-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CYA9l8+0dMjHJJp+PSgy44jKcqcUinzODcUgdHnu1EgaT/WHE6vHFrt3iLGD4mrX HHvlZiAfx66R3xFMby9ACw== 0000950129-01-502587.txt : 20010815 0000950129-01-502587.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950129-01-502587 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE CORPORATION INTERNATIONAL CENTRAL INDEX KEY: 0000089089 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 741488375 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06402 FILM NUMBER: 1710477 BUSINESS ADDRESS: STREET 1: 1929 ALLEN PKWY STREET 2: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135225141 MAIL ADDRESS: STREET 1: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219-0548 10-Q 1 h89782e10-q.txt SERVICE CORPORATION INTERNATIONAL - 06-30-01 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-6402-1 -------------------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in charter) TEXAS 74-1488375 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019 (Address of principal executive offices) (Zip code) (713) 522-5141 (Registrant's telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. YES X NO ----- ----- The number of shares outstanding of the registrant's common stock as of August 10, 2001 was 289,978,139 (excluding treasury shares). 2 SERVICE CORPORATION INTERNATIONAL INDEX
Page Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Operations - Three and Six Months Ended June 30, 2001 and 2000 3 Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 2001 and 2000 5 Consolidated Statement of Stockholders' Equity - Six Months Ended June 30, 2001 6 Notes to Consolidated Financial Statements 7 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 Part II. Other Information Item 1. Legal Proceedings 29 - 31 Item 4. Submission of Matters to a Vote of Security Holders 31 - 32 Item 6. Exhibits and Reports on Form 8-K 32 - 33 Signature 33
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Six months ended June 30, June 30, (In thousands, except per share amounts) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues ........................................................ $ 618,711 $ 636,545 $ 1,296,487 $ 1,320,038 Costs and expenses .............................................. (532,141) (564,477) (1,099,029) (1,130,905) ----------- ----------- ----------- ----------- Gross profit .................................................... 86,570 72,068 197,458 189,133 General and administrative expenses ............................. (18,423) (19,734) (36,402) (39,847) Restructuring and non-recurring charges ......................... (26,223) (13,281) (51,246) (13,281) ----------- ----------- ----------- ----------- Operating income ................................................ 41,924 39,053 109,810 136,005 Interest expense ................................................ (54,152) (73,565) (114,958) (143,114) Other income .................................................... 10,727 7,647 13,681 11,453 ----------- ----------- ----------- ----------- (43,425) (65,918) (101,277) (131,661) ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes, extraordinary gains and cumulative effect of accounting changes .................................................... (1,501) (26,865) 8,533 4,344 (Provision) benefit for income taxes ............................ (9,155) 10,422 (15,870) 150 ----------- ----------- ----------- ----------- Income (loss) from continuing operations before extraordinary gains and cumulative effect of accounting changes .......... (10,656) (16,443) (7,337) 4,494 Income from discontinued operations (net of income taxes of $3,885 and $7,568) .......................................... -- 5,611 -- 10,763 Extraordinary gains on early extinguishments of debt (net of income taxes of $45, $8,845, $2,952 and $12,630, respectively) .............................................. 71 15,388 4,618 21,973 Cumulative effect of accounting changes (net of income taxes of $5,318 and $552,491, respectively) ...................... -- -- (7,601) (909,315) ----------- ----------- ----------- ----------- Net income (loss) ..................................... $ (10,585) $ 4,556 $ (10,320) $ (872,085) =========== =========== =========== =========== Earnings (loss) per share: Basic: Income (loss) from continuing operations before extraordinary gains and cumulative effect of accounting changes ........................... $ (.04) $ (.06) $ (.03) $ .02 Income from discontinued operations .................... -- .02 -- .04 Extraordinary gains on early extinguishments of debt ... .00 .06 .02 .08 Cumulative effect of accounting changes ................ -- -- (.03) (3.34) ----------- ----------- ----------- ----------- Net income (loss) ............................ $ (.04) $ .02 $ (.04) $ (3.20) =========== =========== =========== =========== Diluted: Income (loss) from continuing operations before extraordinary gains and cumulative effect of accounting changes ........................... $ (.04) $ (.06) $ (.03) $ 02 Income from discontinued operations .................... -- .02 -- .04 Extraordinary gains on early extinguishments of debt ... .00 .06 .02 .08 Cumulative effect of accounting changes ................ -- -- (.03) (3.34) ----------- ----------- ----------- ----------- Net income (loss) ............................ $ (.04) $ .02 $ (.04) $ (3.20) =========== =========== =========== =========== Basic weighted average number of shares ......................... 284,852 272,093 279,245 272,078 =========== =========== =========== =========== Diluted weighted average number of shares ....................... 284,852 272,093 279,245 272,801 =========== =========== =========== ===========
(See notes to consolidated financial statements) 3 4 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET
June 30, December 31, (In thousands, except share and per share amounts) 2001 2000 - ------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 46,745 $ 47,909 Receivables, net of allowances ..................................... 408,713 449,989 Inventories ........................................................ 155,761 170,056 Other .............................................................. 112,857 239,345 ------------ ------------ Total current assets ............................................. 724,076 907,299 ------------ ------------ Prearranged funeral contracts ........................................... 3,961,959 4,080,367 Long-term receivables, net of allowances ................................ 1,337,773 1,329,375 Cemetery property, at cost .............................................. 1,971,269 2,026,484 Property, plant and equipment, at cost (net) ............................ 1,517,050 1,675,263 Deferred charges and other assets ....................................... 697,168 717,170 Names and reputations (net) ............................................. 2,020,504 2,162,511 ------------ ------------ $ 12,229,799 $ 12,898,469 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ........................... $ 450,393 $ 501,355 Current maturities of long-term debt ............................... 444,586 176,782 Income taxes ....................................................... 46,183 6,143 ------------ ------------ Total current liabilities ........................................ 941,162 684,280 ------------ ------------ Long-term debt .......................................................... 2,331,857 3,114,515 Deferred prearranged funeral contract revenues .......................... 4,423,332 4,537,669 Deferred preneed cemetery contract revenues ............................. 1,820,076 1,815,157 Deferred income taxes ................................................... 459,539 503,292 Other liabilities ....................................................... 235,444 267,735 Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 289,744,856 and 272,507,010, issued and outstanding (net of 2,502,190 treasury shares, at par) .................. 289,745 272,507 Capital in excess of par value ..................................... 2,233,972 2,156,824 Accumulated deficit ................................................ (226,673) (216,353) Accumulated other comprehensive loss ............................... (278,655) (237,157) ------------ ------------ Total stockholders' equity ...................................... 2,018,389 1,975,821 ------------ ------------ $ 12,229,799 $ 12,898,469 ============ ============
(See notes to consolidated financial statements) 4 5 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30, (In thousands) 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................................ $ (10,320) $(872,085) Adjustments to reconcile net loss to net cash provided by operating activities: Income from discontinued operations, net of taxes .................................. -- (10,763) Extraordinary gains on early extinguishments of debt, net of taxes ................. (4,618) (21,973) Cumulative effect of accounting changes, net of taxes .............................. 7,601 909,315 Depreciation and amortization ...................................................... 100,202 116,846 Benefit for deferred income taxes .................................................. (20,420) (26,335) Restructuring and non-recurring charges ............................................ 51,246 13,281 Payments on restructuring charges .................................................. (13,412) (36,242) Net effect of interest rate component of swap terminations ......................... -- (32,840) Gains from dispositions (net) ...................................................... (6,000) (5,625) Change in assets and liabilities, net of effects from acquisitions and dispositions: Decrease in receivables .......................................................... 29,658 94,427 Decrease (increase) in other assets .............................................. 78,418 (40,662) Increase (decrease) in payables and other liabilities ............................ 31,619 (47,608) Other ............................................................................ 1,309 (8,002) Net effect of prearranged funeral production and maturities ........................ 27,072 71,052 --------- --------- Net cash provided by continuing operations .............................................. 272,355 102,786 Net cash provided by discontinued operations ............................................ -- 92,269 --------- --------- Net cash provided by operating activities ............................................... 272,355 195,055 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ............................................................... (36,547) (39,502) Proceeds from sales of property and equipment ...................................... 46,952 28,302 Proceeds from completion of joint venture .......................................... 106,900 -- Acquisitions, net of cash acquired ................................................. -- 800 Loans issued by lending subsidiary ................................................. -- (3,083) Principal payments received on loans issued by lending subsidiary .................. -- 20,758 Deposits of restricted funds ....................................................... (10,717) (27,550) Other .............................................................................. -- (298) --------- --------- Net cash provided by (used in) continuing operations .................................... 106,588 (20,573) Net cash used in discontinued operations ................................................ -- (82,022) --------- --------- Net cash provided by (used in) investing activities ..................................... 106,588 (102,595) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in borrowings under revolving credit agreements ............ (459,022) 4,571 Proceeds from long-term debt issued ................................................ 345,000 -- Payments of debt ................................................................... (156,647) (63,876) Early extinguishments of debt ...................................................... (99,925) (194,097) Net effect of cross-currency component of swap terminations ........................ -- 143,498 Bank overdrafts and other .......................................................... 452 2,745 --------- --------- Net cash used in financing activities ................................................... (370,142) (107,159) Effect of foreign currency .............................................................. (9,965) (1,842) --------- --------- Net decrease in cash and cash equivalents ............................................... (1,164) (16,541) Adjust for change in cash and cash equivalents associated with discontinued operations .. -- 7,030 Cash and cash equivalents of continuing operations at beginning of period ............... 47,909 57,814 --------- --------- Cash and cash equivalents of continuing operations at end of period ..................... $ 46,745 $ 48,303 ========= =========
(See notes to consolidated financial statements) 5 6 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated Capital in other Common excess Accumulated comprehensive (In thousands) stock of par value deficit loss Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 ..................... $ 272,507 $ 2,156,824 $ (216,353) $(237,157) $ 1,975,821 Comprehensive loss: Net loss ...................................... (10,320) (10,320) Other comprehensive loss: Foreign currency translation ............... (62,328) (62,328) Reclassification adjustment for realized loss on foreign currency translation ..... 20,830 20,830 ----------- Total other comprehensive loss ...... (41,498) ----------- Comprehensive loss ........................... (51,818) Common stock issued: Stock option exercises and stock grants ...... 515 1,764 2,279 Contribution to employee 401(k) .............. 1,279 3,864 5,143 Debenture conversions ........................ 168 4,576 4,744 Debt extinguished using common stock ......... 15,276 66,944 82,220 ----------- ----------- ---------- --------- ----------- Balance at June 30, 2001 ......................... $ 289,745 $ 2,233,972 $ (226,673) $(278,655) $ 2,018,389 =========== =========== ========== ========= ===========
The Company's comprehensive loss for the six months ended June 30, 2000 of $960,982 consisted of a net loss of $872,085, a foreign currency translation loss adjustment of $85,610, and an unrealized loss on securities of $3,287. (See notes to consolidated financial statements) 6 7 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. NATURE OF OPERATIONS Service Corporation International (the Company) is the largest provider of funeral and cemetery services in the world. At June 30, 2001, the Company operated 3,385 funeral service locations, 506 cemeteries and 185 crematoria located in 17 countries on four continents. The Company's funeral service locations and cemetery operations consist of funeral homes, cemeteries, crematoria and related businesses. Funeral service locations sell funeral related merchandise and provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. The Company sells prearranged funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company's cemeteries provide cemetery interment rights (including mausoleum spaces, columbarium niches, lots, and lawn crypts) and sell cemetery related merchandise. Cemetery items are sold on an atneed or preneed basis. Company cemeteries perform interment services and provide management and maintenance of cemetery grounds. Both funeral service locations and cemeteries can contain crematoria facilities. The Company has 188 combination facilities in which a funeral service location is contained within a cemetery. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements for the three and six months ended June 30, 2001 and 2000 include the accounts of the Company and all majority-owned subsidiaries and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments which management considers necessary for a fair presentation of the results for these periods. These consolidated financial statements have been prepared in a manner consistent with the accounting policies described in the annual report on Form 10-K filed with the U. S. Securities and Exchange Commission for the year ended December 31, 2000, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end consolidated balance sheet was derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period. Certain reclassifications have been made to the prior period to conform to the current period presentation with no effect on previously reported results of operations, financial condition or cash flows. The Company has reclassified certain amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements in prior years to conform to current period presentation with no effect on the consolidated financial position, results of operations or cash flows. The Company has restated prior periods to conform with the change in accounting policies as a result of implementing Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No.101) (see note three to the consolidated financial statements). Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. 3. ACCOUNTING CHANGES In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and establishes one method - the purchase method - for accounting for such transactions. SFAS No. 142 addresses goodwill and other intangible assets and redefines useful lives, amortization periods and impairment of goodwill. Under the new provision, goodwill will no longer be amortized, but will be tested for impairment annually. Currently, the 7 8 Company has $2,020,504 in goodwill presented as Names and reputations in the Company's consolidated balance sheet. Amortization of goodwill will continue to be amortized through December 31, 2001 and was $31,086 and $32,861 for the six months ended June 30, 2001 and 2000, respectively. SFAS No. 142 requires goodwill to be tested for impairment by assessing the fair value of reporting units, generally one level below reportable segments. The adoption of SFAS No. 142 may result in a non-cash charge that could have a significant effect on the Company's financial condition and results of operations. The Company is required to adopt SFAS No. 141 for any acquisitions subsequent to June 30, 2001 and to adopt SFAS No. 142 during the first quarter of the year ending December 31, 2002. During the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities: An Amendment of FASB Statement No. 133." In accordance with these pronouncements, the Company recognized a cumulative effect of a change in accounting principle, net of applicable taxes, of $7,601. In 2000, the Company implemented SAB No. 101 which changes the Company's accounting policies regarding the manner in which the Company records preneed sales activities. The implementation of SAB No. 101 had no effect on the consolidated cash flows of the Company. As a result of the required change, the Company's preneed sales activities are affected as follows: o Preneed sales of cemetery interment rights (cemetery burial property) - revenue and all costs associated with the sales of preneed cemetery interment rights are recognized in accordance with the retail land sales provisions of SFAS No. 66, "Accounting for the Sales of Real Estate". Under SFAS No. 66, recognition of revenue and associated costs from constructed cemetery property are deferred until a minimum percentage of the sales price has been collected. Revenues related to the preneed sale of unconstructed cemetery property are deferred until such property is constructed and meets the criteria of SFAS No. 66 described above. Previously, the preneed interment rights and associated costs were recognized at the time the contract was signed with the customer. o Preneed sales of cemetery merchandise (primarily markers and vaults) - revenue and all costs associated with the sales of preneed cemetery merchandise are deferred until the merchandise is delivered. Previously, the preneed cemetery merchandise revenue and associated costs were recognized at the time the contract was signed with the customer. o Preneed sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees) - revenue and all costs associated with the sales of preneed cemetery services are deferred until the services are performed. Previously, the revenue and associated costs were recognized at the time the contract was signed with the customer. o Prearranged funeral and preneed cemetery customer obtaining costs - costs incurred related to obtaining new preneed cemetery and prearranged funeral business are accounted for under the provisions of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises". Under SFAS No. 60, obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new preneed cemetery and prearranged funeral business, are deferred. Previously, with respect to the prearranged funeral business, deferred obtaining costs included variable and fixed direct obtaining costs as well as direct marketing costs. With respect to the preneed cemetery business, obtaining costs were previously expensed as incurred. o Cemetery merchandise and services trust investment earnings - investment earnings generated by assets included in merchandise and services trusts are deferred until the associated merchandise is delivered or services performed. Previously, the trust earnings were recognized as earned in the trust. The change in the Company's accounting policies resulting from implementation of SAB No. 101 has been reported as a change in accounting principle effective as of January 1, 2000. The cumulative effect of the accounting change through December 31, 1999 resulted in a charge to net income of $909,315 (net of a $552,491 tax benefit), or $3.34 per diluted share recorded on January 1, 2000. 8 9 4. DISCONTINUED OPERATIONS In the third quarter of 2000, the Company completed the sales of its wholly owned insurance operations, Auxia and American Memorial Life Insurance Company. Summary of operating results of discontinued operations.
Three months ended Six months ended June 30, 2000 June 30, 2000 ------------------ ---------------- Revenue .................................................. $ 99,919 $ 203,636 Costs and expenses ....................................... (90,423) (185,305) --------- --------- Income from discontinued operations before income taxes .. 9,496 18,331 Provision for income taxes ............................... (3,885) (7,568) --------- --------- Income from discontinued operations ...................... $ 5,611 $ 10,763 ========= =========
5. PREARRANGED FUNERAL AND PRENEED CEMETERY ACTIVITIES The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are generally placed into trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance or annuity contracts. The balance in Prearranged funeral contracts represents amounts due from trust funds, customer receivables or third party insurance companies related to unperformed, price guaranteed prearranged funeral contracts. A corresponding credit is recorded in Deferred prearranged funeral contract revenues. The balance in Deferred prearranged funeral contract revenues represents the original contract price, trust earnings and increasing insurance benefits on unperformed funeral contracts generally funded by trust or third party insurance companies. Funeral revenue is recognized on prearranged funeral contracts at the time the funeral service is performed. Realized trust earnings and increasing insurance benefits are accrued and deferred until the services are performed, at which time these funds are also recognized in funeral revenues. Such amounts are intended to cover future increases in the cost of providing a price guaranteed funeral service. Net obtaining costs incurred pursuant to the sales of prearrangements are included in Deferred charges and other assets. These obtaining costs, which include sales commissions and certain other direct costs that vary with and are primarily related to the acquisition of new prearranged funeral business, are deferred and amortized over 20 years, a period representing the estimated life of the prearranged funeral contract portfolio. Previous to the implementation of SAB No. 101, deferred obtaining costs included variable and fixed direct costs as well as direct marketing costs. Pursuant to the implementation of SAB No. 101 in 2000, the Company changed its accounting policies regarding the manner in which it records preneed cemetery sales activities. As discussed in note three to the consolidated financial statements, the Company defers revenues and all costs associated with certain preneed cemetery sales activities until cemetery burial property is constructed and meets the criteria of SFAS No. 66, merchandise is delivered or services are performed. A receivable from trust for amounts held in cemetery merchandise and services trusts is included in Long-term receivables, at cost. As a result of implementing SAB No. 101, all realized investment earnings related to these cemetery merchandise and services trust funds are deferred until the associated merchandise is delivered or services performed. Realized investment earnings from perpetual care trust funds are intended to defray cemetery maintenance costs and are recognized in current cemetery revenues. 9 10 6. DEBT Debt consists of the following:
June 30, 2001 December 31, 2000 ------------- ----------------- Bank revolving credit agreements .......................................... $ 305,238 $ 789,750 6.75% notes due 2001 ...................................................... -- 123,000 8.72% amortizing notes due 2002 ........................................... 22,274 39,149 8.375% notes due 2004 ..................................................... 51,840 51,840 7.375% notes due 2004 ..................................................... 228,000 250,000 6.0% notes due 2005 ....................................................... 581,550 591,550 7.2% notes due 2006 ....................................................... 150,000 150,000 6.875% notes due 2007 ..................................................... 150,000 150,000 6.5% notes due 2008 ....................................................... 200,000 200,000 6.75% convertible subordinated notes due 2008 ............................. 345,000 -- 7.7% notes due 2009 ....................................................... 200,000 200,000 6.95% amortizing notes due 2010 ........................................... 47,745 49,202 7.875% debentures due 2013 ................................................ 55,627 55,627 7.0% notes due 2015 (putable 2002) ........................................ 102,265 186,040 6.3% notes due 2020 (putable 2003) ........................................ 251,284 300,000 Medium-term notes, maturities through 2019, fixed average interest Rate of 9.67% .......................................................... 12,000 35,720 Convertible debentures, maturities through 2013, fixed interest rates From 4.75% to 5.5%, conversion prices from $11.25 to $50.00 ............ 46,031 49,213 Mortgage notes and other debt, maturities through 2050 .................... 74,967 86,219 Deferred losses on swap terminations and loan costs ....................... (47,378) (16,013) ----------- ----------- Total debt ........................................................... 2,776,443 3,291,297 Less current maturities .............................................. (444,586) (176,782) ----------- ----------- Total long-term debt .......................................... $ 2,331,857 $ 3,114,515 =========== ===========
The Company's consolidated debt had a weighted average interest rate of 6.64% at June 30, 2001 compared to 7.08% at December 31, 2000. The Company's primary bank revolving credit agreements consist of two committed facilities - a 2-year term loan and a 5-year, multi-currency revolver. As of June 30, 2001 and December 31, 2000, the 2-year term loan allows for borrowings up to $269,355 and $296,486 and the 5-year, multi-currency revolver, allows for borrowings up to $628,496 and $691,801, respectively. The 5-year, multi-currency facility provides for borrowings up to $500,000 in foreign currencies, of which $35,883 and $271,263 of the total borrowings were denominated in various foreign currencies at June 30, 2001 and December 31, 2000, respectively. Both of these facilities are primarily used for general corporate purposes and will mature in June 2002. Of the $305,238 borrowed under the credit facilities at June 30, 2001, $269,355 was outstanding on the 2-year term loan and $35,883 was outstanding on the 5-year, multi-currency revolver. The covenants associated with the revolving credit agreements will continue to be calculated using ongoing financial results prior to applying the provisions of SAB No. 101. Interest rates for these facilities are based on various indices as determined by the Company. The weighted average interest rate on the two committed facilities was 5.57% and 7.95% at June 30, 2001 and December 31, 2000, respectively. For each facility, a fee is paid quarterly on the total commitment amount ranging from 0.25% to 0.50% based on the Company's senior debt ratings. The facility fee was 0.50% at June 30, 2001 and December 31, 2000. In June 2001, the Company issued $345,000 in convertible subordinated notes. The notes are convertible into common stock at an initial conversion price of $6.92 and have an interest rate of 6.75%. The notes are noncallable until June 2004 and mature in June 2008. The proceeds from the convertible subordinated notes were used to reduce the Company's debt, including borrowings under the Company's bank revolving credit agreements. 10 11 During the six months ended June 30, 2001, the Company repurchased $23,720 of the Medium-term notes due through 2019 and $83,775 of the 7.00% senior notes due 2015 (putable 2002) in the open market. In addition, the Company exchanged 15,276 shares of its common stock for $48,716 of the 6.30% Senior Notes due 2020 (putable 2003), $22,000 of the 7.375% Senior Notes due 2004, $10,000 of the 6.00% Senior Notes due 2005 and $3,495 of other notes. As a result of these transactions, the Company recognized extraordinary gains on early extinguishments of debt totaling $4,618 (net of tax of $2,952). Subsequent to the second quarter of 2001, the Company repurchased $12,000 of the Medium-term notes due through 2019 and $3,000 of the 7.00% senior notes due 2015 (putable 2002) in the open market. As a result of these transactions, the Company will recognize an extraordinary gain on early extinguishments of debt in the third quarter of 2001. The Company had $79,470 and $68,753 at June 30, 2001 and December 31, 2000, respectively, deposited in interest bearing restricted accounts as security for various credit instruments, which is included in the consolidated balance sheet in Deferred charges and other assets. At June 30, 2001 approximately $15,464 was related to two embedded options associated with the Company's 6.30% notes due 2020 (putable 2003), $53,451 related to letters of credit and the remaining $10,555 was used to secure various other obligations. 7. SEGMENT REPORTING The Company's operations are both product and geographically based and the primary reportable operating segments presented below include funeral and cemetery operations. The Company's geographic segments include North America, Europe and Other Foreign. The Company conducts funeral and cemetery operations in all geographical regions. In 2000, the Company completed the sales of its wholly owned insurance operations. As such, these operations have been reported as discontinued operations (see note four to the consolidated financial statements). The Company's reportable segment information was as follows:
Reportable Funeral Cemetery segments - --------------------------------------------------------------------------------------------------------------------- Revenues from external customers: Three months ended June 30, 2001................................................. $446,571 $172,140 $ 618,711 2000................................................. 458,292 173,976 632,268 Six months ended June 30, 2001................................................. $947,188 $349,299 $1,296,487 2000................................................. 992,732 318,695 1,311,427 - --------------------------------------------------------------------------------------------------------------------- Gross profit: Three months ended June 30, 2001................................................. $ 62,886 $ 23,684 $ 86,570 2000................................................. 47,565 23,589 71,154 Six months ended June 30, 2001................................................. $146,797 $ 50,661 $ 197,458 2000................................................. 154,948 32,511 187,459 - ---------------------------------------------------------------------------------------------------------------------
11 12 The following table reconciles gross profit from reportable segments to the Company's consolidated income (loss) from continuing operations before income taxes, extraordinary gains and cumulative effect of accounting changes:
Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Gross profit from reportable segments.............................. $ 86,570 $ 71,154 $ 197,458 $ 187,459 Lending subsidiary operating income.......................... - 914 - 1,674 General and administrative expenses.......................... (18,423) (19,734) (36,402) (39,847) Restructuring and non-recurring charges (see note 9)......... (26,223) (13,281) (51,246) (13,281) --------------------------------------------------------- Operating income................................................... 41,924 39,053 109,810 136,005 Interest expense............................................. (54,152) (73,565) (114,958) (143,114) Other income................................................. 10,727 7,647 13,681 11,453 --------------------------------------------------------- Income (loss) from continuing operations before income taxes, extraordinary gains and cumulative effect of accounting changes.......................................................... $ (1,501) $ (26,865) $ 8,533 $ 4,344 =========================================================
The Company's geographic segment information was as follows:
North Other America Europe Foreign Total - ---------------------------------------------------------------------------------------------------------------------- Revenues from external customers: Three months ended June 30, 2001.................................................. $437,809 $158,880 $ 22,022 $ 618,711 2000.................................................. 427,998 168,266 40,281 636,545 Six months ended June 30, 2001.................................................. $909,376 $336,543 $ 50,568 $1,296,487 2000.................................................. 872,607 371,924 75,507 1,320,038 - ---------------------------------------------------------------------------------------------------------------------- Operating income (loss): Three months ended June 30, 2001.................................................. $52,456 $ 11,920 $(22,452) $ 41,924 2000.................................................. 29,295 1,423 8,335 39,053 Six months ended June 30, 2001.................................................. $126,692 $ 28,829 $(45,711) $ 109,810 2000.................................................. 92,991 29,946 13,068 136,005 - ---------------------------------------------------------------------------------------------------------------------- Depreciation and amortization : Three months ended June 30, 2001.................................................. $ 36,325 $ 10,847 $ 2,758 $ 49,930 2000.................................................. 41,300 13,991 3,393 58,684 Six months ended June 30, 2001.................................................. $ 73,128 $ 21,924 $ 5,150 $ 100,202 2000.................................................. 81,162 28,773 6,911 116,846 - ---------------------------------------------------------------------------------------------------------------------- Operating locations at June 30: 2001.................................................. 2,127 1,923 26 4,076 2000.................................................. 2,339 2,063 189 4,591
12 13 Included in the North America figures above are the following United States amounts:
Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Revenues from external customers............................. $419,868 $407,656 $870,258 $830,868 Operating income............................................. $ 51,900 $ 26,337 $121,200 $ 85,675 Depreciation and amortization................................ $ 34,490 $ 39,474 $ 69,518 $ 77,405 Operating locations, at June 30,............................. 1,964 2,185 - ------------------------------------------------------------------------------------------------------------------------
Included in the European figures above are the following French amounts:
Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Revenues from external customers............................. $100,679 $101,247 $208,628 $220,188 Operating income (loss)...................................... $5,173 $(4,379) $9,246 $8,780 Depreciation and amortization................................ $5,830 $5,114 $9,608 $10,433 Operating locations, at June 30,............................. 1,152 1,238 - ------------------------------------------------------------------------------------------------------------------------
8. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is presented below:
Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (numerator): Income (loss) from continuing operations before extraordinary gains and cumulative effect of accounting changes - basic.......................... $(10,656) $(16,443) $ (7,337) $ 4,494 After tax interest on convertible debentures............... - - - 190 -------- -------- ------- -------- Income (loss) from continuing operations before extraordinary gains and cumulative effect of accounting changes - diluted........................ $(10,656) $(16,443) $ (7,337) $ 4,684 - --------------------------------------------------------------------------------------------------------------------------------- Shares (denominator): Shares - basic............................................. 284,852 272,093 279,245 272,078 Stock options and warrants............................ - - - 25 Convertible debentures................................ - - - 698 -------- -------- ------- -------- Shares - diluted........................................... 284,852 272,093 279,245 272,801 - --------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share from continuing operations before extraordinary gains and cumulative effect of accounting changes: Basic...................................................... $ (.04) $ (.06) $ (.03) $ .02 Diluted.................................................... $ (.04) $ (.06) $ (.03) $ .02 - ---------------------------------------------------------------------------------------------------------------------------------
13 14 9. RESTRUCTURING AND NON-RECURRING CHARGES The Company recorded restructuring and nonrecurring charges in the first quarter of 1999 (First Quarter 1999 Charge), the fourth quarter of 1999 (Fourth Quarter 1999 Charge), the fourth quarter of 2000 (Fourth Quarter 2000 Charge) and the first quarter of 2001 (First Quarter 2001 Charge). The First Quarter 1999 Charge totaled $89,884 relating to a cost rationalization program initiated in 1999 and consisted of the following: (1) severance costs of $56,757; (2) a charge of $19,123 for terminated projects representing costs associated with certain construction projects that have been cancelled ($2,153) and costs associated with acquisition due diligence which will no longer be pursued ($16,970); (3) a $7,245 charge for business and facility closures, primarily in the Company's European operations; and (4) a remaining charge of $6,759 consisting of various other cost initiatives. The $56,757 for severance costs is related to the termination of five executive contractual relationships and the involuntary termination of approximately 800 employees throughout the Company's global operations. The remaining severance costs related to the executive contractual relationships will be paid out according to the terms of the respective agreements and will extend through 2005. The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost rationalization programs, as well as initiatives required to enhance cash flow and reduce debt. The Fourth Quarter 1999 Charge consisted of the following: (1) severance costs of $150,675; (2) asset impairment of $73,728 associated with assets held for sale which were written down to estimated fair value; (3) asset impairment of $18,245 associated with loans made by the Company's lending subsidiary held for sale which were written down to estimated fair value; (4) $12,719 of informational technology costs associated with projects that will no longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease obligations related to facility closures; and (6) $10,623 of various other items. The $150,675 of severance costs is related to the involuntary termination of 1,141 employees throughout the Company's global operations, including eight executive officers of the Company. Included in this total are 316 individuals that were former owners of independent funeral homes and cemeteries that were purchased by the Company and represent approximately $92,180 of the $150,675 of severance costs. Such individuals will continue to be paid by the Company pursuant to the terms of their contracts, the majority of which will be paid by 2007. The remaining severance costs are expected to be paid out through 2001. The severance costs associated with the executive officers will be paid in accordance with the terms of the respective agreements and will extend through 2005. The Fourth Quarter 2000 Charge totaled $447,491 and related to planned divestitures as a result of a North American facility review, the reduction of the carrying value of an equity investment in North America and certain additional changes to estimates in the Company's restructuring and non-recurring charges recorded in 1999. Of the total Fourth Quarter 2000 Charge, $351,159 of charges related to the planned divestitures of 230 funeral service locations anticipated to be sold as funeral businesses, 174 funeral service locations anticipated to be sold as real estate and 105 cemeteries; $83,256 of charges to reduce the carrying value of the Company's equity investment in Arbor Memorial Services Inc.; and $13,376 of net charges as a result of changes in estimates to the Company's 1999 charges. The changes primarily consisted of $5,739 to further write down to estimated fair value certain remaining loans made by the Company's lending subsidiary, $12,000 to write down to fair value assets held in the Company's European operations, offset by a reduction of $4,363 in previously estimated severance costs in the Company's international operations. In the First Quarter 2001 Charge, the Company recorded an impairment charge of $25,023 of which $25,458 was the result of the decision to joint venture its Australia operations. In connection with the transaction, the Company received net pretax proceeds of approximately $106,900 and securities with a face value of $24,400, which includes a 20% equity interest in the Australian operations and a 12% subordinated convertible note. The Company also made adjustments of $435 to reduce its Fourth Quarter 2000 Charge related to the planned divestitures of certain North American locations. In the second quarter of 2001, the Company recognized a charge of $26,223 of which $25,710 related to the joint venture transaction involving the Company's Australian operations recorded in the First Quarter 2001 Charge. Of the $25,710, the Company recognized a loss of $20,830 for the recognition into earnings of the cumulative foreign currency translation effect from the Australian operations, which was previously included as a separate component of Accumulated other comprehensive loss in the Company's stockholders' equity. The Company further adjusted the First Quarter 2001 Charge by $4,880 as the result of changes in Australia's net assets from the First Quarter of 2001 until closing the transaction. The Company also made adjustments of $513 to increase its Fourth Quarter 2000 Charge related to the planned divestitures of certain North America locations. The Company will continue to make adjustments as actual divestitures are made or better estimates become available throughout future quarters. 14 15 The utilization of the various charges during the six months ended June 30, 2001 was as follows:
Utilization for six months ended June 30, 2001 -------------------------- Original | Balance at Additions or Balance at charge | December 31, adjustments June 30, amount | 2000 during 2001 Cash Non-cash 2001 -------- | ------------ ------------ ------- -------- ------- | First Quarter 1999 Charge...... $ 89,884 | $ 6,210 $ - $ 987 $ 750 $ 4,473 Fourth Quarter 1999 Charge..... 272,544 | 86,959 - 12,425 (548) 75,082 Fourth Quarter 2000 Charge..... 434,415 | - 78 - 78 - First Quarter 2001 Charge...... 25,458 | - 51,168 - 51,168 - -------- | ------- ------- ------- ------- ------- Total..................... $822,301 | $93,169 $51,246 $13,412 $51,448 $79,555 ======== | ======= ======= ======= ======= =======
Of the remaining total restructuring accrual balance, approximately $78,125 relates to severance costs the majority of which will be paid out through 2007. In addition, of the $79,555 remaining in reserves, $45,189 is included in Accounts payable and accrued liabilities and $34,366 is included in Other liabilities in the consolidated balance sheet based on the expected timing of payments. Summary operating results of the Company's Australian operations are as follows. The Australian joint venture was completed in May 2001, therefore 2001 operating results described below reflect one month in the three months ended June 30, 2001 and four months in the six months ended June 30, 2001.
Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 ------ ------- ------- ------- Revenues Funeral......................................... $2,957 $12,851 $13,374 $25,512 Cemetery........................................ 1,186 9,466 6,611 15,429 ------ ------- ------- ------- $4,143 $22,317 $19,985 $40,941 ====== ======= ======= ======= Operating income (loss) (excluding restructuring and non-recurring charges) Funeral......................................... $ (463) $ 1,363 $ 469 $ 2,543 Cemetery........................................ 170 3,750 2,037 5,652 ------ ------- ------- ------- $ (293) $ 5,113 $ 2,506 $ 8,195 ====== ======= ======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA) OVERVIEW The Company is the largest provider of death care services in the world conducting funeral services and cemetery operations in 17 countries on four continents. The Company's largest markets are North America and France, which when combined, represent approximately 80% of the Company's total operating locations and approximately 86% of the Company's total revenues. The funeral and cemetery operations are organized into a North America division covering the United States and Canada, a European division responsible for all operations in Europe and other international operations managed in South America. The majority of these operations are managed in groups called clusters. Clusters are geographical groups of funeral service locations and cemeteries that lower their individual overhead costs by sharing common resources such as operating personnel, preparation services, 15 16 clerical staff, limousines, hearses and preneed sales personnel. Personnel costs, the largest of the operating expenses for the Company, are the cost components most beneficially affected by clustering. The sharing of employees, as well as the other costs mentioned, allows the Company to more efficiently utilize its operating facilities. The funeral service and cemetery operations consist of the Company's funeral homes, cemeteries, crematoria and related businesses. Both funeral service locations and cemeteries can contain crematoria facilities. The Company has 188 combination facilities in which a funeral service location is contained within a cemetery. Included in other services operations in 2000 are the activities of the Company's lending subsidiary. In August 2000, the Company sold a substantial portion of the loan portfolio of its lending subsidiary. Subsequent to this sale date, all activity on remaining loans is recorded in Other income and Interest expense in the Company's consolidated statement of operations. In 2000, the Company completed the sales of its wholly owned insurance operations. As such, these operations have been reported as discontinued operations for all periods presented (see note four to the consolidated financial statements in Item 1 of this Form 10-Q). STRATEGIC INITIATIVES Historically, the Company's growth has been largely attributable to acquiring funeral and cemetery businesses which resulted in creating the world's largest network of funeral service locations and cemeteries. The Company believes this network forms the foundation of its growth initiatives going forward. During the mid-1990s, the market to acquire funeral service locations and cemeteries became extremely competitive which resulted in increased acquisition prices and substantially reduced returns on invested capital. In early 1999, the Company announced plans to significantly reduce the level of its acquisition activity and pursue other means to create meaningful growth from its existing operations. As a result, the Company's current strategic plan is focused on reducing overhead costs, increasing cash flow and reducing debt while at the same time developing key revenue initiatives designed to drive future internal growth in the Company's funeral and cemetery operations without the outlay of significant capital. Overhead Costs The Company's overhead costs include corporate general and administrative expenses, regional field overhead costs and other home office costs related to functions directly supporting field operations. During the second quarter of 2001, the Company's overhead costs were below the levels in the same period of 2000. General and administrative expenses decreased 6.6% in the second quarter of 2001 compared to the same period of 2000. This decrease in general and administrative expenses is principally attributable to the reduction in costs after the Company completed the implementation of its North America proprietary point of sale system in 2000 and due to the completion of the initial rollout of the Company's Central Processing Centers in its North America operating clusters. Operating Free Cash Flow The Company's strategic plan includes the execution of several cash flow initiatives that are designed to increase the Company's operating free cash flow. The Company considers operating free cash flow to be cash funds that generally can be used to reduce the Company's debt and is defined more specifically in the Financial Condition, Liquidity and Capital Resources section in this Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's total and recurring operating free cash flow for the three and six months ended June 30, 2001 and 2000 is summarized below.
Three months ended Six months ended June 30, June 30, ------------------------------------------ ------------------------------------------ 2001 2000 Increase 2001 2000 Increase ---------- ------------ ------------ ----------- ----------- ----------- Total operating free cash flow............ $63,898 $ 50,439 $13,459 $249,220 $131,350 $117,870 Recurring operating free cash flow........ $57,748 $ (27,032) $84,780 $118,527 $49,850 $68,677
Total operating free cash flow reported above includes items of a non-recurring nature. Included in total operating free cash flow of $249,220 for the six months ended June 30, 2001 is $130,693 of non-recurring receipts of funds comprised of an approximate $116,000 income tax refund received in the first quarter of 2001 and amounts collected from funeral and cemetery trust funds. 16 17 Included in total operating free cash flow of $131,350 for the six months ended June 30, 2000 is $81,500 of non-recurring receipts of funds primarily related to the collection of receivables from funeral and cemetery trust funds. Improvements in recurring operating free cash flow for the three and six months ended June 30, 2001 compared to the corresponding periods of 2000 was a result of (i) less cash taxes paid, (ii) less cash interest paid, (iii) reductions in capital expenditure levels, (iv) increases in funds received as a result of the Company's surety bonding programs for prearranged funeral and preneed cemetery activities, and (v) increases in the Company's cash flows from operating activities. The Company continues to implement existing and additional initiatives in 2001 to increase its recurring operating free cash flow. These cash flow initiatives are categorized as revenue growth initiatives, working capital improvements, cost reduction initiatives, asset redeployment and enhanced funeral and cemetery trust administration and management. Revenue initiatives include such programs as the Company's Dignity Memorial(TM) packaged funeral plans and the development of affinity relationships. Working capital improvements include programs to accelerate customer collections and deliver pre-sold merchandise to customers to satisfy trusting requirements. Cost reduction initiatives include changes to the Company's employee benefit plans and other overhead reductions primarily related to information technology costs. The Company's recurring operating free cash flow is also expected to increase related to assets being redeployed and managed more efficiently such as cash override payments that will be received as a result of marketing agreements entered in connection with the sale of its insurance operations and interest savings as a result of proceeds received from the Company's divestitures and joint venturing programs. Enhanced cemetery and funeral trust administration and management will allow the Company to increase operating free cash flow by reducing processing times for trust claims and accelerate trust distributions as well as the continuation of the Company's surety bond program for additional financial assurance. The Company is in various stages of executing the above cash flow initiatives. The Company's current cash flow goals are to have RECURRING operating free cash flow at a run rate between $100,000 and $150,000 by the end of 2001 and at a run rate between $200,000 and $250,000 by the end of 2002. The Company remains comfortable with the current recurring operating free cash flow goals for 2001 and 2002. Several factors in the second half of 2001 are expected to have a greater impact on recurring operating free cash flow including higher cash tax payments and capital expenditure levels as well as seasonally weaker operating profits in the second half of 2001 compared to the first half of 2001. The Company also expects TOTAL operating free cash flow to be between $200,000 and $250,000 by the end of 2001. The Company had total operating free cash flow of $249,220 in the first half of 2001. The Company expects to make non-recurring cash payments of approximately $19,000 to the Company's U. S. cash balance plan in the second half of 2001. With the pension plan cash payments and the factors described above impacting recurring operating free cash flow in the second half of 2001, the Company remains comfortable with the current total operating free cash flow goal for 2001. Long-Term Debt
Debt at Debt at June 30, 2001 December 31, 2000 Change -------------- ----------------- --------- Current maturities of long-term debt................. $ 444,586 $ 176,782 $ 267,804 Long-term debt....................................... 2,331,857 3,114,515 (782,658) ---------- ---------- --------- Total debt...................................... $2,776,443 $3,291,297 $(514,854) ========== ========== =========
The execution of the Company's debt reduction initiatives continues to exceed expectations. During the six months ended June 30, 2001, the Company reduced its total debt by $514,854. Funds available to achieve this debt reduction were generated from the completion of the joint venture of the Company's Australian operations, the Company's recurring operating free cash flow, proceeds from the sales of certain non-strategic funeral and cemetery operations in North America, receipts of non-recurring funds from certain income tax refunds, the extinguishment of certain debt obligations using the Company's common stock in transactions with third parties and receipts of non-recurring funds from the collection of receivables from funeral and cemetery trust funds. Subsequent to June 30, 2001, the Company announced the joint venture of its Spanish and Portuguese operations resulting in approximately $93,100 of net after tax cash proceeds and the sale of its Norwegian operations resulting in approximately $13,100 of net after tax cash proceeds. Additionally, the Company entered into a definitive agreement to sell its funeral operations in The Netherlands for 17 18 approximately $18,500 of net after tax cash proceeds. When these transactions are complete, the Company expects its total debt to be approximately $2,650,000. Revenue Growth Initiatives Due to the Company possessing the largest network of funeral homes and cemeteries in the world, the Company has unique opportunities to leverage its network by adding new products and services, attracting new customers to its existing facilities and to aggressively expand its current market share in its funeral and cemetery markets. The Company plans to expand its market share and generate future revenue growth through the execution of several initiatives without the outlay of significant additional capital. Six of the Company's most important revenue growth initiatives primarily being implemented in North America are listed below: o Creation of a seamless, national brand of funeral service locations under the Dignity Memorial(TM) brand name. o Establishment of exclusive, national, branded affinity relationships with employers, social, fraternal and charitable groups or institutions. o Implementation of Dignity Memorial(TM)funeral packages. o Improvement of standards in customer service. o Continued commitment to funeral and cemetery prearrangement. o Expansion of cremation marketing, merchandising and services. These revenue growth initiatives are currently in various stages of development and implementation. If implemented successfully, the Company believes the above initiatives will allow the Company to generate future revenue growth as well as to expand its market share. RESULTS OF OPERATIONS The following is a discussion of the Company's results of operations for the three and six months ended June 30, 2001 and 2000. These results of operations reflect the implementation of SAB No. 101 as of January 1, 2000, as discussed in note three to the consolidated financial statements included in Item 1 of this Form 10-Q. For purposes of the following discussion, the Company's comparable results in all periods presented represent financial results excluding operations that were acquired or constructed after January 1, 2000 or divested by the Company prior to June 30, 2001. For the quarter ended June 30, 2001, the Company reported revenues of $618,711, representing a 2.8% decrease compared to $636,545 in the second quarter of 2000. Gross profit from continuing operations in the second quarter of 2001 increased 20.1% to $86,570 compared to $72,068 in the same period of 2000. Gross margin percentage increased 23.9% to 14.0% in the second quarter of 2001 compared to 11.3% in the second quarter of 2000. For the three months ended June 30, 2001, the Company reported earnings from continuing operations before restructuring and non-recurring charges of $15,410, net loss of $10,585, diluted earnings per share from continuing operations before restructuring and non-recurring charges of $.05 ($.05 basic) and diluted loss per share of $.04 ($.04 basic). The Company reported a loss from continuing operations before restructuring and non-recurring charges of $8,010, net income of $4,556, diluted loss per share from continuing operations before restructuring and non-recurring charges of $.03 ($.03 basic) and diluted earnings per share of $.02 ($.02 basic) for the second quarter of 2000. 18 19 Results for the Company's continuing operations by geographic segment are detailed in the following tables.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 2001 TOTAL ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $285,971 65.3% $153,686 96.7% $6,914 31.4% $446,571 72.2% Cemetery........ 151,838 34.7% 5,194 3.3% 15,108 68.6% 172,140 27.8% ------------------------------------------------------------------------------------------------------------ $437,809 100.0% $158,880 100.0% $22,022 100.0% $618,711 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $50,676 17.7% $11,663 7.6% $ 547 7.9% $62,886 14.1% Cemetery........ 20,115 13.2% 858 16.5% 2,711 17.9% 23,684 13.8% ------------------------------------------------------------------------------------------------------------ $70,791 16.2% $12,521 7.9% $3,258 14.8% $86,570 14.0% ============================================================================================================
COMPARABLE ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $281,973 65.3% $153,600 96.7% $3,957 22.1% $439,530 72.3% Cemetery........ 149,510 34.7% 5,194 3.3% 13,922 77.9% 168,626 27.7% ------------------------------------------------------------------------------------------------------------ $431,483 100.0% $158,794 100.0% $17,879 100.0% $608,156 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $50,932 18.1% $11,633 7.6% $1,010 25.5% $63,575 14.5% Cemetery........ 19,842 13.3% 858 16.5% 2,541 18.3% 23,241 13.8% ------------------------------------------------------------------------------------------------------------ $70,774 16.4% $12,491 7.9% $3,551 19.9% $86,816 14.3% ============================================================================================================
19 20
THREE MONTHS ENDED JUNE 30, 2000 TOTAL ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $279,091 65.2% $162,062 96.3% $17,139 42.5% $458,292 72.0% Cemetery........ 144,630 33.8% 6,204 3.7% 23,142 57.5% 173,976 27.3% Other Services.. 4,277 1.0% - - - - 4,277 0.7% ------------------------------------------------------------------------------------------------------------ $427,998 100.0% $168,266 100.0% $40,281 100.0% $636,545 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $44,028 15.8% $ 1,527 0.9% $2,010 11.7% $47,565 10.4% Cemetery........ 16,640 11.5% 624 10.1% 6,325 27.3% 23,589 13.6% Other Services.. 914 21.4% - - - - 914 21.4% ------------------------------------------------------------------------------------------------------------ $61,582 14.4% $ 2,151 1.3% $8,335 20.7% $72,068 11.3% ============================================================================================================
COMPARABLE ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $270,413 65.6% $159,742 96.3% $4,288 23.9% $434,443 72.9% Cemetery........ 141,940 34.4% 6,204 3.7% 13,676 76.1% 161,820 27.1% ------------ -------------- ------------- ------------- -------------- ------------ ------------ ----------- $412,353 100.0% $165,946 100.0% $17,964 100.0% $596,263 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $44,724 16.5% $ 1,004 0.6% $ 647 15.1% $46,375 10.7% Cemetery........ 16,355 11.5% 624 10.1% 2,575 18.8% 19,554 12.1% ------------------------------------------------------------------------------------------------------------ $61,079 14.8% $ 1,628 1.0% $3,222 17.9% $65,929 11.1% ============================================================================================================
The following factors contributed to the results for the second quarter of 2001. o Funeral services performed by the Company's worldwide comparable funeral service locations were 3.4% above comparable funeral services in the second quarter of 2000 while total funeral services performed were 1.6% below the same period in the prior year due primarily to the disposition of Australia in the second quarter of 2001. o Total cemetery revenue stabilized during the second quarter of 2001 and on a comparable basis experienced an increase in revenue and gross margin as a result of the continued focus on enhancing cash flow. As a result of this focus, the Company's sales mix is shifting toward more cash flow positive sales, such as heritage cemetery property sales, which can also be recognized as revenue under accounting rules after the implementation of SAB No. 101. o The Company experienced a negative effect of foreign currency translations of approximately $14,000 on revenues and approximately $2,000 on gross profits primarily as a result of the weakened Euro relative to the U.S. dollar in the second quarter of 2001 compared to the second quarter of 2000. Funeral The increase in comparable North America funeral revenues was primarily the result of a 3.1% increase in the volume of funeral services performed coupled with a 1.2% increase in the average revenue per funeral service. In the second quarter of 2001, comparable North America volume increased to 71,873 cases compared to 69,737 cases in the second quarter of 2000. The 20 21 comparable average revenue per funeral service increased to $3,923 in the second quarter of 2001 from $3,878 in the same period prior year primarily as a result of the continued implementation of the Company's revenue growth initiatives, such as Dignity Memorial(TM) packaged funeral plans as well as a focus on training the Company's funeral service personnel in customer satisfaction initiatives. As a result of increased revenue and positive effects of the Company's cost rationalization programs, the Company also experienced an increase in comparable North America funeral gross profit and margin percentage. Comparable European funeral revenues experienced a decline in the second quarter of 2001 compared to the second quarter of 2000 as a result of the negative effect of foreign currency translation primarily related to the Euro. Despite an increase in volume of 3.8% to 62,164 cases in the second quarter of 2001 from 59,876 cases in the second quarter of 2000, comparable funeral revenue was impacted $11,200 by the negative effect of the weakening of the Euro against the U. S. dollar. Comparable gross profit and margin percentage in the European operations improved as a result of cost rationalization programs as well as increases in funeral services performed and higher average revenue per funeral service. Cemetery The Company is continuing actions initiated in 2000 to enhance cash flows of North America cemetery operations. Actions include adjustments to cemetery compensation plans and concentration on sales of deliverable cemetery property and merchandise, as defined by applicable state trusting laws. The sale of deliverable cemetery property and merchandise generally allows for revenue recognition under the Company's cemetery accounting policies. As a result of the above focus, the Company's sales mix is shifting, causing an increase in revenue in the second quarter of 2001 compared to the same period of 2000. Comparable North America gross profit and margin percentage has also been positively impacted by the above mentioned increases in revenue coupled with the reduction in costs as a result of changes in cemetery compensation plans. Other Income and Expenses General and administrative expenses decreased $1,311 to $18,423 in the second quarter of 2001 compared to the second quarter of 2000. The decrease was related to the anticipated reduction in costs after the Company implemented its North America proprietary point of sale system and to the completion of the initial rollout of the Company's Central Processing Centers in its North American operating clusters. Expressed as a percentage of revenue from continuing operations, general and administrative expenses were 3.0% for the three months ended June 30, 2001, compared to 3.1% for the comparable period in 2000. Interest expense decreased $19,413 or 26.4% to $54,152 in the second quarter of 2001 compared to the same period of 2000. The decrease in interest expense for the three months ended June 30, 2001 reflects the decline in the Company's long-term debt balance compared to the same period in 2000 as well as lower interest rates in the first quarter of 2001 compared to the first quarter of 2000. For the three months ended June 30, 2001, the average outstanding debt was $2,900,000 compared to the average outstanding debt for the three months ended June 30, 2000 of $3,840,000. Other income was $10,727 in the quarter ended June 30, 2001 compared to $7,647 in the same period of 2000. Other income primarily consists of income from notes receivable remaining subsequent to selling a portion of the portfolio of the Company's lending subsidiary in August 2000, equity from earnings of investments in certain companies, gains and losses from the sales of businesses that are disposed of for strategic or government mandated purposes (which are not included in the Company's restructuring and non-recurring charges) and prearranged funeral sales cash overrides received from the Company's formerly owned insurance operations (see note four to the consolidated financial statements in Item 1 of this Form 10-Q). Excluding the restructuring and non-recurring charges, the provision for income taxes reflects a 37.7% effective tax rate for the three months ended June 30, 2001 compared to a 41.0% effective benefit rate for the comparable period in 2000. The restructuring charge in the second quarter of 2001 is primarily related to the completion of the joint venture of the Company's Australian operations. The charge represented the earnings recognition of the cumulative foreign currency translation effect for the Australian operations previously included as a separate component of the Company's consolidated stockholders' equity. Because no tax benefit is associated with this charge, the final provision for income taxes reflects an unusually high effective tax rate in the second quarter of 2001. The benefit rate calculated in the second quarter of 2000 was the result of a reduction in the effective tax rate due to actual operating results on a year to date basis contributed by the international and domestic jurisdictions. 21 22 Cremations There has been a growing trend over the last several years in the number of cremations performed in North America as an alternative to traditional funeral service dispositions. Outside of North America, the cremation rate is more stable. While cremations performed by the Company in North America typically have higher gross profit margins than traditional funeral services, cremations usually result in lower revenue and gross profit dollars to the Company. In North America, for the second quarter 2001, 37.3% of all funeral services performed by the Company were cremation cases, compared to 36.8% in the same period of 2000. The Company's strategy for cremation trends in North America is to continue the movement towards performing cremations with memorialization services as well as to offer enhanced and additional cremation products and services to North American cremation consumers. This is being accomplished through programs such as the Company's Dignity Memorial(TM) cremation memorialization packaged funeral plans, which offer the consumer a broad array of choices of products and services for memorialization. The Company also has plans to expand National Cremation(TM) Service, the Company owned largest single provider of cremation services in North America, from its existing base in fourteen states to eighteen states by the end of 2002. Restructuring and Non-Recurring Charges In the second quarter of 2001, the Company recorded a non-cash charge of $26,223 primarily related to the recognition into earnings of the cumulative foreign currency translation effect from the Australian operations, which was previously included as a separate component of Accumulated other comprehensive loss in the Company's stockholders' equity (see note nine to the consolidated financial statements in Item 1 of this Form 10-Q).
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 2001 TOTAL ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $601,521 66.1% $325,259 96.6% $20,408 40.4% $ 947,188 73.1% Cemetery........ 307,855 33.9% 11,284 3.4% 30,160 59.6% 349,299 26.9% ------------------------------------------------------------------------------------------------------------ $909,376 100.0% $336,543 100.0% $50,568 100.0% $1,296,487 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $119,050 19.8% $26,691 8.2% $1,056 5.2% $ 146,797 15.5% Cemetery........ 43,152 14.0% 3,108 27.5% 4,401 14.6% 50,661 14.5% ------------------------------------------------------------------------------------------------------------ $162,202 17.8% $29,799 8.9% $5,457 10.8% $ 197,458 15.2% ============================================================================================================
22 23
COMPARABLE ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $588,707 66.1% $325,055 96.6% $7,034 23.0% $ 920,796 73.2% Cemetery........ 302,577 33.9% 11,284 3.4% 23,549 77.0% 337,410 26.8% ------------------------------------------------------------------------------------------------------------ $891,284 100.0% $336,339 100.0% $30,583 100.0% $1,258,206 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $119,414 20.3% $26,626 8.2% $ 587 8.3% $ 146,627 15.9% Cemetery........ 42,302 14.0% 3,108 27.5% 2,364 10.0% 47,774 14.2% ------------------------------------------------------------------------------------------------------------ $161,716 18.1% $29,734 8.8% $2,951 9.6% $ 194,401 15.5% ============================================================================================================
SIX MONTHS ENDED JUNE 30, 2000 TOTAL ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $602,451 69.0% $357,068 96.0% $33,213 44.0% $ 992,732 75.2% Cemetery........ 261,545 30.0% 14,856 4.0% 42,294 56.0% 318,695 24.1% Other Services.. 8,611 1.0% - - - - 8,611 0.7% ------------------------------------------------------------------------------------------------------------ $872,607 100.0% $371,924 100.0% $75,507 100.0% $1,320,038 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $123,600 20.5% $28,065 7.9% $3,283 9.9% $ 154,948 15.6% Cemetery........ 19,292 7.4% 3,434 23.1% 9,785 23.1% 32,511 10.2% Other Services.. 1,674 19.4% - - - - 1,674 19.4% ------------------------------------------------------------------------------------------------------------ $144,566 16.6% $31,499 8.5% $13,068 17.3% $ 189,133 14.3% ============================================================================================================
COMPARABLE ------------------------------------------------------------------------------------------------------------ NORTH % OF % OF OTHER % OF % OF AMERICA REVENUE EUROPE REVENUE FOREIGN REVENUE TOTAL REVENUE ------------------------------------------------------------------------------------------------------------ Revenues: Funeral......... $584,160 69.4% $351,306 95.9% $7,701 22.3% $ 943,167 75.9% Cemetery........ 257,670 30.6% 14,856 4.1% 26,865 77.7% 299,391 24.1% ------------------------------------------------------------------------------------------------------------ $841,830 100.0% $366,162 100.0% $34,566 100.0% $1,242,558 100.0% ============================================================================================================ Gross profit and margin percentage: Funeral......... $123,929 21.2% $26,487 7.5% $ 740 9.6% $ 151,156 16.0% Cemetery....... 18,609 7.2% 3,434 23.1% 4,133 15.4% 26,176 8.7% ------------------------------------------------------------------------------------------------------------ $142,538 16.9% $ 29,921 8.2% $4,873 14.1% $ 177,332 14.3% ============================================================================================================
23 24 Funeral For the six months ended June 30, 2001, comparable funeral revenues decreased 2.4% to $920,796 while comparable gross profit declined 3.0% to $146,627. These decreases are primarily attributed to a decrease in funeral services performed in the first quarter of 2001 coupled with the negative effect of foreign currency translation. Comparable North America funeral revenues increased 0.8% to $588,707 in the six months ended June 30, 2001 due to an increase in the average revenue per funeral service despite less funeral services performed during this period. Comparable volume declined 1.2% to 150,040 cases while the average revenue per funeral service for comparable sales increased 2.0% to $3,924 during the first six months of 2001. Comparable European funeral revenue decreased 7.5% to $325,055 due to the negative effect of foreign currency translation and a decrease in deaths in the first six months of 2001 compared to 2000. The negative effect of foreign currency impacted comparable European funeral revenues approximately $24,000 in the first six months of 2001. This coupled with a 6.3% decline in volume to 131,050 accounts for the remaining change in comparable European funeral revenue. Comparable European gross profit improved slightly during the first six months of 2001 compared to the same period in 2000 as a result of positive effects of the Company's cost rationalization programs. Other Foreign comparable revenues and gross profit declined as a result of 2.3% lower volume in the Company's South America operations. Cemetery Comparable cemetery revenues increased 12.7% to $337,410 and gross profit increased 82.5% to $47,774 in the first six months of 2001 compared to 2000 primarily related to increased revenue and gross profit in the Company's North America operations. Comparable North America cemetery revenues increased 17.4% to $302,577 while gross profit increased 127.3% to $42,302 in the first six months of 2001. The Company is continuing actions initiated in 2000 to enhance cash flows from cemetery operations. Such initiatives include adjustments to cemetery compensation plans and concentration on sales of cemetery property and merchandise that can be delivered, as defined by applicable state trusting laws. The sale of deliverable cemetery property and merchandise generally allows for revenue recognition under the Company's cemetery accounting policies. As a result, the Company has experienced increased revenue in the first six months of 2001 compared to the same period of 2000. The decline in Other Foreign comparable cemetery revenue is the result of reduced preneed cemetery sales activities as a result of the current instability of the economy of Argentina. Other Income and Expenses General and administrative expenses decreased $3,445 to $36,402 in the first six months of 2001 compared to the first six months of 2000. The decrease relates to the reduction in costs after the Company implemented its North America proprietary point of sale system in 2000 as well as completing the initial rollout of the Company's Central Processing Centers in its North America operating clusters. Expressed as a percentage of revenue from continuing operations, general and administrative expenses were 2.8% and 3.0% for the six months ended 2001 and 2000, respectively. Interest expense decreased $28,156 or 19.7% to $114,958 in the first six months of 2001 compared to the same period in 2000. The decrease in interest expense is related to the decline in the Company's long-term debt balance in 2001 compared to 2000 as well as lower interest rates in the six months ended June 30, 2001 compared to the same period prior year. For the six months ended June 30, 2001, the average outstanding debt was $3,050,000 compared to the average outstanding debt for the six months ended June 30, 2000 of $3,900,000. Other Income was $13,681 in the six months ended June 30, 2001 compared to $11,453 in the same period of 2000. Other income primarily consists of income from notes receivable remaining subsequent to selling a portion of the portfolio of the Company's lending subsidiary in August 2000, equity from earnings of investments in certain companies, gains and losses from the sales of businesses that are disposed of for strategic or government mandated purposes (which are not included in the Company's restructuring and non-recurring charges) and prearranged funeral sales cash overrides received from the Company's formerly owned insurance operations (see note four to the consolidated financial statements in Item 1 of this Form 10-Q). 24 25 The provision for income taxes before restructuring and non-recurring charges reflects an effective tax rate of 38.4% for the six months ended June 30, 2001 compared to an effective tax rate of 26.7% for the comparable period in 2000. The increase in the effective tax rate in the first six months of 2001 is the result of a higher percentage of the Company's operating results being contributed by North America, which carries a higher effective tax rate than the Company's international jurisdictions. Included in restructuring and non-recurring charges in the current year is an impairment charge as a result of the Company completing the joint venture of its Australian operations. Because the effective benefit associated with the restructuring and non-recurring charges is 13.9% and therefore lower than the current tax expense on continuing operations, the consolidated effective tax rate is 186.0%. Similarly in the prior year, a restructuring and non-recurring charge of $13,281 was recorded with a tax benefit of 36.5%. As a result, the consolidated effective tax rate is 3.5% in the six months ended June 30, 2000. Restructuring and Non-Recurring Charges The Company recorded a non-cash charge of $51,246 primarily related to the joint venturing of its Australian operations. An impairment charge totaling $30,338 was recorded as a result of joint venturing its Australia operations. Further, the Company recognized into earnings $20,830 relating to the cumulative foreign currency translation effect from the Australian operations, which was previously included as a separate component of Accumulated other comprehensive loss in the Company's stockholders' equity (see note nine to the consolidated financial statements in Item 1 of this Form 10-Q). FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES General As previously described, the Company's strategic plan currently focuses on reducing overhead costs, increasing cash flow and reducing its debt. The Company's current strategic plan is fully described in the section Strategic Initiatives included in this Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's strategic initiatives are designed to allow the Company to achieve its goals relating to operating free cash flow and debt reduction, while at the same time generating revenue growth without the outlay of significant capital. The Company defines operating free cash flow as adjusted cash flow from operating activities, less capital expenditures and dividends paid. Adjusted cash flow from operating activities includes cash flow provided by operating activities as reflected in the consolidated statement of cash flows adjusted to exclude (i) cash payments associated with the Company's restructuring and non-recurring charges and (ii) other proceeds or payments (included in cash flow provided by operating activities) which are of a non-recurring operational nature. Generally, operating free cash flow is cash funds that can be used to reduce the Company's debt. The Company's progress towards its cash flow targets is as follows:
Six Months Ended 2001 Benchmarks and June 30, 2001 Run Rate Targets 2002 Run Rate Targets -------------------------------------------------------------------- Consolidated cash flow provided by operating activities.... $272,355 Payments on restructuring charges.......................... 13,412 -------- Adjusted cash flow from operating activities........ 285,767 Capital expenditures................................. (36,547) -------- TOTAL OPERATING FREE CASH FLOW...................... 249,220 $200,000 to $250,000 Less: Non-recurring receipts of funds, net......... (130,693) -------- RECURRING OPERATING FREE CASH FLOW.................. $118,527 $100,000 to $150,000 $200,000 to $250,000 ======== Estimated after tax proceeds from sales of assets and non-core businesses................................... $165,152 $200,000 to $500,000 ======== ==================== Total cash flow available........................... $414,372 $400,000 to $750,000 ======== ====================
The net non-recurring receipts of funds totaling $130,693 relates primarily to certain income tax refunds and from the collection of receivables due to the Company from funeral and cemetery trust funds. The Company continues to implement initiatives in 2001 to 25 26 increase its recurring operating free cash flow from 2000 levels. These cash flow initiatives are categorized as (i) revenue growth initiatives, (ii) working capital improvement, (iii) cost reduction initiatives, (iv) asset redeployment and (v) enhanced funeral and cemetery trust administration and management. The Company is currently in various stages of executing the above cash flow initiatives and, along with other cash flow initiatives currently under development, expects recurring operating free cash flow to have a run rate between $100,000 to $150,000 by the end of 2001 and to have a run rate between $200,000 to $250,000 by the end of 2002. The Company's total debt at June 30, 2001 was $2,776,443, representing a decrease in total debt of $514,854 since December 31, 2000. Since September 30, 1999, the peak level of Company debt, the Company has reduced its debt by $1,423,580 or 33.9%. Subsequent to June 30, 2001, the Company announced the joint venture of its Spanish and Portuguese operations resulting in approximately $93,100 of net after tax cash proceeds and the sale of its Norwegian operations resulting in approximately $13,100 of net after tax cash proceeds. Additionally, the Company entered into a definitive agreement to sell its funeral operations in The Netherlands for approximately $18,500 of net after tax cash proceeds. When these transactions are complete, the Company expects its total debt to be approximately $2,650,000. Of the Company's total debt at June 30, 2001 of $2,776,443, debt of $305,238 is related to the Company's primary bank credit agreements maturing in June 2002. These credit agreements provide for total borrowings up to $897,851 as of June 30, 2001 and consist of two committed facilities - a 2-year term loan and a 5-year, multi-currency revolving facility, both due in June 2002. These credit agreements were amended effective November 2000. Significant terms of the amendments include certain agreements made by the Company to reduce commitment amounts on the credit facilities based upon net cash proceeds generated from joint venture and asset sale transactions closed after November 2000; changes to definitions and calculations of financial covenants related to a maximum debt-to-capitalization ratio, a minimum interest coverage ratio and a minimum net worth requirement; limits on the amount of Company assets that could be joint ventured or sold; and certain restrictions on future acquisition activity without lender approval. Under the terms of the amended credit agreements, the covenants will continue to be calculated using ongoing financial results prior to applying the provisions of SAB No. 101. At June 30, 2001, the Company was in compliance with the above mentioned covenants. As mentioned above, the Company's total debt balance after the completion of the recent joint venture and sales of certain European operations is expected to be approximately $2,650,000. Approximately $320,000 of the total $2,650,000 will be classified as current maturities of long-term debt. With non-recurring receipts of funds expected in the second half of 2001 and in 2002, improvements in recurring operating free cash flow described earlier, proceeds expected from sales of certain funeral and cemetery operations in North America and possible proceeds from additional joint venture programs primarily with the Company's international operations, the Company believes funds will be available to reduce these current maturities due in 2002 to a level allowing for the refinancing of remaining balances outstanding, if any. EBITDA The Company reported EBITDA from continuing operations before restructuring and non-recurring charges for the three months ended June 30, 2001 and 2000 of $128,804 and $118,666, respectively. For the six months ended June 30, 2001 and 2000, the Company reported EBITDA before restructuring and non-recurring charges of $274,939 and $277,585, respectively. EBITDA was calculated by adding depreciation and amortization expense and interest expense to the Company's income from continuing operations before income taxes, extraordinary gains and cumulative effect of accounting changes. Financial Assurances In support of the Company's operations, the Company has entered into arrangements with certain insurance companies whereby such insurance companies agree to issue surety bonds on behalf of the Company, as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been issued to support the Company's prearranged funeral and preneed cemetery activities. The underlying obligations that such surety bonds support are recorded in the Company's consolidated balance sheet as Deferred prearranged funeral contract revenues and Deferred preneed cemetery contract revenues. The total surety bonds outstanding as of June 30, 2001 and December 31, 2000 was $270,508 and $215,350, respectively. 26 27 Sources and Uses of Cash Net cash provided by operating activities was $272,355 for the six months ended June 30, 2001 compared to $195,055 for the same period of 2000. Included in the $195,055 for the six months ended June 30, 2000 is $92,269 of net cash provided by discontinued operations. From continuing operations, net cash provided by operating activities was $102,786 for the six months ended June 30, 2000. The Company received funds of approximately $33,000 and $81,500 in the first half of 2001 and 2000, respectively, relating to the collection of receivables from certain funeral and cemetery trust funds which are included in net cash provided by continuing operations. Excluding these receipts of funds, net cash provided by continuing operations increased by $218,069 primarily as a result of approximately $116,000 of cash received from certain income tax refunds, less cash taxes paid, increases in funds received from the Company's surety bonding programs for prearranged funeral and preneed cemetery activities and from general increases in the Company's cash flows generated from its funeral and cemetery operations as a result of the Company's current cash flow initiatives. Net cash provided by investing activities was $106,588 for the six months ended June 30, 2001 compared to net cash used in investing activities of $102,595 for the same period of 2000. Included in the $102,595 in the first half of 2000 is $82,022 of net cash used in investing activities by discontinued operations. Net cash used in investing activities from continuing operations was $20,573 for the six months ended June 30, 2000. The increase of $127,161 in net cash provided by investing activities from continuing operations in the first six months of 2001 compared to the same period of 2000 is primarily related to an increase of $18,650 in proceeds received from sales of property and equipment and from $106,900 of pretax proceeds received in the completion of the joint venture of the Company's Australian operations in May 2001. Net cash used in financing activities was $370,142 for the six months ended June 30, 2001 compared $107,159 for the same period of 2000. Included in the $107,159 is a source of cash of $143,498 related to the cross-currency components of certain swaps the Company terminated in the first quarter of 2000. Excluding the $143,498 source of cash, net cash used in financing activities was $250,657 for the six months ended June 30, 2000. The increase of $119,485 in net cash used in financing activities in the first half of 2001 compared to the same period of 2000 is due to a greater reduction in the Company's debt achieved in the first half of 2001 compared to the first half of 2000. The Company primarily used funds from certain income tax refunds, collection of receipts from funeral and cemetery trust funds, proceeds from sales or property and equipment, proceeds from the completion of the joint venture of the Company's Australian operations and its cash flow from operations to reduce its debt in the first half of 2001. PREARRANGED FUNERAL AND PRENEED CEMETERY ACTIVITIES The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are generally placed into trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance or annuity contracts. Funeral revenues are recognized on prearranged funeral contracts at the time the funeral services are performed. Realized trust earnings and increasing insurance benefits are accrued and deferred until the services are performed, at which time these funds are also recognized in funeral revenues. The Company's trust fund investment program targets a return in excess of the amount necessary to cover future increases in the cost of providing price guaranteed funeral services as well as any selling costs. This is accomplished by allocating the portfolio mix to investments that match the anticipated maturity of the contracts. Direct costs incurred with the sale of prearranged funeral contracts are a current use of cash which is partially offset with cash retained, pursuant to state laws, from amounts trusted and certain general agency commissions earned by the Company for sales of insurance products. Net obtaining costs incurred pursuant to the sales of prearrangements are included in Deferred charges and other assets. These obtaining costs, which include sales commissions and certain other direct costs that vary with and are primarily related to the acquisition of new prearranged funeral business, are deferred and amortized over 20 years, a period representing the estimated life of the prearranged funeral contract portfolio. Previous to the implementation of SAB No. 101, deferred obtaining costs included variable and fixed direct costs as well as direct marketing costs. Pursuant to the implementation of SAB No. 101 in 2000, the Company changed its accounting policies regarding the manner in which it records preneed cemetery sales activities. As discussed in note three to the consolidated financial statements in Item 1 of this Form 10-Q, the Company defers revenues and all costs associated with certain preneed cemetery sales activities until cemetery burial property is constructed and meets the criteria of SFAS No. 66, merchandise is delivered or services are performed. Amounts held in 27 28 cemetery merchandise and services trusts are included in Long-term receivables, at cost. As a result of implementing SAB No. 101, all realized investment earnings related to these cemetery merchandise and services trust funds are deferred until the associated merchandise is delivered or services are performed. The Company remains committed to prearrangement programs with consumers for funeral and cemetery products and services as the Company believes these programs can increase future market share in its funeral service and cemetery markets. During 2000, the Company restructured its prearranged organization and compensation plans to improve the cash flows from the Company's prearrangement activities. Such initiatives include (i) funding the majority of prearranged funeral contracts through insurance sources creating general agency revenue and cash overrides and (ii) introducing direct-to-consumer prearranged marketing in North America to open new marketing channels and expand the scope of the Company's prearrangement activities. At June 30, 2001, the Company had deferred revenues of $6,243,408, of which $4,423,332 is Deferred prearranged funeral contract revenues and $1,820,076 is Deferred preneed cemetery contract revenues, to be recognized as revenue in future periods. For the six months ended June 30, 2001 and 2000, the percentage of North American funeral services performed which were previously prearranged was 29.7% and 28.1%, respectively, and is expected to increase over time. Net prearranged funeral sales were approximately $270,000 for the six months ended June 30, 2001 compared to $295,000 for the six months ended June 30, 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and establishes one method - the purchase method - for accounting for such transactions. SFAS No. 142 addresses goodwill and other intangible assets and redefines useful lives, amortization periods and impairment of goodwill. Under the provisions, goodwill will no longer be amortized, but will be tested for impairment annually. Currently, the Company has $2,020,504 in goodwill presented as Names and reputations in the Company's consolidated balance sheet. Amortization of goodwill will continue to be amortized through December 31, 2001 and was $31,086 and $32,861 for the six months ended June 30, 2001 and 2000, respectively. SFAS No. 142 requires goodwill to be tested for impairment by assessing the fair value of reporting units, generally one level below reportable segments. The adoption of SFAS No. 142 may result in a non-cash charge that could have a significant effect on the Company's financial condition and results of operations. The Company is required to adopt SFAS No. 141 for any acquisitions subsequent to June 30, 2001 and to adopt SFAS No. 142 during the first quarter of the year ending December 31, 2002. During the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities: An Amendment of FASB Statement No. 133." In accordance with these Standards, the Company recognized a cumulative effect of a change in accounting principle, net of applicable taxes, of $7,601. In 2000, the Company implemented SAB No. 101 which changes the Company's accounting policies regarding the manner in which the Company records preneed sales activities. The implementation of SAB No. 101 had no effect on the consolidated cash flows of the Company. As a result of the required change, the Company recognized a cumulative effect of a change in accounting principle, effective January 1, 2000, of $909,315 (net of a $552,491 tax benefit), or $3.34 per diluted share. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS The statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe", "estimate", "project", "expect", "anticipate" or "predict", that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however, many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. Important factors which could cause actual results of the Company to differ materially from those in forward-looking statements include, among other, the following: 28 29 1) Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g. marketable security values, as well as currency and interest rate fluctuations) that could negatively affect the Company, particularly but not limited to, levels of interest expense and negative currency translation effects. 2) Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace. 3) The Company's ability to successfully implement its strategic plan as defined in the Company's Form 10-K as of December 31, 2000 and in this Form 10-Q, including the interest of third parties to purchase certain funeral and cemetery operations and to enter into and consummate alliances and joint ventures with the Company. 4) Changes in consumer demand and/or pricing for the Company's products and services caused by several factors, such as changes in local death rates, cremation rates, competitive pressures and local economic conditions. 5) The Company's ability to successfully implement ongoing cost reduction initiatives, as well as changes in domestic and international economic, political and/or regulatory environments, which could negatively effect the implementation of the Company's cost reduction initiatives. 6) Changes in domestic and international political and/or regulatory environments in which the Company operates, including tax and accounting policies. 7) The Company's ability to successfully exploit its substantial purchasing power with certain of the Company's vendors. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the Company's exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the Company's Form 10-K for the year ended December 31, 2000. There have been no material changes to the disclosure on this matter made in such Form 10-K. For further information regarding the Company's debt exposure see note six to the consolidated financial statements in Item 1 of this Form 10-Q. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Previously Reported Litigation. The following discussion describes certain litigation as of August 13, 2001, which was previously reported: Civil Action H-99-0280; In Re Service Corporation International; In the United States District Court for the Southern District of Texas, Houston Division (the Consolidated Lawsuit). The Consolidated Lawsuit is pending before Judge Lynn N. Hughes and includes 21 class action lawsuits that were filed in the United States District Court of the Southern District of Texas, two class action lawsuits that were originally brought in the United States District Court for the Eastern District of Texas, and a lawsuit brought in the United States District Court for the Southern District of Texas by an individual who sold his funeral home to the Company. The Consolidated Lawsuit names as defendants the Company and three of the Company's current or former executive officers or directors: Robert L. Waltrip, L. William Heiligbrodt and George R. Champagne (the Individual Defendants). The plaintiffs have filed a Consolidated Class Action Complaint in the Consolidated Lawsuit alleging that defendants violated federal securities laws by making materially false and misleading statements and failing to disclose material information concerning the Company's prearranged funeral business. The Consolidated Lawsuit seeks to recover an unspecified amount of monetary damages. Since the litigation is in its preliminary stages and no discovery has occurred, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. However, the Company moved to dismiss all of the allegations in the Consolidated Lawsuit and believes that they do not provide a basis for the recovery of damages because the Company made all required disclosures on a timely basis. The Company and the Individual Defendants have also filed an Answer to the Consolidated Class Action Complaint, and the Company intends to aggressively defend this lawsuit. 29 30 The Consolidated Lawsuit has been brought on behalf of all persons and entities who (i) acquired shares of Company common stock in the merger of a wholly owned subsidiary of Company into Equity Corporation International (ECI); (ii) purchased shares of Company common stock in the open market during the period from July 17, 1998, through January 26, 1999 (the Class Period); (iii) purchased Company call options in the open market during the Class Period; (iv) sold Company put options in the open market during the Class Period; (v) held employee stock options in ECI that became options to purchase Company common stock pursuant to the merger, and (vi) held Company employee stock options to purchase Company common stock under a stock plan during the Class Period. Excluded from the foregoing categories are the Individual Defendants, the members of their immediate families and all other persons who were directors or executive officers of the Company or its affiliated entities at any time during the Class Period. Judge Hughes has certified the Consolidated Lawsuit as a class action. On May 10, 2000, Judge Hughes signed an order amending the class definition to include James P. Hunter, III as a class member. Mr. Hunter was Chairman, President and Chief Executive Officer of ECI at the time of its merger with a wholly-owned subsidiary of the Company. Mr. Hunter and a related family trust filed a separate lawsuit in state court in Angelina County, Texas, which is discussed below. The Company and the Individual Defendants have filed a Motion to Dismiss the Consolidated Lawsuit; the plaintiffs have filed their Opposition to Defendants' Motion to Dismiss the Consolidated Lawsuit; and the Company and the Individual Defendants have filed a Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Lawsuit. The foregoing pleadings will be considered by Judge Hughes in due course. On April 4, 2001, Judge Hughes scheduled a meeting between the parties and the insurers to discuss possible resolution of the case and to exchange information on each sides' position. The meeting was held and the parties reported at a status conference on August 3, 2001 to Judge Hughes that they did not resolve the case. The Court indicated that it would consider the pending motion to dismiss after allowing the parties to supplement their briefs. Copies of the complaint in the Consolidated Lawsuit and the pleadings that have been filed in response thereto and that are referred to herein are filed as exhibits to this Quarterly Report on Form 10-Q. Cause No. 32548-99-11, James P. Hunter, III et al v. Service Corporation International et al; In the _________ Judicial District Court of Angelina County, Texas. On November 10, 1999, James P. Hunter, III and a related family trust filed a lawsuit against the Company, the Individual Defendants, two other officers, an employee of the Company and PricewaterhouseCoopers LLP, the Company's independent accountants, in state District Court in Angelina County, Texas (Hunter Litigation). The plaintiffs allege, among other things, violations of Texas securities law and statutory and common law fraud, and seek unspecified compensatory and exemplary damages. The Company and the other defendants filed an answer in the Hunter Litigation denying the plaintiffs' allegations. Since the litigation is in its very preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. However, the Company believes that the allegations in the Hunter Litigation, like those in the Consolidated Lawsuit, do not provide a basis for the recovery of damages because all required disclosures were made on a timely basis. The Company intends to aggressively defend this litigation. On May 10, 2000, Judge Hughes entered an order in the Consolidated Lawsuit in the federal district court staying the further prosecution of the Hunter Litigation in state court. Hunter and the related family trust appealed this order, and the United States Court of Appeals for the Fifth Circuit lifted the stay in an order of September 13, 2000. Following this appeal, Judge Hughes then signed an order on October 5, 2000, prohibiting Mr. Hunter and the related family trust from pursuing discovery in the Hunter Litigation. Judge Hughes entered the order pursuant to the authority vested to him by the Securities Litigation Uniform Standards Act of 1998. Hunter and the related family trust filed a motion for a trial setting in the state district court. The court has not ruled on this motion. The Company and the other defendants moved to compel arbitration and stay proceedings. On May 7, 2001, the presiding judge entered an order denying the request to compel arbitration of the Company and the Individual Defendants. In June 2001, the Court entered orders dismissing two officers, an employee of the Company and PricewaterhouseCoopers LLP from the case. The Company and the remaining defendants appealed the denial of their request for arbitration to the Texas Court of Appeals in Beaumont, but the appeal was denied on June 29, 2001. On July 19, 2001, the Company appealed this decision to the Texas Supreme Court. On August 13, 2001 Plaintiffs filed their response. A copy of the Plaintiff's Original Petition in the Hunter Litigation and the defendants' original answer in that proceeding are filed as exhibits to this Quarterly Report on Form 10-Q. 30 31 Cause No. 31,820-99-2; Charles Fredrick v. Service Corp. International; In the ___________ Judicial District Court of Angelina County, Texas (Fredrick Litigation). This additional securities fraud case has been brought against the Company by a former shareholder of ECI alleging causes of action exclusively under Texas statutory and common law. The Company has filed an answer denying plaintiff's allegations. Since the litigation is in its preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. However, the Company believes that the allegations in the Fredrick Litigation do not provide a basis for the recovery of damages. The Company intends to vigorously defend this litigation. Cause No. 33701-01-01; Jack D. Rottman v. Service Corporation International, et al; In the ___________ Judicial District Court of Angelina County, Texas. On December 28, 2000, Jack Rottman filed a lawsuit against the Company, the Individual Defendants, two other officers, an employee of the Company, and PricewaterhouseCoopers LLP, the Company's independent accountants, in state District Court in Angelina County, Texas (Rottman Litigation). The plaintiff, a former officer of ECI, alleges, among other things, violations of Texas securities law and statutory and common law fraud, and seeks unspecified compensatory and exemplary damages. The Company and the other defendants filed an answer in the Rottman Litigation denying the plaintiff's allegations. The Company and other defendants moved to compel arbitration of this case. The court has not yet ruled on these motions. Since the litigation is in its very preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. However, the Company believes that the allegations in the Rottman Litigation, like those in the Consolidated Lawsuit, do not provide a basis for the recovery of damages because all required disclosures were made on a timely basis. The Company intends to aggressively defend this litigation. A copy of the Plaintiff's Original Petition in the Rottman Litigation and the Defendants' original answer in that proceeding are filed as exhibits to this Quarterly Report on Form 10-Q. Cause No. 2000-63917; Jack T. Hammer v. Service Corporation International, et al; In the 165th Judicial District Court of Harris County, Texas. On December 15, 2000, Jack T. Hammer filed a lawsuit against the Company, the Individual Defendants, two other officers, an employee of the Company, and PricewaterhouseCoopers LLP, the Company's independent accountants, in state District Court in Harris County, Texas (Hammer Litigation). The plaintiff, a former director of ECI, alleges, among other things, violations of Texas securities law and statutory and common law fraud, and seeks unspecified compensatory and exemplary damages. The Company and the other defendants filed an answer in the Hammer Litigation denying the plaintiff's allegations. Since the litigation is in its very preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. However, the Company believes that the allegations in the Hammer Litigation, like those in the Consolidated Lawsuit, do not provide a basis for the recovery of damages because all required disclosures were made on a timely basis. The Company intends to aggressively defend this litigation. The trial court issued an order setting the matter for trial on November 19, 2001. A copy of the Plaintiff's Original Petition in the Hammer Litigation and the Defendants' original answer in that proceeding are filed as exhibits to the Quarterly Report on Form 10-Q. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 10, 2001, the Company held its annual meeting of shareholders and elected three directors. The shares voting on the director nominees were cast as follows:
Abstentions or Nominee Votes for votes withheld - ---------------------------- ---------------- ------------------ B. D. Hunter............... 233,597,454 8,168,402 Victor L. Lund............. 234,437,601 7,328,255 John W. Mecom, Jr.......... 234,384,439 7,381,417
31 32 In addition, the shareholders approved the Company's 2001 Stock Plan for Non-Employee Directors and Director Fee Plan, which plans are described in the Company's proxy statement dated April 13, 2001. The shares voting were cast as follows:
Abstentions or Broker Proposal Votes for Votes against votes withheld non-votes - ------------------------------------------------------ -------------- ---------------- ----------------- ------------ 2001 Stock Plan for Non-Employee Directors.......... 226,328,499 13,585,016 1,852,340 0 Director Fee Plan.................................... 230,248,850 10,559,565 957,441 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 2001 and 2000. 99.1 Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.2 Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.3 Defendants' motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999). 99.6 Plaintiffs' Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P.Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.7 Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999). 99.8 Plaintiff's Original Petition filed December 28, 2000 in Cause No. 33701-01-01, Jack D. Rottman vs. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the __ Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.16 to Form 10-K for the fiscal year ended December 31, 2000). 99.9 Defendants' Motion to Transfer Venue and Original Answer in response to the Original Petition referred to in Exhibit 99.8. (Incorporated by reference to Exhibit 99.17 to Form 10-K for the fiscal year ended December 31, 2000). 99.10 Plaintiff's Original Petition filed December 15, 2000, in Cause No. 2000-63917, Jack T. Hammer v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the 165th Judicial District Court of Harris County, Texas. (Incorporated by reference to Exhibit 99.18 to Form 10-K for the fiscal year ended December 31, 2000). 32 33 99.11 Defendants' Original Answer to the Original Petition referred to in Exhibit 99.10. (Incorporated by reference to Exhibit 99.19 to Form 10-K for the fiscal year ended December 31, 2000). (b) Reports on Form 8-K During the quarter ended June 30, 2001, the Company filed a report on Form 8-K dated June 27, 2001 reporting (i) under "Item 5. Other Events" that, among other things, the Company entered into a Purchase Agreement with underwriters for the public offering of the Company's 6 3/4% Convertible Subordinated Notes due 2008, and (ii) under "Item 7. Financial Statements and Exhibits" certain exhibits related to said public offering. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 14, 2001 SERVICE CORPORATION INTERNATIONAL By: /s/ Jeffrey E. Curtiss --------------------------------- Jeffrey E. Curtiss Senior Vice President Chief Financial Officer (Principal Financial Officer) 33 34 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 2001 and 2000. 99.1 Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.2 Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.3 Defendants' motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999). 99.6 Plaintiffs' Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P.Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.7 Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999). 99.8 Plaintiff's Original Petition filed December 28, 2000 in Cause No. 33701-01-01, Jack D. Rottman vs. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the __ Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.16 to Form 10-K for the fiscal year ended December 31, 2000). 99.9 Defendants' Motion to Transfer Venue and Original Answer in response to the Original Petition referred to in Exhibit 99.8. (Incorporated by reference to Exhibit 99.17 to Form 10-K for the fiscal year ended December 31, 2000). 99.10 Plaintiff's Original Petition filed December 15, 2000, in Cause No. 2000-63917, Jack T. Hammer v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the 165th Judicial District Court of Harris County, Texas. (Incorporated by reference to Exhibit 99.18 to Form 10-K for the fiscal year ended December 31, 2000). 99.11 Defendants' Original Answer to the Original Petition referred to in Exhibit 99.10. (Incorporated by reference to Exhibit 99.19 to Form 10-K for the fiscal year ended December 31, 2000). EX-12.1 3 h89782ex12-1.txt RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 SERVICE CORPORATION INTERNATIONAL RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended June 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (Thousands, except ratio amounts) Pretax income from continuing operations.............................................. $ 8,533 $ 4,344 Undistributed income of less than 50% owned equity investees.......................... (1,705) (1,403) Minority interest in income of majority owned subsidiaries with fixed charges.................................................................. (507) 378 Add fixed charges as adjusted (from below)............................................ 129,495 164,394 ------------- ------------ $ 135,816 $ 167,713 ------------- ------------ Fixed charges: Interest expense: Corporate ................................................................ $ 111,950 $ 139,780 Financial services........................................................... - 6,612 Capitalized ................................................................ - (1) Amortization of debt costs................................................... 3,008 3,334 1/3 of rental expense................................................................. 14,537 14,668 ------------- ------------ Fixed charges ........................................................................ 129,495 164,393 Less: Capitalized interest.......................................................... - 1 ------------- ------------ Fixed charges as adjusted............................................................. $ 129,495 $ 164,394 ============= ============ Ratio (earnings divided by fixed charges)............................................. 1.05 1.02 ============= ============
Excluding restructuring and non-recurring charges, the ratio of earnings to fixed charges would have been 1.44 and 1.10 for the six months ended June 30, 2001 and 2000, respectively. -----END PRIVACY-ENHANCED MESSAGE-----