the service is performed or merchandise delivered. Preneed
cemetery interment right sales of constructed cemetery burial property are not
recognized until a minimum of 10% of the sales price has been collected.
Revenues related to the preneed sale of unconstructed cemetery burial property
are deferred until such property is constructed and the minimum percentage of
the sales price has been collected. Further, the Company defers certain direct
selling costs associated with these sales which are expensed as revenue is
recognized (see notes three and five to the consolidated financial statements).
Costs related to the sales of interment rights are the accumulation of
property costs and development costs specifically identified by project. At the
completion of the project, costs are charged to operations as revenue is
recognized. Costs related to sales of merchandise and services are based on
actual costs incurred.
47
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Allowances for customer cancellations are provided at the date of sale
based upon historical experience. Pursuant to state law, all or a portion of the
proceeds from cemetery merchandise or services sold on a preneed basis may be
required to be paid into trust funds. Merchandise and services funds trusted at
December 31, 2002 and 2001 were $859,338 and $915,127, respectively. The Company
defers realized investment earnings related to these merchandise and services
trusts until the associated merchandise is delivered or services are performed.
A portion of the proceeds from the sale of cemetery property is required by
state law to be paid into perpetual care trust funds. Realized investment
earnings from these trusts are recognized in current cemetery revenues and are
intended to defray cemetery maintenance costs, which are expensed as incurred.
Perpetual care funds trusted at December 31, 2002 and 2001 were $564,277 and
$543,893, respectively. The principal of such perpetual care trust funds
generally cannot be withdrawn by the Company and therefore is not included in
the consolidated balance sheet.
See note six to the consolidated financial statements regarding preneed
cemetery activity.
Derivatives
Derivative instruments are recognized in the consolidated balance sheet at
their fair values. For derivatives that qualify and are designated as hedges of
future cash flows or net foreign investments, the changes in fair values are
recorded in Other comprehensive income in the consolidated statement of
stockholders equity. For derivatives that qualify and are designated as fair
value hedges, the changes in fair values are recorded in earnings, offset by the
recognition of the changes in fair values of the underlying hedged asset or
liability. The changes in fair values of derivatives that do not qualify for
hedge accounting and the ineffective portion of derivatives that do qualify for
hedge accounting are recorded in earnings. The Company had no outstanding
derivatives at December 31, 2002.
Income Taxes
The Company calculates taxes on a consolidated basis. Deferred income taxes
are computed using the liability method and are provided on all temporary
differences between the financial basis and the tax basis of assets and
liabilities. The Company records a valuation allowance to reduce its deferred
tax assets when uncertainty regarding their realization exists. The Company
intends to permanently reinvest the unremitted earnings of certain of its
foreign subsidiaries in those businesses outside the United States and,
therefore, has not provided for deferred federal income taxes on such unremitted
foreign earnings.
NOTE THREE
ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) 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 the purchase method for accounting for
such transactions. SFAS No. 142 addresses accounting for goodwill and other
intangible assets and redefines useful lives, amortization periods and
impairment of goodwill. Under the new pronouncement, goodwill is no longer
amortized, but is tested for impairment annually by assessing the fair value of
reporting units, generally one level below reportable segments. The Company
identified North America, France, Germany, Singapore and Argentina as reporting
units for its funeral operations and North America, Argentina, Chile and Uruguay
as reporting units for its cemetery operations. In order to assess impairment of
goodwill, the Company determined the fair value of its reporting units based on
a combination of present value of expected future cash flows and multiples of
revenues. As a result of the adoption of SFAS No. 142 in the first quarter of
2002, the Company recognized a charge reflected as a cumulative effect of
accounting change
48
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $135,560 (net of a tax benefit of $11,234) or $.46 per diluted share related
to the impairment of goodwill in its North America cemetery reporting unit.
The following table shows the historical results compared to unaudited pro
forma effects of SFAS No. 142 had goodwill not been amortized during that
period.
<Table>
<Caption>
2001 2000
--------- -----------
Loss from continuing operations before extraordinary items
and cumulative effects of accounting changes.............. $(596,627) $ (425,523)
Add back: Goodwill amortization, net of taxes............... 47,455 52,842
--------- -----------
Pro forma loss from continuing operations before
extraordinary items and cumulative effects of accounting
changes................................................... $(549,172) $ (372,681)
========= ===========
Net loss.................................................... $(597,796) $(1,343,251)
Add back: Goodwill amortization, net of taxes............... 47,455 53,360
--------- -----------
Pro forma net loss.......................................... $(550,341) $(1,289,891)
========= ===========
Basic and diluted earnings (loss) per share before
extraordinary items and cumulative effects of accounting
changes................................................... $ (2.09) $ (1.56)
Add back: Goodwill amortization, net of taxes............... .17 .19
--------- -----------
Pro forma basic and diluted loss per share before
extraordinary items and cumulative effects of accounting
changes................................................... $ (1.92) $ (1.37)
========= ===========
Basic and diluted net loss per share........................ $ (2.10) $ (4.93)
Add back: Goodwill amortization, net of taxes............... .17 .19
--------- -----------
Pro forma basic and diluted net loss per share.............. $ (1.93) $ (4.74)
========= ===========
</Table>
The changes in the carrying amounts of goodwill for the Company's segments
are as follows:
<Table>
<Caption>
FUNERAL CEMETERY
SEGMENT SEGMENT TOTAL
---------- --------- ----------
Balance as of December 31, 2001.................. $1,246,273 $ 163,036 $1,409,309
Impairment loss recorded upon adoption of SFAS
No. 142........................................ -- (146,794) (146,794)
Goodwill reduced related to disposition
programs....................................... (68,078) (14,220) (82,298)
Effect of foreign currency and other............. 4,076 (115) 3,961
---------- --------- ----------
Balance as of December 31, 2002.................. $1,182,271 $ 1,907 $1,184,178
========== ========= ==========
</Table>
In June 2001, the FASB 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 provisions of SFAS No. 143, 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 are
allocated to expense over the useful life of the asset. The Company does not
expect the adoption of SFAS No. 143 to have a material effect on the Company's
consolidated financial position, results of operations, or 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 FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, and addresses the impairment or disposal of long-
49
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lived assets. SFAS No. 144 requires that long-lived assets to be held and used
be written down to fair value when it is concluded that the carrying value of
such assets are not recoverable on an undiscounted cash flow basis. Assets to be
disposed of by sale are required to be recorded at the lower of their carrying
amounts or fair value less estimated cost to sell. The Company adopted SFAS No.
144 during the first quarter of 2002 with no impact on the results of
operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and classified as extraordinary items
as well as certain other items. When the pronouncement is adopted, gains and
losses from early extinguishments of debt will be included in Other income in
the consolidated statement of operations. The Company is required to adopt SFAS
No. 145 during the first quarter of 2003 as it relates to the classification of
extinguishments of debt for all periods presented. The other provisions of SFAS
No. 145 are generally effective for transactions occurring after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." The principal difference between
this pronouncement and Issue 94-3 is that the statement follows FASB Concepts
Statement No. 6 in that a liability for a cost associated with an exit or
disposal activity is recognized when the liability is incurred, not at the
entity's commitment to an exit plan. The Company does not anticipate a
significant impact on its results of operations, financial position or cash
flows as a result of adopting this pronouncement. The Company is required to
adopt SFAS No. 146 for exit or disposal activities that are initiated after
December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" and specifies additional methods of
transition for companies that adopt the fair value method of accounting for
stock options and amends the disclosure requirements of SFAS No. 123. The
Company adopted the disclosure requirements of SFAS No. 148 for the year ended
December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the disclosures required by a guarantor about its obligations and
it requires grantors to recognize a liability, at fair value at the time of
issuance. The provisions for initial recognition and measurement are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial statements of periods
that end after December 15, 2002. The Company has disclosed the guarantees
related to FIN No. 45 within note ten to the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities an Interpretation of Accounting
Research Bulletin (ARB) No. 51." FIN No. 46 clarifies the application of ARB No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
defines the terms related to variable interest entities and clarifies if such
entities should be consolidated. The Company is currently assessing the impact
of FIN No. 46 on the Company's results of operations, financial position and
cash flows.
In 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
50
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activities: An Amendment of FASB Statement No. 133." The change in the Company's
accounting policies resulting from the implementation of SFAS 133 has been
treated as a change in accounting principle effective January 1, 2001. In
accordance with these pronouncements, the Company recognized a cumulative effect
of a change in accounting principle, net of applicable taxes, of $7,601 or $.03
per diluted share. It was impractical for the Company to obtain the amounts on a
pro forma basis for the year ended December 31, 2000.
In September 2001, the FASB Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue 01-5 entitled "Application of FASB Statement No. 52 to
an Investment Being Evaluated for Impairment that Will Be Disposed Of." This
consensus requires the inclusion of accumulated foreign currency translation
amounts in the assessments of impairment of long-lived assets expected to be
disposed of. Prior to issuance of the consensus, related accumulated foreign
currency translation amounts were included in results of operations at the time
of disposal. The Company applied this consensus in connection with impairment
assessments of assets to be disposed of performed after July 19, 2001, the
effective date of the consensus. See note sixteen to the consolidated financial
statements for further discussion on impairment charges recorded in 2001 related
to the Company's foreign investments.
In 2000, the Company implemented SAB No. 101 "Revenue Recognition in
Financial Statements" which changed 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 prearranged sales
activities are affected as follows:
- 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, revenue and associated costs from constructed
cemetery property are not recognized until a minimum percentage (10%) 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 revenue and associated costs
were recognized at the time the contract was signed with the customer.
- 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.
- 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.
- Prearranged funeral and preneed cemetery customer selling 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. As a result, the Company's
policy is to defer only commission and related fringes of prearranged
funeral and preneed cemetery business. Previously, deferred selling costs
for prearranged funeral business included variable and fixed direct
selling costs as well as direct marketing costs; and, selling costs for
preneed cemetery business were previously expensed as incurred.
51
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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 treated 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.
NOTE FOUR
PREARRANGED FUNERAL 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 generally are used to
pay premiums on life insurance or annuity contracts, or are placed into trust
accounts, pursuant to applicable law.
The balance in Prearranged funeral contracts represents amounts due from
trust funds, customer receivables or third party insurance companies related to
unperformed, price guaranteed prearranged funeral contracts. A corresponding
credit is recorded to Deferred prearranged funeral contract revenues.
Funeral revenue is recognized on prearranged funeral contracts at the time
the funeral service is performed. Trust earnings and increasing insurance
benefits are accrued and deferred until the services are performed, at which
times these funds are also recognized in funeral revenues. Such amounts are
intended to cover future increases in the cost of providing a price guaranteed
funeral service. Deferred selling costs incurred pursuant to the sales of
prearrangements are included in Deferred charges and other assets. These selling
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 12 years, a period representing the
estimated life of the prearranged funeral contracts. Previous to 2002, the
amortization period was 20 years, see note two to the consolidated financial
statements. Deferred selling costs as of December 31, 2002 and 2001 were $92,741
and $99,245, respectively.
Prearranged Funeral Contracts
As previously mentioned, the balance in prearranged funeral contracts
represents amounts due from trust funds, customer receivables or third party
insurance companies related to unperformed, price guaranteed prearranged funeral
contracts. The components of prearranged funeral contracts in the consolidated
balance sheet at December 31 are as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Trusts:
Receivables due from trust assets......................... $ 983,357 $1,177,354
Receivables from customers................................ 220,541 271,645
---------- ----------
Trust related assets................................... 1,203,898 1,448,999
Receivables from third party insurance companies............ 3,442,170 3,027,696
---------- ----------
Trust and insurance related assets........................ 4,646,068 4,476,695
Allowance for cancellation.................................. (372,278) (367,500)
---------- ----------
Prearranged funeral contracts............................. $4,273,790 $4,109,195
========== ==========
</Table>
52
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allowance for cancellation is based on historical experience and is
equivalent to approximately 8.7% of the total balance at December 31, 2002 and
8.9% of prearranged funeral contracts at December 31, 2001. Accumulated earnings
from trust funds and increasing insurance benefits of third party insurance
companies have been included to the extent that they have been accrued through
December 31, 2002 and 2001, respectively. The cumulative trust funded total has
been reduced by allowable cash withdrawals for trust earnings and amounts
retained by the Company pursuant to various state laws.
The activity in prearranged funeral contracts for the years ended December
31 is as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Beginning balance -- Prearranged funeral contracts.......... $4,109,195 $4,080,367
Net sales................................................. 601,816 503,287
Acquisitions (dispositions) of businesses................. (293,888) (122,926)
Realized earnings and increasing insurance benefits for
third party insurance companies........................ 43,217 49,239
Maturities................................................ (370,336) (333,125)
Distributed earnings...................................... -- (49,153)
Change in cancellation reserve............................ (4,778) (16,568)
Effect of foreign currency and other...................... 188,564 (1,926)
---------- ----------
Ending balance -- Prearranged funeral contracts............. $4,273,790 $4,109,195
========== ==========
</Table>
The cost and market value of the assets held in the trust funds underlying
the Company's prearranged funeral contracts at December 31 are detailed below.
The Company believes the unrealized losses related to the assets held in trust
funds are temporary in nature.
<Table>
<Caption>
2002 2001
------------------- -----------------------
COST MARKET COST MARKET
-------- -------- ---------- ----------
Cash and cash equivalents............... $ 78,010 $ 78,010 $ 84,601 $ 84,601
Fixed Income Securities:
U.S. Treasury......................... 88,017 91,979 45,414 43,455
Foreign government.................... 54,954 56,000 208,408 211,772
Corporate............................. 11,763 12,401 11,748 11,693
Mortgage-backed....................... 103,793 105,024 196,065 191,779
Asset-backed.......................... 2,722 2,820 1,174 1,197
Municipal............................. -- -- 1,168 1,217
Other................................. 452 458 749 724
Equity securities:
Preferred stock....................... -- -- 214 214
Common stock.......................... 473,257 413,488 440,146 439,174
Mutual funds:
Equity................................ 59,487 50,172 72,581 61,761
Fixed income.......................... 54,639 56,155 51,271 52,301
Private equity and other................ 56,263 48,106 63,815 63,649
-------- -------- ---------- ----------
Prearranged funeral trust assets........ $983,357 $914,613 $1,177,354 $1,163,537
======== ======== ========== ==========
Market value as of a percentage of
cost.................................. 93.0% 98.8%
======== ==========
</Table>
53
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Prearranged Funeral Contract Revenues
Deferred prearranged funeral contract revenues represent the original
contract price, trust earnings and increasing insurance benefits on unperformed
funeral contracts generally funded by trust or third party insurance companies.
The total amounts associated with unperformed prearranged funeral contracts
consists of contracts funded by trust, surety bonds in lieu of trust funds, or
third party insurance.
The following table summarizes for the years ended December 31 the activity
in deferred prearranged funeral contract revenues:
<Table>
<Caption>
2002 2001
---------- ----------
Beginning balance -- Deferred prearranged funeral contract
revenues.................................................. $4,596,116 $4,537,669
Net sales................................................. 647,119 543,785
Acquisitions (dispositions) of businesses................. (361,005) (159,809)
Realized earnings and increasing insurance benefits from
third party insurance companies........................ 43,307 48,864
Maturities................................................ (387,144) (357,105)
Change in cancellation reserve............................ (4,778) (16,568)
Effect of foreign currency and other...................... 126,379 (720)
---------- ----------
Ending balance -- Deferred prearranged funeral contract
revenues.................................................. $4,659,994 $4,596,116
========== ==========
</Table>
NOTE FIVE
PRENEED CEMETERY ACTIVITIES
The Company sells price guaranteed preneed cemetery contracts providing for
future merchandise, services or property at prices prevailing when the
agreements are signed. A portion of the payments under these contracts may be
required to be placed into trust accounts, pursuant to applicable law.
Cemetery revenue is recognized on preneed cemetery contracts when the
service is performed or merchandise is delivered. The Company defers certain
direct selling costs associated with preneed cemetery sales which are deferred,
and expenses such costs when the corresponding revenue is recognized. Deferred
selling costs related to preneed cemetery contracts of $213,086 and $213,414 as
of December 31, 2002 and 2001, respectively, were included in Deferred charges
and other assets in the consolidated balance sheet.
Preneed Cemetery Contracts
The balance in preneed cemetery contracts are included in current and
long-term receivables in the consolidated balance sheet and the components at
December 31 are as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Receivables due from trust assets........................... $ 859,338 $ 915,127
Cemetery receivables due from customers..................... 652,986 738,063
Less: Unearned finance charges.............................. (102,394) (112,254)
---------- ----------
1,409,930 1,540,936
Less: Atneed receivables from customers..................... (51,326) (56,364)
---------- ----------
1,358,604 1,484,572
Less: Allowance for contract cancellations.................. (211,853) (209,540)
---------- ----------
$1,146,751 $1,275,032
========== ==========
</Table>
54
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The activity in preneed cemetery contracts for the years ended December 31
is as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Beginning balance -- preneed cemetery contracts............. $1,275,032 $1,396,139
Net sales................................................. 317,062 402,383
Acquisitions (dispositions) of businesses................. (18,194) (53,859)
Realized earnings (losses)................................ (30,798) 2,289
Distributed earnings and net cash receipts................ (238,214) (337,631)
Deliveries and maturities................................. (128,925) (143,459)
Change in cancellation reserve............................ (2,313) 13,336
Effect of foreign currency and other...................... (26,899) (4,166)
---------- ----------
Ending balance -- preneed cemetery contracts................ $1,146,751 $1,275,032
========== ==========
</Table>
Merchandise and Services Trusts
Amounts paid into cemetery merchandise and services trusts are included in
Current and long-term receivables, at cost, in the consolidated balance sheet.
The cost and market values associated with the assets held in the cemetery
merchandise and services trust funds underlying these receivables at December 31
are detailed below. The Company believes the unrealized losses related to the
assets held in trust funds are temporary in nature.
<Table>
<Caption>
2002 2001
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Cash and cash equivalents.................. $ 85,526 $ 85,526 $ 49,874 $ 49,874
Fixed Income Securities:
U.S. Treasury............................ 120,140 131,133 82,897 80,280
Foreign government....................... 11,096 11,096 10,579 10,646
Corporate................................ 4,464 4,867 20,278 20,540
Mortgage-backed.......................... 150,007 156,891 225,648 226,726
Asset-backed............................. 1,549 1,657 2,116 2,151
Municipal................................ 2,046 2,188 2,268 2,241
Other.................................... 2,142 2,152 305 294
Equity securities:
Preferred stock.......................... -- -- 176 180
Common stock............................. 320,116 273,937 334,560 331,721
Mutual funds:
Equity................................... 88,609 70,794 109,655 91,800
Fixed income............................. 41,807 42,273 44,676 45,555
Private equity and other................... 31,836 26,702 32,095 29,291
-------- -------- -------- --------
Preneed cemetery merchandise and services
trust assets............................. $859,338 $809,216 $915,127 $891,299
======== ======== ======== ========
Market value as a percentage of cost....... 94.2% 97.4%
======== ========
</Table>
55
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of implementing SAB No. 101 (see note three to the consolidated
financial statements), all realized investment earnings related to these
cemetery merchandise and services trust funds are deferred until the associated
merchandise is delivered or service is performed. Prior to 2000, the realized
investment earnings were recognized as earned in the trusts. The realized
investment earnings recognized in the consolidated statement of operations
related to these cemetery merchandise and services trust funds were $24,734,
$15,081, and $19,947 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Deferred Preneed Cemetery Contract Revenues
The Company defers revenues associated with certain preneed cemetery sales
activities until cemetery burial property is constructed and meets the minimum
down payment requirement (10%), merchandise is delivered or services are
performed. The activity in deferred preneed cemetery contract revenues for the
years ended December 31 is as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Beginning balance -- Deferred preneed cemetery contract
revenues.................................................. $1,756,041 $1,815,157
Net sales................................................... 302,691 324,640
Acquisitions (dispositions) of businesses................... (45,312) (82,467)
Realized earnings (losses) on merchandise and services trust
funds..................................................... (30,291) 2,514
Deliveries and maturities................................... (297,209) (288,897)
Change in cancellation reserve.............................. 3,149 11,275
Effect of foreign currency and other........................ 3,369 (4,019)
Non-cash adjustments........................................ (19,777) (22,162)
---------- ----------
Ending balance -- Deferred preneed cemetery contract
revenues.................................................. $1,672,661 $1,756,041
========== ==========
</Table>
56
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Perpetual Care Trusts
A portion of the proceeds from the sale of cemetery property is required by
state law to be paid into perpetual care trust funds. The principal of such
perpetual care trust funds generally cannot be withdrawn by the Company and
therefore is not included in the consolidated balance sheet. The cost and market
values associated with the assets held in perpetual care trust funds at December
31 are detailed below.
<Table>
<Caption>
2002 2001
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
Cash and cash equivalents.................. $ 63,932 $ 63,932 $ 30,826 $ 30,826
Fixed Income Securities:
U.S. Treasury............................ 64,473 67,226 29,588 29,829
Foreign government....................... 20,978 21,726 14,993 16,644
Corporate................................ 57,488 60,470 70,102 71,174
Mortgage-backed.......................... 94,996 98,359 133,472 133,226
Asset-backed............................. 18,052 19,588 14,913 15,022
Municipal................................ -- -- 33 32
Other.................................... 2,731 3,295 4,933 4,495
Equity securities:
Preferred stock.......................... 13,906 12,632 3,096 3,143
Common stock............................. 25,428 23,717 32,308 34,475
Mutual funds:
Equity................................... 29,311 28,470 32,440 32,528
Fixed income............................. 142,086 136,281 146,990 141,789
Private equity and other................... 30,896 35,563 30,199 34,374
-------- -------- -------- --------
Perpetual care trust assets................ $564,277 $571,259 $543,893 $547,557
======== ======== ======== ========
Market value as a percentage of cost....... 101.2% 100.7%
======== ========
</Table>
Realized investment earnings from these perpetual care trust funds are
recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs, which are expensed as incurred. The realized investment
earnings related to these perpetual care trust funds were $26,611, $29,926, and
$26,660 for the years ended December 31, 2002, 2001, and 2000, respectively.
NOTE SIX
INCOME TAXES
The provision or benefit for income taxes includes United States federal
income taxes, determined on a consolidated return basis, foreign, state and
local income taxes.
Loss from continuing operations before income taxes, extraordinary items
and cumulative effects of accounting changes for the years ended December 31 is
as follows:
<Table>
<Caption>
2002 2001 2000
--------- --------- ---------
United States..................................... $(198,950) $(570,024) $(474,256)
Foreign........................................... 57,987 34,596 (42,722)
--------- --------- ---------
$(140,963) $(535,428) $(516,978)
========= ========= =========
</Table>
57
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax provision (benefit) from continuing operations for the years
ended December 31 consisted of the following:
<Table>
<Caption>
2002 2001 2000
--------- -------- ---------
Current:
United States.................................... $(127,426) $(25,432) $(149,465)
Foreign.......................................... (15,161) 9,935 12,436
State and local.................................. (1,498) 4,001 535
--------- -------- ---------
(144,085) (11,496) (136,494)
--------- -------- ---------
Deferred:
United States.................................... 84,904 66,287 47,923
Foreign.......................................... 22,207 2,856 (13,717)
State and local.................................. (2,766) 3,552 10,833
--------- -------- ---------
104,345 72,695 45,039
--------- -------- ---------
Total (benefit) provision..................... $ (39,740) $ 61,199 $ (91,455)
========= ======== =========
</Table>
The Company made income tax payments on continuing operations of
approximately $8,920, $22,423, and $56,007, excluding income tax refunds of
$63,547, $122,522 and $35,032, for the years ended December 31, 2002, 2001, and
2000, respectively. Income tax refunds include approximately $21,962 and
$116,300 related to losses on sales of investments and refunds of approximately
$35,306 and $0 related to the approval of a change in tax accounting method in
2002 and 2001, respectively.
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate for the years ended December 31 were as follows:
<Table>
<Caption>
2002 2001 2000
-------- --------- ---------
Computed tax (benefit) provision at the applicable
federal statutory income tax rate................ $(49,337) $(187,400) $(180,942)
State and local taxes, net of federal income tax
benefits......................................... 3,252 4,909 7,389
Dividends received deduction and tax exempt
interest......................................... (638) (1,668) (2,005)
Amortization of goodwill........................... -- 9,619 11,485
Foreign jurisdiction tax rate difference........... (8,333) (16,173) (14,472)
Foreign net operating loss utilization............. (9,895) -- --
Write down of assets............................... 28,554 111,984 92,155
Valuation allowance associated with assets held for
sale............................................. 5,683 143,646 --
Other.............................................. (9,026) (3,718) (5,065)
-------- --------- ---------
(Benefit) provision for income taxes.......... $(39,740) $ 61,199 $ (91,455)
======== ========= =========
Total effective tax rate...................... (28.2)% 11.4% (17.7%)
======== ========= =========
</Table>
Deferred taxes are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted marginal tax rates. The tax effects of temporary differences
58
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and carry-forwards that give rise to significant portions of deferred tax assets
and liabilities as of December 31 consisted of the following:
<Table>
<Caption>
2002 2001
--------- ---------
Inventories and cemetery property, principally due to
purchase accounting adjustments........................... $ 452,545 $ 511,432
Property, plant and equipment, principally due to
depreciation and to purchase accounting adjustments....... 152,934 148,744
Other....................................................... 194,993 142,009
--------- ---------
Deferred tax liabilities.................................... 800,472 802,185
--------- ---------
Receivables, principally due to sales of cemetery interment
rights and related products............................... (65,872) (181,243)
Deferred revenue on prearranged funeral and cemetery
contracts, principally due to earnings from trust funds... (13,682) (121,303)
Accrued liabilities......................................... (91,097) (48,363)
Loss and foreign tax credit carry-forwards.................. (282,896) (185,931)
--------- ---------
Deferred tax assets......................................... (453,547) (536,840)
--------- ---------
Valuation allowance......................................... 158,001 168,528
--------- ---------
Net deferred income taxes................................. $ 504,926 $ 433,873
========= =========
</Table>
Current refundable income taxes and current deferred tax assets are
included in Other current assets, long-term deferred tax assets are included in
Deferred charges and other assets, with current taxes payable and current
deferred tax liabilities being reflected as Income taxes on the consolidated
balance sheet. The Company has a receivable recorded in Other current assets on
the consolidated balance sheet of $92,445 at December 31, 2002, which was
subsequently received in February 2003.
At December 31, 2002 and 2001, United States income taxes had not been
provided on $73,852 and $88,261, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention not to remit these
earnings. The Company intends to permanently reinvest the unremitted earnings of
certain of its foreign subsidiaries in those businesses outside the United
States and, therefore, has not provided for deferred income taxes on such
unremitted foreign earnings.
Various subsidiaries have international, federal and state operating loss
carry-forwards of $1,365,145 with expiration dates through 2022. The Company
believes that some uncertainty exists with respect to future realization of
these loss carry-forwards, therefore a valuation allowance has been established
for the carry-forwards not expected to be realized. The valuation allowance is
primarily attributable to the U.S. capital loss recorded in connection with the
financial statement writedown of assets held for sale.
The loss carry-forwards will expire as follows:
<Table>
2003........................................................ $ 11,277
2004........................................................ 5,111
2005........................................................ 23,342
2006........................................................ 44,032
2007........................................................ 16,782
Thereafter.................................................. 1,264,601
----------
Total..................................................... $1,365,145
==========
</Table>
59
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SEVEN
DEBT
Debt as of December 31 was as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Bank credit agreements...................................... $ -- $ 29,061
8.72% amortizing notes due in 2002.......................... -- 4,653
6.3% notes due in 2003...................................... 84,801 251,284
7.375% notes due in 2004.................................... 111,190 228,000
8.375% notes due in 2004.................................... 50,797 51,840
6.0% notes due in 2005...................................... 387,241 581,550
7.2% notes due in 2006...................................... 150,000 150,000
6.875% notes due in 2007.................................... 150,000 150,000
6.5% notes due in 2008...................................... 200,000 200,000
6.75% convertible subordinated notes due in 2008, conversion
price of $6.92............................................ 328,005 345,000
7.7% notes due in 2009...................................... 199,000 200,000
7.7% notes due in 2009...................................... 172,183 --
6.95% amortizing notes due in 2010.......................... 42,106 45,929
7.875% debentures due in 2013............................... 55,627 55,627
7.0% notes due in 2015...................................... 25 58,460
Convertible debentures, interest rates range from 4.75% to
5.5%, due through 2013, conversion prices range from
$12.55 to $50.00.......................................... 39,531 46,031
Mortgage notes and other debt, maturities through 2050...... 76,733 181,520
Deferred loan costs and net hedging losses.................. (62,401) (44,342)
---------- ----------
Total debt.................................................. 1,984,838 2,534,613
Less current maturities..................................... (100,330) (220,640)
---------- ----------
Total long-term debt................................... $1,884,508 $2,313,973
========== ==========
</Table>
The aggregate maturities of debt for the five years subsequent to December
31, 2002, are as follows:
<Table>
2003........................................................ $ 100,330
2004........................................................ 185,582
2005........................................................ 419,085
2006........................................................ 182,297
2007........................................................ 166,599
2008 and thereafter......................................... 930,945
----------
Total....................................................... $1,984,838
==========
</Table>
Bank Credit Agreements
In July 2002, the Company executed a bank credit agreement for general
corporate purposes that matures in July 2005. The new credit facility provides a
total commitment of $185,000, including a sublimit of $125,000 to support
letters of credit, and is secured by the stock, inventory and receivables of
certain of the
60
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's domestic subsidiaries. These same domestic subsidiaries have
guaranteed the Company's obligations associated with this facility. The bank
credit agreement contains certain financial covenants, including a minimum
interest coverage ratio, a maximum leverage ratio and limits on capital
expenditures. Additionally, the Company is restricted from paying dividends and
making other distributions. Interest rates for outstanding borrowings are based
on various indices as determined by the Company. The Company also pays a
quarterly fee on the unused commitment, ranging from 0.50% to 0.75%, which is
based on the percentage of the facility used and was 0.625% at December 31,
2002. At December 31, 2002, the Company had no borrowings and $85,845 in letters
of credit outstanding under the bank credit agreement related to insurance and
surety vendors.
At December 31, 2001, the Company had two primary bank credit agreements,
which were used for general corporate purposes: a 5-year multi-currency revolver
and a 2-year term loan. The 5-year multi-currency revolver allowed for
borrowings up to $400,000 at December 31, 2001, of which $285,714 could be
denominated in foreign currencies. No borrowings were outstanding under the
5-year revolver at either December 31, 2001, or at its maturity in June 2002.
The 2-year term loan had an outstanding balance of $29,061 at December 31, 2001,
which was repaid in February 2002. Interest rates for the multi-currency
revolver and the term loan were based on various indices as determined by the
Company. The weighted average rate of these borrowings at December 31, 2001 was
4.75%. A quarterly fee was paid on the total commitment amount, ranging from
0.25% to 0.50%, which was based on the Company's senior unsecured credit rating
and was 0.50% at December 31, 2001.
New Issuances and Exchanges of Debt
In September 2002, the Company issued $172,183 of unregistered 7.70% notes
due 2009 in connection with an exchange offering to holders of an equivalent
principal amount of its existing 6.00% notes due 2005. Upon settlement of the
exchange offer, the Company paid approximately $11,480 in closing fees,
incentive payments and accrued interest. Subsequent to December 31, 2002, the
Company exchanged substantially all of the unregistered notes issued in
September 2002 for an equivalent principal amount of registered 7.70% notes due
2009 with substantially identical terms.
In June 2001, the Company issued $345,000 of 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 callable after
June 2004 and mature in June 2008. The proceeds from the convertible
subordinated notes were used to refinance the Company's debt, including
borrowings under the Company's bank credit agreements.
Settlements and Extinguishments of Debt
Aside from the $172,183 of 6.00% notes due 2005 that were extinguished in
the previously mentioned exchange offering, the Company also purchased the
following notes in the open market during the year ending December 31, 2002:
$2,850 of the 7.00% notes due 2015 (putable 2002); $166,483 of the 6.30% notes
due 2003; $116,810 of the 7.375% notes due 2004; $1,043 of the 8.375% notes due
2004; $22,126 of the 6.00% notes due 2005; $16,995 of the notes due 2008; $1,000
of the 7.70% notes due 2009; and $15,618 of mortgage notes and other debt. As a
result of these transactions, the Company recognized extraordinary gains on
early extinguishments of debt totaling $4,903 (net of tax expense of $2,880). As
of February 26, 2003, the Company purchased the following bonds in the open
market in 2003: $8,528 of the 6.30% notes due 2003; $21,000 of the 6.00% notes
due 2005; $1,200 of the 6.875%; $1,830 of the 7.70% notes due 2009; $7,997 of
the 7.70% notes due 2009; and $25 of the 7.00% notes due 2015.
In May 2002, the Company's French subsidiary satisfied $113,500 of debt
associated with the financial restructuring of the Company's French subsidiary
with non-cash French financial assets. At December 31, 2001, this debt was
included in Current maturities of long-term debt and the assets were included in
Other current assets.
61
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 1, 2002, substantially all of the holders of the 7.00% notes due
2015 (putable 2002) presented the notes for payment pursuant to the terms of the
embedded put option. The Company paid the holders in accordance with the terms
of the agreement.
During the year ended December 31, 2001, the Company purchased $35,720 of
the medium-term notes due through 2019 and $127,580 of the 7.00% 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% notes due 2020 (putable
2003); $22,000 of the 7.375% notes due 2004; $10,000 of the 6.00% 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 $4,731
(net of tax expense of $3,024).
Additional Debt Disclosures
The Company's consolidated debt had a weighted average interest rate of
6.87% at December 31, 2002, compared to 6.72% at December 31, 2001.
Approximately 99% of the total debt had a fixed interest rate at December 31,
2002 and 2001.
Cash interest payments for the three years ending December 31, 2002, were
as follows:
<Table>
2002........................................................ $158,585
2001........................................................ 218,429
2000........................................................ 244,638
</Table>
At December 31, 2002 and 2001, respectively, the Company had deposited
$23,592 and $81,627 in restricted interest-bearing accounts that were held as
security for various credit instruments included in Deferred charges and other
assets in the consolidated balance sheet. In addition, the Company had assets of
approximately $40,845 and $27,051 pledged as collateral for the mortgage notes
and other debt at December 31, 2002 and 2001, respectively. Included in mortgage
notes and other debt, the Company had capital lease obligations totaling $26,822
at December 31, 2002 primarily related to vehicles in the Company's
international operations.
NOTE EIGHT
DERIVATIVES
The Company occasionally participates in hedging activities using various
derivative instruments including interest rate and cross-currency swap
agreements, and forward currency exchange contracts. These instruments are used
to hedge potential exposures in the interest rate and foreign exchange rate
markets. The Company has documented policies and procedures to monitor and
control the use of derivative instruments and only enters into transactions with
a limited group of creditworthy financial institutions. The Company generally
does not engage in derivative transactions for speculative or trading purposes,
nor is it a party to leveraged derivatives.
During the year ended December 31, 2002, in connection with the purchase of
the 6.30% notes due 2020 (putable 2003), the Company terminated options embedded
in the extinguished securities by exchanging them for new options with
economically equivalent terms. The initial liability of $16,213 was recorded
with the early extinguishment of debt in Accounts payable and accrued
liabilities in the consolidated balance sheet and subsequently the Company
recognized a charge of $40,787 in Impairment losses and other operating expenses
in the consolidated statement of operations. In October 2002, the Company paid
$57,000 in full settlement of the options associated with the 6.30% notes due
2020 (putable 2003) hereafter presented as the 6.30% notes due 2003.
62
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2001, the Company executed certain forward currency exchange contracts
to hedge its net foreign investments. At December 31, 2001 the outstanding
hedges had notional values of L70,000 and E40,000, equivalent to an aggregate
notional value of approximately $130,761, and were recorded at a fair value of
$5,326 in Accounts payable and accrued liabilities in the consolidated balance
sheet. During 2002, the Company executed additional forward currency exchange
contracts to hedge its foreign net investment with notional value of E60,000,
equivalent to an aggregate notional value of $57,901. The Company settled all
outstanding forward exchange contracts during 2002, with an aggregate payment of
$11,836. A corresponding entry was recorded in Foreign currency translation
adjustment in the consolidated statement of stockholders' equity for the amount
of the payment.
In 2001, in conjunction with adopting SFAS No. 133, the Company
reclassified $23,195 of net deferred hedging losses related to interest rate
losses incurred upon termination of the fair value hedges of the Company's debt.
These deferred losses, previously recorded in Deferred charges and other assets,
have been reclassified to Long-term debt in the consolidated balance sheet and
are being amortized over the life of the underlying bonds.
NOTE NINE
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
equivalents, trade receivables and accounts payable approximate fair values due
to the short-term nature of these instruments. It is not practicable to estimate
the fair value of receivables due on cemetery contracts or prearranged funeral
contracts (other than prearranged funeral trust funds and cemetery merchandise
and services trust funds; see notes four and five to the consolidated financial
statements) without incurring excessive costs because of the large number of
individual contracts with varying terms. The carrying value of other notes
receivable approximates fair value as the Company regularly reviews the loans
for impairment. At December 31, 2002 and 2001, other notes receivable included
in Current and Long-term receivables in the consolidated balance sheet was
$138,985 and $154,715, respectively. The Company also had $9,615 and $13,269 in
outstanding undrawn commitments at December 31, 2002 and 2001, respectively.
63
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair market value of the Company's debt at December 31 was as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Bank credit agreements...................................... $ -- $ 28,189
8.72% amortizing notes due in 2002.......................... -- 4,653
6.3% notes due in 2003...................................... 83,953 243,745
7.375% notes due in 2004.................................... 110,773 214,320
8.375% notes due in 2004.................................... 50,797 49,248
6.0% notes due in 2005...................................... 364,007 500,133
7.2% notes due in 2006...................................... 142,500 132,000
6.875% notes due in 2007.................................... 137,250 129,000
6.5% notes due in 2008...................................... 179,000 172,000
6.75% convertible subordinated notes due in 2008, conversion
price of $6.92............................................ 302,995 346,725
7.7% notes due in 2009...................................... 187,060 170,000
7.7% notes due in 2009...................................... 161,852 --
6.95% amortizing notes due in 2010.......................... 39,087 38,581
7.875% debentures due in 2013............................... 49,578 44,502
7.0% notes due in 2015...................................... 24 58,460
Convertible debentures, interest rates range from 4.75% to
5.5% due through 2013, conversion prices range from $12.55
to $50.00................................................. 34,728 39,126
Mortgage notes and other debt, maturities through 2050...... 76,732 181,520
---------- ----------
Total debt............................................. $1,920,336 $2,352,202
========== ==========
</Table>
The fair value of the fixed rate long-term borrowings and convertible
securities was estimated by discounting the future cash flows, including
interest payments, using rates currently available for debt of similar terms and
maturity, based on the Company's credit standing and other market factors.
Mortgage notes and other debt have been reported at face value because of the
multitude and non-trading nature of these notes.
The Company grants credit in the normal course of business, and the credit
risk with respect to funeral, cemetery and prearranged funeral and preneed
cemetery receivables due from customers is generally considered minimal because
of the diversification of the customers served. Bad debts have not been
significant in relation to the volume of deferred revenues. Customer payments on
prearranged funeral or preneed cemetery contracts that are placed into state
regulated trusts or are used to pay premiums on life insurance contracts
generally do not subject the Company to collection risk. Insurance funded
contracts are subject to supervision by state insurance departments and are
protected in the majority of states by insurance guaranty acts.
The Company's cash deposits, some of which exceed insured limits, were
distributed among various regional and national banks in the jurisdictions in
which the Company operates. In addition, the Company regularly invests excess
cash in financial instruments, which are not insured, such as commercial paper,
money-market funds, and Eurodollar time deposits that are offered by a variety
of financial institutions and corporations with high quality credit ratings. The
Company believes that the associated credit risk of such instruments is not
material.
64
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE TEN
COMMITMENTS AND CONTINGENCIES
Leases
The Company's leases principally relate to funeral home facilities,
transportation equipment and two aircraft. The majority of the Company's
operating leases contain options to (i) purchase the property at fair value on
the exercise date, (ii) purchase the property for a value determined at the
inception of the leases, or (iii) renew for the fair rental value at the end of
the primary lease term. Rental expense for these leases was $89,291, $92,895,
and $94,629 for the years ended December 31, 2002, 2001, and 2000, respectively.
In 2002, the Company entered into certain capital leases primarily related to
vehicles in its international operations. As of December 31, 2002, future
minimum lease payments for operating and capital leases exceeding one year are
as follows:
<Table>
<Caption>
OPERATING CAPITAL
--------- -------
2003........................................................ $ 45,939 $ 6,930
2004........................................................ 39,388 6,455
2005........................................................ 31,323 7,165
2006........................................................ 18,994 4,609
2007........................................................ 13,045 2,249
2008 and thereafter......................................... 30,956 3,754
-------- -------
Subtotal............................................... 179,645 31,162
Less: Subleases........................................... (4,006) --
-------- -------
Total.................................................. $175,639 31,162
======== -------
Less: interest on capital leases.......................... (4,340)
-------
Total principal payable on capital leases................... $26,822
=======
</Table>
Purchase Commitments
The Company has a purchase agreement with a major casket manufacturer for
its North American operations with an original minimum commitment of $750,000
over a six-year period expiring at the end of 2004. During 2002, the Company
made minimum purchases of approximately $87 million under this purchase
agreement. The agreement contains provisions for annual price adjustments. The
agreement provides for a one-year extension period to 2005 in which the Company
is allowed to satisfy any remaining commitment that exists at the end of the
original term.
Management, Consultative and Non-Competition Agreements
The Company has entered into management, employment, consultative and
non-competition agreements, generally for five to ten years, with certain
officers and employees of the Company and former owners of businesses acquired.
The Company has modified several of the above agreements as part of cost
rationalization programs (see note sixteen to the consolidated financial
statements). During the years ended December 2002, 2001, and 2000, the Company
recognized expense of $56,878, $70,758, and $75,141, respectively, related to
these agreements. The decrease in expense is a result of the cost
rationalization programs recorded through Impairment charges and other operating
expenses. The Company has estimated the maximum future cash commitment under
these agreements; as a result, this commitment is not indicative of the future
expense to be recognized due to amounts recorded in Impairment charges and other
operating expenses. At December 31,
65
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002, the maximum estimated future cash commitment under agreements with
remaining commitment terms was as follows:
<Table>
2003........................................................ $ 80,210
2004........................................................ 42,402
2005........................................................ 34,776
2006........................................................ 24,283
2007........................................................ 17,539
2008 and thereafter......................................... 19,465
--------
Total..................................................... $218,675
========
</Table>
Contingent Purchase Obligations
In connection with certain acquisitions made with the Company's South
America operations, the Company entered into contingent purchase obligations
with certain former owners of those businesses. These obligations require the
Company to pay additional consideration if cumulative earnings thresholds, as
defined in such agreements, are met between 2003 and 2005. As of December 31,
2002, the contingent consideration is estimated to be $40,000. This additional
consideration may be paid partially in common stock at the discretion of the
former owners.
Representations and Warranties
The Company has contingent obligations of $30,329 related to the Company's
international asset sales and joint venture transactions. In some cases, the
Company has agreed to guarantee certain representations and warranties with such
disposition transactions with letters of credit or interest bearing cash
investments. The Company has interest bearing cash investments of $15,329
included in Deferred charges and other assets collateralizing these contingent
obligations. The Company does not believe it will ultimately be required to fund
to third parties any claims against these representations and warranties.
The Company enters into other representations and warranties associated
with North American asset sales that it does not believe are material in nature.
Litigation
The Company is a party to various litigation matters, investigations and
proceedings. The Company reserves for estimated losses relating to these
contingencies if amounts can be reasonably estimated and are probable to occur.
The following discussion describes certain litigation and proceedings as of
March 14, 2003.
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
66
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 were
held in 2001 between the parties and their insurers to discuss possible
resolution of the case, but no progress was 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.
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. On review
by appeal, the Texas Supreme Court reversed the finding of the Texas state
district court and granted the motion to compel arbitration against Hunter and
remanded the issue of whether the Hunter Family Trust must also arbitrate. Cause
No. 01-0650, In Re Service Corporation International, et al, 85 S.W. 3d 171
(Tex. 2002). The Texas state trial court in Hunter has not issued a further
order on this matter. In the Hammer matter, the Texas state district court
ordered the case to arbitration.
67
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 5, 2002, Hunter and the Hunter Family Trust filed a demand for
arbitration styled Case No. 70 Y 168 00717 02; James P. Hunter, III and the
James P. Hunter, III Family Trust v. Service Corporation International, Robert
L. Waltrip, L. William Heiligbrodt, and George R. Champagne; before the American
Arbitration Association in Houston, Texas. The Hunter plaintiffs' arbitration
demand also asserts claims against the Company and the Individual Defendants
with respect to the Company's acquisition of ECI. Hunter also individually
asserts claims that he was instructed to resign as an officer of the Company
several months after the merger and suffered lost income as a result.
Since the arbitration is in its preliminary stages and no discovery has
occurred, the Company and the Individual Defendants cannot quantify their
ultimate liability, if any, for the payment of damages or predict the outcome of
the arbitration. However, the Company and the Individual Defendants believe that
the allegations in the Hunter arbitration do not provide a basis for recovery of
damages on several legal grounds. The Company and the Individual Defendants
intend to aggressively defend this arbitration action which is set for hearing
in June 2003.
Copies of certain pleadings in these cases are filed as exhibits to the
Company's Annual Report on Form 10-K.
Certain insurance policies held by the Company to cover potential director
and officer liability may reduce cash outflows with respect to an adverse
outcome of the above lawsuits. If an adverse decision in these matters exceeds
the insurance coverage or if the insurance coverage is deemed not to apply to
these matters, an adverse decision could have a material adverse effect on the
Company, its financial condition, results of operations or cash flows.
Thomas G. Conway et al v. Service Corporation International, et al; Cause
No. CV-02-2818; In the United States District Court for the Eastern District of
New York, filed May 10, 2002 and Demand for Arbitration, No. 13 168 02061 02,
before the American Arbitration Association ("AAA") ("Conway" action). The
Conway action was filed against the Company and two former officers of the
Company who were also former officers of ECI, James P. Hunter III ("Hunter") and
Jack D. Rottman ("Rottman"). On August 28, 2002, the Conway plaintiffs filed a
Demand for Arbitration and Statement of Claim against the Company, ECI and SCI
Delaware Funeral Services, Inc., a subsidiary of the Company ("SCI Delaware"),
in New York City. The American Arbitration Association ruled that the
arbitration would be conducted in Houston, Texas. The Conway plaintiffs have
indicated that they will refuse to recognize the transfer on the grounds that it
is improper to conduct the arbitration in Houston, Texas. The Company, ECI and
SCI Delaware have initiated an action in the United States District Court for
the Southern District of Texas to compel the Conway plaintiffs to arbitrate
their claims in Houston, Texas.
The plaintiffs in the Conway action owned funeral homes in Queens County
and Suffolk County, New York, which were sold and merged into a subsidiary of
ECI in January 1998. The plaintiffs are also included in the definition of class
members in the Consolidated Lawsuit described above. In the Conway action,
plaintiffs assert that ECI failed to disclose that ECI was negotiating the
merger with the Company in breach of covenants in the agreements between ECI and
the plaintiffs. ECI purchased the plaintiffs' funeral homes with ECI stock and
cash, and the Plaintiffs' ECI stock was exchanged for stock in the Company in
the merger of January 1999. Plaintiffs allege damages from the loss in value of
the Company's stock from 1999 to the present. The plaintiffs seek to recover
compensatory damages alleged at a minimum of $8 million and punitive damages
alleged at a minimum of $14 million. The plaintiffs allege that SCI and SCI
Delaware are liable as the alleged "successor" entities to ECI.
Since the arbitration is in its preliminary stages and no discovery has
occurred, the Company cannot quantify the ultimate liability of the Company or
its subsidiaries, if any, for the payment of damages or predict the outcome of
the litigation. However, the Company and its subsidiaries believe that the
allegations in the
68
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Conway action do not provide a basis for recovery of damages on several legal
grounds. The Company and its subsidiaries intend to aggressively defend this
lawsuit.
Shareholder Derivative Demand; The Company received a letter dated January
14, 2002, addressed to the Board of Directors, from a law firm stating that it
represented a shareholder of the Company. The letter asserts a shareholder
derivative demand that the Company take legal action against its directors and
officers based upon alleged conduct that is the subject of:
(1) a putative class action lawsuit filed on December 19, 2001, in
Broward County, Florida against the Company and one of its subsidiaries;
(2) a lawsuit filed against the Company by former employees of the
Company in Atlanta, Georgia; and
(3) certain events described in newspaper articles referred to in the
plaintiffs' consolidated complaint in the Consolidated Lawsuit (described
above).
The Board of Directors responded to the letter by forming a committee of
certain independent directors to conduct an inquiry into the allegations in the
letter. The committee retained independent counsel to assist it in its inquiry.
The letter does not seek a specified amount of legal damages. Based on its
investigation, the Committee determined that a lawsuit or derivative proceeding
against the directors or officers of SCI is not in the best interest of SCI. The
Committee reported its decision to the Executive Committee of the Board of
Directors on September 11, 2002.
Maurice Levie, Derivatively on behalf of Nominal Defendant, Service
Corporation International v. R. L. Waltrip, et al and Service Corporation
International; No. 2002-42417; In the 164th Judicial District Court of Harris
County, Texas, Filed August 20, 2002 ("Levie" action). The Levie action was
filed against the Company and the members of its Board of Directors individually
as a result of the Shareholder Derivative Demand of January 14, 2002, described
above. In response to the filing of the lawsuit before the conclusion of the
Committee's investigation, the Company and the individual directors filed an
answer denying the allegations in the lawsuit and a motion to dismiss.
Since the litigation is in its preliminary stages and no discovery has
occurred, the Company cannot quantify its ultimate liability or that of its
individual directors, if any, for the payment of damages or predict the outcome
of the litigation. However, the Company and the individual directors believe
that the allegations in the Levie action do not provide a basis for recovery of
damages on several legal grounds. The Company and the individual directors
intend to aggressively defend this lawsuit. The Company filed the motion to
dismiss the entire lawsuit against it and individual directors based on the
results of the investigation and determination of the Committee in response to
the shareholder demand letter. This motion is currently pending before the trial
court.
Joan Light, Shirley Eisenbert and Carol Prisco v. SCI Funeral Services of
Florida, Inc. d/b/a Menorah Gardens & Funeral Chapels, and Service Corporation
International; Case No. 01-21376 CA 08; In the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida, General Jurisdiction
Division (the Consumer Lawsuit). The Consumer Lawsuit was filed December 19,
2001 and names the Company and a subsidiary as defendants. It is a putative
class action which has not been certified. A hearing on the Motion for Class
Certification has taken place but a ruling is not expected on what, if any,
class might be certified until April 2003 or later.
The Consumer Lawsuit has been brought on behalf of all persons with burial
plots or family members buried at Menorah Gardens & Funeral Chapels in Florida.
Excluded from the class definition are persons whose claims have been reduced to
judgment or have been settled as of the date of class certification.
69
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plaintiffs allege that defendants have failed to exercise reasonable
care in handling remains by secretly: (i) dumping remains in a wooded area; (ii)
burying remains in locations other than the ones purchased; (iii) crushing
vaults to make room for other vaults; (iv) burying remains on top of the other
or head to foot rather than side-by-side; (v) moving remains; and (vi)
co-mingling remains.
The plaintiffs in the Consumer Lawsuit allege that the above conduct
constitutes negligence, tortious interference with the handling of dead bodies,
infliction of emotional distress, and violation of industry specific state
statutes, as well as the state's Deceptive and Unfair Trade Practices Act. The
plaintiffs seek an unspecified amount of compensatory and punitive damages. The
Court has granted plaintiffs' motion for leave to amend their complaint to
include punitive damages. Plaintiffs also seek equitable/injunctive relief in
the form of a permanent injunction requiring defendants to fund a court
supervised program that provides for monitoring and studying of the cemetery and
any disturbed remains to insure their proper disposition.
On April 21, 2002, additional plaintiffs filed a lawsuit styled Sol
Guralnick, Linda Weiner, Joan Nix, Gilda Schwartz, Paul Schwartz, Ann Ferrante,
Steve Schwartz, Nancy Backlund, Jamie Osit, Corey King, Marc King, Barbara
Feinberg Clark v. SCI Funeral Services of Florida, Inc. d/b/a Menorah Gardens
and Funeral Chapels and Service Corporation International; In the Circuit Court
in the 15th Judicial Circuit, Palm Beach County, Florida; Case number CA024815AE
(the Guralnick Lawsuit), making essentially the same allegations as the Consumer
Lawsuit with the exception that it does not contain class allegations.
Since the Consumer and Guralnick Lawsuits, and related discovery, are in
preliminary stages, the Company cannot quantify its ultimate liability, if any,
for the payment of damages or predict the outcome of the litigation. The Company
intends to continue its investigation and to aggressively defend itself in the
litigation as well as continue to cooperate with state officials in resolving
the issues presented.
In addition to the litigation described above, the Florida Attorney General
and State Comptroller filed an action against the Company on March 1, 2002
styled Office of the Attorney General, Department of Legal Affairs, State of
Florida and Office of the Comptroller, Department of Banking and Finance, State
of Florida v. Service Corporation International, a Texas Corporation and S.C.I.
Funeral Services of Florida, Inc., a Florida Corporation doing business as
Menorah Gardens & Funeral Chapels; Case No. CA 02-02666AG; In the Circuit Court
of the 15th Judicial Circuit in and for Palm Beach County, Florida (the AG
Lawsuit).
The AG Lawsuit alleges similar claims as the Consumer Lawsuit including
that defendants conducted their business through the willful use of false and
deceptive representations regarding: (i) the certainty of plot location and
size; (ii) the permanence of interment; and (iii) the nature and quality of the
care that defendants intended to provide.
The AG Lawsuit alleges that defendants violated Florida statutes by
engaging in the above referenced conduct. The AG Lawsuit seeks: (i) the
appointment of a receiver or administrator to manage and correct the operations
of the defendants' Florida Menorah Gardens facilities; (ii) a full accounting of
all plots sold and offered for sale by defendants at their Florida Menorah
Gardens facilities; (iii) an award of unspecified actual damages sustained by
consumers; (iv) an award of unspecified punitive damages pursuant to Florida
statute; (v) imposition of civil penalties for each violation of the Florida
statutes; (vi) an award of attorneys' fees and costs; and (vii) a permanent
injunction against the defendants prohibiting them from (a) engaging in the
funeral and/or cemetery business at their Florida Menorah Gardens facilities;
(b) using false or misleading representations in their advertising and sales
materials directed to the State of Florida; and (c) violating the Florida
statutes.
In connection with the allegations in the Consumer and AG Lawsuits, the
Florida Department of Law Enforcement caused a search warrant to be issued to
investigate possible criminal activity. The Company is continuing to fully
cooperate in the investigation.
70
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As with the Consumer and Guralnick Lawsuits, since the AG Lawsuit
litigation is in its preliminary stages, the Company cannot quantify its
ultimate liability, if any, for the payment of damages or predict the outcome of
the litigation. The Company has agreed to the appointment of an examiner who is
charged with overseeing the remapping and burial processes at the cemeteries.
The Company has insurance policies which are intended to limit the Company's
outflows in the event of a decision adverse to the Company in the Consumer
Lawsuit, the Guralnick Lawsuit and the AG Lawsuit. If an adverse decision in
these matters exceeds the Company's insurance coverage or if the insurance
coverage is deemed not to apply to these matters, an adverse decision could have
a material adverse effect on the Company, its financial condition, results of
operations or cash flows.
NOTE ELEVEN
STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock, $1
per share par value. No shares were issued as of December 31, 2002 and 2001. At
December 31, 2002 and 2001, 500,000,000 common shares of $1 par value were
authorized and the Company had 297,010,237 and 292,153,765, respectively, shares
issued and outstanding, net of 2,516,396 and 2,502,190 shares held in treasury
at par at December 31, 2002 and 2001, respectively.
The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the rights holders to purchase certain securities of the Company or the
acquiring company. The rights, which are redeemable by the Company for $.01 per
right, expire in July 2008 unless extended.
Stock Benefit Plans
The Company has benefit plans whereby shares of the Company's common stock
may be issued pursuant to the exercise of stock options granted to officers and
key employees. The Company's Amended 1996 Incentive Plan reserves 24,000,000
shares of common stock for outstanding and future awards of stock options,
restricted stock and other stock based awards to officers and key employees of
the Company. The Company's 1996 Non-qualified Incentive Plan reserves 8,700,000
shares of common stock for outstanding and future awards of nonqualified stock
options to employees who are not officers of the Company.
The plans allow for options to be granted as either non-qualified or
incentive stock options. The options are granted with an exercise price equal to
the then current market price of the Company's common stock. The options are
generally exercisable at a rate of 33 1/3% each year unless alternative vesting
methods are approved by the Company's Compensation Committee of the Board of
Directors. At December 31, 2002 and 2001, 5,005,623 and 5,215,623 options were
outstanding with alternative vesting methods. Under the alternative vesting
methods, partial or full accelerated vesting will occur when the price of
Company common stock reaches pre-determined prices. If the pre-determined stock
prices are not met in the required time period, the options will fully vest in
periods ranging from eight to ten years from date of grant. At December 31, 2002
and 2001, 6,168,833 and 7,349,923 shares, respectively, were reserved for future
option grants under all stock option plans.
71
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth certain stock option information:
<Table>
<Caption>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at December 31, 1999......................... 19,893,110 $23.36
Granted................................................ 7,288,650 4.89
Exercised.............................................. -- --
Cancelled.............................................. (1,887,967) 24.92
---------- ------
Outstanding at December 31, 2000......................... 25,293,793 17.92
Granted................................................ 9,083,100 3.98
Exercised.............................................. (136,414) 4.32
Cancelled.............................................. (4,291,215) 21.94
---------- ------
Outstanding at December 31, 2001......................... 29,949,264 13.18
Granted................................................ 5,699,100 4.32
Exercised.............................................. (42,633) 4.38
Cancelled.............................................. (5,604,481) 12.51
---------- ------
Outstanding at December 31, 2002......................... 30,001,250 $11.63
========== ======
Exercisable at December 31, 2000......................... 12,262,434 $21.45
========== ======
Exercisable at December 31, 2001......................... 12,824,879 $18.72
========== ======
Exercisable at December 31, 2002......................... 16,194,767 $14.81
========== ======
</Table>
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED-AVERAGE EXERCISABLE AT
RANGE OF DECEMBER 31, REMAINING WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICE 2002 CONTRACTUAL LIFE EXERCISE PRICE 2002 EXERCISE PRICE
- -------------- -------------- ---------------- ---------------- -------------- ----------------
$ 0.00- 4.00 8,184,200 5.8 $ 3.33 2,588,986 $ 3.30
4.00- 5.00 4,485,738 3.2 4.40 2,023,959 4.39
5.00-10.00 5,600,450 6.1 5.80 1,702,848 6.71
10.00-20.00 6,632,245 3.8 16.05 6,601,624 16.06
20.00-43.00 5,098,617 2.3 31.96 3,277,350 32.03
- ------------- ---------- --- ------ ---------- ------
$ 0.00-43.00 30,001,250 4.4 $11.63 16,194,767 $14.81
============= ========== === ====== ========== ======
</Table>
72
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had elected to recognize compensation cost for its option
plans based on the fair value at the grant dates for awards under those plans,
net loss and loss per share would have been changed for the years ended December
31 to the pro forma amounts indicated below:
<Table>
<Caption>
2002 2001 2000
--------- --------- -----------
Net loss......................................... $(231,880) $(597,796) $(1,343,251)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
expense........................................ (13,537) (17,680) (24,735)
--------- --------- -----------
Pro forma net loss............................... $(245,417) $(615,476) $(1,367,986)
========= ========= ===========
Basic and diluted net loss per share............. $ (.79) $ (2.10) $ (4.93)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
expense........................................ (.04) (0.06) (0.10)
--------- --------- -----------
Pro forma basic and diluted net loss per share... $ (.83) $ (2.16) $ (5.03)
========= ========= ===========
</Table>
The fair value of the Company's stock options used to compute the pro forma
net loss and loss per share disclosures is determined by calculating the
estimated present value at grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions:
<Table>
<Caption>
ASSUMPTIONS 2002 2001 2000
- ----------- ---------- ---------- ----------
Dividend yield.................................... 0.0% 0.0% 0.0%
Expected volatility............................... 66.3% 62.0% 57.2%
Risk-free interest rate........................... 3.6% 5.1% 6.7%
Expected holding period........................... 6.1 years 7.1 years 7.0 years
Weighted average fair value....................... $2.90 $2.68 $3.18
</Table>
In 2001, the Company replaced its 1995 Stock Plan for Non-Employee Directors,
which expired, with its 2001 Stock Plan for Non-Employee Directors. Under this
new plan, non-employee directors automatically receive yearly awards of
restricted stock through the year 2005. Each award will not exceed 15,000 shares
of common stock per director per year and vests after one year of service. In
2002 and 2001, each non-employee director was awarded 10,000 shares of common
stock. For the years ended December 31, 2002, 2001 and 2000, respectively,
100,000, 110,000 and 33,000 shares of restricted stock were awarded at fair
values of $4.25, $5.86 and $4.03, respectively. Further in 2001, the Company
voted to create a Director Fee Plan to allow for partial payment of compensation
to Non-Employee Directors through common stock. In 2002 and 2001, 45,108 and
36,784, respectively, shares of common stock was granted under the Director Fee
Plan. Further 21,724 and 6,688 shares have been deferred by certain officers and
reserved for future use under the Director Fee Plan in accordance with the Plan
agreement at December 31, 2002 and 2001, respectively.
73
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated Other Comprehensive Income (Loss)
The Company's components of accumulated other comprehensive income (loss)
at December 31 are as follows:
<Table>
<Caption>
FOREIGN CURRENCY UNREALIZED GAIN MINIMUM PENSION ACCUMULATED OTHER
TRANSLATION (LOSSES) ON LIABILITY COMPREHENSIVE
ADJUSTMENT SECURITIES ADJUSTMENT INCOME (LOSS)
---------------- --------------- --------------- -----------------
Balance at December 31, 1999... $ (37,768) $(22,222) $ -- $ (59,990)
Activity in 2000............. (202,709) (4,792) (12,724) (220,225)
Reclassification adjustment
for discontinued
operations................ 16,044 27,014 -- 43,058
--------- -------- -------- ---------
Balance at December 31, 2000... (224,433) -- (12,724) (237,157)
Activity in 2001............. (76,403) -- (16,629) (93,032)
Reclassification adjustment
for sold businesses....... 38,990 -- -- 38,990
--------- -------- -------- ---------
Balance at December 31, 2001... (261,846) -- (29,353) (291,199)
Activity in 2002............. 43,776 -- (7,202) 36,574
Reclassification adjustment
for sold businesses....... 47,479 -- -- 47,479
--------- -------- -------- ---------
Balance at December 31, 2002... $(170,591) $ -- $(36,555) $(207,146)
========= ======== ======== =========
</Table>
Included in Foreign currency translation adjustment are net losses of
$162,715 and an associated deferred tax asset of $59,662 related to the
Company's international operations held for sale. Accordingly, if these sale
transactions are consummated, Foreign currency translation adjustment and
Accumulated other comprehensive loss will be reduced by this amount. The Minimum
pension liability adjustment of $36,555 at December 31, 2002 is net of deferred
taxes of $23,146.
NOTE TWELVE
RETIREMENT PLANS
The Company has a non-contributory, defined benefit pension plan covering
substantially all United States employees (US Pension Plan), a supplemental
retirement plan for certain current and former key employees (SERP), a
supplemental retirement plan for officers and certain key employees (Senior
SERP), and a retirement plan for certain non-employee directors (Directors'
Plan). In 2000, the Company also established a 401(k) employee savings plan.
Effective January 1, 2001, the Company curtailed its US Pension Plan, SERP,
Senior SERP and Directors' Plan and recognized a curtailment loss of $3,572 in
2001.
Retirement benefits for the US Pension Plan are generally based on years of
service and compensation. This contribution is an actuarially determined amount
consistent with the funding requirements of the Employee Retirement Income
Security Act of 1974. Assets of the pension plan consist primarily of bank money
market funds, fixed income investments and marketable equity securities. The
marketable equity securities include shares of Company common stock with a value
of $4,394 and $6,603 at December 31, 2002 and 2001, respectively.
Retirement benefits under the SERP are based on years of service and
average monthly compensation, reduced by benefits under the pension plan and
Social Security. The Senior SERP provides retirement benefits based on years of
service and position. The Directors' Plan provides for an annual benefit to
directors
74
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
following their retirement, based on a vesting schedule. The retirement benefits
under the SERP, Senior SERP and Directors' Plan are an unfunded obligation of
the Company; however, the Company purchased various life insurance policies on
the participants in these plans with the intent to use the proceeds or any cash
value buildup from such policies to assist in meeting, at least to the extent of
such assets, the plans' benefit requirements.
Most foreign employees are covered by their respective foreign government
mandated or defined contribution plans which are adequately funded and are not
considered significant to the financial condition or results of operations of
the Company. The plans' liabilities and their related costs are computed in
accordance with the laws of the individual countries and appropriate actuarial
practices.
The components of net periodic benefit cost for the years ended December 31
were as follows:
<Table>
<Caption>
2002 2001 2000
------- -------- --------
Service cost -- benefits earned during the period..... $ -- $ 5,081 $ 15,941
Interest cost on projected benefit obligation......... 9,824 14,474 14,965
Return on plan assets................................. (8,539) (13,569) (13,688)
Curtailment charge.................................... -- 3,572 --
Amortization of unrecognized transition asset......... -- (418) (440)
Amortization of prior service cost.................... 197 114 1,126
Recognized net loss (gain)............................ 4,834 2,826 (449)
------- -------- --------
$ 6,316 $ 12,080 $ 17,455
======= ======== ========
</Table>
The plans' funded status at December 31 were as follows (based on
valuations as of September 30):
<Table>
<Caption>
2002 2001
-------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $193,325 $198,977
Service cost................................................ -- 5,081
Contributions paid by participants.......................... -- 1,098
Interest cost............................................... 9,824 14,474
Plan amendments............................................. -- 1,802
Settlement/curtailment charge............................... (13,325) (9,333)
Actuarial loss.............................................. 3,642 7,136
Benefits paid............................................... (6,683) (24,891)
Effects of dispositions..................................... (43,941) --
Effect of foreign currency.................................. -- (1,019)
-------- --------
Benefit obligation at end of year........................... $142,842 $193,325
======== ========
</Table>
75
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001
-------- --------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $147,075 $152,766
Actual return on plan assets................................ (10,528) (22,136)
Employer contributions...................................... 3,214 42,901
Contributions paid by participants.......................... -- 1,098
Settlement charge........................................... (13,325) --
Benefits paid............................................... (7,299) (26,242)
Effects of dispositions..................................... (41,676) --
Effect of foreign currency.................................. -- (1,312)
-------- --------
Fair value of plan assets at end of year.................... $ 77,461 $147,075
======== ========
Funded status of plan....................................... $(65,381) $(46,250)
Fourth quarter contributions................................ -- 354
Unrecognized actuarial loss................................. 59,701 58,904
Unrecognized prior service cost............................. 1,357 2,163
Unrecognized net transition asset........................... -- (1,253)
Effect of foreign currency.................................. -- 99
-------- --------
Net amount recognized....................................... $ (4,323) $ 14,017
======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET:
Prepaid benefit cost........................................ $ -- $ 8,146
Accrued benefit liability................................... (65,381) (43,621)
Intangible asset............................................ 1,357 1,554
Accumulated other comprehensive loss........................ 59,701 47,938
-------- --------
Net amount recognized....................................... $ (4,323) $ 14,017
======== ========
</Table>
The plans' weighted-average assumptions were as follows:
<Table>
<Caption>
2002 2001
-------- --------
Discount rate used to determine obligations................. 7.00% 6.97%
Assumed rate of compensation increase....................... 0.00% 3.50%
Assumed rate of return on plan assets....................... 9.00% 8.43%
</Table>
The 2001 balances included a defined benefit pension plan for the Company's
United Kingdom operations (UK Plan). In 2002, the Company joint ventured the
United Kingdom operations and as such, retirement plans included in 2002 are for
U.S. employees only. Discount rates for the U.S. plans were 7.00% and 7.25% in
2002 and 2001, respectively, and 6.00% in 2001 for the UK Plan. The assumed rate
of compensation increase for the year ended December 31, 2001 reflects the
assumptions for the UK Plan only as all other plans subject to this disclosure
were curtailed effective January 1, 2001.
The Company has an employee savings plan that qualifies under section
401(k) of the Internal Revenue Code for the exclusive benefit of their United
States employees. Under the plan, participating employees may contribute a
portion of their pretax and/or after tax income in accordance with specified
guidelines up to a maximum of 50%. The Company then matches a percentage of the
employee contributions through
76
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributions of the Company's common stock. For 2002 and 2001, the Company
match was based upon the following:
<Table>
<Caption>
YEARS OF VESTING SERVICE PERCENTAGE OF DEFERRED COMPENSATION
- ------------------------ -----------------------------------
75% of the first 6% of deferred
0-5 years................................ compensation
110% of the first 6% of deferred
6-10 years............................... compensation
135% of the first 6% of deferred
11 or more years......................... compensation
</Table>
The amount of Company matched common stock contributions in 2002 and 2001
was $18,150 and $12,635, respectively.
NOTE THIRTEEN
SEGMENT REPORTING
The Company's operations are product based and geographically based, and
the 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 its North
America and Other foreign segments and conducts funeral operations in its
European segment. In the first quarter of 2002, the Company completed a joint
venture of its United Kingdom operations (see note sixteen to the consolidated
financial statements), which conducted both funeral and cemetery operations in
this European segment.
In 2002, the Company began recognizing revenues associated with delivered
caskets previously prearranged on cemetery contracts as part of funeral
operations. Previously, such casket revenue was recognized in cemetery
operations. The Company has reclassified the prior year operating results to
conform to the current period presentation with no effect on previously reported
results of operations, financial position or cash flows.
In addition in 2002, the Company changed its allocation methodology of
overhead costs in North America to be based on funeral and cemetery reporting
unit revenues. The change in overhead allocation has not impacted the Company's
consolidated results of operations, financial position or cash flows.
In 2000, the Company completed sales of its wholly owned insurance
operations. As such, these operations have been reclassified and reported as
discontinued operations (see note seventeen to the consolidated financial
statements).
The Company's reportable segment information is as follows:
<Table>
<Caption>
REPORTABLE
FUNERAL CEMETERY SEGMENTS
---------- -------- ----------
Revenues from external customers:
2002............................................ $1,635,395 $637,028 $2,272,423
2001............................................ 1,821,430 688,913 2,510,343
2000............................................ 1,926,601 626,635 2,553,236
Depreciation and amortization:
2002............................................ $ 75,758 $ 18,076 $ 93,834
2001............................................ 141,024 33,487 174,511
2000............................................ 157,174 40,162 197,336
Gross profits:
2002............................................ $ 279,568 $ 84,347 $ 363,915
2001............................................ 265,163 94,223 359,386
2000............................................ 274,728 50,619 325,347
</Table>
77
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
REPORTABLE
FUNERAL CEMETERY SEGMENTS
---------- ---------- -----------
Total assets:
2002.......................................... $6,980,500 $3,350,929 $10,331,429
2001.......................................... 7,123,855 4,007,642 11,131,497
2000.......................................... 7,865,099 4,464,622 12,329,721
Capital expenditures:
2002.......................................... $ 69,940 $ 44,271 $ 114,211
2001.......................................... 56,824 26,596 83,420
2000.......................................... 40,660 43,943 84,603
Operating locations at year end (unaudited):
2002.......................................... 2,526 507 3,033
2001.......................................... 3,210 541 3,751
2000.......................................... 3,751 629 4,380
</Table>
Subsequent to the sale of substantially all remaining loans held by the
Company's lending subsidiary, results of operations from remaining loans are
included in Other income in the consolidated statement of operations and assets
have been consolidated with corporate assets. The following table reconciles
certain reportable segment amounts to the Company's corresponding consolidated
amounts:
<Table>
<Caption>
REPORTABLE LENDING
SEGMENTS SUBSIDIARY CORPORATE CONSOLIDATED
----------- ---------- --------- ------------
Revenues from external customers:
2002................................ $ 2,272,423 $ -- $ -- $ 2,272,423
2001................................ 2,510,343 -- -- 2,510,343
2000................................ 2,553,236 11,494 -- 2,564,730
Depreciation and amortization:
2002................................ $ 93,834 $ -- $ 34,712 $ 128,546
2001................................ 174,511 -- 19,426 193,937
2000................................ 197,336 -- 26,695 224,031
Total assets:
2002................................ $10,331,429 $ -- $392,356 $10,723,785
2001................................ 11,131,497 -- 448,440 11,579,937
2000................................ 12,329,721 40,120 505,433 12,875,274
Capital expenditures(1):
2002................................ $ 114,211 $ -- $ 12,924 $ 127,135
2001................................ 83,420 -- 2,574 85,994
2000................................ 84,603 -- 13,192 97,795
</Table>
- ---------------
(1) Consolidated capital expenditures include $27,090, $11,830, and $14,425 for
the years ended December 31, 2002, 2001, and 2000, respectively, for capital
leases and purchases of property, plant and equipment, cemetery property,
and goodwill of acquired businesses. The 2001 amount relates to assets
previously held by the Company's lending subsidiary exchanged for collateral
in bankruptcy proceedings. The 2000 amount above related to the Company
acquiring by deed in lieu of foreclosure the collateral underlying certain
loans from the Company's lending subsidiary. Excluding these capital
expenditures related to acquired businesses the Company had consolidated
capital expenditures of $100,045, $74,164, and $83,370 for the years ended
December 31, 2002, 2001, and 2000, respectively.
78
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles gross profits from reportable segments shown
above to the Company's consolidated income (loss) before income taxes and
extraordinary items:
<Table>
<Caption>
2002 2001 2000
--------- --------- ---------
Gross profit from reportable segments............. $ 363,915 $ 359,386 $ 325,347
Lending subsidiary income from operations....... -- -- 2,295
General and administrative expenses............. (89,752) (70,309) (79,932)
Impairment losses and other operating
expenses..................................... (289,054) (644,147) (517,776)
--------- --------- ---------
Operating loss.................................... (14,891) (355,070) (270,066)
Interest expense................................ (161,494) (211,626) (281,548)
Other income.................................... 19,021 15,044 17,455
Gains from dispositions......................... 16,401 16,224 17,181
--------- --------- ---------
Loss from continuing operations before income
taxes, extraordinary items and cumulative
effects of accounting changes................... $(140,963) $(535,428) $(516,978)
========= ========= =========
</Table>
Although total amounts reported have not changed, the Company has made
certain reclassifications within geographic segments in order to more accurately
reflect the results in all years with alignment of current management
objectives.
The Company's geographic segment information was as follows:
<Table>
<Caption>
NORTH OTHER
AMERICA EUROPE FOREIGN TOTAL
---------- ---------- --------- ----------
Revenues from external customers:
2002............................... $1,741,382 $ 496,409 $ 34,632 $2,272,423
2001............................... 1,781,159 647,714 81,470 2,510,343
2000............................... 1,737,014 686,199 141,517 2,564,730
Depreciation and amortization
2002............................... $ 119,060 $ 8,943 $ 543 $ 128,546
2001............................... 144,581 40,614 8,742 193,937
2000............................... 159,864 50,758 13,409 224,031
Operating income (loss):
2002............................... $ (56,693) $ 50,488 $ (8,686) $ (14,891)
2001............................... 209,247 (317,394) (246,923) (355,070)
2000............................... (308,409) 19,823 18,520 (270,066)
Impairment and other operating
expenses:
2002............................... $ 272,040 $ 777 $ 16,237 $ 289,054
2001............................... 17,657 370,232 256,258 644,147
2000............................... 496,336 20,424 1,016 517,776
Long-lived assets:
2002............................... $4,241,601 $ 254,694 $ 42,343 $4,538,638
2001............................... 4,741,276 603,016 47,005 5,391,297
2000............................... 4,882,795 1,154,260 521,178 6,558,233
Operating locations at year end
(unaudited):
2002............................... 1,866 1,143 24 3,033
2001............................... 1,999 1,726 26 3,751
2000............................... 2,256 1,942 182 4,380
</Table>
79
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the North American figures above are the following
United States amounts:
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
Revenues from external customers................. $1,667,884 $1,701,574 $1,657,553
Operating income (loss)(1)....................... (69,664) 187,282 (225,359)
Long-lived assets................................ 4,122,815 4,618,405 4,648,778
Operating locations at year end (unaudited)...... 1,714 1,842 2,092
</Table>
Included in the European figures above are the following French amounts:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Revenues from external customers..................... $473,643 $425,129 $415,615
Operating income (loss)(1)........................... 46,797 (102,349) 5,235
Long-lived assets.................................... 265,415 202,141 344,369
Operating locations at year end (unaudited).......... 1,125 1,139 1,169
</Table>
- ---------------
(1) Operating income (loss) includes $270,866, $27,154, and $345,917 in
impairment losses and other operating expenses in the United States and
$(63), $126,612, and $8,913 in France for the years ended December 31, 2002,
2001, and 2000, respectively.
During 2002 and 2001, the Company divested of certain North America and
international funeral service locations and cemeteries not considered part of
its core operations. These divested operations do not qualify as discontinued
operations under SFAS No. 144 because either the divested operations were held
for sale in accordance with previous accounting pronouncements related to
dispositions or they do not meet the criteria as defined in SFAS No. 144.
Summary operating results of the Company's divested operations are as follows.
<Table>
<Caption>
NORTH AMERICA EUROPE
----------------- ------------------
2002 2001 2002 2001
------- ------- ------- --------
Revenues:
Funeral..................................... $22,485 $74,687 $14,284 $190,673
Cemetery.................................... 4,648 16,568 2,190 25,745
------- ------- ------- --------
$27,133 $91,255 $16,474 $216,418
======= ======= ======= ========
Operating income (excluding impairment losses
and other operating expenses):
Funeral..................................... $(1,393) $(4,271) $ 3,358 $ 22,682
Cemetery.................................... 1,513 4,149 740 8,336
------- ------- ------- --------
$ 120 $ (122) $ 4,098 $ 31,018
======= ======= ======= ========
</Table>
80
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
OTHER FOREIGN TOTAL
----------------- ------------------
2002 2001 2002 2001
------- ------- ------- --------
Revenues:
Funeral..................................... $ -- $13,637 $36,769 $278,997
Cemetery.................................... -- 6,609 6,838 48,922
------- ------- ------- --------
$ -- $20,246 $43,607 $327,919
======= ======= ======= ========
Operating income (excluding impairment losses
and other operating expenses):
Funeral..................................... $ -- $ (637) $ 1,965 $ 17,774
Cemetery.................................... -- 2,036 2,253 14,521
------- ------- ------- --------
$ -- $ 1,399 $ 4,218 $ 32,295
======= ======= ======= ========
</Table>
The net assets of the Company's United Kingdom subsidiary (divested in the
first quarter of 2002) were as follows:
<Table>
<Caption>
DECEMBER 31, 2001
-----------------
Assets:
Cash and cash equivalents................................. $ 1,673
Receivables, net of allowances............................ 24,113
Inventories............................................... 7,845
Other..................................................... 14,124
Prearranged funeral contracts............................. 229,859
Cemetery property, at cost................................ 245,018
Property, plant and equipment, net........................ 117,658
Deferred charges and other assets......................... 3,956
Goodwill, net............................................. 35,276
--------
Total assets........................................... 679,522
Liabilities:
Accounts payable and accrued liabilities.................. 41,863
Income taxes.............................................. 672
Deferred prearranged funeral contract revenues............ 304,437
Deferred cemetery contract revenues....................... 32,358
Deferred income taxes..................................... 22,437
Other liabilities......................................... 40,915
--------
Total liabilities...................................... 442,682
--------
Net assets.................................................. $236,840
========
</Table>
81
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE FOURTEEN
SUPPLEMENTARY INFORMATION
The detail of certain balance sheet accounts was as follows:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Cash and cash equivalents:
Cash...................................................... $ 35,338 $ 21,791
Commercial paper and temporary investments................ 165,287 7,501
---------- ----------
$ 200,625 $ 29,292
========== ==========
Receivables and allowances:
Current:
Trade accounts......................................... $ 149,968 $ 209,471
Cemetery contracts and trusted cemetery merchandise and
services sales....................................... 204,497 246,087
Loans and other notes receivable....................... 12,717 24,771
---------- ----------
367,182 480,329
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 43,920 61,683
Unearned finance charges............................... 31,497 32,167
---------- ----------
75,417 93,850
---------- ----------
$ 291,765 $ 386,479
========== ==========
Long-term:
Cemetery contracts..................................... $ 453,375 $ 506,045
Trusted cemetery merchandise and services sales........ 854,452 901,058
Loans and other notes receivable....................... 126,268 129,944
---------- ----------
1,434,095 1,537,047
---------- ----------
Less:
Allowance for contract cancellations and doubtful
accounts............................................. 206,740 207,468
Unearned finance charges............................... 70,897 80,087
---------- ----------
277,637 287,555
---------- ----------
$1,156,458 $1,249,492
========== ==========
</Table>
Interest rates on cemetery contracts and loans and other notes receivable
range from 3.5% to 14.5% at December 31, 2002 and 2001. Included in Loans and
other notes receivable in the consolidated balance sheet
82
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is $1,808 and $354 of notes with officers, employees and former employees of the
Company, and $4,638 and $4,712 of notes with other related parties at December
31, 2002 and 2001, respectively.
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Inventories:
Developed land, lawn crypts and mausoleums................ $ 43,297 $ 51,882
Caskets, vaults, urns, markers and bases.................. 92,232 117,093
---------- ----------
$ 135,529 $ 168,975
========== ==========
Cemetery property:
Undeveloped land.......................................... $1,308,182 $1,671,953
Developed land, lawn crypts and mausoleums................ 259,402 252,820
---------- ----------
$1,567,584 $1,924,773
========== ==========
Property, plant and equipment:
Land...................................................... $ 252,769 $ 299,169
Buildings and improvements................................ 1,170,342 1,192,755
Operating equipment....................................... 373,294 430,020
Leasehold improvements.................................... 23,412 53,660
---------- ----------
1,819,817 1,975,604
Less: accumulated depreciation............................ (631,477) (618,194)
---------- ----------
$1,188,340 $1,357,410
========== ==========
Accounts payable and accrued liabilities:
Trade payables............................................ $ 56,387 $ 78,852
Payroll................................................... 91,836 92,670
Interest.................................................. 21,427 40,753
Insurance................................................. 44,089 50,419
Bank overdraft accrual.................................... 16,349 26,010
Employee termination costs and costs to exit activities... 28,179 71,916
Property, sales and use tax payables...................... 29,516 30,551
Other..................................................... 74,127 92,979
---------- ----------
$ 361,910 $ 484,150
========== ==========
</Table>
83
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-CASH TRANSACTIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Common stock issued under restricted stock plans..... $ 425 $ 645 $ 133
Minimum liability under retirement plans............. (7,202) (16,629) (12,724)
Debenture conversions to common stock................ -- 5,528 --
Debt extinguished using common stock................. -- 81,221 --
Common stock issued in acquisitions.................. -- -- 247
Common stock contributions to employee 401(k)........ 18,150 12,635 812
Common stock contributions to cash balance plan...... -- 6,500 --
Debt extinguished using non-cash French assets....... 113,500 -- --
Capital leases....................................... 26,822 -- --
Debt exchange 6.00% notes due 2005 for 7.70% notes
due 2009........................................... 172,183 -- --
</Table>
NOTE FIFTEEN
EARNINGS PER SHARE
The basic and diluted per share amounts were the same in all periods
presented because the Company reported a loss from continuing operations before
extraordinary items and cumulative effects of accounting changes for the three
years ended December 31, 2002.
<Table>
<Caption>
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Loss (numerator):
Loss before extraordinary items and cumulative
effects of accounting changes -- basic....... $(101,223) $(596,627) $(425,523)
After tax interest on convertible debentures.... -- -- --
--------- --------- ---------
Loss before extraordinary items and cumulative
effects of accounting changes -- diluted..... $(101,223) $(596,627) $(425,523)
========= ========= =========
Shares (denominator):
Shares -- basic................................. 294,533 285,127 272,172
Stock options.............................. -- -- 23
Convertible debentures..................... -- -- 349
--------- --------- ---------
Shares -- diluted............................... 294,533 285,127 272,544
========= ========= =========
Loss income per share before extraordinary items
and cumulative effects of accounting changes:
Basic........................................... $ (0.34) $ (2.09) $ (1.56)
Diluted......................................... (0.34) (2.09) (1.56)
Net loss per share:
Basic........................................... $ (.79) $ (2.10) $ (4.93)
Diluted......................................... (.79) (2.10) (4.93)
</Table>
The computation of diluted earnings per share excludes outstanding stock
options and convertible debentures because the inclusion of such options and
debentures would be antidilutive in the periods
84
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
presented. Total options and convertible debentures that could impact dilutive
earnings per share are as follows:
<Table>
<Caption>
2002 2001 2000
------ ------ ------
Antidilutive options ($2.26 to $42.53)..................... 30,001 29,949 25,294
Antidilutive convertible debentures ($6.92 to $50.00)...... 51,408 51,763 2,066
------ ------ ------
Total common stock equivalents excluded from
computation........................................... 81,409 81,712 27,360
====== ====== ======
</Table>
NOTE SIXTEEN
IMPAIRMENT LOSSES AND OTHER OPERATING EXPENSES
The Company has recorded Impairment losses and other operating expenses,
previously disclosed as restructuring and non-recurring charges, in 2002, 2001,
2000 and 1999. The Company continues to adjust the estimates of certain items
included in the original charges, as better estimates become available or actual
divestitures occur.
At December 31, 2002, approximately $80,193 of the remaining total
restructuring charge balance relates to severance costs and contractual
obligations, the majority of which will be paid by 2012. Further, of the $80,193
remaining reserves, $28,179 is included in Accounts payable and accrued
liabilities in the consolidated balance sheet based on the expected timing of
payment.
The activity related to impairment losses and other operating expenses was
as follows:
2002 Activity
<Table>
<Caption>
UTILIZATION FOR TWELVE
MONTHS ENDED
BALANCE AT ADDITIONS OR DECEMBER 31, 2002 BALANCE AT
ORIGINAL DECEMBER 31, ADJUSTMENTS ---------------------- DECEMBER 31,
CHARGE AMOUNT 2001 DURING 2002 CASH NON-CASH 2002
------------- ------------ ------------ --------- ---------- ------------
First Quarter 1999
Charge............... $ 89,884 $ 2,743 $ -- $ 1,326 $ 853 $ 564
Fourth Quarter 1999
Charge............... 272,544 67,517 (1,418) 7,308 10,537 48,254
2000 Charges........... 434,415 19,011 (23,490) 175 (4,654) --
2001 Charges........... 663,548 15,959 20,983 1,682 31,875 3,385
2002 Charges........... 292,979 -- 292,979 2,315 262,674 27,990
---------- -------- -------- ------- -------- -------
$1,753,370 $105,230 $289,054 $12,806 $301,285 $80,193
========== ======== ======== ======= ======== =======
</Table>
The Company's 2002 charges of $292,979 relate primarily to $158,481 for
certain funeral and cemetery operations being held for sale, $40,787 for
adjusting to market value certain options associated with the Company's Senior
notes due 2003, $39,327 from relieving certain individuals from their consulting
and/or covenant-not-to-compete contractual obligations, $18,701 to reduce the
value of equity investments in North America companies, $12,902 of severance
costs for former employees and $22,781 as disposal losses of long-lived assets.
The Company also recorded a reduction in Impairment losses and other operating
expenses of $3,925 as changes in estimates of charges previously recorded in
2001, 2000 and 1999, of which $16,237 was related to additional estimated
reductions in the value of the Company's Argentina business due to continued
economic decline, offset by $20,162 primarily related to reductions in estimates
as a result of evaluating properties held for sale. The Company reviewed
properties held for sale under previously recorded charges and in accordance
with new accounting pronouncement SFAS No. 144, "Accounting for the Impairment
or
85
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Disposal of Long-Lived Assets," the Company transferred certain locations no
longer being actively marketed to held and used. As a result, the Company
recorded a reduction to its 2000 charges.
The $158,481 for certain funeral and cemetery operations being held for
sale in North America represents 80 funeral service locations, 38 cemeteries and
22 businesses being sold for their real estate values. The $39,327 related to
relieving 248 individuals from their consulting and/or covenant-not-to-compete
contractual obligations under such agreements. Individuals will continue to be
paid by the Company pursuant to such contractual terms, the majority of which
will be paid by 2012. The severance charges relate to 411 employees
involuntarily terminated in North America related to sales and administrative
positions. Also included were severance charges for three executive officers.
The remaining 2002 reserve is primarily related to the severance and terminated
consulting and/or covenant-not-to-compete contractual obligations.
2001 Activity
<Table>
<Caption>
UTILIZATION FOR TWELVE
MONTHS ENDED
BALANCE AT ADDITIONS OR DECEMBER 31, 2001 BALANCE AT
ORIGINAL DECEMBER 31, ADJUSTMENTS ---------------------- DECEMBER 31,
CHARGE AMOUNT 2000 DURING 2001 CASH NON-CASH 2001
------------- ------------ ------------------ --------- ---------- ------------
First Quarter 1999
Charge............. $ 89,884 $ 6,210 $ -- $ 1,986 $ 1,481 $ 2,743
Fourth Quarter 1999
Charge............. 272,544 86,959 -- 19,694 (252) 67,517
2000 Charges......... 434,415 -- (19,401) -- (38,412) 19,011
2001 Charges......... 663,548 -- 663,548 1,114 646,475 15,959
---------- ------- -------- ------- -------- --------
$1,460,391 $93,169 $644,147 $22,794 $609,292 $105,230
========== ======= ======== ======= ======== ========
</Table>
The Company's 2001 charges relate primarily to impairment charges
associated with international businesses sold or held for sale. The total charge
recorded in 2001 of $663,548 consists of $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 the Netherlands, Norway and Belgium; $573,394 related to
the planned joint venture or disposition of its remaining investments outside
the United States; and $11,855 of severance and asset write downs related to
on-going cost rationalization programs.
In the first quarter of 2002, the Company joint ventured its United Kingdom
operations, receiving pretax proceeds of approximately $273,000 (which included
approximately $9,000 in retained cash) and securities with a face value of
$21,600, which includes a 20% equity interest in the United Kingdom operations
and a 12% subordinated note.
In 2001, the Company joint ventured its Australia operations and 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. Also included in this charge, 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 stockholders' equity.
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 $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 effect into
earnings, previously included as a separate component of Accumulated other
comprehensive loss in stockholders' equity.
The $573,394 write down in 2001 related to assets held for sale in the
Company's international jurisdictions. As part of computing the write down, the
Company included a loss of $189,613 related to the
86
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cumulative foreign currency translation effect included in accumulated other
comprehensive income. Reflected in the cumulative foreign currency translation
adjustment at December 31, 2002 is a remaining loss of $162,715 related to
assets held for sale. This amount will be removed from accumulated other
comprehensive income when the asset sales are completed. See note three to the
consolidated financial statements regarding accounting changes and note eleven
to the consolidated financial statements regarding Other comprehensive losses.
The original charge consisted of the following:
<Table>
<Caption>
2001 CHARGE NUMBER OF LOCATIONS
----------- -------------------
United Kingdom......................................... $218,153 525
France................................................. 126,734 1,139
South America.......................................... 193,856 22
Other Foreign.......................................... 34,651 66
-------- -----
$573,394 1,752
======== =====
</Table>
The $11,855 consists of $7,597 for severance costs related to the
termination of 123 employees in North America and 63 employees in Argentina.
Nineteen individuals under employment, consultant and/or
covenants-not-to-compete contractual agreements have been relieved from their
obligations or restrictions under such agreements. Individuals will continue to
be paid by the Company pursuant to such contractual terms, the majority of which
will be paid by 2005. The remaining $4,258 related to assets impaired as a
result of changes in the Company's technology strategy and termination of lease
obligations related to facility closures.
In 2001, the Company has recognized $19,401 as a reduction from 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. These changes in estimates are the result of better
than anticipated market values as these previously impaired properties have been
sold. The Company will continue to make adjustments as actual divestitures are
consummated or better estimates become available. The Company received pretax
proceeds of $35,799 related to the sale of its equity investment in the Canadian
funeral home and cemetery company.
The 2000 Charges totaled $491,119 related to the planned divestitures as a
result of a North American facility review and the reduction of the carrying
value of an equity investment in North America. Of the total 2000 Charges,
$351,159 of charges related to the planned divestitures of 230 funeral service
locations anticipated to be sold as funeral businesses, 174 funeral service
locations anticipated to be sold as real estate and 105 cemeteries and $139,960
of charges to reduce the carrying value of equity investments.
In 2000, the Company also recognized $26,657 related to changes in
estimates for certain items originally included in the Fourth Quarter 1999
Charge. The changes primarily related to increasing the provision for asset
impairment by $27,989 to further write down to estimated fair value loans made
by the Company's lending subsidiary; $12,000 to write down to fair value assets
held in the Company's European operations; offset by reductions of $8,969 for
assets previously written down to their fair value, which were no longer being
held for sale; and $4,363 in previously estimated severance costs in the
Company's international operations.
The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999 and consisted of the following: (1)
severance costs of $56,757; (2) a charge of $19,123 of which $2,153 related to
terminated projects representing costs associated with certain construction
projects that have been cancelled and $16,970 related to costs associated with
acquisition due diligence which will no longer be
87
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursued; (3) a $7,245 charge for business and facility closures, primarily in
the Company's European operations; and (4) a remaining charge of $6,759
consisting of various other cost initiatives.
The $56,757 for severance costs is related to the termination of five
executive contractual relationships and the involuntary termination of
approximately 100 employees in North America (of which approximately 20 were
located in the corporate office), 600 employees in France, 85 employees in other
European operations and 10 employees in other foreign operations. The positions
terminated were both operational and administrative in nature. The severance
costs related to the executive contractual relationships will be paid out
according to the terms of the respective agreements and will extend through
2005.
The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The Fourth Quarter 1999 Charge consisted of the following: (1)
severance costs of $150,675; (2) asset impairment of $73,728 associated with
assets held for sale which were written down to estimated fair value; (3) asset
impairment of $18,245 associated with loans made by the Company's lending
subsidiary held for sale which were written down to estimated fair value; (4)
$12,719 of informational technology costs associated with projects that will no
longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease
obligations related to facility closures; and (6) $10,623 of various other
items.
The $150,675 of severance costs is related to the involuntary termination
of 1,141 employees of the Company. Included in this total are 715 employees in
the Company's international operations, 385 employees in North America, 33
employees in the Company's corporate home office and 8 executive officers of the
Company. Of the 715 employees in the Company's international operations, 290 are
additional involuntary terminations in France pursuant to the Company's First
Quarter Charge. In the North America total, 316 individuals were former owners
of independent funeral homes and cemeteries that were purchased by the Company
and represent approximately $92,180 of the $150,675 of severance costs. These
individuals were under employment, consultant and/or covenant-not-to-compete
contractual agreements and have been relieved from their obligations or
restrictions under their agreements. Such individuals will continue to be paid
by the Company pursuant to such contractual terms, the majority of which will be
paid by 2007. The other positions terminated were both operational and
administrative in nature and the 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 $73,728 of charges related to assets held for sale consists of
approximately $59,655 in the Company's North American operations, approximately
$11,645 in the Company's international operations and approximately $2,428 of
corporate assets. The $59,655 of charges in North America include approximately
50 funeral homes or cemeteries and approximately 45 individual parcels of
undeveloped cemetery property or excess land that are held for sale and being
reduced to their estimated fair values. The Company believes it is a prudent
strategy to hold these underperforming assets for sale and redeploy the proceeds
from such sales to reduce debt.
NOTE SEVENTEEN
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
(AMLIC). The financial statements have been reclassified to reflect these
operations as discontinued. The operating results for Auxia have been included
through August 31, 2000 and the operating results for AMLIC have been included
through September 30, 2000, the dates of dispositions of the respective
companies. In the fourth quarter of 2001, the Company recognized the partial
release of a contingent liability associated with the sale of its insurance
operations in income from discontinued operations.
88
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary operating results of discontinued operations:
<Table>
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------
2001 2000
------- ----------
Revenues.................................................... $ -- $ 295,062
Cost and expenses........................................... 2,637 (275,172)
------ ---------
Income from discontinued operations before income taxes..... 2,637 19,890
Provision for income taxes.................................. (936) (6,543)
------ ---------
Income from discontinued operations......................... $1,701 $ 13,347
====== =========
</Table>
NOTE EIGHTEEN
QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH YEAR
-------- --------- -------- --------- ----------
Revenues:
2002........................... $585,758 $ 566,328 $543,808 $ 576,529 $2,272,423
2001........................... 677,776 618,711 582,979 630,877 2,510,343
Gross profit:
2002........................... $119,164 $ 91,273 $ 75,409 $ 78,069 $ 363,915
2001........................... 110,888 86,570 67,019 94,909 359,386
Income (loss) from continuing
operations before extraordinary
items and cumulative effects of
accounting changes:
2002........................... $ 46,168 $(140,160) $ (844) $ (6,387) $ (101,223)
2001........................... 3,319 (10,656) 4,182 (593,472) (596,627)
Net income (loss):
2002........................... $(88,711) $(143,015) $ 4,061 $ (4,215) $ (231,880)
2001........................... 265 (10,585) 4,281 (591,757) (597,796)
Basic earnings (loss) per share
from continuing operations
before extraordinary items and
cumulative effects of
accounting changes:
2002........................... $ .16 $ (.48) $ (.00) $ (.02) $ (.34)
2001........................... .01 (.04) .02 (2.03) (2.09)
Diluted earnings (loss) per share
from continuing operations
before extraordinary items and
cumulative effects of
accounting changes:
2002........................... $ .15 $ (.48) $ (.00) $ (.02) $ (.34)
2001........................... .01 (.04) .02 (2.03) (2.09)
</Table>
89
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income (loss) from continuing operations before extraordinary items and
cumulative effects of accounting changes includes the following impairment
losses and other operating expenses and changes in estimates:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH YEAR
-------- --------- -------- --------- ----------
Impairment losses and other
operating expenses:
2002........................... $ (4,894) $(231,674) $(27,942) $ (24,544) $ (289,054)
2001........................... (25,023) (26,223) (6,185) (586,716) (644,147)
Changes in estimates:
2002........................... $ 3,800 $ 2,200 $ 8,800 $ 3,500 $ 18,300
2001........................... 10,140 10,894 23,033 14,826 58,893
</Table>
For a more detailed discussion of impairment losses and other operating
expenses, see note sixteen to the consolidated financial statements. For a more
detailed discussion of the changes in estimates, see note two to the
consolidated financial statements.
90
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2002
<Table>
<Caption>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD
- ----------- ---------- ---------- ----------- ------------- ---------
(IN THOUSANDS)
Current --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 2002.... $ 61,683 $ 2,711 $ (93) $(20,381) $ 43,920
Year ended December 31, 2001.... 64,852 19,976 (4,150) (18,995) 61,683
Year ended December 31, 2000.... 77,080 20,005 (18,558) (13,675) 64,852
Due After One Year --
Allowance for contract
cancellations and doubtful
accounts:
Year ended December 31, 2002.... $207,468 $ 9,648 $ (8,179) $ (2,197) $206,740
Year ended December 31, 2001.... 234,257 (13,208) (11,077) (2,504) 207,468
Year ended December 31, 2000.... 97,285 19,885 121,097 (4,010) 234,257
Deferred Tax Valuation Allowance:
Year ended December 31, 2002.... $168,528 $(10,527) $ -- $ -- $158,001
Year ended December 31, 2001.... 69,199 99,329 -- -- 168,528
Year ended December 31, 2000.... 27,278 41,921 -- -- 69,199
</Table>
- ---------------
(1) Uncollected receivables written off, net of recoveries.
(2) Primarily cumulative effect of accounting change and acquisitions and
dispositions of operations.
91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by PART III (Items 10, 11, 12 and 13) has been
omitted as the Company intends to file with the Commission not later than 120
days after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement (i) with
respect to Item 10 under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," (ii) with respect to Items 11 and 13
under the captions "Certain Information with Respect to Officers and Directors,"
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" and (iii) with respect to Item 12 under the caption "Voting
Securities and Principal Holders." The information as specified in the preceding
sentence is incorporated herein by reference; provided however, notwithstanding
anything set forth in this Form 10-K, the information under the captions
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" in such Proxy Statement, and the information in the paragraphs under the
caption "Audit Committee Report" in such Proxy Statement, are not incorporated
by reference into this Form 10-K.
The information regarding the Company's executive officers called for by
Item 401 of Regulation S-K has been included in PART I of this report.
The information regarding the Company's equity compensation plan
information called for by Item 201(d) of Regulation S-K is set forth below.
Equity Compensation Plan Information at December 31, 2002:
<Table>
<Caption>
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- ------------- -------------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders..... 21,941,673 $12.69 5,426,051
Equity compensation
plans not approved by
security
holders(1)........... 8,059,577 8.75 5,516,348(2)
---------- ------ ----------
Total.................. 30,001,250 $11.63 10,942,399
========== ====== ==========
</Table>
- ---------------
(1) Includes options outstanding under the Equity Corporation International 1994
Long-Term Incentive Plan which became exercisable to acquire Company common
stock when the Company acquired Equity Corporation International in January
1999. The outstanding options cover an aggregate of 341,716 shares at a
weighted-average exercise price of $22.50 per share. No shares of Company
common stock are available for any future grants under this plan.
Includes options outstanding under the 1996 Nonqualified Incentive Plan
under which nonqualified stock options may be granted to employees who are
not officers or directors. The exercise price of an option may not be less
than the fair market value of the underlying stock on the date of grant and
no option may
92
have a term of more than ten years. The terms of the options, including
vesting, are set by a committee appointed by the Board of Directors. The
Board of Directors may amend, terminate or suspend the plan in its
discretion. The Company has 7,717,861 total options outstanding under the
1996 Non-qualified Incentive Plan. The Company has options available for
future issuance under the 1996 Nonqualified Incentive Plan of 742,782. See
note eleven to the consolidated financial statements in Item 8 of this Form
10-K for a further description of 1996 Nonqualified Incentive Plan. These
plans have not been submitted for shareholder approval.
(2) Includes an estimated 4,773,566 shares registered for the Employee Stock
Purchase Plan. Under such plan, a dollar value of shares (not an amount of
shares) are registered. The above estimate was determined by dividing (i)
the remaining unissued dollar value of registered shares at December 31,
2002, which was $15,848,238, by (ii) the closing price of $3.32 per share of
common stock at December 31, 2002.
The Employee Stock Purchase Plan enables Company employees in North America
to invest via payroll deductions up to $500 (or $600 Canadian) per month in
Company common stock. Contributions are utilized to purchase the stock in the
open market. With respect to Canadian employees who meet certain requirements,
the Company will provide annually a match equal to 25% of the amount of the
employee's contribution subject to a maximum contribution per participant of
$1,800 Canadian. This plan has not been submitted for shareholder approval.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act") ) as of a date within
90 days prior to the filing date of this report (the "Evaluation Date"). Based
on such evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the Company
periodic filings under the Exchange Act.
CHANGE IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect such controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)-(2) Financial Statements and Schedule:
The financial statements and schedule are listed in the accompanying
Index to Financial Statements and Related Schedule on page 38 of this
report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index on pages 98-101
are filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended December 31, 2002, the Company did not file
any reports on Form 8-K.
(c) Included in (a) above.
(d) Included in (a) above.
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Service Corporation International, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SERVICE CORPORATION INTERNATIONAL
By: /s/ JAMES M. SHELGER
------------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)
Dated: March 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ R. L. WALTRIP* Chairman of the Board and Chief March 17, 2003
- -------------------------------------- Executive Officer (Principal
(R. L. Waltrip) Executive Officer)
/s/ JEFFREY E. CURTISS* Senior Vice President Chief March 17, 2003
- -------------------------------------- Financial Officer and Treasurer
(Jeffrey E. Curtiss) (Principal Financial Officer)
/s/ ERIC D. TANZBERGER* Vice President and Corporate March 17, 2003
- -------------------------------------- Controller
(Eric D. Tanzberger)
/s/ ANTHONY L. COELHO* Director March 17, 2003
- --------------------------------------
(Anthony L. Coelho)
/s/ JACK FINKELSTEIN* Director March 17, 2003
- --------------------------------------
(Jack Finkelstein)
/s/ A. J. FOYT, JR.* Director March 17, 2003
- --------------------------------------
(A. J. Foyt, Jr.)
/s/ JAMES H. GREER* Director March 17, 2003
- --------------------------------------
(James H. Greer)
/s/ B. D. HUNTER* Director March 17, 2003
- --------------------------------------
(B. D. Hunter)
/s/ VICTOR L. LUND* Director March 17, 2003
- --------------------------------------
(Victor L. Lund)
</Table>
94
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN W. MECOM, JR.* Director March 17, 2003
- --------------------------------------
(John W. Mecom, Jr.)
/s/ CLIFTON H. MORRIS, JR.* Director March 17, 2003
- --------------------------------------
(Clifton H. Morris, Jr.)
/s/ E. H. THORNTON, JR.* Director March 17, 2003
- --------------------------------------
(E. H. Thornton, Jr.)
/s/ W. BLAIR WALTRIP* Director March 17, 2003
- --------------------------------------
(W. Blair Waltrip)
/s/ EDWARD E. WILLIAMS* Director March 17, 2003
- --------------------------------------
(Edward E. Williams)
*By: /s/ JAMES M. SHELGER
------------------------------
(James M. Shelger, as
Attorney-In-Fact For each of
the Persons indicated)
</Table>
95
SERVICE CORPORATION INTERNATIONAL
A TEXAS CORPORATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
SECTION 302 CERTIFICATION
I, Robert L. Waltrip, certify that:
1. I have reviewed this annual report on Form 10-K of Service Corporation
International, a Texas corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ ROBERT L. WALTRIP
--------------------------------------
Robert L. Waltrip
Chairman of the Board and
Chief Executive Officer
Date: March 17, 2003
96
SERVICE CORPORATION INTERNATIONAL
A TEXAS CORPORATION
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
SECTION 302 CERTIFICATION
I, Jeffrey E. Curtiss, certify that:
1. I have reviewed this annual report on Form 10-K of Service Corporation
International, a Texas corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ JEFFREY E. CURTISS
--------------------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: March 17, 2003
97
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Registration Statement No.
333-10867 on Form S-3).
3.2 -- Articles of Amendment to Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 3.1 to Form 10-Q for
the fiscal quarter ended September 30, 1996).
3.3 -- Statement of Resolution Establishing Series of Shares of
Series D Junior Participating Preferred Stock, dated July
27, 1998. (Incorporated by reference to Exhibit 3.2 to Form
10-Q for the fiscal quarter ended June 30, 1998).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.1 to Form 10-Q for the fiscal quarter ended September 30,
1999).
4.1 -- Rights Agreement dated as of May 14, 1998 between the
Company and Harris Trust and Savings Bank. (Incorporated by
reference to Exhibit 99.1 to Form 8-K dated May 14, 1998).
4.2 -- Agreement Appointing a Successor Rights Agent Under Rights
Agreement, dated June 1, 1999, by the Company, Harris Trust
and Savings Bank and The Bank of New York. (Incorporated by
reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter
ended June 30, 1999).
10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated by
reference to Exhibit 10.1 to Form 10-K for the fiscal year
ended December 31, 1991).
10.2 -- First Amendment to Retirement Plan For Non-Employee
Directors. (Incorporated by reference to Exhibit 10.2 to
Form 10-K for the fiscal year ended December 31, 2000).
10.3 -- Agreement dated May 14, 1992 between the Company, R.L.
Waltrip and related parties relating to life insurance.
(Incorporated by reference to Exhibit 10.4 to Form 10-K for
the fiscal year ended December 31, 1992).
10.4 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and R.L. Waltrip. (Incorporated by
reference to Exhibit 10.3 to Form 10-K for the fiscal year
ended December 31, 1998).
10.5 -- First Amendment to Employment Agreement, dated February 25,
2003, between SCI Executive Services, Inc. and R.L. Waltrip.
10.6 -- Non-Competition Agreement and Amendment to Employment
Agreement, dated November 11, 1991, among the Company, R.L.
Waltrip and Claire Waltrip. (Incorporated by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended December
31, 1992).
10.7 -- Separation and Release Agreement, dated January 18, 2000,
among the Company, SCI Executive Services, Inc. and W. Blair
Waltrip. (Incorporated by reference to Exhibit 10.6 to Form
10-K for the fiscal year ended December 31, 1999).
10.8 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and B.D. Hunter.
(Incorporated by reference to Exhibit 10.8 to Form 10-K for
the fiscal year ended December 31, 2001).
10.9 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and Thomas L.
Ryan.
10.10 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and Michael R.
Webb.
10.11 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and Jeffrey E.
Curtiss. (Incorporated by reference to Exhibit 10.9 to Form
10-K for the fiscal year ended December 31, 2001).
10.12 -- Form of Employment Agreement pertaining to officers (other
than the officers identified in the preceding exhibits).
(Incorporated by reference to Exhibit 10.11 to Form 10-K for
the fiscal year ended December 31, 2001).
10.13 -- 1986 Stock Option Plan. (Incorporated by reference to
Exhibit 10.21 to Form 10-K for the fiscal year ended
December 31, 1991).
</Table>
98
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14 -- Amendment to 1986 Stock Option Plan, dated February 12, 1997
(Incorporated by reference to Exhibit 10.11 to Form 10-K for
the fiscal year ended December 31, 1996).
10.15 -- Amendment to 1986 Stock Option Plan, dated November 13, 1997
(Incorporated by reference to Exhibit 10.12 to Form 10-K for
the fiscal year ended December 31, 1997).
10.16 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.17 -- First Amendment to Amended 1987 Stock Plan. (Incorporated by
reference to Exhibit 10.23 to Form 10-K for the fiscal year
ended December 31, 1993).
10.18 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 4.12 to Registration Statement No.
333-00179 on Form S-8).
10.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated February 12, 1997. (Incorporated by reference to
Exhibit 10.15 to Form 10-K for the fiscal year ended
December 31, 1996).
10.20 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997. (Incorporated by reference to
Exhibit 10.17 to Form 10-K for the fiscal year ended
December 31, 1997).
10.21 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.22 -- Amendment to 1995 Incentive Equity Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.18 to Form
10-K for the fiscal year ended December 31, 1996).
10.23 -- Amendment to 1995 Incentive Equity Plan, dated November 13,
1997. (Incorporated by reference to Exhibit 10.21 to Form
10-K for the fiscal year ended December 31, 1997).
10.24 -- Amended 1996 Incentive Plan. (Incorporated by reference to
Annex A to Proxy Statement dated April 13, 1999).
10.25 -- Split Dollar Life Insurance Plan. (Incorporated by reference
to Exhibit 10.36 to Form 10-K for the fiscal year ended
December 31, 1995).
10.26 -- Supplemental Executive Retirement Plan for Senior Officers
(as Amended and Restated Effective as of January 1, 1998).
(Incorporated by reference to Exhibit 10.28 to Form 10-K for
the fiscal year ended December 31, 1998).
10.27 -- First Amendment to Supplemental Executive Retirement Plan
for Senior Officers. (Incorporated by reference to Exhibit
10.28 to Form 10-K for the fiscal year ended December 31,
2000).
10.28 -- SCI 401(k) Retirement Savings Plan. (Incorporated by
reference to Exhibit 4.7 to Form S-8 filed as of June 1,
2000, Registration Statement No. 333-38310).
10.29 -- First Amendment to SCI 401(k) Retirement Savings Plan.
(Incorporated by reference to Exhibit 10.31 to Form 10-K for
the fiscal year ended December 31, 2000).
10.30 -- SCI 401(k) Retirement Savings Plan as Amended and Restated.
(Incorporated by reference to Exhibit 4.9 to Registration
Statement No. 333-91046).
10.31 -- 2001 Stock Plan for Non-Employee Directors. (Incorporated by
reference to Annex A to Proxy Statement dated April 13,
2001).
10.32 -- Director Fee Plan. (Incorporated by reference to Annex B to
Proxy Statement dated April 13, 2001).
10.33 -- First Amendment, dated November 13, 2002, to Director Fee
Plan.
10.34 -- 1996 Nonqualified Incentive Plan. (Incorporated by reference
to Exhibit 99.1 to Registration Statement No. 333-33101).
10.35 -- Amendment to 1996 Nonqualified Incentive Plan dated November
13, 1997. (Incorporated by reference to Exhibit 99.2 to
Registration Statement No. 333-50084).
10.36 -- Amendment to 1996 Nonqualified Incentive Plan dated November
11, 1999. (Incorporated by reference to Exhibit 99.3 to
Registration Statement No. 333-50084).
</Table>
99
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.37 -- Amendment to 1996 Nonqualified Incentive Plan dated February
14, 2001. (Incorporated by reference to Exhibit 99.4 to
Registration Statement No. 333-67800).
10.38 -- Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 1.1 to Registration Statement No. 2-62484 on Form
S-8).
10.39 -- Amendment No. 1 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 15.1 to Registration
Statement No. 2-62484 on Form S-8).
10.40 -- Amendment No. 2 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 28.3 to Registration
Statement No. 33-25061 on Form S-8).
10.41 -- Amendment No. 3 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 28.4 to Registration
Statement No. 33-35708 on Form S-8).
10.42 -- Amendment No. 4 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K dated December 21, 1993).
10.43 -- Amendment No. 5 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 10.31 to Form 10-K for
the fiscal year ended December 31, 1999).
10.44 -- Amendment No. 6 to the Employee Stock Purchase Plan.
10.45 -- Amendment No. 7 to the Employee Stock Purchase Plan.
10.46 -- Agreement between Merrill Lynch Canada Inc. and Service
Corporation International. (Incorporated by reference to
Exhibit 28.5 to Post-Effective Amendment No. 1 to
Registration Statement No. 33-8907 on Form S-8).
10.47 -- First Amendment to Agreement between Merrill Lynch Canada
Inc. and Service Corporation International. (Incorporated by
reference to Exhibit 4.2 to Current Report on Form 8-K dated
December 21, 1993).
10.48 -- Employee Stock Purchase Plan Administration Agreement dated
July 25, 2001 between Service Corporation International
(Canada) Limited and Fastrak Systems Inc.
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Accountants (PricewaterhouseCoopers
LLP).
24.1 -- Powers of Attorney.
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 -- Defendants' 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).
</Table>
100
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 PriceWaterhouse Coopers, L.L.P.; 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 v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M.
Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P.;
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, L.L.P.; 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 99.10 to Form 10-K for the fiscal year ended
December 31, 2000).
99.12 -- Plaintiffs' First Amended Demand for Arbitration and
Complaint for Damages filed January 24, 2003 in Case No. 70
Y 168 00717 02, James P. Hunter, III and the James P.
Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
and George R. Champagne, before the American Arbitration
Association in Houston, Texas.
99.13 -- Credit Agreement dated as of July 24, 2002 among the
Company, as Borrower, the Lenders Party thereto, JPMorgan
Chase Bank, as Administrative Agent, Bank of America, N.A.,
as Syndicated Agent, and Credit Lyonnais, Lehman Commercial
Paper Inc. and Merrill Lynch Capital Corporation, as
Co-Documentation Agents, J.P. Morgan Securities Inc., and
Banc of America Securities LLC, as Joint Bookrunners and
Joint Lead Arrangers. (Incorporated by reference to Exhibit
99.2 to Form 8-K dated July 25, 2002).
99.14 -- Amendment No. 1 dated as of December 6, 2002 to the Credit
Agreement referred to in Exhibit 99.13.
99.15 -- Certification of Periodic Financial Reports by Robert L.
Waltrip in satisfaction of Section 906 of the Sarbanes-Oxley
Act of 2002.
99.16 -- Certification of Periodic Financial Reports by Jeffrey E.
Curtiss in satisfaction of Section 906 of the Sarbanes-Oxley
Act of 2002.
</Table>
In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.48.
Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as
exhibits to this report certain instruments with respect to long-term debt under
which the total amount of securities authorized thereunder does not exceed 10
percent of the total assets of Registrant and its subsidiaries on a consolidated
basis. Registrant agrees to furnish a copy of any such instrument to the
Commission upon request.
101
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Registration Statement No.
333-10867 on Form S-3).
3.2 -- Articles of Amendment to Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 3.1 to Form 10-Q for
the fiscal quarter ended September 30, 1996).
3.3 -- Statement of Resolution Establishing Series of Shares of
Series D Junior Participating Preferred Stock, dated July
27, 1998. (Incorporated by reference to Exhibit 3.2 to Form
10-Q for the fiscal quarter ended June 30, 1998).
3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit
3.1 to Form 10-Q for the fiscal quarter ended September 30,
1999).
4.1 -- Rights Agreement dated as of May 14, 1998 between the
Company and Harris Trust and Savings Bank. (Incorporated by
reference to Exhibit 99.1 to Form 8-K dated May 14, 1998).
4.2 -- Agreement Appointing a Successor Rights Agent Under Rights
Agreement, dated June 1, 1999, by the Company, Harris Trust
and Savings Bank and The Bank of New York. (Incorporated by
reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter
ended June 30, 1999).
10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated by
reference to Exhibit 10.1 to Form 10-K for the fiscal year
ended December 31, 1991).
10.2 -- First Amendment to Retirement Plan For Non-Employee
Directors. (Incorporated by reference to Exhibit 10.2 to
Form 10-K for the fiscal year ended December 31, 2000).
10.3 -- Agreement dated May 14, 1992 between the Company, R.L.
Waltrip and related parties relating to life insurance.
(Incorporated by reference to Exhibit 10.4 to Form 10-K for
the fiscal year ended December 31, 1992).
10.4 -- Employment Agreement, dated January 1, 1998, between SCI
Executive Services, Inc. and R.L. Waltrip. (Incorporated by
reference to Exhibit 10.3 to Form 10-K for the fiscal year
ended December 31, 1998).
10.5 -- First Amendment to Employment Agreement, dated February 25,
2003, between SCI Executive Services, Inc. and R.L. Waltrip.
10.6 -- Non-Competition Agreement and Amendment to Employment
Agreement, dated November 11, 1991, among the Company, R.L.
Waltrip and Claire Waltrip. (Incorporated by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended December
31, 1992).
10.7 -- Separation and Release Agreement, dated January 18, 2000,
among the Company, SCI Executive Services, Inc. and W. Blair
Waltrip. (Incorporated by reference to Exhibit 10.6 to Form
10-K for the fiscal year ended December 31, 1999).
10.8 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and B.D. Hunter.
(Incorporated by reference to Exhibit 10.8 to Form 10-K for
the fiscal year ended December 31, 2001).
10.9 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and Thomas L.
Ryan.
10.10 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and Michael R.
Webb.
10.11 -- Employment and Noncompetition Agreement, dated February 13,
2002, between SCI Executive Services, Inc. and Jeffrey E.
Curtiss. (Incorporated by reference to Exhibit 10.9 to Form
10-K for the fiscal year ended December 31, 2001).
10.12 -- Form of Employment Agreement pertaining to officers (other
than the officers identified in the preceding exhibits).
(Incorporated by reference to Exhibit 10.11 to Form 10-K for
the fiscal year ended December 31, 2001).
10.13 -- 1986 Stock Option Plan. (Incorporated by reference to
Exhibit 10.21 to Form 10-K for the fiscal year ended
December 31, 1991).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14 -- Amendment to 1986 Stock Option Plan, dated February 12, 1997
(Incorporated by reference to Exhibit 10.11 to Form 10-K for
the fiscal year ended December 31, 1996).
10.15 -- Amendment to 1986 Stock Option Plan, dated November 13, 1997
(Incorporated by reference to Exhibit 10.12 to Form 10-K for
the fiscal year ended December 31, 1997).
10.16 -- Amended 1987 Stock Plan. (Incorporated by reference to
Appendix A to Proxy Statement dated April 1, 1991).
10.17 -- First Amendment to Amended 1987 Stock Plan. (Incorporated by
reference to Exhibit 10.23 to Form 10-K for the fiscal year
ended December 31, 1993).
10.18 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 4.12 to Registration Statement No.
333-00179 on Form S-8).
10.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated February 12, 1997. (Incorporated by reference to
Exhibit 10.15 to Form 10-K for the fiscal year ended
December 31, 1996).
10.20 -- Amendment to 1993 Long-Term Incentive Stock Option Plan,
dated November 13, 1997. (Incorporated by reference to
Exhibit 10.17 to Form 10-K for the fiscal year ended
December 31, 1997).
10.21 -- 1995 Incentive Equity Plan. (Incorporated by reference to
Annex B to Proxy Statement dated April 17, 1995).
10.22 -- Amendment to 1995 Incentive Equity Plan, dated February 12,
1997. (Incorporated by reference to Exhibit 10.18 to Form
10-K for the fiscal year ended December 31, 1996).
10.23 -- Amendment to 1995 Incentive Equity Plan, dated November 13,
1997. (Incorporated by reference to Exhibit 10.21 to Form
10-K for the fiscal year ended December 31, 1997).
10.24 -- Amended 1996 Incentive Plan. (Incorporated by reference to
Annex A to Proxy Statement dated April 13, 1999).
10.25 -- Split Dollar Life Insurance Plan. (Incorporated by reference
to Exhibit 10.36 to Form 10-K for the fiscal year ended
December 31, 1995).
10.26 -- Supplemental Executive Retirement Plan for Senior Officers
(as Amended and Restated Effective as of January 1, 1998).
(Incorporated by reference to Exhibit 10.28 to Form 10-K for
the fiscal year ended December 31, 1998).
10.27 -- First Amendment to Supplemental Executive Retirement Plan
for Senior Officers. (Incorporated by reference to Exhibit
10.28 to Form 10-K for the fiscal year ended December 31,
2000).
10.28 -- SCI 401(k) Retirement Savings Plan. (Incorporated by
reference to Exhibit 4.7 to Form S-8 filed as of June 1,
2000, Registration Statement No. 333-38310).
10.29 -- First Amendment to SCI 401(k) Retirement Savings Plan.
(Incorporated by reference to Exhibit 10.31 to Form 10-K for
the fiscal year ended December 31, 2000).
10.30 -- SCI 401(k) Retirement Savings Plan as Amended and Restated.
(Incorporated by reference to Exhibit 4.9 to Registration
Statement No. 333-91046).
10.31 -- 2001 Stock Plan for Non-Employee Directors. (Incorporated by
reference to Annex A to Proxy Statement dated April 13,
2001).
10.32 -- Director Fee Plan. (Incorporated by reference to Annex B to
Proxy Statement dated April 13, 2001).
10.33 -- First Amendment, dated November 13, 2002, to Director Fee
Plan.
10.34 -- 1996 Nonqualified Incentive Plan. (Incorporated by reference
to Exhibit 99.1 to Registration Statement No. 333-33101).
10.35 -- Amendment to 1996 Nonqualified Incentive Plan dated November
13, 1997. (Incorporated by reference to Exhibit 99.2 to
Registration Statement No. 333-50084).
10.36 -- Amendment to 1996 Nonqualified Incentive Plan dated November
11, 1999. (Incorporated by reference to Exhibit 99.3 to
Registration Statement No. 333-50084).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.37 -- Amendment to 1996 Nonqualified Incentive Plan dated February
14, 2001. (Incorporated by reference to Exhibit 99.4 to
Registration Statement No. 333-67800).
10.38 -- Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 1.1 to Registration Statement No. 2-62484 on Form
S-8).
10.39 -- Amendment No. 1 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 15.1 to Registration
Statement No. 2-62484 on Form S-8).
10.40 -- Amendment No. 2 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 28.3 to Registration
Statement No. 33-25061 on Form S-8).
10.41 -- Amendment No. 3 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 28.4 to Registration
Statement No. 33-35708 on Form S-8).
10.42 -- Amendment No. 4 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K dated December 21, 1993).
10.43 -- Amendment No. 5 to the Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 10.31 to Form 10-K for
the fiscal year ended December 31, 1999).
10.44 -- Amendment No. 6 to the Employee Stock Purchase Plan.
10.45 -- Amendment No. 7 to the Employee Stock Purchase Plan.
10.46 -- Agreement between Merrill Lynch Canada Inc. and Service
Corporation International. (Incorporated by reference to
Exhibit 28.5 to Post-Effective Amendment No. 1 to
Registration Statement No. 33-8907 on Form S-8).
10.47 -- First Amendment to Agreement between Merrill Lynch Canada
Inc. and Service Corporation International. (Incorporated by
reference to Exhibit 4.2 to Current Report on Form 8-K dated
December 21, 1993).
10.48 -- Employee Stock Purchase Plan Administration Agreement dated
July 25, 2001 between Service Corporation International
(Canada) Limited and Fastrak Systems Inc.
12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Accountants (PricewaterhouseCoopers
LLP).
24.1 -- Powers of Attorney.
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 -- Defendants' 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).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 PriceWaterhouse Coopers, L.L.P.; 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 v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M.
Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P.;
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, L.L.P.; 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 99.10 to Form 10-K for the fiscal year ended
December 31, 2000).
99.12 -- Plaintiffs' First Amended Demand for Arbitration and
Complaint for Damages filed January 24, 2003 in Case No. 70
Y 168 00717 02, James P. Hunter, III and the James P.
Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
and George R. Champagne, before the American Arbitration
Association in Houston, Texas.
99.13 -- Credit Agreement dated as of July 24, 2002 among the
Company, as Borrower, the Lenders Party thereto, JPMorgan
Chase Bank, as Administrative Agent, Bank of America, N.A.,
as Syndicated Agent, and Credit Lyonnais, Lehman Commercial
Paper Inc. and Merrill Lynch Capital Corporation, as
Co-Documentation Agents, J.P. Morgan Securities Inc., and
Banc of America Securities LLC, as Joint Bookrunners and
Joint Lead Arrangers. (Incorporated by reference to Exhibit
99.2 to Form 8-K dated July 25, 2002).
99.14 -- Amendment No. 1 dated as of December 6, 2002 to the Credit
Agreement referred to in Exhibit 99.13.
99.15 -- Certification of Periodic Financial Reports by Robert L.
Waltrip in satisfaction of Section 906 of the Sarbanes-Oxley
Act of 2002.
99.16 -- Certification of Periodic Financial Reports by Jeffrey E.
Curtiss in satisfaction of Section 906 of the Sarbanes-Oxley
Act of 2002.
</Table>