-----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, HDIW/Q6f5c2DHfgDRep5NDOimzy6hBp56XTNyp4UFXYPzBhtZMP0+cz3BO9lYNEE 1B70FBZQ6ygQE75NFETPOQ== 0000950129-03-001392.txt : 20030317 0000950129-03-001392.hdr.sgml : 20030317 20030317080344 ACCESSION NUMBER: 0000950129-03-001392 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030317 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06402 FILM NUMBER: 03605005 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-K 1 h02718e10vk.txt SERVICE CORPORATION INTERNATIONAL - 12/31/2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K --------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-6402-1 --------------------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in its charter) TEXAS 74-1488375 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1929 ALLEN PARKWAY HOUSTON, TEXAS 77019 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 713/522-5141 --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock ($1 par value) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange 6 3/4% Convertible Subordinated Notes Due 2008 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in the Securities Exchange Act of 1934 Rule 12b-2). Yes [X] No [ ] The aggregate market value of the common stock held by non-affiliates of the registrant (assuming that the registrant's only affiliates are its officers and directors) is $862,198,386 based upon a closing market price of $2.94 on March 10, 2003 of a share of common stock as reported on the New York Stock Exchange -- Composite Transactions Tape. At June 28, 2002, the aggregate market value of the Common Stock held by non-affiliates was $1,399,185,466 based upon a closing market price of $4.83 per share. The number of shares outstanding of the registrant's common stock as of March 10, 2003 was 298,119,717 (net of treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement in connection with its 2003 Annual Meeting of Shareholders (Part III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SERVICE CORPORATION INTERNATIONAL INDEX
PAGE ------ PART I Item 1. Business.................................................... 2-5 Item 2. Properties.................................................. 5-6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matter to Vote of Security Holders............ 6-7 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters......................................... 7-8 Item 6. Selected Financial Data..................................... 8-9 Item 7. Management's Discussion and Analysis of Financial Conditions and Result of Operations.................................... 9-36 Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................................ 36-37 Item 8. Financial Statements and Supplementary Data................. 38-91 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 92 PART III Item 10. Directors and Executive Officers of the Company............. 92 Item 11. Executive Compensation...................................... 92 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 92 Item 13. Certain Relationships and Related Transactions.............. 92-93 Item 14. Controls and Procedures..................................... 93 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 93 Signatures............................................................ 94-95 Certification of Chief Executive Officer.............................. 96 Certification of Principal Financial Officer.......................... 97 Exhibit Index......................................................... 98-101
1 PART I ITEM 1. BUSINESS (DOLLARS IN MILLIONS) Service Corporation International is the largest funeral and cemetery company in the world. The terms SCI or the Company include the registrant and its subsidiaries, unless the context indicates otherwise. As of December 31, 2002, the Company operated 2,393 funeral service locations, 451 cemeteries and 189 crematoria located in eight countries. The Company also has minority interest investments in funeral and cemetery operations in certain countries outside of North America. As of December 31, 2002, the Company's North America operations represented approximately 77% of the Company's consolidated revenues, 84% of consolidated gross profits and 62% of the Company's total operating locations. The Company's operations consist of funeral service locations, cemeteries, crematoria and related businesses. The Company's funeral service locations provide all professional services related to funerals, including the use of funeral facilities and motor vehicles. Funeral service locations sell caskets, coffins, burial vaults, cremation receptacles, flowers, burial garments and other ancillary products and services. The Company's cemeteries sell interment rights associated with cemetery property (including mausoleum spaces, lots and lawn crypts) and cemetery merchandise (including stone and bronze memorials, burial vaults, caskets and cremation memorialization products). The Company's cemeteries also perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries operate crematoria and certain cemeteries contain gardens specifically for the purpose of cremation memorialization. The Company owns 190 funeral service/cemetery combination locations and 37 flower shops engaged principally in the design and sale of funeral floral arrangements. With the aging of the population in North America, the Company believes the death care industry possesses attractive characteristics, and the Company is uniquely positioned, with its unparalleled network of funeral service locations and cemeteries, to benefit from these demographic trends. The Company was incorporated in Texas in July of 1962. The Company's principal corporate offices are located at 1929 Allen Parkway, Houston, Texas 77019 and its telephone number is (713) 522-5141. The Company's website is http:/www.sci-corp.com. The Company makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on the Company's website is not part of this report. FUNERAL AND CEMETERY OPERATIONS GENERAL The funeral and cemetery operations consist of the Company's funeral service locations, cemeteries, crematoria and related businesses. As of December 31, 2002, the Company's operations are organized into a North America division covering the United States and Canada, a European division primarily responsible for the Company's French operations and an Other Foreign division relating to operations managed in the Pacific Rim and South America. Each division is under the direction of divisional executive management with substantial industry experience. Local funeral service location and cemetery managers, under the direction of the divisional management, receive support and resources from the Company's headquarters in Houston, Texas and have substantial autonomy with respect to the manner in which services are conducted. The Company's operations in its North America division are segregated into Eastern and Western operations. The Eastern and Western operations in North America are managed by separate operational and financial management teams. Within these Eastern and Western operations in North America, the majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. These clusters are geographical groups of funeral service locations and cemeteries that can share common resources such as operating personnel, preparation services, clerical and accounting staff, limousines, hearses and preneed sales activity. 2 The death care industry in North America is characterized by a large number of locally owned, independent operations. To compete successfully, the Company's funeral service locations and cemeteries must maintain good reputations and high professional standards in the industry, as well as offer attractive products and services at competitive prices. The Company believes it has an unparalleled network of funeral service locations and cemeteries that offer high quality products and services at prices that are competitive with local competing funeral homes, cemeteries and retail locations. The Company has multiple funeral service locations and cemeteries in a number of metropolitan areas. Within individual metropolitan areas, the funeral service locations and cemeteries operate under various names because most operations were acquired as existing businesses. Some of the Company's funeral service locations in its international operations operate under certain brand names specific for a general area or country. The Company has branded its funeral operations in North America under the Dignity Memorial(R) brand name. A national brand name is new and unique to the death care industry in North America. While this branding process is intended to emphasize the Company's seamless national network of funeral service locations and cemeteries in North America, the original names associated with acquired operations with their inherent goodwill and heritage will generally remain the same. In the death care industry, there has been a growing trend in the number of cremations performed in North America as an alternative to traditional funeral service dispositions. The west coast of the United States and the State of Florida have the highest concentration of cremation consumers in North America. While cremations performed by the Company in North America typically have higher gross profit margins than traditional funeral services, cremations usually result in lower revenue and gross profit dollars to the Company than traditional funeral services. In North America during 2002, 38.2% of all funeral services performed by the Company were cremation cases, compared to 37.0% performed in 2001. The Company has expanded its cremation memorialization products and services in several North American markets, which has resulted in higher average sales for cremation cases compared to historical levels. The Company also continues to expand its nationally branded cremation service locations called National Cremation(R) Service (NCS). NCS currently operates in fourteen high cremation states and has plans to expand to eighteen states by the end of 2003. The Company believes that the NCS consumer would not have chosen traditional funeral service locations as an alternative to NCS, and therefore is considered an incremental customer to the Company. Since its inception in the 1960's, the Company had been focused on the acquisition and consolidation of independent funeral homes and cemeteries in the very fragmented death care industry. During the 1990's, the Company also expanded its operations through acquisitions in Europe, Australia, South America and the Pacific Rim. In 1999, the Company, as well as other consolidators in the death care industry, significantly reduced the level of acquisition activity and focused on identifying and addressing underperforming businesses. This focus resulted in the Company divesting of several North American and international operations. During 2002 and 2001, the Company completed joint ventures of its operations in Australia, United Kingdom, Spain and Portugal; and divested of its operations in the Netherlands, Norway, Italy and Belgium. The Company has also implemented plans to sell certain funeral service locations and cemeteries in North America as going concerns or as real estate. The Company is currently in discussions with various third parties concerning the joint venturing of its remaining international operations and intends to operate a core business of high quality funeral service locations and cemeteries in North America. FUNERAL SERVICE LOCATIONS The Company's 2,393 funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral service locations sell caskets, coffins, burial vaults, cremation receptacles, flowers, burial garments, and other ancillary products and services. The Company's funeral service locations generally experience a greater demand for their services in the winter months primarily related to higher incidents of deaths from pneumonia and influenza. In addition to selling its products and services to client families at the time of need, the Company also sells prearranged funeral services in most of its service markets. Funeral prearrangement is a means through which a customer contractually agrees to the terms of a funeral to be performed in the future. All or a portion 3 of the funds collected from prearranged funeral contracts are placed in trust accounts, pursuant to applicable law, or are used to pay premiums on life insurance policies from third party insurers. In certain situations pursuant to applicable laws, the Company will post a surety bond as financial assurance for a certain amount of the preneed funeral contract in lieu of placing certain funds in trust accounts. See the Financial Assurances section included in Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K for further details on the Company's practice of posting such surety bonds. At December 31, 2002, the Company's Deferred prearranged funeral contract revenues amounted to approximately $4.7 billion. For additional information regarding prearranged funeral activities, see the Prearranged Funeral and Cemetery Activities section in Financial Condition, Liquidity and Capital Resources in Item 7 and notes two, three and four to the consolidated financial statements in Item 8 of this Form 10-K. CEMETERIES The Company's cemeteries sell interment rights associated with cemetery property such as mausoleum spaces, lots and lawn crypts, and sells cemetery merchandise such as stone and bronze memorials, burial vaults, caskets and cremation memorialization products. The Company's cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries operate crematoria and certain cemeteries contain gardens specifically for the purpose of cremation memorialization. Cemetery sales are often made on a preneed basis pursuant to installment contracts providing for monthly payments. A portion of the proceeds from cemetery contracts is generally required by law to be paid into perpetual care trust funds. Earnings from perpetual care trust funds are used to defray the maintenance costs of cemeteries. Additionally, all or a portion of the proceeds from the sale of preneed cemetery merchandise and services may be required by law to be paid into merchandise and services trusts until the merchandise is delivered or the service is provided. In certain situations pursuant to applicable laws, the Company will post a surety bond as financial assurance for a certain amount of the preneed cemetery contract in lieu of placing certain funds into trust accounts. See the Financial Assurances section included in Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K for further details on the Company's practice of posting such surety bonds. At December 31, 2002, the Company's Deferred preneed cemetery contract revenue amounted to approximately $1.7 billion. For additional information regarding cemetery preneed activities, see the Prearranged Funeral and Cemetery Activities section in Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K and notes two, three and five to the consolidated financial statements in Item 8 of this Form 10-K. COMBINED FUNERAL SERVICE LOCATIONS AND CEMETERIES The Company currently owns 190 funeral service/cemetery combination locations in North America in which a funeral service location is physically located within or adjoining a Company cemetery. Combination locations allow certain facility, personnel and equipment costs to be shared between the funeral service location and cemetery and typically have a higher gross margin than if the funeral and cemetery operations were operated separately. Combination locations also create synergies between funeral and cemetery sales force personnel and give consumers added convenience to purchase both funeral and cemetery products and services at a single location. DISCONTINUED OPERATIONS The Company formerly owned two insurance companies: a French life insurance company (Auxia) and a U.S. life insurance company (American Memorial Life Insurance Company or AMLIC). These insurance operations assisted in the funding of prearranged funeral contracts sold by Company-owned or affiliated funeral service locations. During 2000, the Company completed the sales of both insurance companies. Accordingly, the consolidated financial statements in this Form 10-K have been reclassified to reflect these operations as discontinued. Operating results from Auxia have been included through August 31, 2000 and the operating results from AMLIC have been included through September 30, 2000, the disposition dates of the respective companies. See note seventeen to the consolidated financial statements in Item 8 of this Form 10-K. 4 EMPLOYEES At December 31, 2002, the Company employed 21,088 (13,427 in the United States) individuals on a full time basis and 7,836 (6,678 in the United States) individuals on a part time basis. Of the full time employees, 20,452 were in the funeral and cemetery operations and 636 were in corporate or other overhead activities and services. All of the Company's eligible United States employees who so elect are covered by the Company's group health and life insurance plans. Eligible United States employees are participants in retirement plans of the Company or various subsidiaries, while foreign employees are covered by other Company defined or government mandated benefit plans. Although labor disputes are experienced from time to time, relations with employees are generally considered favorable. REGULATION The Company's operations are subject to regulations, supervision and licensing under various U.S. federal, state, local and foreign statutes, ordinances and regulations. The Company believes that it is in substantial compliance with the significant provisions of such statutes, ordinances and regulations. Since 1984, the Company has operated in the United States under the Federal Trade Commission (FTC) comprehensive trade regulation rule for the funeral industry. The rule contains requirements for funeral industry practices, including extensive price and other affirmative disclosures and imposes mandatory itemization of funeral goods and services. From time to time in connection with the Company's former strategy of growth through acquisitions, the Company entered into consent orders with the FTC that required the Company to dispose of certain operations in order to proceed with such acquisitions, or limited the Company's ability to make acquisitions in specified areas. The trade regulation rule and the various consent orders have not had a material adverse effect on the Company's operations. The French funeral services industry has undergone significant regulatory change in recent years. Historically, the French funeral services industry had been controlled, as provided by national legislation, either (i) directly by municipalities through municipality-operated funeral establishments (Municipal Monopoly), or (ii) indirectly by the remaining municipalities that have contracted for funeral service activities with third party providers, such as the Company's French funeral operations (Exclusive Municipal Authority). Legislation was passed that has generally ended municipal control of the French funeral service business and has allowed free competition among funeral service providers. Under such legislation, the Exclusive Municipal Authority was abolished in January 1996, and the Municipal Monopoly was eliminated in January 1998. Cemeteries in France are currently controlled by municipalities and religious organizations. The Company sells cemetery merchandise such as markers and monuments to consumers for use in these cemeteries. ITEM 2. PROPERTIES (DOLLARS IN MILLIONS) The Company's executive headquarters are located at 1929 Allen Parkway, Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary of the Company owns an undivided one-half interest in the building and parking garage. The other undivided one-half interest is owned by an unrelated third party. The Company plans to acquire the building at the end of the lease in July 2005 for $2 million. The property consists of approximately 127,000 square feet of office space and 185,000 square feet of parking space. The Company leases all of the office space in the building for $59 thousand per month. The Company pays all operating expenses. One half of the rent is paid to the wholly owned subsidiary and the other half is paid to the owners of the remaining undivided one-half interest. The Company owns and utilizes two additional buildings located in Houston, Texas for corporate activities containing a total of approximately 167,000 square feet of office space. At December 31, 2002, the Company owned approximately 63% of the real estate and buildings used by its 3,033 funeral service locations, cemeteries and crematoria, and 37% of such facilities are leased. In addition, the Company leased two aircraft pursuant to cancelable operating leases. At December 31, 2002, the Company operated 10,331 vehicles, of which 43% were owned and 57% were leased. For additional 5 information regarding leases, see the Contractual, Commercial and Contingent Commitments section in Financial Condition, Liquidity and Capital Resources in Item 7 and note ten to the consolidated financial statements in Item 8 of this Form 10-K. At December 31, 2002, the Company's 451 cemeteries contained a total of approximately 30,763 acres, of which approximately 55% was developed. The specialized nature of the Company's businesses requires that its facilities be well-maintained and kept in good condition and management of the Company believes that these standards are met. ITEM 3. LEGAL PROCEEDINGS Information regarding legal proceedings is set forth in note ten to the consolidated financial statements in Item 8 of this Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE COMPANY Pursuant to General Instruction G to Form 10-K, the information regarding executive officers of the Company called for by Item 401 of Regulation S-K is hereby included in Part I of this report. The following table sets forth as of March 14, 2003 the name and age of each executive officer of the Company, the office held, and the date first elected an officer.
YEAR FIRST BECAME OFFICER NAME AGE POSITION OFFICER(1) - ------------ --- -------- ---------- R. L. Waltrip............................. 72 Chairman of the Board and Chief 1962 Executive Officer B. D. Hunter.............................. 73 Vice Chairman of the Board 1986 Thomas L. Ryan............................ 37 President and Chief Operating 1999 Officer Michael R. Webb........................... 44 Executive Vice President 1998 Jeffrey E. Curtiss........................ 54 Senior Vice President Chief 2000 Financial Officer and Treasurer Stephen M. Mack........................... 51 Senior Vice President Eastern 1998 Operations James M. Shelger.......................... 53 Senior Vice President General 1987 Counsel and Secretary J. Daniel Garrison........................ 51 Vice President Operations 1998 Services W. Cardon Gerner.......................... 48 Vice President Accounting 1999 Frank T. Hundley.......................... 43 Vice President Finance 2000 Eric D. Tanzberger........................ 34 Vice President and Corporate 2000 Controller Stephen J. Uthoff......................... 51 Vice President Chief Information 2000 Officer Sumner J. Waring, III..................... 34 Vice President Western Operations 2002
- --------------- (1) Indicates the year a person was first elected as an officer although there were subsequent periods when certain persons ceased being officers of the Company. 6 Unless otherwise indicated below, the persons listed above have been executive officers or employees for more than five years. Mr. Hunter was appointed Vice Chairman of the Board in January 2000. For more than five years, prior to February 2002, Mr. Hunter had been the Chairman of Huntco, Inc., an intermediate steel processor, and was also its Chief Executive Officer prior to May 2000. In February 2002, Huntco, Inc., filed a petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code during a severe downturn in the steel industry. Mr. Hunter has been a director of the Company since 1986 and also served as Vice Chairman of the Board of the Company from September 1986 to May 1989. Mr. Curtiss joined the Company as Senior Vice President and Chief Financial Officer in January 2000. In August 2002, Mr. Curtiss' responsibilities changed to include the responsibilities of Treasurer of the Company. From January 1992 until July 1999, Mr. Curtiss served as Senior Vice President and Chief Financial Officer of Browning-Ferris Industries, Inc., a waste services company. Mr. Gerner joined the Company in January 1999 in connection with the acquisition of Equity Corporation International (ECI) and in March 1999 was promoted to Vice President Corporate Controller. In August 2002, Mr. Gerner's responsibilities and position changed to Vice President Accounting. Before the acquisition, Mr. Gerner had been Senior Vice President and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner was a partner with Ernst & Young LLP. Mr. Hundley joined the Company as Vice President Treasurer in March 2000. In August 2002, Mr. Hundley's responsibilities and position changed to Vice President Finance. Prior thereto, Mr. Hundley served for more than five years in various capacities at Banc of America Securities, LLC, its predecessors and affiliates, including as Managing Director. Mr. Uthoff joined the Company as Vice President Chief Information Officer in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice President -- Planning & Analysis of Browning-Ferris Industries, Inc., a waste services company. Each officer of the Company is elected by the Board of Directors and holds his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner prescribed in the Bylaws of the Company. Each officer of a subsidiary of the Company is elected by the subsidiary's board of directors and holds his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner prescribed in the bylaws of the subsidiary. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been traded on the New York Stock Exchange since May 14, 1974. On December 31, 2002, there were 6,984 holders of record of the Company's common stock. In October 1999, the Company suspended payment of regular quarterly cash dividends on its outstanding common stock in order to focus on improving cash flow and reducing existing debt. Under the Company's bank credit agreement, the Company is restricted from paying dividends and making other distributions. The table below shows the Company's quarterly high and low common stock prices for the two years ended December 31, 2002:
2002 2001 ------------- ------------- HIGH LOW HIGH LOW ----- ----- ----- ----- First quarter.......................................... $5.50 $4.55 $4.75 $1.56 Second quarter......................................... 5.15 3.60 7.23 4.22 Third quarter.......................................... 4.64 2.25 7.90 5.82 Fourth quarter......................................... 3.71 2.42 6.45 4.64
7 SRV is the New York Stock Exchange ticker symbol for the common stock of the Company. Options in the Company's common stock are traded on the Philadelphia Stock Exchange under the symbol SRV. On May 9, 2002, the Company issued 10,000 shares of common stock to each of ten non-employee directors pursuant to the 2001 Stock Plan for Non-Employee Directors. On May 10, 2002, the Company issued 5,012 shares of common stock to each of nine directors and, pursuant to deferrals, became obligated to issue 5,012 to each of three directors in the future pursuant to the Director Fee Plan. The Company did not receive any monetary consideration for the issuances. These issuances were unregistered because they did not constitute a "sale" within the meaning of Section 2(3) of the Securities Act of 1933, as amended. For equity compensation plan information, see Part III of this report on pages 92 and 93. ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) The following selected consolidated financial data for the years December 31, 1998 through 2002 is derived from the Company's audited consolidated financial statements. This data should be read in conjunction with the Company's consolidated financial statements and accompanying notes to the consolidated financial statements included in Item 8 of this Form 10-K. In 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses accounting for goodwill and other intangible assets and redefines useful lives, amortization periods and impairment of goodwill. Under the new pronouncement, goodwill is no longer amortized, but is tested for impairment annually by assessing the fair value of reporting units, generally one level below reportable segments. As a result of the adoption of SFAS No. 142, the Company recognized a non-cash charge reflected as a cumulative effect of accounting change of $135.6 million, net of applicable taxes, related to the impairment of goodwill in its North American cemetery reporting unit. In 2000, the Company implemented Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). See note three to the consolidated financial statements in Item 8 of this Form 10-K for more details on the implementation of SAB No. 101. As a result of this implementation, the Company changed certain of its accounting policies regarding prearranged sales activities. The Company recorded a non-cash charge reflected as a cumulative affect of accounting change of $909.3 million, net of applicable taxes, as of January 1, 2000. The selected consolidated statement of operations data presented below is reported on a pro forma basis to reflect the application of SFAS No. 142 and SAB No. 101 to the financial data for the four years ended December 31, 2001 and the two years ended December 31, 1999, respectively. Further, results of operations have been reclassified for all periods presented to separately reflect results of discontinued operations. See note seventeen to the consolidated financial statements of Item 8 of this Form 10-K for further discussion of discontinued operations. 8 SELECTED CONSOLIDATED FINANCIAL DATA
PRO FORMA AS REPORTED --------------------------------------------- 2002 2001 2000 1999 1998 ----------- --------- --------- --------- --------- SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue from continuing operations...................... $ 2,272.4 $ 2,510.3 $ 2,564.7 $ 2,745.1 $ 2,354.8 (Loss) income from continuing operations before extraordinary items and cumulative effects of accounting changes.............. $ (101.2) $ (549.2) $ (372.7) $ (157.2) $ 183.8 Net (loss) income.................. (231.9) (550.3) (1,289.9) (137.7) 194.9 Earnings per share: (Loss) income from continuing operations before extraordinary items and cumulative effects of accounting changes Basic........................... $ (.34) $ (1.92) $ (1.37) $ (.58) $ .72 Diluted......................... (.34) (1.92) (1.37) (.58) .70 Net (loss) income Basic........................... $ (.79) $ (1.93) $ (4.74) $ (.51) $ .76 Diluted......................... (.79) (1.93) (4.74) (.51) .75 Cash dividends per share........... -- -- -- .27 .36 SELECTED CONSOLIDATED BALANCE SHEET DATA (AS REPORTED): Total assets....................... $10,723.8 $11,579.9 $12,875.3 $12,978.2 $11,729.8 Long-term debt, less current maturities...................... 1,884.5 2,314.0 3,091.3 3,636.1 3,764.6 Stockholders' equity............... 1,303.8 1,432.9 1,975.8 3,495.3 3,154.1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA) INTRODUCTION The Company is the largest provider of funeral and cemetery services in the world. As of December 31, 2002, the Company operated 2,393 funeral service locations, 451 cemeteries and 189 crematoria located in eight countries. The Company also has minority interest investments in funeral and cemetery operations in certain countries outside of North America. As of December 31, 2002, the Company's North America operations represented approximately 77% of the Company's consolidated revenues, 84% of consolidated gross profits and 62% of the Company's total operating locations. The Company's funeral and cemetery operations are organized into a North America division covering the United States and Canada, a European division primarily responsible for the Company's French operations and an Other Foreign division relating to operations in the Pacific Rim and South America. The Company's operations in its North America division are segregated into Eastern and Western operations. The Eastern and Western operations in North America are managed by separate operational and financial management teams. Within these Eastern and Western operations in North America, the majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. These clusters are geographical groups of funeral service locations and cemeteries that can share common resources such as operating personnel, preparation services, clerical and accounting staff, limousines, hearses and preneed sales activity. 9 STRATEGIC INITIATIVES Historically, the Company's growth was largely attributable to acquiring funeral and cemetery businesses. This acquisition program created the world's largest network of funeral service locations and cemeteries. During the mid-1990s, the funeral and cemetery acquisition market became extremely competitive resulting in increased acquisition prices and substantially reduced returns on invested capital. In early 1999, the Company announced plans to significantly reduce the level of its acquisition activity and pursue growth from its existing operations. As a result, the Company's strategic plan became focused on reducing overhead costs, increasing cash flow and reducing debt, while at the same time developing key revenue initiatives designed to drive future growth in the Company's funeral and cemetery operations without the significant outlay of capital. At the end of 2002, the Company's capital structure and cash flows were dramatically improved compared to 1999 levels. At December 31, 2002, net debt was $1.78 billion and recurring operating free cash flow was $210 million during 2002. These results, related to net debt and recurring operating free cash flow, were better than guidance ranges previously communicated by the Company. Net debt is defined as total debt less cash and cash equivalents and recurring operating free cash flow is defined in Financial Condition, Liquidity and Capital Resources within Item 7 of this Form 10-K. The Company's operational goals during 2003 are to establish new avenues to grow its existing base of funeral and cemetery revenues while diligently managing its cash expenses. The Company will also examine during 2003 other opportunities to grow its North America funeral and cemetery operations primarily using its strong cash flows from operations. These potential growth opportunities could include acquisitions of high-quality funeral service locations and cemeteries in large or strategic North America markets, additional construction of funeral service locations on Company-owned cemeteries and the construction of high-end cemetery property development projects. The Company's financial objectives in 2003 focus on continued stabilization of the Company's capital structure by generating strong cash flows, completing asset divestitures and further debt reduction. A goal of the Company is to obtain a stable "BB" credit rating from Standard & Poor's and a stable "Ba2" credit rating from Moody's, with general access to the capital markets. The death care industry in North America is facing several challenges that need to be mitigated in order for the Company to grow its core funeral and cemetery revenues. Such challenges in North America include an increasing trend towards cremation, a lack of near-term projected growth in the number of deaths, pricing competition and the ability to attract and retain high quality individuals to the industry. Additionally, the Company's expectations of valuations related to potential acquisitions of high-quality funeral service locations and cemeteries in North America may be below current seller's expectations. In order to grow its existing base of funeral and cemetery revenues in North America and report near-term improvement in these operations, the Company believes it must be successful in executing certain tactical initiatives. The Company believes the following tactical initiatives will solidify the foundational base and create a cultural environment on which to build and grow these operations in the near-term. - Increasing the impact of the Company's Dignity Memorial(R) branded funeral and cremation packages. - Redesigning the Company's sales processes and organization. - Improving the Company's business and financial processes. - Developing the appropriate organizational structure in order to promote better teamwork, accountability and execution. - Developing other initiatives including the implementation of local market action plans. In addition to the Company's national brand name for its operations in North America, Dignity Memorial(R) also represents a unique set of packaged funeral and cremation plans offered exclusively for the Company's network. The Dignity Memorial(R) funeral and cremation packages are designed to simplify customer decision-making and include new products and services, which have traditionally not been available through funeral service locations. The Company's goal is to continue to increase in 2003 the customer selection rate of the Dignity Memorial(R) packaged plans, which on average have a $2,000 higher average revenue per funeral service compared to non-Dignity Memorial(R) sales. 10 The Company has recently implemented significant changes to the organizational structure, processes and quality of its sales efforts. These changes are expected to reduce costs and improve cash flows in 2003 in the Company's North America funeral and cemetery operations. Examples of these changes to the Company's sales processes and organization include eliminating ineffective lead procurement programs and shifting to personal referrals, restructuring and aligning compensation and incentive programs, reducing sales management positions and reducing turnover and other unproductive sales activities. The Company is currently in the process of improving business and financial processes and systems that support its North America funeral and cemetery operations. These changes are designed to ultimately reduce the Company's costs supporting the core funeral and cemetery operations. Examples of these business and financial processes and system improvements include the implementation of a new point of sale system at the individual funeral home or cemetery level, outsourcing certain accounting functions, redesigning reporting systems and focusing remaining support services to be aligned with the field operational objectives. The Company is also currently in the process of streamlining its organizational structure and focusing its near-term training programs on leadership and development of key field management. These changes are designed to foster an environment with the management of its funeral and cemetery operations in North America that promotes teamwork, accountability and execution of the Company's strategic initiatives. Other initiatives the Company is developing include the implementation of local market action plans designed to grow funeral and cemetery revenues and aligning all compensation programs within the Company with clear and definable goals. In addition to the Company's tactical initiatives to improve its North America funeral and cemetery operations in the near-term, the Company is currently developing its long-term strategic plan with an emphasis on three concepts that will be addressed and developed to create a strategic framework for future growth in shareholder value. - Growing core funeral and cemetery profits by attracting new business to existing locations. - Expansion in large or strategic markets in North America. - Investing in the Company's human capital. The Company believes it must attract new customers and business in order to grow core funeral and cemetery profits over the long-term. Actions by the Company to attract new customers over the long-term include developing a more contemporary marketing model that incorporates market segmentation such as targeting traditional versus cremation consumers, leveraging and developing the power of the Company's Dignity Memorial(R) national brand in North America and continuing to develop affinity relationships with organizations containing large groups of individuals to whom the Company could exclusively market its products and services. The Company's long-term strategic plan being developed will also address Company plans to expand its funeral and cemetery network in large or strategic markets in North America. The Company will address in this plan the criteria for such expansion, including future capital deployment through acquisition, construction or franchising of funeral and cemetery operations. The Company also believes it must invest in its human capital and resources. Attracting, hiring, developing and retaining high quality management and employees will be a key long-term objective of the Company as it develops this long-term strategic plan. OUTLOOK FOR 2003 The Company's outlook for 2003 projects strong cash flows and further improvements in its capital structure compared to 2002. As disclosed earlier in this section, the Company's operational goals during 2003 are to establish new avenues to grow its existing base of funeral and cemetery revenues while diligently managing its cash expenses. The Company will also examine during 2003 other opportunities to grow its North America funeral and cemetery operations primarily using its strong cash flows from operations. These potential growth opportunities could include acquisitions of high-quality funeral service locations and 11 cemeteries in large or strategic North America markets, additional construction of funeral service locations on Company-owned cemeteries and the construction of high-end cemetery property development projects. The Company intends to operate a core business of high-quality funeral service locations and cemeteries in North America. Due to the uncertain timing of the Company's expectation to joint venture its French operations during 2003, the Company's 2003 outlook includes its French operating results for the full year of 2003. If the Company executes such a transaction during 2003, the Company's 2003 outlook would be affected accordingly. The Company's French operations are projected to have gross profits of approximately $55-$65 million, cash flows from operating activities of approximately $40-$50 million and capital expenditures of approximately $15-$20 million. Due to the uncertainty surrounding the possibility or timing of certain events during 2003, the Company's 2003 outlook does not contain earnings per share guidance calculated in accordance with accounting principles generally accepted in the United States of America (GAAP). Events which the Company believes could possibly occur during 2003 and could have an effect on the Company's 2003 earnings per share include, among others, the following: - The possibility of the completion of a joint venture transaction with the Company's French operations. - The possibility of gains or losses related to the Company disposing of funeral homes, cemeteries or undeveloped cemetery property associated with previously announced asset disposition programs or in the normal course of its business. - The possibility of gains or losses from early extinguishments of debt. - The possibility of the recognition of a cumulative effect of an accounting change from the adoption of newly required accounting pronouncements. - The possibility of the recognition of costs associated with settlements of litigation to which the Company is currently a party. The Company's outlook for 2003 contains only operating and liquidity measures that are calculated in accordance with GAAP. The Company's results to be reported publicly in the future will primarily contain financial results that are GAAP figures. The Company will continue to report results from comparable or "same store" North America funeral and cemetery operations. 2003 FULL YEAR FORECASTED GAAP MEASURES
2003 FULL YEAR FORECAST ----------------------- Operating Measures North America Comparable (or "Same Store") Operations: Funeral Revenues.......................................... $1,090-$1,150 Cemetery Revenues......................................... $500-$550 Funeral Gross Margin Percentage........................... 18%-22% Cemetery Gross Margin Percentage.......................... 9%-13% International Operations: Revenues.................................................. $500-$550 Gross Margin Percentage................................... 10%-14% General and Administrative Expenses......................... $75-$85 Interest Expense............................................ $140-$155 Other Income................................................ $10-$20 Consolidated Effective Tax Rate............................. 36%-38% Liquidity Measures Depreciation and Amortization............................... $145-$165 Cash Flows From Operating Activities........................ $350-$400 Capital Expenditures........................................ $110-$130
12 The following qualitative commentary describes the Company's assumptions, estimates and beliefs supporting its 2003 outlook. Operating Measures - The Company's 2003 outlook for North America comparable funeral revenues assumes an equivalent amount to slightly fewer funeral services performed offset by projected low single digit percentage increases in the average revenue per funeral service compared to 2002 levels. The North America comparable funeral gross margin percentage should be positively impacted in 2003 by reductions in costs related to changes in the Company's sales structure and processes. This positive impact will be somewhat offset by increased personnel (including pension) and insurance costs. - The Company's 2003 outlook for North America comparable cemetery revenues is projected to be below 2002 levels resulting from more normalized levels of completion of cemetery property development projects in 2003 compared to 2002 as well as from projected reductions in revenues resulting from changes in the Company's sales structure and processes. The North America comparable cemetery gross margin percentage should be flat to slightly down in 2003 as a result of the lower projected cemetery revenues as well as from higher expected cemetery maintenance costs. These negative impacts should be partially offset by cash savings resulting from the changes in the Company's sales structure and processes described earlier. - Revenues and the gross margin percentage from international operations are expected to be flat to above 2002 levels primarily related to a projected improvement in operating performance in 2003 from the Company's French operations. In addition to projected operating improvement, the Company's French operations will not incur depreciation expense in 2003 in anticipation of the completion of the joint venture of such operations in 2003. Approximately $8.9 million of depreciation expense was recognized in 2002 related to the Company's French operations. Significant movements in foreign currency, particularly the Euro, could affect these projected results from the Company's international operations. - General and administrative expenses in 2003 are projected to be below 2002 levels. This projection includes approximately $4 million of new expenses anticipated in 2003 resulting from the Company's decision to utilize a new long-term incentive compensation program, which will recognize expenses currently as compared to the utilization of stock options in previous periods. As in 2002, the Company will incur in 2003 approximately $13.5 million of accelerated non-cash amortization expense related to existing capitalized system costs as a result of the Company's decision to implement new information systems. - Interest expense is projected to be lower in 2003 compared to 2002 levels as the Company believes it will continue to reduce its debt levels. - Other income in 2003 is projected to primarily consist of interest income and income from the Company's cash override agreement with a third party insurance company that funds prearranged funeral contracts for consumers. - The Company's consolidated effective tax rate is projected to increase to approximately 37% in 2003 primarily related to the utilization in previous years of the Company's net operating loss carry-forwards related to its French operations. Liquidity Measures - As stated above, the Company's 2003 outlook for depreciation and amortization assumes no depreciation expense related to the Company's French operations in anticipation by the Company of the completion of the joint venture of such operations in 2003. Approximately $8.9 million of depreciation expense was recognized in 2002 related to the Company's French operations. Amortization expense of approximately $40 million is included in the Company's 2003 outlook related to preneed cemetery deferred selling costs in North America. 13 - Cash flows from operating activities in 2003 is expected to be above 2002 levels. Approximately $85-$95 million of net non-recurring sources of cash flows, primarily related to a $92 million cash tax refund received in February 2003, is projected to be included in cash flows from operating activities during 2003. In 2002, the Company had net non-recurring sources of cash flows of $82.1 million included in cash flows from operating activities. The Company also does not expect to pay U.S. federal income taxes for the next several years due to tax loss carry-forwards. - Capital expenditures are projected to be slightly higher in 2003 as the Company expects to invest more growth capital into projects that are expected to increase future revenues. Of the Company's total projected capital expenditures in 2003 of $110-$130 million, the Company expects to spend approximately $75-$85 million in capital expenditures deemed reasonably necessary to maintain the Company's funeral homes, cemeteries, crematoria and other facilities in a condition consistent with Company standards. CRITICAL ACCOUNTING POLICIES AND ACCOUNTING CHANGES The Company's consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. The following is a discussion of the Company's critical accounting policies pertaining to revenue recognition, the impairment or disposal of long-lived assets, and the use of estimates. REVENUE RECOGNITION Funeral revenue is recognized when funeral services are performed. The Company's trade receivables primarily consist of amounts due for funeral services already performed. The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Revenues associated with sales of prearranged funeral contracts, which include accumulated trust earnings and increasing insurance benefits, are deferred until such time that the funeral services are performed (see note four to the consolidated financial statements in Item 8 of this Form 10-K). Sales of atneed cemetery interment rights, merchandise and services are recognized when the service is performed or merchandise delivered. Preneed cemetery interment sales of constructed cemetery burial property are not recognized until a minimum of 10% of the sales price has been collected. Once 10% of the sales price is collected, all of the constructed interment sale revenue is recognized. Revenues related to the preneed sale of unconstructed cemetery burial property is deferred until such property is constructed and the minimum percentage of the sales price has been collected. Currently, the Company defers certain direct selling costs, primarily commissions and fringe benefits, associated with preneed cemetery sales and then expenses those costs as the associated revenue is recognized. (See notes three and five to the consolidated financial statements in Item 8 of this Form 10-K.) Costs related to the sales of interment rights are the accumulation of property costs and development costs specifically identified by project. At the completion of the project, costs are charged to operations as revenue is recognized. Costs related to sales of merchandise and services are based on actual costs incurred. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets to be held and used be reported at the lower of their carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of their carrying amount or fair value less estimated cost to sell. In 2002, the Company ceased depreciation of operating assets held for sale during the year. During the year, the Company determined transactions to sell or joint venture certain assets would be delayed until after 14 2002. As a result, the Company resumed normal depreciation of those assets held in France and Chile in the third quarter of 2002. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the carrying values of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the period. Actual results could differ from such estimates. Key estimates used by management, among others, include: Allowance for doubtful accounts -- The Company estimates its allowance for doubtful accounts based on analysis of historical collection activity. These estimates could be impacted by changes in the economy, among other things. Depreciation of long-lived assets -- The Company depreciates its long-lived assets over their estimated useful lives. These estimates of useful lives may be affected by such factors as changing market conditions or changes in regulatory requirements. In 2002, the Company changed the estimated useful life of its existing information technology systems as a result of the decision to implement a new North America point of sale system and an upgraded general ledger system. The Company recognized approximately $13.5 million of additional amortization expense relate to this change in estimate. Amortization of deferred selling costs -- The Company changed the amortization period of its deferred prearranged funeral selling costs from 20 years to 12 years, a period representing the estimated life of the prearranged funeral contracts. The change in estimate was made in order to more accurately reflect current trends regarding the timeframe from when a prearranged contract is sold to when it is serviced atneed. This change in estimate reduced funeral gross profit by approximately $6.7 million. In future years, this estimate could be further impacted by changes in mortality rates and changes in the demographics of the Company's customers. Taxes -- The Company's ability to realize the benefit of its deferred tax assets requires the Company to achieve certain future earnings levels. The Company has established a valuation allowance against a portion of its deferred tax assets and could be required to further adjust that valuation allowance if market conditions change materially and future earnings are, or are projected to be, significantly different from its current estimates. The Company intends to permanently reinvest the unremitted earnings of certain of its foreign subsidiaries in those businesses outside the United States and, therefore, has not provided for deferred federal income taxes on such unremitted foreign earnings. Preneed cemetery revenues -- The Company recognizes revenues associated with preneed cemetery merchandise and services upon evidence of delivery of such merchandise and services. The Company has an ongoing review program of its obligations for delivery of cemetery merchandise and services. Included in the Company's backlog of preneed cemetery contract revenues of approximately $1.7 billion are estimates made by management related to the status of delivery of cemetery merchandise and services. Any changes in these estimates in future periods and resulting revenue recognition of these obligations will vary and depend upon the outcome of such continuous obligation reviews. Pension cost -- The Company's pension costs and liabilities are actuarily determined based on certain assumptions including expected long-term rates of return on plan assets and the discount rate used to compute future benefit obligations. The Company's policy is to use a discount rate comparable to rates of return on high-quality fixed income investments available and expected to be available during the period to maturity of the Company's pension benefits. Actuarial gains and losses resulting from changes in the assumptions, or experience different from those assumptions, are amortized over the remaining service period of active employees expected to receive benefits under the plans. 15 ACCOUNTING CHANGES In 2002, the Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and established the purchase method for accounting for such transactions. SFAS No. 142 addresses accounting for goodwill and other intangible assets and redefines useful lives, amortization periods and impairment of goodwill. Under the new pronouncement, goodwill is no longer amortized, but is tested for impairment annually by assessing the fair value of reporting units, generally one level below reportable segments. As a result of the adoption of SFAS No. 142, the Company recognized a charge reflected as a cumulative effect of accounting change of $135.6 million or $.46 per diluted share related to the impairment of goodwill in its North American cemetery reporting unit. The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which superceded SFAS No. 121. SFAS No. 144 requires that long-lived assets to be held and used be written down to fair value when it is concluded that the carrying value of such assets are not recoverable on an undiscounted cash flow basis. Assets to be disposed of by sale are required to be recorded at the lower of their carrying amounts or fair value less estimated cost to sell. The Company adopted SFAS No. 144 during the first quarter of 2002 with no impact on the results of operations, financial position or cash flows. In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivatives Instruments and Certain Hedging Activities: An Amendment of FASB Statement No. 133." In accordance with these pronouncements, the Company recognized a cumulative effect of accounting change of $7.6 million or $.03 per diluted share. The charge primarily related to the recognition of net deferred charges from interest rate gains and losses realized on the termination of swap agreements designated as cash flow hedges. These charges were previously amortized into interest expense over the terms of the swap agreements, whereas the new standards require recognition as the derivative gains and losses are incurred. In 2000, the Company implemented SAB No. 101 which changed the Company's accounting policies regarding the manner in which it records prearranged sales activities. The implementation of SAB No. 101 had no effect on the consolidated cash flows of the Company. The accounting change, which occurred as a result of the required implementation of SAB No. 101, has been treated as a change in accounting principle effective as of the beginning of 2000. For a more detailed discussion of these changes, see note three to the consolidated financial statements in Item 8 of this Form 10-K. As a result of the implementation of SAB No. 101, the Company recognized a cumulative effect of accounting change of $909.3 million or $3.34 per diluted share. RESULTS OF OPERATIONS For the year ended December 31, 2002, the Company reported total revenues from continuing operations of $2,272.4 million, representing a 9.5% decrease compared to total revenues from continuing operations for 2001 of $2,510.3 million. Gross profit from continuing operations improved 1.3% to $363.9 million and the gross margin percentage increased in 2002 to 16.0% from 14.3% in 2001. The decline in revenues is primarily attributable to operations disposed in 2001 and 2002, while the improvement in gross profit and margin percentage is the result of the cost reduction initiatives and reduced changes in estimates of previously deferred cemetery revenue during the year. Excluding non-recurring items and including pro forma adjustments to 2001, the Company reported $92.1 million ($.31 per diluted share) and $114.7 million ($.39 per diluted share) of earnings before non-recurring items for the full year of 2002 and 2001, respectively. In 2002, the Company ceased amortization of goodwill as required by SFAS No. 142; changed the amortization period of deferred prearranged funeral obtaining costs from 20 to 12 years; changed the allocation methodology of overhead costs in North America to be based on funeral and cemetery reporting unit revenues; began recognizing revenues associated with delivered caskets previously prearranged on cemetery contracts as part of funeral operations instead of cemetery operations; and ceased depreciation of operating assets held for sale during 2002. In 2002, the Company determined transactions to sell or joint venture certain assets would be delayed until after 2002. As a result, the Company resumed normal depreciation of those assets held in 16 France and Chile in the third quarter of 2002. For purposes of the following discussion, the Company has presented the financial information for 2001 and 2000 on a pro forma basis as if these changes had been implemented in all years presented. Further, results in all periods presented are representative of the Company's comparable results, which excludes operations that were acquired or constructed after January 1, 2001 and divested by the Company prior to December 31, 2002. As a result, some acquisitions entered into in 2000 may not be included for the full year depending on the timing of the acquisition. Comparable financial results are meant to be reflective of the Company's "same store" results of operations. For further information, refer to Non-GAAP Financial Measures in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K. The following is a discussion of the Company's results of comparable operations by geographic segment:
COMPARABLE YEAR ENDED DECEMBER 31, 2002 ------------------------------------------------------------------------------------------------------------- NORTH AMERICA % OF REVENUE EUROPE % OF REVENUE OTHER FOREIGN % OF REVENUE TOTAL % OF REVENUE ------------- ------------ ------ ------------ ------------- ------------ -------- ------------ Revenues: Funeral............ $1,111.8 64.9% $479.9 100.0% $ 6.9 19.9% $1,598.6 71.7% Cemetery........... 602.4 35.1% -- --% 27.8 80.1% 630.2 28.3% -------- ----- ------ ----- ----- ----- -------- ----- $1,714.2 100.0% $479.9 100.0% $34.7 100.0% $2,228.8 100.0% ======== ===== ====== ===== ===== ===== ======== ===== Gross profit and margin percentage: Funeral............ $ 227.4 20.5% $ 47.4 10.0% $ 2.8 40.6% $ 277.6 17.4% Cemetery........... 77.4 12.8% -- --% 4.7 16.9% 82.1 13.0% -------- ----- ------ ----- ----- ----- -------- ----- $ 304.8 17.8% $ 47.4 10.0% $ 7.5 21.6% $ 359.7 16.1% ======== ===== ====== ===== ===== ===== ======== =====
COMPARABLE PRO FORMA YEAR ENDED DECEMBER 31, 2001 ------------------------------------------------------------------------------------------------------------- NORTH AMERICA % OF REVENUE EUROPE % OF REVENUE OTHER FOREIGN % OF REVENUE TOTAL % OF REVENUE ------------- ------------ ------ ------------ ------------- ------------ -------- ------------ Revenues: Funeral............ $1,099.8 65.1% $431.3 100.0% $11.3 18.5% $1,542.4 70.7% Cemetery........... 590.1 34.9% -- --% 49.9 81.5% 640.0 29.3% -------- ----- ------ ----- ----- ----- -------- ----- $1,689.9 100.0% $431.3 100.0% $61.2 100.0% $2,182.4 100.0% ======== ===== ====== ===== ===== ===== ======== ===== Gross profit and margin percentage: Funeral............ $ 236.7 21.5% $ 36.5 8.5% $ 2.7 23.9% $ 275.9 17.9% Cemetery........... 90.0 15.3% -- -- 12.4 24.8% 102.4 16.0% -------- ----- ------ ----- ----- ----- -------- ----- $ 326.7 19.3% $ 36.5 8.5% $15.1 24.7% $ 378.3 17.3% ======== ===== ====== ===== ===== ===== ======== =====
COMPARABLE PRO FORMA YEAR ENDED DECEMBER 31, 2000 ------------------------------------------------------------------------------------------------------------- NORTH AMERICA % OF REVENUE EUROPE % OF REVENUE OTHER FOREIGN % OF REVENUE TOTAL % OF REVENUE ------------- ------------ ------ ------------ ------------- ------------ -------- ------------ Revenues: Funeral............ $1,086.6 68.4% $422.3 100.0% $11.9 20.6% $1,520.8 73.5% Cemetery........... 502.1 31.6% -- --% 45.9 79.4% 548.0 26.5% -------- ----- ------ ----- ----- ----- -------- ----- $1,588.7 100.0% $422.3 100.0% $57.8 100.0% $2,068.8 100.0% ======== ===== ====== ===== ===== ===== ======== ===== Gross profit and margin percentage: Funeral............ $ 244.5 22.5% $ 26.9 6.4% $ 3.6 30.3% $ 275.0 18.1% Cemetery........... 46.3 9.2% -- --% 7.8 17.0% 54.1 9.9% -------- ----- ------ ----- ----- ----- -------- ----- $ 290.8 18.3% $ 26.9 6.4% $11.4 19.7% $ 329.1 15.9% ======== ===== ====== ===== ===== ===== ======== =====
17 FUNERAL
COMPARABLE FUNERAL SERVICES PERFORMED ------------------------------------------------- NORTH AMERICA EUROPE OTHER FOREIGN TOTAL ------------- ------- ------------- ------- December 31: 2002........................................... 272,792 137,668 4,069 414,529 2001........................................... 274,684 138,475 4,104 417,263 2000........................................... 274,147 142,387 4,286 420,820
Comparable North America funeral revenues increased in 2002 compared to 2001 and 2000 despite a decline in the comparable number of funeral services performed over those same periods. The decline in the number of funeral services performed was offset by an increase in the average revenue per funeral service. The average revenue per funeral service for comparable revenues was $4,042 in 2002, $3,976 in 2001 and $3,938 in 2000. This average revenue per funeral service continues to be positively impacted by the Company's Dignity Memorial(R) packaged funeral plans. The decline in the number of funeral services performed is consistent with trends in mortality information, accumulated by the Company, experienced throughout North America. Comparable North America gross profit and margin percentage declined in 2002 compared to 2001 and 2000 as a result of increased costs associated with full-time personnel. The gross margin percentage was within the Company's annual 2002 targeted range of 18% to 23% despite these increases in costs. In both 2002 and 2001, the Company has recorded reductions in the allowance for doubtful accounts associated with funeral receivables in North America as collections have improved. In the death care industry, there has been a growing trend in the number of cremations performed in North America as an alternative to traditional funeral service dispositions. The west coast of the United States and the state of Florida have the highest concentration of cremation consumers in North America. While cremations performed by the Company in North America typically have higher gross profit margins than traditional funeral services, cremations usually result in lower revenue and gross profit dollars to the Company than traditional funeral services. In North America during 2002, 38.2% of all funeral services performed by the Company were cremation cases, compared to 37.0% and 36.3% performed in 2001 and 2000. In recent years the Company has continued to expand its cremation memorialization products and services in several North America markets which has resulted in higher average sales for cremation cases compared to historical levels. The Company's cremation memorialization products and services include providing memorial services, several options in memorialization gardens built in certain sections of the Company's cemeteries, urns, and niches in mausoleums or columbariums in which to place remains. The Company also continues to expand its nationally branded cremation service company called National Cremation(R) Service (NCS). NCS currently operates in fourteen states with high cremation rates and has plans to continue to expand to eighteen states by the end of 2003. The Company believes that the NCS consumer would not have chosen the Company's traditional funeral service locations as an alternative to NCS, and therefore is considered an incremental customer to the Company. Comparable international funeral revenues also increased in 2002 compared to 2001 and 2000 despite a decline in the number of funeral services performed. The effect of foreign currency positively impacted 2002 by approximately $20.2 million and $6.0 million when compared to foreign currency exchange rates in effect during 2001 and 2000, respectively, as a result in the strengthening of the Euro relative to the U.S. dollar. Excluding this effect, revenues increased as a result of increases in the average revenue per funeral service, incremental products and services offered to client families and delivery of burial monuments in France. Comparable international gross profit and margin percentage improved in 2002 compared to 2001 and 2000. The increase in the gross profit and margin percentage was the result of improved results in the Company's French operations, as discussed above. CEMETERY Comparable North America cemetery revenues increased in 2002 compared to 2001 and 2000 as a result of increases in completed cemetery property development projects and increases in the amount of cash 18 receipts and down payments received from preneed property sales. Preneed cemetery property revenues are recognized when development of the property is completed and customer payments are at least 10% of the total contract amount. Comparable North America cemetery gross profit and margin percentage declined in 2002 compared to 2001, but increased compared to 2000 as a result of the Company's ongoing review of obligations to deliver cemetery merchandise and services to customers in order to collect funds due to the Company from applicable cemetery trust funds. As a result of these reviews, the Company recognized revenue related to changes in estimates of previously Deferred preneed cemetery contract revenues. This change in estimate increased revenues and gross profits $23.4 million and $18.3 million, respectively, in 2002 and $68.5 million and $54.9 million in 2001. The Company will continue to review these obligations to deliver cemetery merchandise and services to customers, however, the impact recognized in future periods may not be as significant as prior years. Comparable international cemetery revenues decreased in 2002 compared to 2001 and 2000 as a result of the effect of foreign currency translation, which negatively impacted revenues in 2002 by approximately $21.3 million and $25.0 million when compared to foreign currency exchange rates in effect during 2001 and 2000, respectively. In January 2002, the Argentine peso, which previously exchanged at a rate of one peso to one U.S. dollar, was converted to a free floating currency. As a result, the Company's South America operations have experienced negative adjustments in foreign currency translation. Comparable international cemetery gross profit and margin percentage decreased also as a result of the above mentioned currency effects. OTHER INCOME AND EXPENSES The Company's corporate general and administrative expenses increased in 2002 to $89.8 million from $70.3 million in 2001 and $79.9 million in 2000. Included in the 2002 amount of $89.8 million is $13.5 million of accelerated non-cash amortization expense related to existing capitalized system costs as a result of the Company's decision in 2002 to implement new information systems. The prior periods did not include any such accelerated non-cash amortization expense. In addition to the $13.5 million of accelerated non-cash amortization expense in 2002, general and administrative expenses increased primarily related to approximately $12 million of professional fees and increases in the Company's reserves for litigation matters recognized in the fourth quarter of 2002. Expressed as a percentage of revenue from continuing operations, general and administrative expenses were 3.9%, 2.8% and 3.1% for the years ended December 31, 2002, 2001 and 2000, respectively. Impairment losses and other operating expenses, previously disclosed as Restructuring and non-recurring charges, were $289.1 million in 2002 and consisted of (i) $158.5 million for impairment losses from certain funeral and cemetery operations being held for sale, (ii) $40.8 million to adjust the market value of certain options associated with the Company's 6.3% Senior notes due 2020 (putable in 2003), (iii) $39.3 million from relieving certain individuals from their consulting and/or covenant-not-to-compete contractual obligations, (iv) $16.2 million related to the additional estimated reduction in the value of the Company's businesses in Argentina due to the continued economic decline, (v) $18.7 million related to the permanent reduction in value of equity investments in North American companies, (vi) $12.9 million of severance costs for former employees and (vii) $2.7 million primarily related to changes in estimates of previously recorded charges for impaired operations. The Company will continue to make adjustments as actual divestitures are consummated or better estimates become available. For further information detailing these non-recurring items, see note sixteen to the consolidated financial statements in Item 8 of this Form 10-K. Impairment losses and other operating expenses recorded in 2001 were $644.1 million and consisted of $663.5 million in charges related to (i) the loss on joint venturing the Company's Australian operations, (ii) losses from the disposition of operations in the Netherlands, Norway and Belgium, and (iii) the impairment of certain international operations held for sale. These charges were offset by $19.4 million consisting of favorable changes in estimates of previously recorded charges of certain divested North America funeral homes and cemeteries and the Company's equity investment in a Canadian funeral home and 19 cemetery company. In 2000, the Company recorded impairment losses and other operating expenses of $517.8 million which consisted of (i) $351.2 million of impairment losses related to the planned divestitures of certain North America businesses, (ii) $139.9 million related to the permanent reduction in the carrying value of equity investments, and (iii) $26.7 million in changes in estimates of previously recorded charges. The Company recorded certain additional non-recurring items during 2002, 2001 and 2000, related to extraordinary gains on early extinguishments of debt, net losses associated with the sales of the Company's discontinued operations and cumulative effects of accounting changes. For a detailed discussion of these and other non-recurring items, see Non-GAAP Financial Measures included in this Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K. Interest expense decreased to $161.5 million in 2002 compared to $211.6 million and $281.5 million in 2001 and 2000, respectively. The decrease in interest expense reflects the successful reduction in the Company's debt balance. The Company's average outstanding debt was $2.2 billion in 2002 compared to $2.8 billion and $3.7 billion in 2001 and 2000, respectively. Other income was $19.0 million in 2002 compared to $15.1 million and $17.5 million in 2001 and 2000, respectively. Other income primarily consists of income from various notes receivable and cash investments, equity earnings of investments in certain companies and cash overrides from prearranged funeral sales with third party insurance companies. Other income increased in 2002 as a result of increased income on cash investments offset by an increase in bad debt reserves on a loan to an international crematory made by the Company. Gains from dispositions were $16.4 million in 2002 compared to $16.2 million and $17.2 million in 2001 and 2000, respectively. Included in gains from dispositions are asset sales not associated with previously recognized impairment charges. Also included in 2001 was a $2.1 million gain recognized on the sale of 85% of the Company's Spain and Portugal operations. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Cash and cash equivalents.............................. $ 200.6 $ 29.3 $ 47.9 Total debt............................................. 1,984.8 2,534.6 3,268.1 -------- -------- -------- Net debt (total debt less cash)........................ $1,784.2 $2,505.3 $3,220.2 ======== ======== ========
The Company continued to improve its balance sheet and liquidity in 2002. The Company's total debt less cash and cash equivalents decreased by $721.1 million or 28.8% during 2002 as a result of strong cash flows and a successful asset divestiture/joint venture program that produced approximately $325 million of net pretax cash proceeds for the Company. The majority of these net pretax cash proceeds resulted from the completion of a joint venture transaction in 2002 related to the Company's operations in the United Kingdom, which generated approximately $273 million of net pretax cash proceeds. Additionally, the Company's debt balance at December 31, 2001 included $113.5 million of debt associated with the financial restructuring of the Company's French subsidiary, which was satisfied with non-cash French financial assets during 2002. In the third quarter of 2002, the Company completed an exchange of $172.2 million of the Company's 6.0% senior notes due 2005 for 7.7% senior notes due 2009. In addition to extending $172.2 million of debt maturities an additional four years, this transaction had the non-cash effect of reducing the Company's net debt by $21.1 million. The Company's 2003 outlook discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations contains liquidity measures that are calculated in accordance with GAAP. The Company's results to be reported publicly in the future will primarily contain financial results that are GAAP financial measures. In 2002 and 2001, the Company has reported the liquidity measure EBITDA before non-recurring items and recurring operating free cash flow. These measures should be considered non-GAAP financial measures and are provided to more clearly present the financial results that management uses 20 to manage its funeral and cemetery businesses. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP are presented in the section Non-GAAP Financial Measures included in this Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company calculates the non-GAAP financial measure EBITDA before non-recurring items for each period presented by adding interest, tax, depreciation and amortization expenses back to earnings before non-recurring items. The term earnings before non-recurring items is a non-GAAP financial measure representing earnings excluding certain non-recurring items. The reconciliation of earnings before non-recurring items to the net losses reported by the Company under GAAP in 2002 and 2001 are contained in the section Non- GAAP Financial Measures included in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Reductions in EBITDA before non-recurring items in 2002 compared to 2001 are primarily related to the Company's asset divestiture and joint venture transactions that have occurred. Calculations for EBITDA before non-recurring items for 2002 and 2001 are as follows:
FULL YEAR --------------- 2002 2001 ------ ------ Earnings before non-recurring items......................... $ 92.1 $114.7 Add: Interest expense....................................... 161.5 211.6 Tax expense not associated with non-recurring items... 39.6 54.8 Depreciation and amortization(1)...................... 128.5 116.9 ------ ------ EBITDA before non-recurring items........................... $421.7 $498.0 ====== ======
- --------------- (1) 2001 depreciation and amortization is presented in this table pro forma as if certain accounting changes made in 2002 were implemented in 2001 to provide a more relevant comparison to the 2002 results. The Company calculates the non-GAAP financial measure recurring operating free cash flow by adjusting cash flows from operating activities to exclude (i) cash payments associated with the Company's restructuring and non-recurring charges and (ii) other cash receipts or payments (included in cash flows from operating activities) which are of a non-recurring operational nature, and then subtracting maintenance capital expenditures. Total operating free cash flow is calculated in the same manner as above except the amount includes all non-recurring cash payments and receipts and non-recurring or growth capital expenditures. The Company's total operating free cash flow does not include proceeds from business sales or joint ventures. The Company defines maintenance capital expenditures as capital expenditures considered reasonably necessary to maintain the Company's funeral service locations, cemeteries, crematoria and other facilities in a condition consistent with Company standards. Growth capital expenditures are considered expenditures made for the purpose of generating additional or incremental revenues. The reconciliation of recurring operating free cash flow to cash flows from operating activities calculated under GAAP are contained in the Section Non-GAAP Financial Measures included in this Management's Discussion and Analysis of Financial Condition and 21 Results of Operations. The following table details the calculation described above for the Company's total and recurring operating free cash for 2002 and 2001.
FULL YEAR ----------------- 2002 2001 ------- ------- Operating free cash flow: Consolidated cash flow provided by operating activities... $ 352.2 $ 383.3 Payments on restructuring charges......................... 12.8 22.8 ------- ------- Adjusted cash flow from operating activities........... 365.0 406.1 ------- ------- Capital Expenditures...................................... (100.1) (74.1) ------- ------- TOTAL OPERATING FREE CASH FLOW.............................. 264.9 332.0 Less: Net non-recurring receipts.......................... (54.9) (161.5) ------- ------- RECURRING OPERATING FREE CASH FLOW.......................... $ 210.0 $ 170.5 ======= =======
Net non-recurring receipts for 2002 consist of $57.1 million of non-recurring tax refunds, $25.0 million of net non-recurring receipts primarily related to non-recurring funeral and cemetery trust receipts and escrow amounts received related to divestitures, offset by $27.1 million of growth or non-recurring capital expenditures. The $161.5 million of net non-recurring cash receipts in 2001 includes $116.3 million of non-recurring tax refunds and the collection of receivables from funeral and cemetery trust funds of approximately $79.8 million, offset by non-recurring payments of approximately $27.9 million related to the Company's curtailed pension plans and $6.7 million of other non-recurring cash payments. The Company's objectives in 2003 focus on continued stabilization of the Company's capital structure by generating strong cash flows, completing asset divestitures and further debt reduction. A goal of the Company is to obtain a stable "BB" credit rating from Standard and Poor's and a stable "Ba2" credit rating from Moody's, with general access to the capital markets. The Company believes it currently has strong liquidity. As of February 26, 2003, the Company had liquidity of approximately $350 million, comprised of a cash balance of approximately $250 million and approximately $100 million of availability under the Company's $185 million credit facility. The Company has no cash borrowings under this credit facility, but has issued approximately $85 million of letters of credit under the credit facility. At December 31, 2002, the Company had current maturities of long-term debt of $100.3 million primarily consisting of approximately $84 million of 6.3% Senior Notes due in March 2003. Based on the Company's current cash balances, the Company believes it has adequate means to meet its current maturities of long-term debt. At February 26, 2003, the Company's maturity schedule for certain of its outstanding senior public notes due in the near and intermediate term is as follows:
OUTSTANDING AT FEBRUARY 26, 2003 ----------------- (IN MILLIONS) 6.3% senior notes due March 2003............................ $ 76 7.375% senior notes due April 2004.......................... $111 8.375% senior notes due December 2004....................... $ 51 6.0% senior notes due December 2005......................... $366
Based on the Company's current cash balance, its expectation of future annual cash flows, its expectation of future asset divestiture/joint venture proceeds of approximately $300-$400 million, and its current borrowing capacity under its credit facility, the Company believes it has adequate means to meet its near and intermediate maturities of current and long-term debt. 22 CONTRACTUAL, COMMERCIAL AND CONTINGENT COMMITMENTS The Company has assumed various financial obligations and commitments in the ordinary course of conducting its business. The Company has contractual obligations requiring future cash payments under existing contractual arrangements, such as management, consultative and non-competition agreements. The Company also has commercial and contingent obligations which result in cash payments only if certain contingent events occur requiring the Company's performance pursuant to a funding commitment. The following table details the Company's known future cash payments (on an undiscounted basis) related to various contractual obligations as of December 31, 2002.
PAYMENTS DUE BY PERIOD ------------------------------------------------------ CONTRACTUAL OBLIGATIONS TOTAL 2003 2004-2005 2006-2007 THEREAFTER - ----------------------- -------- ------ --------- --------- ---------- Current maturities of long-term debt(1)..... $ 100.3 $100.3 $ -- $ -- $ -- Long-term debt(1)........................... 1,884.5 -- 604.7 348.9 930.9 Casket purchase agreement(2)................ 380.0 87.0 293.0 -- -- Operating and capital lease agreements(3)... 210.8 52.9 84.3 38.9 34.7 Contingent purchase obligation(4)........... 40.0 -- 40.0 -- -- Management, consultative and non-competition agreements(5)............................. 218.7 80.2 77.2 41.8 19.5 -------- ------ -------- ------ ------ TOTAL CONTRACTUAL OBLIGATIONS............. $2,834.3 $320.4 $1,099.2 $429.6 $985.1 ======== ====== ======== ====== ======
- --------------- (1) The Company's outstanding indebtedness contains standard provisions including defaults on scheduled principal and interest payments and changes of control clauses. In addition, the Company's bank credit agreement contains a maximum leverage ratio and a minimum interest coverage ratio. For further information see note seven to the consolidated financial statements in Item 8 of this Form 10-K. (2) The Company has a purchase agreement with a major casket manufacturer for its North American operations with an original minimum commitment of $750 million over a six-year period expiring at the end of 2004. At December 31, 2002, the Company's remaining maximum commitment under the purchase agreement was $380.0 million. The agreement contains provisions for annual price adjustments. Additionally, the agreement provides for a one-year extension period to 2005 in which the Company is allowed to satisfy any remaining commitment that exists at the end of the original term. (3) The majority of the Company's operating leases contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the leases, or (iii) renew for the fair rental value at the end of the primary lease term. The Company's operating leases primarily relate to funeral service locations, automobiles, limousines, hearses, cemetery operating and maintenance equipment and two aircraft. The Company has residual value exposures related to certain operating leases of approximately $7.5 million. The Company believes it is unlikely that it will have to make future cash payments related to these residual value exposures. (4) In connection with certain acquisitions related to the Company's South America operations, the Company entered into contingent purchase obligations with certain former owners of those businesses. These obligations require the Company to pay additional consideration if cumulative earnings thresholds, as defined in such agreements, are met between 2003 and 2005. As of December 31, 2002, the contingent consideration is estimated to be approximately $40 million. This additional consideration can be paid partially in stock at the discretion of the former owners. (5) The Company has entered into management employment, consultative and non-competition agreements which contractually require the Company to make cash payments over the contractual period. The agreements have been primarily entered into with certain officers and employees of the Company and former owners of businesses acquired. The contractual obligation amounts pertain to the total commitment outstanding under these agreements and may not be indicative of future expenses to be incurred related to these agreements due to cost rationalization programs completed by the Company. See note 23 sixteen to the consolidated financial statements in Item 8 of this Form 10-K for further discussion regarding these cost rationalization programs. The following table details the Company's known potential or possible future cash payments (on an undiscounted basis) related to various commercial and contingent obligations as of December 31, 2002.
EXPIRATION BY PERIOD ---------------------------------------------------- COMMERCIAL AND CONTINGENT OBLIGATIONS TOTAL 2003 2004-2005 2006-2007 THEREAFTER - ------------------------------------- ------ ------ --------- --------- ---------- Surety obligations(1)......................... $214.1 $214.1 $ -- $ -- $ -- Letters of credit(2).......................... 85.8 85.8 -- -- -- Lending commitment(3)......................... 9.6 9.6 -- -- -- Representations and warranties(4)............. 30.3 4.3 13.8 3.7 8.5 ------ ------ ----- ---- ---- TOTAL COMMERCIAL AND CONTINGENT OBLIGATIONS.............................. $339.8 $313.8 $13.8 $3.7 $8.5 ====== ====== ===== ==== ====
- --------------- (1) In support of the Company's operations, the Company has entered into arrangements with certain high quality surety companies whereby such companies agree to issue surety bonds on behalf of the Company, as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been issued to support the Company's prearranged funeral and preneed cemetery activities. The underlying obligations these surety bonds assure are appropriately recorded on the Company's consolidated balance sheet as Deferred prearranged funeral contract revenues and Deferred preneed cemetery contract revenues. The total surety bonds outstanding at December 31, 2002 was $314.7 million ($303.7 million related to prearranged funeral and preneed cemetery obligations). In the event all of the high quality surety companies cancelled or did not renew the Company's outstanding surety bonds (generally renewed on a rolling twelve-month basis), the Company would be required to obtain replacement assurance or fund an estimate of $214.1 million as of December 31, 2002, primarily into state mandated trust accounts. At this time, the Company does not believe it will be required to fund material future amounts related to these surety bonds. (2) The Company is occasionally required to post letters of credit, issued by a financial institution, to secure certain insurance programs or other obligations. Letters of credit generally authorize the financial institution to make a payment to the beneficiary upon the satisfaction of a certain event or the failure of the Company to satisfy an obligation. The letters of credit are generally posted for 1-year terms and are usually automatically renewed upon maturity until such time as the Company has satisfied the commitment secured by the letter of credit. The Company is obligated to reimburse the issuer only if the beneficiary collects on the letter of credit. The Company believes that it is unlikely it will be required to fund a claim under its outstanding letters of credit. In 2002, the full amount of the letters of credit were supported by the Company's credit facility which expires July 2005. (3) The Company's lending subsidiary had previously participated in a syndicated credit facility which continues to be outstanding through June 2004. The borrower, Carriage Services, Inc., has the ability to draw upon this undrawn portion of its credit line at any time through maturity, and the Company is required to provide the funding requested up to its total commitment amount, which is $14.4 million. (4) In addition to letters of credit described above, the Company currently has contingent obligations of $30.3 million related to the Company's asset sale/joint venture transactions. The Company has agreed to guarantee certain representations and warranties associated with such disposition transactions with letters of credit or interest bearing cash investments. The Company has interest bearing cash investments of $15.3 million included in Deferred charges and other assets collateralizing these contingent obligations. The Company does not believe it will ultimately be required to fund to third parties any claims against these representations and warranties. 24 SOURCES AND USES OF CASH Net cash provided by operating activities was $352.2 million in 2002 compared to $383.3 million in 2001, a decrease of $31.1 million. The decrease is primarily the result of (1) lower tax refunds and (2) less cash received from the collection of receivables related to certain cemetery and funeral trust funds, offset by (3) lower cash interest payments and (4) improvements in working capital. Total cash tax refunds, net of payments, were $54.6 million in 2002 and $100.1 million in 2001. Trust fund receipts from the collection of receivables from certain funeral and cemetery trust funds were $10.8 million and $80.5 million in 2002 and 2001, respectively. Cash interest payments were $158.6 million and $218.4 million in 2002 and 2001 respectively. Also included in net cash provided by operating activities is approximately $95.5 million and $93.0 million of cash receipts from the Company's surety bonding program for 2002 and 2001, respectively. See the further discussion of the Company's surety bonds in the Financial Assurances section included in this Financial Condition, Liquidity and Capital Resources. Net cash provided by investing activities was $326.9 million in 2002 compared to $325.4 million in 2001. Net cash provided by investing activities was flat in 2002 compared to 2001, despite an increase in capital expenditures of $25.9 million and lower proceeds from sales and joint ventures of operations of $44.4 million. These changes were offset by reduced cash collateral requirements of $70.9 million as a result of settling certain options and issuing letters of credit under the Company's credit facility. Net cash used in financing activities was $505.5 million in 2002 compared to $727.4 million in 2001. Included in 2002 was a use of cash of $57 million related to the final settlement of certain options associated with the Company's senior notes due 2020 (putable 2003). Excluding this transaction, net cash used in financing activities in both periods is related to the Company's continued debt reduction initiatives. The Company primarily used funds collected during these periods from tax refunds, receipts from certain funeral and cemetery trust funds, proceeds from sales and joint ventures of operations and its cash flow from operations to reduce its debt. PREARRANGED FUNERAL AND CEMETERY ACTIVITIES In addition to selling its products and services to client families at the time of need, the Company also sells prearranged funeral services in most of its service markets. Funeral prearrangement is a means through which a customer contractually agrees to the terms of a funeral to be performed in the future. All or a portion of the funds collected from prearranged funeral contracts are placed in trust accounts, pursuant to applicable law, or are used to pay premiums on life insurance policies from third party insurers. In certain situations pursuant to applicable laws, the Company will post a surety bond as financial assurance for a certain amount of the preneed funeral contract in lieu of placing certain funds in trust accounts. See the Financial Assurances section within this Financial Condition, Liquidity and Capital Resources section for further details on the Company's practice of posting such surety bonds. Cemetery sales are also made on a preneed basis pursuant to installment contracts providing for monthly payments. A portion of the proceeds from cemetery contracts is generally required by law to be paid into perpetual care trust funds. Earnings from perpetual care trust funds are used to defray the maintenance costs of cemeteries. Additionally, all or a portion of the proceeds from the sale of preneed cemetery merchandise and services may be required by law to be paid into merchandise and services trusts until the merchandise is delivered or the service is provided. In certain situations pursuant to applicable laws, the Company will post a surety bond as financial assurance for a certain amount of the preneed cemetery contract in lieu of placing certain funds into trust accounts. See the Financial Assurances section within this Financial Condition, Liquidity and Capital Resources section for further details on the Company's practice of posting such surety bonds. For purposes of discussion in this section, the use of the term "prearranged" or "prearrangement" refers to funeral programs specifically or funeral and cemetery programs generally. The use of the term "preneed" refers to cemetery programs specifically. Prearrangement is a means through which a customer contractually agrees to the terms of a funeral and/or cemetery burial to be performed or provided in the future. 25 Revenues associated with prearranged contracts are deferred until such time that the funeral or cemetery services are performed or merchandise is delivered. Preneed sales of cemetery interment rights (cemetery burial property) are not recognized until a minimum of 10% of the sales price has been collected and the property has been constructed. Compensation costs incurred related to the acquisition of new prearranged funeral trust contracts, primarily commissions and fringe benefits, are deferred as selling costs and amortized over 12 years, a period representing the estimated life of the prearranged funeral contracts. Prior to 2002, the amortization period was 20 years. As of January 1, 2002, the Company changed the estimated period to 12 years to more accurately reflect current trends regarding the timeframe from selling a preneed contract to when it is serviced atneed. The amount of funeral deferred selling costs amortized in the consolidated statement of operations for North America was $14.5 million and $6.4 million in 2002 and 2001, respectively. Had the Company changed the amortization period in 2001 from 20 to 12 years, the amortization expense would have been $12.3 million in 2001. Cemetery deferred selling costs, primarily commissions and fringe benefits, are expensed as the associated revenues are recognized. Other costs associated with the sales and marketing of prearranged contracts -- lead procurements costs, brochures and marketing materials, advertising and administrative costs -- are expensed as incurred. When prearranged funeral services and merchandise are funded through insurance policies purchased by customers from third party life insurance companies, the Company earns a commission on the sale of such policies for acting as an agent in selling such insurance contracts. Such general agency revenues are based on a percentage per contract sold and are recognized, net of related expenses, when the insurance purchase transaction between the customer and third party insurance provider has been completed. In 2002 and 2001, $13.0 million and $6.0 million, respectively, of net general agency revenues were recognized. Excluding the related expenses being netted against the associated general agency commissions, the Company recognized $48.1 million and $43.3 million of general agency revenues in 2002 and 2001, respectively. Additionally, the Company may receive cash overrides related to life insurance policies sold as a result of marketing agreements entered into in connection with the sale of its insurance subsidiaries in 2000. These overrides are recorded in Other income in the consolidated statement of operations. The table below details the North America results of funeral and cemetery prearranged production for the years ended December 31, 2002 and 2001 and the related deferred selling costs incurred to procure the prearrangements. Additionally, the table reflects revenues recognized and previously deferred selling costs recognized in the consolidated statements of operations associated with previously prearranged production for the years ended December 31, 2002 and 2001.
NORTH AMERICA --------------------------------- FUNERAL CEMETERY --------------- --------------- 2002 2001 2002 2001 ------ ------ ------ ------ ORIGINATION: Prearranged production............................. $411.1 $398.7 $303.2 $322.7 Deferred selling costs............................. $ 17.0 $ 14.4 $ 44.2 $ 40.9 MATURITY: Previously prearranged production included in current period revenues.......................... $314.2 $293.0 $297.1 $288.0 Amortization/recognition of deferred selling costs in current period(1)............................. $ 14.5 $ 6.4 $ 43.6 $ 37.8
- --------------- (1) The amortization of funeral deferred selling costs reflects the historical amount recorded in 2001. If the amortization period was changed from 20 to 12 years as of January 1, 2001, the amortization would have been $12.3 million. As described earlier, prearranged contracts can be funded through several alternatives. For prearranged funeral or preneed cemetery contracts funded through trusts, generally all or a certain portion of the funds collected are required to be placed into trust accounts, pursuant to applicable law. Funds not required to be placed into trust accounts are retained by the Company and used for working capital purposes to help alleviate 26 the current cost of those prearrangement programs. Realized investment earnings on funds placed into trust accounts are generally accumulated and deferred until the maturity of each prearranged contract. However, in certain states, the Company is allowed to distribute a portion of the realized investment earnings before the prearrangement contract matures. When a prearranged trust contract matures, the Company receives the principal and previously undistributed trust fund income and any remaining receivable due from the customer. In certain situations, the Company can post a surety bond as financial assurance pursuant to applicable law in an amount that would otherwise be required to be trusted. Funds collected on prearranged contracts where the Company has posted a surety bond may be retained by the Company creating a source of working capital cash flow generated from operating activities before the prearranged contract matures. When the prearranged contract matures, the Company receives any remaining receivable due from the customer. Finally, the customer may elect to purchase an insurance contract from a third party life insurance company to fund a prearranged funeral contract, the funds of which are collected and used to pay premiums on life insurance or annuity contracts. Increasing death benefits associated with life insurance contracts are accumulated and deferred until the maturity of each prearranged contract. When a prearranged insurance contract matures, the Company receives the proceeds from the third party insurance companies consisting of the original contract amount and any increasing death benefits. Deferred prearranged funeral contract revenue or preneed cemetery contract revenue is recognized in the consolidated statement of operations at the time the service is performed or the merchandise is delivered. For trust or bonded contracts, the revenue recognized is generally greater than the cash received by the Company at the time a prearranged contract matures and creates a negative effect on working capital cash flow generated from operating activities. The cash flow activity from originating funeral production until the maturity of the prearranged funeral contract is captured in the line item Net effect of prearranged funeral production and maturities in the consolidated statement of cash flows. Cash flow is provided by the amount retained from funds collected from the customer and distributed trust fund earnings. This is reduced by the payment of deferred selling costs and the use of funds to service matured contracts. The cash flow activity from originating the preneed cemetery contract until recognition of the deferred revenue is reflected through Changes in receivables and Changes in other assets in the consolidated statement of cash flows. Changes in receivables is affected by cash flow provided by the amount retained from funds collected from the customer and distributed trust earnings, and is reduced by the use of funds to service preneed cemetery contracts. Changes in other assets is affected by the cash use associated with the payment of deferred selling costs when the preneed cemetery contracts are originated, offset by the reduction in deferred selling costs associated with recognition of the preneed cemetery revenue. The following table reflects the total North American backlog of deferred prearranged contract revenues and the prearranged assets associated with the contracts at December 31. The difference between the amounts of Deferred prearranged contract revenues and the prearranged assets associated with such contracts represents future revenues to be recognized in which the associated cash has already been collected by the Company.
NORTH AMERICA --------------------------------------------------------------- FUNERAL CEMETERY TOTAL ------------------- ------------------- ------------------- 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- Deferred prearranged contract revenues...... $3,638.3 $3,571.8 $1,671.6 $1,733.7 $5,309.9 $5,305.5 Deferred net selling costs.................. 90.1 93.8 210.3 210.6 300.4 304.4 Prearranged assets: Trust related assets... 980.9 984.5 859.3 915.1 1,840.2 1,899.6 Third party insurance related assets...... 2,175.5 2,075.4 -- -- 2,175.5 2,075.4
27 The deferred prearranged contract revenue associated with prearranged funeral contracts and preneed cemetery contracts are reflected separately in the consolidated balance sheet. Both funeral and cemetery deferred selling costs (net of an estimated allowance for cancellation) are included as a component of Deferred charges and other assets. Prearranged assets associated with prearranged funeral contracts, which consist of amounts due from trusts, customer receivables or third party insurance receivables (net of an estimated allowance for cancellations), are reflected as Prearranged funeral contracts separately in the consolidated balance sheet. Prearranged assets associated with preneed cemetery contracts, which consist of amounts due from trusts and customer receivables (net of an estimated allowance for cancellation) are reflected in Current and Long term receivables in the consolidated balance sheet. The Company estimates that deferred revenue and deferred selling costs to be recognized in 2003 for North America funeral and cemetery operations are $322.0 million and $15.5 million for funeral, and $216.0 million and $31.5 million for cemetery, respectively. FINANCIAL ASSURANCES In support of operations, the Company has entered into arrangements with certain high quality surety companies whereby such companies agree to issue surety bonds on behalf of the Company as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support the Company's prearranged funeral and preneed cemetery activities. The underlying obligations these surety bonds assure are appropriately recorded on the Company's consolidated balance sheet as Deferred prearranged funeral contract revenues and Deferred preneed cemetery contract revenues (see notes four and five to the consolidated financial statements in Item 8 and Prearranged Funeral and Cemetery Activities within Financial Condition, Liquidity and Capital Resources of this Form 10-K for further details regarding the Company's prearranged funeral and preneed cemetery activities). The breakdown of bonds between funeral and cemetery prearrangements, as well as surety bonds for other activities, is as follows:
DECEMBER 31, 2002 ----------------- Prearranged funeral......................................... $108.3 Preneed cemetery: Merchandise and services.................................. 172.8 Preconstruction........................................... 22.6 ------ Bonds supporting prearranged funeral and cemetery obligations........................................... 303.7 ------ Bonds supporting prearranged business permits............... 4.9 Other bonds................................................. 6.1 ------ Total bonds outstanding........................... $314.7 ======
As the Company sells prearranged funeral contracts and preneed cemetery contracts, the Company intends to post surety bonds where allowed by applicable law. The Company posts the surety bond in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is determined by the total amount of the prearranged contract that would otherwise be required to be trusted, in accordance with applicable state law. During 2002 and 2001, the Company recognized $95.5 million and $93.0 million, respectively, in cash receipts attributable to bonded sales. Surety bond premiums are paid annually and are automatically renewable, unless prior notice of cancellation, until maturity of the underlying prearranged contracts. Except for cemetery preconstruction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, the Company would be required to obtain replacement assurance or fund a trust for an amount generally less than the posted bond amount, unless the customer's prearranged contract has been paid in full. A quantitative detail of this subject is discussed in the Contractual, Commercial and Contingent Commitments section included within 28 Financial Condition, Liquidity and Capital Resources. The Company does not believe it will be required to fund material future amounts related to these surety bonds. The applicable Florida law which allows posting of surety bonds for prearranged contracts expires December 31, 2004. Unless the law is otherwise amended, the Company plans to shift from bonding to either trust or insurance funding for prearranged funeral and cemetery programs in the state of Florida in the year 2005. Prearranged contracts entered into prior to December 31, 2004 where the Company posts surety bonds will be allowed to continue to be bonded for the remaining life of those contracts. Of the total bonding proceeds received by the Company for 2002 and 2001, approximately $70.3 million and $67.2 million, respectively, were attributable to the state of Florida. Assuming the Company's prearranged funeral and cemetery sales production in Florida in 2005 is consistent with production for the full year of 2002, the pre-tax forecasted cash flow impact of shifting to trusting is expected to be approximately $20 to $25 million lower in that year before considering the cash flow impact of contracts going atneed. This forecast reduction in pre-tax cash flow involves assumptions about the mix of preneed sales among property, merchandise and services and the appropriate levels of trusting required by Florida law. Using the same general assumptions, there would also be expected an estimated cash flow decrease in years 2006 through 2009 of approximately $2 to $7 million per year. NON-GAAP FINANCIAL MEASURES The Company has reported certain operating and liquidity financial measures in this Management's Discussion and Analysis of Financial Condition and Results of Operations that exclude certain non-recurring items. These figures should be considered non-GAAP financial measures and are provided to more clearly present the financial results that management uses to manage its funeral and cemetery businesses. Non-recurring items excluded from certain financial information are related to discontinued operations, non-recurring charges for restructuring activities or planned sales of businesses, cumulative effects of accounting changes and extraordinary gains on early extinguishments of debt. The Company has also adjusted the results of operations in 2001 and 2000 to be consistent with the accounting presentations in 2002. Operating results for 2001 and 2000 have been presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations in a pro forma format as if certain changes made in 2002 were implemented in those years to provide a more relevant comparison to the 2002 results. Such changes include (1) discontinuing amortization of goodwill pursuant to new accounting standards, (2) changing the amortization period related to deferred prearranged funeral selling costs from 20 to 12 years, (3) revising the estimated allocation of overhead costs between the funeral and cemetery segments, (4) recognizing as part of funeral operations instead of cemetery operations, those revenues associated with delivered caskets previously prearranged on cemetery contracts and (5) discontinuing the depreciation of certain operating assets held for sale in 2002. 29 The following two tables reconcile the non-GAAP financial measures earnings before non-recurring items and diluted EPS before non-recurring items to net loss and diluted loss per share calculated under GAAP.
DECEMBER 31, ----------------------------- 2002 2001 2000 ------- ------- --------- Earnings before non-recurring items.................... $ 92.1 $ 114.7 $ 58.8 Adjust for 2001 pro forma items (after tax): Goodwill amortization................................ -- (47.4) (52.8) Amortization of deferred prearranged funeral obtaining costs................................... -- 3.6 3.8 Depreciation expense related to operations held for sale in 2002...................................... -- (14.5) (21.5) Adjust for 2002 and 2001 non-recurring items (after tax): Gains from dispositions, impairment losses and other operating expenses................................ (193.3) (653.0) (413.8) Income from discontinued operations.................. -- 1.7 13.3 Loss on sale of discontinued operations.............. -- -- (43.7) Extraordinary gains on early extinguishments of debt.............................................. 4.9 4.7 21.9 Cumulative effects of accounting changes............. (135.6) (7.6) (909.3) ------- ------- --------- Net loss............................................... $(231.9) $(597.8) $(1,343.3) ======= ======= =========
DECEMBER 31, ----------------------------- 2002 2001 2000 ------- ------- --------- Diluted EPS before non-recurring items................. $ .31 $ .39 $ .22 Adjust for 2001 pro forma items (after tax): Goodwill amortization................................ -- (.17) (.19) Amortization of deferred prearranged funeral obtaining costs................................... -- .01 .01 Depreciation expense related to operations held for sale in 2002...................................... -- (.05) (.08) Effect of dilution................................... -- .01 -- Adjust for 2002 and 2001 non-recurring items (after tax): Gains from dispositions, impairment losses and other operating expenses................................ (.65) (2.28) (1.52) Income from discontinued operations.................. -- .00 .05 Loss on sale of discontinued operations.............. -- -- (.16) Extraordinary gains on early extinguishments of debt.............................................. .01 .02 .08 Cumulative effects of accounting changes............. (.46) (.03) (3.34) ------- ------- --------- Diluted loss per share................................. $ (.79) $ (2.10) $ (4.93) ======= ======= =========
30 The Company calculates EBITDA for each period by adding interest, tax, depreciation and amortization expenses back to earnings before non-recurring items. Reported EBITDA before non-recurring items for the years ended December 31, 2002, 2001 and 2000 is $421.7 million, $498.0 million and $489.3 million, respectively. The following table reconciles EBITDA before non-recurring items to the Company's operating loss calculated under GAAP.
DECEMBER 31, --------------------------- 2002 2001 2000 ------- ------- ------- EBITDA before non-recurring items....................... $ 421.7 $ 498.0 $ 489.3 Less: Depreciation and amortization..................... (128.5) (193.9) (224.1) Impairment losses and other operating expenses........ (289.1) (644.1) (517.8) Other income.......................................... (19.0) (15.1) (17.5) ------- ------- ------- Operating loss.......................................... $ (14.9) $(355.1) $(270.1) ======= ======= =======
The Company calculates the non-GAAP financial measure recurring operating free cash flow by adjusting cash flows from operating activities to exclude (i) cash payments associated with the Company's restructuring and non-recurring charges and (ii) other cash receipts or payments (included in cash flows from operating activities) which are of a non-recurring operational nature and then subtracting maintenance capital expenditures. The Company defines maintenance capital expenditures as capital expenditures considered reasonably necessary to maintain the Company's funeral homes, cemeteries, crematoria and other facilities in a condition consistent with Company standards. The following table reconciles recurring operating free cash flow to cash flows from operating activities calculated under GAAP. The following table reconciles recurring operating free cash flow to cash flows from operating activities calculated under GAAP.
DECEMBER 31, --------------- 2002 2001 ------ ------ Recurring operating free cash flow.......................... $210.0 $170.5 Add back: Net non-recurring items........................... 54.9 161.5 ------ ------ Total operating free cash flow.............................. 264.9 332.0 Add back: Capital expenditures.............................. 100.1 74.1 Less: Payments on restructuring charges..................... (12.8) (22.8) ------ ------ Cash flows from operating activities........................ $352.2 $383.3 ====== ======
OTHER MATTERS In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), "Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN No. 46 clarifies the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 defines the terms related to variable interest entities and clarifies if such entities should be consolidated. The Company is currently assessing the impact of FIN No. 46 on the Company's results of operations, financial position and cash flows. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS The statements in this Form 10-K that are not historical facts are forward-looking statements made in reliance on the "safe harbor" protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe," "estimate," "project," "expect," "anticipate" or "predict," that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however, many important factors could cause the Company's actual consolidated results in the future to differ materially from the forward-looking 31 statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. These factors are discussed below. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the Company, whether as a result of new information, future events or otherwise. RISKS RELATED TO THE COMPANY'S BUSINESS The Company's ability to execute its strategic plan depends on many factors, many of which are beyond the Company's control. The Company's strategic plan is focused on reducing overhead costs, increasing cash flow, asset redeployment, and reducing debt while at the same time developing key revenue initiatives designed to generate future internal growth in its core funeral and cemetery operations without the outlay of significant additional capital. Many of the factors necessary for the Company's execution of its strategic plan are beyond the Company's control. The Company can give no assurance that it will be able to execute any or all of its strategic plan. Failure to execute any or all of the strategic plan could have a material adverse effect on the Company, its financial condition, results of operations or cash flows. The Company's indebtedness limits funds available for its operations. As of December 31, 2002, the Company had approximately $2.0 billion in debt. The Company's indebtedness may limit its ability to obtain additional financing, limit its flexibility in planning for, or reacting to, changes in its markets, require the sale of assets which it would otherwise want to retain and require the dedication of more cash flow to service its debt than it desires. The Company's ability to satisfy its indebtedness in a timely manner will be dependent on the successful execution of its long-term strategic plan and the resulting improvements in its operating performance. The Company's bank credit agreement and indentures contain covenants that may prevent the Company from engaging in certain transactions. The Company's bank credit agreement and indentures contain, among other things, various affirmative and negative covenants that may prevent the Company from engaging in certain transactions that might otherwise be considered beneficial to the Company. These covenants limit, among other things, the ability of the Company and its subsidiaries to: - borrow money; - pay dividends or distributions; - purchase or redeem stock; - make investments; - engage in transactions with affiliates; - engage in sale-leaseback transactions; and - consummate certain liens on assets. The credit agreement also requires the Company to maintain certain financial ratios and satisfy other financial condition tests. Although the maturity of the Company's bank credit agreement brings an end to the restrictions created by it, any future credit agreements or indentures may contain terms and conditions that are more or less restrictive than those of the existing bank credit agreement and indentures. If the Company lost the ability to use surety bonding to support its prearranged funeral and preneed cemetery activities, the Company could have to make material cash payments to fund certain trust funds. The Company has entered into arrangements with certain high quality surety companies whereby such companies agree to issue surety bonds on behalf of the Company, as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the 32 majority of the surety bonds issued and outstanding have been issued to support the Company's prearranged funeral and preneed cemetery activities. In the event the surety companies canceled or did not renew the outstanding surety bonds, the Company could have to obtain replacement assurance or fund certain trust funds, which could result in material cash outflows. Furthermore, the Company's future cash flows could be materially affected if the Company lost access to using surety bonds for financial assurance in its normal course of business. The funeral home and cemetery industry is highly competitive. In North America and most international markets in which the Company operates, the funeral and cemetery industry is characterized by a large number of locally owned, independent operations. To compete successfully, the Company's funeral service locations and cemeteries must maintain good reputations and high professional standards in the industry, as well as offer attractive products and services at competitive prices. In addition, the Company must market itself in such a manner as to distinguish itself from its competitors. If it is unable to successfully compete, the Company, its financial condition, results of operations and cash flows could be materially adversely effected. The Company's affiliated funeral and cemetery trust funds own investments in equity securities and mutual funds, which are affected by financial market conditions that are beyond the Company's control. In connection with the Company's prearranged funeral operations and preneed cemetery merchandise sales, affiliated funeral and cemetery trust funds own investments in equity securities and mutual funds. The Company's earnings and investment gains and losses on these equity securities and mutual funds are affected by financial market conditions that are beyond the Company's control. If the Company's earnings from perpetual care trust funds decline, the Company would experience a decline in current revenues. If the Company's earnings from other trust funds decline, the Company would likely experience a decline in future revenues. In addition, if the trust funds experienced investment losses, there would likely be insufficient funds in the trusts to cover the costs of delivering services and merchandise or maintaining cemeteries in the future. The Company would have to cover any such shortfall with cash flows, which could have a material adverse effect on the Company, its financial condition, results of operations or cash flows. As of December 31, 2002, net unrealized depreciation in the prearranged funeral and cemetery merchandise and services trust funds amounted to $68.7 million and $50.1 million respectively. The perpetual care trust funds had net unrealized appreciation of $7.0 million as of December 31, 2002. See notes four and five to the consolidated financial statements in Item 8 of this Form 10-K. The following table summarizes the investment returns excluding fees on the Company's trust funds for the last three years.
2002 2001 2000 ---- ---- ---- Prearranged funeral trust funds............................. (7.6)% 1.7% 2.8% Cemetery merchandise and services trust funds............... (5.5)% 1.0% 5.3% Perpetual care trust funds.................................. 5.3% 4.3% 9.4%
Increasing insurance benefits related to prearranged funeral contracts funded through life insurance or annuity contracts may not cover future increases in the cost of providing a price guaranteed funeral service. The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. For prearranged funeral contracts funded through life insurance or annuity contracts, the Company receives in cash a general agency commission of approximately 14% of the total sale from the third party insurance company. Additionally, the Company accrues an increasing insurance benefit associated with the contract of approximately 1% per year to be received in cash by the Company at the time the funeral service is performed. There is no guarantee that the increasing insurance benefit will cover future increases in the cost of providing a price guaranteed funeral service, which could materially adversely affect the Company's future cash flows, revenues and profit margins. 33 The Company may not be able to joint venture or sell its international operations on acceptable terms or at all. The Company's long-term strategic plan includes the joint venture or sale of its remaining international operations outside of North America in order to create cash proceeds to reduce debt. For example, the Company believes it can joint venture its French operations in 2003. If the Company is unable to joint venture or sell these operations on acceptable terms or otherwise, it could adversely affect the Company's ability to achieve its strategic plan. The Company's foreign operations and investments involve special risks. The Company's activities in areas outside the United States are subject to risks inherent in foreign operations, including: - Loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, wars, insurrection and other political risks; - The effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems; and - Changes in laws, regulations and policies of foreign governments, including those associated with changes in the governing parties. The Company is the subject of lawsuits in Florida that, if decided against it, could have a negative effect on its financial condition, results of operations and cash flows and the Company may be subject to additional class action or other significant lawsuits in the future. Since December 2001, private plaintiffs and the state of Florida have brought proceedings against the Company for, among other things, allegedly deceiving customers by destroying caskets and remains and overselling space in two south Florida cemeteries owned by a Florida operating subsidiary. The private lawsuit is a purported class action which has not been certified but seeks substantial damages. The state actions involve, among other things, the appointment of an examiner to oversee the remedial actions and burial processes at the two cemeteries, as well as a criminal investigation by the Florida Department of Law Enforcement Agency. The ultimate outcome of these cases cannot be determined at this time. The Company has insurance policies which are designed to limit cash outflows in the event of a decision adverse to it in these matters. If the costs or damages awarded against the Company in these matters exceed the insurance coverage, if the insurance coverage is determined not to apply to these amounts, or if an insurance carrier is unable to pay, the Company would have to pay them out of its own funds, which could have a material adverse effect on the Company, its financial condition, results of operations and cash flows. In addition, the Company is in the ordinary course of business involved in other litigation proceedings. There is a risk that one of the lawsuits that the Company does not view as significant at the moment, or an additional lawsuit brought in the future, could have a material adverse effect on the Company, its financial condition, results of operations or cash flows. The Company is the subject of securities fraud class action lawsuits that, if decided against it, could have a negative effect on its financial condition, results of operations and cash flows. In January 1999, numerous putative class-action lawsuits were filed in the United States District Courts for the Southern and Eastern Districts of Texas, on behalf of persons and entities who (1) acquired shares of the Company's common stock in the merger with Equity Corporation International, or ECI; (2) purchased shares of the Company's common stock in the open market during the period from July 17, 1998 through January 26, 1999 (referred to herein as the class period); (3) purchased call options in the open market during the class period; (4) sold put options in the open market during the class period; (5) held employee stock options in ECI that became options to acquire the Company's stock pursuant to the ECI merger; and (6) held employee stock options to purchase the Company's common stock under a plan during the class period. These actions have been consolidated into one lawsuit in the federal court in Houston, Texas. The consolidated 34 complaint alleges that the Company and three of its current or former executive officers and directors violated federal securities laws by making false and misleading statements and failing to disclose material information concerning the Company's prearranged funeral business and other financial matters, including in connection with the ECI merger. Plaintiffs allege damages based on the market loss, during the class period, of the outstanding shares, including those exchanged in the ECI merger. In October 1999, the Company filed a motion to dismiss the consolidated complaint that has not been ruled on by the court. Four similar cases were also brought in the state courts of Texas by former officers, directors and shareholders of ECI alleging violations of Texas securities laws and statutory and common law fraud in connection with the ECI merger. The ultimate outcome of the stockholder class-action and employee cases cannot be determined at this time. The plaintiffs have not been required to quantify their claim of damages, but the Company believes they are likely to seek substantial amounts. Certain insurance policies held by the Company may limit the Company's cash outflows in the event of a decision adverse to the Company in these matters. If the legal costs or the damages awarded against the Company exceed the insurance coverage, if the insurance coverage is determined not to apply to these amounts, or if an insurance carrier is unable to pay, the Company would have to pay them out of its own funds, which could have a material adverse effect on the Company, its financial condition, results of operations or cash flows. RISKS RELATED TO THE DEATH CARE INDUSTRY If the number of deaths in the Company's markets declines, its cash flows and revenues may decrease. The United States Bureau of the Census estimates that the number of deaths in the United States will increase by approximately one percent per year from 2000 to 2010. However, longer life spans could reduce the number of deaths. If the number of deaths declines, the number of funeral services and interments performed by the Company will decrease and the Company, its financial condition, results of operations and cash flows may be materially adversely effected. The growing trend in the number of cremations performed in North America could result in lower revenue and gross profit dollars. In the death care industry, there has been a growing trend in the number of cremations performed in North America as an alternative to traditional funeral service dispositions. While cremations performed by the Company in North America typically have higher gross profit margins than traditional funeral services, cremations usually result in lower revenue and gross profit dollars to the Company than traditional funeral services. In North America during 2002, 38.2% of all funeral services performed by the Company were cremation cases compared to 37.0% and 36.3% performed in 2001 and 2000, respectively. In recent years the Company has continued to expand its cremation memorialization products and services in several North American markets, which has resulted in higher average sales for cremation cases compared to historical levels. The Company also continues to expand its nationally branded cremation service locations called National Cremation(R) Service. If the Company is unable to successfully expand its cremation memorialization products and services or its nationally branded cremation service locations, the Company, its financial condition, results of operations and cash flows could be materially adversely effected. The funeral home and cemetery businesses are high fixed-cost businesses. The majority of the Company's operations throughout the world are managed in groups called "clusters". Clusters are geographical groups of funeral service locations and cemeteries that lower their individual overhead costs by sharing common resources such as operating personnel, preparation services, clerical staff, motor vehicles and preneed sales personnel. Personnel costs, the largest of the operating expenses for the company, are the costs components most beneficially affected by clustering. The Company must incur many of these costs no matter the number of funeral services or interments performed. Because the Company cannot necessarily decrease these costs when it experiences declines in sales, declines in sales can cause margins, profits and cash flows to decline at a greater rate than the decline in revenues. 35 The funeral home and cemetery industry is highly regulated. The Company's operations are subject to regulation, supervision and licensing under numerous foreign, federal, state and local laws, ordinances and regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery products and services, and various other aspects of our business. The impact of such regulations varies depending on the location of the Company's funeral and cemetery operations. Violations of applicable laws could result in fines or other sanctions to the Company. In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs and decrease cash flows. For example, foreign, federal, state, local and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. Some states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate the ability of the Company to use surety bonding, increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which the Company operates, these and other possible proposals could have a material adverse effect on the Company, its financial condition, results of operations and cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information presented below should be read in conjunction with notes eight and nine to the consolidated financial statements in Item 8 of this Form 10-K. The Company historically used derivatives primarily in the form of interest rate swaps and cross-currency interest rate swaps in combination with local currency borrowings in order to manage its mix of fixed and floating rate debt and to hedge the Company's net investment in foreign assets. The Company generally does not participate in derivative transactions that are leveraged or considered speculative in nature. The Company was not a party to any derivative transactions at December 31, 2002. At December 31, 2002 and 2001, 99% of the Company's total debt consisted of fixed rate debt at a weighted average rate of 6.87% and 6.75%, respectively. The Company does not have a significant investment in foreign operations that are in highly inflationary economies. Approximately 8% of the Company's net investment and 21% of its operating income excluding impairment charges and other operating expenses are denominated in foreign currencies at December 31, 2002. At December 31, 2001, approximately 16% of the Company's net investment and 26% of its operating income excluding impairment charges and other operating expenses were denominated in foreign currencies. MARKETABLE EQUITY AND DEBT SECURITIES -- PRICE RISK In connection with the Company's prearranged funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity securities and mutual funds, which are sensitive to current market prices. Cost and market values as of December 31, 2002 and 2001 are presented in notes four and five to the consolidated financial statements in Item 8 of this Form 10-K. MARKET-RATE SENSITIVE INSTRUMENTS -- INTEREST RATE AND CURRENCY RISK The Company performs a sensitivity analysis to assess the impact of interest rate and exchange rate risks on earnings. This analysis determines the effect of a hypothetical 10% adverse change in market rates. In actuality, market rate volatility is dependent on many factors that are impossible to forecast. Therefore, the adverse changes described below could differ substantially from the hypothetical 10% change. At December 31, 2002, the Company was not a party to any derivative transactions. At December 31, 2001, the Company was party to two derivative instruments that were subject to interest rate and currency exchange rate exposures. Although the derivative instruments outstanding at December 31, 2001 were sensitive to market rates, they have been excluded from this analysis since they qualify and are designated as effective hedges of net foreign investments. Given this, the changes in the market values of these instruments, 36 caused by market rates, do not affect interest expense. Therefore, the effect of the sensitivity analysis described below results solely from the Company's debt instruments. A sensitivity analysis of debt instruments with variable interest rate components was modeled to assess the impact that changing interest rates could have on pretax earnings. The sensitivity analysis assumes an instantaneous 10% adverse change to the then prevailing interest rates with all other variables held constant. Given this model, the Company's pretax earnings, on an annual basis, would not change in 2002 and would be negatively impacted by approximately $150 thousand on December 31, 2001. A similar model was used to assess the impact of changes in exchange rates for foreign currencies on interest expense. At December 31, 2002, the Company's debt exposure was primarily associated with the Euro. At December 31, 2001, the Company's debt exposure was primarily associated with the British pound. A 10% adverse change in the strength of the U.S. dollar would have negatively affected the Company's interest expense, on an annual basis, by approximately $190 thousand and $800 thousand on December 31, 2002, and 2001, respectively. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
PAGE ---- Financial statements: Report of Independent Accountants......................... 39 Consolidated Statement of Operations for the three years ended December 31, 2002................................ 40 Consolidated Balance Sheet as of December 31, 2002 and 2001................................................... 41 Consolidated Statement of Cash Flows for the three years ended December 31, 2002................................ 42 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2002.................... 43 Notes to Consolidated Financial Statements................ 44-90 Financial Statement Schedule: II -- Valuation and Qualifying Accounts................... 91
All other schedules have been omitted because the required information is not applicable or is not present in amounts sufficient to require submission or because the information required is included in the consolidated financial statements or the related notes thereto. 38 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Service Corporation International In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Service Corporation International and its subsidiaries at December 31, 2002 and December 31, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note three to the consolidated financial statements, the Company changed its method of accounting for goodwill on January 1, 2002, changed its method of accounting for derivative financial instruments and hedging activities on January 1, 2001 and changed its method of accounting for prearranged sales activities on January 1, 2000. PricewaterhouseCoopers LLP Houston, Texas March 14, 2003 39 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.............................................. $ 2,272,423 $ 2,510,343 $ 2,564,730 Costs and expenses.................................... (1,908,508) (2,150,957) (2,237,088) ----------- ----------- ----------- Gross profits............................... 363,915 359,386 327,642 General and administrative expenses................... (89,752) (70,309) (79,932) Impairment losses and other operating expenses........ (289,054) (644,147) (517,776) ----------- ----------- ----------- Operating loss.............................. (14,891) (355,070) (270,066) Interest expense...................................... (161,494) (211,626) (281,548) Other income.......................................... 19,021 15,044 17,455 Gains from dispositions............................... 16,401 16,224 17,181 ----------- ----------- ----------- Loss from continuing operations before income taxes, extraordinary items and cumulative effects of accounting changes................................... (140,963) (535,428) (516,978) Benefit (provision) for income taxes.................. 39,740 (61,199) 91,455 ----------- ----------- ----------- Loss from continuing operations before extraordinary items and cumulative effects of accounting changes............................................. (101,223) (596,627) (425,523) Income from discontinued operations (net of income tax expense of $936 and $6,543 respectively)............ -- 1,701 13,347 Loss on disposal of discontinued operations (net of income tax expense of $73,839)...................... -- -- (43,733) Extraordinary gains on early extinguishments of debt (net of income tax expense of $2,880, $3,024, and $12,630, respectively).............................. 4,903 4,731 21,973 Cumulative effects of accounting changes (net of income tax benefit of $11,234, $5,318 and $522,491, respectively)....................................... (135,560) (7,601) (909,315) ----------- ----------- ----------- Net loss.................................... $ (231,880) $ (597,796) $(1,343,251) =========== =========== =========== Basic and diluted earnings per share: Loss from continuing operations before extraordinary items and cumulative effects of accounting changes.......................................... $ (.34) $ (2.09) $ (1.56) Income from discontinued operations................. -- .00 .05 Loss on disposal of discontinued operations......... -- -- (.16) Extraordinary gains on early extinguishments of debt............................................. .01 .02 .08 Cumulative effects of accounting changes............ (.46) (.03) (3.34) ----------- ----------- ----------- Net loss.................................... $ (.79) $ (2.10) $ (4.93) =========== =========== =========== Basic and diluted weighted average number of shares... 294,533 285,127 272,172 =========== =========== ===========
(See notes to consolidated financial statements) 40 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET
DECEMBER 31, ------------------------- 2002 2001 ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 200,625 $ 29,292 Receivables, net of allowances............................ 291,765 386,479 Inventories............................................... 135,529 168,975 Other..................................................... 126,980 245,207 ----------- ----------- Total current assets.............................. 754,899 829,953 ----------- ----------- Prearranged funeral contracts, net of allowances............ 4,273,790 4,109,195 Long-term receivables, net of allowances.................... 1,156,458 1,249,492 Cemetery property, at cost.................................. 1,567,584 1,924,773 Property, plant and equipment, at cost (net)................ 1,188,340 1,357,410 Deferred charges and other assets........................... 598,536 699,805 Goodwill (net).............................................. 1,184,178 1,409,309 ----------- ----------- $10,723,785 $11,579,937 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $ 361,910 $ 484,150 Current maturities of long-term debt...................... 100,330 220,640 Income taxes.............................................. 2,043 5,812 ----------- ----------- Total current liabilities......................... 464,283 710,602 ----------- ----------- Long-term debt.............................................. 1,884,508 2,313,973 Deferred prearranged funeral contract revenues.............. 4,659,994 4,596,116 Deferred preneed cemetery contract revenues................. 1,672,661 1,756,041 Deferred income taxes....................................... 522,453 546,747 Other liabilities........................................... 216,115 223,597 Commitments and contingencies (note ten) Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 297,010,237 and 292,153,765 issued and outstanding (net of 2,516,396 and 2,502,190 treasury shares at par)......................................... 297,010 292,154 Capital in excess of par value............................ 2,259,936 2,246,055 Accumulated deficit....................................... (1,046,029) (814,149) Accumulated other comprehensive loss...................... (207,146) (291,199) ----------- ----------- Total stockholders' equity........................ 1,303,771 1,432,861 ----------- ----------- $10,723,785 $11,579,937 =========== ===========
(See notes to consolidated financial statements) 41 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 --------- --------- ----------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................... $(231,880) $(597,796) $(1,343,251) Adjustments to reconcile net loss to net cash provided by operating activities: Income from discontinued operations, net of tax.......... -- (1,701) (13,347) Loss on disposal of discontinued operations, net of tax.................................................... -- -- 43,733 Extraordinary gains on early extinguishments of debt, net of tax................................................. (4,903) (4,731) (21,973) Cumulative effects of accounting changes, net of tax..... 135,560 7,601 909,315 Depreciation and amortization............................ 128,546 193,937 224,031 Provision for deferred income taxes...................... 104,345 72,695 45,039 Impairment losses and other operating expenses........... 289,054 644,147 517,776 Payments on restructuring charges........................ (12,806) (22,794) (46,655) Gains from dispositions.................................. (16,401) (16,224) (17,181) Net effect of interest rate component of swap terminations........................................... -- -- (32,840) Change in assets and liabilities, net of effects from acquisitions and dispositions: Decrease (increase) in receivables..................... 27,972 50,360 191,137 Decrease (increase) in other assets.................... 88,587 100,516 (265,504) Decrease in other liabilities.......................... (178,126) (106,409) (109,975) Net effect of prearranged funeral production and maturities............................................ 19,605 45,979 112,520 Other.................................................. 2,619 17,755 30,775 --------- --------- ----------- Net cash provided by continuing operations.................. 352,172 383,335 223,600 Net cash provided by discontinued operations................ -- -- 144,640 --------- --------- ----------- Net cash provided by operating activities................... 352,172 383,335 368,240 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures....................................... (100,045) (74,164) (83,370) Proceeds from joint ventures and sales of equity investments, net of cash retained........................ 291,795 285,688 278,025 Proceeds from divestitures and sales of property and equipment................................................ 76,292 126,792 92,593 Net withdrawals (deposits) of restricted funds............. 58,035 (12,874) (68,753) Proceeds from sales of loans by lending subsidiary......... -- -- 84,803 Principal payments received on loans by lending subsidiary............................................... -- -- 21,649 Other...................................................... 848 (32) (8,913) --------- --------- ----------- Net cash provided by continuing operations.................. 326,925 325,410 316,034 Net cash used in discontinued operations.................... -- -- (122,966) --------- --------- ----------- Net cash provided by investing activities................... 326,925 325,410 193,068 CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in borrowings under credit agreements......... (29,061) (734,186) (395,096) Payments of debt........................................... (75,857) (166,262) (126,342) Proceeds from long-term debt issued........................ -- 345,000 -- Early extinguishments of debt.............................. (307,232) (155,545) (194,097) Net effect of cross-currency component of swap terminations............................................. -- -- 143,498 Settlement of options...................................... (57,000) Bank overdrafts and other.................................. (36,332) (16,445) 7,574 --------- --------- ----------- Net cash used in financing activities....................... (505,482) (727,438) (564,463) Effect of foreign currency.................................. (2,282) 76 (131) --------- --------- ----------- Net increase (decrease) in cash and cash equivalents........ 171,333 (18,617) (3,286) Adjust for change in cash and cash equivalents associated with discontinued operations............................... -- -- (6,619) Cash and cash equivalents of continuing operations at beginning of period........................................ 29,292 47,909 57,814 --------- --------- ----------- Cash and cash equivalents of continuing operations at end of period..................................................... $ 200,625 $ 29,292 $ 47,909 ========= ========= ===========
(See notes to consolidated financial statements) 42 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED CAPITAL IN RETAINED OTHER COMMON EXCESS OF EARNINGS COMPREHENSIVE STOCK PAR VALUE (DEFICIT) INCOME (LOSS) TOTAL ---------- ---------- ----------- ------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Balance at December 31, 1999........................... $ 272,064 $2,156,301 $ 1,126,898 $ (59,990) $ 3,495,273 Comprehensive loss: Net loss............................................. (1,343,251) (1,343,251) Other comprehensive loss: Foreign currency translation....................... (202,709) (202,709) Unrealized loss on securities, net................. (4,792) (4,792) Minimum pension liability adjustment, net.......... (12,724) (12,724) Reclassification adjustment for realized loss on securities....................................... 27,014 27,014 Reclassification adjustment for realized loss on foreign currency translation..................... 16,044 16,044 ----------- Total other comprehensive loss................... (177,167) ----------- Comprehensive loss..................................... (1,520,418) Common Stock issued: Stock option exercises and stock grants.............. 33 100 133 Acquisitions......................................... 61 186 247 Contributions to employee 401(k)..................... 356 456 812 Repurchase of common stock............................. (7) (219) (226) ---------- ---------- ----------- --------- ----------- Balance at December 31, 2000........................... 272,507 2,156,824 (216,353) (237,157) 1,975,821 Comprehensive loss: Net loss............................................. (597,796) (597,796) Other comprehensive loss: Foreign currency translation....................... (76,403) (76,403) Minimum pension liability adjustment, net.......... (16,629) (16,629) Reclassification adjustment for realized loss on foreign currency translation..................... 38,990 38,990 ----------- Total other comprehensive loss................... (54,042) ----------- Comprehensive loss..................................... (651,838) Common Stock issued: Stock option exercises and stock grants.............. 627 2,367 2,994 Contributions to employee 401(k) and cash balance plan............................................... 3,576 15,559 19,135 Debenture conversions................................ 244 5,284 5,528 Debenture extinguished using common stock............ 15,200 66,021 81,221 ---------- ---------- ----------- --------- ----------- Balance at December 31, 2001........................... 292,154 2,246,055 (814,149) (291,199) 1,432,861 Comprehensive loss: Net loss............................................. (231,880) (231,880) Other comprehensive income: Foreign currency translation....................... 43,776 43,776 Minimum pension liability adjustment, net.......... (7,202) (7,202) Reclassification adjustment for realized loss on foreign currency translation..................... 47,479 47,479 ----------- Total other comprehensive income................. 84,053 ----------- Comprehensive loss..................................... (147,827) Common Stock issued: Stock option exercises and stock grants.............. 173 414 587 Contributions to employee 401(k)..................... 4,683 13,467 18,150 ---------- ---------- ----------- --------- ----------- Balance at December 31, 2002........................... $ 297,010 $2,259,936 $(1,046,029) $(207,146) $ 1,303,771 ========== ========== =========== ========= ===========
(See notes to consolidated financial statements) 43 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE ONE NATURE OF OPERATIONS Service Corporation International (SCI or the Company) is the largest provider of death care services in the world through its funeral service and cemetery operations. At December 31, 2002, the Company operated 2,393 funeral service locations, 451 cemeteries and 189 crematoria located in eight countries. The Company also has minority interest investments in funeral and cemetery operations in four countries outside of North America. The funeral service locations and cemetery operations consist of the Company's funeral service locations, cemeteries, crematoria and related businesses. Company personnel at the funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral related merchandise is sold at funeral service locations and certain funeral service locations contain crematoria. The Company sells prearranged funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company's cemeteries provide cemetery interment rights (including mausoleum spaces, lots and lawn crypts) and sell cemetery related merchandise. Cemetery items are sold on an atneed or preneed basis. Company personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries also operate crematoria. There are 190 combination locations that contain a funeral service location within a Company owned cemetery. NOTE TWO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of SCI and all majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years to conform to current period presentation with no effect on the consolidated financial position, results of operations or cash flows. In 2002, the Company began recognizing revenues associated with delivered caskets previously prearranged on cemetery contracts as part of funeral operations. Previously, such casket revenue was recognized in cemetery operations. The Company reclassified prior year operating results to conform to the current period presentation with no effect on previously reported results of operations, financial position or cash flows. Use of Estimates in the Preparation of Financial Statements The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. The Company has an ongoing review program of its obligations to deliver cemetery merchandise and services to customers in order to collect funds from applicable cemetery trust funds. As a result of this ongoing review, the Company has recognized changes in estimates of Deferred preneed cemetery contract revenues which had the effect of increasing revenues and gross profits in 2002 by $23,400 and $18,300, respectively, compared to $68,500 and $54,900, respectively, in 2001. The Company intends to continue to review these obligations, however, the impact recognized in future periods will depend on the outcome of such reviews. 44 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2002, the Company changed the amortization period related to deferred prearranged funeral selling costs from 20 years to 12 years. This change in estimate was made in order to more accurately reflect current trends regarding the timeframe from when a prearranged contract is sold to when it is serviced atneed. This change in estimate reduced funeral gross profit and net loss by approximately $6,700 and $4,200, or $.01 per diluted share in 2002. The Company changed its allocation methodology of overhead costs in North America to be based on funeral and cemetery reporting unit revenues. The change in overhead allocation has not impacted the Company's reported results of operations, financial position or cash flows. In addition, in 2002, the Company decided to implement new information technology systems, including a new North America point of sale system and an upgraded general ledger system. As a result of this decision, the Company accelerated amortization of its existing capitalized systems costs beginning in the second quarter of 2002 to reflect the remaining estimated useful lives of these systems. The Company recognized approximately $13,500 of additional amortization in 2002 related to this change in estimate. This change in estimate impacted net loss approximately $8,500 or diluted loss per share $.03 in 2002. Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories and Cemetery Property Funeral merchandise and cemetery burial property and merchandise are stated at the lower of average cost or market. Property, Plant and Equipment, net Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized. Costs of property sold or retired and the related accumulated depreciation are removed from the consolidated balance sheet; resulting gains and losses are included in the consolidated statement of operations. Goodwill The excess of purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases is included in Goodwill. Goodwill is tested for impairment annually based on the fair value of the Company's reporting units pursuant to the provisions of SFAS No. 142 for its Funeral operations (North America, France, Germany, Singapore and Argentina) and Cemetery operations (North America, Argentina, Chile and Uruguay). See note three to the consolidated financial statements for further information. Depreciation and Amortization Depreciation of property, plant and equipment is provided using the straight line method over the estimated useful lives of the various classes of assets. Property and plant are depreciated over a period ranging from seven to fifty years, equipment is depreciated over a period from five to twenty years and leasehold improvements are depreciated over the shorter of the lease term or a range of five to fifty years. For the years ended December 31, 2002, 2001, and 2000 depreciation expense from continuing operations was $90,036, $100,263, and $109,995, respectively. 45 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Prepaid management, consultative and non-competition agreements, primarily with former owners and key employees of businesses acquired, are amortized on a straight-line basis over the lives (generally from five to ten years) of the respective contracts. Amortization expense associated with these agreements for the years ended December 31, 2002, 2001, and 2000 was $15,532, $19,715, and $21,527, respectively. Deferred selling costs incurred pursuant to the sales of trust funded prearranged funeral contracts are deferred and amortized over 12 years, a period representing the estimated life of the prearranged funeral contracts. Amortization associated with these deferred selling costs for the years ended December 31, 2002, 2001, and 2000 was $14,592, $7,318, and $7,116, respectively. See Use of Estimates in the Preparation of Financial Statements within this note for further information regarding deferred selling costs. For the years ended December 31, 2001 and 2000, amortization expense of goodwill from continuing operations was $59,237 and $65,541, respectively. See note three to the consolidated financial statement for further information regarding accounting for goodwill. Other miscellaneous amortization from continuing operations for the years ended December 31, 2002, 2001, and 2000 was $8,386, $7,404, and $19,852, respectively. Impairment or Disposal of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets to be held and used be reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less estimated cost to sell. In January 2002, the Company ceased depreciation of operating assets held for sale. The Company later determined transactions to sell or joint venture certain assets would be delayed until after 2002. As a result, the Company resumed normal depreciation of those assets held in France and Chile in the third quarter of 2002. Stock Options The Company accounts for employee stock-based compensation expense under the intrinsic value method. Under the intrinsic value method, no compensation expense is recognized on stock options if the grant price equals the market value on the date of grant. If the Company had elected to recognize compensation cost for its option plans based on the fair value at the grant dates for awards under those plans, net loss and loss per share would have been changed for the years 46 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ended December 31 to the pro forma amounts indicated below. For further information see note eleven to the consolidated financial statements.
2002 2001 2000 --------- --------- ----------- Net loss......................................... $(231,880) $(597,796) $(1,343,251) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense........................................ (13,537) (17,680) (24,735) --------- --------- ----------- Pro forma net loss............................... $(245,417) $(615,476) $(1,367,986) ========= ========= =========== Basic and diluted net loss per share............. $ (.79) $ (2.10) $ (4.93) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense........................................ (.04) (0.06) (0.10) --------- --------- ----------- Pro forma basic and diluted net loss per share... $ (.83) $ (2.16) $ (5.03) ========= ========= ===========
Foreign Currency Translation All assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of the reporting period. The resulting translation adjustments are included in stockholders' equity as a component of Accumulated other comprehensive income (loss) in the consolidated statement of stockholders' equity. Revenue and expense items are translated at the average exchange rates for the reporting period. With respect to transactions denominated in currencies other than the functional currencies of the Company's operations, transactional currency gains and losses are recorded through the consolidated statement of operations. Funeral Operations Funeral revenue is recognized when funeral services are performed. The Company's trade receivables consist of amounts due for funeral services already performed. An allowance for doubtful accounts has been provided based on historical experience. The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Revenues associated with sales of prearranged funeral contracts, which include accumulated trust earnings and increasing insurance benefits, are deferred until such time that the funeral services are performed (see note four to the consolidated financial statements). Cemetery Operations Sales of atneed cemetery interment rights, merchandise and services are recognized when the service is performed or merchandise delivered. Preneed cemetery interment right sales of constructed cemetery burial property are not recognized until a minimum of 10% of the sales price has been collected. Revenues related to the preneed sale of unconstructed cemetery burial property are deferred until such property is constructed and the minimum percentage of the sales price has been collected. Further, the Company defers certain direct selling costs associated with these sales which are expensed as revenue is recognized (see notes three and five to the consolidated financial statements). Costs related to the sales of interment rights are the accumulation of property costs and development costs specifically identified by project. At the completion of the project, costs are charged to operations as revenue is recognized. Costs related to sales of merchandise and services are based on actual costs incurred. 47 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Allowances for customer cancellations are provided at the date of sale based upon historical experience. Pursuant to state law, all or a portion of the proceeds from cemetery merchandise or services sold on a preneed basis may be required to be paid into trust funds. Merchandise and services funds trusted at December 31, 2002 and 2001 were $859,338 and $915,127, respectively. The Company defers realized investment earnings related to these merchandise and services trusts until the associated merchandise is delivered or services are performed. A portion of the proceeds from the sale of cemetery property is required by state law to be paid into perpetual care trust funds. Realized investment earnings from these trusts are recognized in current cemetery revenues and are intended to defray cemetery maintenance costs, which are expensed as incurred. Perpetual care funds trusted at December 31, 2002 and 2001 were $564,277 and $543,893, respectively. The principal of such perpetual care trust funds generally cannot be withdrawn by the Company and therefore is not included in the consolidated balance sheet. See note six to the consolidated financial statements regarding preneed cemetery activity. Derivatives Derivative instruments are recognized in the consolidated balance sheet at their fair values. For derivatives that qualify and are designated as hedges of future cash flows or net foreign investments, the changes in fair values are recorded in Other comprehensive income in the consolidated statement of stockholders equity. For derivatives that qualify and are designated as fair value hedges, the changes in fair values are recorded in earnings, offset by the recognition of the changes in fair values of the underlying hedged asset or liability. The changes in fair values of derivatives that do not qualify for hedge accounting and the ineffective portion of derivatives that do qualify for hedge accounting are recorded in earnings. The Company had no outstanding derivatives at December 31, 2002. Income Taxes The Company calculates taxes on a consolidated basis. Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realization exists. The Company intends to permanently reinvest the unremitted earnings of certain of its foreign subsidiaries in those businesses outside the United States and, therefore, has not provided for deferred federal income taxes on such unremitted foreign earnings. NOTE THREE ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and establishes the purchase method for accounting for such transactions. SFAS No. 142 addresses accounting for goodwill and other intangible assets and redefines useful lives, amortization periods and impairment of goodwill. Under the new pronouncement, goodwill is no longer amortized, but is tested for impairment annually by assessing the fair value of reporting units, generally one level below reportable segments. The Company identified North America, France, Germany, Singapore and Argentina as reporting units for its funeral operations and North America, Argentina, Chile and Uruguay as reporting units for its cemetery operations. In order to assess impairment of goodwill, the Company determined the fair value of its reporting units based on a combination of present value of expected future cash flows and multiples of revenues. As a result of the adoption of SFAS No. 142 in the first quarter of 2002, the Company recognized a charge reflected as a cumulative effect of accounting change 48 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of $135,560 (net of a tax benefit of $11,234) or $.46 per diluted share related to the impairment of goodwill in its North America cemetery reporting unit. The following table shows the historical results compared to unaudited pro forma effects of SFAS No. 142 had goodwill not been amortized during that period.
2001 2000 --------- ----------- Loss from continuing operations before extraordinary items and cumulative effects of accounting changes.............. $(596,627) $ (425,523) Add back: Goodwill amortization, net of taxes............... 47,455 52,842 --------- ----------- Pro forma loss from continuing operations before extraordinary items and cumulative effects of accounting changes................................................... $(549,172) $ (372,681) ========= =========== Net loss.................................................... $(597,796) $(1,343,251) Add back: Goodwill amortization, net of taxes............... 47,455 53,360 --------- ----------- Pro forma net loss.......................................... $(550,341) $(1,289,891) ========= =========== Basic and diluted earnings (loss) per share before extraordinary items and cumulative effects of accounting changes................................................... $ (2.09) $ (1.56) Add back: Goodwill amortization, net of taxes............... .17 .19 --------- ----------- Pro forma basic and diluted loss per share before extraordinary items and cumulative effects of accounting changes................................................... $ (1.92) $ (1.37) ========= =========== Basic and diluted net loss per share........................ $ (2.10) $ (4.93) Add back: Goodwill amortization, net of taxes............... .17 .19 --------- ----------- Pro forma basic and diluted net loss per share.............. $ (1.93) $ (4.74) ========= ===========
The changes in the carrying amounts of goodwill for the Company's segments are as follows:
FUNERAL CEMETERY SEGMENT SEGMENT TOTAL ---------- --------- ---------- Balance as of December 31, 2001.................. $1,246,273 $ 163,036 $1,409,309 Impairment loss recorded upon adoption of SFAS No. 142........................................ -- (146,794) (146,794) Goodwill reduced related to disposition programs....................................... (68,078) (14,220) (82,298) Effect of foreign currency and other............. 4,076 (115) 3,961 ---------- --------- ---------- Balance as of December 31, 2002.................. $1,182,271 $ 1,907 $1,184,178 ========== ========= ==========
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under the provisions of SFAS No. 143, the fair value of a liability for an asset retirement obligation should be recognized in the period in which it is incurred, if a reasonable estimate can be made. The associated costs are capitalized as part of the carrying amount of the long-lived asset and are allocated to expense over the useful life of the asset. The Company does not expect the adoption of SFAS No. 143 to have a material effect on the Company's consolidated financial position, results of operations, or cash flows. The Company is required to adopt SFAS No. 143 during the first quarter of the year ending December 31, 2003. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, and addresses the impairment or disposal of long- 49 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lived assets. SFAS No. 144 requires that long-lived assets to be held and used be written down to fair value when it is concluded that the carrying value of such assets are not recoverable on an undiscounted cash flow basis. Assets to be disposed of by sale are required to be recorded at the lower of their carrying amounts or fair value less estimated cost to sell. The Company adopted SFAS No. 144 during the first quarter of 2002 with no impact on the results of operations, financial position or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and classified as extraordinary items as well as certain other items. When the pronouncement is adopted, gains and losses from early extinguishments of debt will be included in Other income in the consolidated statement of operations. The Company is required to adopt SFAS No. 145 during the first quarter of 2003 as it relates to the classification of extinguishments of debt for all periods presented. The other provisions of SFAS No. 145 are generally effective for transactions occurring after May 15, 2002. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The principal difference between this pronouncement and Issue 94-3 is that the statement follows FASB Concepts Statement No. 6 in that a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred, not at the entity's commitment to an exit plan. The Company does not anticipate a significant impact on its results of operations, financial position or cash flows as a result of adopting this pronouncement. The Company is required to adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" and specifies additional methods of transition for companies that adopt the fair value method of accounting for stock options and amends the disclosure requirements of SFAS No. 123. The Company adopted the disclosure requirements of SFAS No. 148 for the year ended December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the disclosures required by a guarantor about its obligations and it requires grantors to recognize a liability, at fair value at the time of issuance. The provisions for initial recognition and measurement are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of periods that end after December 15, 2002. The Company has disclosed the guarantees related to FIN No. 45 within note ten to the consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), "Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN No. 46 clarifies the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 defines the terms related to variable interest entities and clarifies if such entities should be consolidated. The Company is currently assessing the impact of FIN No. 46 on the Company's results of operations, financial position and cash flows. In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging 50 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Activities: An Amendment of FASB Statement No. 133." The change in the Company's accounting policies resulting from the implementation of SFAS 133 has been treated as a change in accounting principle effective January 1, 2001. In accordance with these pronouncements, the Company recognized a cumulative effect of a change in accounting principle, net of applicable taxes, of $7,601 or $.03 per diluted share. It was impractical for the Company to obtain the amounts on a pro forma basis for the year ended December 31, 2000. In September 2001, the FASB Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 01-5 entitled "Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment that Will Be Disposed Of." This consensus requires the inclusion of accumulated foreign currency translation amounts in the assessments of impairment of long-lived assets expected to be disposed of. Prior to issuance of the consensus, related accumulated foreign currency translation amounts were included in results of operations at the time of disposal. The Company applied this consensus in connection with impairment assessments of assets to be disposed of performed after July 19, 2001, the effective date of the consensus. See note sixteen to the consolidated financial statements for further discussion on impairment charges recorded in 2001 related to the Company's foreign investments. In 2000, the Company implemented SAB No. 101 "Revenue Recognition in Financial Statements" which changed the Company's accounting policies regarding the manner in which the Company records preneed sales activities. The implementation of SAB No. 101 had no effect on the consolidated cash flows of the Company. As a result of the required change, the Company's prearranged sales activities are affected as follows: - Preneed sales of cemetery interment rights (cemetery burial property) -- revenue and all costs associated with the sales of preneed cemetery interment rights are recognized in accordance with the retail land sales provisions of SFAS No. 66 "Accounting for the Sales of Real Estate". Under SFAS No. 66, revenue and associated costs from constructed cemetery property are not recognized until a minimum percentage (10%) of the sales price has been collected. Revenues related to the preneed sale of unconstructed cemetery property are deferred until such property is constructed and meets the criteria of SFAS No. 66 described above. Previously, the preneed interment rights revenue and associated costs were recognized at the time the contract was signed with the customer. - Preneed sales of cemetery merchandise (primarily markers and vaults) -- revenue and all costs associated with the sales of preneed cemetery merchandise are deferred until the merchandise is delivered. Previously, the preneed cemetery merchandise revenue and associated costs were recognized at the time the contract was signed with the customer. - Preneed sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees) -- revenue and all costs associated with the sales of preneed cemetery services are deferred until the services are performed. Previously, the revenue and associated costs were recognized at the time the contract was signed with the customer. - Prearranged funeral and preneed cemetery customer selling costs -- costs incurred related to obtaining new preneed cemetery and prearranged funeral business are accounted for under the provisions of SFAS No. 60 "Accounting and Reporting by Insurance Enterprises". Under SFAS No. 60, obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new preneed cemetery and prearranged funeral business, are deferred. As a result, the Company's policy is to defer only commission and related fringes of prearranged funeral and preneed cemetery business. Previously, deferred selling costs for prearranged funeral business included variable and fixed direct selling costs as well as direct marketing costs; and, selling costs for preneed cemetery business were previously expensed as incurred. 51 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - Cemetery merchandise and services trust investment earnings -- investment earnings generated by assets included in merchandise and services trusts are deferred until the associated merchandise is delivered or services performed. Previously, the trust earnings were recognized as earned in the trust. The change in the Company's accounting policies resulting from implementation of SAB No. 101 has been treated as a change in accounting principle effective as of January 1, 2000. The cumulative effect of the accounting change through December 31, 1999 resulted in a charge to net income of $909,315 (net of a $552,491 tax benefit), or $3.34 per diluted share recorded on January 1, 2000. NOTE FOUR PREARRANGED FUNERAL ACTIVITIES The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts generally are used to pay premiums on life insurance or annuity contracts, or are placed into trust accounts, pursuant to applicable law. The balance in Prearranged funeral contracts represents amounts due from trust funds, customer receivables or third party insurance companies related to unperformed, price guaranteed prearranged funeral contracts. A corresponding credit is recorded to Deferred prearranged funeral contract revenues. Funeral revenue is recognized on prearranged funeral contracts at the time the funeral service is performed. Trust earnings and increasing insurance benefits are accrued and deferred until the services are performed, at which times these funds are also recognized in funeral revenues. Such amounts are intended to cover future increases in the cost of providing a price guaranteed funeral service. Deferred selling costs incurred pursuant to the sales of prearrangements are included in Deferred charges and other assets. These selling costs, which include sales commissions and certain other direct costs that vary with and are primarily related to the acquisition of new prearranged funeral business, are deferred and amortized over 12 years, a period representing the estimated life of the prearranged funeral contracts. Previous to 2002, the amortization period was 20 years, see note two to the consolidated financial statements. Deferred selling costs as of December 31, 2002 and 2001 were $92,741 and $99,245, respectively. Prearranged Funeral Contracts As previously mentioned, the balance in prearranged funeral contracts represents amounts due from trust funds, customer receivables or third party insurance companies related to unperformed, price guaranteed prearranged funeral contracts. The components of prearranged funeral contracts in the consolidated balance sheet at December 31 are as follows:
2002 2001 ---------- ---------- Trusts: Receivables due from trust assets......................... $ 983,357 $1,177,354 Receivables from customers................................ 220,541 271,645 ---------- ---------- Trust related assets................................... 1,203,898 1,448,999 Receivables from third party insurance companies............ 3,442,170 3,027,696 ---------- ---------- Trust and insurance related assets........................ 4,646,068 4,476,695 Allowance for cancellation.................................. (372,278) (367,500) ---------- ---------- Prearranged funeral contracts............................. $4,273,790 $4,109,195 ========== ==========
52 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The allowance for cancellation is based on historical experience and is equivalent to approximately 8.7% of the total balance at December 31, 2002 and 8.9% of prearranged funeral contracts at December 31, 2001. Accumulated earnings from trust funds and increasing insurance benefits of third party insurance companies have been included to the extent that they have been accrued through December 31, 2002 and 2001, respectively. The cumulative trust funded total has been reduced by allowable cash withdrawals for trust earnings and amounts retained by the Company pursuant to various state laws. The activity in prearranged funeral contracts for the years ended December 31 is as follows:
2002 2001 ---------- ---------- Beginning balance -- Prearranged funeral contracts.......... $4,109,195 $4,080,367 Net sales................................................. 601,816 503,287 Acquisitions (dispositions) of businesses................. (293,888) (122,926) Realized earnings and increasing insurance benefits for third party insurance companies........................ 43,217 49,239 Maturities................................................ (370,336) (333,125) Distributed earnings...................................... -- (49,153) Change in cancellation reserve............................ (4,778) (16,568) Effect of foreign currency and other...................... 188,564 (1,926) ---------- ---------- Ending balance -- Prearranged funeral contracts............. $4,273,790 $4,109,195 ========== ==========
The cost and market value of the assets held in the trust funds underlying the Company's prearranged funeral contracts at December 31 are detailed below. The Company believes the unrealized losses related to the assets held in trust funds are temporary in nature.
2002 2001 ------------------- ----------------------- COST MARKET COST MARKET -------- -------- ---------- ---------- Cash and cash equivalents............... $ 78,010 $ 78,010 $ 84,601 $ 84,601 Fixed Income Securities: U.S. Treasury......................... 88,017 91,979 45,414 43,455 Foreign government.................... 54,954 56,000 208,408 211,772 Corporate............................. 11,763 12,401 11,748 11,693 Mortgage-backed....................... 103,793 105,024 196,065 191,779 Asset-backed.......................... 2,722 2,820 1,174 1,197 Municipal............................. -- -- 1,168 1,217 Other................................. 452 458 749 724 Equity securities: Preferred stock....................... -- -- 214 214 Common stock.......................... 473,257 413,488 440,146 439,174 Mutual funds: Equity................................ 59,487 50,172 72,581 61,761 Fixed income.......................... 54,639 56,155 51,271 52,301 Private equity and other................ 56,263 48,106 63,815 63,649 -------- -------- ---------- ---------- Prearranged funeral trust assets........ $983,357 $914,613 $1,177,354 $1,163,537 ======== ======== ========== ========== Market value as of a percentage of cost.................................. 93.0% 98.8% ======== ==========
53 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Prearranged Funeral Contract Revenues Deferred prearranged funeral contract revenues represent the original contract price, trust earnings and increasing insurance benefits on unperformed funeral contracts generally funded by trust or third party insurance companies. The total amounts associated with unperformed prearranged funeral contracts consists of contracts funded by trust, surety bonds in lieu of trust funds, or third party insurance. The following table summarizes for the years ended December 31 the activity in deferred prearranged funeral contract revenues:
2002 2001 ---------- ---------- Beginning balance -- Deferred prearranged funeral contract revenues.................................................. $4,596,116 $4,537,669 Net sales................................................. 647,119 543,785 Acquisitions (dispositions) of businesses................. (361,005) (159,809) Realized earnings and increasing insurance benefits from third party insurance companies........................ 43,307 48,864 Maturities................................................ (387,144) (357,105) Change in cancellation reserve............................ (4,778) (16,568) Effect of foreign currency and other...................... 126,379 (720) ---------- ---------- Ending balance -- Deferred prearranged funeral contract revenues.................................................. $4,659,994 $4,596,116 ========== ==========
NOTE FIVE PRENEED CEMETERY ACTIVITIES The Company sells price guaranteed preneed cemetery contracts providing for future merchandise, services or property at prices prevailing when the agreements are signed. A portion of the payments under these contracts may be required to be placed into trust accounts, pursuant to applicable law. Cemetery revenue is recognized on preneed cemetery contracts when the service is performed or merchandise is delivered. The Company defers certain direct selling costs associated with preneed cemetery sales which are deferred, and expenses such costs when the corresponding revenue is recognized. Deferred selling costs related to preneed cemetery contracts of $213,086 and $213,414 as of December 31, 2002 and 2001, respectively, were included in Deferred charges and other assets in the consolidated balance sheet. Preneed Cemetery Contracts The balance in preneed cemetery contracts are included in current and long-term receivables in the consolidated balance sheet and the components at December 31 are as follows:
2002 2001 ---------- ---------- Receivables due from trust assets........................... $ 859,338 $ 915,127 Cemetery receivables due from customers..................... 652,986 738,063 Less: Unearned finance charges.............................. (102,394) (112,254) ---------- ---------- 1,409,930 1,540,936 Less: Atneed receivables from customers..................... (51,326) (56,364) ---------- ---------- 1,358,604 1,484,572 Less: Allowance for contract cancellations.................. (211,853) (209,540) ---------- ---------- $1,146,751 $1,275,032 ========== ==========
54 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity in preneed cemetery contracts for the years ended December 31 is as follows:
2002 2001 ---------- ---------- Beginning balance -- preneed cemetery contracts............. $1,275,032 $1,396,139 Net sales................................................. 317,062 402,383 Acquisitions (dispositions) of businesses................. (18,194) (53,859) Realized earnings (losses)................................ (30,798) 2,289 Distributed earnings and net cash receipts................ (238,214) (337,631) Deliveries and maturities................................. (128,925) (143,459) Change in cancellation reserve............................ (2,313) 13,336 Effect of foreign currency and other...................... (26,899) (4,166) ---------- ---------- Ending balance -- preneed cemetery contracts................ $1,146,751 $1,275,032 ========== ==========
Merchandise and Services Trusts Amounts paid into cemetery merchandise and services trusts are included in Current and long-term receivables, at cost, in the consolidated balance sheet. The cost and market values associated with the assets held in the cemetery merchandise and services trust funds underlying these receivables at December 31 are detailed below. The Company believes the unrealized losses related to the assets held in trust funds are temporary in nature.
2002 2001 ------------------- ------------------- COST MARKET COST MARKET -------- -------- -------- -------- Cash and cash equivalents.................. $ 85,526 $ 85,526 $ 49,874 $ 49,874 Fixed Income Securities: U.S. Treasury............................ 120,140 131,133 82,897 80,280 Foreign government....................... 11,096 11,096 10,579 10,646 Corporate................................ 4,464 4,867 20,278 20,540 Mortgage-backed.......................... 150,007 156,891 225,648 226,726 Asset-backed............................. 1,549 1,657 2,116 2,151 Municipal................................ 2,046 2,188 2,268 2,241 Other.................................... 2,142 2,152 305 294 Equity securities: Preferred stock.......................... -- -- 176 180 Common stock............................. 320,116 273,937 334,560 331,721 Mutual funds: Equity................................... 88,609 70,794 109,655 91,800 Fixed income............................. 41,807 42,273 44,676 45,555 Private equity and other................... 31,836 26,702 32,095 29,291 -------- -------- -------- -------- Preneed cemetery merchandise and services trust assets............................. $859,338 $809,216 $915,127 $891,299 ======== ======== ======== ======== Market value as a percentage of cost....... 94.2% 97.4% ======== ========
55 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of implementing SAB No. 101 (see note three to the consolidated financial statements), all realized investment earnings related to these cemetery merchandise and services trust funds are deferred until the associated merchandise is delivered or service is performed. Prior to 2000, the realized investment earnings were recognized as earned in the trusts. The realized investment earnings recognized in the consolidated statement of operations related to these cemetery merchandise and services trust funds were $24,734, $15,081, and $19,947 for the years ended December 31, 2002, 2001 and 2000, respectively. Deferred Preneed Cemetery Contract Revenues The Company defers revenues associated with certain preneed cemetery sales activities until cemetery burial property is constructed and meets the minimum down payment requirement (10%), merchandise is delivered or services are performed. The activity in deferred preneed cemetery contract revenues for the years ended December 31 is as follows:
2002 2001 ---------- ---------- Beginning balance -- Deferred preneed cemetery contract revenues.................................................. $1,756,041 $1,815,157 Net sales................................................... 302,691 324,640 Acquisitions (dispositions) of businesses................... (45,312) (82,467) Realized earnings (losses) on merchandise and services trust funds..................................................... (30,291) 2,514 Deliveries and maturities................................... (297,209) (288,897) Change in cancellation reserve.............................. 3,149 11,275 Effect of foreign currency and other........................ 3,369 (4,019) Non-cash adjustments........................................ (19,777) (22,162) ---------- ---------- Ending balance -- Deferred preneed cemetery contract revenues.................................................. $1,672,661 $1,756,041 ========== ==========
56 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Perpetual Care Trusts A portion of the proceeds from the sale of cemetery property is required by state law to be paid into perpetual care trust funds. The principal of such perpetual care trust funds generally cannot be withdrawn by the Company and therefore is not included in the consolidated balance sheet. The cost and market values associated with the assets held in perpetual care trust funds at December 31 are detailed below.
2002 2001 ------------------- ------------------- COST MARKET COST MARKET -------- -------- -------- -------- Cash and cash equivalents.................. $ 63,932 $ 63,932 $ 30,826 $ 30,826 Fixed Income Securities: U.S. Treasury............................ 64,473 67,226 29,588 29,829 Foreign government....................... 20,978 21,726 14,993 16,644 Corporate................................ 57,488 60,470 70,102 71,174 Mortgage-backed.......................... 94,996 98,359 133,472 133,226 Asset-backed............................. 18,052 19,588 14,913 15,022 Municipal................................ -- -- 33 32 Other.................................... 2,731 3,295 4,933 4,495 Equity securities: Preferred stock.......................... 13,906 12,632 3,096 3,143 Common stock............................. 25,428 23,717 32,308 34,475 Mutual funds: Equity................................... 29,311 28,470 32,440 32,528 Fixed income............................. 142,086 136,281 146,990 141,789 Private equity and other................... 30,896 35,563 30,199 34,374 -------- -------- -------- -------- Perpetual care trust assets................ $564,277 $571,259 $543,893 $547,557 ======== ======== ======== ======== Market value as a percentage of cost....... 101.2% 100.7% ======== ========
Realized investment earnings from these perpetual care trust funds are recognized in current cemetery revenues and are intended to defray cemetery maintenance costs, which are expensed as incurred. The realized investment earnings related to these perpetual care trust funds were $26,611, $29,926, and $26,660 for the years ended December 31, 2002, 2001, and 2000, respectively. NOTE SIX INCOME TAXES The provision or benefit for income taxes includes United States federal income taxes, determined on a consolidated return basis, foreign, state and local income taxes. Loss from continuing operations before income taxes, extraordinary items and cumulative effects of accounting changes for the years ended December 31 is as follows:
2002 2001 2000 --------- --------- --------- United States..................................... $(198,950) $(570,024) $(474,256) Foreign........................................... 57,987 34,596 (42,722) --------- --------- --------- $(140,963) $(535,428) $(516,978) ========= ========= =========
57 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax provision (benefit) from continuing operations for the years ended December 31 consisted of the following:
2002 2001 2000 --------- -------- --------- Current: United States.................................... $(127,426) $(25,432) $(149,465) Foreign.......................................... (15,161) 9,935 12,436 State and local.................................. (1,498) 4,001 535 --------- -------- --------- (144,085) (11,496) (136,494) --------- -------- --------- Deferred: United States.................................... 84,904 66,287 47,923 Foreign.......................................... 22,207 2,856 (13,717) State and local.................................. (2,766) 3,552 10,833 --------- -------- --------- 104,345 72,695 45,039 --------- -------- --------- Total (benefit) provision..................... $ (39,740) $ 61,199 $ (91,455) ========= ======== =========
The Company made income tax payments on continuing operations of approximately $8,920, $22,423, and $56,007, excluding income tax refunds of $63,547, $122,522 and $35,032, for the years ended December 31, 2002, 2001, and 2000, respectively. Income tax refunds include approximately $21,962 and $116,300 related to losses on sales of investments and refunds of approximately $35,306 and $0 related to the approval of a change in tax accounting method in 2002 and 2001, respectively. The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate for the years ended December 31 were as follows:
2002 2001 2000 -------- --------- --------- Computed tax (benefit) provision at the applicable federal statutory income tax rate................ $(49,337) $(187,400) $(180,942) State and local taxes, net of federal income tax benefits......................................... 3,252 4,909 7,389 Dividends received deduction and tax exempt interest......................................... (638) (1,668) (2,005) Amortization of goodwill........................... -- 9,619 11,485 Foreign jurisdiction tax rate difference........... (8,333) (16,173) (14,472) Foreign net operating loss utilization............. (9,895) -- -- Write down of assets............................... 28,554 111,984 92,155 Valuation allowance associated with assets held for sale............................................. 5,683 143,646 -- Other.............................................. (9,026) (3,718) (5,065) -------- --------- --------- (Benefit) provision for income taxes.......... $(39,740) $ 61,199 $ (91,455) ======== ========= ========= Total effective tax rate...................... (28.2)% 11.4% (17.7%) ======== ========= =========
Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates. The tax effects of temporary differences 58 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and carry-forwards that give rise to significant portions of deferred tax assets and liabilities as of December 31 consisted of the following:
2002 2001 --------- --------- Inventories and cemetery property, principally due to purchase accounting adjustments........................... $ 452,545 $ 511,432 Property, plant and equipment, principally due to depreciation and to purchase accounting adjustments....... 152,934 148,744 Other....................................................... 194,993 142,009 --------- --------- Deferred tax liabilities.................................... 800,472 802,185 --------- --------- Receivables, principally due to sales of cemetery interment rights and related products............................... (65,872) (181,243) Deferred revenue on prearranged funeral and cemetery contracts, principally due to earnings from trust funds... (13,682) (121,303) Accrued liabilities......................................... (91,097) (48,363) Loss and foreign tax credit carry-forwards.................. (282,896) (185,931) --------- --------- Deferred tax assets......................................... (453,547) (536,840) --------- --------- Valuation allowance......................................... 158,001 168,528 --------- --------- Net deferred income taxes................................. $ 504,926 $ 433,873 ========= =========
Current refundable income taxes and current deferred tax assets are included in Other current assets, long-term deferred tax assets are included in Deferred charges and other assets, with current taxes payable and current deferred tax liabilities being reflected as Income taxes on the consolidated balance sheet. The Company has a receivable recorded in Other current assets on the consolidated balance sheet of $92,445 at December 31, 2002, which was subsequently received in February 2003. At December 31, 2002 and 2001, United States income taxes had not been provided on $73,852 and $88,261, respectively, of undistributed earnings of foreign subsidiaries since it is the Company's intention not to remit these earnings. The Company intends to permanently reinvest the unremitted earnings of certain of its foreign subsidiaries in those businesses outside the United States and, therefore, has not provided for deferred income taxes on such unremitted foreign earnings. Various subsidiaries have international, federal and state operating loss carry-forwards of $1,365,145 with expiration dates through 2022. The Company believes that some uncertainty exists with respect to future realization of these loss carry-forwards, therefore a valuation allowance has been established for the carry-forwards not expected to be realized. The valuation allowance is primarily attributable to the U.S. capital loss recorded in connection with the financial statement writedown of assets held for sale. The loss carry-forwards will expire as follows: 2003........................................................ $ 11,277 2004........................................................ 5,111 2005........................................................ 23,342 2006........................................................ 44,032 2007........................................................ 16,782 Thereafter.................................................. 1,264,601 ---------- Total..................................................... $1,365,145 ==========
59 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE SEVEN DEBT Debt as of December 31 was as follows:
2002 2001 ---------- ---------- Bank credit agreements...................................... $ -- $ 29,061 8.72% amortizing notes due in 2002.......................... -- 4,653 6.3% notes due in 2003...................................... 84,801 251,284 7.375% notes due in 2004.................................... 111,190 228,000 8.375% notes due in 2004.................................... 50,797 51,840 6.0% notes due in 2005...................................... 387,241 581,550 7.2% notes due in 2006...................................... 150,000 150,000 6.875% notes due in 2007.................................... 150,000 150,000 6.5% notes due in 2008...................................... 200,000 200,000 6.75% convertible subordinated notes due in 2008, conversion price of $6.92............................................ 328,005 345,000 7.7% notes due in 2009...................................... 199,000 200,000 7.7% notes due in 2009...................................... 172,183 -- 6.95% amortizing notes due in 2010.......................... 42,106 45,929 7.875% debentures due in 2013............................... 55,627 55,627 7.0% notes due in 2015...................................... 25 58,460 Convertible debentures, interest rates range from 4.75% to 5.5%, due through 2013, conversion prices range from $12.55 to $50.00.......................................... 39,531 46,031 Mortgage notes and other debt, maturities through 2050...... 76,733 181,520 Deferred loan costs and net hedging losses.................. (62,401) (44,342) ---------- ---------- Total debt.................................................. 1,984,838 2,534,613 Less current maturities..................................... (100,330) (220,640) ---------- ---------- Total long-term debt................................... $1,884,508 $2,313,973 ========== ==========
The aggregate maturities of debt for the five years subsequent to December 31, 2002, are as follows: 2003........................................................ $ 100,330 2004........................................................ 185,582 2005........................................................ 419,085 2006........................................................ 182,297 2007........................................................ 166,599 2008 and thereafter......................................... 930,945 ---------- Total....................................................... $1,984,838 ==========
Bank Credit Agreements In July 2002, the Company executed a bank credit agreement for general corporate purposes that matures in July 2005. The new credit facility provides a total commitment of $185,000, including a sublimit of $125,000 to support letters of credit, and is secured by the stock, inventory and receivables of certain of the 60 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's domestic subsidiaries. These same domestic subsidiaries have guaranteed the Company's obligations associated with this facility. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio and limits on capital expenditures. Additionally, the Company is restricted from paying dividends and making other distributions. Interest rates for outstanding borrowings are based on various indices as determined by the Company. The Company also pays a quarterly fee on the unused commitment, ranging from 0.50% to 0.75%, which is based on the percentage of the facility used and was 0.625% at December 31, 2002. At December 31, 2002, the Company had no borrowings and $85,845 in letters of credit outstanding under the bank credit agreement related to insurance and surety vendors. At December 31, 2001, the Company had two primary bank credit agreements, which were used for general corporate purposes: a 5-year multi-currency revolver and a 2-year term loan. The 5-year multi-currency revolver allowed for borrowings up to $400,000 at December 31, 2001, of which $285,714 could be denominated in foreign currencies. No borrowings were outstanding under the 5-year revolver at either December 31, 2001, or at its maturity in June 2002. The 2-year term loan had an outstanding balance of $29,061 at December 31, 2001, which was repaid in February 2002. Interest rates for the multi-currency revolver and the term loan were based on various indices as determined by the Company. The weighted average rate of these borrowings at December 31, 2001 was 4.75%. A quarterly fee was paid on the total commitment amount, ranging from 0.25% to 0.50%, which was based on the Company's senior unsecured credit rating and was 0.50% at December 31, 2001. New Issuances and Exchanges of Debt In September 2002, the Company issued $172,183 of unregistered 7.70% notes due 2009 in connection with an exchange offering to holders of an equivalent principal amount of its existing 6.00% notes due 2005. Upon settlement of the exchange offer, the Company paid approximately $11,480 in closing fees, incentive payments and accrued interest. Subsequent to December 31, 2002, the Company exchanged substantially all of the unregistered notes issued in September 2002 for an equivalent principal amount of registered 7.70% notes due 2009 with substantially identical terms. In June 2001, the Company issued $345,000 of convertible subordinated notes. The notes are convertible into common stock at an initial conversion price of $6.92 and have an interest rate of 6.75%. The notes are callable after June 2004 and mature in June 2008. The proceeds from the convertible subordinated notes were used to refinance the Company's debt, including borrowings under the Company's bank credit agreements. Settlements and Extinguishments of Debt Aside from the $172,183 of 6.00% notes due 2005 that were extinguished in the previously mentioned exchange offering, the Company also purchased the following notes in the open market during the year ending December 31, 2002: $2,850 of the 7.00% notes due 2015 (putable 2002); $166,483 of the 6.30% notes due 2003; $116,810 of the 7.375% notes due 2004; $1,043 of the 8.375% notes due 2004; $22,126 of the 6.00% notes due 2005; $16,995 of the notes due 2008; $1,000 of the 7.70% notes due 2009; and $15,618 of mortgage notes and other debt. As a result of these transactions, the Company recognized extraordinary gains on early extinguishments of debt totaling $4,903 (net of tax expense of $2,880). As of February 26, 2003, the Company purchased the following bonds in the open market in 2003: $8,528 of the 6.30% notes due 2003; $21,000 of the 6.00% notes due 2005; $1,200 of the 6.875%; $1,830 of the 7.70% notes due 2009; $7,997 of the 7.70% notes due 2009; and $25 of the 7.00% notes due 2015. In May 2002, the Company's French subsidiary satisfied $113,500 of debt associated with the financial restructuring of the Company's French subsidiary with non-cash French financial assets. At December 31, 2001, this debt was included in Current maturities of long-term debt and the assets were included in Other current assets. 61 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On June 1, 2002, substantially all of the holders of the 7.00% notes due 2015 (putable 2002) presented the notes for payment pursuant to the terms of the embedded put option. The Company paid the holders in accordance with the terms of the agreement. During the year ended December 31, 2001, the Company purchased $35,720 of the medium-term notes due through 2019 and $127,580 of the 7.00% notes due 2015 (putable 2002) in the open market. In addition, the Company exchanged 15,200 shares of its common stock for $48,716 of the 6.30% notes due 2020 (putable 2003); $22,000 of the 7.375% notes due 2004; $10,000 of the 6.00% notes due 2005; and $2,995 of other notes. As a result of these transactions, the Company recognized extraordinary gains on early extinguishments of debt totaling $4,731 (net of tax expense of $3,024). Additional Debt Disclosures The Company's consolidated debt had a weighted average interest rate of 6.87% at December 31, 2002, compared to 6.72% at December 31, 2001. Approximately 99% of the total debt had a fixed interest rate at December 31, 2002 and 2001. Cash interest payments for the three years ending December 31, 2002, were as follows: 2002........................................................ $158,585 2001........................................................ 218,429 2000........................................................ 244,638
At December 31, 2002 and 2001, respectively, the Company had deposited $23,592 and $81,627 in restricted interest-bearing accounts that were held as security for various credit instruments included in Deferred charges and other assets in the consolidated balance sheet. In addition, the Company had assets of approximately $40,845 and $27,051 pledged as collateral for the mortgage notes and other debt at December 31, 2002 and 2001, respectively. Included in mortgage notes and other debt, the Company had capital lease obligations totaling $26,822 at December 31, 2002 primarily related to vehicles in the Company's international operations. NOTE EIGHT DERIVATIVES The Company occasionally participates in hedging activities using various derivative instruments including interest rate and cross-currency swap agreements, and forward currency exchange contracts. These instruments are used to hedge potential exposures in the interest rate and foreign exchange rate markets. The Company has documented policies and procedures to monitor and control the use of derivative instruments and only enters into transactions with a limited group of creditworthy financial institutions. The Company generally does not engage in derivative transactions for speculative or trading purposes, nor is it a party to leveraged derivatives. During the year ended December 31, 2002, in connection with the purchase of the 6.30% notes due 2020 (putable 2003), the Company terminated options embedded in the extinguished securities by exchanging them for new options with economically equivalent terms. The initial liability of $16,213 was recorded with the early extinguishment of debt in Accounts payable and accrued liabilities in the consolidated balance sheet and subsequently the Company recognized a charge of $40,787 in Impairment losses and other operating expenses in the consolidated statement of operations. In October 2002, the Company paid $57,000 in full settlement of the options associated with the 6.30% notes due 2020 (putable 2003) hereafter presented as the 6.30% notes due 2003. 62 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2001, the Company executed certain forward currency exchange contracts to hedge its net foreign investments. At December 31, 2001 the outstanding hedges had notional values of L70,000 and E40,000, equivalent to an aggregate notional value of approximately $130,761, and were recorded at a fair value of $5,326 in Accounts payable and accrued liabilities in the consolidated balance sheet. During 2002, the Company executed additional forward currency exchange contracts to hedge its foreign net investment with notional value of E60,000, equivalent to an aggregate notional value of $57,901. The Company settled all outstanding forward exchange contracts during 2002, with an aggregate payment of $11,836. A corresponding entry was recorded in Foreign currency translation adjustment in the consolidated statement of stockholders' equity for the amount of the payment. In 2001, in conjunction with adopting SFAS No. 133, the Company reclassified $23,195 of net deferred hedging losses related to interest rate losses incurred upon termination of the fair value hedges of the Company's debt. These deferred losses, previously recorded in Deferred charges and other assets, have been reclassified to Long-term debt in the consolidated balance sheet and are being amortized over the life of the underlying bonds. NOTE NINE CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments has been determined using available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, trade receivables and accounts payable approximate fair values due to the short-term nature of these instruments. It is not practicable to estimate the fair value of receivables due on cemetery contracts or prearranged funeral contracts (other than prearranged funeral trust funds and cemetery merchandise and services trust funds; see notes four and five to the consolidated financial statements) without incurring excessive costs because of the large number of individual contracts with varying terms. The carrying value of other notes receivable approximates fair value as the Company regularly reviews the loans for impairment. At December 31, 2002 and 2001, other notes receivable included in Current and Long-term receivables in the consolidated balance sheet was $138,985 and $154,715, respectively. The Company also had $9,615 and $13,269 in outstanding undrawn commitments at December 31, 2002 and 2001, respectively. 63 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair market value of the Company's debt at December 31 was as follows:
2002 2001 ---------- ---------- Bank credit agreements...................................... $ -- $ 28,189 8.72% amortizing notes due in 2002.......................... -- 4,653 6.3% notes due in 2003...................................... 83,953 243,745 7.375% notes due in 2004.................................... 110,773 214,320 8.375% notes due in 2004.................................... 50,797 49,248 6.0% notes due in 2005...................................... 364,007 500,133 7.2% notes due in 2006...................................... 142,500 132,000 6.875% notes due in 2007.................................... 137,250 129,000 6.5% notes due in 2008...................................... 179,000 172,000 6.75% convertible subordinated notes due in 2008, conversion price of $6.92............................................ 302,995 346,725 7.7% notes due in 2009...................................... 187,060 170,000 7.7% notes due in 2009...................................... 161,852 -- 6.95% amortizing notes due in 2010.......................... 39,087 38,581 7.875% debentures due in 2013............................... 49,578 44,502 7.0% notes due in 2015...................................... 24 58,460 Convertible debentures, interest rates range from 4.75% to 5.5% due through 2013, conversion prices range from $12.55 to $50.00................................................. 34,728 39,126 Mortgage notes and other debt, maturities through 2050...... 76,732 181,520 ---------- ---------- Total debt............................................. $1,920,336 $2,352,202 ========== ==========
The fair value of the fixed rate long-term borrowings and convertible securities was estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors. Mortgage notes and other debt have been reported at face value because of the multitude and non-trading nature of these notes. The Company grants credit in the normal course of business, and the credit risk with respect to funeral, cemetery and prearranged funeral and preneed cemetery receivables due from customers is generally considered minimal because of the diversification of the customers served. Bad debts have not been significant in relation to the volume of deferred revenues. Customer payments on prearranged funeral or preneed cemetery contracts that are placed into state regulated trusts or are used to pay premiums on life insurance contracts generally do not subject the Company to collection risk. Insurance funded contracts are subject to supervision by state insurance departments and are protected in the majority of states by insurance guaranty acts. The Company's cash deposits, some of which exceed insured limits, were distributed among various regional and national banks in the jurisdictions in which the Company operates. In addition, the Company regularly invests excess cash in financial instruments, which are not insured, such as commercial paper, money-market funds, and Eurodollar time deposits that are offered by a variety of financial institutions and corporations with high quality credit ratings. The Company believes that the associated credit risk of such instruments is not material. 64 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE TEN COMMITMENTS AND CONTINGENCIES Leases The Company's leases principally relate to funeral home facilities, transportation equipment and two aircraft. The majority of the Company's operating leases contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the leases, or (iii) renew for the fair rental value at the end of the primary lease term. Rental expense for these leases was $89,291, $92,895, and $94,629 for the years ended December 31, 2002, 2001, and 2000, respectively. In 2002, the Company entered into certain capital leases primarily related to vehicles in its international operations. As of December 31, 2002, future minimum lease payments for operating and capital leases exceeding one year are as follows:
OPERATING CAPITAL --------- ------- 2003........................................................ $ 45,939 $ 6,930 2004........................................................ 39,388 6,455 2005........................................................ 31,323 7,165 2006........................................................ 18,994 4,609 2007........................................................ 13,045 2,249 2008 and thereafter......................................... 30,956 3,754 -------- ------- Subtotal............................................... 179,645 31,162 Less: Subleases........................................... (4,006) -- -------- ------- Total.................................................. $175,639 31,162 ======== ------- Less: interest on capital leases.......................... (4,340) ------- Total principal payable on capital leases................... $26,822 =======
Purchase Commitments The Company has a purchase agreement with a major casket manufacturer for its North American operations with an original minimum commitment of $750,000 over a six-year period expiring at the end of 2004. During 2002, the Company made minimum purchases of approximately $87 million under this purchase agreement. The agreement contains provisions for annual price adjustments. The agreement provides for a one-year extension period to 2005 in which the Company is allowed to satisfy any remaining commitment that exists at the end of the original term. Management, Consultative and Non-Competition Agreements The Company has entered into management, employment, consultative and non-competition agreements, generally for five to ten years, with certain officers and employees of the Company and former owners of businesses acquired. The Company has modified several of the above agreements as part of cost rationalization programs (see note sixteen to the consolidated financial statements). During the years ended December 2002, 2001, and 2000, the Company recognized expense of $56,878, $70,758, and $75,141, respectively, related to these agreements. The decrease in expense is a result of the cost rationalization programs recorded through Impairment charges and other operating expenses. The Company has estimated the maximum future cash commitment under these agreements; as a result, this commitment is not indicative of the future expense to be recognized due to amounts recorded in Impairment charges and other operating expenses. At December 31, 65 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2002, the maximum estimated future cash commitment under agreements with remaining commitment terms was as follows: 2003........................................................ $ 80,210 2004........................................................ 42,402 2005........................................................ 34,776 2006........................................................ 24,283 2007........................................................ 17,539 2008 and thereafter......................................... 19,465 -------- Total..................................................... $218,675 ========
Contingent Purchase Obligations In connection with certain acquisitions made with the Company's South America operations, the Company entered into contingent purchase obligations with certain former owners of those businesses. These obligations require the Company to pay additional consideration if cumulative earnings thresholds, as defined in such agreements, are met between 2003 and 2005. As of December 31, 2002, the contingent consideration is estimated to be $40,000. This additional consideration may be paid partially in common stock at the discretion of the former owners. Representations and Warranties The Company has contingent obligations of $30,329 related to the Company's international asset sales and joint venture transactions. In some cases, the Company has agreed to guarantee certain representations and warranties with such disposition transactions with letters of credit or interest bearing cash investments. The Company has interest bearing cash investments of $15,329 included in Deferred charges and other assets collateralizing these contingent obligations. The Company does not believe it will ultimately be required to fund to third parties any claims against these representations and warranties. The Company enters into other representations and warranties associated with North American asset sales that it does not believe are material in nature. Litigation The Company is a party to various litigation matters, investigations and proceedings. The Company reserves for estimated losses relating to these contingencies if amounts can be reasonably estimated and are probable to occur. The following discussion describes certain litigation and proceedings as of March 14, 2003. In Re Service Corporation International; Cause No. H-99-0280; In the United States District Court for the Southern District of Texas, Houston Division (the Consolidated Lawsuit). The Consolidated Lawsuit was filed in January 1999 and includes numerous separate lawsuits that were filed in various United States District Courts in Texas. The Consolidated Lawsuit has been certified as a class action and names as defendants the Company and three of the Company's current or former executive officers or directors (the Individual Defendants). The Consolidated Lawsuit has been brought on behalf of all persons and entities who (i) acquired shares of Company common stock in the merger of a wholly-owned subsidiary of the Company into Equity Corporation International (ECI); (ii) purchased shares of Company common stock in the open market during the period from July 17, 1998 through January 26, 1999 (the Class Period); (iii) purchased Company call options in the open market during the Class Period; (iv) sold Company put options in the open market during the Class Period; (v) held employee stock options in ECI that became options to purchase Company common 66 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock pursuant to the merger; and (vi) held Company employee stock options to purchase Company common stock under a stock plan during the Class Period. Excluded from the class definition categories are the Individual Defendants, the members of their immediate families and all other persons who were directors or executive officers of the Company or its affiliated entities at any time during the Class Period (with one amendment by the Court to include James P. Hunter, III as a class member). Mr. Hunter was the Chairman, President and Chief Executive Officer of ECI at the time of its merger with a wholly-owned subsidiary of the Company. The plaintiffs in the Consolidated Lawsuit allege that defendants violated federal securities laws by making materially false and misleading statements and failing to disclose material information concerning the Company's prearranged funeral business. The Consolidated Lawsuit seeks to recover an unspecified amount of monetary damages. Since the litigation is in its preliminary stages and no discovery has occurred, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. However, the Company believes that the allegations in the Consolidated Lawsuit do not provide a basis for the recovery of damages because the Company made all required disclosures on a timely basis. The Company intends to aggressively defend this lawsuit. At the Court's direction, meetings were held in 2001 between the parties and their insurers to discuss possible resolution of the case, but no progress was made. A Motion to Dismiss the Consolidated Lawsuit filed by the Company and the Individual Defendants is pending before the Court. Several other lawsuits have been filed against the Company, the Individual Defendants and other defendants, including, in the second and third lawsuits listed below, the Company's independent accountants, PricewaterhouseCoopers, LLP, in Texas state courts by former ECI shareholders, officers and directors. These lawsuits include the following matters: No. 32548-99-11; James P. Hunter, III, et al. v. Service Corporation International, et al.; In the District Court of Angelina County, Texas ("Hunter" matter); No. 2000-63917; Jack T. Hammer v. Service Corporation International, et al.; In the 165th Judicial District Court of Harris County, Texas ("Hammer" matter); No. 33701-01-01; Jack D. Rottman v. Service Corporation International, et al.; In the District Court of Angelina County, Texas ("Rottman" matter); and No. 31820-99-2; Charles Fredrick, Individually, and as a Representative of the Class v. Service Corp. International; In the District Court of Angelina County, Texas. These lawsuits allege, among other things, violations of Texas securities law and statutory and common law fraud, and seek unspecified compensatory and exemplary damages. Since these lawsuits are in their preliminary stages and no discovery has occurred, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of these lawsuits. However, the Company believes the allegations in these lawsuits, like those in the Consolidated Lawsuit, do not provide a basis for the recovery of damages because all required disclosures were made on a timely basis. The Company intends to aggressively defend this litigation. The Company is seeking arbitration in the Hunter, Hammer, and Rottman matters. In the Hunter matter, the Texas state district court denied the motion to compel arbitration filed by the Company and the Individual Defendants. On review by appeal, the Texas Supreme Court reversed the finding of the Texas state district court and granted the motion to compel arbitration against Hunter and remanded the issue of whether the Hunter Family Trust must also arbitrate. Cause No. 01-0650, In Re Service Corporation International, et al, 85 S.W. 3d 171 (Tex. 2002). The Texas state trial court in Hunter has not issued a further order on this matter. In the Hammer matter, the Texas state district court ordered the case to arbitration. 67 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On November 5, 2002, Hunter and the Hunter Family Trust filed a demand for arbitration styled Case No. 70 Y 168 00717 02; James P. Hunter, III and the James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, and George R. Champagne; before the American Arbitration Association in Houston, Texas. The Hunter plaintiffs' arbitration demand also asserts claims against the Company and the Individual Defendants with respect to the Company's acquisition of ECI. Hunter also individually asserts claims that he was instructed to resign as an officer of the Company several months after the merger and suffered lost income as a result. Since the arbitration is in its preliminary stages and no discovery has occurred, the Company and the Individual Defendants cannot quantify their ultimate liability, if any, for the payment of damages or predict the outcome of the arbitration. However, the Company and the Individual Defendants believe that the allegations in the Hunter arbitration do not provide a basis for recovery of damages on several legal grounds. The Company and the Individual Defendants intend to aggressively defend this arbitration action which is set for hearing in June 2003. Copies of certain pleadings in these cases are filed as exhibits to the Company's Annual Report on Form 10-K. Certain insurance policies held by the Company to cover potential director and officer liability may reduce cash outflows with respect to an adverse outcome of the above lawsuits. If an adverse decision in these matters exceeds the insurance coverage or if the insurance coverage is deemed not to apply to these matters, an adverse decision could have a material adverse effect on the Company, its financial condition, results of operations or cash flows. Thomas G. Conway et al v. Service Corporation International, et al; Cause No. CV-02-2818; In the United States District Court for the Eastern District of New York, filed May 10, 2002 and Demand for Arbitration, No. 13 168 02061 02, before the American Arbitration Association ("AAA") ("Conway" action). The Conway action was filed against the Company and two former officers of the Company who were also former officers of ECI, James P. Hunter III ("Hunter") and Jack D. Rottman ("Rottman"). On August 28, 2002, the Conway plaintiffs filed a Demand for Arbitration and Statement of Claim against the Company, ECI and SCI Delaware Funeral Services, Inc., a subsidiary of the Company ("SCI Delaware"), in New York City. The American Arbitration Association ruled that the arbitration would be conducted in Houston, Texas. The Conway plaintiffs have indicated that they will refuse to recognize the transfer on the grounds that it is improper to conduct the arbitration in Houston, Texas. The Company, ECI and SCI Delaware have initiated an action in the United States District Court for the Southern District of Texas to compel the Conway plaintiffs to arbitrate their claims in Houston, Texas. The plaintiffs in the Conway action owned funeral homes in Queens County and Suffolk County, New York, which were sold and merged into a subsidiary of ECI in January 1998. The plaintiffs are also included in the definition of class members in the Consolidated Lawsuit described above. In the Conway action, plaintiffs assert that ECI failed to disclose that ECI was negotiating the merger with the Company in breach of covenants in the agreements between ECI and the plaintiffs. ECI purchased the plaintiffs' funeral homes with ECI stock and cash, and the Plaintiffs' ECI stock was exchanged for stock in the Company in the merger of January 1999. Plaintiffs allege damages from the loss in value of the Company's stock from 1999 to the present. The plaintiffs seek to recover compensatory damages alleged at a minimum of $8 million and punitive damages alleged at a minimum of $14 million. The plaintiffs allege that SCI and SCI Delaware are liable as the alleged "successor" entities to ECI. Since the arbitration is in its preliminary stages and no discovery has occurred, the Company cannot quantify the ultimate liability of the Company or its subsidiaries, if any, for the payment of damages or predict the outcome of the litigation. However, the Company and its subsidiaries believe that the allegations in the 68 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Conway action do not provide a basis for recovery of damages on several legal grounds. The Company and its subsidiaries intend to aggressively defend this lawsuit. Shareholder Derivative Demand; The Company received a letter dated January 14, 2002, addressed to the Board of Directors, from a law firm stating that it represented a shareholder of the Company. The letter asserts a shareholder derivative demand that the Company take legal action against its directors and officers based upon alleged conduct that is the subject of: (1) a putative class action lawsuit filed on December 19, 2001, in Broward County, Florida against the Company and one of its subsidiaries; (2) a lawsuit filed against the Company by former employees of the Company in Atlanta, Georgia; and (3) certain events described in newspaper articles referred to in the plaintiffs' consolidated complaint in the Consolidated Lawsuit (described above). The Board of Directors responded to the letter by forming a committee of certain independent directors to conduct an inquiry into the allegations in the letter. The committee retained independent counsel to assist it in its inquiry. The letter does not seek a specified amount of legal damages. Based on its investigation, the Committee determined that a lawsuit or derivative proceeding against the directors or officers of SCI is not in the best interest of SCI. The Committee reported its decision to the Executive Committee of the Board of Directors on September 11, 2002. Maurice Levie, Derivatively on behalf of Nominal Defendant, Service Corporation International v. R. L. Waltrip, et al and Service Corporation International; No. 2002-42417; In the 164th Judicial District Court of Harris County, Texas, Filed August 20, 2002 ("Levie" action). The Levie action was filed against the Company and the members of its Board of Directors individually as a result of the Shareholder Derivative Demand of January 14, 2002, described above. In response to the filing of the lawsuit before the conclusion of the Committee's investigation, the Company and the individual directors filed an answer denying the allegations in the lawsuit and a motion to dismiss. Since the litigation is in its preliminary stages and no discovery has occurred, the Company cannot quantify its ultimate liability or that of its individual directors, if any, for the payment of damages or predict the outcome of the litigation. However, the Company and the individual directors believe that the allegations in the Levie action do not provide a basis for recovery of damages on several legal grounds. The Company and the individual directors intend to aggressively defend this lawsuit. The Company filed the motion to dismiss the entire lawsuit against it and individual directors based on the results of the investigation and determination of the Committee in response to the shareholder demand letter. This motion is currently pending before the trial court. Joan Light, Shirley Eisenbert and Carol Prisco v. SCI Funeral Services of Florida, Inc. d/b/a Menorah Gardens & Funeral Chapels, and Service Corporation International; Case No. 01-21376 CA 08; In the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, General Jurisdiction Division (the Consumer Lawsuit). The Consumer Lawsuit was filed December 19, 2001 and names the Company and a subsidiary as defendants. It is a putative class action which has not been certified. A hearing on the Motion for Class Certification has taken place but a ruling is not expected on what, if any, class might be certified until April 2003 or later. The Consumer Lawsuit has been brought on behalf of all persons with burial plots or family members buried at Menorah Gardens & Funeral Chapels in Florida. Excluded from the class definition are persons whose claims have been reduced to judgment or have been settled as of the date of class certification. 69 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The plaintiffs allege that defendants have failed to exercise reasonable care in handling remains by secretly: (i) dumping remains in a wooded area; (ii) burying remains in locations other than the ones purchased; (iii) crushing vaults to make room for other vaults; (iv) burying remains on top of the other or head to foot rather than side-by-side; (v) moving remains; and (vi) co-mingling remains. The plaintiffs in the Consumer Lawsuit allege that the above conduct constitutes negligence, tortious interference with the handling of dead bodies, infliction of emotional distress, and violation of industry specific state statutes, as well as the state's Deceptive and Unfair Trade Practices Act. The plaintiffs seek an unspecified amount of compensatory and punitive damages. The Court has granted plaintiffs' motion for leave to amend their complaint to include punitive damages. Plaintiffs also seek equitable/injunctive relief in the form of a permanent injunction requiring defendants to fund a court supervised program that provides for monitoring and studying of the cemetery and any disturbed remains to insure their proper disposition. On April 21, 2002, additional plaintiffs filed a lawsuit styled Sol Guralnick, Linda Weiner, Joan Nix, Gilda Schwartz, Paul Schwartz, Ann Ferrante, Steve Schwartz, Nancy Backlund, Jamie Osit, Corey King, Marc King, Barbara Feinberg Clark v. SCI Funeral Services of Florida, Inc. d/b/a Menorah Gardens and Funeral Chapels and Service Corporation International; In the Circuit Court in the 15th Judicial Circuit, Palm Beach County, Florida; Case number CA024815AE (the Guralnick Lawsuit), making essentially the same allegations as the Consumer Lawsuit with the exception that it does not contain class allegations. Since the Consumer and Guralnick Lawsuits, and related discovery, are in preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. The Company intends to continue its investigation and to aggressively defend itself in the litigation as well as continue to cooperate with state officials in resolving the issues presented. In addition to the litigation described above, the Florida Attorney General and State Comptroller filed an action against the Company on March 1, 2002 styled Office of the Attorney General, Department of Legal Affairs, State of Florida and Office of the Comptroller, Department of Banking and Finance, State of Florida v. Service Corporation International, a Texas Corporation and S.C.I. Funeral Services of Florida, Inc., a Florida Corporation doing business as Menorah Gardens & Funeral Chapels; Case No. CA 02-02666AG; In the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (the AG Lawsuit). The AG Lawsuit alleges similar claims as the Consumer Lawsuit including that defendants conducted their business through the willful use of false and deceptive representations regarding: (i) the certainty of plot location and size; (ii) the permanence of interment; and (iii) the nature and quality of the care that defendants intended to provide. The AG Lawsuit alleges that defendants violated Florida statutes by engaging in the above referenced conduct. The AG Lawsuit seeks: (i) the appointment of a receiver or administrator to manage and correct the operations of the defendants' Florida Menorah Gardens facilities; (ii) a full accounting of all plots sold and offered for sale by defendants at their Florida Menorah Gardens facilities; (iii) an award of unspecified actual damages sustained by consumers; (iv) an award of unspecified punitive damages pursuant to Florida statute; (v) imposition of civil penalties for each violation of the Florida statutes; (vi) an award of attorneys' fees and costs; and (vii) a permanent injunction against the defendants prohibiting them from (a) engaging in the funeral and/or cemetery business at their Florida Menorah Gardens facilities; (b) using false or misleading representations in their advertising and sales materials directed to the State of Florida; and (c) violating the Florida statutes. In connection with the allegations in the Consumer and AG Lawsuits, the Florida Department of Law Enforcement caused a search warrant to be issued to investigate possible criminal activity. The Company is continuing to fully cooperate in the investigation. 70 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As with the Consumer and Guralnick Lawsuits, since the AG Lawsuit litigation is in its preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages or predict the outcome of the litigation. The Company has agreed to the appointment of an examiner who is charged with overseeing the remapping and burial processes at the cemeteries. The Company has insurance policies which are intended to limit the Company's outflows in the event of a decision adverse to the Company in the Consumer Lawsuit, the Guralnick Lawsuit and the AG Lawsuit. If an adverse decision in these matters exceeds the Company's insurance coverage or if the insurance coverage is deemed not to apply to these matters, an adverse decision could have a material adverse effect on the Company, its financial condition, results of operations or cash flows. NOTE ELEVEN STOCKHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock, $1 per share par value. No shares were issued as of December 31, 2002 and 2001. At December 31, 2002 and 2001, 500,000,000 common shares of $1 par value were authorized and the Company had 297,010,237 and 292,153,765, respectively, shares issued and outstanding, net of 2,516,396 and 2,502,190 shares held in treasury at par at December 31, 2002 and 2001, respectively. The Board of Directors has adopted a preferred share purchase rights plan and has declared a dividend of one preferred share purchase right for each share of common stock outstanding. The rights become exercisable in the event of certain attempts to acquire 20% or more of the common stock of the Company and entitle the rights holders to purchase certain securities of the Company or the acquiring company. The rights, which are redeemable by the Company for $.01 per right, expire in July 2008 unless extended. Stock Benefit Plans The Company has benefit plans whereby shares of the Company's common stock may be issued pursuant to the exercise of stock options granted to officers and key employees. The Company's Amended 1996 Incentive Plan reserves 24,000,000 shares of common stock for outstanding and future awards of stock options, restricted stock and other stock based awards to officers and key employees of the Company. The Company's 1996 Non-qualified Incentive Plan reserves 8,700,000 shares of common stock for outstanding and future awards of nonqualified stock options to employees who are not officers of the Company. The plans allow for options to be granted as either non-qualified or incentive stock options. The options are granted with an exercise price equal to the then current market price of the Company's common stock. The options are generally exercisable at a rate of 33 1/3% each year unless alternative vesting methods are approved by the Company's Compensation Committee of the Board of Directors. At December 31, 2002 and 2001, 5,005,623 and 5,215,623 options were outstanding with alternative vesting methods. Under the alternative vesting methods, partial or full accelerated vesting will occur when the price of Company common stock reaches pre-determined prices. If the pre-determined stock prices are not met in the required time period, the options will fully vest in periods ranging from eight to ten years from date of grant. At December 31, 2002 and 2001, 6,168,833 and 7,349,923 shares, respectively, were reserved for future option grants under all stock option plans. 71 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables set forth certain stock option information:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- ---------------- Outstanding at December 31, 1999......................... 19,893,110 $23.36 Granted................................................ 7,288,650 4.89 Exercised.............................................. -- -- Cancelled.............................................. (1,887,967) 24.92 ---------- ------ Outstanding at December 31, 2000......................... 25,293,793 17.92 Granted................................................ 9,083,100 3.98 Exercised.............................................. (136,414) 4.32 Cancelled.............................................. (4,291,215) 21.94 ---------- ------ Outstanding at December 31, 2001......................... 29,949,264 13.18 Granted................................................ 5,699,100 4.32 Exercised.............................................. (42,633) 4.38 Cancelled.............................................. (5,604,481) 12.51 ---------- ------ Outstanding at December 31, 2002......................... 30,001,250 $11.63 ========== ====== Exercisable at December 31, 2000......................... 12,262,434 $21.45 ========== ====== Exercisable at December 31, 2001......................... 12,824,879 $18.72 ========== ====== Exercisable at December 31, 2002......................... 16,194,767 $14.81 ========== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- --------------------------------- NUMBER NUMBER OUTSTANDING AT WEIGHTED-AVERAGE EXERCISABLE AT RANGE OF DECEMBER 31, REMAINING WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE EXERCISE PRICE 2002 CONTRACTUAL LIFE EXERCISE PRICE 2002 EXERCISE PRICE - -------------- -------------- ---------------- ---------------- -------------- ---------------- $ 0.00- 4.00 8,184,200 5.8 $ 3.33 2,588,986 $ 3.30 4.00- 5.00 4,485,738 3.2 4.40 2,023,959 4.39 5.00-10.00 5,600,450 6.1 5.80 1,702,848 6.71 10.00-20.00 6,632,245 3.8 16.05 6,601,624 16.06 20.00-43.00 5,098,617 2.3 31.96 3,277,350 32.03 - ------------- ---------- --- ------ ---------- ------ $ 0.00-43.00 30,001,250 4.4 $11.63 16,194,767 $14.81 ============= ========== === ====== ========== ======
72 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) If the Company had elected to recognize compensation cost for its option plans based on the fair value at the grant dates for awards under those plans, net loss and loss per share would have been changed for the years ended December 31 to the pro forma amounts indicated below:
2002 2001 2000 --------- --------- ----------- Net loss......................................... $(231,880) $(597,796) $(1,343,251) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense........................................ (13,537) (17,680) (24,735) --------- --------- ----------- Pro forma net loss............................... $(245,417) $(615,476) $(1,367,986) ========= ========= =========== Basic and diluted net loss per share............. $ (.79) $ (2.10) $ (4.93) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense........................................ (.04) (0.06) (0.10) --------- --------- ----------- Pro forma basic and diluted net loss per share... $ (.83) $ (2.16) $ (5.03) ========= ========= ===========
The fair value of the Company's stock options used to compute the pro forma net loss and loss per share disclosures is determined by calculating the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
ASSUMPTIONS 2002 2001 2000 - ----------- ---------- ---------- ---------- Dividend yield.................................... 0.0% 0.0% 0.0% Expected volatility............................... 66.3% 62.0% 57.2% Risk-free interest rate........................... 3.6% 5.1% 6.7% Expected holding period........................... 6.1 years 7.1 years 7.0 years Weighted average fair value....................... $2.90 $2.68 $3.18
In 2001, the Company replaced its 1995 Stock Plan for Non-Employee Directors, which expired, with its 2001 Stock Plan for Non-Employee Directors. Under this new plan, non-employee directors automatically receive yearly awards of restricted stock through the year 2005. Each award will not exceed 15,000 shares of common stock per director per year and vests after one year of service. In 2002 and 2001, each non-employee director was awarded 10,000 shares of common stock. For the years ended December 31, 2002, 2001 and 2000, respectively, 100,000, 110,000 and 33,000 shares of restricted stock were awarded at fair values of $4.25, $5.86 and $4.03, respectively. Further in 2001, the Company voted to create a Director Fee Plan to allow for partial payment of compensation to Non-Employee Directors through common stock. In 2002 and 2001, 45,108 and 36,784, respectively, shares of common stock was granted under the Director Fee Plan. Further 21,724 and 6,688 shares have been deferred by certain officers and reserved for future use under the Director Fee Plan in accordance with the Plan agreement at December 31, 2002 and 2001, respectively. 73 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accumulated Other Comprehensive Income (Loss) The Company's components of accumulated other comprehensive income (loss) at December 31 are as follows:
FOREIGN CURRENCY UNREALIZED GAIN MINIMUM PENSION ACCUMULATED OTHER TRANSLATION (LOSSES) ON LIABILITY COMPREHENSIVE ADJUSTMENT SECURITIES ADJUSTMENT INCOME (LOSS) ---------------- --------------- --------------- ----------------- Balance at December 31, 1999... $ (37,768) $(22,222) $ -- $ (59,990) Activity in 2000............. (202,709) (4,792) (12,724) (220,225) Reclassification adjustment for discontinued operations................ 16,044 27,014 -- 43,058 --------- -------- -------- --------- Balance at December 31, 2000... (224,433) -- (12,724) (237,157) Activity in 2001............. (76,403) -- (16,629) (93,032) Reclassification adjustment for sold businesses....... 38,990 -- -- 38,990 --------- -------- -------- --------- Balance at December 31, 2001... (261,846) -- (29,353) (291,199) Activity in 2002............. 43,776 -- (7,202) 36,574 Reclassification adjustment for sold businesses....... 47,479 -- -- 47,479 --------- -------- -------- --------- Balance at December 31, 2002... $(170,591) $ -- $(36,555) $(207,146) ========= ======== ======== =========
Included in Foreign currency translation adjustment are net losses of $162,715 and an associated deferred tax asset of $59,662 related to the Company's international operations held for sale. Accordingly, if these sale transactions are consummated, Foreign currency translation adjustment and Accumulated other comprehensive loss will be reduced by this amount. The Minimum pension liability adjustment of $36,555 at December 31, 2002 is net of deferred taxes of $23,146. NOTE TWELVE RETIREMENT PLANS The Company has a non-contributory, defined benefit pension plan covering substantially all United States employees (US Pension Plan), a supplemental retirement plan for certain current and former key employees (SERP), a supplemental retirement plan for officers and certain key employees (Senior SERP), and a retirement plan for certain non-employee directors (Directors' Plan). In 2000, the Company also established a 401(k) employee savings plan. Effective January 1, 2001, the Company curtailed its US Pension Plan, SERP, Senior SERP and Directors' Plan and recognized a curtailment loss of $3,572 in 2001. Retirement benefits for the US Pension Plan are generally based on years of service and compensation. This contribution is an actuarially determined amount consistent with the funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the pension plan consist primarily of bank money market funds, fixed income investments and marketable equity securities. The marketable equity securities include shares of Company common stock with a value of $4,394 and $6,603 at December 31, 2002 and 2001, respectively. Retirement benefits under the SERP are based on years of service and average monthly compensation, reduced by benefits under the pension plan and Social Security. The Senior SERP provides retirement benefits based on years of service and position. The Directors' Plan provides for an annual benefit to directors 74 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) following their retirement, based on a vesting schedule. The retirement benefits under the SERP, Senior SERP and Directors' Plan are an unfunded obligation of the Company; however, the Company purchased various life insurance policies on the participants in these plans with the intent to use the proceeds or any cash value buildup from such policies to assist in meeting, at least to the extent of such assets, the plans' benefit requirements. Most foreign employees are covered by their respective foreign government mandated or defined contribution plans which are adequately funded and are not considered significant to the financial condition or results of operations of the Company. The plans' liabilities and their related costs are computed in accordance with the laws of the individual countries and appropriate actuarial practices. The components of net periodic benefit cost for the years ended December 31 were as follows:
2002 2001 2000 ------- -------- -------- Service cost -- benefits earned during the period..... $ -- $ 5,081 $ 15,941 Interest cost on projected benefit obligation......... 9,824 14,474 14,965 Return on plan assets................................. (8,539) (13,569) (13,688) Curtailment charge.................................... -- 3,572 -- Amortization of unrecognized transition asset......... -- (418) (440) Amortization of prior service cost.................... 197 114 1,126 Recognized net loss (gain)............................ 4,834 2,826 (449) ------- -------- -------- $ 6,316 $ 12,080 $ 17,455 ======= ======== ========
The plans' funded status at December 31 were as follows (based on valuations as of September 30):
2002 2001 -------- -------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year..................... $193,325 $198,977 Service cost................................................ -- 5,081 Contributions paid by participants.......................... -- 1,098 Interest cost............................................... 9,824 14,474 Plan amendments............................................. -- 1,802 Settlement/curtailment charge............................... (13,325) (9,333) Actuarial loss.............................................. 3,642 7,136 Benefits paid............................................... (6,683) (24,891) Effects of dispositions..................................... (43,941) -- Effect of foreign currency.................................. -- (1,019) -------- -------- Benefit obligation at end of year........................... $142,842 $193,325 ======== ========
75 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2001 -------- -------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year.............. $147,075 $152,766 Actual return on plan assets................................ (10,528) (22,136) Employer contributions...................................... 3,214 42,901 Contributions paid by participants.......................... -- 1,098 Settlement charge........................................... (13,325) -- Benefits paid............................................... (7,299) (26,242) Effects of dispositions..................................... (41,676) -- Effect of foreign currency.................................. -- (1,312) -------- -------- Fair value of plan assets at end of year.................... $ 77,461 $147,075 ======== ======== Funded status of plan....................................... $(65,381) $(46,250) Fourth quarter contributions................................ -- 354 Unrecognized actuarial loss................................. 59,701 58,904 Unrecognized prior service cost............................. 1,357 2,163 Unrecognized net transition asset........................... -- (1,253) Effect of foreign currency.................................. -- 99 -------- -------- Net amount recognized....................................... $ (4,323) $ 14,017 ======== ======== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET: Prepaid benefit cost........................................ $ -- $ 8,146 Accrued benefit liability................................... (65,381) (43,621) Intangible asset............................................ 1,357 1,554 Accumulated other comprehensive loss........................ 59,701 47,938 -------- -------- Net amount recognized....................................... $ (4,323) $ 14,017 ======== ========
The plans' weighted-average assumptions were as follows:
2002 2001 -------- -------- Discount rate used to determine obligations................. 7.00% 6.97% Assumed rate of compensation increase....................... 0.00% 3.50% Assumed rate of return on plan assets....................... 9.00% 8.43%
The 2001 balances included a defined benefit pension plan for the Company's United Kingdom operations (UK Plan). In 2002, the Company joint ventured the United Kingdom operations and as such, retirement plans included in 2002 are for U.S. employees only. Discount rates for the U.S. plans were 7.00% and 7.25% in 2002 and 2001, respectively, and 6.00% in 2001 for the UK Plan. The assumed rate of compensation increase for the year ended December 31, 2001 reflects the assumptions for the UK Plan only as all other plans subject to this disclosure were curtailed effective January 1, 2001. The Company has an employee savings plan that qualifies under section 401(k) of the Internal Revenue Code for the exclusive benefit of their United States employees. Under the plan, participating employees may contribute a portion of their pretax and/or after tax income in accordance with specified guidelines up to a maximum of 50%. The Company then matches a percentage of the employee contributions through 76 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contributions of the Company's common stock. For 2002 and 2001, the Company match was based upon the following:
YEARS OF VESTING SERVICE PERCENTAGE OF DEFERRED COMPENSATION - ------------------------ ----------------------------------- 75% of the first 6% of deferred 0-5 years................................ compensation 110% of the first 6% of deferred 6-10 years............................... compensation 135% of the first 6% of deferred 11 or more years......................... compensation
The amount of Company matched common stock contributions in 2002 and 2001 was $18,150 and $12,635, respectively. NOTE THIRTEEN SEGMENT REPORTING The Company's operations are product based and geographically based, and the reportable operating segments presented below include funeral and cemetery operations. The Company's geographic segments include North America, Europe and Other Foreign. The Company conducts funeral and cemetery operations in its North America and Other foreign segments and conducts funeral operations in its European segment. In the first quarter of 2002, the Company completed a joint venture of its United Kingdom operations (see note sixteen to the consolidated financial statements), which conducted both funeral and cemetery operations in this European segment. In 2002, the Company began recognizing revenues associated with delivered caskets previously prearranged on cemetery contracts as part of funeral operations. Previously, such casket revenue was recognized in cemetery operations. The Company has reclassified the prior year operating results to conform to the current period presentation with no effect on previously reported results of operations, financial position or cash flows. In addition in 2002, the Company changed its allocation methodology of overhead costs in North America to be based on funeral and cemetery reporting unit revenues. The change in overhead allocation has not impacted the Company's consolidated results of operations, financial position or cash flows. In 2000, the Company completed sales of its wholly owned insurance operations. As such, these operations have been reclassified and reported as discontinued operations (see note seventeen to the consolidated financial statements). The Company's reportable segment information is as follows:
REPORTABLE FUNERAL CEMETERY SEGMENTS ---------- -------- ---------- Revenues from external customers: 2002............................................ $1,635,395 $637,028 $2,272,423 2001............................................ 1,821,430 688,913 2,510,343 2000............................................ 1,926,601 626,635 2,553,236 Depreciation and amortization: 2002............................................ $ 75,758 $ 18,076 $ 93,834 2001............................................ 141,024 33,487 174,511 2000............................................ 157,174 40,162 197,336 Gross profits: 2002............................................ $ 279,568 $ 84,347 $ 363,915 2001............................................ 265,163 94,223 359,386 2000............................................ 274,728 50,619 325,347
77 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REPORTABLE FUNERAL CEMETERY SEGMENTS ---------- ---------- ----------- Total assets: 2002.......................................... $6,980,500 $3,350,929 $10,331,429 2001.......................................... 7,123,855 4,007,642 11,131,497 2000.......................................... 7,865,099 4,464,622 12,329,721 Capital expenditures: 2002.......................................... $ 69,940 $ 44,271 $ 114,211 2001.......................................... 56,824 26,596 83,420 2000.......................................... 40,660 43,943 84,603 Operating locations at year end (unaudited): 2002.......................................... 2,526 507 3,033 2001.......................................... 3,210 541 3,751 2000.......................................... 3,751 629 4,380
Subsequent to the sale of substantially all remaining loans held by the Company's lending subsidiary, results of operations from remaining loans are included in Other income in the consolidated statement of operations and assets have been consolidated with corporate assets. The following table reconciles certain reportable segment amounts to the Company's corresponding consolidated amounts:
REPORTABLE LENDING SEGMENTS SUBSIDIARY CORPORATE CONSOLIDATED ----------- ---------- --------- ------------ Revenues from external customers: 2002................................ $ 2,272,423 $ -- $ -- $ 2,272,423 2001................................ 2,510,343 -- -- 2,510,343 2000................................ 2,553,236 11,494 -- 2,564,730 Depreciation and amortization: 2002................................ $ 93,834 $ -- $ 34,712 $ 128,546 2001................................ 174,511 -- 19,426 193,937 2000................................ 197,336 -- 26,695 224,031 Total assets: 2002................................ $10,331,429 $ -- $392,356 $10,723,785 2001................................ 11,131,497 -- 448,440 11,579,937 2000................................ 12,329,721 40,120 505,433 12,875,274 Capital expenditures(1): 2002................................ $ 114,211 $ -- $ 12,924 $ 127,135 2001................................ 83,420 -- 2,574 85,994 2000................................ 84,603 -- 13,192 97,795
- --------------- (1) Consolidated capital expenditures include $27,090, $11,830, and $14,425 for the years ended December 31, 2002, 2001, and 2000, respectively, for capital leases and purchases of property, plant and equipment, cemetery property, and goodwill of acquired businesses. The 2001 amount relates to assets previously held by the Company's lending subsidiary exchanged for collateral in bankruptcy proceedings. The 2000 amount above related to the Company acquiring by deed in lieu of foreclosure the collateral underlying certain loans from the Company's lending subsidiary. Excluding these capital expenditures related to acquired businesses the Company had consolidated capital expenditures of $100,045, $74,164, and $83,370 for the years ended December 31, 2002, 2001, and 2000, respectively. 78 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table reconciles gross profits from reportable segments shown above to the Company's consolidated income (loss) before income taxes and extraordinary items:
2002 2001 2000 --------- --------- --------- Gross profit from reportable segments............. $ 363,915 $ 359,386 $ 325,347 Lending subsidiary income from operations....... -- -- 2,295 General and administrative expenses............. (89,752) (70,309) (79,932) Impairment losses and other operating expenses..................................... (289,054) (644,147) (517,776) --------- --------- --------- Operating loss.................................... (14,891) (355,070) (270,066) Interest expense................................ (161,494) (211,626) (281,548) Other income.................................... 19,021 15,044 17,455 Gains from dispositions......................... 16,401 16,224 17,181 --------- --------- --------- Loss from continuing operations before income taxes, extraordinary items and cumulative effects of accounting changes................... $(140,963) $(535,428) $(516,978) ========= ========= =========
Although total amounts reported have not changed, the Company has made certain reclassifications within geographic segments in order to more accurately reflect the results in all years with alignment of current management objectives. The Company's geographic segment information was as follows:
NORTH OTHER AMERICA EUROPE FOREIGN TOTAL ---------- ---------- --------- ---------- Revenues from external customers: 2002............................... $1,741,382 $ 496,409 $ 34,632 $2,272,423 2001............................... 1,781,159 647,714 81,470 2,510,343 2000............................... 1,737,014 686,199 141,517 2,564,730 Depreciation and amortization 2002............................... $ 119,060 $ 8,943 $ 543 $ 128,546 2001............................... 144,581 40,614 8,742 193,937 2000............................... 159,864 50,758 13,409 224,031 Operating income (loss): 2002............................... $ (56,693) $ 50,488 $ (8,686) $ (14,891) 2001............................... 209,247 (317,394) (246,923) (355,070) 2000............................... (308,409) 19,823 18,520 (270,066) Impairment and other operating expenses: 2002............................... $ 272,040 $ 777 $ 16,237 $ 289,054 2001............................... 17,657 370,232 256,258 644,147 2000............................... 496,336 20,424 1,016 517,776 Long-lived assets: 2002............................... $4,241,601 $ 254,694 $ 42,343 $4,538,638 2001............................... 4,741,276 603,016 47,005 5,391,297 2000............................... 4,882,795 1,154,260 521,178 6,558,233 Operating locations at year end (unaudited): 2002............................... 1,866 1,143 24 3,033 2001............................... 1,999 1,726 26 3,751 2000............................... 2,256 1,942 182 4,380
79 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Included in the North American figures above are the following United States amounts:
2002 2001 2000 ---------- ---------- ---------- Revenues from external customers................. $1,667,884 $1,701,574 $1,657,553 Operating income (loss)(1)....................... (69,664) 187,282 (225,359) Long-lived assets................................ 4,122,815 4,618,405 4,648,778 Operating locations at year end (unaudited)...... 1,714 1,842 2,092
Included in the European figures above are the following French amounts:
2002 2001 2000 -------- -------- -------- Revenues from external customers..................... $473,643 $425,129 $415,615 Operating income (loss)(1)........................... 46,797 (102,349) 5,235 Long-lived assets.................................... 265,415 202,141 344,369 Operating locations at year end (unaudited).......... 1,125 1,139 1,169
- --------------- (1) Operating income (loss) includes $270,866, $27,154, and $345,917 in impairment losses and other operating expenses in the United States and $(63), $126,612, and $8,913 in France for the years ended December 31, 2002, 2001, and 2000, respectively. During 2002 and 2001, the Company divested of certain North America and international funeral service locations and cemeteries not considered part of its core operations. These divested operations do not qualify as discontinued operations under SFAS No. 144 because either the divested operations were held for sale in accordance with previous accounting pronouncements related to dispositions or they do not meet the criteria as defined in SFAS No. 144. Summary operating results of the Company's divested operations are as follows.
NORTH AMERICA EUROPE ----------------- ------------------ 2002 2001 2002 2001 ------- ------- ------- -------- Revenues: Funeral..................................... $22,485 $74,687 $14,284 $190,673 Cemetery.................................... 4,648 16,568 2,190 25,745 ------- ------- ------- -------- $27,133 $91,255 $16,474 $216,418 ======= ======= ======= ======== Operating income (excluding impairment losses and other operating expenses): Funeral..................................... $(1,393) $(4,271) $ 3,358 $ 22,682 Cemetery.................................... 1,513 4,149 740 8,336 ------- ------- ------- -------- $ 120 $ (122) $ 4,098 $ 31,018 ======= ======= ======= ========
80 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER FOREIGN TOTAL ----------------- ------------------ 2002 2001 2002 2001 ------- ------- ------- -------- Revenues: Funeral..................................... $ -- $13,637 $36,769 $278,997 Cemetery.................................... -- 6,609 6,838 48,922 ------- ------- ------- -------- $ -- $20,246 $43,607 $327,919 ======= ======= ======= ======== Operating income (excluding impairment losses and other operating expenses): Funeral..................................... $ -- $ (637) $ 1,965 $ 17,774 Cemetery.................................... -- 2,036 2,253 14,521 ------- ------- ------- -------- $ -- $ 1,399 $ 4,218 $ 32,295 ======= ======= ======= ========
The net assets of the Company's United Kingdom subsidiary (divested in the first quarter of 2002) were as follows:
DECEMBER 31, 2001 ----------------- Assets: Cash and cash equivalents................................. $ 1,673 Receivables, net of allowances............................ 24,113 Inventories............................................... 7,845 Other..................................................... 14,124 Prearranged funeral contracts............................. 229,859 Cemetery property, at cost................................ 245,018 Property, plant and equipment, net........................ 117,658 Deferred charges and other assets......................... 3,956 Goodwill, net............................................. 35,276 -------- Total assets........................................... 679,522 Liabilities: Accounts payable and accrued liabilities.................. 41,863 Income taxes.............................................. 672 Deferred prearranged funeral contract revenues............ 304,437 Deferred cemetery contract revenues....................... 32,358 Deferred income taxes..................................... 22,437 Other liabilities......................................... 40,915 -------- Total liabilities...................................... 442,682 -------- Net assets.................................................. $236,840 ========
81 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE FOURTEEN SUPPLEMENTARY INFORMATION The detail of certain balance sheet accounts was as follows:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- Cash and cash equivalents: Cash...................................................... $ 35,338 $ 21,791 Commercial paper and temporary investments................ 165,287 7,501 ---------- ---------- $ 200,625 $ 29,292 ========== ========== Receivables and allowances: Current: Trade accounts......................................... $ 149,968 $ 209,471 Cemetery contracts and trusted cemetery merchandise and services sales....................................... 204,497 246,087 Loans and other notes receivable....................... 12,717 24,771 ---------- ---------- 367,182 480,329 ---------- ---------- Less: Allowance for contract cancellations and doubtful accounts............................................. 43,920 61,683 Unearned finance charges............................... 31,497 32,167 ---------- ---------- 75,417 93,850 ---------- ---------- $ 291,765 $ 386,479 ========== ========== Long-term: Cemetery contracts..................................... $ 453,375 $ 506,045 Trusted cemetery merchandise and services sales........ 854,452 901,058 Loans and other notes receivable....................... 126,268 129,944 ---------- ---------- 1,434,095 1,537,047 ---------- ---------- Less: Allowance for contract cancellations and doubtful accounts............................................. 206,740 207,468 Unearned finance charges............................... 70,897 80,087 ---------- ---------- 277,637 287,555 ---------- ---------- $1,156,458 $1,249,492 ========== ==========
Interest rates on cemetery contracts and loans and other notes receivable range from 3.5% to 14.5% at December 31, 2002 and 2001. Included in Loans and other notes receivable in the consolidated balance sheet 82 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) is $1,808 and $354 of notes with officers, employees and former employees of the Company, and $4,638 and $4,712 of notes with other related parties at December 31, 2002 and 2001, respectively.
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- Inventories: Developed land, lawn crypts and mausoleums................ $ 43,297 $ 51,882 Caskets, vaults, urns, markers and bases.................. 92,232 117,093 ---------- ---------- $ 135,529 $ 168,975 ========== ========== Cemetery property: Undeveloped land.......................................... $1,308,182 $1,671,953 Developed land, lawn crypts and mausoleums................ 259,402 252,820 ---------- ---------- $1,567,584 $1,924,773 ========== ========== Property, plant and equipment: Land...................................................... $ 252,769 $ 299,169 Buildings and improvements................................ 1,170,342 1,192,755 Operating equipment....................................... 373,294 430,020 Leasehold improvements.................................... 23,412 53,660 ---------- ---------- 1,819,817 1,975,604 Less: accumulated depreciation............................ (631,477) (618,194) ---------- ---------- $1,188,340 $1,357,410 ========== ========== Accounts payable and accrued liabilities: Trade payables............................................ $ 56,387 $ 78,852 Payroll................................................... 91,836 92,670 Interest.................................................. 21,427 40,753 Insurance................................................. 44,089 50,419 Bank overdraft accrual.................................... 16,349 26,010 Employee termination costs and costs to exit activities... 28,179 71,916 Property, sales and use tax payables...................... 29,516 30,551 Other..................................................... 74,127 92,979 ---------- ---------- $ 361,910 $ 484,150 ========== ==========
83 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NON-CASH TRANSACTIONS
YEARS ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Common stock issued under restricted stock plans..... $ 425 $ 645 $ 133 Minimum liability under retirement plans............. (7,202) (16,629) (12,724) Debenture conversions to common stock................ -- 5,528 -- Debt extinguished using common stock................. -- 81,221 -- Common stock issued in acquisitions.................. -- -- 247 Common stock contributions to employee 401(k)........ 18,150 12,635 812 Common stock contributions to cash balance plan...... -- 6,500 -- Debt extinguished using non-cash French assets....... 113,500 -- -- Capital leases....................................... 26,822 -- -- Debt exchange 6.00% notes due 2005 for 7.70% notes due 2009........................................... 172,183 -- --
NOTE FIFTEEN EARNINGS PER SHARE The basic and diluted per share amounts were the same in all periods presented because the Company reported a loss from continuing operations before extraordinary items and cumulative effects of accounting changes for the three years ended December 31, 2002.
2002 2001 2000 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Loss (numerator): Loss before extraordinary items and cumulative effects of accounting changes -- basic....... $(101,223) $(596,627) $(425,523) After tax interest on convertible debentures.... -- -- -- --------- --------- --------- Loss before extraordinary items and cumulative effects of accounting changes -- diluted..... $(101,223) $(596,627) $(425,523) ========= ========= ========= Shares (denominator): Shares -- basic................................. 294,533 285,127 272,172 Stock options.............................. -- -- 23 Convertible debentures..................... -- -- 349 --------- --------- --------- Shares -- diluted............................... 294,533 285,127 272,544 ========= ========= ========= Loss income per share before extraordinary items and cumulative effects of accounting changes: Basic........................................... $ (0.34) $ (2.09) $ (1.56) Diluted......................................... (0.34) (2.09) (1.56) Net loss per share: Basic........................................... $ (.79) $ (2.10) $ (4.93) Diluted......................................... (.79) (2.10) (4.93)
The computation of diluted earnings per share excludes outstanding stock options and convertible debentures because the inclusion of such options and debentures would be antidilutive in the periods 84 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) presented. Total options and convertible debentures that could impact dilutive earnings per share are as follows:
2002 2001 2000 ------ ------ ------ Antidilutive options ($2.26 to $42.53)..................... 30,001 29,949 25,294 Antidilutive convertible debentures ($6.92 to $50.00)...... 51,408 51,763 2,066 ------ ------ ------ Total common stock equivalents excluded from computation........................................... 81,409 81,712 27,360 ====== ====== ======
NOTE SIXTEEN IMPAIRMENT LOSSES AND OTHER OPERATING EXPENSES The Company has recorded Impairment losses and other operating expenses, previously disclosed as restructuring and non-recurring charges, in 2002, 2001, 2000 and 1999. The Company continues to adjust the estimates of certain items included in the original charges, as better estimates become available or actual divestitures occur. At December 31, 2002, approximately $80,193 of the remaining total restructuring charge balance relates to severance costs and contractual obligations, the majority of which will be paid by 2012. Further, of the $80,193 remaining reserves, $28,179 is included in Accounts payable and accrued liabilities in the consolidated balance sheet based on the expected timing of payment. The activity related to impairment losses and other operating expenses was as follows: 2002 Activity
UTILIZATION FOR TWELVE MONTHS ENDED BALANCE AT ADDITIONS OR DECEMBER 31, 2002 BALANCE AT ORIGINAL DECEMBER 31, ADJUSTMENTS ---------------------- DECEMBER 31, CHARGE AMOUNT 2001 DURING 2002 CASH NON-CASH 2002 ------------- ------------ ------------ --------- ---------- ------------ First Quarter 1999 Charge............... $ 89,884 $ 2,743 $ -- $ 1,326 $ 853 $ 564 Fourth Quarter 1999 Charge............... 272,544 67,517 (1,418) 7,308 10,537 48,254 2000 Charges........... 434,415 19,011 (23,490) 175 (4,654) -- 2001 Charges........... 663,548 15,959 20,983 1,682 31,875 3,385 2002 Charges........... 292,979 -- 292,979 2,315 262,674 27,990 ---------- -------- -------- ------- -------- ------- $1,753,370 $105,230 $289,054 $12,806 $301,285 $80,193 ========== ======== ======== ======= ======== =======
The Company's 2002 charges of $292,979 relate primarily to $158,481 for certain funeral and cemetery operations being held for sale, $40,787 for adjusting to market value certain options associated with the Company's Senior notes due 2003, $39,327 from relieving certain individuals from their consulting and/or covenant-not-to-compete contractual obligations, $18,701 to reduce the value of equity investments in North America companies, $12,902 of severance costs for former employees and $22,781 as disposal losses of long-lived assets. The Company also recorded a reduction in Impairment losses and other operating expenses of $3,925 as changes in estimates of charges previously recorded in 2001, 2000 and 1999, of which $16,237 was related to additional estimated reductions in the value of the Company's Argentina business due to continued economic decline, offset by $20,162 primarily related to reductions in estimates as a result of evaluating properties held for sale. The Company reviewed properties held for sale under previously recorded charges and in accordance with new accounting pronouncement SFAS No. 144, "Accounting for the Impairment or 85 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Disposal of Long-Lived Assets," the Company transferred certain locations no longer being actively marketed to held and used. As a result, the Company recorded a reduction to its 2000 charges. The $158,481 for certain funeral and cemetery operations being held for sale in North America represents 80 funeral service locations, 38 cemeteries and 22 businesses being sold for their real estate values. The $39,327 related to relieving 248 individuals from their consulting and/or covenant-not-to-compete contractual obligations under such agreements. Individuals will continue to be paid by the Company pursuant to such contractual terms, the majority of which will be paid by 2012. The severance charges relate to 411 employees involuntarily terminated in North America related to sales and administrative positions. Also included were severance charges for three executive officers. The remaining 2002 reserve is primarily related to the severance and terminated consulting and/or covenant-not-to-compete contractual obligations. 2001 Activity
UTILIZATION FOR TWELVE MONTHS ENDED BALANCE AT ADDITIONS OR DECEMBER 31, 2001 BALANCE AT ORIGINAL DECEMBER 31, ADJUSTMENTS ---------------------- DECEMBER 31, CHARGE AMOUNT 2000 DURING 2001 CASH NON-CASH 2001 ------------- ------------ ------------------ --------- ---------- ------------ First Quarter 1999 Charge............. $ 89,884 $ 6,210 $ -- $ 1,986 $ 1,481 $ 2,743 Fourth Quarter 1999 Charge............. 272,544 86,959 -- 19,694 (252) 67,517 2000 Charges......... 434,415 -- (19,401) -- (38,412) 19,011 2001 Charges......... 663,548 -- 663,548 1,114 646,475 15,959 ---------- ------- -------- ------- -------- -------- $1,460,391 $93,169 $644,147 $22,794 $609,292 $105,230 ========== ======= ======== ======= ======== ========
The Company's 2001 charges relate primarily to impairment charges associated with international businesses sold or held for sale. The total charge recorded in 2001 of $663,548 consists of $51,780 related to the joint venture of the Company's Australia operations; $26,519 related to the sales of the Company's operations in the Netherlands, Norway and Belgium; $573,394 related to the planned joint venture or disposition of its remaining investments outside the United States; and $11,855 of severance and asset write downs related to on-going cost rationalization programs. In the first quarter of 2002, the Company joint ventured its United Kingdom operations, receiving pretax proceeds of approximately $273,000 (which included approximately $9,000 in retained cash) and securities with a face value of $21,600, which includes a 20% equity interest in the United Kingdom operations and a 12% subordinated note. In 2001, the Company joint ventured its Australia operations and received net pretax proceeds of approximately $148,807 and securities with a face value of $24,400, which includes a 20% equity interest in the Australia operations and a 12% subordinated convertible note. Also included in this charge, the Company recognized $38,781 of the cumulative foreign currency translation effect into earnings, previously included as a separate component of Accumulated other comprehensive loss in stockholders' equity. In August 2001, the Company sold 85% of its operations in Spain and Portugal. In connection with this transaction, the Company received net pretax proceeds of $101,082 and recorded a gain of $2,062 which is included in Gains from dispositions in the consolidated statement of operations. Included in the gain, the Company recognized $209 of the cumulative foreign currency effect into earnings, previously included as a separate component of Accumulated other comprehensive loss in stockholders' equity. The $573,394 write down in 2001 related to assets held for sale in the Company's international jurisdictions. As part of computing the write down, the Company included a loss of $189,613 related to the 86 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cumulative foreign currency translation effect included in accumulated other comprehensive income. Reflected in the cumulative foreign currency translation adjustment at December 31, 2002 is a remaining loss of $162,715 related to assets held for sale. This amount will be removed from accumulated other comprehensive income when the asset sales are completed. See note three to the consolidated financial statements regarding accounting changes and note eleven to the consolidated financial statements regarding Other comprehensive losses. The original charge consisted of the following:
2001 CHARGE NUMBER OF LOCATIONS ----------- ------------------- United Kingdom......................................... $218,153 525 France................................................. 126,734 1,139 South America.......................................... 193,856 22 Other Foreign.......................................... 34,651 66 -------- ----- $573,394 1,752 ======== =====
The $11,855 consists of $7,597 for severance costs related to the termination of 123 employees in North America and 63 employees in Argentina. Nineteen individuals under employment, consultant and/or covenants-not-to-compete contractual agreements have been relieved from their obligations or restrictions under such agreements. Individuals will continue to be paid by the Company pursuant to such contractual terms, the majority of which will be paid by 2005. The remaining $4,258 related to assets impaired as a result of changes in the Company's technology strategy and termination of lease obligations related to facility closures. In 2001, the Company has recognized $19,401 as a reduction from changes in estimates of previously recorded charges of certain divested North American funeral homes and cemeteries and its equity investment in a Canadian funeral home and cemetery company. These changes in estimates are the result of better than anticipated market values as these previously impaired properties have been sold. The Company will continue to make adjustments as actual divestitures are consummated or better estimates become available. The Company received pretax proceeds of $35,799 related to the sale of its equity investment in the Canadian funeral home and cemetery company. The 2000 Charges totaled $491,119 related to the planned divestitures as a result of a North American facility review and the reduction of the carrying value of an equity investment in North America. Of the total 2000 Charges, $351,159 of charges related to the planned divestitures of 230 funeral service locations anticipated to be sold as funeral businesses, 174 funeral service locations anticipated to be sold as real estate and 105 cemeteries and $139,960 of charges to reduce the carrying value of equity investments. In 2000, the Company also recognized $26,657 related to changes in estimates for certain items originally included in the Fourth Quarter 1999 Charge. The changes primarily related to increasing the provision for asset impairment by $27,989 to further write down to estimated fair value loans made by the Company's lending subsidiary; $12,000 to write down to fair value assets held in the Company's European operations; offset by reductions of $8,969 for assets previously written down to their fair value, which were no longer being held for sale; and $4,363 in previously estimated severance costs in the Company's international operations. The First Quarter 1999 Charge totaled $89,884 relating to a cost rationalization program initiated in 1999 and consisted of the following: (1) severance costs of $56,757; (2) a charge of $19,123 of which $2,153 related to terminated projects representing costs associated with certain construction projects that have been cancelled and $16,970 related to costs associated with acquisition due diligence which will no longer be 87 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pursued; (3) a $7,245 charge for business and facility closures, primarily in the Company's European operations; and (4) a remaining charge of $6,759 consisting of various other cost initiatives. The $56,757 for severance costs is related to the termination of five executive contractual relationships and the involuntary termination of approximately 100 employees in North America (of which approximately 20 were located in the corporate office), 600 employees in France, 85 employees in other European operations and 10 employees in other foreign operations. The positions terminated were both operational and administrative in nature. The severance costs related to the executive contractual relationships will be paid out according to the terms of the respective agreements and will extend through 2005. The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost rationalization programs, as well as initiatives required to enhance cash flow and reduce debt. The Fourth Quarter 1999 Charge consisted of the following: (1) severance costs of $150,675; (2) asset impairment of $73,728 associated with assets held for sale which were written down to estimated fair value; (3) asset impairment of $18,245 associated with loans made by the Company's lending subsidiary held for sale which were written down to estimated fair value; (4) $12,719 of informational technology costs associated with projects that will no longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease obligations related to facility closures; and (6) $10,623 of various other items. The $150,675 of severance costs is related to the involuntary termination of 1,141 employees of the Company. Included in this total are 715 employees in the Company's international operations, 385 employees in North America, 33 employees in the Company's corporate home office and 8 executive officers of the Company. Of the 715 employees in the Company's international operations, 290 are additional involuntary terminations in France pursuant to the Company's First Quarter Charge. In the North America total, 316 individuals were former owners of independent funeral homes and cemeteries that were purchased by the Company and represent approximately $92,180 of the $150,675 of severance costs. These individuals were under employment, consultant and/or covenant-not-to-compete contractual agreements and have been relieved from their obligations or restrictions under their agreements. Such individuals will continue to be paid by the Company pursuant to such contractual terms, the majority of which will be paid by 2007. The other positions terminated were both operational and administrative in nature and the severance costs are expected to be paid out through 2001. The severance costs associated with the executive officers will be paid in accordance with the terms of the respective agreements and will extend through 2005. The $73,728 of charges related to assets held for sale consists of approximately $59,655 in the Company's North American operations, approximately $11,645 in the Company's international operations and approximately $2,428 of corporate assets. The $59,655 of charges in North America include approximately 50 funeral homes or cemeteries and approximately 45 individual parcels of undeveloped cemetery property or excess land that are held for sale and being reduced to their estimated fair values. The Company believes it is a prudent strategy to hold these underperforming assets for sale and redeploy the proceeds from such sales to reduce debt. NOTE SEVENTEEN DISCONTINUED OPERATIONS In the third quarter of 2000, the Company completed the sales of its wholly owned insurance operations, Auxia and American Memorial Life Insurance Company (AMLIC). The financial statements have been reclassified to reflect these operations as discontinued. The operating results for Auxia have been included through August 31, 2000 and the operating results for AMLIC have been included through September 30, 2000, the dates of dispositions of the respective companies. In the fourth quarter of 2001, the Company recognized the partial release of a contingent liability associated with the sale of its insurance operations in income from discontinued operations. 88 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summary operating results of discontinued operations:
TWELVE MONTHS ENDED DECEMBER 31, -------------------- 2001 2000 ------- ---------- Revenues.................................................... $ -- $ 295,062 Cost and expenses........................................... 2,637 (275,172) ------ --------- Income from discontinued operations before income taxes..... 2,637 19,890 Provision for income taxes.................................. (936) (6,543) ------ --------- Income from discontinued operations......................... $1,701 $ 13,347 ====== =========
NOTE EIGHTEEN QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR -------- --------- -------- --------- ---------- Revenues: 2002........................... $585,758 $ 566,328 $543,808 $ 576,529 $2,272,423 2001........................... 677,776 618,711 582,979 630,877 2,510,343 Gross profit: 2002........................... $119,164 $ 91,273 $ 75,409 $ 78,069 $ 363,915 2001........................... 110,888 86,570 67,019 94,909 359,386 Income (loss) from continuing operations before extraordinary items and cumulative effects of accounting changes: 2002........................... $ 46,168 $(140,160) $ (844) $ (6,387) $ (101,223) 2001........................... 3,319 (10,656) 4,182 (593,472) (596,627) Net income (loss): 2002........................... $(88,711) $(143,015) $ 4,061 $ (4,215) $ (231,880) 2001........................... 265 (10,585) 4,281 (591,757) (597,796) Basic earnings (loss) per share from continuing operations before extraordinary items and cumulative effects of accounting changes: 2002........................... $ .16 $ (.48) $ (.00) $ (.02) $ (.34) 2001........................... .01 (.04) .02 (2.03) (2.09) Diluted earnings (loss) per share from continuing operations before extraordinary items and cumulative effects of accounting changes: 2002........................... $ .15 $ (.48) $ (.00) $ (.02) $ (.34) 2001........................... .01 (.04) .02 (2.03) (2.09)
89 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income (loss) from continuing operations before extraordinary items and cumulative effects of accounting changes includes the following impairment losses and other operating expenses and changes in estimates:
FIRST SECOND THIRD FOURTH YEAR -------- --------- -------- --------- ---------- Impairment losses and other operating expenses: 2002........................... $ (4,894) $(231,674) $(27,942) $ (24,544) $ (289,054) 2001........................... (25,023) (26,223) (6,185) (586,716) (644,147) Changes in estimates: 2002........................... $ 3,800 $ 2,200 $ 8,800 $ 3,500 $ 18,300 2001........................... 10,140 10,894 23,033 14,826 58,893
For a more detailed discussion of impairment losses and other operating expenses, see note sixteen to the consolidated financial statements. For a more detailed discussion of the changes in estimates, see note two to the consolidated financial statements. 90 SERVICE CORPORATION INTERNATIONAL SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 2002
BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD - ----------- ---------- ---------- ----------- ------------- --------- (IN THOUSANDS) Current -- Allowance for contract cancellations and doubtful accounts: Year ended December 31, 2002.... $ 61,683 $ 2,711 $ (93) $(20,381) $ 43,920 Year ended December 31, 2001.... 64,852 19,976 (4,150) (18,995) 61,683 Year ended December 31, 2000.... 77,080 20,005 (18,558) (13,675) 64,852 Due After One Year -- Allowance for contract cancellations and doubtful accounts: Year ended December 31, 2002.... $207,468 $ 9,648 $ (8,179) $ (2,197) $206,740 Year ended December 31, 2001.... 234,257 (13,208) (11,077) (2,504) 207,468 Year ended December 31, 2000.... 97,285 19,885 121,097 (4,010) 234,257 Deferred Tax Valuation Allowance: Year ended December 31, 2002.... $168,528 $(10,527) $ -- $ -- $158,001 Year ended December 31, 2001.... 69,199 99,329 -- -- 168,528 Year ended December 31, 2000.... 27,278 41,921 -- -- 69,199
- --------------- (1) Uncollected receivables written off, net of recoveries. (2) Primarily cumulative effect of accounting change and acquisitions and dispositions of operations. 91 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by PART III (Items 10, 11, 12 and 13) has been omitted as the Company intends to file with the Commission not later than 120 days after the close of its fiscal year a definitive Proxy Statement pursuant to Regulation 14A. Such information is set forth in such Proxy Statement (i) with respect to Item 10 under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," (ii) with respect to Items 11 and 13 under the captions "Certain Information with Respect to Officers and Directors," "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" and (iii) with respect to Item 12 under the caption "Voting Securities and Principal Holders." The information as specified in the preceding sentence is incorporated herein by reference; provided however, notwithstanding anything set forth in this Form 10-K, the information under the captions "Compensation Committee Report on Executive Compensation" and "Performance Graph" in such Proxy Statement, and the information in the paragraphs under the caption "Audit Committee Report" in such Proxy Statement, are not incorporated by reference into this Form 10-K. The information regarding the Company's executive officers called for by Item 401 of Regulation S-K has been included in PART I of this report. The information regarding the Company's equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth below. Equity Compensation Plan Information at December 31, 2002:
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) PLAN CATEGORY (A) (B) (C) - ------------- -------------------------- -------------------- ------------------------- Equity compensation plans approved by security holders..... 21,941,673 $12.69 5,426,051 Equity compensation plans not approved by security holders(1)........... 8,059,577 8.75 5,516,348(2) ---------- ------ ---------- Total.................. 30,001,250 $11.63 10,942,399 ========== ====== ==========
- --------------- (1) Includes options outstanding under the Equity Corporation International 1994 Long-Term Incentive Plan which became exercisable to acquire Company common stock when the Company acquired Equity Corporation International in January 1999. The outstanding options cover an aggregate of 341,716 shares at a weighted-average exercise price of $22.50 per share. No shares of Company common stock are available for any future grants under this plan. Includes options outstanding under the 1996 Nonqualified Incentive Plan under which nonqualified stock options may be granted to employees who are not officers or directors. The exercise price of an option may not be less than the fair market value of the underlying stock on the date of grant and no option may 92 have a term of more than ten years. The terms of the options, including vesting, are set by a committee appointed by the Board of Directors. The Board of Directors may amend, terminate or suspend the plan in its discretion. The Company has 7,717,861 total options outstanding under the 1996 Non-qualified Incentive Plan. The Company has options available for future issuance under the 1996 Nonqualified Incentive Plan of 742,782. See note eleven to the consolidated financial statements in Item 8 of this Form 10-K for a further description of 1996 Nonqualified Incentive Plan. These plans have not been submitted for shareholder approval. (2) Includes an estimated 4,773,566 shares registered for the Employee Stock Purchase Plan. Under such plan, a dollar value of shares (not an amount of shares) are registered. The above estimate was determined by dividing (i) the remaining unissued dollar value of registered shares at December 31, 2002, which was $15,848,238, by (ii) the closing price of $3.32 per share of common stock at December 31, 2002. The Employee Stock Purchase Plan enables Company employees in North America to invest via payroll deductions up to $500 (or $600 Canadian) per month in Company common stock. Contributions are utilized to purchase the stock in the open market. With respect to Canadian employees who meet certain requirements, the Company will provide annually a match equal to 25% of the amount of the employee's contribution subject to a maximum contribution per participant of $1,800 Canadian. This plan has not been submitted for shareholder approval. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act") ) as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company periodic filings under the Exchange Act. CHANGE IN INTERNAL CONTROLS Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)-(2) Financial Statements and Schedule: The financial statements and schedule are listed in the accompanying Index to Financial Statements and Related Schedule on page 38 of this report. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index on pages 98-101 are filed as part of this report. (b) Reports on Form 8-K During the quarter ended December 31, 2002, the Company did not file any reports on Form 8-K. (c) Included in (a) above. (d) Included in (a) above. 93 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Service Corporation International, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERVICE CORPORATION INTERNATIONAL By: /s/ JAMES M. SHELGER ------------------------------------ (James M. Shelger, Senior Vice President, General Counsel and Secretary) Dated: March 17, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ R. L. WALTRIP* Chairman of the Board and Chief March 17, 2003 - -------------------------------------- Executive Officer (Principal (R. L. Waltrip) Executive Officer) /s/ JEFFREY E. CURTISS* Senior Vice President Chief March 17, 2003 - -------------------------------------- Financial Officer and Treasurer (Jeffrey E. Curtiss) (Principal Financial Officer) /s/ ERIC D. TANZBERGER* Vice President and Corporate March 17, 2003 - -------------------------------------- Controller (Eric D. Tanzberger) /s/ ANTHONY L. COELHO* Director March 17, 2003 - -------------------------------------- (Anthony L. Coelho) /s/ JACK FINKELSTEIN* Director March 17, 2003 - -------------------------------------- (Jack Finkelstein) /s/ A. J. FOYT, JR.* Director March 17, 2003 - -------------------------------------- (A. J. Foyt, Jr.) /s/ JAMES H. GREER* Director March 17, 2003 - -------------------------------------- (James H. Greer) /s/ B. D. HUNTER* Director March 17, 2003 - -------------------------------------- (B. D. Hunter) /s/ VICTOR L. LUND* Director March 17, 2003 - -------------------------------------- (Victor L. Lund)
94
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN W. MECOM, JR.* Director March 17, 2003 - -------------------------------------- (John W. Mecom, Jr.) /s/ CLIFTON H. MORRIS, JR.* Director March 17, 2003 - -------------------------------------- (Clifton H. Morris, Jr.) /s/ E. H. THORNTON, JR.* Director March 17, 2003 - -------------------------------------- (E. H. Thornton, Jr.) /s/ W. BLAIR WALTRIP* Director March 17, 2003 - -------------------------------------- (W. Blair Waltrip) /s/ EDWARD E. WILLIAMS* Director March 17, 2003 - -------------------------------------- (Edward E. Williams) *By: /s/ JAMES M. SHELGER ------------------------------ (James M. Shelger, as Attorney-In-Fact For each of the Persons indicated)
95 SERVICE CORPORATION INTERNATIONAL A TEXAS CORPORATION CERTIFICATION OF CHIEF EXECUTIVE OFFICER SECTION 302 CERTIFICATION I, Robert L. Waltrip, certify that: 1. I have reviewed this annual report on Form 10-K of Service Corporation International, a Texas corporation (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ ROBERT L. WALTRIP -------------------------------------- Robert L. Waltrip Chairman of the Board and Chief Executive Officer Date: March 17, 2003 96 SERVICE CORPORATION INTERNATIONAL A TEXAS CORPORATION CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER SECTION 302 CERTIFICATION I, Jeffrey E. Curtiss, certify that: 1. I have reviewed this annual report on Form 10-K of Service Corporation International, a Texas corporation (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JEFFREY E. CURTISS -------------------------------------- Jeffrey E. Curtiss Senior Vice President Chief Financial Officer and Treasurer (Principal Financial Officer) Date: March 17, 2003 97 EXHIBIT INDEX PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-10867 on Form S-3). 3.2 -- Articles of Amendment to Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996). 3.3 -- Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred Stock, dated July 27, 1998. (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 1998). 3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 4.1 -- Rights Agreement dated as of May 14, 1998 between the Company and Harris Trust and Savings Bank. (Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 14, 1998). 4.2 -- Agreement Appointing a Successor Rights Agent Under Rights Agreement, dated June 1, 1999, by the Company, Harris Trust and Savings Bank and The Bank of New York. (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 1999). 10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.1 to Form 10-K for the fiscal year ended December 31, 1991). 10.2 -- First Amendment to Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.2 to Form 10-K for the fiscal year ended December 31, 2000). 10.3 -- Agreement dated May 14, 1992 between the Company, R.L. Waltrip and related parties relating to life insurance. (Incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended December 31, 1992). 10.4 -- Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and R.L. Waltrip. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended December 31, 1998). 10.5 -- First Amendment to Employment Agreement, dated February 25, 2003, between SCI Executive Services, Inc. and R.L. Waltrip. 10.6 -- Non-Competition Agreement and Amendment to Employment Agreement, dated November 11, 1991, among the Company, R.L. Waltrip and Claire Waltrip. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 1992). 10.7 -- Separation and Release Agreement, dated January 18, 2000, among the Company, SCI Executive Services, Inc. and W. Blair Waltrip. (Incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 1999). 10.8 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and B.D. Hunter. (Incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended December 31, 2001). 10.9 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and Thomas L. Ryan. 10.10 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and Michael R. Webb. 10.11 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and Jeffrey E. Curtiss. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 2001). 10.12 -- Form of Employment Agreement pertaining to officers (other than the officers identified in the preceding exhibits). (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 2001). 10.13 -- 1986 Stock Option Plan. (Incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended December 31, 1991).
98
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 -- Amendment to 1986 Stock Option Plan, dated February 12, 1997 (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 1996). 10.15 -- Amendment to 1986 Stock Option Plan, dated November 13, 1997 (Incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1997). 10.16 -- Amended 1987 Stock Plan. (Incorporated by reference to Appendix A to Proxy Statement dated April 1, 1991). 10.17 -- First Amendment to Amended 1987 Stock Plan. (Incorporated by reference to Exhibit 10.23 to Form 10-K for the fiscal year ended December 31, 1993). 10.18 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4.12 to Registration Statement No. 333-00179 on Form S-8). 10.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.15 to Form 10-K for the fiscal year ended December 31, 1996). 10.20 -- Amendment to 1993 Long-Term Incentive Stock Option Plan, dated November 13, 1997. (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1997). 10.21 -- 1995 Incentive Equity Plan. (Incorporated by reference to Annex B to Proxy Statement dated April 17, 1995). 10.22 -- Amendment to 1995 Incentive Equity Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year ended December 31, 1996). 10.23 -- Amendment to 1995 Incentive Equity Plan, dated November 13, 1997. (Incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended December 31, 1997). 10.24 -- Amended 1996 Incentive Plan. (Incorporated by reference to Annex A to Proxy Statement dated April 13, 1999). 10.25 -- Split Dollar Life Insurance Plan. (Incorporated by reference to Exhibit 10.36 to Form 10-K for the fiscal year ended December 31, 1995). 10.26 -- Supplemental Executive Retirement Plan for Senior Officers (as Amended and Restated Effective as of January 1, 1998). (Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended December 31, 1998). 10.27 -- First Amendment to Supplemental Executive Retirement Plan for Senior Officers. (Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended December 31, 2000). 10.28 -- SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 4.7 to Form S-8 filed as of June 1, 2000, Registration Statement No. 333-38310). 10.29 -- First Amendment to SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.31 to Form 10-K for the fiscal year ended December 31, 2000). 10.30 -- SCI 401(k) Retirement Savings Plan as Amended and Restated. (Incorporated by reference to Exhibit 4.9 to Registration Statement No. 333-91046). 10.31 -- 2001 Stock Plan for Non-Employee Directors. (Incorporated by reference to Annex A to Proxy Statement dated April 13, 2001). 10.32 -- Director Fee Plan. (Incorporated by reference to Annex B to Proxy Statement dated April 13, 2001). 10.33 -- First Amendment, dated November 13, 2002, to Director Fee Plan. 10.34 -- 1996 Nonqualified Incentive Plan. (Incorporated by reference to Exhibit 99.1 to Registration Statement No. 333-33101). 10.35 -- Amendment to 1996 Nonqualified Incentive Plan dated November 13, 1997. (Incorporated by reference to Exhibit 99.2 to Registration Statement No. 333-50084). 10.36 -- Amendment to 1996 Nonqualified Incentive Plan dated November 11, 1999. (Incorporated by reference to Exhibit 99.3 to Registration Statement No. 333-50084).
99
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.37 -- Amendment to 1996 Nonqualified Incentive Plan dated February 14, 2001. (Incorporated by reference to Exhibit 99.4 to Registration Statement No. 333-67800). 10.38 -- Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 1.1 to Registration Statement No. 2-62484 on Form S-8). 10.39 -- Amendment No. 1 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 15.1 to Registration Statement No. 2-62484 on Form S-8). 10.40 -- Amendment No. 2 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 28.3 to Registration Statement No. 33-25061 on Form S-8). 10.41 -- Amendment No. 3 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 28.4 to Registration Statement No. 33-35708 on Form S-8). 10.42 -- Amendment No. 4 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated December 21, 1993). 10.43 -- Amendment No. 5 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.31 to Form 10-K for the fiscal year ended December 31, 1999). 10.44 -- Amendment No. 6 to the Employee Stock Purchase Plan. 10.45 -- Amendment No. 7 to the Employee Stock Purchase Plan. 10.46 -- Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated by reference to Exhibit 28.5 to Post-Effective Amendment No. 1 to Registration Statement No. 33-8907 on Form S-8). 10.47 -- First Amendment to Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated December 21, 1993). 10.48 -- Employee Stock Purchase Plan Administration Agreement dated July 25, 2001 between Service Corporation International (Canada) Limited and Fastrak Systems Inc. 12.1 -- Ratio of Earnings to Fixed Charges. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Independent Accountants (PricewaterhouseCoopers LLP). 24.1 -- Powers of Attorney. 99.1 -- Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.2 -- Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.3 -- Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.4 -- Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99-280, In Re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.5 -- Defendants' Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999).
100
EXHIBIT NUMBER DESCRIPTION ------- ----------- 99.6 -- Plaintiffs' Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PriceWaterhouse Coopers, L.L.P.; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.7 -- Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999). 99.8 -- Plaintiff's Original Petition filed December 28, 2000 in Cause No. 33701-01-01, Jack D. Rottman v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P.; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.16 to Form 10-K for the fiscal year ended December 31, 2000). 99.9 -- Defendants' Motion to Transfer Venue and Original Answer in response to the Original Petition referred to in Exhibit 99.8. (Incorporated by reference to Exhibit 99.17 to Form 10-K for the fiscal year ended December 31, 2000). 99.10 -- Plaintiff's Original Petition filed December 15, 2000, in Cause No. 2000-63917, Jack T. Hammer v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P.; in the 165th Judicial District Court of Harris County, Texas. (Incorporated by reference to Exhibit 99.18 to Form 10-K for the fiscal year ended December 31, 2000). 99.11 -- Defendants' Original Answer to the Original Petition referred to in Exhibit 99.10. (Incorporated by reference to Exhibit 99.10 to Form 10-K for the fiscal year ended December 31, 2000). 99.12 -- Plaintiffs' First Amended Demand for Arbitration and Complaint for Damages filed January 24, 2003 in Case No. 70 Y 168 00717 02, James P. Hunter, III and the James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, and George R. Champagne, before the American Arbitration Association in Houston, Texas. 99.13 -- Credit Agreement dated as of July 24, 2002 among the Company, as Borrower, the Lenders Party thereto, JPMorgan Chase Bank, as Administrative Agent, Bank of America, N.A., as Syndicated Agent, and Credit Lyonnais, Lehman Commercial Paper Inc. and Merrill Lynch Capital Corporation, as Co-Documentation Agents, J.P. Morgan Securities Inc., and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers. (Incorporated by reference to Exhibit 99.2 to Form 8-K dated July 25, 2002). 99.14 -- Amendment No. 1 dated as of December 6, 2002 to the Credit Agreement referred to in Exhibit 99.13. 99.15 -- Certification of Periodic Financial Reports by Robert L. Waltrip in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. 99.16 -- Certification of Periodic Financial Reports by Jeffrey E. Curtiss in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
In the above list, the management contracts or compensatory plans or arrangements are set forth in Exhibits 10.1 through 10.48. Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as exhibits to this report certain instruments with respect to long-term debt under which the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of Registrant and its subsidiaries on a consolidated basis. Registrant agrees to furnish a copy of any such instrument to the Commission upon request. 101 EXHIBIT INDEX PURSUANT TO ITEM 601 OF REG. S-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-10867 on Form S-3). 3.2 -- Articles of Amendment to Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996). 3.3 -- Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred Stock, dated July 27, 1998. (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 1998). 3.4 -- Bylaws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 4.1 -- Rights Agreement dated as of May 14, 1998 between the Company and Harris Trust and Savings Bank. (Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 14, 1998). 4.2 -- Agreement Appointing a Successor Rights Agent Under Rights Agreement, dated June 1, 1999, by the Company, Harris Trust and Savings Bank and The Bank of New York. (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 1999). 10.1 -- Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.1 to Form 10-K for the fiscal year ended December 31, 1991). 10.2 -- First Amendment to Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.2 to Form 10-K for the fiscal year ended December 31, 2000). 10.3 -- Agreement dated May 14, 1992 between the Company, R.L. Waltrip and related parties relating to life insurance. (Incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended December 31, 1992). 10.4 -- Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and R.L. Waltrip. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended December 31, 1998). 10.5 -- First Amendment to Employment Agreement, dated February 25, 2003, between SCI Executive Services, Inc. and R.L. Waltrip. 10.6 -- Non-Competition Agreement and Amendment to Employment Agreement, dated November 11, 1991, among the Company, R.L. Waltrip and Claire Waltrip. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 1992). 10.7 -- Separation and Release Agreement, dated January 18, 2000, among the Company, SCI Executive Services, Inc. and W. Blair Waltrip. (Incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 1999). 10.8 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and B.D. Hunter. (Incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended December 31, 2001). 10.9 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and Thomas L. Ryan. 10.10 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and Michael R. Webb. 10.11 -- Employment and Noncompetition Agreement, dated February 13, 2002, between SCI Executive Services, Inc. and Jeffrey E. Curtiss. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 2001). 10.12 -- Form of Employment Agreement pertaining to officers (other than the officers identified in the preceding exhibits). (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 2001). 10.13 -- 1986 Stock Option Plan. (Incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended December 31, 1991).
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 -- Amendment to 1986 Stock Option Plan, dated February 12, 1997 (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 1996). 10.15 -- Amendment to 1986 Stock Option Plan, dated November 13, 1997 (Incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1997). 10.16 -- Amended 1987 Stock Plan. (Incorporated by reference to Appendix A to Proxy Statement dated April 1, 1991). 10.17 -- First Amendment to Amended 1987 Stock Plan. (Incorporated by reference to Exhibit 10.23 to Form 10-K for the fiscal year ended December 31, 1993). 10.18 -- 1993 Long-Term Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4.12 to Registration Statement No. 333-00179 on Form S-8). 10.19 -- Amendment to 1993 Long-Term Incentive Stock Option Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.15 to Form 10-K for the fiscal year ended December 31, 1996). 10.20 -- Amendment to 1993 Long-Term Incentive Stock Option Plan, dated November 13, 1997. (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1997). 10.21 -- 1995 Incentive Equity Plan. (Incorporated by reference to Annex B to Proxy Statement dated April 17, 1995). 10.22 -- Amendment to 1995 Incentive Equity Plan, dated February 12, 1997. (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year ended December 31, 1996). 10.23 -- Amendment to 1995 Incentive Equity Plan, dated November 13, 1997. (Incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended December 31, 1997). 10.24 -- Amended 1996 Incentive Plan. (Incorporated by reference to Annex A to Proxy Statement dated April 13, 1999). 10.25 -- Split Dollar Life Insurance Plan. (Incorporated by reference to Exhibit 10.36 to Form 10-K for the fiscal year ended December 31, 1995). 10.26 -- Supplemental Executive Retirement Plan for Senior Officers (as Amended and Restated Effective as of January 1, 1998). (Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended December 31, 1998). 10.27 -- First Amendment to Supplemental Executive Retirement Plan for Senior Officers. (Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended December 31, 2000). 10.28 -- SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 4.7 to Form S-8 filed as of June 1, 2000, Registration Statement No. 333-38310). 10.29 -- First Amendment to SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.31 to Form 10-K for the fiscal year ended December 31, 2000). 10.30 -- SCI 401(k) Retirement Savings Plan as Amended and Restated. (Incorporated by reference to Exhibit 4.9 to Registration Statement No. 333-91046). 10.31 -- 2001 Stock Plan for Non-Employee Directors. (Incorporated by reference to Annex A to Proxy Statement dated April 13, 2001). 10.32 -- Director Fee Plan. (Incorporated by reference to Annex B to Proxy Statement dated April 13, 2001). 10.33 -- First Amendment, dated November 13, 2002, to Director Fee Plan. 10.34 -- 1996 Nonqualified Incentive Plan. (Incorporated by reference to Exhibit 99.1 to Registration Statement No. 333-33101). 10.35 -- Amendment to 1996 Nonqualified Incentive Plan dated November 13, 1997. (Incorporated by reference to Exhibit 99.2 to Registration Statement No. 333-50084). 10.36 -- Amendment to 1996 Nonqualified Incentive Plan dated November 11, 1999. (Incorporated by reference to Exhibit 99.3 to Registration Statement No. 333-50084).
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.37 -- Amendment to 1996 Nonqualified Incentive Plan dated February 14, 2001. (Incorporated by reference to Exhibit 99.4 to Registration Statement No. 333-67800). 10.38 -- Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 1.1 to Registration Statement No. 2-62484 on Form S-8). 10.39 -- Amendment No. 1 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 15.1 to Registration Statement No. 2-62484 on Form S-8). 10.40 -- Amendment No. 2 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 28.3 to Registration Statement No. 33-25061 on Form S-8). 10.41 -- Amendment No. 3 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 28.4 to Registration Statement No. 33-35708 on Form S-8). 10.42 -- Amendment No. 4 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated December 21, 1993). 10.43 -- Amendment No. 5 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.31 to Form 10-K for the fiscal year ended December 31, 1999). 10.44 -- Amendment No. 6 to the Employee Stock Purchase Plan. 10.45 -- Amendment No. 7 to the Employee Stock Purchase Plan. 10.46 -- Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated by reference to Exhibit 28.5 to Post-Effective Amendment No. 1 to Registration Statement No. 33-8907 on Form S-8). 10.47 -- First Amendment to Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated December 21, 1993). 10.48 -- Employee Stock Purchase Plan Administration Agreement dated July 25, 2001 between Service Corporation International (Canada) Limited and Fastrak Systems Inc. 12.1 -- Ratio of Earnings to Fixed Charges. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Independent Accountants (PricewaterhouseCoopers LLP). 24.1 -- Powers of Attorney. 99.1 -- Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.2 -- Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.3 -- Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.4 -- Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99-280, In Re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.5 -- Defendants' Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999).
EXHIBIT NUMBER DESCRIPTION ------- ----------- 99.6 -- Plaintiffs' Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PriceWaterhouse Coopers, L.L.P.; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.7 -- Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999). 99.8 -- Plaintiff's Original Petition filed December 28, 2000 in Cause No. 33701-01-01, Jack D. Rottman v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P.; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.16 to Form 10-K for the fiscal year ended December 31, 2000). 99.9 -- Defendants' Motion to Transfer Venue and Original Answer in response to the Original Petition referred to in Exhibit 99.8. (Incorporated by reference to Exhibit 99.17 to Form 10-K for the fiscal year ended December 31, 2000). 99.10 -- Plaintiff's Original Petition filed December 15, 2000, in Cause No. 2000-63917, Jack T. Hammer v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P.; in the 165th Judicial District Court of Harris County, Texas. (Incorporated by reference to Exhibit 99.18 to Form 10-K for the fiscal year ended December 31, 2000). 99.11 -- Defendants' Original Answer to the Original Petition referred to in Exhibit 99.10. (Incorporated by reference to Exhibit 99.10 to Form 10-K for the fiscal year ended December 31, 2000). 99.12 -- Plaintiffs' First Amended Demand for Arbitration and Complaint for Damages filed January 24, 2003 in Case No. 70 Y 168 00717 02, James P. Hunter, III and the James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, and George R. Champagne, before the American Arbitration Association in Houston, Texas. 99.13 -- Credit Agreement dated as of July 24, 2002 among the Company, as Borrower, the Lenders Party thereto, JPMorgan Chase Bank, as Administrative Agent, Bank of America, N.A., as Syndicated Agent, and Credit Lyonnais, Lehman Commercial Paper Inc. and Merrill Lynch Capital Corporation, as Co-Documentation Agents, J.P. Morgan Securities Inc., and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers. (Incorporated by reference to Exhibit 99.2 to Form 8-K dated July 25, 2002). 99.14 -- Amendment No. 1 dated as of December 6, 2002 to the Credit Agreement referred to in Exhibit 99.13. 99.15 -- Certification of Periodic Financial Reports by Robert L. Waltrip in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. 99.16 -- Certification of Periodic Financial Reports by Jeffrey E. Curtiss in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
EX-10.5 3 h02718exv10w5.txt 1ST AMEND.TO EMPLOYMENT AGMT - R. L. WALTRIP EXHIBIT 10.5 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") made and entered into as of this 25th day of February, 2003, by and between SCI EXECUTIVE SERVICES, INC., a Delaware corporation (the "Company") wholly owned by SERVICE CORPORATION INTERNATIONAL, a Texas corporation (the "Parent"), and R. L. WALTRIP, (the "Employee"). W I T N E S S E T H: WHEREAS, the Company and the Employee entered into an Employment Agreement effective January 1, 1998 (the "Employment Agreement"), and the Parent guaranteed payment and performance under the Employment Agreement; and WHEREAS, the Company and the Employee have agreed to amend the Employment Agreement in certain respects; NOW THEREFORE, in consideration of the premises and the agreements herein contained, the parties intending to continue to be legally bound by the Employment Agreement as amended by this Amendment, hereby agree as follows: 1. Section 1 of the Employment Agreement is hereby amended by deleting the entire Section 1 and substituting the following as Section 1 in its entirety: "1. Employment and Term. The Company agrees to employ the Employee and the Employee agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period beginning on the date of the First Amendment to this Employment Agreement and ending as of the close of business on December 31, 2006 (such period is referred to hereinafter as the "Employment Period")." 2. Section 2 of the Employment Agreement is hereby amended by deleting the first sentence thereof and substituting the following for such sentence: "During the Employment Period, the Employee shall serve either as Chairman of the Board of Directors of the Parent, or as Chairman of the Board of Directors and Chief Executive Officer of the Parent, as designated at the discretion of the Board of Directors of the Parent, and shall have the duties, powers and authority heretofore possessed by the holder of such office(s) and such other powers consistent therewith as are delegated to him in writing from time to time by the Board of Directors of the Parent (the "Board"). 3. Section 4(c) of the Employment Agreement is hereby amended by adding a new subparagraph at the end of such Section to be and read as follows: "It is understood and agreed that the First Amendment to this Employment Agreement shall not constitute "Good Reason" for purposes of this Agreement." 4. Section 4(e) of the Employment Agreement is hereby amended by deleting the last sentence of such Section. 5. Section 5(a) of the Employment Agreement is hereby amended by deleting all of the language within the parenthetical at the end of such Section so that the Section ends prior to such parenthetical. 6. The terms and provisions of the Employment Agreement, as amended hereby, continue in full force and effect. IN WITNESS WHEREOF, the Employee and, pursuant to due authorization from the Board, the Company have caused this Amendment to be executed as of the date first above written. R. L. WALTRIP /s/ R. L. Waltrip ----------------------------------- "EMPLOYEE" SCI EXECUTIVE SERVICES, INC. By: /s/ Curtis G. Briggs ------------------------------- Name: Curtis G. Briggs Title: Vice President "COMPANY" Pursuant to due authorization from its Board of Directors, the Parent, by its execution hereof, absolutely and unconditionally guarantees to Employee the full and timely payment and performance of each obligation of the Company to Employee under the Employment Agreement as amended by this Amendment, waives any and all rights that it may otherwise have to require Employee to proceed against the Company for nonpayment or nonperformance, waives any and all defenses that would otherwise be a defense to this guarantee, and agrees to remain liable to Employee for all payment and performance obligations of the Company under the Employment Agreement as amended by this Amendment, whether arising before, on or after the date of this Amendment, until the Employment Agreement shall terminate pursuant to its terms. SERVICE CORPORATION INTERNATIONAL By: /s/ James M. Shelger -------------------------------- Name: James M. Shelger Title: Senior Vice President General Counsel and Secretary "PARENT" EX-10.9 4 h02718exv10w9.txt EMPLOYMENT & NONCOMPETITION AGMT - THOMAS L. RYAN EXHIBIT 10.9 EMPLOYMENT AND NONCOMPETITION AGREEMENT THIS AGREEMENT is made and effective this 13th day of February, 2002 between SCI Executive Services, Inc., a Delaware corporation (the "Company"), and Thomas L. Ryan (the "Employee"): ARTICLE I EMPLOYMENT 1.1 Employment Term. The Company agrees to employ the Employee and the Employee agrees to accept such employment, in accordance with the terms and conditions of this Agreement, for the period beginning on the date of this Agreement and ending as of the close of business on December 31, 2002 (such period together with all extensions thereof are referred to hereinafter as the "Employment Term"); provided, however, that commencing on January 1, 2003, and on each January 1 thereafter (each such date shall be hereinafter referred to as a "Renewal Date"), the Employment Term shall be extended so as to terminate one year from such Renewal Date if (i) the Company notifies the Employee in writing of such extension at least thirty days prior to such Renewal Date and (ii) the Employee has not previously given the Company written notice that the Employment Term shall not be so extended. In the event that the Company gives the Employee written notice at any time of its intention not to renew the Employment Term, then the Employment Term shall terminate on December 31 of the year in which such notice of non-renewal is given and shall not thereafter be further extended. If the Company fails to notify the Employee at least thirty days prior to a Renewal Date either of its intention to extend the Employment Term as provided above or its intention not to so extend the Employment Term, then the Employment Term shall not be extended and shall terminate as of the day prior to such Renewal Date. 1.2 Duties. The Employee shall serve the Company in an executive or managerial capacity and shall hold such title as may be authorized from time to time by the Board of Directors of Service Corporation International ("SCI"). The Employee shall have the duties, powers and authority consistent therewith and such other powers as are delegated to him in writing from time to time by the Board of Directors of SCI. If the Employee is elected to any office or other position with the Company during the term of this Agreement, the Employee will serve in such capacity or capacities without further compensation unless the Compensation Committee (the "Compensation Committee") of the Board of Directors of SCI authorizes additional compensation. The Employee's title and duties may be changed from time to time at the discretion of the Company. The Employee also agrees to perform, without additional compensation, such other services for the Company and for any subsidiary or affiliated corporations of the Company or for any partnerships in which the Company has an interest, as the Company shall from time to time specify. The term "Company" as used hereinafter shall be deemed to include and refer to subsidiaries and affiliated corporations and partnerships. Employee agrees and acknowledges that he owes, and will comply with, a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to 1 take no action or fail to take action if such action or failure to act would injure the Company's business, its interests or its reputation. 1.3 Extent of Service. During the Employment Term, the Employee shall devote his full time, attention and energy to the business of the Company, and, except as may be specifically permitted by the Company, shall not be engaged in any other business activity during the term of this Agreement. The foregoing shall not be construed as preventing the Employee from making passive investments in other businesses or enterprises, provided, however, that such investments will not: (1) require services on the part of the Employee which would in any way impair the performance of his duties under this Agreement, or (2) in any manner significantly interfere with Employee's responsibilities as an Employee of the Company in accordance with this Agreement. 1.4 Compensation (a) Salary. The Company shall pay to the Employee a salary at the rate in effect for Employee at the date of this Agreement. Such salary is to be payable in installments in accordance with the payroll policies of the Company in effect from time to time during the term of this Agreement. The Company may (but is not required to) make such upward adjustments to the Employee's salary as it deems appropriate from time to time. (b) Incentive Compensation. In addition to the above salary, the Employee shall be eligible annually for incentive compensation at the discretion of the Compensation Committee. (c) Other Benefits. The Employee shall be reimbursed in accordance with the Company's normal expense reimbursement policy for all of the actual and reasonable costs and expenses accrued by Employee in the performance of his or her services and duties hereunder, including but not limited to, travel and entertainment expenses. The Employee shall be entitled to participate in all insurance, stock options, retirement plans and other benefit plans or programs as may be from time to time specifically adopted and approved by the Company for its employees, in accordance with the eligibility requirements and any other terms and conditions of such plans. It is understood and agreed between the parties hereto that the Company reserves the right, at its sole discretion, to modify, amend or terminate such plans, programs or benefits at any time. 1.5 Termination (a) Death. If the Employee dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate except that (i) the Company shall continue to pay the Employee's estate the Employee's salary in installments through the end of the Employment Term which was in effect immediately prior to Employee's death, and (ii) the Company shall pay the Employee's estate any applicable Pro Rated Bonus (defined hereinbelow). (b) Disability. If during the term of this Agreement, the Employee shall be 2 prevented from performing his duties hereunder by reason of disability, then the Company, on 30 days' prior notice to the Employee, may terminate Employee's employment under this Agreement. For purposes of this Agreement, the Employee shall be deemed to have become disabled when the Company, upon the advice of a qualified physician, shall have determined that the Employee has become physically or mentally incapable (excluding infrequent and temporary absences due to ordinary illness) of performing his duties under this Agreement. In the event of a termination pursuant to this paragraph 1.5(b), the Company shall be relieved of all of its obligations under this Agreement, except that the Company shall pay to the Employee (or his estate, in the event of his subsequent death), (i) the Employee's salary in installments through the end of the Employment Term which was in effect immediately prior to Employee's disability, and (ii) any applicable Pro Rated Bonus. Before making any termination decision pursuant to this Section 1.5(b), the Company shall determine whether there is any reasonable accommodation (within the meaning of the Americans With Disabilities Act) which would enable the Employee to perform the essential functions of the Employee's position under this Agreement despite the existence of any such disability. If such a reasonable accommodation is possible, the Company shall make that accommodation and shall not terminate the Employee's employment hereunder during the Employment Term based on such disability. (c) Certain Discharges. Prior to the end of the Employment Term, the Company may discharge the Employee for Cause and terminate Employee's employment hereunder without notice and without any further liability hereunder to Employee or his estate. For purposes of this Agreement, "Cause" shall mean a determination by the Company that Employee: (i) has been convicted of a crime involving moral turpitude; (ii) has regularly failed or refused to follow policies or directives established by the Company or the Board of Directors of SCI; (iii) has willfully and persistently failed to attend to his duties; (iv) has committed acts amounting to gross negligence or willful misconduct to the detriment of the Company or its affiliates; (v) has violated any of his obligations under Articles II or III of this Agreement; or (vi) has otherwise breached any of the terms or provisions of this Agreement. (d) Without Cause. Prior to the end of the Employment Term, the employment of the Employee with the Company may be terminated by the Company other than for Cause, death or disability. If such event occurs prior to a Change of Control (defined hereinbelow), the Company shall have no further obligation to Employee or his estate except that the Company shall pay to the Employee (or his estate, in the event of his subsequent death), (i) the Employee's salary in installments through the end of the Employment Term which was in effect immediately prior to Employee's termination, and (ii) any applicable Pro Rated Bonus. (e) Voluntary Termination by Employee. If during the term of this Agreement, the Employee voluntarily terminates his employment with the Company prior to any Change of Control, the Company shall be relieved of all of its obligations under this Agreement, except that the Company shall pay the Employee (or his estate, in the event of his subsequent death) (i) the Employee's salary through the date of Employee's termination, and (ii) any incentive compensation under Section 1.4(b) determined by the Compensation Committee for any fiscal period ended prior 3 to the date of Employee's termination which had not been paid at the time of his termination. All such payments to the Employee or his estate shall be made in the same manner and at the same times as the Employee's salary or incentive compensation would have been paid to the Employee had he not terminated his employment. (f) Change of Control. If (i) a Change of Control occurs during the Employment Term and (ii) within twelve months after such Change of Control the Employee's employment is (x) terminated by the Company other than for Cause, death or disability, or (y) terminated by Employee for any or no reason (except under circumstances which would be grounds for termination of Employee by the Company for Cause), then the Company shall be relieved of all of its obligations under this Agreement, except that the Company shall pay the Employee (or his estate, in the event of his subsequent death) the following amounts: (1) Two, multiplied by the Employee's annual salary in effect immediately prior to the Change of Control, which amount will be paid in a lump sum in cash within 30 days after the Employee's date of termination, plus (2) Any applicable Pro Rated Bonus. The obligations of the Company under this Section 1.5(f) shall remain in effect for twelve months after any Change of Control that occurs during the Employment Term notwithstanding the fact that such twelve month period may extend beyond the expiration of the Employment Term. (g) Post Employment Term Matters. In the event the Employment Term terminates because it is not extended or renewed pursuant to Section 1.1, then the Company shall be relieved of all of its obligations under this Agreement and Employee will thereafter be an employee "at will" of the Company. ARTICLE II INFORMATION 2.1 Nondisclosure of Information. The Employee acknowledges that in the course of his employment by the Company he will receive certain trade secrets, which may include, but are not limited to, programs, lists of acquisition or disposition prospects and knowledge of acquisition strategy, financial information and reports, lists of customers or potential customers and other confidential information and knowledge concerning the business of the Company (hereinafter collectively referred to as "Information") which the Company desires to protect. The Employee understands that the Information is confidential and agrees not to reveal the Information to anyone outside the Company so long as the confidential or secret nature of the Information shall continue, unless compelled to do so by any federal or state regulatory agency or by a court order. If Employee becomes aware that disclosure of any Information is being sought by such an agency or through a court order, Employee will immediately notify the Company. The Employee further agrees that he will at no time use the Information in competing with the Company. Upon 4 termination of Employee's employment with the Company, the Employee shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment or relating to the Information, and the Employee agrees that all such materials are and will at all times remain the property of the Company and to the extent the Employee has any rights therein, he hereby irrevocably assigns such rights to the Company. 2.2 Disclosure of Information, Ideas, Concepts, Improvements, Discoveries and Inventions. As part of the Employee's fiduciary duties to the Company, Employee agrees that during his employment by the Company, and for a period of six months after the termination of the employment relationship for any reason, Employee shall promptly disclose in writing to the Company all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by Employee, either individually or jointly with others, and which relate to the business, products or services of the Company or any of its subsidiaries or affiliates, irrespective of whether Employee utilized the Company's time or facilities and irrespective of whether such information, idea, concept, improvement, discovery or invention was conceived, developed, discovered or acquired by the Employee on the job, at home, or elsewhere. This obligation extends to all types of information, ideas and concepts, including information, ideas and concepts relating to new types of services, corporate opportunities, acquisition prospects, the identity of key representatives within acquisition prospect organizations, prospective names or service marks for the Company's business activities, and the like. 2.3 Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions and All Original Works of Authorship. (a) All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Employee or which are disclosed or made known to Employee, individually or in conjunction with others, during Employee's employment by the Company and which relate to the Company's business, products or services (including but not limited to all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer's organization or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks), are and shall be the sole and exclusive property of the Company. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of the Company. (b) In particular, Employee hereby specifically sells, assigns and transfers to the Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions described in Section 2.3 (a) above, and any United States or foreign applications for patents, inventor's certificates or other industrial rights that 5 may be filed thereon, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and applications for registration of such names and marks. Both during the period of Employee's employment by the Company and thereafter, Employee shall assist the Company and its nominees at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions both in the United States and all foreign countries, including but not limited to the execution of all lawful oaths and all assignment documents requested by the Company or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, including divisions, continuations, continuations-in-part, reissues, and/or extensions thereof, and any application for the registration of such names and marks. (c) Moreover, if during Employee's employment by the Company, Employee creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as videotapes, written presentations on acquisitions, computer programs, drawing, maps, architectural renditions, models, manuals, brochures or the like) relating to the Company's business, products, or services, whether such work is created solely by Employee or jointly with others, the Company shall be deemed the author of such work if the work is prepared by Employee in the scope of his or her employment; or, if the work is not prepared by Employee within the scope of his or her employment but is specially ordered by Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and the Company shall be considered the author of the work. In the event such work is neither prepared by the Employee within the scope of his or her employment or is not a work specially ordered and deemed to be a work made for hire, then Employee hereby agrees to assign, and by these presents, does assign, to the Company all of Employee's worldwide right, title and interest in and to the work and all rights of copyright therein. Both during the period of Employee's employment by the Company and thereafter, Employee agrees to assist the Company and its nominee, at any time, in protection of the Company's worldwide right, title and interest in and to the work and all rights of copyright therein, including but not limited to, the execution of all formal assignment documents requested by the Company or its nominees and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries. ARTICLE III NONCOMPETITION 3.1 Noncompetition. During the Employment Term (and for a period of one or two years thereafter if the Company exercises its options under Section 3.2 hereof), Employee shall not, acting alone or in conjunction with others, directly or indirectly, in any market in which the Company or any of its affiliated companies conducts business, work for or engage in any business in competition with the business conducted by the Company or any of its affiliated companies, whether for his own account or by soliciting, canvassing or accepting any business or transaction 6 for or from any other company or business in competition with such business of the Company or any of its affiliated companies. In the event that a court should determine that any restriction herein is unenforceable, the parties hereto agree that the obligations under this paragraph shall be enforceable for the maximum term and maximum geographical area allowable by law. 3.2 Extension. The Company shall have the option to extend Employee's obligations under Section 3.1 for one additional year (the "First Extension Term") beyond the end of the Employment Term. If the Company exercises such option, it shall be required to pay Employee an amount equal to one year's salary, based on Employee's salary rate as of the date his employment with the Company ceased (the "Noncompetition Payment"). Such Noncompetition Payment shall be made in 12 equal monthly installments (each installment being an amount equal to 1/12th of such annual salary) commencing on the date which is thirty (30) days after the last day of the Employment Term. Subsequent payments shall be made on the same day of each succeeding month until 12 payments have been made. If the Employee breaches his noncompetition obligations, the Company shall be entitled to cease making such monthly payments. The purpose of this paragraph is to make the noncompetition obligation of the Employee more reasonable from the Employee's point of view. The amounts to be paid by the Company are not intended to be liquidated damages or an estimate of the actual damages that would be sustained by the Company if the Employee breaches his post-employment noncompetition obligation. If the Employee breaches his post-employment noncompetition obligation, the Company shall be entitled to all of its remedies at law or in equity for damages and injunctive relief. The Company may exercise the option conferred by this paragraph at any time within 30 days after the last day of the Employment Term by mailing written notice of such exercise to Employee. If the Company exercises its option to extend Employee's obligations as set forth in the preceding paragraph, then the Company shall have the option to extend Employee's obligations under Section 3.1 for one additional year (the "Second Extension Term") beyond the end of the First Extension Term. If the Company exercises its option to extend Employee's obligations for the Second Extension Term, the rights and obligations of the parties set forth in the preceding paragraph shall be applicable during the Second Extension Term. The Company may exercise the option conferred by this paragraph at any time within 30 days after the last day of the First Extension Term by mailing written notice of such exercise to Employee. 3.3 Termination For Cause or Termination By Employee. Notwithstanding anything to the contrary in this Agreement, in the event that Employee's employment hereunder is terminated for Cause pursuant to Section 1.5 (c) hereof, or in the event Employee voluntarily terminates the employment relationship for any reason other than a material breach of this Agreement by the Company, the noncompetition obligations of Employee described in Section 3.1 above shall automatically continue for a period of two years from the date the employment relationship ceases, and the Company shall not be required to (i) make any payments to Employee in consideration for such obligations, or (ii) provide any notice to Employee. Notwithstanding the foregoing this Section 3.3 shall not be applicable in the event Employee voluntarily terminates the employment relationship within twelve months after a Change of Control that occurs during the Employment 7 Term; provided however, the first clause of this sentence shall be null and void if such termination referenced therein occurs under circumstances which would be grounds for termination of Employee by the Company for Cause. 3.4 Obligations to Refrain From Competing Unfairly. In addition to the other obligations agreed to by Employee in this Agreement, Employee agrees that during the Employment Term and for five (5) year(s) thereafter, he shall not at any time, directly or indirectly for the benefit or any other party than the Company or any of its affiliated companies, (a) induce, entice, or solicit any employee of the Company or any of its affiliated companies to leave his employment, or (b) contact, communicate or solicit any customer of the Company or any of its affiliated companies derived from any customer list, customer lead, mail, printed matter or other information secured from the Company or any of its affiliated companies or their present or past employees, or (c) in any other manner use any customer lists or customer leads, mail, telephone numbers, printed material or material of the Company or any of its affiliated companies relating thereto. 3.5 Acknowledgement. Employee acknowledges that Employee's compliance with the provisions of this Article III is necessary to protect the existing goodwill and other proprietary rights of the Company, as well as all goodwill and relationships that may be acquired or enhanced during the course of Employee's employment with the Company, and all confidential information which may come into existence or to which Employee may have access during his employment with the Company. Employee further acknowledges that Employee will become familiar with certain of the Company's affairs, operations, customers and confidential information and data by means of his employment with the Company, and that failure to comply with the provisions of this Article III will result in irreparable and continuing damage to the Company for which there will be no adequate remedy at law. The Company shall be entitled to all of its remedies at law or in equity for damages and injunctive relief in the event of any violation of this Article III by Employee. ARTICLE IV MISCELLANEOUS 4.1 Notices. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Employee: ___________________ ___________________ ___________________ 8 If to the Company: General Counsel c/o SCI Executive Services, Inc. 1929 Allen Parkway Houston, Texas 77019 Attention: Legal Department Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 4.2 Entire Agreement. This Agreement replaces and merges all previous agreements and discussions relating to the same or similar subject matters between Employee and the Company (or any of its affiliates) and constitutes the entire agreement between the Employee and the Company (and any of its affiliates) with respect to the subject matter of this Agreement. Any existing employment agreement between the Employee and the Company (or any of its affiliates) is hereby terminated, effective immediately. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by an employee, officer, or representative of the Company or by any written agreement unless signed by an officer of the Company who is expressly authorized by the Company to execute such document. 4.3 Specific Performance. The Employee acknowledges that a remedy at law for any breach of Article II or III of this Agreement will be inadequate, agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such breach or attempted breach, and further agrees to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or any other equitable relief. 4.4 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition, invalidity or unenforceability without invalidating the remainder of such provision or the remaining provisions of this Agreement. 4.5 Assignment. This Agreement may not be assigned by the Employee. Neither the Employee, his spouse, nor his estate shall have any right to commute, encumber or dispose of any right to receive payments hereunder, it being understood that such payments and the right thereto are nonassignable and nontransferable. This Agreement may be assigned by the Company. 4.6 Binding Effect. Subject to the provisions of Section 4.5 of this Agreement, this Agreement shall be binding upon and inure to the benefit of the parties hereto, the Employee's heirs and personal representatives, and the successors and assigns of the Company. 9 4.7 Captions. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 4.8 Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of Texas. 4.9 Counterparts. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute the same instrument. 4.10 Survival of Certain Obligations. Employee's obligations under Articles II and III hereof shall survive any termination of Employee's employment hereunder. 4.11 Waiver. The waiver by either party of any right hereunder or of any breach of this Agreement shall not operate as or be construed to be an amendment of this Agreement or a waiver of any future right or breach. 4.12 Gender. All references to the masculine pronoun herein are used for convenience and ease of reading only and are intended and apply to the feminine gender as well. 4.13 Dispute Resolution. (a) Employee and the Company agree that, except for the matters identified in Section 4.13(b) below, all disputes relating to any aspects of Employee's employment with the Company shall be resolved by binding arbitration. This includes, but is not limited to, any claims against the Company, its affiliates or their officers, directors, employees, or agents for breach of contract, wrongful discharge, discrimination, harassment, defamation, misrepresentation, and emotional distress, as well as any disputes pertaining to the meaning or effect of this Agreement. (b) It is expressly agreed that this Section 4.13 shall not govern claims for workers' compensation or unemployment benefits, or any claim by the Company against Employee which is based on fraud, theft or other dishonest conduct of Employee. (c) Any claim which either party has against the other must be presented in writing by the claiming party to the other within one year of the date the claiming party knew or should have known of the facts giving rise to the claim. Otherwise, the claim shall be deemed waived and forever barred even if there is a federal or state statute of limitations which would have given more time to pursue the claim. (d) Each party may retain legal counsel and shall pay its own costs and attorneys' fees, regardless of the outcome of the arbitration. Each party shall pay one-half of the 10 compensation to be paid to the arbitrators, as well as one-half of any other costs relating to the administration of the arbitration proceeding (for example, room rental, court reporter, etc.). (e) An arbitrator shall be selected by mutual agreement of the parties. If the parties are unable to agree on a single arbitrator, each party shall select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The three arbitrators so selected will then hear and decide the matter. All arbitrators must be attorneys, judges or retired judges who are licensed to practice law in the state where the Employee is or most recently was employed by the Company. The arbitration proceedings shall be conducted within the county in which Employee is or most recently was employed by the Company or at another mutually agreeable location. (f) Except as otherwise provided herein, the arbitration proceedings shall be conducted in accordance with the statutes, rules or regulations governing arbitration in the state in which Employee is or most recently was employed by the Company. In the absence of such statutes, rules or regulations, the arbitration proceedings shall be conducted in accordance with the employment arbitration rules of the American Arbitration Association ("AAA"); provided however, that the foregoing reference to the AAA rules shall not be deemed to require any filing with that organization, nor any direct involvement of that organization. In the event of any inconsistency between this Agreement and the statutes, rules or regulations to be applied pursuant to this paragraph, the terms of this Agreement shall apply. (g) The arbitrator shall issue a written award, which shall contain, at a minimum, the names of the parties, a summary of the issues in controversy, and a description of the award issued. Upon motion to a court of competent jurisdiction, either party may obtain a judgment or decree in conformity with the arbitration award, and said award shall be enforced as any other judgment or decree. (h) In resolving claims governed by this Section 4.13, the arbitrator shall apply the laws of the state in which Employee is or most recently was employed by the Company, and/or federal law, if applicable. (i) Employee and the Company agree and acknowledge that any arbitration proceedings between them, and the outcome of such proceedings, shall be kept strictly confidential; provided however, that the Company may disclose such information to the extent required by law and to its employees, agents and professional advisors who have a legitimate need to know such information, and the Employee may disclose such information (1) to the extent required by law, (2) to the extent that the Employee is required to disclose same to professional persons assisting Employee in preparing tax returns; and (3) to Employee's legal counsel. 4.14 Change of Control. "Change of Control" means the happening of any of the following events: 11 (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of Common Stock of SCI (the "Outstanding SCI Common Stock") or (B) the combined voting power of the then outstanding voting securities of SCI entitled to vote generally in the election of directors (the "Outstanding SCI Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control under this subsection (a): (i) any acquisition directly from SCI (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by SCI, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by SCI or any corporation controlled by SCI, or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (A), (B) and (C) of subsection (c) of this definition of "Change of Control" are satisfied; or (b) Individuals who, as of the effective date hereof, constitute the Board of Directors of SCI (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of SCI; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by SCI's shareholders, was approved by (A) a vote of at least a majority of the directors then comprising the Incumbent Board, or (B) a vote of at least a majority of the directors then comprising the Executive Committee of the Board of Directors of SCI at a time when such committee was comprised of at least five members and all members of such committee were either members of the Incumbent Board or considered as being members of the Incumbent Board pursuant to clause (A) of this subsection (b), shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of SCI; or (c) Approval by the shareholders of SCI of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (A) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities, as the case may be, (B) no Person (excluding SCI, any employee benefit plan (or related trust) of SCI or such corporation resulting from such reorganization, merger or consolidation, and any Person beneficially owning, immediately prior 12 to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding SCI Common Stock or Outstanding SCI Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of SCI of (A) a complete liquidation or dissolution of SCI or (B) the sale or other disposition of all or substantially all of the assets of SCI other than to a corporation, with respect to which following such sale or other disposition, (i) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is the beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities, as the case may be, (ii) no Person (excluding SCI and any employee benefit plan (or related trust) of SCI or such corporation, and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding SCI Common Stock or Outstanding SCI Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board of Directors of SCI providing for such sale or other disposition of assets of SCI. 4.15 Pro Rated Bonus. "Pro Rated Bonus" shall mean, a bonus equal to the product of (i) the bonus Employee did not receive but would have received under Section 1.4(b) if he had remained an employee through the end of the Employment Term, it being understood that the amount of such bonus Employee would have received shall be determined by reference to the average amount of bonus actually awarded to other officers who were at the same or comparable level of responsibility as Employee immediately prior to his termination, and (ii) a fraction, the denominator of which is 365 and the numerator of which is the number of days in the fiscal year being considered through the date of death, determination of disability or notice of termination of employment, whichever is applicable. In the event that a majority of SCI officers do not receive a bonus for the fiscal year being considered, then the Pro Rated Bonus shall not be applicable and Employee shall not be entitled to a Pro Rated Bonus. The Pro Rated Bonus, if any, payable to 13 Employee shall be paid within 90 days after the date that bonuses, if any, are awarded for a majority of SCI officers for the year being considered. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. "COMPANY" SCI Executive Services, Inc. By: /s/ Curtis G. Briggs ----------------------------------------- Curtis G. Briggs Vice President "EMPLOYEE" /s/ Thomas L. Ryan -------------------------------------------- 14 EX-10.10 5 h02718exv10w10.txt EMPLOYMENT & NONCOMPETITION AGMT - MICHAEL R. WEBB EXHIBIT 10.10 EMPLOYMENT AND NONCOMPETITION AGREEMENT THIS AGREEMENT is made and effective this 13th day of February, 2002 between SCI Executive Services, Inc., a Delaware corporation (the "Company"), and Michael R. Webb (the "Employee"): ARTICLE I EMPLOYMENT 1.1 Employment Term. The Company agrees to employ the Employee and the Employee agrees to accept such employment, in accordance with the terms and conditions of this Agreement, for the period beginning on the date of this Agreement and ending as of the close of business on December 31, 2002 (such period together with all extensions thereof are referred to hereinafter as the "Employment Term"); provided, however, that commencing on January 1, 2003, and on each January 1 thereafter (each such date shall be hereinafter referred to as a "Renewal Date"), the Employment Term shall be extended so as to terminate one year from such Renewal Date if (i) the Company notifies the Employee in writing of such extension at least thirty days prior to such Renewal Date and (ii) the Employee has not previously given the Company written notice that the Employment Term shall not be so extended. In the event that the Company gives the Employee written notice at any time of its intention not to renew the Employment Term, then the Employment Term shall terminate on December 31 of the year in which such notice of non-renewal is given and shall not thereafter be further extended. If the Company fails to notify the Employee at least thirty days prior to a Renewal Date either of its intention to extend the Employment Term as provided above or its intention not to so extend the Employment Term, then the Employment Term shall not be extended and shall terminate as of the day prior to such Renewal Date. 1.2 Duties. The Employee shall serve the Company in an executive or managerial capacity and shall hold such title as may be authorized from time to time by the Board of Directors of Service Corporation International ("SCI"). The Employee shall have the duties, powers and authority consistent therewith and such other powers as are delegated to him in writing from time to time by the Board of Directors of SCI. If the Employee is elected to any office or other position with the Company during the term of this Agreement, the Employee will serve in such capacity or capacities without further compensation unless the Compensation Committee (the "Compensation Committee") of the Board of Directors of SCI authorizes additional compensation. The Employee's title and duties may be changed from time to time at the discretion of the Company. The Employee also agrees to perform, without additional compensation, such other services for the Company and for any subsidiary or affiliated corporations of the Company or for any partnerships in which the Company has an interest, as the Company shall from time to time specify. The term "Company" as used hereinafter shall be deemed to include and refer to subsidiaries and affiliated corporations and partnerships. Employee agrees and acknowledges that he owes, and will comply with, a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to 1 take no action or fail to take action if such action or failure to act would injure the Company's business, its interests or its reputation. 1.3 Extent of Service. During the Employment Term, the Employee shall devote his full time, attention and energy to the business of the Company, and, except as may be specifically permitted by the Company, shall not be engaged in any other business activity during the term of this Agreement. The foregoing shall not be construed as preventing the Employee from making passive investments in other businesses or enterprises, provided, however, that such investments will not: (1) require services on the part of the Employee which would in any way impair the performance of his duties under this Agreement, or (2) in any manner significantly interfere with Employee's responsibilities as an Employee of the Company in accordance with this Agreement. 1.4 Compensation (a) Salary. The Company shall pay to the Employee a salary at the rate in effect for Employee at the date of this Agreement. Such salary is to be payable in installments in accordance with the payroll policies of the Company in effect from time to time during the term of this Agreement. The Company may (but is not required to) make such upward adjustments to the Employee's salary as it deems appropriate from time to time. (b) Incentive Compensation. In addition to the above salary, the Employee shall be eligible annually for incentive compensation at the discretion of the Compensation Committee. (c) Other Benefits. The Employee shall be reimbursed in accordance with the Company's normal expense reimbursement policy for all of the actual and reasonable costs and expenses accrued by Employee in the performance of his or her services and duties hereunder, including but not limited to, travel and entertainment expenses. The Employee shall be entitled to participate in all insurance, stock options, retirement plans and other benefit plans or programs as may be from time to time specifically adopted and approved by the Company for its employees, in accordance with the eligibility requirements and any other terms and conditions of such plans. It is understood and agreed between the parties hereto that the Company reserves the right, at its sole discretion, to modify, amend or terminate such plans, programs or benefits at any time. 1.5 Termination (a) Death. If the Employee dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate except that (i) the Company shall continue to pay the Employee's estate the Employee's salary in installments through the end of the Employment Term which was in effect immediately prior to Employee's death, and (ii) the Company shall pay the Employee's estate any applicable Pro Rated Bonus (defined hereinbelow). (b) Disability. If during the term of this Agreement, the Employee shall be 2 prevented from performing his duties hereunder by reason of disability, then the Company, on 30 days' prior notice to the Employee, may terminate Employee's employment under this Agreement. For purposes of this Agreement, the Employee shall be deemed to have become disabled when the Company, upon the advice of a qualified physician, shall have determined that the Employee has become physically or mentally incapable (excluding infrequent and temporary absences due to ordinary illness) of performing his duties under this Agreement. In the event of a termination pursuant to this paragraph 1.5(b), the Company shall be relieved of all of its obligations under this Agreement, except that the Company shall pay to the Employee (or his estate, in the event of his subsequent death), (i) the Employee's salary in installments through the end of the Employment Term which was in effect immediately prior to Employee's disability, and (ii) any applicable Pro Rated Bonus. Before making any termination decision pursuant to this Section 1.5(b), the Company shall determine whether there is any reasonable accommodation (within the meaning of the Americans With Disabilities Act) which would enable the Employee to perform the essential functions of the Employee's position under this Agreement despite the existence of any such disability. If such a reasonable accommodation is possible, the Company shall make that accommodation and shall not terminate the Employee's employment hereunder during the Employment Term based on such disability. (c) Certain Discharges. Prior to the end of the Employment Term, the Company may discharge the Employee for Cause and terminate Employee's employment hereunder without notice and without any further liability hereunder to Employee or his estate. For purposes of this Agreement, "Cause" shall mean a determination by the Company that Employee: (i) has been convicted of a crime involving moral turpitude; (ii) has regularly failed or refused to follow policies or directives established by the Company or the Board of Directors of SCI; (iii) has willfully and persistently failed to attend to his duties; (iv) has committed acts amounting to gross negligence or willful misconduct to the detriment of the Company or its affiliates; (v) has violated any of his obligations under Articles II or III of this Agreement; or (vi) has otherwise breached any of the terms or provisions of this Agreement. (d) Without Cause. Prior to the end of the Employment Term, the employment of the Employee with the Company may be terminated by the Company other than for Cause, death or disability. If such event occurs prior to a Change of Control (defined hereinbelow), the Company shall have no further obligation to Employee or his estate except that the Company shall pay to the Employee (or his estate, in the event of his subsequent death), (i) the Employee's salary in installments through the end of the Employment Term which was in effect immediately prior to Employee's termination, and (ii) any applicable Pro Rated Bonus. (e) Voluntary Termination by Employee. If during the term of this Agreement, the Employee voluntarily terminates his employment with the Company prior to any Change of Control, the Company shall be relieved of all of its obligations under this Agreement, except that the Company shall pay the Employee (or his estate, in the event of his subsequent death) (i) the Employee's salary through the date of Employee's termination, and (ii) any incentive compensation under Section 1.4(b) determined by the Compensation Committee for any fiscal period ended prior 3 to the date of Employee's termination which had not been paid at the time of his termination. All such payments to the Employee or his estate shall be made in the same manner and at the same times as the Employee's salary or incentive compensation would have been paid to the Employee had he not terminated his employment. (f) Change of Control. If (i) a Change of Control occurs during the Employment Term and (ii) within twelve months after such Change of Control the Employee's employment is (x) terminated by the Company other than for Cause, death or disability, or (y) terminated by Employee for any or no reason (except under circumstances which would be grounds for termination of Employee by the Company for Cause), then the Company shall be relieved of all of its obligations under this Agreement, except that the Company shall pay the Employee (or his estate, in the event of his subsequent death) the following amounts: (1) Two, multiplied by the Employee's annual salary in effect immediately prior to the Change of Control, which amount will be paid in a lump sum in cash within 30 days after the Employee's date of termination, plus (2) Any applicable Pro Rated Bonus. The obligations of the Company under this Section 1.5(f) shall remain in effect for twelve months after any Change of Control that occurs during the Employment Term notwithstanding the fact that such twelve month period may extend beyond the expiration of the Employment Term. (g) Post Employment Term Matters. In the event the Employment Term terminates because it is not extended or renewed pursuant to Section 1.1, then the Company shall be relieved of all of its obligations under this Agreement and Employee will thereafter be an employee "at will" of the Company. ARTICLE II INFORMATION 2.1 Nondisclosure of Information. The Employee acknowledges that in the course of his employment by the Company he will receive certain trade secrets, which may include, but are not limited to, programs, lists of acquisition or disposition prospects and knowledge of acquisition strategy, financial information and reports, lists of customers or potential customers and other confidential information and knowledge concerning the business of the Company (hereinafter collectively referred to as "Information") which the Company desires to protect. The Employee understands that the Information is confidential and agrees not to reveal the Information to anyone outside the Company so long as the confidential or secret nature of the Information shall continue, unless compelled to do so by any federal or state regulatory agency or by a court order. If Employee becomes aware that disclosure of any Information is being sought by such an agency or through a court order, Employee will immediately notify the Company. The Employee further agrees that he will at no time use the Information in competing with the Company. Upon 4 termination of Employee's employment with the Company, the Employee shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment or relating to the Information, and the Employee agrees that all such materials are and will at all times remain the property of the Company and to the extent the Employee has any rights therein, he hereby irrevocably assigns such rights to the Company. 2.2 Disclosure of Information, Ideas, Concepts, Improvements, Discoveries and Inventions. As part of the Employee's fiduciary duties to the Company, Employee agrees that during his employment by the Company, and for a period of six months after the termination of the employment relationship for any reason, Employee shall promptly disclose in writing to the Company all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by Employee, either individually or jointly with others, and which relate to the business, products or services of the Company or any of its subsidiaries or affiliates, irrespective of whether Employee utilized the Company's time or facilities and irrespective of whether such information, idea, concept, improvement, discovery or invention was conceived, developed, discovered or acquired by the Employee on the job, at home, or elsewhere. This obligation extends to all types of information, ideas and concepts, including information, ideas and concepts relating to new types of services, corporate opportunities, acquisition prospects, the identity of key representatives within acquisition prospect organizations, prospective names or service marks for the Company's business activities, and the like. 2.3 Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions and All Original Works of Authorship. (a) All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Employee or which are disclosed or made known to Employee, individually or in conjunction with others, during Employee's employment by the Company and which relate to the Company's business, products or services (including but not limited to all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer's organization or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks), are and shall be the sole and exclusive property of the Company. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of the Company. (b) In particular, Employee hereby specifically sells, assigns and transfers to the Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions described in Section 2.3 (a) above, and any United States or foreign applications for patents, inventor's certificates or other industrial rights that 5 may be filed thereon, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and applications for registration of such names and marks. Both during the period of Employee's employment by the Company and thereafter, Employee shall assist the Company and its nominees at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions both in the United States and all foreign countries, including but not limited to the execution of all lawful oaths and all assignment documents requested by the Company or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, including divisions, continuations, continuations-in-part, reissues, and/or extensions thereof, and any application for the registration of such names and marks. (c) Moreover, if during Employee's employment by the Company, Employee creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as videotapes, written presentations on acquisitions, computer programs, drawing, maps, architectural renditions, models, manuals, brochures or the like) relating to the Company's business, products, or services, whether such work is created solely by Employee or jointly with others, the Company shall be deemed the author of such work if the work is prepared by Employee in the scope of his or her employment; or, if the work is not prepared by Employee within the scope of his or her employment but is specially ordered by Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and the Company shall be considered the author of the work. In the event such work is neither prepared by the Employee within the scope of his or her employment or is not a work specially ordered and deemed to be a work made for hire, then Employee hereby agrees to assign, and by these presents, does assign, to the Company all of Employee's worldwide right, title and interest in and to the work and all rights of copyright therein. Both during the period of Employee's employment by the Company and thereafter, Employee agrees to assist the Company and its nominee, at any time, in protection of the Company's worldwide right, title and interest in and to the work and all rights of copyright therein, including but not limited to, the execution of all formal assignment documents requested by the Company or its nominees and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries. ARTICLE III NONCOMPETITION 3.1 Noncompetition. During the Employment Term (and for a period of one or two years thereafter if the Company exercises its options under Section 3.2 hereof), Employee shall not, acting alone or in conjunction with others, directly or indirectly, in any market in which the Company or any of its affiliated companies conducts business, work for or engage in any business in competition with the business conducted by the Company or any of its affiliated companies, whether for his own account or by soliciting, canvassing or accepting any business or transaction 6 for or from any other company or business in competition with such business of the Company or any of its affiliated companies. In the event that a court should determine that any restriction herein is unenforceable, the parties hereto agree that the obligations under this paragraph shall be enforceable for the maximum term and maximum geographical area allowable by law. 3.2 Extension. The Company shall have the option to extend Employee's obligations under Section 3.1 for one additional year (the "First Extension Term") beyond the end of the Employment Term. If the Company exercises such option, it shall be required to pay Employee an amount equal to one year's salary, based on Employee's salary rate as of the date his employment with the Company ceased (the "Noncompetition Payment"). Such Noncompetition Payment shall be made in 12 equal monthly installments (each installment being an amount equal to 1/12th of such annual salary) commencing on the date which is thirty (30) days after the last day of the Employment Term. Subsequent payments shall be made on the same day of each succeeding month until 12 payments have been made. If the Employee breaches his noncompetition obligations, the Company shall be entitled to cease making such monthly payments. The purpose of this paragraph is to make the noncompetition obligation of the Employee more reasonable from the Employee's point of view. The amounts to be paid by the Company are not intended to be liquidated damages or an estimate of the actual damages that would be sustained by the Company if the Employee breaches his post-employment noncompetition obligation. If the Employee breaches his post-employment noncompetition obligation, the Company shall be entitled to all of its remedies at law or in equity for damages and injunctive relief. The Company may exercise the option conferred by this paragraph at any time within 30 days after the last day of the Employment Term by mailing written notice of such exercise to Employee. If the Company exercises its option to extend Employee's obligations as set forth in the preceding paragraph, then the Company shall have the option to extend Employee's obligations under Section 3.1 for one additional year (the "Second Extension Term") beyond the end of the First Extension Term. If the Company exercises its option to extend Employee's obligations for the Second Extension Term, the rights and obligations of the parties set forth in the preceding paragraph shall be applicable during the Second Extension Term. The Company may exercise the option conferred by this paragraph at any time within 30 days after the last day of the First Extension Term by mailing written notice of such exercise to Employee. 3.3 Termination For Cause or Termination By Employee. Notwithstanding anything to the contrary in this Agreement, in the event that Employee's employment hereunder is terminated for Cause pursuant to Section 1.5 (c) hereof, or in the event Employee voluntarily terminates the employment relationship for any reason other than a material breach of this Agreement by the Company, the noncompetition obligations of Employee described in Section 3.1 above shall automatically continue for a period of two years from the date the employment relationship ceases, and the Company shall not be required to (i) make any payments to Employee in consideration for such obligations, or (ii) provide any notice to Employee. Notwithstanding the foregoing this Section 3.3 shall not be applicable in the event Employee voluntarily terminates the employment relationship within twelve months after a Change of Control that occurs during the Employment 7 Term; provided however, the first clause of this sentence shall be null and void if such termination referenced therein occurs under circumstances which would be grounds for termination of Employee by the Company for Cause. 3.4 Obligations to Refrain From Competing Unfairly. In addition to the other obligations agreed to by Employee in this Agreement, Employee agrees that during the Employment Term and for five (5) year(s) thereafter, he shall not at any time, directly or indirectly for the benefit or any other party than the Company or any of its affiliated companies, (a) induce, entice, or solicit any employee of the Company or any of its affiliated companies to leave his employment, or (b) contact, communicate or solicit any customer of the Company or any of its affiliated companies derived from any customer list, customer lead, mail, printed matter or other information secured from the Company or any of its affiliated companies or their present or past employees, or (c) in any other manner use any customer lists or customer leads, mail, telephone numbers, printed material or material of the Company or any of its affiliated companies relating thereto. 3.5 Acknowledgement. Employee acknowledges that Employee's compliance with the provisions of this Article III is necessary to protect the existing goodwill and other proprietary rights of the Company, as well as all goodwill and relationships that may be acquired or enhanced during the course of Employee's employment with the Company, and all confidential information which may come into existence or to which Employee may have access during his employment with the Company. Employee further acknowledges that Employee will become familiar with certain of the Company's affairs, operations, customers and confidential information and data by means of his employment with the Company, and that failure to comply with the provisions of this Article III will result in irreparable and continuing damage to the Company for which there will be no adequate remedy at law. The Company shall be entitled to all of its remedies at law or in equity for damages and injunctive relief in the event of any violation of this Article III by Employee. ARTICLE IV MISCELLANEOUS 4.1 Notices. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Employee: ___________________ ___________________ ___________________ 8 If to the Company: General Counsel c/o SCI Executive Services, Inc. 1929 Allen Parkway Houston, Texas 77019 Attention: Legal Department Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 4.2 Entire Agreement. This Agreement replaces and merges all previous agreements and discussions relating to the same or similar subject matters between Employee and the Company (or any of its affiliates) and constitutes the entire agreement between the Employee and the Company (and any of its affiliates) with respect to the subject matter of this Agreement. Any existing employment agreement between the Employee and the Company (or any of its affiliates) is hereby terminated, effective immediately. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by an employee, officer, or representative of the Company or by any written agreement unless signed by an officer of the Company who is expressly authorized by the Company to execute such document. 4.3 Specific Performance. The Employee acknowledges that a remedy at law for any breach of Article II or III of this Agreement will be inadequate, agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such breach or attempted breach, and further agrees to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or any other equitable relief. 4.4 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition, invalidity or unenforceability without invalidating the remainder of such provision or the remaining provisions of this Agreement. 4.5 Assignment. This Agreement may not be assigned by the Employee. Neither the Employee, his spouse, nor his estate shall have any right to commute, encumber or dispose of any right to receive payments hereunder, it being understood that such payments and the right thereto are nonassignable and nontransferable. This Agreement may be assigned by the Company. 4.6 Binding Effect. Subject to the provisions of Section 4.5 of this Agreement, this Agreement shall be binding upon and inure to the benefit of the parties hereto, the Employee's heirs and personal representatives, and the successors and assigns of the Company. 9 4.7 Captions. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 4.8 Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of Texas. 4.9 Counterparts. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute the same instrument. 4.10 Survival of Certain Obligations. Employee's obligations under Articles II and III hereof shall survive any termination of Employee's employment hereunder. 4.11 Waiver. The waiver by either party of any right hereunder or of any breach of this Agreement shall not operate as or be construed to be an amendment of this Agreement or a waiver of any future right or breach. 4.12 Gender. All references to the masculine pronoun herein are used for convenience and ease of reading only and are intended and apply to the feminine gender as well. 4.13 Dispute Resolution. (a) Employee and the Company agree that, except for the matters identified in Section 4.13(b) below, all disputes relating to any aspects of Employee's employment with the Company shall be resolved by binding arbitration. This includes, but is not limited to, any claims against the Company, its affiliates or their officers, directors, employees, or agents for breach of contract, wrongful discharge, discrimination, harassment, defamation, misrepresentation, and emotional distress, as well as any disputes pertaining to the meaning or effect of this Agreement. (b) It is expressly agreed that this Section 4.13 shall not govern claims for workers' compensation or unemployment benefits, or any claim by the Company against Employee which is based on fraud, theft or other dishonest conduct of Employee. (c) Any claim which either party has against the other must be presented in writing by the claiming party to the other within one year of the date the claiming party knew or should have known of the facts giving rise to the claim. Otherwise, the claim shall be deemed waived and forever barred even if there is a federal or state statute of limitations which would have given more time to pursue the claim. (d) Each party may retain legal counsel and shall pay its own costs and attorneys' fees, regardless of the outcome of the arbitration. Each party shall pay one-half of the 10 compensation to be paid to the arbitrators, as well as one-half of any other costs relating to the administration of the arbitration proceeding (for example, room rental, court reporter, etc.). (e) An arbitrator shall be selected by mutual agreement of the parties. If the parties are unable to agree on a single arbitrator, each party shall select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The three arbitrators so selected will then hear and decide the matter. All arbitrators must be attorneys, judges or retired judges who are licensed to practice law in the state where the Employee is or most recently was employed by the Company. The arbitration proceedings shall be conducted within the county in which Employee is or most recently was employed by the Company or at another mutually agreeable location. (f) Except as otherwise provided herein, the arbitration proceedings shall be conducted in accordance with the statutes, rules or regulations governing arbitration in the state in which Employee is or most recently was employed by the Company. In the absence of such statutes, rules or regulations, the arbitration proceedings shall be conducted in accordance with the employment arbitration rules of the American Arbitration Association ("AAA"); provided however, that the foregoing reference to the AAA rules shall not be deemed to require any filing with that organization, nor any direct involvement of that organization. In the event of any inconsistency between this Agreement and the statutes, rules or regulations to be applied pursuant to this paragraph, the terms of this Agreement shall apply. (g) The arbitrator shall issue a written award, which shall contain, at a minimum, the names of the parties, a summary of the issues in controversy, and a description of the award issued. Upon motion to a court of competent jurisdiction, either party may obtain a judgment or decree in conformity with the arbitration award, and said award shall be enforced as any other judgment or decree. (h) In resolving claims governed by this Section 4.13, the arbitrator shall apply the laws of the state in which Employee is or most recently was employed by the Company, and/or federal law, if applicable. (i) Employee and the Company agree and acknowledge that any arbitration proceedings between them, and the outcome of such proceedings, shall be kept strictly confidential; provided however, that the Company may disclose such information to the extent required by law and to its employees, agents and professional advisors who have a legitimate need to know such information, and the Employee may disclose such information (1) to the extent required by law, (2) to the extent that the Employee is required to disclose same to professional persons assisting Employee in preparing tax returns; and (3) to Employee's legal counsel. 4.14 Change of Control. "Change of Control" means the happening of any of the following events: 11 (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of Common Stock of SCI (the "Outstanding SCI Common Stock") or (B) the combined voting power of the then outstanding voting securities of SCI entitled to vote generally in the election of directors (the "Outstanding SCI Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control under this subsection (a): (i) any acquisition directly from SCI (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by SCI, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by SCI or any corporation controlled by SCI, or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (A), (B) and (C) of subsection (c) of this definition of "Change of Control" are satisfied; or (b) Individuals who, as of the effective date hereof, constitute the Board of Directors of SCI (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of SCI; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by SCI's shareholders, was approved by (A) a vote of at least a majority of the directors then comprising the Incumbent Board, or (B) a vote of at least a majority of the directors then comprising the Executive Committee of the Board of Directors of SCI at a time when such committee was comprised of at least five members and all members of such committee were either members of the Incumbent Board or considered as being members of the Incumbent Board pursuant to clause (A) of this subsection (b), shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of SCI; or (c) Approval by the shareholders of SCI of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (A) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities, as the case may be, (B) no Person (excluding SCI, any employee benefit plan (or related trust) of SCI or such corporation resulting from such reorganization, merger or consolidation, and any Person beneficially owning, immediately prior 12 to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding SCI Common Stock or Outstanding SCI Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of SCI of (A) a complete liquidation or dissolution of SCI or (B) the sale or other disposition of all or substantially all of the assets of SCI other than to a corporation, with respect to which following such sale or other disposition, (i) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is the beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding SCI Common Stock and Outstanding SCI Voting Securities, as the case may be, (ii) no Person (excluding SCI and any employee benefit plan (or related trust) of SCI or such corporation, and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding SCI Common Stock or Outstanding SCI Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board of Directors of SCI providing for such sale or other disposition of assets of SCI. 4.15 Pro Rated Bonus. "Pro Rated Bonus" shall mean, a bonus equal to the product of (i) the bonus Employee did not receive but would have received under Section 1.4(b) if he had remained an employee through the end of the Employment Term, it being understood that the amount of such bonus Employee would have received shall be determined by reference to the average amount of bonus actually awarded to other officers who were at the same or comparable level of responsibility as Employee immediately prior to his termination, and (ii) a fraction, the denominator of which is 365 and the numerator of which is the number of days in the fiscal year being considered through the date of death, determination of disability or notice of termination of employment, whichever is applicable. In the event that a majority of SCI officers do not receive a bonus for the fiscal year being considered, then the Pro Rated Bonus shall not be applicable and Employee shall not be entitled to a Pro Rated Bonus. The Pro Rated Bonus, if any, payable to 13 Employee shall be paid within 90 days after the date that bonuses, if any, are awarded for a majority of SCI officers for the year being considered. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. "COMPANY" SCI Executive Services, Inc. By: /s/ Curtis G. Briggs ----------------------------------------- Curtis G. Briggs Vice President "EMPLOYEE" /s/ Michael R. Webb -------------------------------------------- 14 EX-10.33 6 h02718exv10w33.txt 1ST AMENDMENT TO DIRECTOR FEE PLAN EXHIBIT 10.33 FIRST AMENDMENT TO DIRECTOR FEE PLAN WHEREAS, the Board of Directors of Service Corporation International (the "Company") adopted, and, on May 10, 2001, the shareholders of the Company approved, the Service Corporation International Director Fee Plan (the "Plan"); and WHEREAS, the Company desires to amend a certain provision of the Plan relating to the Payment Date (as defined therein); W I T N E S E T H Effective as of November 13, 2002, the first sentence of Section 4.3 of the Plan is amended to read as follows in its entirety: "4.3 The annual retainer fee shall be paid on the day of the annual shareholders meeting (the "Payment Date")." SERVICE CORPORATION INTERNATIONAL November 13, 2002 EX-10.44 7 h02718exv10w44.txt AMENDMENT NO. 6 TO EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.44 AMENDMENT NO. 6 SERVICE CORPORATION INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN This Amendment is executed by Service Corporation International (the "Company") effective as of July 31, 2001. WITNESSETH WHEREAS, the Company executed the Service Corporation International Stock Purchase Plan on August 22, 1979, Amendment No. 1 thereto on June 5, 1981, Amendment No. 2 thereto on October 19, 1988, Amendment No. 3 thereto on June 19, 1990, Amendment No. 4 thereto on December 21, 1993, and Amendment No. 5 thereto on January 1, 2000 (as amended, the "Plan"), which continues in force and effect, and is made a part hereof by reference; and WHEREAS, Merrill Lynch, Pierce, Fenner & Smith will no longer administer the Plan for those Employees of a Canadian Employing Company, and the Company has arranged for Fastrak Systems, Inc., a corporation organized under the laws of Ontario ("Fastrak"), to serve as the Plan's administrator for those Employees of a Canadian Employing Company; WHEREAS, Merrill Lynch, Pierce, Fenner & Smith will continue as the administrator under the Plan for those Employees of a U.S. Employing Company; NOW, THEREFORE, in consideration of the premises, the Company hereby amends the Plan in the following respect: 1. Section 1.1 is hereby amended and restated as follows: "1.11 Merrill Lynch/Fastrak: Merrill Lynch, Pierce, Fenner & Smith Incorporated and Fastrak Systems Inc., the companies through which the Plan is administered as herein provided. Merrill Lynch, Pierce, Fenner & Smith Incorporated serves as Plan administrator for those Employees of a U.S. Employing Company. Fastrak Systems Inc. serves as Plan administrator for those Employees of a Canadian Employing Company. References to Merrill Lynch/Fastrak shall be applied as the context requires." 2. All references in the Plan to "Merrill Lynch" are hereby amended to state "Merrill Lynch/Fastrak." 3. Section 9 of the Plan is hereby amended to include the following new Subsection: "9.10 In the event of any conflict between the provisions of this Plan and the provisions of the Administration Agreement by and between the Company and Fastrak Systems, Inc., the provisions of the Administration Agreement will control with respect to accounts administered by Fastrak Systems, Inc." IN WITNESS WHEREOF, the Company has executed this Amendment to the Plan effective as of July 31, 2001. SERVICE CORPORATION INTERNATIONAL By: /s/ JAMES M. SHELGER ----------------------------- Title: SENIOR VICE PRESIDENT EX-10.45 8 h02718exv10w45.txt AMENDMENT NO. 7 TO EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.45 AMENDMENT NO. 7 SERVICE CORPORATION INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN This Amendment is executed by Service Corporation International (the "Company") effective as of December 17, 2001. WITNESSETH WHEREAS, the Company executed the Service Corporation International Stock Purchase Plan on August 22, 1979, Amendment No. 1 thereto on June 5, 1981, Amendment No. 2 thereto on October 19, 1988, Amendment No. 3 thereto on June 19, 1990, Amendment No. 4 thereto on December 21, 1993, Amendment No. 5 thereto on January 1, 2000, and Amendment No. 6 thereto on July 31, 2001 (as amended, the "Plan"), which continues in force and effect, and is made a part hereof by reference; and WHEREAS, Merrill Lynch, Pierce, Fenner & Smith has assigned its obligations to administer the Plan for those Employees of a U.S. Employing Company to Computershare, Ltd. ("Computershare"); NOW, THEREFORE, in consideration of the premises, the Company hereby amends the Plan in the following respect: 1. Section 1.11 of the Plan is hereby amended and restated as follows: "1.11 Computershare or Fastrak: Computershare, Ltd. and Fastrak Systems Inc., the companies through which the Plan is administered as herein provided. Computershare, Ltd. serves as Plan administrator for those Employees of a U.S. Employing Company. Fastrak Systems Inc. serves as Plan administrator for those Employees of a Canadian Employing Company. References to Computershare or Fastrak shall be applied as the context requires." 2. All references in the Plan to "Merrill Lynch/Fastrak" are hereby amended to state "Computershare or Fastrak". IN WITNESS WHEREOF, the Company has executed this Amendment to the Plan effective as of December 17, 2001. SERVICE CORPORATION INTERNATIONAL By: /s/ JAMES M. SHELGER ------------------------------ Title: Senior Vice-President -------------------------- EX-10.48 9 h02718exv10w48.txt EMPLOYEE STOCK PURCHASE PLAN ADMINISTRATION AGMT EXHIBIT 10.48 EMPLOYEE STOCK PURCHASE PLAN ADMINISTRATION AGREEMENT THIS AGREEMENT entered into this 25th day of July, 2001, BETWEEN: SERVICE CORPORATION INTERNATIONAL (CANADA) LIMITED, a corporation incorporated under the laws of CANADA (hereinafter called the "Company") OF THE FIRST PART - and - FASTRAK SYSTEMS INC., a corporation incorporated under the laws of Ontario (hereinafter called the "Administrator") OF THE SECOND PART WITNESSETH: WHEREAS SERVICE CORPORATION INTERNATIONAL ("SCI") has established the SERVICE CORPORATION INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN (the "Plan"), a copy of which is attached hereto as Appendix "A", to facilitate the acquisition of full and fractional shares of SCI common stock (the "Shares") for the benefit of employees of SCI and its U.S and Canadian subsidiaries; AND WHEREAS the Company wishes to appoint the Administrator to carry out administrative duties for the benefit of the Company's Canadian employees who are participants in the Plan, in accordance with the Plan and this Agreement, and the Administrator wishes to accept such appointment; NOW THEREFORE in consideration of the premises and the respective covenants of the parties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Administrator hereby agree as follows: 1. Participants in the Plan will be those employees of the Company and its affiliates or subsidiaries who qualify for participation under the Plan, who complete a Plan enrollment form and who are so designated by the Company to the Administrator (the "Plan Participants"). -2- 2. The Company undertakes to open and maintain a trading account for the benefit of the Plan Participants (the "ESPP Account") with a dealer that is registered under applicable securities laws to trade in the Shares in each of the jurisdictions where the Plan Participants reside (the "Plan Broker"). The Company shall ensure that the Administrator will have all necessary access and authority to deal with the ESPP Account so as to permit the Administrator to perform its duties under the Plan and this Agreement. 3. The Company shall provide the Administrator with all records and other information relating to the Plan and the Plan Participants so as to permit the Administrator to carry out its administrative duties and obligations hereunder. 4. Plan Participants may participate in the Plan by means of authorizing the Company to make payroll deductions for the purpose of purchasing the Shares in accordance with the Plan. For each designated investment period, the Company will aggregate the amounts from the pay deductions of all Plan Participants, along with the Company's contribution, if any, and forward to the Plan Broker the related payment amount. Concurrently for each investment period the Company will provide the Administrator with the relevant payroll data including deduction/contribution, participant name, SIN and address data for each Plan Participant via electronic medium. 5. Subject to the provisions set forth below, bulk share purchases will be executed as soon as reasonably practicable following receipt of funds by the Plan Broker or any such longer period required by securities legislation, stock exchange rules, or other relevant rules. The Plan Broker will purchase at market price on the NEW YORK STOCK EXCHANGE as many of SERVICE CORPORATION INTERNATIONAL COMMON SHARES as the contributed funds will allow. When necessary, in the opinion of the Plan Broker, a stock purchase may be spread out over a period time so that the market for the security is not abnormally disrupted. 6. The Shares purchased in bulk by the Plan Broker for the contributing Plan Participants shall be credited to the ESPP Account three (3) business days after each purchase and shall be allocated pro rata to the respective Plan Participants' accounts maintained in the Plan register. Allocations are to be made at the average cost of all Shares purchased in full shares and fractional interests to the ten-thousandth of a share. 7. All Shares are to be registered in the name of the Company for the benefit of Plan Participants, unless a Plan Participant requests that a certificate for any or all of his or her full Shares be delivered to them directly. 8. If SCI pays cash dividends on the Shares, such dividends will be credited to the ESPP Account for the benefit of each Plan Participant holding full or fractional Shares on the appropriate record date, upon their receipt. Subject to the terms of the Plan, these dividends are to be automatically reinvested in additional Shares as a bulk purchase. Similarly, stock dividends and/or stock splits will be allocated pro rata to each Plan Participant account, where applicable. Stock rights cannot be exercised, and may be sold and -3- the proceeds reinvested on a bulk basis. An administration fee may be charged on reinvestment purchases in accordance with the fee agreement between the Company and the Administrator. 9. A Plan Participant may direct the Administrator to sell any or all of his or her full or fractional Shares through the Plan Broker in bulk, whereby all Plan Participants' sales requests received by the Administrator by the cut-off time on disposition day(s), will be aggregated and submitted under a single sale order. Each Plan Participant may be charged an administration fee in accordance with the fee agreement between the Company and the Administrator, in addition to the pro-rated regular brokerage commission and any transfer taxes, registration fee or other normal brokerage related charges as may be applicable to the bulk sale. Alternatively, a Plan Participant may sell at market directly through the Plan Broker, where the Plan Participant has made prior arrangements to open an individual trading account and directed the Administrator to transfer Shares from his or her Plan account to his or her individual brokerage account with the Plan Broker. With respect to the sale or transfer of his or her Plan Shares the Plan Participant shall only provide direction to the Administrator via the Plan Internet or IVR facilities, written communication and fax Withdrawal Form. For greater certainty, the Administrator will not accept verbal direction for the sale or transfer of Plan Shares and, will at no time provide securities and/or investment advice with respect to the Shares. The Administrator may rely on directions received from a Plan Participant. 10. The Company shall ensure that if a Plan Participant ceases to be qualified to participate in the Plan, by reason of termination of employment with the Company or otherwise, such person shall cease to be a Plan Participant under the Plan. Upon the occurrence of such an event, and upon notice of same by the Company to the Administrator, the Company shall provide the necessary instructions to the Administrator to either transfer the former Plan Participant's Shares, sell the Shares, or deliver a cheque for his or her fractional interest along with a certificate for all full Shares. Such distribution to a Plan Participant shall be effected as soon as practicable following receipt of Company instructions. Administration fees and commissions, where applicable, are to be paid by the Plan Participant and may be set off against the Plan Participant's deliverables. 11. The Administrator shall keep accurate and appropriate accounts and records for each Plan Participant, all Company contributions under the Plan, all dividends received and all amounts disbursed by it to the Plan Participants pursuant to the Plan and all shares delivered by the Administrator to the Plan Participants pursuant to the Plan. In addition, the Administrator will prepare periodic statements of the ESPP Account for the Company's benefit. 12. The accounts and records maintained by the Administrator shall be open to inspection and audit during reasonable business hours by such reasonable number of persons designated by the Company as its representatives for such purposes. To the extent the Administrator is legally obligated to permit any persons other than those so designated by the Company to have such access, the Administrator shall provide such other persons with -4- access to accounts and records during reasonable business hours. No persons other than those designated by the Company or those otherwise entitled thereto by applicable law shall have the right to demand or be entitled to any accounting from the Administrator. 13. Quarterly statements will be mailed to the address of each Plan Participant as maintained on the Plan register and will reflect all transactions affecting his or her Plan account during the period. 14. The Administrator will, upon notice from the Company and the Administrator's receipt of all appropriate materials, mail or caused to be mailed notices of meetings, proxies, annual reports, information circular or other material for distribution to Plan Participants. The parties hereto agree that all such mailings shall be undertaken at the Company's expense. 15. The Administrator's remuneration for its services hereunder and under the Plans shall be as set forth in a fee agreement between the Company and the Administrator. 16. The Company hereby makes the following representations and warranties to the Administrator: (a) the Plan complies with the securities legislation in each of the jurisdictions in which Plan Participants reside; (b) all of the Plan Participants are eligible to acquire the Company's securities under the Plan; (c) the participation of the Plan Participants is voluntary; and (d) all trades in the Shares by a Plan Participant made under and in accordance with the provisions of the Plan and this Agreement comply with the securities legislation applicable in the jurisdiction of the respective Plan Participant. 17. The Company shall indemnify and save harmless the Administrator, its employees, officers, directors and agents from and against all liability arising from the Administrator acting in accordance with the directions of the Company or its properly appointed agents received by the Administrator in writing or by electronic medium, or in acting in reliance upon information provided to it by the Company or the Plan Broker, provided that this indemnity shall in no way be construed so as to relieve the Administrator of liability for a breach of this Agreement, the Plan or as imposed by law. The Administrator, its employees, officers, directors and agents shall be reimbursed by the Company for all such liabilities and for all expenses reasonably incurred in their defence. 18. The Administrator shall indemnify and save harmless the Company, its directors, officers, employees and agents from and against any liability arising as a result of the negligence or wilful misconduct of the Administrator or breach by the Administrator of its obligations under this Agreement, the Plan or as imposed by law. The Company, its -5- directors, officers, employees and agents shall be reimbursed by the Administrator for all such liabilities and for all expenses reasonably incurred in their defence. 19. All notices under this Agreement shall be given in writing and shall be deemed to have been delivered four (4) business days after being sent by prepaid ordinary mail, or if personally delivered, upon delivery to each party at the following addresses: Fastrak Systems Inc. Service Corporation International 401 Bay Street (Canada) Limited Suite 2315 Suite 950, 409 Granville Street Toronto, Ontario United Kingdom Building M5H 2Y4 Vancouver, BC Attn: Vice President Attn: John A. Gordon Service Operations If there is an interruption in postal services, notices hereunder must be given by personal delivery. 20. The Company or the Administrator may terminate this Agreement upon ninety (90) days prior written notice to the other party. In the event of such termination, the Company shall, at its sole expense, arrange for the transfer of the Administrator's responsibilities to another qualified party. 21. This Agreement contains all the terms and conditions agreed to by the parties hereto, and no other agreements, written or oral, respecting the subject matter of this Agreement shall be deemed to exist, or to bind either party, notwithstanding this Agreement shall be subject to the terms and provisions of the Plan. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 22. This Agreement shall enure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. 23. This Agreement shall be governed by the laws of the Province of Ontario and the laws of Canada applicable therein (excluding any rule or principle of the conflict of laws which might refer interpretation to the laws of another jurisdiction). Each party irrevocably submits and attorns to the non-exclusive jurisdiction of the courts of Ontario with respect to any matter arising hereunder or related hereto. 24. Time is of the essence of each provision of this Agreement. -6- IN WITNESS WHEREOF the parties hereto have duly executed this Agreement on this ___ day of ________, 2001. Service Corporation International (Canada) Limited By: /s/ JOHN A. GORDON ----------------------------- Name: John A. Gordon Title: President Fastrak Systems Inc. By: /s/ JOHN MOORE ----------------------------- Name: John Moore Title: President (GRAPHIC) FASTRAK SYSTEMS INC. EMPLOYEE STOCK PURCHASE PLAN ADMINISTRATION FOR SERVICE CORPORATION INTERNATIONAL (CANADA) LIMITED OTHER TERMS AND CONDITIONS: A. The fees quoted herein, other than broker related fees, are guaranteed for a period of two years from the date of appointment, payable quarterly. ALL FEES ARE IN CANADIAN FUNDS UNLESS OTHERWISE STATED. B. All out-of-pocket expenses (including, but not limited to, printing and stationery, postage, telecopier and delivery charges, legal fees and disbursements) will be charged in addition to the listed fees. Where the required frequency of statement mailing is greater than quarterly, out of pocket mailhouse charges will be recoverable at cost. C. Special services that are not described or referred to above including, but not limited to corporate reorganizations and stock splits, will be based up on an analysis of the work required. Special request for programming will be billed at current rates. D. Standard reports from the Fastrak system are included in the above fees. Customized reports may result in additional charges based on report complexity and time required developing the report. Note: Standard report includes annual report detailing the number of shares held by each participant on December 31 of the 3 preceding plan years. E. PARTICIPANT DISCOUNT BROKER FEES: Sales may be communicated to the Plan Administrator via Internet, IVR or fax and will be executed through a discount broker for the Plan. The commission schedule is subject to change upon notification from the broker. Sales through the Plan Administrator will take place in bulk, and are available daily if desired. Market trading is available through the Plan broker upon the participant opening a brokerage account and directing the Administrator to transfer shares to it. The following schedule is for information purposes only and is representative of current competitive discount broker rates applicable to transactions of specific Plan held company stock within the ESPP and charged to individual plan holders.
TRANSACTION BROKER FEES AND COMMISSIONS ----------- --------------------------- Share Sale (share price greater than USD $2.01) USD $0.03 per share (minimum = USD $29) Certificate Request CAD $45.00 + GST Electronic Share Transfer to another Merrill Lynch HSBC account No Charge Electronic Share Transfer to another financial institution CAD $100.00 + GST
All participant fees will be recovered via a sale of assets from their account. (GRAPHIC) FASTRAK SYSTEMS INC. EMPLOYEE STOCK PURCHASE PLAN ADMINISTRATION FOR SERVICE CORPORATION INTERNATIONAL (CANADA) LIMITED F. This schedule is subject to adjustment if changes in practices, legislation or circumstances in general increase the expense, work or responsibility of performing the services under the agreements. The Goods and Services Tax and other tax or levy which may be imposed by any governmental authorities shall be charged and payable on the listed fees, where applicable. G. In the event that our services were terminated within the first 12 months of appointment the minimum Service Fee would be chargeable, in addition to standard charges for producing files and reports requested in connection with conversion of the accounts. H. This Fee Schedule is confidential. It has been prepared exclusively for Service Corporation International (Canada) Limited and the pricing information contained herein may not be shared with any unrelated third party without the prior written authorization of Fastrak Systems Inc. SERVICE CORPORATION INTERNATIONAL FASTRAK SYSTEMS INC. (CANADA) LIMITED /s/ JOHN A. GORDON /s/ JOHN MOORE --------------------------------- -------------------------- --------------------------------- -------------------------- Date: July 25, 2001 ----------------------- (GRAPHIC) FASTRAK SYSTEMS INC. EMPLOYEE STOCK PURCHASE PLAN ADMINISTRATION FOR SERVICE CORPORATION INTERNATIONAL (CANADA) LIMITED SERVICE FEE SCHEDULE*
ANNUAL PER NUMBER OF PARTICIPANT PAYROLL FILE & DIVIDEND PARTICIPANTS COMPONENT REINVESTMENT COMPONENT ------------ ----------- ---------------------- 1 - 249 CAD$ 25.00 2.00% of Total Contributions 250 - 999 $ 17.50 1.75% of Total Contributions 1,000- 2,499 $ 10.50 1.30% of Total Contributions
* Based on electronic receipt of payroll file and subject to minimum annual CAD $10,000. NORMAL PROXY SCHEDULE Annual reports & Proxy mailing - $1.00 handling fee per set plus actual cost of postage and mailing expenses Annual report only - $0.50 handling fee per annual report plus actual cost of postage and mailing expenses Interims & miscellaneous reports - $0.40 handling fee per report plus all expenses IVR and INTERNET ACCESS Participant IVR (Interactive Voice Response) and Internet access include account enquiry and participant sale requests included CALL CENTRE COMMUNICATION Respond to participant telephone request for information included WITHDRAWAL AND CHEQUE ISSUANCE (CHARGED TO PARTICIPANTS) - Cheque issuance CDN $25.00 - Withdrawal of shares from the Plan $25.00 ANCILLARY FEES (IF APPLICABLE) - Manual data input $5.00 per name - Rejected payroll file & reloading file $150.00 per file EX-12.1 10 h02718exv12w1.txt RATIO OF EARNINGS TO FIXED CHARGES . . . EXHIBIT 12.1 SERVICE CORPORATION INTERNATIONAL RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 2002 2001 ------------ ------------ (Thousands, except ratio amounts) (Loss) from continuing operations before income taxes, extraordinary items and cumulative effects of accounting changes .................................... $ (140,963) $ (535,428) Undistributed income of less than 50% owned equity investees ..................... 0 (939) Minority interest in income of majority owned subsidiaries that have not incurred fixed charges ........................................ 706 (799) Add fixed charges (from below) ................................................... 181,211 242,628 ------------ ------------ $ 40,954 $ (294,538) ------------ ------------ Fixed charges: Interest expense: Corporate ................................................................... $ 154,392 $ 205,520 Amortization of debt costs .................................................. 7,102 6,106 1/3 of rental expense ............................................................ 19,717 31,002 ------------ ------------ Fixed charges .................................................................... $ 181,211 $ 242,628 ============ ============ Ratio (earnings divided by fixed charges) ........................................ (A) (A) ============ ============
(A) Due to the loss in the twelve months ended December 31, 2002 and 2001, the ratio coverage was less than 1:1. In order to achieve a coverage of 1:1, the Company would have had to generate additional income before income taxes, extraordinary items and cumulative effects of accounting changes of $140,257 and $537,166 for the years ended December 31, 2002 and 2001, respectively. Excluding impairment losses and other operating expenses, the ratio of earnings to fixed charges would have been 1.82 and 1.44 for the twelve months ended December 31, 2002 and 2001, respectively. EX-21.1 11 h02718exv21w1.txt SUBSIDIARIES OF THE COMPANY . . . EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
March 1, 2003 Ownership ALABAMA SCI Funeral Services, Inc. (Iowa Corp) Alabama subsidiaries SCI Alabama Funeral Services, Inc.------------------------------------------ 100% SCI Georgia Funeral Services, Inc. (DE Corp) Alabama subsidiary ECI Alabama Services, LLC--------------------------------------------- 100% ALASKA SCI Funeral Services, Inc. (Iowa Corp) Alaska subsidiary SCI Alaska Funeral Services, Inc.------------------------------------------- 100% ARIZONA SCI Funeral Services, Inc. (Iowa Corp) Arizona subsidiaries National Cremation Society, Inc.-------------------------------------------- 100% SCI Arizona Funeral Services, Inc.------------------------------------------ 100% ARKANSAS SCI Funeral Services, Inc. (Iowa Corp) Arkansas subsidiary SCI Arkansas Funeral Services, Inc.----------------------------------------- 100% CALIFORNIA SCI Funeral Services, Inc. (Iowa Corp) California subsidiaries SCI California Funeral Services, Inc.--------------------------------------- 100% Mount Vernon Memorial Park-------------------------------------------- 100% SCI Special, Inc. (DE Corp) SCI Administrative Services, LLC (DE LLC) SCI Management L.P.-(DE LP) California subsidiary SCI Western Operations HQ, Inc.--------------------------------- 100% COLORADO SCI Funeral Services, Inc. (Iowa Corp) Colorado subsidiary SCI Colorado Funeral Services, Inc.----------------------------------------- 100% CONNECTICUT SCI Funeral Services, Inc. (Iowa Corp) Connecticut subsidiary SCI Connecticut Funeral Services, Inc.-------------------------------------- 100% DELAWARE BestHalf.com, Inc.------------------------------------------------------------------- 80% Christian Funeral Services, Inc.----------------------------------------------------- 100% SCI Funeral Services, Inc. (Iowa Corp) Delaware subsidiaries ECI Cemetery Management Services, Inc.-------------------------------------- 100% ECI Indiana Holdings, Inc.-------------------------------------------------- 100% ECI Services of Indiana, L.P.----------------------------------------- 1% ECI Indiana Holdings (LP), LLC------------------------------------------- 100% ECI Services of Indiana, L.P.----------------------------- 99% ECI Management Services, Inc.----------------------------------------------- 100% ECI-San Jose, Inc.---------------------------------------------------------- 100% ECI Services of Georgia, Inc.----------------------------------------------- 100% ECI Services of Louisiana, Inc.--------------------------------------------- 100% ECI Services of Maine, Inc.------------------------------------------------- 100%
1 ECI Services of Missouri, Inc.---------------------------------------------- 100% ECI Services of New Hampshire, Inc.----------------------------------------- 100% ECI Services of South Dakota, Inc.------------------------------------------ 100% ECI Services of Vermont, Inc.----------------------------------------------- 100% Lake View Management Company, Inc.------------------------------------------ 100% Memorial Guardian Plans, Inc.----------------------------------------------- 100% SCI California Funeral Services, Inc. (CA Corp) Delaware subsidiaries California Cemetery and Funeral Services, LLC------------------------- 5% ECI Capital Corporation-------------------------------------------------- 100% California Cemetery and Funeral Services, LLC------------------------- 95% SCI Funeral Services, Inc.-------------------------------------------------- 100% SCI Georgia Funeral Services, Inc.------------------------------------------ 100% ECI Alabama Services, LLC (AL LLC) Delaware subsidiary ECI-Chapel Hill, Inc.------------------------------------------- 100% SCI Indiana Holdings, Inc.-------------------------------------------------- 100% SCI Indiana Funeral Services, L.P.------------------------------ 1% SCI Indiana Holdings (LP), LLC---------------------------------------- 100% SCI Indiana Funeral Services, L.P.------------------------------ 99% SCI Iowa Funeral Services, Inc. (IA Corp) Delaware subsidiary SCI Iowa Finance Company---------------------------------------------- 100% SCI Maryland Funeral Services, Inc. (MD Corp) Delaware subsidiary ECI Cemetery Services of Maryland, LLC-------------------------------- 100% SCI Missouri Funeral Services, Inc. (MO Corp) Delaware subsidiary Missouri Commemorative Services, LLC---------------------------------- 100% SCI Ohio Funeral Services, Inc. (OH Corp) Delaware subsidiary Rose Hill Securities Company------------------------------------------ 100% SCI Pennsylvania Funeral Services, Inc.(PA Corp) Delaware subsidiary Gabauer Funeral Home, Inc.-------------------------------------------- 100% SCI Texas Funeral Services, Inc.-------------------------------------------- 100% Texas Marker, L.P.---------------------------------------------------- 1% Professional Funeral Traditions, LLC---------------------------------- 100% Texas Marker, L.P.---------------------------------------------- 99% CemCare, Inc. -------------------------------------------------------- 100% SCI Virginia Funeral Services, Inc. (VA Corp) Delaware subsidiaries SCI Loan Services, LLC------------------------------------------------ 100% PSI Funding, Inc.----------------------------------------------- 100% Salvatore Air Transportation Corp.--------------------------------------------------- 100% SCI Aviation, Inc.------------------------------------------------------------------- 100% SCI Executive Services, Inc.--------------------------------------------------------- 100% SCI Finance Management Inc.---------------------------------------------------------- 100% SCI Financial Services, Inc.--------------------------------------------------------- 100% Making Everlasting Memories, L.L.C.----------------------------------------- 80% Purple Cross Insurance Agency, Inc.----------------------------------------- 100% SCI Investment Services, Inc.----------------------------------------------- 100% SCI International Limited------------------------------------------------------------ 100% Galahad Investment Corporation---------------------------------------------- 20% Kenyon International Emergency Services, Inc.------------------------------- 100% SCI Financing Corporation--------------------------------------------------- 100% SCI GP1, LLC---------------------------------------------------------------- 100% SCI GP2, LLC---------------------------------------------------------------- 100% Service Corporation International (Canada) Limited (CAN Corp) DE subsidiary SCI Funeral & Cemetery Purchasing Cooperative, Inc.------------------- 20% Centre Funeraire Cote-des-Neiges Inc. (CAN Corp) DE subsidiary SCI Funeral & Cemetery Purchasing Cooperative, Inc.------------- 20% SCI Special, Inc.-------------------------------------------------------------------- 100% SCI Administrative Services, LLC-------------------------------------------- 100% SCI Management L.P.--------------------------------------------------- 1%
2 Remembrance Memorial Traditions, LLC---------------------------------------- 100% SCI Management L.P.--------------------------------------------------- 99% International Funeral Services, Inc.---------------------------- 100% Dignity Memorial Network, Inc.---------------------------------- 100% SCI Funeral & Cemetery Purchasing Cooperative, Inc.-------- 20% SCI Western Operations HQ, Inc. (CA Corp) DE subsidiary SCI Funeral & Cemetery Purchasing Cooperative, Inc.-------- 20% SCI EOps HQ, Inc. (NY Corp) SCI Eastern Operations HQ Services, L.P. (TX LP) DE subsidiary SCI Funeral & Cemetery Purchasing Cooperative, Inc.---- 20% SCI Capital Corporation----------------------------------------------------- 100% Investment Capital Corporation (TX Corp) Delaware subsidiary IFC-YP, Inc.---------------------------------------------------- 100% DISTRICT OF COLUMBIA SCI Funeral Services, Inc. (Iowa Corp) DC subsidiaries Joseph Gawler's Sons, Inc.-------------------------------------------------- 100% Witzke Funeral Homes, Inc.-------------------------------------------------- 100% FLORIDA SCI Funeral Services, Inc. (Iowa Corp) Florida subsidiaries SCI Funeral Services of Florida, Inc.--------------------------------------- 100% Florida Marker, LLC--------------------------------------------------- 100% FM Cemetery, Inc.----------------------------------------------------- 100% Fountainhead Memorial Park, LLC--------------------------------------- 100% Lakeview Memorial Gardens, LLC---------------------------------------- 100% Memorial Plans, Inc.-------------------------------------------------- 100% San Jose Funeral Homes, Inc.------------------------------------------ 100% GEORGIA SCI Funeral Services, Inc. (Iowa Corp) Georgia subsidiaries SCI Georgia Funeral Services, Inc. (DE Corp) Georgia subsidiaries SCI Georgia Land, Inc.------------------------------------------------ 100% ECI Cemetery Services of Georgia, LLC--------------------------------- 100% HAWAII SCI Funeral Services, Inc. (Iowa Corp) Hawaii subsidiaries SCI Hawaii Funeral Services, Inc.------------------------------------------- 100% Hawaiian Memorial Life Plan, Ltd.------------------------------------- 100% ILLINOIS SCI Funeral Services, Inc. (Iowa Corp) Illinois subsidiaries SCI Illinois Services, Inc.------------------------------------------------- 100% Lake View Memorial Gardens, Inc.-------------------------------------------- 100% Lake View Funeral Home, Inc.------------------------------------------ 100% IOWA SCI Funeral Services, Inc.----------------------------------------------------------- 100% Bunker's Eden Vale, Inc.---------------------------------------------------- 100% SCI Iowa Funeral Services, Inc.--------------------------------------------- 100% KANSAS SCI Funeral Services, Inc. (Iowa Corp) Kansas subsidiary SCI Kansas Funeral Services, Inc.------------------------------------------- 100%
3 KENTUCKY SCI Funeral Services, Inc. (Iowa Corp) Kentucky subsidiary SCI Kentucky Funeral Services, Inc.----------------------------------------- 99% LOUISIANA SCI Funeral Services, Inc. (Iowa Corp) Louisiana subsidiary SCI Louisiana Funeral Services, Inc.---------------------------------------- 100% MAINE SCI Funeral Services, Inc. (Iowa Corp) Maine subsidiary SCI Maine Funeral Services, Inc.-------------------------------------------- 100% MARYLAND SCI Funeral Services, Inc. (Iowa Corp) Maryland subsidiaries HFH, Inc.------------------------------------------------------------------- 100% Burgee-Henss-Seitz Funeral Home, Inc.--------------------------------- 100% Bradley-Ashton-Matthews Funeral Home, Inc.---------------------------- 100% Charles S. Zeiler & Son, Inc.----------------------------------------- 100% Danzansky-Goldberg Memorial Chapels, Inc.----------------------------- 100% Edward Sagel Funeral Direction, Inc.---------------------------------- 100% Fleck Funeral Home, Inc.---------------------------------------------- 100% Gary L. Kaufman Funeral Home at Meadowridge Memorial Park, Inc.--------------------------------- 100% Gary L. Kaufman Funeral Home Southwest, Inc.-------------------------- 100% Lemmon Funeral Home of Dulaney Valley, Inc.--------------------------- 100% Loring Byers Funeral Directors, Inc.---------------------------------- 100% Miller-Dippel Funeral Home, Inc.-------------------------------------- 100% Moran-Ashton Funeral Home, Inc.--------------------------------------- 100% National Cremation Service, Inc.-------------------------------------- 100% Sterling-Ashton-Schwab Funeral Home, Inc.----------------------------- 100% Witzke Funeral Home of Catonsville, Inc.------------------------------ 100% Witzke, Inc.---------------------------------------------------- 55.17% SCI Maryland Funeral Services, Inc.----------------------------------------- 100% George Washington Cemetery Company, LLC------------------------------- 100% MASSACHUSETTS SCI Funeral Services, Inc. (Iowa Corp) Massachusetts subsidiaries Affiliated Family Funeral Service, Inc.------------------------------------- 100% AFFS Boston, Inc.----------------------------------------------------- 40% AFFS North, Inc.------------------------------------------------------ 30% AFFS Norwood, Inc.---------------------------------------------------- 40% AFFS Quincy, Inc.----------------------------------------------------- 40% AFFS South Coast East, Inc.------------------------------------------- 40% AFFS South Coast West, Inc.------------------------------------------- 10% AFFS West, Inc.------------------------------------------------------- 30% Brunelle Funeral Home, Inc.------------------------------------------- 40% Langone Funeral Home, Inc.-------------------------------------------- 40% Messier Funeral Home, Inc.-------------------------------------------- 40% Perlman Funeral Home, Inc.-------------------------------------------- 40% Pillsbury Funeral Homes, Inc.----------------------------------------- 40% Stanetsky Memorial Chapels, Inc.-------------------------------------- 40% Sullivan Funeral Homes, Inc.------------------------------------------ 40% ECI-Carr Funeral Home, Inc.------------------------------------------- 49% ECI-Fay McCabe Funeral Home, Inc.------------------------------------- 49% ECI-Henderson Funeral Home, Inc.-------------------------------------- 49% ECI-Rapino Memorial Home, Inc.---------------------------------------- 49%
4 MICHIGAN SCI Funeral Services, Inc. (Iowa Corp) Michigan subsidiary SCI Michigan Funeral Services, Inc.----------------------------------------- 100% MINNESOTA SCI Funeral Services, Inc. (Iowa Corp) Minnesota subsidiaries SCI Minnesota Funeral Services, Inc.---------------------------------------- 100% Crystal Lake Cemetery Association------------------------------------- 100% MISSISSIPPI SCI Funeral Services, Inc. (Iowa Corp) Mississippi subsidiaries SCI Mississippi Funeral Services, Inc.-------------------------------------- 100% Nowell Funeral Homes, Inc.-------------------------------------------- 100% Nowell-Flippin Funeral Home (MS Partnership)------------------------------------------ 7.83% Nowell Funeral Services, Inc. of Kosciusko, Mississippi----------------------------------------------------- 100% Nowell-Flippin Funeral Home (MS Partnership)------------------------------------------ 15.67% MISSOURI SCI Funeral Services, Inc. (Iowa Corp) Missouri subsidiaries SCI Missouri Funeral Services, Inc.----------------------------------------- 100% Memorial Guardian Plans, Inc.----------------------------------------- 100% NEBRASKA SCI Funeral Services, Inc. (Iowa Corp) Nebraska subsidiary SCI Nebraska Funeral Services, Inc.----------------------------------------- 100% NEVADA SCI Funeral Services, Inc. (Iowa Corp) Nevada subsidiaries SCI Texas Funeral Services, Inc. (DE Corp) Nevada subsidiary SCI Texas Finance Company--------------------------------------------- 100% NEW JERSEY SCI Funeral Services, Inc. (Iowa Corp) New Jersey subsidiaries SCI New Jersey Funeral Services, Inc.--------------------------------------- 100% Garden State Crematory, Inc.------------------------------------------ 100% Wien & Wien, Inc.----------------------------------------------------- 100% NEW MEXICO SCI Funeral Services, Inc. (Iowa Corp) New Mexico subsidiaries SCI New Mexico Funeral Services, Inc.--------------------------------------- 100% Southwest Commemorative Services, Inc.-------------------------------- 100% NEW YORK SCI Funeral Services, Inc. (Iowa Corp) New York subsidiaries SCI Funeral Services of New York, Inc.-------------------------------------- 100% Chas. Peter Nagel Inc.------------------------------------------------ 100% I. J. Morris, Inc.---------------------------------------------------- 100% Marsellus Casket Company, Inc.---------------------------------------- 100% New York Funeral Chapels, Inc.---------------------------------------- 100% New York Marker, LLC-------------------------------------------------- 100% Thomas M. Quinn & Sons, Inc.------------------------------------------ 100% SCI Special, Inc. (DE Corp) SCI Administrative Services, LLC (DE LLC)
5 SCI Management L.P.-(DE LP) New York subsidiary SCI EOps HQ, Inc.----------------------------------------------- 100% NORTH CAROLINA SCI Funeral Services, Inc. (Iowa Corp) North Carolina subsidiary SCI North Carolina Funeral Services, Inc.----------------------------------- 100% OHIO SCI Funeral Services, Inc. (Iowa Corp) Ohio subsidiaries Green Hills Management, Inc.------------------------------------------------ 100% SCI Ohio Funeral Services, Inc.--------------------------------------------- 100% The Knollwood Cemetery Company---------------------------------------- 100% Sunset Trust Estate--------------------------------------------------- 100% OKLAHOMA SCI Funeral Services, Inc. (Iowa Corp) Oklahoma subsidiaries AED, Inc.------------------------------------------------------------------- 100% Memorial Gardens Association------------------------------------------ 100% Rose Hill Burial Park, a Trust---------------------------------------- 90% SCI Oklahoma Funeral Services, Inc.----------------------------------------- 100% Memorial Park Cemetery of Bartlesville, Oklahoma, A Business Trust------------------------------------------------ 100% Rose Hill Memorial Park Trust----------------------------------------- 100% Sunset Memorial Park Cemetery Trust----------------------------------- 100% Memorial Park Association-A Trust------------------------------------- 100% Sunny Lane Cemetery--------------------------------------------------- 100% OREGON SCI Funeral Services, Inc. (Iowa Corp) Oregon subsidiaries SCI Oregon Funeral Services, Inc.------------------------------------------- 100% Uniservice Corporation------------------------------------------------ 100% PENNSYLVANIA SCI Funeral Services, Inc. (Iowa Corp) Pennsylvania subsidiaries Memorial Guardian Plans, Inc.(DE Corp) Pennsylvania subsidiary Ensure Agency of Pennsylvania, Inc.----------------------------------- 100% SCI Pennsylvania Funeral Services, Inc.------------------------------------- 100% Auman Funeral Home, Inc.---------------------------------------------- 100% Ed Melenyzer Co.------------------------------------------------------ 100% Funeral Corporation Pennsylvania-------------------------------------- 100% Laughlin Funeral Home, Ltd.------------------------------------- 100% Luther M. Kniffen, Inc.----------------------------------------- 100% Rohland Funeral Home-------------------------------------------- 100% Harold B. Mulligan Co., Inc.------------------------------------------ 100% Stephen R. Haky Funeral Home, Inc.------------------------------------ 100% Theo. C. Auman, Inc.-------------------------------------------------- 100% Auman's, Inc.--------------------------------------------------- 100% Francis F. Seidel, Inc.----------------------------------------- 100% Memorial Services Planning Corporation-------------------------- 100% RHODE ISLAND SCI Funeral Services, Inc. (Iowa Corp) Rhode Island subsidiary SCI Rhode Island Funeral Services, Inc.------------------------------------- 100% SOUTH CAROLINA SCI Funeral Services, Inc. (Iowa Corp) South Carolina subsidiary SCI South Carolina Funeral Services, Inc.----------------------------------- 100%
6 TENNESSEE SCI Funeral Services, Inc. (Iowa Corp) Tennessee subsidiaries SCI Tennessee Funeral Services, Inc.---------------------------------------- 100% Lily of the Valley, Inc.---------------------------------------------- 100% Lynnhurst Cemetery, Inc.---------------------------------------------- 100% Memphis Memory Gardens, Inc.------------------------------------------ 100% TEXAS SCI Funeral Services, Inc. (Iowa Corp) Texas subsidiaries Equity Corporation International of Texas----------------------------------- 100% JPH Properties, Inc.-------------------------------------------------------- 100% Professional Funeral Associates, Inc.--------------------------------------- 100% SCI Texas Funeral Services, Inc. (DE Corp) Texas subsidiaries FHC Realty, Inc.------------------------------------------------------ 100% SCI Holdings of Texas, Inc.------------------------------------------- 100% Texas Marker, L.P.---------------------------------------------------- 100% WFG Liquidation Corporation------------------------------------------- 100% SCI Special, Inc. (DE Corp) SCI Capital Corporation (DE Corp) Texas subsidiary Investment Capital Corporation---------------------------------------- 100% SCI Administrative Services, LLC (DE LLC) SCI Management L.P.-(DE LP) SCI Eastern Operations HQ Services, L.P.------------------------ 1% SCI EOps HQ, Inc. (NY Corp) SCI Eastern Operations HQ Services, L.P.------------------ 99% UTAH SCI Funeral Services, Inc. (Iowa Corp) Utah subsidiaries SCI Utah Funeral Services, Inc.--------------------------------------------- 100% Wasatch Land and Improvement Company---------------------------------- 100% Wasatch Lawn Cemetery Association------------------------------------- 100% VIRGINIA SCI Funeral Services, Inc. (Iowa Corp) Virginia subsidiaries Memorial Guardian Plans, Inc. (Delaware Corp) Virginia subsidiary Sentinel Security Plans, Inc.----------------------------------------- 100% SCI Virginia Funeral Services, Inc.----------------------------------------- 100% WASHINGTON SCI Funeral Services, Inc. (Iowa Corp) Washington subsidiary SCI Washington Funeral Services, Inc.--------------------------------------- 100% WEST VIRGINIA SCI Funeral Services, Inc. (Iowa Corp) West Virginia subsidiaries SCI West Virginia Funeral Services, Inc.------------------------------------ 100% Rosedale Cemetery Company--------------------------------------------- 100% Rosedale Funeral Chapel, Inc.----------------------------------------- 100% WISCONSIN SCI Funeral Services, Inc. (Iowa Corp) Wisconsin subsidiary SCI Wisconsin Funeral Services, Inc.---------------------------------------- 100%
7 CANADA SCI International Limited (Delaware Corp.) Canada subsidiaries Service Corporation International (Canada)Limited------------------------------- 100% Can Ensure Group, Inc.-(Federal)-------------------------------------------- 100% Centre Funeraire Cote-des-Neiges Inc.-(Quebec)------------------------------ 100% CFCDN Holdings Inc.-(Quebec)------------------------------------------------ 100% 611102 Saskatchewan Ltd.-------------------------------------------------------- 100% 3056269 Nova Scotia Company----------------------------------------------------- 100% Service Corporation International Canada Funding Limited Partnership----------------------------------------------------------- 1% 3056271 Nova Scotia Company----------------------------------------------------- 100% Service Corporation International Canada Funding Limited Partnership----------------------------------------------------------- 99% Simmons & McBride Ltd. (Dormant)------------------------------------------------ 100% 3052761 Canada Inc. (Dormant)--------------------------------------------------- 100% ARGENTINA SCI International Limited (Delaware Corp.) Argentina subsidiaries SCI Latin America Ltd. (Cayman Island Corp.) Argentina subsidiaries ***Jardin del Pilar SRL----------------------------------------------------- 100% *** 1 share of stock is owned by SCI Cayman II Ltd and 1 share of stock is owned by Service Corporation International AUSTRALIA SCI International Limited (Delaware Corp.) Australia subsidiary SCIA Holdings Pty. Limited------------------------------------------------------ 20% BELGIUM SCI International Limited (Delaware Corp.) Belgium subsidiaries Camilla Belgium N.V.----------------------------------------------------- 100% Diana Belgium N.V.------------------------------------------------------- 100% BRAZIL SCI International Limited (Delaware Corp.) Brazil subsidiary SCI Latin America Ltd. (Cayman Co.)-------------------------------------- 100% Service Corporation International Brazil Limitada------------------ 100% CAYMAN ISLANDS SCI International Limited (Delaware Corp.) Cayman Island subsidiaries SCI Latin America Ltd---------------------------------------------------------- 100% SCI Cayman II Ltd.------------------------------------------------------- 100% CHILE SCI International Limited (Delaware Corp.) Chile subsidiaries SCI Latin America Ltd. (Cayman Island Corp.) Chile subsidiaries Service Corporation International Chile Limitada------------------------- 100% Administradora Los Parques SA-------------------------------------- 57% Inversiones Austral SA--------------------------------------------- 100% Administradora Los Parques SA-------------------------------- 43% Los Parques SA----------------------------------------------------- 100% Administradora Funeraria Ltda.------------------------------- 51% Cinerario Ltda.---------------------------------------------- 49% FRANCE SCI International Limited (Delaware Corp.) French subsidiaries SPFGF-------------------------------------------------------------------------- 100% Service Corporation International-Europe Continentale-------------------------- 100%
8 R.L.C-------------------------------------------------------- 100% OGF---------------------------------------------------- 100% GNEPF SAS---------------------------------------- 100% Avenir Funeraire Conseil------------------------- 100% S.A Constructions Cedroni Freres----------------- 99.33% CGPF--------------------------------------------- 97.81% Groupement Funeraire du Pere Lachaise-------------------------------------- 64.24% Societe Europeenne De Prevoyance et D'Assistance--------------------------------- 99.20% France Funeraire Service------------------- 100% Societe Monegasque De Thanatologie--------------- 98.79% Ste De Transports Thanatologiques A. Walter------------------------------------ 57.67% CGSM--------------------------------------------- 99.91% Le CAF------------------------------------------- 52.87% PFSE Tunisie------------------------------------- 94.00% GERMANY SCI International Limited (Delaware Corp.) German subsidiaries SCI D GmbH--------------------------------------------------------------------- 100% Norddeutsche Bestattungsgesellschaft mbH--------------------------------- 100% Bestattungsinstitut Barbel Brand GmbH------------------------------------ 100% Breidenstein Bestattungen GmbH------------------------------------------- 100% Thomas Amm GmbH---------------------------------------------------------- 100% LUXEMBOURG SCI International Limited (Delaware Corp.) Luxembourg subsidiary SCI Luxembourg SARL------------------------------------------------------------- 93% Galahad Investment Corporation (Delaware Corp.) Luxembourg subsidiary SCI Luxembourg SARL------------------------------------------------------------- 7% MALAYSIA SCI International Limited (Delaware Corp.) Malaysian subsidiaries Enlightened Transition Sdn Bhd-------------------------------------------------- 100% PORTUGAL SCI International Limited (Delaware Corp.) Portugal subsidiaries SCI Portugal, S.A.-------------------------------------------------------------- 15% SINGAPORE SCI International Limited (Delaware Corp.) Singapore subsidiaries Singapore Casket Company PLC--------------------------------------------------------- 67.57% Casket Palace Company PLC------------------------------------------- 100% SPAIN SCI International Limited (Delaware Corp.) Spain subsidiaries Service Corporation International Spain----------------------------------------- 15% SWITZERLAND SCI International Limited (Delaware Corp.) Swiss subsidiaries Service Corporation International-Europe Continentale (French Corp.) Swiss subsidiaries R.L.C. (French Corp.) Swiss subsidiaries OGF (French Corp.) Swiss subsidiaries Osefi Holdings SA--------------------------------------- 99%
9 Financiere Du Maupas SA---------------------------- 95% UNITED KINGDOM SCI International Limited (Delaware Corp.) United Kingdom subsidiaries Dignity Limited------------------------------------------------------------ 20% URUGUAY SCI International Limited (Delaware Corp.) Uruguay subsidiaries SCI Latin America Ltd. (Cayman Island Corp.) Uruguay subsidiaries Berley SA------------------------------------------------------------------ 100% Coral TreBol--------------------------------------------------------------- 88.70% Pidanol SA----------------------------------------------------------------- 91.17% Rensolar SA---------------------------------------------------------------- 91.17% Vigar SA------------------------------------------------------------------- 100%
10 EX-23.1 12 h02718exv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-65711), Form S-4 (No. 333-01857) and Form S-8 (Nos. 333-67800, 333-50084, 333-33101, 333-00177, 333-00179, 33-9790, 333-68683, 333-82475, 333-70983, 33-50987 and 333-91046) of Service Corporation International of our report dated March 14, 2003, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Houston, Texas March 14, 2003 EX-24.1 13 h02718exv24w1.txt POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ R. L. Waltrip ----------------------------------- R. L. WALTRIP POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Jeffrey E. Curtiss --------------------------------- JEFFREY E. CURTISS POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorney and agent with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Eric D. Tanzberger ------------------------------- ERIC D. TANZBERGER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Anthony L. Coelho ----------------------------------- ANTHONY L. COELHO POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Jack Finkelstein ---------------------------------- JACK FINKELSTEIN POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ A. J. Foyt, Jr. ---------------------------------- A. J. FOYT, JR. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ James H. Greer -------------------------------- JAMES H. GREER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ B. D. Hunter -------------------------------- B. D. HUNTER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Victor L. Lund -------------------------------- VICTOR L. LUND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ John W. Mecom, Jr. -------------------------------- JOHN W. MECOM, JR. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Clifton H. Morris, Jr. -------------------------------- CLIFTON H. MORRIS, JR. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ E. H. Thornton, Jr. ------------------------------- E. H. THORNTON, JR. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ W. Blair Waltrip -------------------------------- W. BLAIR WALTRIP POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Service Corporation International, a Texas corporation (the "Company"), does hereby constitute and appoint Jeffrey E. Curtiss and James M. Shelger his true and lawful attorneys and agents (each with authority to act alone), with power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year of the Company ending December 31, 2002 and to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as a part of, as an exhibit to or in connection with said Report or amendments; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 12th day of February, 2003. /s/ Edward E. Williams -------------------------------- EDWARD E. WILLIAMS EX-99.12 14 h02718exv99w12.txt PLAINTIFFS' 1ST AMENDED DEMAND FOR ARBITRATION EXHIBIT 99.12 ARBITRATION BEFORE THE AMERICAN ARBITRATION ASSOCIATION HOUSTON, TEXAS ) Case No. 70 Y 16800717 02 ) JAMES P. HUNTER, III and ) JAMES P. HUNTER, III FAMILY ) PARTNERSHIP, LTD., ) Claimants ) FIRST AMENDED ) DEMAND FOR ARBITRATION vs. ) AND COMPLAINT FOR ) DAMAGES SERVICE CORPORATION INTERNATIONAL, ) ROBERT L. WALTRIP, ) L. WILLIAM HEILIGBRODT, and ) GEORGE R. CHAMPAGNE, ) ) Respondents ) Claimants James P. Hunter, III and James P. Hunter, III Family Partnership, Ltd., submit the following controversy for arbitration before the American Arbitration Association against Respondents Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, and George K. Champagne, and allege as follows: I. NATURE OF ACTION 1. Claimants sue for fraud and misrepresentation under Texas statutory and common law. Claimants gave up shares and stock options in Equity Corporation International (Equity) and acquired the shares of Service Corporation International (SCI) in the stock-for-stock merger of Equity into SCI (the Merger) on January 19, 1999. Jim Hunter also surrendered his positions as Chairman, CEO, and President of Equity and accepted instead a position as an employee and officer of SCI. As the top executive officer of Equity and its chairman, as well as one of Equity's largest shareholders, Jim Hunter's consent to the Merger was essential to its consummation. To persuade Jim Hunter to consent to the Merger and to accept employment by SCI, respondents hid knowledge they had and were under a duty to disclose concerning SCI's poor financial performance in the quarter ending December 31, 1998. In so doing, respondents misrepresented and concealed material information that, had it been disclosed, would have resulted in termination of the transaction. II. JURISDICTION AND VENUE 2. The claims asserted herein arise under the Texas Securities Act, Tex. Rev. Civ. Stat. art. 581-33, Tex. Bus. & Comm. Code Section 27.01, and the Texas common law of fraud, negligent misrepresentation, and conspiracy. 3. Claimants filed suit on these claims in state court in Angelina County, Texas, in November 1999. Respondents demanded that these claims be arbitrated pursuant to Section 10.6 of an Agreement and Plan of Merger by and among Service Corporation International, SCI Delaware Funeral Services, Inc., and Equity Corporation International (the Merger Agreement). The arbitration provisions of the Merger Agreement are attached as Exhibit A. 4. Paragraph 10.6(b) of the Merger Agreement provides that the arbitration shall be conducted in Houston, Texas, pursuant to the Commercial Arbitration Rules of the American Arbitration Association in effect at the time of the arbitration, except as modified by the provisions of the Merger Agreement or the mutual agreement of the parties. III. APPOINTMENT OF CLAIMANTS' ARBITRATOR 5. Claimants appoint the Honorable Robert M. Parker as their arbitrator. Judge Parker's mailing address is 100 East Ferguson, Suite 1114, Tyler, Texas 75702. -2- IV. PARTIES 6. Claimant Jim Hunter is a resident of Lufkin, Texas. Jim Hunter was the Chairman of the Board, President, and Chief Executive Officer of Equity from the time of its spin-off in 1990 from SCI until the Merger. Jim Hunter built Equity into the fourth largest publicly-traded provider of deathcare services and products in the United States, and increased annual revenues from $18 million in 1990 to an estimated $206 million in 1998. 7. Respondent SCI is a corporation organized under the laws of the State of Texas with its principal executive offices located at 1929 Allen Parkway, Houston, Texas. Respondent SCI is represented in this dispute by J. Clifford Gunter, III, Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002. Mr. Gunter has agreed and is authorized to accept service of this arbitration demand on behalf of respondent SCI. 8. Respondent Robert L. Waltrip (Waltrip) is the Chief Executive Officer and Chairman of the Board of SCI. Waltrip resides in Houston, Texas. Respondent Waltrip is represented in this dispute by J. Clifford Gunter III, Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002. Mr. Gunter has agreed and is authorized to accept service of this arbitration demand on behalf of respondent SCI. 9. Respondent L. William Heiligbrodt (Heiligbrodt) was the President and Chief Operating Officer of SCI front before the time he contacted Hunter on July 22,1998, to ask Hunter to consider the Merger, until February 11, 1999. Respondent Heiligbrodt is represented in this dispute by J. Clifford Gunter III, Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002. Mr. Gunter has agreed and is authorized to accept service of this arbitration demand on behalf of respondent SCI. -3- 10. George R. Champagne (Champagne) was the Executive Vice President and Chief Financial Officer of SCI since before July 22, 1998, until after the Merger was consummated. Respondent Champagne is represented in this dispute by J. Clifford Gunter III, Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002. Mr. Gunter has agreed and is authorized to accept service of this arbitration demand on behalf of respondent SCI. V. FACTS NEGOTIATION AND CLOSING OF THE MERGER AGREEMENT 11. On July 22, 1998, respondents Heiligbrodt and Waltrip contacted Jim Hunter to ask him whether Equity would be interested in being acquired by SCI. 12. Jim Hunter thought that SCI could be an attractive merger prospect for Equity in the summer of 1998. Accordingly, after defendants Heiligbrodt and Waltrip contacted Jim Hunter on July 22, 1998, Jim Hunter decided to consider a merger with SCI. 13. On July 27,1998, Heiligbrodt met with Jim Hunter. At the meeting, Heiligbrodt delivered a letter signed by defendant Waltrip urging Jim Hunter to enter into formal merger negotiations. 14. Following the July 27, 1998 meeting, Equity formally retained ABN AMRO as its financial advisor. SCI hired J. P. Morgan & Co. (Morgan). 15. SCI and Equity executed the Merger Agreement on August 6, 1998. 16. In connection with the Merger, Jim Hunter agreed to an employment agreement with SCI and its subsidiary to serve as SCI's Executive Vice President for at least three years. The employment agreement provided for a salary, discretionary bonuses, and other compensation to Jim Hunter. -4- 17. In the Merger Agreement, SCI represented that at the closing date of the Merger, there had been no development that could reasonably be anticipated to be adverse to SCI's business or financial condition (sections 4.7 and 10.10(g)), and promised that SCI would promptly notify Equity if it learned of any such development (section 7.9). Equity had the right to terminate the Merger Agreement in the event of any such development (sections 8.2(a) and 9.1 (a)(i)). Claimants relied on SCI's representations and promises, and understood that SCI had a duty to disclose any such adverse development to Equity, and therefore to Jim Hunter, Equity's CEO. 18. The Merger Agreement was incorporated by reference in and attached to a November 20, 1998 Prospectus and Proxy Statement (the Prospectus) that was transmitted to Claimants. The Prospectus explicitly stated that shareholders should rely on the information contained in and incorporated by reference in the Prospectus. 19. In December 1998, the Merger Agreement was amended to lower the exchange ratio for the Merger, reflecting the rising price of SCI stock. On December 12, 1998, SCI amended the Prospectus to disclose the lower exchange ratio. In accordance with the renegotiated exchange ratio, Claimants received when the Merger closed 0.71053 shares of SCI stock for each of their shares of Equity stock, and Jim Hunter exchanged his Equity stock options for SCI stock options on the same exchange ratio. 20. The Merger closed on January 19, 1999. Through January 19, 1999, SCI did not disclose to Equity or Claimants any development that could reasonably be anticipated to be adverse to SCI's business or financial condition. Claimants reasonably believed that there had been no such adverse development up to and including January 19,1999, because they knew that SCI was required to disclose any such development to Equity, and SCI had not done so. -5- SCI DISCLOSES ITS POOR RESULTS 21. Within seven days of the Merger, however, SCI publicly announced on January 26, 1999 that it had substantially missed both its fourth quarter and its annual earnings estimates. 22. SCI's failure to meet its earnings estimates was material information to Claimants. If Jim Hunter had known that SCI anticipated missing or had missed its earnings estimates before the Merger closed on January 19, 1999, Jim Hunter would have caused Equity to terminate the Merger Agreement. SCI's failure to meet its earnings estimates was a development that could reasonably be anticipated to be adverse to SCI's business or financial condition and SCI did in fact anticipate that it would be adverse to SCI's business and financial condition. SCI knew that the earnings information would come as a tremendous shock to the investment community and would cause an immediate and drastic drop in the price of SCI's shares. JIM HUNTER DISCOVERS THE FRAUD AND IS TOLD TO RESIGN 23. After SCI publicly announced its failure to meet its earning estimates on January 26, 1999, SCI's CFO, respondent George Champagne, acknowledged to Jim Hunter that SCI had known before the Merger closed that SCI would substantially miss its earnings estimates. 24. In addition, after the January 26, 1999 announcement, an employee of SCI's auditor, PricewaterhouseCoopers told Jim Hunter that PricewaterhouseCoopers knew before the Merger closed that SCI would substantially miss its earnings estimates, and that this information was memorialized in a memorandum that had been sent to SCI. 25. In late February or early March, 1999, Jim Hunter was asked to attend a meeting in which counsel for SCI asked for Jim Hunter's reaction to the statement that "our investigation has shown that senior management of SCI had no knowledge of the impending earnings shortfall." Jim Hunter responded that the statement was ludicrous. -6- 26. Two days later, defendant Waltrip advised Jim Hunter that there was no longer any place for him in the SCI organization. Accordingly, Jim Hunter resigned as an officer of SCI and entered into an amendment of his employment agreement with SCI. Pursuant to the amendment, the term of the employment agreement was limited, Jim Hunter's duties were restricted, and Jim Hunter's eligibility to earn bonus payments was constrained. CAUSES OF ACTION COUNT I TEXAS SECURITIES ACT, ART. 581-33 27. Claimants repeat and reallege each allegation contained above. 28. Claimants bring this Count under the Texas Securities Act, Art. 58l-33A, B, and C. 29. SCI offered to buy from claimants their Equity shares, and to sell to claimants SCI shares, by means of an untrue statement of a material fact, and by an omission to state a state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. 30. SCI was the issuer for the SCI shares sold to claimants via the Merger. SCI disseminated a prospectus for the Merger exchange shares registered under 15 U.S.C. Section 77f. The prospectus contained an untrue statement of material fact, and omissions of material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading. 31. Claimants had no knowledge of the misrepresentations or omissions at the time of the Merger when they sold their Equity shares and purchased SCI shares. 32. Each of the respondents had knowledge of the misrepresentations and omissions or in the exercise of reasonable care would have known of the untruths or omissions. -7- 33. Each of the individual respondents was a control person of SCI for purposes of art. 581-33 F and so is liable jointly and severally with SCI for SCI's violations of art. 581-33 A, B and C. 34. Pursuant to art. 581-33 D, claimants hereby tender their SCI shares and options and seeks recovery of the value of the Equity shares and options they surrendered upon the Merger, with any offsets as provided under the statute. 35. Claimants also seek costs and reasonable attorney's fees. COUNT II TEXAS BUSINESS & COMMERCE CODE SECTION 27.01 36. Claimants repeat and reallege each allegation contained above. 37. Claimants bring this Count for fraud in a transaction involving stock in a corporation under Tex. Bus. & Comm. Code Section 27.01. 38. Respondents misrepresented that there had been no development that could reasonably be anticipated to be adverse to SCI's business or financial condition through the date the Merger was consummated. 39. Respondents made the material misrepresentations with the intent to induce Jim Hunter to refrain from terminating the Merger Agreement and to cause Equity to consummate the Merger after the shareholder approval. 40. Claimants relied on the material misrepresentations. 41. Claimants had no knowledge of the falsity of respondents' material misrepresentations. 42. As persons who made material false representations to claimants in violation of Section 27.01(a), SCI and the individual respondents are liable to claimants for actual damages under -8- Section 27.01(b). Claimants' actual damages include their loss on the value of their Equity stock and options as well as Jim Hunter's diminished compensation as an employee of SCI. 43. Because respondents had actual awareness of the falsity of their material misrepresentations, they are liable to claimants for exemplary damages under Section 27.01(c). 44. Respondents are liable to claimants under Section 27.01(e) for reasonable and necessary attorney's fees, expert witness fees, costs for copies of depositions, and costs of court. COUNT III COMMON LAW FRAUD 45. Claimants repeat and reallege each allegation contained above. 46. Respondents made the material misrepresentations described above. In addition, respondents had a duty to disclose the information concerning SCI's poor results, but failed to do so. As soon as SCI learned of the possibility that it would miss its earnings target, SCI had a duty to inform Equity, and therefore Hunter, and the failure to do so constituted a material omission and a continuing misrepresentation that it had not suffered any adverse development. 47. Respondents knew that the misrepresentations were false when made or made such material misrepresentations recklessly and without any knowledge of their truth, and knew that the omissions failed to correct prior representations that were false. 48. Respondents intended that claimants rely on the material misrepresentations. 49. Claimants did rely on respondents' material misrepresentations. 50. As result of the respondents' fraud, claimants suffered injury. Claimants' actual damages include their loss on the value of their Equity stock and options as well as Jim Hunter's diminished compensation as an employee of SCI. Respondents are liable to claimants for actual damages. -9- 51. Respondents willfully and intentionally defrauded claimants and so are liable to them for exemplary damages. COUNT IV NEGLIGENT MISREPRESENTATION 52. Claimants repeat and reallege each allegation contained above. 53. Respondents provided false information to Hunter in the course of their business or in a transaction in which they had a pecuniary interest. 54. Respondents provided the false information for the guidance of claimants in claimants' business. 55. Respondents did not exercise reasonable care or competence in obtaining or communicating the information to claimants. 56. As a result of respondents' negligent misrepresentations, claimants suffered damages. Claimants' actual damages include their loss on the value of their Equity stock and options as well as Jim Hunter's diminished compensation as an employee of SCI. WHEREFORE, claimants pray for relief and judgment, as follows: o Compensatory damages against all respondents, jointly and severally; o Exemplary damages against all respondents; o Interest on damages in accordance with law; o Claimants' reasonable and necessary costs (including reasonable and necessary attorney's fees); o Expert witness fees; o Costs of copies of depositions; and o Such other and further relief as the arbitration panel may deem just and prosper. -10- DATED: 1/24/03 Respectfully submitted, ------- SUSMAN GODFREY L.L.P. By: /s/ MARK L.D. WAWRO --------------------------------- Mark L.D. Wawro State Bar No. 20988275 Harry P. Susman State Bar No. 24008875 1000 Louisiana Street, Suite 5100 Houston, Texas 77002 Telephone: (713) 651-9366 Fax: (713) 654-6666 Attorneys for Claimants OF COUNSEL: George Chandler Law Offices of George Chandler 207 East Frank Street #105 Lufkin, Texas 75902 Telephone: (936) 632-7778 Fax: (936) 632-1304 -11- EX-99.14 15 h02718exv99w14.txt AMENDMENT NO.1 TO CREDIT AGREEMENT EXHIBIT 99.14 EXECUTION COPY AMENDMENT NO. 1 dated as of December 6, 2002 (this "Amendment") to the Credit Agreement dated as of July 24, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among SERVICE CORPORATION INTERNATIONAL, a Texas corporation (the "Borrower"), the financial institutions from time to time party thereto (the "Lenders"), JPMORGAN CHASE BANK, as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent") and as Collateral Agent for the Lenders, BANK OF AMERICA, N.A., as Syndication Agent for the Lenders, and CREDIT LYONNAIS NEW YORK BRANCH, LEHMAN COMMERCIAL PAPER INC. and MERRILL LYNCH CAPITAL CORPORATION, as Co- Documentation Agents for the Lenders. WHEREAS, the Borrower has requested that the Lenders amend certain provisions of the Credit Agreement; and WHEREAS, the undersigned Lenders are willing to agree to such amendments, on the terms, subject to the conditions and to the extent set forth herein; NOW, THEREFORE, in consideration of the above premises, the agreements, provisions and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each capitalized term used herein but not defined herein which is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement. SECTION 2. Amendment of Credit Agreement. Pursuant to Section 9.02 of the Credit Agreement, effective as of the Effective Date (as defined in Section 4 hereof), the Credit Agreement is hereby amended as follows: (a) Amendment of Section 6.02. Section 6.02 of the Credit Agreement is amended by deleting the word "and" at the end of clause (f) thereof, replacing the period at the end of clause (g) thereof with "; and" and inserting a new clause (h) as follows: "(h) the Lien granted by SCI International Limited on the (pound) 14,823,529 unsecured fixed rate note of Dignity Holdings Limited ("Dignity") dated 2 February 11, 2002 to the collateral agent under the Credit Agreement dated on or about December 20, 2002, among Dignity, the lenders party thereto and J.P. Morgan Europe Limited, as administrative agent and collateral agent for the lenders thereunder." (b) Amendment of Section 6.05. Section 6.05 of the Credit Agreement is amended by deleting the word "and" at the end of clause (l) thereof, replacing the period at the end of clause (m) thereof with "; and" and inserting a new clause (n) as follows: "(n) the Guarantee by OGF Societe Anonyme of obligations of Courtage d'Assurance Funeraire Societe Anonyme pertaining to certain previously issued capitalization bonds of Auxia, Societe Anonyme; provided, however, that the amount of obligations guaranteed by OGF Societe Anonyme pursuant to this clause (n) shall not exceed (euro) 15,000,000 in the aggregate." SECTION 3. Representations and Warranties. To induce the other parties hereto to enter into this Amendment, the Borrower represents to each of the Lenders and the Administrative Agent that, as of the Effective Date: (a) after giving effect to this Amendment, the representations and warranties of the Loan Parties set forth in the Loan Documents are true and correct with the same effect as if made on the Effective Date, except for representations and warranties that expressly relate to an earlier date, which representations and warranties were true and correct as of such earlier date; (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing under the Credit Agreement; and (c) this Amendment has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation the Borrower, enforceable against it in accordance with its terms. SECTION 4. Conditions to Effectiveness. This Amendment shall become effective on the date (the "Effective Date") upon which each of the following conditions is satisfied: (a) The Administrative Agent shall have received counterparts of this Amendment that, when taken together, bear the signatures of the Borrower and the Required Lenders. 3 (b) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming that (i) the representations and warranties of the Loan Parties set forth in the Credit Agreement, as amended by this Amendment, and the other Loan Documents are true and correct as of the Effective Date, except for representations and warranties that expressly relate to an earlier date, which representations and warranties were true and correct as of such earlier date, (ii) each Loan Party is in compliance with all the terms and provisions set forth in the Credit Agreement, as amended by this Amendment, and each other Loan Document on its part to be observed or performed and (iii) after giving effect to this Amendment on the Effective Date, no Default or Event of Default shall have occurred and be continuing under the Credit Agreement. (c) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including fees, charges and disbursements of counsel) required to be reimbursed or paid by the Borrower under the Loan Documents. SECTION 5. Effect of Amendment. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, amend, or otherwise affect the rights and remedies of the Lenders or the Administrative Agent under the Credit Agreement or any other Loan Document and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrower or any other Loan Party to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall apply and be effective with respect to the matters expressly referred to herein. After the Effective Date, any reference to the Credit Agreement shall mean the Credit Agreement, as modified hereby. This Amendment shall constitute a "Loan Document" for all purposes under the Credit Agreement and each other Loan Document. SECTION 6. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 7. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original but all of which when taken together shall 4 constitute but one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. SECTION 8. Costs and Expenses. The Borrower agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent. SECTION 9. Headings. The headings of this Amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. [The remainder of this page intentionally left blank] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first written above. SERVICE CORPORATION INTERNATIONAL, by: _______________________________ Name: Title: JPMORGAN CHASE BANK, individually and as Administrative Agent, by: _______________________________ Name: Title: BANK OF AMERICA, N.A., by: _______________________________ Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, by: _______________________________ Name: Title: 6 LEHMAN COMMERCIAL PAPER INC., by: _______________________________ Name: Title: MERRILL LYNCH CAPITAL, CORPORATION, by: _______________________________ Name: Title: EX-99.15 16 h02718exv99w15.txt CERT.OF ROBERT L. WALTRIP PURSUANT TO SECTION 906 EXHIBIT 99.15 Certification of Periodic Financial Reports I, Robert L. Waltrip, of Service Corporation International, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report on Form 10-K for the period ended December 31, 2002 (the "Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Service Corporation International. Dated: March 17, 2003 /s/ Robert L. Waltrip ------------------------------ Robert L. Waltrip Chairman of the Board and Chief Executive Officer EX-99.16 17 h02718exv99w16.txt CERT.OF JEFFREY E. CURTISS PURSUANT TO SECTION 906 EXHIBIT 99.16 Certification of Periodic Financial Reports I, Jeffrey E. Curtiss, of Service Corporation International, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report on Form 10-K for the period ended December 31, 2002 (the "Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Service Corporation International. Dated: March 17, 2003 /s/ Jeffrey E. Curtiss ----------------------------- Jeffrey E. Curtiss Senior Vice President Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----