-----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, EnCTkQ14guWAH9IzSkiB/jz7489Zjan96tkAAoqasxgqzr51P3GJrWuOjOgmJsUB MykS0mw5ohz9BqEHkl9EgQ== 0000950129-03-003971.txt : 20030807 0000950129-03-003971.hdr.sgml : 20030807 20030807155602 ACCESSION NUMBER: 0000950129-03-003971 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE CORPORATION INTERNATIONAL CENTRAL INDEX KEY: 0000089089 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 741488375 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06402 FILM NUMBER: 03828541 BUSINESS ADDRESS: STREET 1: 1929 ALLEN PKWY STREET 2: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135225141 MAIL ADDRESS: STREET 1: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219-0548 10-Q 1 h07919e10vq.txt SERVICE CORPORATION INTERNATIONAL - JUNE 30, 2003 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------- -------- COMMISSION FILE NUMBER 1-6402-1 ---------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in charter) TEXAS 74-1488375 (State or other jurisdiction of (I. R. S. employer incorporation or organization) identification number) 1929 ALLEN PARKWAY, HOUSTON, TEXAS 77019 (Address of principal executive offices) (Zip code) 713-522-5141 (Registrant's telephone number, including area code) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. YES X NO ----- ----- 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 number of shares outstanding of the registrant's common stock as of August 4, 2003 was 300,460,098 (net of treasury shares). SERVICE CORPORATION INTERNATIONAL INDEX
Page Part I. Financial Information 3 Item 1. Financial Statements 3 Consolidated Statement of Operations - Three and Six Months Ended June 30, 2003 and 2002 3 Consolidated Balance Sheet - June 30, 2003 and December 31, 2002 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 2003 and 2002 5 Consolidated Statement of Stockholders' Equity - Six Months Ended June 30, 2003 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Introduction 21 Goals and Challenges 21 Critical Accounting Policies, Accounting Changes and New Accounting Pronouncements 24 Results of Operations 25 Financial Condition, Liquidity and Capital Resources 30 Prearranged Funeral and Preneed Cemetery Activities 32 Cautionary Statement on Forward-Looking Statements 34 Item 3. Quantitative and Qualitative Disclosures about Market Risk 35 Item 4. Controls and Procedures 35 Part II. Other Information 35 Item 1. Legal Proceedings 35 Item 2. Changes in Securities and Use of Proceeds 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 6. Exhibits and Reports on Form 8-K 36 Signature
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Six months ended June 30, June 30, ------------------------------ ------------------------------ (In thousands, except per share amounts) 2003 2002 2003 2002 - ------------------------------------------------------------ ------------ ------------ ------------ ------------ Revenues ................................................... $ 586,242 $ 583,423 $ 1,166,335 $ 1,184,689 Costs and expenses ......................................... 491,824 492,150 959,362 974,252 ------------ ------------ ------------ ------------ Gross profits .............................................. 94,418 91,273 206,973 210,437 General and administrative expenses ........................ (36,268) (19,592) (57,679) (35,323) Gains and impairment (losses) on dispositions, net ......... (1,519) (187,709) 7,815 (190,621) Other operating expenses ................................... (1,724) (40,807) (1,724) (40,807) ------------ ------------ ------------ ------------ Operating income (loss) .................................... 54,907 (156,835) 155,385 (56,314) Interest expense ........................................... (36,121) (41,406) (73,517) (84,792) Other income (expense), net ................................ 2,398 (1,984) 6,410 6,200 ------------ ------------ ------------ ------------ Income (loss) before income taxes and cumulative effect of accounting change .................................. 21,184 (200,225) 88,278 (134,906) (Provision) benefit for income taxes ....................... (6,805) 57,210 (31,630) 38,740 ------------ ------------ ------------ ------------ Income (loss) before cumulative effect of accounting change ................................................ 14,379 (143,015) 56,648 (96,166) Cumulative effect of accounting change (net of income tax benefit of $11,234) ............................... -- -- -- (135,560) ------------ ------------ ------------ ------------ Net income (loss) ................................ $ 14,379 $ (143,015) $ 56,648 $ (231,726) ============ ============ ============ ============ Basic earnings (loss) per share: Income (loss) before cumulative effect of accounting change ....................... $ .05 $ (0.49) $ 0.19 $ (0.33) Cumulative effect of accounting change ............ -- -- -- (0.46) ------------ ------------ ------------ ------------ Net income (loss) ....................... $ .05 $ (0.49) $ 0.19 $ (0.79) ============ ============ ============ ============ Diluted earnings (loss) per share: Income (loss) before cumulative effect of accounting change ....................... $ .05 $ (0.49) $ 0.18 $ (0.33) Cumulative effect of accounting change ............ -- -- -- (0.46) ------------ ------------ ------------ ------------ Net income (loss) ....................... $ .05 $ (0.49) $ 0.18 $ (0.79) ============ ============ ============ ============ Basic weighted average number of shares .................... 299,351 293,872 298,563 293,263 ============ ============ ============ ============ Diluted weighted average number of shares .................. 299,844 293,872 344,139 293,263 ============ ============ ============ ============
(See notes to consolidated financial statements) 3 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET
June 30, December 31, (In thousands, except share and per share amounts) 2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents .................................................... $ 157,988 $ 200,625 Receivables, net of allowances ............................................... 261,829 291,765 Inventories .................................................................. 130,976 135,529 Other ........................................................................ 44,909 126,980 ------------ ------------ Total current assets ....................................................... 595,702 754,899 ------------ ------------ Prearranged funeral contracts ..................................................... 4,528,000 4,273,790 Long-term receivables, net of allowances .......................................... 1,124,239 1,156,458 Cemetery property, at cost ........................................................ 1,551,912 1,567,584 Property, plant and equipment, at cost (net) ...................................... 1,207,931 1,188,340 Deferred charges and other assets ................................................. 608,071 598,536 Goodwill .......................................................................... 1,198,195 1,184,178 ------------ ------------ $ 10,814,050 $ 10,723,785 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ..................................... $ 335,990 $ 361,910 Current maturities of long-term debt ......................................... 130,897 100,330 Income taxes ................................................................. 11,140 2,043 ------------ ------------ Total current liabilities .................................................. 478,027 464,283 ------------ ------------ Long-term debt .................................................................... 1,604,920 1,884,508 Deferred prearranged funeral contract revenues .................................... 4,907,234 4,659,994 Deferred preneed cemetery contract revenues ....................................... 1,646,513 1,672,661 Deferred income taxes ............................................................. 540,478 522,453 Other liabilities ................................................................. 220,900 216,115 Commitments and contingencies (note 6) Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 299,987,535 and 297,010,237, issued and outstanding (net of 2,469,445 and 2,516,396 treasury shares, at par) .............. 299,988 297,010 Capital in excess of par value ............................................... 2,266,955 2,259,936 Accumulated deficit .......................................................... (989,381) (1,046,029) Accumulated other comprehensive loss ......................................... (161,584) (207,146) ------------ ------------ Total stockholders' equity ................................................ 1,415,978 1,303,771 ------------ ------------ $ 10,814,050 $ 10,723,785 ============ ============
(See notes to consolidated financial statements) 4 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30, (In thousands) 2003 2002 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................. $ 56,648 $ (231,726) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change, net of tax ....................... -- 135,560 Depreciation and amortization ............................................ 84,357 87,453 Provision (benefit) for deferred income taxes ............................ 19,675 (50,902) (Gains) and impairment losses on dispositions, net ....................... (7,815) 190,621 Other operating expenses ................................................. 1,724 40,807 Payments on restructuring charges ........................................ (6,332) (5,807) (Gains) and losses on early extinguishments of debt, net ................. (1,903) 3,423 Changes in assets and liabilities, net of effects from dispositions: Decrease in receivables ................................................ 56,167 13,445 Decrease in other assets ............................................... 43,149 16,137 Increase (decrease) in payables and other liabilities .................. 2,644 (50,120) Other .................................................................. 8,149 (3,545) Net effect of prearranged funeral production and maturities .............. (12,813) 13,029 ---------- ---------- Net cash provided by operating activities ..................................... 243,650 158,375 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ..................................................... (47,678) (39,999) Proceeds from divestitures and sales of property and equipment ........... 34,232 34,724 Proceeds and distributions from joint ventures and equity investments, net of cash retained .................................................. 30,802 266,704 Net deposits of restricted funds ......................................... (37,336) (34,188) Other .................................................................... -- 848 ---------- ---------- Net cash (used in) provided by investing activities ........................... (19,980) 228,089 CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in borrowings under credit agreements ....................... -- (29,061) Payments of debt ......................................................... (83,469) (67,549) Early extinguishments of debt ............................................ (175,515) (156,308) Bank overdrafts and other ................................................ (11,201) 204 ---------- ---------- Net cash used in financing activities ......................................... (270,185) (252,714) Effect of foreign currency .................................................... 3,878 (613) ---------- ---------- Net (decrease) increase in cash and cash equivalents .......................... (42,637) 133,137 Cash and cash equivalents at beginning of period .............................. 200,625 29,292 ---------- ---------- Cash and cash equivalents at end of period .................................... $ 157,988 $ 162,429 ========== ==========
(See notes to consolidated financial statements) 5 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated Capital in other Common excess of Accumulated comprehensive (In thousands) Stock par value deficit income (loss) Total - ------------------------------------------ -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2002 ............. $ 297,010 $ 2,259,936 $ (1,046,029) $ (207,146) $ 1,303,771 Comprehensive income: Net income ........................... 56,648 56,648 Foreign currency translation ......... 45,562 45,562 -------------- Comprehensive income ................. 102,210 Common stock issued: Contribution to employee 401(k) plan ... 2,772 6,605 9,377 Other .................................. 206 414 620 -------------- -------------- -------------- -------------- -------------- Balance at June 30, 2003 ................. $ 299,988 $ 2,266,955 $ (989,381) $ (161,584) $ 1,415,978 ============== ============== ============== ============== ==============
(See notes to consolidated financial statements) 6 SERVICE CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. NATURE OF OPERATIONS Service Corporation International (SCI or the Company) is the largest provider of funeral and cemetery services in the world through its funeral service and cemetery operations. At June 30, 2003, the Company operated 2,259 funeral service locations, 431 cemeteries and 188 crematoria located in eight countries. The Company also has minority interest equity investments in funeral and cemetery operations in countries outside of North America. The funeral service 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 property 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 186 combination locations that contain a funeral service location within a Company owned cemetery. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements for the three and six months ended June 30, 2003 and 2002 include the accounts of the Company and all majority-owned subsidiaries and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments which management considers necessary for a fair presentation of the results for these periods. These consolidated financial statements have been prepared in a manner consistent with the accounting policies described in the annual report on Form 10-K filed with the U. S. Securities and Exchange Commission for the year ended December 31, 2002, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end consolidated balance sheet was derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period. The Company has reclassified certain prior year amounts to conform to the current period financial presentation with no effect on previously reported results of operations, financial condition 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 periods. As a result, actual results could differ from these estimates. During the second quarter of 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 in order to reflect the estimated remaining useful lives of these systems. The Company recognized approximately $4,700 of additional amortization related to this change in estimate during the six months ended June 30, 2003 compared to the same period of 2002. 7 3. ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS 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 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 adopted SFAS No. 143 during the first quarter of 2003 with no effect on its results of operations, financial condition 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." The Company adopted SFAS No. 145 during the first quarter of 2003 as it relates to the classification of extinguishments of debt for all periods presented. 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. Gains and losses from early extinguishments of debt are included in Other income in the consolidated statement of operations for all periods presented. The Company recorded $1,903 as gains from the early extinguishment of debt in Other income for the six months ended June 30, 2003 and has reclassified $3,423 related to the prior year period to Other income, which was previously reported as an extraordinary loss. The other provisions of SFAS No. 145 were generally effective for transactions occurring after May 15, 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 No. 45 clarifies the disclosures required by a guarantor about its obligations and it requires guarantors 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 were effective for financial statements for periods that end after December 15, 2002. There have been no material changes in the guarantees related to FIN No. 45 since December 31, 2002. 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 provisions of FIN No. 46 are effective immediately for all enterprises with variable interests in variable interest entities created after January 31, 2003. A public entity with a variable interest in a variable interest entity created before February 1, 2003 shall apply the provisions of FIN No. 46 in the first fiscal year or interim period beginning after June 15, 2003. As a result of the adoption of FIN No. 46, the Company believes it will be required to consolidate, as of July 1, 2003, its prearranged funeral, cemetery merchandise and services and endowment care trust funds, as well as certain cemeteries managed, but not owned, by the Company. The Company is currently assessing the impact, if any, on its results of operations, financial condition or cash flows as a result of potentially consolidating such trust funds. However, the Company believes it will recognize an asset and equal liability in its Consolidated Balance Sheet of approximately $630 million as a result of consolidating the endowment care trust funds. The Company also believes, however, it will recognize a pretax charge of approximately $20 to $30 million representing the cumulative effect of an accounting change in the third quarter of 2003, primarily as a result of consolidating certain cemeteries not owned by the Company. 8 4. DEBT
June 30, 2003 December 31, 2002 ------------------ ------------------ 6.3% notes due 2003 ............................................................ $ -- $ 84,801 7.375% notes due April 2004 .................................................... 111,190 111,190 8.375% notes due December 2004 ................................................. 50,797 50,797 6.0% notes due 2005 ............................................................ 281,717 387,241 7.2% notes due 2006 ............................................................ 150,000 150,000 6.875% notes due 2007 .......................................................... 146,300 150,000 6.5% notes due 2008 ............................................................ 195,000 200,000 6.75% convertible subordinated notes due 2008, conversion price of $6.92 per share ............................................................. 312,694 328,005 7.7% notes due 2009 ............................................................ 358,356 371,183 6.95% amortizing notes due 2010 ................................................ 16,260 42,106 7.875% debentures due 2013 ..................................................... 55,627 55,627 Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.5%, conversion prices from $12.55 to $50.00 per share ....... 39,171 39,531 Mortgage notes and other debt, maturities through 2050 ......................... 72,982 76,758 Deferred loan costs and net hedging losses ..................................... (54,277) (62,401) ------------------ ------------------ Total debt ................................................................ 1,735,817 1,984,838 Less current maturities ................................................... (130,897) (100,330) ------------------ ------------------ Total long-term debt ............................................... $ 1,604,920 $ 1,884,508 ================== ==================
Bank Credit Agreements The Company's bank credit agreement matures in July 2005 and provides a total commitment of $185,000, including a sublimit of $125,000 to support letters of credit. The credit facility is secured by the stock, inventory and receivables of certain of the Company's domestic subsidiaries and these domestic subsidiaries have guaranteed the Company's debt obligation 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. The Company had no borrowings under the bank credit agreement at either June 30, 2003 or December 31, 2002; however, the Company used the credit agreement sublimit to support letters of credit, in the amounts of $81,215 and $85,845, at June 30, 2003 and December 31, 2002, respectively. 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 June 30, 2003 and at December 31, 2002. Settlements and Extinguishments of Debt During the six months ending June 30, 2003, the Company purchased the following notes in the open market: $8,528 of the 6.3% notes due 2003; $105,524 of the 6.0% notes due 2005; $3,700 of the 6.875% notes due 2007; $5,000 of the 6.5% notes due 2008; $15,311 of the 6.75% notes due 2008; $12,827 of the 7.7% notes due 2009; $25,031 of the 6.95% amortizing notes due 2010; and the remaining $25 of the 7.0% notes due 2015. As a result of these transactions, the Company recognized a net gain for the first half of 2003 of $1,903 recorded in Other income in the consolidated statement of operations. In March 2003, as required by the terms of the agreement, the Company repaid the remaining $76,273 due on the 6.30% notes due in 2003. 9 Additional Debt Disclosures The Company's consolidated debt had a weighted average interest rate of 6.95% at June 30, 2003 compared to 6.87% at December 31, 2002. Approximately 99% of the Company's total outstanding debt had a fixed interest rate at June 30, 2003 and December 31, 2002. At June 30, 2003 and December 31, 2002, the Company had deposited $60,928 and $23,592, respectively, in restricted interest-bearing accounts, held as collateral for various credit instruments, which is included in Deferred charges and other assets in the consolidated balance sheet. 5. SEGMENT REPORTING The Company's operations are both product 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 with respect to its United Kingdom operations which conducted both funeral and cemetery operations in its European segment. The Company has reclassified certain prior year amounts to conform to the current period presentation with no effect on previously reported results of operations, financial condition or cash flows. The Company's reportable segment information is as follows:
Reportable Funeral Cemetery Segments - ---------------------------------------------------- ------------ ------------ ------------ Revenues from external customers: Three months ended June 30, 2003 .......................................... $ 427,567 $ 158,675 $ 586,242 2002 .......................................... $ 406,806 $ 176,617 $ 583,423 Six months ended June 30, 2003 .......................................... $ 866,854 $ 299,481 $ 1,166,335 2002 .......................................... $ 855,147 $ 329,542 $ 1,184,689 - ---------------------------------------------------- ------------ ------------ ------------ Gross profits: Three months ended June 30, 2003 .......................................... $ 67,576 $ 26,842 $ 94,418 2002 .......................................... $ 65,762 $ 25,511 $ 91,273 Six months ended June 30, 2003 .......................................... $ 154,825 $ 52,148 $ 206,973 2002 .......................................... $ 166,547 $ 43,890 $ 210,437 - ---------------------------------------------------- ------------ ------------ ------------
10 The following table reconciles gross profits from reportable segments to the Company's consolidated income (loss) before income taxes and cumulative effect of accounting change:
Three months ended Six months ended June 30, June 30, --------------------------- --------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Gross profits from reportable segments .......................... $ 94,418 $ 91,273 $ 206,973 $ 210,437 General and administrative expenses ....................... (36,268) (19,592) (57,679) (35,323) Gains and impairment (losses) on dispositions, net ........ (1,519) (187,709) 7,815 (190,621) Other operating expenses .................................. (1,724) (40,807) (1,724) (40,807) ---------- ---------- ---------- ---------- Operating income (loss) ......................................... 54,907 (156,835) 155,385 (56,314) Interest expense .......................................... (36,121) (41,406) (73,517) (84,792) Other income (expense), net ............................... 2,398 (1,984) 6,410 6,200 ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of accounting change .......................................... $ 21,184 $ (200,225) $ 88,278 $ (134,906) ========== ========== ========== ==========
11 The Company's geographic segment information is as follows:
North Other America Europe Foreign Total - ---------------------------------------------------------- ------------ ------------ ------------ ------------ Revenues from external customers: Three months ended June 30, 2003 .............................................. $ 433,217 $ 142,036 $ 10,989 $ 586,242 2002 .............................................. $ 460,116 $ 113,925 $ 9,382 $ 583,423 Six months ended June 30, 2003 .............................................. $ 867,597 $ 279,293 $ 19,445 $ 1,166,335 2002 .............................................. $ 922,588 $ 243,175 $ 18,926 $ 1,184,689 - ---------------------------------------------------------- ------------ ------------ ------------ ------------ Operating income (loss): Three months ended June 30, 2003 .............................................. $ 35,426 $ 16,247 $ 3,234 $ 54,907 2002 .............................................. $ (154,967) $ 11,574 $ (13,442) $ (156,835) Six months ended June 30, 2003 .............................................. $ 116,419 $ 33,946 $ 5,020 $ 155,385 2002 .............................................. $ (74,901) $ 30,071 $ (11,484) $ (56,314) - ---------------------------------------------------------- ------------ ------------ ------------ ------------ Gains and impairment (losses) on dispositions, net: Three months ended June 30, 2003 .............................................. $ (470) $ (1,049) $ -- $ (1,519) 2002 .............................................. $ (171,686) $ 214 $ (16,237) $ (187,709) Six months ended June 30, 2003 .............................................. $ 10,191 $ (2,376) $ -- $ 7,815 2002 .............................................. $ (174,635) $ 251 $ (16,237) $ (190,621) - ---------------------------------------------------------- ------------ ------------ ------------ ------------ Other operating expenses: Three months ended June 30, 2003 .............................................. $ (1,724) $ -- $ -- $ (1,724) 2002 .............................................. $ (40,807) $ -- $ -- $ (40,807) Six months ended June 30, 2003 .............................................. $ (1,724) $ -- $ -- $ (1,724) 2002 .............................................. $ (40,807) $ -- $ -- $ (40,807) - ---------------------------------------------------------- ------------ ------------ ------------ ------------ Depreciation and amortization: Three months ended June 30, 2003 .............................................. $ 43,287 $ -- $ 128 $ 43,415 2002 .............................................. $ 47,723 $ -- $ -- $ 47,723 Six months ended June 30, 2003 .............................................. $ 84,111 $ -- $ 246 $ 84,357 2002 .............................................. $ 87,453 $ -- $ -- $ 87,453 - ---------------------------------------------------------- ------------ ------------ ------------ ------------ Operating locations at June 30,: 2003 .............................................. 1,833 1,022 23 2,878 2002 .............................................. 1,897 1,156 26 3,079 - ---------------------------------------------------------- ------------ ------------ ------------ ------------
12 Included in the North America figures above are the following United States amounts:
Three months ended Six months ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Revenues from external customers ....... $ 413,563 $ 441,746 $ 829,417 $ 885,077 Operating income (loss) ................ $ 29,412 $ (157,570) $ 106,551 $ (82,273) Depreciation and amortization .......... $ 41,833 $ 46,515 $ 81,421 $ 85,005 Operating locations at June 30, ........ 1,678 1,750
Included in the European figures above are the following French amounts:
Three months ended Six months ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Revenues from external customers ....... $ 140,215 $ 112,132 $ 275,648 $ 223,652 Operating income ....................... $ 14,757 $ 11,647 $ 33,503 $ 27,647 Operating locations at June 30, ........ 1,006 1,138
During the six months ended June 30, 2003 and throughout 2002, the Company divested 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, "Accounting for the Impairment or disposal of Long Lived Assets," 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. Revenue and gross profit information of the Company's divested operations for the three and six months ended June 30, 2003 and 2002 are as follows:
North America Europe ------------------------------------------------------- ------------------------------------------------------ Three months ended Six months ended Three months ended Six months ended June 30, June 30, June 30, June 30, --------------------------- -------------------------- -------------------------- -------------------------- 2003 2002 2003 2002 2003 2002 2003 2002 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Funeral ...... $ 792 $ 8,232 $ 3,523 $ 20,465 $ -- $ -- $ -- $ 14,284 Cemetery ..... -- 5,129 658 9,872 -- -- -- 2,190 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 792 $ 13,361 $ 4,181 $ 30,337 $ -- $ -- $ -- $ 16,474 ============ ============ ============ ============ ============ ============ ============ ============ Gross Profits: Funeral ...... $ (923) $ (1,153) $ (1,952) $ (1,046) $ -- $ -- $ -- $ 3,359 Cemetery ..... (827) 1,675 (1,294) 2,057 -- -- 740 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ (1,750) $ 522 $ (3,246) $ 1,011 $ -- $ -- $ -- $ 4,099 ============ ============ ============ ============ ============ ============ ============ ============
13
Other Foreign Total -------------------------------------------- ----------------------------------------------- Three months ended Six months ended Three months ended Six months ended June 30, June 30, June 30, June 30, -------------------- -------------------- --------------------- --------------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- -------- Revenues: Funeral .... $ -- $ -- $ -- $ -- $ 792 $ 8,232 $ 3,523 $ 34,749 Cemetery ... -- -- -- -- -- 5,129 658 12,062 -------- -------- -------- -------- -------- -------- -------- -------- $ -- $ -- $ -- $ -- $ 792 $ 13,361 $ 4,181 $ 46,811 ======== ======== ======== ======== ======== ======== ======== ======== Gross Profits: Funeral .... $ -- $ -- $ -- $ -- $ (923) $ (1,153) $ (1,952) $ 2,313 Cemetery ... -- -- -- -- (827) 1,675 (1,294) 2,797 -------- -------- -------- -------- -------- -------- -------- -------- $ -- $ -- $ -- $ -- $ (1,750) $ 522 $ (3,246) $ 5,110 ======== ======== ======== ======== ======== ======== ======== ========
6. COMMITMENTS AND CONTINGENCIES 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 August 6, 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 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. 14 On November 5, 2002, James P. Hunter, III and the James P. Hunter, III 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 asserted claims against the Company and the Individual Defendants with respect to the Company's merger with ECI in 1999. Hunter also individually asserted 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. The arbitration was held in June 2003. On August 6, 2003, the Company received the decision of the arbitration panel in the Hunter arbitration. The amount of the award made under Texas securities laws was approximately $27.8 million comprising amounts relating to ECI stock and ECI stock options held by claimants, and attorney fees. The arbitration panel made no finding that the Company knew or should have known of facts that should have been disclosed to claimants. As a result of this decision, the Company recognized $15.0 million in general and administrative expenses in the second quarter of 2003. The recognition of this amount was necessary principally because one of the Company's insurance carriers that would have covered a portion of this decision is insolvent. The Company is reviewing the impact, if any, the Hunter award may have on other pending litigation. Several other lawsuits have been filed against the Company, the Individual Defendants and other defendants, including, in the first and second 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. 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 Hammer and Rottman matters. In the Hammer matter, the Texas state district court ordered the case to arbitration. To date, no further action has occurred. No arbitration demand has been filed. Copies of certain pleadings in these cases are filed as exhibits to this report. 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 July 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 15 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 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 takes 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, 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 has not been made by the trial judge. 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. 16 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. Nine individual claimants that were originally part of the putative class in the Consumer Lawsuit, and three additional persons, have filed ten separate lawsuits setting forth individual claims. These individual claimants are represented by counsel for plaintiffs in the Consumer Lawsuit. 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. 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 related lawsuits. 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. 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 SCI 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 alleged 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 was settled on May 2, 2003. This settlement was made without any admissions or finding of fault and included the Company agreeing to certain remedial measures as well as agreeing to make payments totaling $6 million. In addition, on May 21, 2003, the Special Assistant State Attorney for Palm Beach County, Florida, filed criminal charges against the Company, a Florida subsidiary and certain individuals. The criminal charges involve allegations of misconduct by the Company and its Florida subsidiary, including allegations similar to those in the Consumer Lawsuit. The Company intends to vigorously defend its interests in this matter. 17 7. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is presented below:
Three months ended Six months ended June 30, June 30, ---------- ---------- ---------- ---------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change (numerator): Income (loss) before cumulative effect of accounting change - basic ......................................... $ 14,379 $ (143,015) $ 56,648 $ (96,166) After tax interest on convertible debt ............... -- -- 6,649 -- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change - diluted ...................................... $ 14,379 $ (143,015) $ 63,297 $ (96,166) ---------- ---------- ---------- ---------- Net income (loss) (numerator): Net income (loss) - basic .................................. $ 14,379 $ (143,015) $ 56,648 $ (231,726) After tax interest on convertible debt ..................... -- -- 6,649 -- ---------- ---------- ---------- ---------- Net income (loss) - diluted ................................ $ 14,379 $ (143,015) $ 63,297 $ (231,726) ---------- ---------- ---------- ---------- Shares (denominator): Shares - basic ............................................. 299,351 293,872 298,563 293,263 Stock options ......................................... 493 -- 381 -- Convertible debt ...................................... -- -- 45,195 -- ---------- ---------- ---------- ---------- Shares - diluted ........................................... 299,844 293,872 344,139 293,263 ---------- ---------- ---------- ---------- Income (loss) per share before cumulative effect of accounting change: Basic ...................................................... $ .05 $ (0.49) $ .19 $ (0.33) Diluted .................................................... $ .05 $ (0.49) $ .18 $ (0.33) ---------- ---------- ---------- ---------- Net income (loss) per share: Basic ...................................................... $ .05 $ (0.49) $ .19 $ (0.79) Diluted .................................................... $ .05 $ (0.49) $ .18 $ (0.79) ---------- ---------- ---------- ----------
In the six months ended June 30, 2003, the Company's 6.75% convertible subordinated notes are dilutive to earnings and are included in the calculation of diluted earnings per share. The computation of diluted earnings per share excludes outstanding stock options and convertible debt in certain periods in which the inclusion of such options and debt would be antidilutive in the periods presented. Total options and convertible debt that could impact dilutive earnings per share are as follows:
Three months ended Six months ended June 30, June 30, -------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Antidilutive options .................................. 25,921 31,957 26,025 32,333 Antidilutive convertible debt ......................... 46,739 51,763 1,544 51,763 -------- -------- -------- -------- Total common stock equivalents excluded from computation ................................. 72,660 83,720 27,569 84,096 ======== ======== ======== ========
18 8. STOCKHOLDERS' EQUITY Stock Options The Company accounts for employee stock-based compensation expense under the intrinsic value method. Under this 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 expense for its options plans based on the fair value method, net income (loss) and per share amounts would have changed to the pro forma amounts indicated below.
Three months ended Six months ended June 30, June 30, --------------------------- --------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net income (loss) ............................................... $ 14,379 $ (143,015) $ 56,648 $ (231,726) Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense .......... (2,179) (3,384) (4,361) (6,768) ----------- ----------- ----------- ----------- Pro forma net income ............................................ $ 12,200 $ (146,399) $ 52,287 $ (238,494) =========== =========== =========== =========== Basic earnings (loss) per share: Net income (loss) ............................................... $ .05 $ (0.49) $ .19 $ (0.79) Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense .......... (.01) (.01) (.01) (.02) ----------- ----------- ----------- ----------- Pro forma basic earnings (loss) per share ....................... $ .04 $ (0.50) $ .18 $ (0.81) =========== =========== =========== =========== Diluted earnings (loss) per share: Net income (loss) ............................................... $ .05 $ (0.49) $ .18 $ (0.79) Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense .......... (.01) (.01) (.01) (.02) ----------- ----------- ----------- ----------- Pro forma diluted earnings (loss) per share ..................... $ .04 $ (0.50) $ 0.17 $ (.81) =========== =========== =========== ===========
The fair value of the Company's stock options used to compute the pro forma net income and per share disclosures is determined by calculating the estimated fair value at grant date using the Black-Scholes option-pricing model. 19 Accumulated Other Comprehensive Loss The components of Accumulated other comprehensive loss are as follows:
Foreign Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustment Adjustment Loss ------------ ------------ ------------- Balance at December 31, 2002 ............................... $ (170,591) $ (36,555) $ (207,146) Activity in 2003 ...................................... 45,562 -- 45,562 ------------ ------------ ------------- Balance at June 30, 2003 ................................... $ (125,029) $ (36,555) $ (161,584) ============ ============ ============= Balance at December 31, 2001 ............................... $ (261,846) $ (29,353) $ (291,199) Activity in 2002 ...................................... 13,154 -- 13,154 Reclassification adjustment for sold businesses ....... 47,479 -- 47,479 ------------ ------------ ------------- Balance at June 30, 2002 ................................... $ (201,213) $ (29,353) $ (230,566) ============ ============ =============
The components of Comprehensive income (loss) are as follows.
Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Comprehensive income (loss): Net income (loss) ...................... $ 14,379 $ (143,015) $ 56,648 $ (231,726) Total other comprehensive income ....... 25,409 11,637 45,562 60,633 ---------- ---------- ---------- ---------- Comprehensive income (loss) ......... $ 39,788 $ (131,378) $ 102,210 $ (171,093) ========== ========== ========== ==========
9. GAINS AND IMPAIRMENT LOSSES ON DISPOSITIONS AND OTHER OPERATING EXPENSES Six Months Ended June 30, 2003 and 2002 As dispositions occur in the normal course of business, gains or losses on the sale of such businesses are recognized in the income statement line item Gains and impairment (losses) on dispositions, net. Additionally, as dispositions occur related to the Company's ongoing asset sale programs, adjustments are made through this income statement line item to reflect the difference between actual proceeds received from the sale compared to the original estimates. Gains on dispositions for the six months ended June 30, 2003 and 2002 were $12,852 and $5,140, respectively. Impairment losses related to assets held for sale for the six months ended June 30, 2003 and 2002 were $14,449 and $159,693, respectively. Changes to previously estimated impairment losses were a net reduction to such losses of $9,412 in the first half of 2003 and an additional net loss of $36,068 in the first half of 2002. As described above, the sum of these three components are recognized in the income statement line item Gains and impairment (losses) on dispositions, net, and amounted to a net gain of $7,815 and a net loss of $190,621 in the first half of 2003 and 2002, respectively. In the first six months of 2002, Other operating expenses of $40,807 related to the termination of certain consulting and non-compete contractual agreements. 20 Previous Years' Charges Included in the Company's charge amounts in 2002, 2001, 2000 and 1999 are severance costs related to cost rationalization programs and terminated contractual relationships of former employees and executive officers, planned divestitures of certain North America and international funeral service and cemetery businesses, reductions in carrying values of equity investments, adjustments to market values of certain options associated with the Company's senior notes and relieving certain individuals from their consulting and/or covenant-not-to-compete contractual obligations. The majority of the remaining balance at June 30, 2003 of these original charge amounts related to severance costs and terminated consulting and/or covenant-not-to-compete contractual obligations will be paid by 2012. Of the $56,622 remaining liability at June 30, 2003, $19,178 is included in Accounts payable and accrued liabilities and $37,444 is included in Other liabilities in the consolidated balance sheet based on the expected timing of payments. The Company continues to adjust the estimates of certain items included in the original charge amounts as better estimates become available or actual divestitures occur. The activity related to these original charge amounts for the six months ended June 30, 2003 is detailed below. The adjustments made during the first half of 2003 to the original charge amounts were recognized in the income statement line item Gains and impairment (losses) on dispositions, net, as described above.
Utilization for six months ended June 30, 2003 ---------------------------- Original Balance at Balance at charge December 31, Adjustments June 30, amount 2002 during 2003 Cash Non-cash 2003 ------------ ------------ ------------ ------------ ------------ ------------ First Quarter 1999 Charge .... $ 89,884 $ 564 $ 122 $ 280 $ -- $ 406 Fourth Quarter 1999 Charge ... 272,544 48,254 (5,399) 3,608 14,267 24,980 Fourth Quarter 2000 Charge ... 434,415 -- (4,858) -- (4,858) -- 2001 Charges ................. 663,548 3,385 -- 204 (214) 3,395 2002 Charges ................. 292,979 27,990 723 3,334 (2,462) 27,841 ------------ ------------ ------------ ------------ ------------ ------------ Total ................... $ 1,753,370 $ 80,193 $ (9,412) $ 7,426 $ 6,733 $ 56,622 ============ ============ ============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company is the largest provider of funeral and cemetery services in the world. As of June 30, 2003, the Company operated 2,259 funeral service locations, 431 cemeteries and 188 crematoria located in 8 countries. The Company also has minority interest equity investments in funeral and cemetery operations in certain countries outside of North America. As of June 30, 2003, the Company's North America operations represented approximately 74% of the Company's consolidated revenues, 81% of consolidated gross profits and 64% 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 separated into Eastern and Western operations. The Eastern and Western operations in North America are managed by separate operational, sales 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 personnel. GOALS AND CHALLENGES The Company's operational goals are to grow its existing base of funeral and cemetery revenues while diligently managing its cash expenses. In addition to reducing debt, the Company will also examine investment opportunities to grow its North America funeral and cemetery operations where appropriate investment returns can be reasonably expected using its cash flows from operations and 21 significant cash on hand. These potential growth opportunities could include acquisitions of funeral service locations and cemeteries in large or strategic North America markets, additional construction of funeral service locations on Company-owned cemeteries and the development of high-end cemetery property inventory. The Company's financial objectives in 2003 focus on generating strong cash flows, completing asset divestitures and reducing debt to further improve the capital structure. The Company is targeting a "BB" credit rating from Standard & Poor's and a "Ba2" credit rating from Moody's, with general access to the capital markets. The Company's current ratings with these agencies are "BB-" and "B1", respectively. The Company and the death care industry face certain challenges in growing funeral and cemetery revenues. The primary challenges include a lack of near-term growth in the number of deaths and an increasing trend toward cremation. Although the United States Census Bureau projects that the numbers of deaths will grow up to 1% annually through 2010, modern advances in medicine and healthier lifestyles could reduce the numbers of deaths during this time. In recent months, the industry has experienced a meaningful reduction in the numbers of deaths. In the first six months of 2003, the Company's North American comparable funeral volume declined 3.5%. The Company believes this trend is consistent with trends experienced by other companies in the funeral service and casket manufacturing industries and also with mortality data reported by the Centers for Disease Control and Prevention. An increasing trend toward cremation continues to put downward pressure on the Company's funeral and cemetery revenues and gross profits. Today, cremation services account for approximately 39% of the total funerals performed by the Company in North America. A cremation service typically has a lower average revenue and gross profit dollars than a traditional funeral service and also the cremation consumer may choose not to purchase cemetery property or merchandise. The Company has initiatives to address these challenges as part of its overall growth strategy as described below. STRATEGIC INITIATIVES The Company's growth strategy begins with developing the appropriate organizational structure and cultural environment that promotes teamwork, accountability and execution. In this regard, the Company is working to redesign all compensation programs with clear, specific and definable goals that are aligned with shareholder objectives. In the near-term there are a number of tactical actions that the Company believes will improve the infrastructure of the organization while at the same time drive improvements in earnings and cash flow. To generate sustainable growth over the longer term, the Company is focused on leveraging the power of its branded network of businesses and its strong cash flows. Near Term Focus The Company believes the following tactical initiatives will solidify the foundation on which to build and grow its funeral service and cemetery operations in the future while also improving results in the near-term. o Improving the cost structure through redesigning the sales organization and improving business and financial processes. o Increasing the impact of the Company's Dignity Memorial(R) branded funeral and cremation packages. o Driving accountability and improved results through local market action plans. The Company has recently implemented significant changes to the structure and processes of its sales organization designed to reduce costs and improve cash flows in 2003 while improving the quality of its sales efforts. Examples of these changes include eliminating ineffective lead procurement programs, incentive travel programs and other inefficient sales activities and shifting to a sales model based on personal referrals, redesigning sales management compensation programs to profit-based measures from revenue-based measures and reducing sales management positions. The Company is also shifting to a compensation model for its sales counselors that is variable and directly related to the production of new business, but not solely based on commissions. The Company is currently in the process of improving business and financial processes and systems that support its North America funeral and cemetery operations with a focus on improving efficiency and eliminating unnecessary costs and expenses. Examples of these improvements include replacing three separate contract entry systems with one system for funeral home, cemetery and trust administration, outsourcing certain accounting functions including accounts payable, payroll and trust administration to third-party 22 providers, and streamlining and standardizing management financial reports to focus on key performance measures that are aligned with shareholder objectives. These initiatives are expected to meaningfully reduce overhead costs beginning in 2004. 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 through the Company's network on an atneed and preneed basis. The Dignity Memorial(R) funeral and cremation packages are designed to simplify customer decision-making and include products and services which have traditionally not been available through funeral service locations. These products appeal to both cremation and burial consumers and include a 24-Hour Compassion Helpline, legal services membership, bereavement travel discounts, internet memorial archive capabilities and the Aftercare(R) Planner - an exclusive, comprehensive organizing system that helps families manage the many business details that arise after a death occurs. The Company's goal in 2003 is to continue to increase the sales of Dignity Memorial(R) packaged funeral plans, which on average result in incremental revenue per service to the Company of more than $2,000 compared to non-Dignity Memorial(R) packaged sales. Other near term initiatives include the development and implementation of local market action plans designed to grow funeral and cemetery revenues and profits. In every funeral and cemetery operation, each local manager has identified the strengths, weaknesses, opportunities and threats of their local market and developed action plans around it that include measurable objectives, necessary resources, and a timetable for completion. These local market action plans provide an important measurement tool and further drive accountability within the organization. Framework for Long-term Growth In addition to the Company's tactical initiatives described above to improve its North America funeral and cemetery operations in the near-term, the Company is currently developing a framework for its long-term strategic plan with an emphasis on three key concepts that will drive future growth in shareholder value: o Growing core revenues and profits from existing businesses. o Expanding in large or strategic markets in North America through capital investment. o Investing in the Company's human capital. The Company believes it must attract new customers to its existing businesses 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 leverages the power of the Company's Dignity Memorial(R) national brand in North America and its size as a national company. The Company's marketing programs will utilize information from the more than nine million consumers in its collective databases to determine geographic, demographic and lifestyle factors of its consumers. The Company is currently testing new television, radio and print advertising that, if successful, will be launched on a nationwide basis. In addition, the Company will continue to capitalize on its nationwide network of providers and develop affinity relationships with organizations containing large groups of individuals to whom the Company could exclusively market its products and services. To grow its existing businesses, the Company is also focused on enhancing its sales opportunities through improved merchandising techniques. In the Company's funeral service locations, testing is being done to consider potential modifications to its casket selection rooms to further promote the sales of Dignity Memorial(R) packaged plans. Within the Company's cemetery segment, initiatives are underway to employ a tiered-product marketing strategy that emphasizes a wide range of product offerings with particular emphasis on building strategic high-end property development projects. To grow its core revenues and profits, the Company is also refining its strategies to address the growing trend toward cremation. To enhance its cremation revenues and profits, the Company is focused on utilizing better marketing and merchandising methods to increase sales of products and services aimed specifically at cremation consumers. In the near term, sales of Dignity Memorial(R) cremation plans can have a meaningful impact as these sales on average result in more than $1,200 of incremental revenue per service to the Company compared to non-Dignity cremation sales. The Company is also currently developing new displays to be used in the arrangement process that clearly explain the products and services available to cremation consumers. Within its cemetery segment, the Company is promoting its cremation gardens, which are separate sections located within certain of the Company's cemeteries where 23 cremated ashes can be permanently placed. Comprehensive training programs are being developed to support and drive these key initiatives, as well as focus on creating a personal and meaningful experience for the cremation consumer. The Company's long-term growth strategy also addresses plans to expand its funeral and cemetery network in North America where investment returns in excess of capital costs can be reasonably expected. The Company will focus future growth capital deployment through acquisition or construction in the top 150 markets in the United States. The Company is targeting these large markets because they offer several advantages: more than 70% of the U.S. population resides in these markets, the markets have a tendency to be less dependent on local heritage, they are more conducive to clustering and contemporary marketing strategies and it is easier to attract quality management. In smaller markets, the Company will consider recruiting independent funeral providers to join the Dignity Memorial(R) network in a franchise relationship where the Company receives an annual fee and earns cash for Dignity Memorial(R) services and products sold and affinity services performed, but does not have its capital at risk. At the end of June 2003, the Company had approximately 170 franchised providers. When combined with the Company's network capabilities, the Dignity Memorial(R) network has the ability to provide services to approximately 74% of the U.S. population. The Company also believes it must invest in its human capital and resources. Attracting, hiring, developing and retaining high quality management and employees is critical to the success of the long-term strategic plan. In the near term, the Company is focusing its efforts on leadership and management development. Over the longer term, the Company will be developing a comprehensive training program called "Dignity University" that incorporates required specific curriculum for each job type within the Company using a combination of traditional classroom, web-based courses, virtual classroom and on-the-job training for the more than 20,000 individuals that the Company employs. CRITICAL ACCOUNTING POLICIES, ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS The Company's consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. These critical accounting policies should be read in conjunction with the annual report filed with the U.S. Securities and Exchange Commission on Form 10-K, for the year ended December 31, 2002. USE OF ESTIMATES In the second quarter of 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 $4.7 million of additional amortization related to this change in estimate during the six months ended June 30, 2003 compared to the same period of 2002. ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS New Accounting Pronouncements 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 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 adopted SFAS No. 143 during the first quarter of 2003 with no effect on its results of operations, financial condition 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." The Company adopted SFAS No. 145 during the first quarter of 2003 as it relates to the classification of extinguishments of debt for all periods presented. 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. Gains and losses from early extinguishments of debt are included in Other income in the consolidated statement of operations for all periods presented. The Company has recorded $1,903 as gains from the early extinguishment of debt in Other income for the six months ended June 30, 2003 and reclassified $3,423 related to the prior year period to Other income, which was previously reported as an extraordinary loss. 24 The other provisions of SFAS No. 145 were generally effective for transactions occurring after May 15, 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 No. 45 clarifies the disclosures required by a guarantor about its obligations and it requires guarantors 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 were effective for financial statements of periods that end after December 15, 2002. There have been no material changes in the guarantees related to FIN No. 45 as disclosed by the Company in its 2002 annual report on Form 10-K. 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 provisions of FIN No. 46 are effective immediately for all enterprises with variable interests in variable interest entities created after January 31, 2003. A public entity with a variable interest in a variable interest entity created before February 1, 2003 shall apply the provisions of FIN No. 46 in the first fiscal year or interim period beginning after June 15, 2003. As a result of the adoption of FIN No. 46, the Company believes it will be required to consolidate, as of July 1, 2003, its prearranged funeral, cemetery merchandise and services and endowment care trust funds, as well as certain cemeteries managed, but not owned, by the Company. The Company is currently assessing the impact, if any, on its results of operations, financial condition or cash flows as a result of potentially consolidating such trust funds. However, the Company believes it will recognize an asset and equal liability in its Consolidated Balance Sheet of approximately $630 million as a result of consolidating the endowment care trust funds. The Company also believes, however, it will recognize a pretax charge of approximately $20 to $30 million representing the cumulative effect of an accounting change in the third quarter of 2003, primarily as a result of consolidating certain cemeteries not owned by the Company. RESULTS OF OPERATIONS The following table highlights the consolidated results of operations for the three months ended June 30, 2003 and 2002.
Three months ended (In millions, except per share amounts) June 30, ------------------------ 2003 2002 ---------- ---------- Total revenues ......................... $ 586.2 $ 583.4 Total gross profits .................... 94.4 91.3 Net income / (loss) .................... 14.4 (143.0) Diluted earnings / (loss) per share .... $ .05 $ (.49)
Revenues increased in the second quarter of 2003 compared to the second quarter of 2002. Favorable currency effects in the Company's French funeral operations helped to offset the negative impact from asset dispositions and decreases in the Company's North American cemetery revenues. Gross profits for the second quarter of 2003 increased $3.1 million or 3.4%, led by significant profit improvements in the Company's North America cemetery and French funeral businesses. The Company reported net income of $14.4 million and diluted earnings per share of $.05 during the second quarter of 2003 compared to a net loss of $143.0 million and diluted loss per share of $.49 in the second quarter of 2002. The net loss reported in 2002 was impacted by an impairment loss of $187.7 for certain funeral and cemetery operations being held for sale and other operating expenses of $40.8 million associated with the termination of certain consulting and non-compete contractual obligations. 25 Detailed Comparable Operating Results - Three Months Ended June 30, 2003 and 2002 The following table and segment analysis summarizes the Company's comparable results for the three months ended June 30, 2003 and 2002. Comparable financial information excludes operations that have been acquired or constructed after January 1, 2002 and operations that have been divested or joint ventured by the Company prior to June 30, 2003. Comparable financial results are meant to be reflective of the Company's "same store" results of operations.
(In millions) Three months ended June 30, 2003 -------------------------------------------------------------------------------------- Comparable -------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue ------- ------- ------ ------- ------- ------- ------ ------- Revenues: Funeral ............................ $ 282.1 65.2% $142.1 100.0% $ 2.3 21.1% $426.5 72.9% Cemetery ........................... 150.3 34.8% -- --% 8.6 78.9% 158.9 27.1% ------- ----- ------ ----- ------ ----- ------ ----- $ 432.4 100.0% $142.1 100.0% $ 10.9 100.0% $585.4 100.0% ======= ===== ====== ===== ====== ===== ====== ===== Gross profit and margin percentage: Funeral ............................ $ 51.7 18.3% $ 16.0 11.3% $ 0.9 39.1% $ 68.6 16.1% Cemetery ........................... 25.3 16.8% -- --% 2.3 26.7% 27.6 17.4% ------- ---- ------ ---- ------ ---- ------ ---- $ 77.0 17.8% $ 16.0 11.3% $ 3.2 29.4% $ 96.2 16.4% ======= ==== ====== ==== ====== ==== ====== ====
Three months ended June 30, 2002 -------------------------------------------------------------------------------------- Comparable -------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue ------- ------- ------ ------- ------- ------- ------ ------- Revenues: Funeral ............................ $ 282.9 63.3% $113.9 100.0% $ 1.7 18.1% $398.5 69.9% Cemetery ........................... 163.8 36.7% -- --% 7.7 81.9% 171.5 30.1% ------- ----- ------ ----- ------ ----- ------ ----- $ 446.7 100.0% $113.9 100.0% $ 9.4 100.0% $570.0 100.0% ======= ===== ====== ===== ====== ===== ====== ===== Gross profit and margin percentage: Funeral ............................ $ 54.6 19.3% $ 11.5 10.1% $ 0.7 41.2% $ 66.8 16.8% Cemetery ........................... 21.8 13.3% -- --% 2.1 27.3% 23.9 13.9% ------- ---- ------ ---- ------ ---- ------ ---- $ 76.4 17.1% $ 11.5 10.1% $ 2.8 29.8% $ 90.7 15.9% ======= ==== ====== ==== ====== ==== ====== ====
Comparable Funeral Segment Analysis
Comparable funeral services performed ------------------------------------------- North Other America Europe Foreign Total ------- ------ ------- ----- Three months ended June 30, 2003 65,352 33,353 1,300 100,005 2002 66,402 33,512 841 100,755
Although the number of funeral services performed in North America declined 1.6%, funeral revenues remained flat quarter over quarter. A 2.2% increase in the average revenue per funeral service helped to offset the decline in funeral services performed and lower levels of general agency revenues associated with insurance funded prearranged funeral sales. This increase in average revenue per funeral service was achieved despite an increase in cremation services during the quarter, which typically carry a lower average 26 revenue and is attributable to the success of the Company's Dignity Memorial(R) packaged funeral plan sales initiative. The Company believes the decline in the number of funeral services performed during the quarter is primarily attributable to declines in the number of deaths in North America as evidenced by similar trends experienced by other companies in the funeral service and casket industries, as well as mortality data reported by the Centers for Disease Control and Prevention. The North America funeral gross margin was 18.3% versus 19.3% in the prior year quarter. The gross margin decline was primarily a result of fewer than expected funeral services performed on a predominantly fixed cost structure, particularly as it relates to personnel costs. North America funeral locations had an average cremation rate of 39.3% compared to 37.9% in the prior year quarter. The average revenue per cremation service increased 2.7% over the prior year quarter due to increased sales of Dignity Memorial(R) packaged cremation plans, which offer consumers a broad array of unique cremation products and services. In North America, 31.6% of funeral services performed were previously prearranged compared to 31.3% in the prior year quarter. Revenues from the performance of prearranged funeral contracts had an average revenue per funeral service of $4,021 in the second quarter of 2003 compared to $3,948 in the second quarter of 2002. Revenues and gross profits from funeral operations in France were $140.2 million and $15.8 million in the second quarter of 2003 compared to $112.1 million and $11.6 million in 2002. Included in 2003 results are positive effects of foreign currency translation of $26.8 million in revenues and $3.1 million in gross profits compared to 2002. Excluding the favorable currency effect, France's funeral revenues grew by $1.3 million and gross margin improved to 11.3% versus 10.4% in the prior year quarter. Comparable Cemetery Segment Analysis North America cemetery revenues decreased by $13.5 million or 8.2% compared to the prior year quarter. The decline in revenues is primarily attributable to fewer cemetery property development projects completed in the second quarter of 2003 compared to the second quarter of 2002 and lower levels of cemetery merchandise delivered during the quarter. Although cemetery revenues declined, the North America cemetery gross margin improved to 16.8% compared to 13.3% in the prior year quarter. The gross margin increase was primarily due to a reduction in selling costs as a result of significant changes to the Company's preneed sales structure and processes. Revenues and gross profits from cemetery operations in South America were $8.7 million and $2.3 million in the second quarter of 2003 compared to $7.7 million and $2.1 million in 2002. Included in 2003 results are negative effects of foreign currency translation of $0.3 million in revenues and $0.1 million in gross profits compared to 2002. Excluding the unfavorable currency effect, South America's cemetery revenues and gross profits increased 16.4% and 18.2%, respectively, compared to the prior year quarter. Other Income and Expenses The Company recognized a net loss of $1.5 million during the second quarter of 2003 in the income statement line item Gains and impairment (losses) on dispositions, net. As dispositions occur in the normal course of business, gains or losses on the sales of such businesses are recognized in this line item. Additionally, as dispositions occur related to the Company's ongoing North America asset sale programs, adjustments are made through this income statement line item to reflect the difference between actual proceeds received from the sale compared to the original estimates. During the second quarter of 2003, the Company sold its equity investment in Spain for net cash proceeds of $26.0 million and recognized a gain of $8.1 million included in Gains and impairment (losses) on dispositions, net. This gain was offset by impairment losses for several dispositions in North America during the quarter. The Company has three components of overhead costs in North America: general and administrative expenses, home office overhead and field overhead. Home office and field overhead costs are allocated to funeral and cemetery operations in North America while general and administrative expenses are disclosed in a separate line item on the income statement. Home office and field overhead costs totaled $38.5 million in the second quarter of 2003 compared to $39.7 million in the same period of 2002. Reductions in costs as a result of changes to the compensation structure and processes of the Company's preneed sales efforts helped to offset initial start up costs associated with the outsourcing of its accounts payable, payroll and trust administration functions. These outsourcing programs are expected to meaningfully reduce overhead costs beginning in 2004. In the second quarter of 2003, general 27 and administrative expenses were $36.3 million compared to $19.6 million in 2002. The increase in general and administrative expenses primarily resulted from $15.0 million recognized in June 2003 related to a decision in an arbitration matter. The recognition of this amount was necessary because one of the Company's insurance carriers that would have covered a portion of this decision is insolvent. General and administrative expenses were also impacted by increased professional fees and other costs associated with cash flow and profit improvement initiatives. The Company recognized $2.4 million of Other income during the second quarter of 2003 compared to an expense of $2.0 million in the prior year quarter. Other income consists of interest income earned from various investments, cash overrides received from the Company's former North American insurance company and gains on early extinguishments of debt. The increase in 2003 is a result of losses on early extinguishments of debt of $4.4 million recognized in the second quarter of 2002. Interest expense decreased $5.3 million or 12.8% in the second quarter of 2003 compared to the prior year quarter as a result of the significant debt reductions by the Company in the last twelve months. The Company's consolidated effective tax rate was 32.1% during the quarter compared to 28.6% in the prior year quarter. The increase in the effective tax rate is due to the utilization in previous years of the Company's net operating loss carry-forwards related to its French operations. Detailed Comparable Operating Results - Six Months Ended June 30, 2003 and 2002 The following table and segment analysis summarizes the Company's comparable results for the first six months of 2003 and 2002. Comparable financial information excludes operations that have been acquired or constructed after January 1, 2002 and operations that have been divested or joint ventured by the Company prior to June 30, 2003. Comparable financial results are meant to be reflective of the Company's "same store" results of operations.
(In millions) Six months ended June 30, 2003 -------------------------------------------------------------------------------------- Comparable -------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue ------- ------- ------- ------- ------- ------- -------- ------- Revenues: Funeral ............................ $ 580.3 67.2% $ 279.3 100.0% $ 3.7 19.1% $ 863.3 74.3% Cemetery ........................... 283.1 32.8% -- --% 15.7 80.9% 298.8 25.7% ------- ----- ------- ----- ------ ----- -------- ----- $ 863.4 100.0% $ 279.3 100.0% $ 19.4 100.0% $1,162.1 100.0% Gross profit and margin percentage: Funeral ............................ $ 120.4 20.7% $ 35.0 12.5% $ 1.4 37.8% $ 156.8 18.2% Cemetery ........................... 49.8 17.6% -- --% 3.6 22.9% 53.4 17.9% ------- ----- ------- ----- ------ ----- -------- ----- $ 170.2 19.7% $ 35.0 12.5% $ 5.0 25.8% $ 210.2 18.1% ======= ===== ======= ===== ====== ===== ======== =====
Six months ended June 30, 2002 -------------------------------------------------------------------------------------- Comparable -------------------------------------------------------------------------------------- North % of % of Other % of % of America revenue Europe revenue Foreign revenue Total revenue ------- ------- ------- ------- ------- ------- -------- ------- Revenues: Funeral ............................ $ 590.1 66.1% $ 226.7 100.0% $ 3.6 18.9% $ 820.4 72.1% Cemetery ........................... 302.1 33.9% -- --% 15.4 81.1% 317.5 27.9% ------- ----- ------- ----- ------ ----- -------- ----- $ 892.2 100.0% $ 226.7 100.0% $ 19.0 100.0% $1,137.9 100.0% Gross profit and margin percentage: Funeral ............................ $ 135.2 22.9% $ 27.6 12.2% $ 1.4 38.9% $ 164.2 20.0% Cemetery ........................... 37.7 12.5% -- --% 3.4 22.1% 41.1 12.9% ------- ----- ------- ----- ------ ----- -------- ----- $ 172.9 19.4% $ 27.6 12.2% $ 4.8 25.3% $ 205.3 18.0% ======= ===== ======= ===== ====== ===== ======== =====
28 Comparable Funeral Segment Analysis
Comparable funeral services performed ------------------------------------------------------- North Other America Europe Foreign Total ------- ------ ------- ----- Six months ended June 30, 2003..................... 135,114 69,872 2,148 207,134 2002..................... 139,958 71,472 1,788 213,218
Comparable North America funeral revenues decreased $9.8 million or 1.7% in the first six months of 2003 compared to 2002 primarily as a result of a decrease in the number of funeral services performed. Funeral services performed decreased 3.5% in the first half of 2003 compared to 2002. The Company believes the decline in funeral services performed is primarily attributable to declines in the number of deaths in North America as evidenced by similar trends experienced by other companies in the funeral service and casket industries, as well as mortality data reported by the Centers for Disease Control and Prevention. This decline was partially offset by an increase in the average revenue per funeral service of 2.4% during the period. The increase was primarily a result of selling more Dignity Memorial(R) packaged funeral plans, which offer consumers a broad array of unique products and services. The North America gross margin was 20.7% versus 22.9% in the prior year. The gross margin decline is primarily a result of fewer than expected funeral services performed on a predominantly fixed cost structure, particularly as it relates to personnel costs. The impact of fewer funeral services performed was partially offset by reductions in costs resulting from strategic changes in the Company's prearranged funeral sales activity. North American funeral locations had an average cremation rate of 39.2% compared to 37.5% in the prior period. The average revenue per cremation service increased 3.3% over the prior period, led by increased sales of Dignity Memorial(R) packaged cremation plans. In North America, 31.7% of funeral services performed were previously prearranged compared to 31.5% in the prior period. The average revenue associated with the performance of these funerals was $3,989 in the first half of 2003 compared to $3,921 in 2002. Revenues and gross profits from funeral operations in France were $275.6 million and $34.5 million in the second quarter of 2003 compared to $223.7 million and $27.6 million in 2002. Included in 2003 results are positive effects of foreign currency translation of $51.5 million in revenues and $6.5 million in gross profits compared to 2002. Excluding the favorable currency effect, France's funeral revenues slightly increased. An increase in the average revenue per funeral service helped to offset a decline in funeral services performed. France's gross margins excluding the favorable currency effect were 12.5% in the first six months of 2003 compared to 12.4% in 2002. As the Company's French operations were held for sale for the first half of 2003 and 2002, the French business had no depreciation and amortization for these periods. Comparable Cemetery Segment Analysis North American cemetery revenues decreased by $19.0 million or 6.3% compared to the prior period primarily due to lower levels of cemetery property sales and cemetery merchandise delivered during the period. Although cemetery revenues declined, the North America cemetery gross margin improved to 17.6% compared to 12.5% in the prior period. The gross margin increase was primarily due to a reduction in selling costs as a result of significant changes to the Company's preneed sales structure and process. Revenues and gross profits from cemetery operations in South America were $15.7 million and $3.6 million in the second quarter of 2003 compared to $15.4 million and $3.4 million in 2002. Included in 2003 results are negative effects of foreign currency translation of $1.8 million in revenues and $0.3 million in gross profits compared to 2002. Excluding the unfavorable currency effect, South America's cemetery revenues and gross profits increased 14.1% and 15.4%, respectively, compared to the prior year quarter. Other Income and Expenses The Company recognized a net gain of $7.8 million during the first six months of 2003 in the income statement line item Gains and impairment (losses) on dispositions, net, compared to a net loss of $190.6 million in 2002. As dispositions occur in the normal course of business, gains or losses on the sales of such businesses are recognized in this income statement line item. Additionally, as dispositions occur related to the Company's ongoing North America asset sale programs, adjustments are made through this line item 29 to reflect the difference between actual proceeds received from the sale compared to the original estimates. The $190.6 million loss reported in 2002 primarily related to an impairment charge for certain funeral and cemetery operations held for sale. In addition, in the first six months of 2002, the Company reported Other operating expenses of $40.1 million related to the termination of certain consulting and non-compete contractual obligations. The Company has three components of overhead costs in North America: general and administrative expenses, home office overhead and field overhead. Home office and field overhead costs are allocated to funeral and cemetery operations in North America while general and administrative expenses are disclosed in a separate line item on the income statement. Home office and field overhead costs totaled $76.9 million in the first six months of 2003 compared to $79.4 million in the same period of 2002. Reductions in costs as a result of changes to the compensation structure and processes of the Company's preneed sales efforts helped to offset initial start up costs associated with the outsourcing of its accounts payable, payroll and trust administration functions. These outsourcing programs are expected to meaningfully reduce overhead costs beginning in 2004. In the first half of 2003, general and administrative expenses were $57.7 million compared to $35.3 million in 2002. The increase in general and administrative expenses primarily resulted from $15.0 million recognized in June 2003 related to a decision in an arbitration matter. The recognition of this amount was necessary because one of the Company's insurance carriers that would have covered a portion of this decision is insolvent. General and administrative expenses were also impacted by the Company's decision in 2002 to implement new information systems. As a result of this decision, the Company accelerated the amortization of existing capitalized system costs and recorded $4.7 million of additional costs in the first six months of 2003 compared to 2002. General and administrative expenses in 2003 were also impacted by increased professional fees and other costs associated with cash flow and profit initiatives and costs to expense the Company's new long term incentive program. In 2002, the Company granted stock options which were not expensed. The Company recognized $6.4 million in Other income during the first six months of 2003 compared to $6.2 million in 2002. Other income consists of interest income earned from various investments, cash overrides received from the Company's former North American insurance company and gains on early extinguishments of debt. Interest expense decreased $11.3 million or 13.3% in the first six months of 2003 compared to the prior year as a result of the significant debt reductions by the Company. The Company's consolidated effective tax rate was 35.8% during the first half of 2003 compared to 28.7% in the first half of 2002. The increase in the effective tax rate is due to the utilization in the previous year of the Company's net operating loss carry-forwards related to its French operations. The Company is under audit by the Internal Revenue Service for the tax years 2001 and 2000. At the present time, the IRS has not proposed any significant tax adjustments. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial objectives in 2003 focus on the continued improvement of the Company's capital structure by further reducing debt, generating strong cash flows and completing asset divestitures. A goal of the Company is to obtain a "BB" credit rating from Standard and Poor's and a "Ba2" credit rating from Moody's, with general access to the capital markets. The Company's current ratings with these agencies are "BB-" and "B1", respectively.
June 30, 2003 December 31, 2002 ------------- ----------------- Cash and cash equivalents $ 158.0 $ 200.6 Total debt $ 1,735.8 $ 1,984.8
The Company believes it currently has strong liquidity. As of June 30, 2003, the Company had a cash balance of approximately $158 million. The Company's total debt less cash and cash equivalents decreased by $206.4 million or 11.6% during the first six months of 2003 reflecting strong cash flows provided by operating activities and the receipt of an unusual tax refund in the first quarter of 2003 of $94.5 million. In addition, at June 30, 2003, the Company had approximately $104 million of availability under its $185 million bank credit facility. The Company had no cash borrowings under this credit facility, but had issued approximately $81 million of letters of credit under the facility. At June 30, 2003, the Company had current maturities of long-term debt of $130.9 million primarily related to its senior notes due in April 2004 of $111.2 million. The maturity schedule for certain of its outstanding senior public notes due in the near and intermediate term was as follows: 30
Outstanding at (In millions) June 30, 2003 -------------- 7.375% senior notes due April 2004................... $ 111.2 8.375% senior notes due December 2004................ $ 50.8 6.0% senior notes due December 2005.................. $ 281.7
Based on the Company's current cash balance, its expectation of future annual cash flows, its anticipation of future asset divestiture and 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 term debt obligations as well as its operating needs. Sources and Uses of Cash Net cash provided by operating activities was $243.7 million for the six months ended June 30, 2003 compared to $158.4 million for the same period of 2002. The increase is primarily the result of cemetery operating improvements, an increase in unusual tax refunds and lower cash interest payments. Unusual cash tax refunds were $94.5 million in 2003 compared to $22.0 million in 2002. Cash interest payments were $71.4 million in the six months ended June 30, 2003 compared to $85.5 million in the same period of 2002. Net cash used by investing activities was $20.0 million for the six months ended June 30, 2003 compared to $228.1 million of net cash provided by investing activities in the same period of 2002. The decrease principally related to a reduction in proceeds from joint ventures and sales of equity investments and increases in capital expenditures. During the first quarter of 2002, the Company completed the joint venture of its United Kingdom operations, which resulted in $266.7 million in pretax cash proceeds. During the second quarter of 2003, the Company sold its remaining equity investment in its operations in Spain for pretax cash proceeds of $26.0 million. The Company's capital expenditures increased $7.7 million in the six months ended June 30, 2003 compared to the same period of 2002 due to a greater emphasis on maintenance capital spending in the Company's existing operations. Net cash used in financing activities was $270.2 million for the six months ended June 30, 2003 compared to $252.7 million for the same period of 2002. The net cash used in financing activities in both periods is related to the Company's continued debt reduction initiatives. 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 sales activities. The underlying obligations these surety bonds assure are recorded on the Company's consolidated balance sheet as Deferred prearranged funeral contract revenues and Deferred preneed cemetery contract revenues. The breakdown of surety bonds between funeral and cemetery prearrangements, as well as surety bonds for other activities, is as follows:
June 30, December 31, 2003 2002 -------- ------------ Prearranged funeral ................................................... $ 116.7 $ 108.3 Preneed cemetery: Merchandise and services ......................................... 176.6 172.8 Preconstruction .................................................. 21.1 22.6 -------- ------------ Bonds supporting prearranged funeral and cemetery obligations .... 314.4 303.7 -------- ------------ Bonds supporting prearranged business permits ......................... 4.9 4.9 Other bonds ........................................................... 5.6 6.1 -------- ------------ Total surety bonds outstanding ................................... $ 324.9 $ 314.7 ======== ============
31 As the Company sells prearranged funeral contracts and preneed cemetery contracts, the Company posts surety bonds in certain instances where allowed by applicable law. In these instances, the Company posts these surety bonds in lieu of trusting a certain amount of funds received from the customer. Generally, 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. For the six months ended June 30, 2003 and 2002, the Company had $50.0 million and $48.3 million, respectively, of cash receipts attributable to bonded sales. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs. 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 a surety bond, the Company would be required to obtain replacement surety 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. The Company does not currently believe it will be required to fund material future amounts related to these surety bonds. The Company is reviewing its strategy of using surety bonds to provide financial assurance to consumers related to the Company's prearranged funeral and preneed cemetery sales activities. The economics of this activity has recently changed as surety bonding programs have increased in cost. As the Company's financial condition and liquidity have improved, it is also more difficult for the Company to purchase its outstanding debt securities at a discount. Furthermore, the applicable Florida law which allows posting of surety bonds for prearranged contracts will expire December 31, 2004. 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 the six months ended June 30, 2003 and 2002, approximately $37.7 million and $35.2 million, respectively, were attributable to the state of Florida. If and when the Company decides to use trusting instead of surety bonding in its Florida operations, the Company estimates a negative impact to its cash flow from operations of approximately $15 to $20 million in the first annual period. In subsequent periods, the impact to cash flows from operations is not material. PREARRANGED FUNERAL AND PRENEED CEMETERY ACTIVITIES The Company believes an active funeral and cemetery prearrangement program can increase future market share in the markets in which the Company operates, and is an important component of the Company's revenue growth initiatives in North America. 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. 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 which vary with and are directly related to the production of new trust funded prearranged funeral contracts are deferred as selling costs and amortized over 12 years, a period representing the estimated life of the prearranged funeral contracts. Cemetery deferred selling costs, which also vary with and are directly related to the production of new cemetery contracts, are amortized into expense when the corresponding revenues are recognized. Other costs associated with the sales and marketing of prearranged contracts - lead procurement 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 (GA) revenues are based on a percentage per contract sold and are recognized when the insurance purchase transaction between the customer and the third party insurance provider has been completed. In the first quarter of 2003, the Company began recognizing as revenues such GA revenues, previously recorded as reductions to direct expenses. The Company has reclassified the prior year amounts to conform to the current period presentation with no effect on previously reported results of operations, financial condition or cash flows. GA revenues recognized in the six months ended June 30, 2003 and 2002 were 32 $16.0 million and $25.1 million, respectively. Compensation costs which vary with and are directly related to the production of new insurance funded prearranged funeral contracts are expensed as incurred and amounted to $9.5 million and $15.9 million for the six months ended June 30, 2003 and 2002, 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 an insurance subsidiary in 2000. These cash overrides are recorded in Other income in the consolidated statement of operations. The table below details North America funeral and cemetery prearranged production for the six months ended June 30, 2003 and 2002, and the related deferred selling costs incurred to procure the prearrangements. Additionally, the table reflects North America revenues recognized and North America previously deferred selling costs recognized in the consolidated statement of operations associated with previously prearranged production for the six months ended June 30, 2003 and 2002.
North America ---------------------------------------- (In millions) Funeral Cemetery ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- Origination: Prearranged production ...................... $ 174.2 $ 228.3 $ 115.9 $ 166.4 ======= ======= ======= ======= Deferred selling costs, net ................. $ 6.8 $ 9.5 $ 22.9 $ 24.6 ======= ======= ======= ======= Maturities: Previously prearranged production included in current period revenues .... $ 172.1 $ 177.7 $ 111.7 $ 130.8 ======= ======= ======= ======= Amortization of deferred selling costs in current period ...................... $ 7.5 $ 7.4 $ 17.8 $ 20.6 ======= ======= ======= =======
Generally, all or a certain portion of the funds collected for prearranged funeral or preneed cemetery contracts funded through trusts 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, generally to help alleviate 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 prearranged 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, funds collected from prearranged funeral contracts can be 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. As previously stated, deferred prearranged funeral or cemetery contract revenue is recognized in the consolidated statement of operations at the time the contract matures. 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 at the time of contract maturity. The cash flow activity from originating funeral production until the maturity of a 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 33 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 flows provided by the amount retained from funds collected from the customer and distributed trust earnings, reduced by 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 receivables associated with the contracts. The difference between the amounts of Deferred prearranged contract revenues and the prearranged receivables associated with such contracts represents future revenues to be recognized in which the associated cash has already been collected by the Company.
North America ---------------------------------------------------------------------- (In millions) Funeral Cemetery Total ---------------------- ---------------------- ---------------------- June 30, December 31, June 30, December 31, June 30, December 31, 2003 2002 2003 2002 2003 2002 -------- ------------ -------- ------------ -------- ------------ Deferred prearranged contract revenues, net ....... $3,641.8 $3,638.3 $1,644.8 $1,671.6 $5,286.6 $5,309.9 Deferred selling cost ............. $ 89.6 $ 90.1 $ 205.0 $ 203.3 $ 294.6 $ 293.4 Prearranged receivables, net: Trust related receivables .................. $1,004.8 $ 980.9 $ 858.4 $ 859.3 $1,863.2 $1,840.2 Third party insurance related receivables .......... $2,174.7 $2,175.5 $ -- $ -- $2,174.7 $2,175.5
The deferred prearranged contract revenue associated with prearranged funeral contracts and preneed cemetery contracts (net of an estimated allowance for cancellation) 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. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the "safe harbor" protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe," "estimate," "project," "expect," "anticipate" or "predict," that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however, many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. Important factors which could cause actual results of the Company to differ materially from those in forward-looking statements include, among others, the following: 34 1) Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g., marketable security values, as well as currency and interest rate fluctuations) that could negatively affect the Company, particularly, but not limited to, levels of trust fund income, interest expense and negative currency translation effects. 2) The outcomes of pending lawsuits and proceedings against the Company involving alleged violations of securities laws. 3) The outcomes of pending lawsuits in Florida involving certain cemetery locations, including criminal charges or other civil claims being filed against the Company, its subsidiaries or its employees. 4) The Company's ability to successfully implement its strategic plan related to producing operating improvements, strong cash flows and further deleveraging as discussed herein and in the Company's Form 10-K for the year ended December 31, 2002. 5) The Company's ability to successfully implement its plan to reduce costs and increase cash flows associated with significant changes being made to the Company's organization structure, process and quality of its sales efforts. 6) Changes in consumer demand and/or pricing for the Company's products and services due to several factors, such as changes in local number of deaths, cremation rates, competitive pressures and local economic conditions. 7) Changes in domestic and international political and/or regulatory environments in which the Company operates, including potential changes in tax, accounting and trusting policies. 8) Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace. 9) The Company's ability to successfully complete its ongoing process improvement and system implementation projects, including the Company's replacement of its North America point-of-sale information technology systems. 10) The Company's ability to successfully access surety and insurance markets at a reasonable cost. 11) The Company's ability to successfully exploit its substantial purchasing power with certain of the Company's vendors. For further information on these and other risks and uncertainties, see the Company's 2002 Annual Report on Form 10-K. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the Company, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the Company's exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the Company's Form 10-K for the year ended December 31, 2002. There have been no material changes to the disclosure on this matter made in such Form 10-K. ITEM 4. CONTROLS AND PROCEDURES As required by Rules 13a-15 and 15d-15 under the Securities Act of 1934, as amended (the "Exchange Act"), Robert L. Waltrip, the Company's Chief Executive Officer, and Jeffrey E. Curtiss, the Company's Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the Company's second fiscal quarter of 2003 (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's periodic filings under the Exchange Act. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information regarding legal proceedings is set forth in note six to the consolidated financial statements in Item 1 of Part I of this Form 10-Q, which information is hereby incorporated by reference herein. 35 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 7, 2003, the Company issued 46,951 shares of common stock to Mr. Sumner James Waring III, Vice President Western Operations of the Company. In exchange therefor, Mr. Waring cancelled the obligations of the Company to make payments to him under a noncompetition agreement between Mr. Waring and the Company. To determine the number of shares issued, the present value of the cancelled obligations ($161,981) was divided by the closing per share price of the common stock on May 7, 2003 ($3.45). This issuance was unregistered because it was a private transaction within the meaning of Section 4(2) of the Securities Act of 1933, as amended. On May 8, 2003, the Company issued 19,445 shares of common stock (or deferred common stock equivalents) to each of ten non-employee directors 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 8, 2003, the Company held its annual meeting of shareholders and elected five directors. The shares voting on the director nominees were cast as follows:
Abstentions or Nominee Votes for votes withheld ------- --------- -------------- Alan R. Buckwalter, III 250,344,363 17,538,521 Anthony L. Coelho 246,155,050 21,727,834 A.J. Foyt, Jr. 245,425,821 22,457,063 R.L. Waltrip 229,525,417 38,357,467 Edward E. Williams 247,963,939 19,918,945
In addition, the shareholders approved the selection of PricewaterhouseCoopers LLP as the Company's independent accountants for 2003. The shares voting were cast as follows:
Abstentions or Broker Votes for Votes against votes withheld non-votes ----------- ------------- -------------- --------- 261,043,417 6,634,180 205,287 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 First Amendment to 2001 Stock Plan for Non-Employee Directors dated May 8, 2003. 10.2 Second Amendment to Director Fee Plan dated May 8, 2003. 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 2003 and 2002. 31.1 Certification of Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Periodic Financial Reports by Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Periodic Financial Reports by Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. 36 99.1 Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.2 Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.3 Defendants' motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999). 99.6 Plaintiffs' Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.7 Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999). 99.8 Plaintiff's Original Petition filed December 28, 2000 in Cause No. 33701-01-01, Jack D. Rottman vs. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the __________ Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.16 to Form 10-K for the fiscal year ended December 31, 2000). 99.9 Defendants' Motion to Transfer Venue and Original Answer in response to the Original Petition referred to in Exhibit 99.8. (Incorporated by reference to Exhibit 99.17 to Form 10-K for the fiscal year ended December 31, 2000). 99.10 Plaintiff's Original Petition filed December 15, 2000, in Cause No. 2000-63917, Jack T. Hammer v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the 165th Judicial District Court of Harris County, Texas. (Incorporated by reference to Exhibit 99.18 to Form 10-K for the fiscal year ended December 31, 2000). 99.11 Defendants' Original Answer to the Original Petition referred to in Exhibit 99.10. (Incorporated by reference to Exhibit 99.19 to Form 10-K for the fiscal year ended December 31, 2000). 99.12 Plaintiffs' First Amended Demand for Arbitration and Complaint for Damages filed January 24, 2003 in Cash 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. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 2002). 37 (b) Reports on Form 8-K During the quarter ended June 30, 2003, the Company furnished a report on Form 8-K dated May 8, 2003 reporting (i) under "Item 7. Financial Statements and Exhibits" that attached as an exhibit was a press release dated May 8, 2003, and (ii) under "Item 9. Regulation FD Disclosure" that the Company issued the press release which disclosed financial results for the first quarter of 2003. In addition, the Company filed a report on Form 8-K dated May 8, 2003 reporting (i) under "Item 5. Other Events" that the Company issued a press release announcing the election of Alan R. Buckwalter, III to the Board of Directors and the retirement of E. H. Thornton, Jr., and (ii) under "Item 7. Financial Statements and Exhibits" that a copy of the referenced press release was attached as an exhibit. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 7, 2003 SERVICE CORPORATION INTERNATIONAL By: /s/ Jeffrey E. Curtiss -------------------------------- Jeffrey E. Curtiss Senior Vice President Chief Financial Officer and Treasurer (Principal Financial Officer) 38 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 First Amendment to 2001 Stock Plan for Non-Employee Directors dated May 8, 2003. 10.2 Second Amendment to Director Fee Plan dated May 8, 2003. 12.1 Ratio of earnings to fixed charges for the six months ended June 30, 2003 and 2002. 31.1 Certification of Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Periodic Financial Reports by Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Periodic Financial Reports by Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Consolidated Class Action Complaint filed September 3, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.2 Defendants' Answer to the Consolidated Class Action Complaint filed September 17, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.3 Defendants' motion to Dismiss the Consolidated Class Action Complaint filed October 8, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 5, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.4 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants' Motion to Dismiss the Consolidated Class Action Complaint filed November 24, 1999 in Civil Action No. H-99-280, In re Service Corporation International. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 1999). 99.6 Plaintiffs' Original Petition filed November 10, 1999 in Cause No. 32548-99-11, James P. Hunter, III and James P. Hunter, III Family Trust v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.5 to Form 10-Q for the fiscal quarter ended September 30, 1999). 99.7 Defendants' Original Answer in response to the Original Petition referred to in Exhibit 99.6. (Incorporated by reference to Exhibit 99.14 to Form 10-K for the fiscal year ended December 31, 1999). 99.8 Plaintiff's Original Petition filed December 28, 2000 in Cause No. 33701-01-01, Jack D. Rottman vs. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the __________ Judicial District Court of Angelina County, Texas. (Incorporated by reference to Exhibit 99.16 to Form 10-K for the fiscal year ended December 31, 2000). 99.9 Defendants' Motion to Transfer Venue and Original Answer in response to the Original Petition referred to in Exhibit 99.8. (Incorporated by reference to Exhibit 99.17 to Form 10-K for the fiscal year ended December 31, 2000). 99.10 Plaintiff's Original Petition filed December 15, 2000, in Cause No. 2000-63917, Jack T. Hammer v. Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers LLP; in the 165th Judicial District Court of Harris County, Texas. (Incorporated by reference to Exhibit 99.18 to Form 10-K for the fiscal year ended December 31, 2000). 99.11 Defendants' Original Answer to the Original Petition referred to in Exhibit 99.10. (Incorporated by reference to Exhibit 99.19 to Form 10-K for the fiscal year ended December 31, 2000). 99.12 Plaintiffs' First Amended Demand for Arbitration and Complaint for Damages filed January 24, 2003 in Cash 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. (Incorporated by reference to Exhibit 99.12 to Form 10-K for the fiscal year ended December 31, 2002).
EX-10.1 3 h07919exv10w1.txt 1ST AMEND.TO 2001 STOCK PLAN FOR NON-EMPLOYEE DIR Exhibit 10.1 FIRST AMENDMENT TO 2001 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS WHEREAS, the Board of Directors of Service Corporation International (the "Company") desires to amend the 2001 Stock Plan for Non-Employee Directors (the "Plan") so that the Plan shall not be applicable to any director emeritus; WITNESSETH Effective as of May 8, 2003, the Plan is hereby amended as follows: 1. The first sentence of Section 6 of the Plan is amended to read as follows in its entirety: Awards may be granted only to directors of the Company who, at the time of grant, are not employees of the Company or of any subsidiary of the Company. 2. The first sentence of Section 7 of the Plan as amended to read as follows in its entirety: The Board shall grant to each eligible director on the second Thursday in May of each year, beginning on May 10, 2001, Awards for such number of shares of Common Stock as determined by the Board, but which amount shall not exceed 15,000 shares per director in any year. 3. The Plan is amended to delete all references to "director emeritus." SERVICE CORPORATION INTERNATIONAL May 8, 2003 EX-10.2 4 h07919exv10w2.txt 2ND AMEND.TO DIRECTOR FEE PLAN Exhibit 10.2 SECOND AMENDMENT TO DIRECTOR FEE PLAN WHEREAS, the Board of Directors of Service Corporation International (the "Company") desires to amend the Service Corporation International Director Fee Plan (the "Plan") so that the Plan shall not be applicable to any director emeritus; WITNESSETH Effective as of May 8, 2003, the Plan is hereby amended as follows: 1. The sentence in Section 2 of the Plan is amended to read as follows in its entirety: Each director (a "Director") of the Board of Directors of the Company (the "Board") shall be eligible for participation in the Plan. 2. The Plan is amended to delete all references to "director emeritus." SERVICE CORPORATION INTERNATIONAL May 8, 2003 EX-12.1 5 h07919exv12w1.txt RATIO OF EARNINGS TO FIXED CHARGES . . . Exhibit 12.1 SERVICE CORPORATION INTERNATIONAL RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended June 30, 2003 2002 ---------- ---------- (Thousands, except ratio amounts) Income (loss) before income taxes and cumulative effect of accounting change ... $ 88,278 $(134,906) Undistributed income of less than 50% owned equity investees ................... -- -- Minority interest in income of majority owned subsidiaries that have not incurred fixed charges .......................................... 286 469 Add fixed charges as adjusted (from below) ..................................... 83,088 95,953 --------- --------- $ 171,652 $ (38,484) --------- --------- Fixed charges: Interest expense: Corporate ............................................................. $ 68,843 $ 81,546 Amortization of debt costs ............................................ 4,674 3,246 1/3 of rental expense .......................................................... 9,571 11,161 --------- --------- Fixed charges .................................................................. 83,088 95,953 Less: Capitalized interest .................................................... -- -- --------- --------- Fixed charges as adjusted ...................................................... $ 83,088 $ 95,953 ========= ========= Ratio (earnings divided by fixed charges) ...................................... 2.07 (A) ========= =========
(A) Due to the loss in the six months ended June 30, 2002, 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 and cumulative effects of accounting changes of $134,437. EX-31.1 6 h07919exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 Exhibit 31.1 CERTIFICATION I, Robert L. Waltrip, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Service Corporation International (the "registrant"); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2003 /s/ Robert L. Waltrip ------------------------------ Robert L. Waltrip Chairman of the Board and Chief Executive Officer EX-31.2 7 h07919exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 Exhibit 31.2 CERTIFICATION I, Jeffrey E. Curtiss, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Service Corporation International (the "registrant"); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2003 /s/ Jeffrey E. Curtiss ------------------------------ Jeffrey E. Curtiss Senior Vice President Chief Financial Officer and Treasurer EX-32.1 8 h07919exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 Exhibit 32.1 Certification of Chief Executive Officer I, Robert L. Waltrip, of Service Corporation International, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Service Corporation International. Dated: August 7, 2003 /s/ Robert L. Waltrip --------------------------------- Robert L. Waltrip Chairman of the Board and Chief Executive Officer EX-32.2 9 h07919exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 Exhibit 32.2 Certification of Principal Financial Officer I, Jeffrey E. Curtiss, of Service Corporation International, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Service Corporation International. Dated: August 7, 2003 /s/ Jeffrey E. Curtiss ------------------------------ Jeffrey E. Curtiss Senior Vice President Chief Financial Officer and Treasurer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----