FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
or
o | 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
Texas | 74-1488375 | |
(State or other jurisdiction of | (I. R. S. employer identification | |
incorporation or organization) | number) | |
1929 Allen Parkway, Houston, Texas | 77019 | |
(Address of principal executive offices) | (Zip code) |
713-522-5141
(Registrants 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 registrants common stock as of November 1, 2004 was 330,339,308 (net of treasury shares).
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SERVICE CORPORATION INTERNATIONAL
INDEX
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Three and Nine Months Ended September 30, 2004 and 2003
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September 30, 2004 and December 31, 2003
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Nine Months Ended September 30, 2004 and 2003
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Nine Months Ended September 30, 2004
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7-34 | ||||||||
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34-35 | ||||||||
35-37 | ||||||||
37-40 | ||||||||
40-46 | ||||||||
46-49 | ||||||||
49-56 | ||||||||
56-57 | ||||||||
57-58 | ||||||||
58-60 | ||||||||
60 | ||||||||
60 | ||||||||
60 | ||||||||
60-61 | ||||||||
62 | ||||||||
Form of Indemnification Agreement | ||||||||
First Amendment to Retirement Savings Plan | ||||||||
Ratio of earnings to fixed charges | ||||||||
Certification of CEO - Section 302 | ||||||||
Certification of CFO - Section 302 | ||||||||
Certification of CEO - Section 906 | ||||||||
Certification of CFO - Section 906 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SERVICE CORPORATION INTERNATIONAL
(In thousands, except per share amounts)
(See notes to unaudited consolidated financial statements)
3
SERVICE CORPORATION INTERNATIONAL
(In thousands, except share amounts)
(See notes to unaudited consolidated financial statements)
4
SERVICE CORPORATION INTERNATIONAL
(In thousands)
(See notes to unaudited consolidated financial statements)
5
SERVICE CORPORATION INTERNATIONAL
(In thousands)
(See notes to unaudited consolidated financial statements)
6
SERVICE CORPORATION INTERNATIONAL
1. Nature of Operations
Service Corporation International (SCI or the Company) is the worlds largest
provider of funeral and cemetery services. The Company owns and operates
funeral service locations, cemeteries and crematoria located in seven
countries. The Company also has a minority interest equity investment in
funeral operations in France. In addition to its cemetery and funeral
operations, the Company owns and operates Kenyon International Emergency Services, a
disaster response team that engages in mass fatality and emergency response
services.
The funeral service and cemetery operations consist of funeral service
locations, cemeteries, crematoria and related businesses. Personnel at the
funeral service locations provide all professional services relating to
funerals, including the use of funeral facilities and motor vehicles, and
preparation and embalming services. Funeral related merchandise (including
caskets, coffins, burial vaults, cremation receptacles, flowers and other
ancillary products and services) is sold at funeral service locations. Certain
funeral service locations contain crematoria. The Company sells preneed
funeral services whereby a customer contractually agrees to the terms of a
funeral to be performed in the future. The Companys cemeteries provide
cemetery property interment rights (including mausoleum spaces, lots and lawn
crypts) and sell cemetery related merchandise (including stone and bronze
memorials, burial vaults, casket and cremation memorialization products) and
services (primarily merchandise installations and burial openings and
closings). Cemetery items are sold on an atneed or preneed basis. Personnel
at cemeteries perform interment services and provide management and maintenance
of cemetery grounds. Certain cemeteries operate crematoria, and certain
cemeteries contain gardens specifically for the purpose of cremation
memorialization.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements for the three and nine months ended
September 30, 2004 and 2003 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 Companys
current report on Form 8-K filed September 2, 2004, which superseded the annual
report on Form 10-K filed with the U. S. Securities and Exchange Commission for
the year ended December 31, 2003, 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 expenses during the reporting period. As a result, actual
results could differ from these estimates.
7
The effective tax rate in the three months ended September 30, 2004 was an
expense of 24.9% compared to a benefit of 38.2% in the three months ended
September 30, 2003. The 2004 rate was favorably impacted by a $2,356 tax
benefit adjustment resulting from a change in estimated 2003 federal tax
liabilities. The tax benefit in the three months ended September 30, 2003 is
due to the net loss for the quarter. The effective tax rate in the nine months
ended September 30, 2004 was a benefit of 4.7% compared to an expense of 36.2%
in the same period of 2003. The unusual tax rate in the nine months ended
September 30, 2004 is due to non-cash tax benefits recognized from the joint
venture of the French operations consummated in March 2004 and the sale of the
Companys equity investment in the United Kingdom in the second quarter of
2004. For more information, see note fifteen to the consolidated financial
statements.
Equity Investments
At September 30, 2004, the Company had a minority investment in certain funeral
operations in France. The Company accounts for this investment using the
equity method of accounting for investments recorded in
Deferred charges and
other assets
on the Companys consolidated balance sheet.
Treasury Stock
The Company recently announced a share repurchase program authorizing the
investment of up to $100,000 to repurchase its common stock. The Company
makes
purchases in the open market or through privately negotiated
transactions subject to market conditions and normal trading
restrictions. The Company accounts for the repurchase of its common stock
under the par value method. The Company uses the average cost method on the
subsequent reissuance of treasury shares. Any resulting differences
between the
average cost and the current market value upon issuance of treasury stock to
the Companys 401(k) plans are expensed as compensation cost.
3. Accounting Changes and New Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board (FASB) reached
consensus on the guidance provided by Emerging Issues Task Force Issue 03-1
(EITF 03-1),
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.
The guidance is applicable to debt and
equity securities that are within the scope of FASB Statement of Financial
Accounting Standard (SFAS) No. 115,
Accounting for Certain Investments in
Debt and Equity Securities.
EITF 03-1 specifies that an impairment would be
considered other-than-temporary unless (a) the investor has the ability and
intent to hold an investment for a reasonable period of time sufficient for the
recovery of the fair value up to (or beyond) the cost of the investment and (b)
evidence indicating the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. EITF 03-1 was
scheduled to be effective for reporting periods ending after June 15, 2004.
The measurement and recognition provisions relating to debt and equity
securities have been delayed until the FASB issues additional guidance. The
Company adopted the disclosure provisions of EITF 03-1 during the period ended
June 30, 2004. The adoption of the measurement and recognition provisions will
not have a material impact on the consolidated financial statements, result of
operations or liquidity of the Company.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) No. 51.
This interpretation 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.
In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R).
8
Under the provisions of FIN 46R, the Company is required to consolidate
certain cemeteries and trust assets. Merchandise and service trusts and
cemetery perpetual care trusts are considered variable interest entities
because the trusts meet the conditions of paragraphs 5(a) and 5(b)(1) of FIN
46R. That is, as a group, the equity investors (if any) do not have sufficient
equity at risk and do not have the direct or indirect ability through voting or
similar rights to make decisions about the trusts activities that have a
significant effect on the success of the trusts. FIN 46R requires the Company
to consolidate merchandise and service trusts and cemetery perpetual care
trusts for which the Company is the primary beneficiary (i.e., those for which
the Company absorbs a majority of the trusts expected losses). The Company is
the primary beneficiary of a trust whenever a majority of the assets of the
trust are attributable to deposits of customers of the Company.
Consolidation of Trusts:
The Company implemented FIN 46R as of March 31, 2004,
which resulted in the consolidation of the Companys preneed funeral and
cemetery merchandise and service trust assets and the Companys cemetery
perpetual care trusts. No cumulative effect of an accounting change was
recognized by the Company as a result of the implementation of FIN 46R as it
relates to the consolidation of the trusts. The implementation of FIN 46R
affects certain line items on the Companys consolidated balance sheet and
statement of operations as described below; however, there is no impact to net
income in the statement of operations as a result of the implementation.
Additionally, the implementation of FIN 46R did not result in any net changes
to the Companys consolidated statement of cash flows; however, it does require
certain financing and investing activities to be disclosed. See notes four
through six to the consolidated financial statements.
Although FIN 46R requires consolidation of most of the merchandise and
service and perpetual care trusts, it does not change the legal relationships
among the trusts, the Company and its customers. In the case of merchandise
and service trusts, the customers are the legal beneficiaries. In the case of
cemetery perpetual care trusts, the Company does not have a legal right to the
perpetual care trust assets. For these reasons, upon consolidation of the
trusts, the Company recognizes non-controlling interests in its financial
statements to reflect third party interests in these trusts in accordance with
FASB Statement No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity
(SFAS 150). The Company
classifies deposits to merchandise and service trusts as non-controlling
liability interests and classifies deposits to cemetery perpetual care trusts
as non-controlling equity interests.
The Company records cash received from customers, which has not been
deposited in trusts as restricted cash in
Deferred charges and other assets
in
its consolidated balance sheet. At September 30, 2004, these pending deposits
totaled $10,800. The Company continues to account for amounts received from
customers prior to delivery of merchandise or services that are not required to
be deposited in merchandise and service trusts as deferred revenue.
Beginning March 31, 2004, the Company recognizes net realized investment
earnings of the merchandise and service trusts and perpetual care trusts, as
well as the related trustee investment expenses and taxes, within
Other income,
net
. The Company then recognizes a corresponding expense within
Other income,
net
representing the net realized earnings of those trusts that are
attributable to the non-controlling interest holders. The corresponding credit
for this expense is reflected in the Companys consolidated balance sheet in
Non-controlling interest in funeral and cemetery trusts
for merchandise and
service trusts or
Non-controlling interest in perpetual care trusts
for
cemetery perpetual care trusts. The sum of these expenses recorded in
Other
income, net
offset the net realized earnings of such trusts also recognized
within
Other income, net
. Accordingly, the Companys net income in the
consolidated statement of operations is not affected by consolidation of the
trusts in accordance with FIN 46R.
To the extent the earnings of the trusts are distributed prior to the
delivery of merchandise and/or services, a corresponding amount of
non-controlling interest is reclassified to deferred revenue until the
corresponding revenues are recognized. In the case of
merchandise and service trusts, the Company recognizes as revenues,
amounts previously attributed to non-controlling interests and deferred
revenues upon the performance of services and delivery of merchandise,
including earnings accumulated in these trusts. In the case of the cemetery
perpetual care trusts, distributable earnings are recognized in cemetery
revenues to the extent of qualifying cemetery maintenance costs.
Prior to the implementation of FIN 46R and the consolidation of the
trusts, monies received from customers and deposited into merchandise and
service trusts until maturity of the preneed contract were recorded as
receivables due from trust assets. Upon
9
implementation of FIN 46R, the Company
replaced receivables due from trust assets with the trust assets, at market, to
the extent the Company was required to consolidate the trusts.
An allowance for contract cancellation is provided based on historical
experience. An allowance is no longer provided on the monies associated with
the preneed contract that are held in trust, currently recorded as trust
assets, but previously recorded as receivables due from trust assets. As such,
the amount has decreased since the implementation of FIN 46R.
Both the merchandise and services trusts and the cemetery perpetual care
trusts hold investments in marketable securities that are classified as
available-for-sale by the Company under the requirements of Statement of
Financial Accounting Standards No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
(SFAS
115). In accordance with SFAS
115, available-for-sale securities of the trusts are recorded at fair value,
with unrealized gains and losses excluded from earnings and initially recorded
as a component of
Accumulated other comprehensive loss
in the Companys
consolidated balance sheet. Using the guidance in EITF Topic D-41,
Adjustments
in Assets and Liabilities for Holding Gains and Losses as Related to the
Implementation of FASB Statement No. 115
(Topic D-41), unrealized gains and
losses on available-for-sale securities of the trusts attributable to the
non-controlling interest holders are not recorded as
Accumulated other
comprehensive income (loss)
, but are recorded as an adjustment to either
Non-controlling interest in funeral and cemetery trusts
or
Non-controlling
interest in perpetual care trusts
. Therefore, unrealized gains and losses
attributable to the non-controlling interest holders are reclassified from
Accumulated other comprehensive income (loss)
to either
Non-controlling
interest in funeral and cemetery trusts
or
Non-controlling interest in
perpetual care trusts
. The gross effect from applying Topic D-41 on the
Companys
Accumulated other comprehensive income (loss)
is disclosed in note
fourteen of the consolidated financial statements. However, the Companys
Accumulated other comprehensive income (loss)
on the face of the balance sheet
is ultimately not affected by consolidation of the trusts.
For additional discussion of the Companys accounting policies after the
implementation of FIN 46R, see notes four through seven to the consolidated
financial statements.
Consolidation of Certain Cemeteries:
Effective as of March 31, 2004, the
Company consolidated certain cemeteries managed by the Company in accordance
with FIN 46R. The Company recognized an after tax charge of $14,462,
representing the cumulative effect of an accounting change, as a result of
consolidating these cemeteries. The results of operations and cash flows of
these cemeteries are included in the Companys consolidated statements of
operations and cash flows beginning March 31, 2004. Excluding the cumulative
effect of accounting change, the effect of consolidating these entities did not
have a significant impact on the Companys reported results of operations.
Insurance Funded Preneed Insurance Contracts
The Company has changed its method of accounting for insurance funded preneed
contracts as the Company has concluded that its insurance funded preneed
funeral contracts are not assets and liabilities as defined by Statement of
Financial Accounting Concepts No. 6,
Elements in Financial Statements.
Therefore, the Company has removed from its consolidated balance sheet amounts
relating to insurance funded preneed funeral contracts previously recorded in
Preneed funeral receivables and trust investments
and
Deferred preneed funeral
revenues
, which at December 31, 2003, were $3,505,094, respectively. The
removal of these amounts did not have an impact on the Companys consolidated
stockholders equity, results of operations or cash flows. See note four to
the consolidated financial statements for additional information on insurance
related preneed funeral balances.
Pension Plans
In December 2003, the FASB revised SFAS No. 132,
Employers Disclosures about
Pensions and Other Postretirement Benefits
(SFAS 132R). SFAS 132R requires
additional disclosures about the assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The Company has adopted the revised disclosure
requirements. The Companys pension plans are frozen with no cost benefits
accreting to participants except interest.
Effective January 1, 2004, the Company changed its accounting for gains
and losses on its pension plan assets and liabilities. The Company now
recognizes such gains and losses in its consolidated statement of operations as
such gains and losses are incurred under pension accounting. Prior to January
1, 2004, the Company amortized the difference between actual and expected
investment returns
10
and actuarial gains and losses over seven years (except to
the extent that settlements with employees required earlier recognition). The
Company believes the new method of accounting better reflects the economic
nature of the Companys pension plans and recognizes gains and losses on the
pension plan assets and liabilities in the year the gains or losses occur. As
a result of this accounting change, the Company recognized a charge for the
cumulative effect of an accounting change of $33,599 (net of tax) as of January
1, 2004. This amount represents accumulated unrecognized net losses related to
the pension plan assets and liabilities. In addition, for interim periods, the
Company records net pension expense or income reflecting estimated returns on
plan assets and obligations. The Company will recognize actual gains and
losses on plan assets and obligations as actuarial information becomes
available upon review of the annual remeasurement. See note ten to
the consolidated financial statements for additional
information on pensions.
The three and nine months ended September 30, 2003 pro forma amounts in
the table below reflect the new policy to recognize gains and losses on the
pension plans as incurred and reflect interim estimates as mentioned above.
4. Preneed Funeral Activities
The Company sells price-guaranteed preneed funeral contracts through various
programs. Because the services or merchandise will not be provided until the
future, most states and provinces require that all or a portion of the customer
payments under these contracts be protected for the benefit of the customers
pursuant to applicable law. Some or all of the funds may be required to be
placed into trust accounts or a surety bond may be posted in lieu of trusting
(collectively trust funded preneed funeral contracts). Alternatively, where
allowed, customers may purchase a life insurance or annuity policy from third
party insurance companies to fund their preneed funeral (insurance funded
preneed funeral contracts). The insurance policy proceeds, which include
increasing insurance benefits, will be used to pay the Company for the funeral
goods and services selected at the time of contract origination. Under either
customer funding option, the Company enters into a preneed funeral contract
with the customer to provide funeral services in the future. The contract
amounts associated with unfulfilled insurance funded preneed funeral contracts
are not reflected on the consolidated balance sheet. Effective March 31, 2004,
the Company changed certain aspects of its accounting for trust funded preneed
funeral contracts upon implementation of FIN 46R. For additional information,
see note three to the consolidated financial statements. After the change,
when a trust funded preneed funeral contract is consummated, the Company
records an asset (included in
Preneed funeral receivables and trust
investments
) and corresponding liability (included in
Deferred preneed funeral
revenues
) for the contract price. When the
Company receives payments from the customer, the Company deposits the amount
required by law into the trust and reclasses the corresponding amount from
Deferred preneed funeral revenues
into
Non-controlling interest in funeral and
cemetery trusts
. The Company deposited $8,542 and $32,770 into trusts during
the three and nine months ended September 30, 2004, respectively and withdrew
$18,509 and $38,817 from trusts during the three and nine months ended
September 30, 2004, respectively.
Direct selling costs related to trust funded preneed funeral contracts are
deferred and included in
Deferred charges and other assets
in the Companys
consolidated balance sheet. The deferred selling costs are expensed in
proportion to the corresponding trust funded preneed funeral contract revenue
when recognized. Deferred selling costs associated with trust funded preneed
funeral contracts were $111,953 and $113,920 at September 30, 2004 and at
December 31, 2003, respectively. Direct selling costs incurred pursuant to the
sales of insurance funded preneed funeral contracts are expensed as incurred.
11
Preneed Funeral Receivables and Trust Investments
Preneed funeral receivables and trust investments
, net of allowance for
cancellation, represent trust assets and customer receivables related to
unperformed, price-guaranteed trust funded preneed funeral contracts. The
components of
Preneed funeral receivables and trust investments
in the
Companys consolidated balance sheet at September 30, 2004 and December 31,
2003 are as follows:
An allowance for contract cancellation is provided based on historical
experience. An allowance is no longer provided on the monies associated with
the preneed contracts that are held in trust, currently recorded as trust
investments, but previously recorded as receivables due from trust assets. As
such, the amount has decreased since the implementation of FIN 46R.
Upon cancellation of a trust funded preneed funeral contract, a customer
is generally entitled to receive a refund of the funds held in trust. In many
jurisdictions, the Company may be obligated to fund any shortfall if the
amounts deposited by the customer exceed the funds in trust including
investment income. As a result, when realized or unrealized losses of a trust
result in trust funded preneed funeral contracts being under-funded, the
Company assesses such contracts to determine whether a loss provision should be
recorded. No loss amounts have been required to be recognized as of September
30, 2004 or December 31, 2003.
Preneed funeral receivables and trust investments
are reduced by the trust
investment earnings the Company has been allowed to withdraw in certain states
prior to maturity and amounts received from customers that are not required to
be deposited into trust, pursuant to various state laws. These earnings are
recorded in
Deferred preneed funeral revenues
until the service is performed or
the merchandise is delivered.
The cost and market values associated with funeral trust investments at
September 30, 2004 are detailed below. The market value of funeral trust
investments was based primarily on quoted market prices at September 30, 2004.
The Company periodically evaluates investments for other-than-temporary
impairment and as a result of its most recent review believes the unrealized
losses of $29,410 related to trust investments are temporary in nature. At
September 30, 2004, the Companys unrealized losses greater than one year in
duration primarily related to certain private equity and other investments.
12
Maturities of fixed income securities at September 30, 2004 are estimated
as follows:
During the three and nine months ended September 30, 2004, purchases of
available-for-sale securities included in trust investments were $269,884 and
$493,932, respectively and sales of available-for-sale securities included in
trust investments were $276,927 and $561,306, respectively. These transactions
resulted in $13,950 and $10,414 of realized gains and realized losses,
respectively for the three months ended September 30, 2004. For the nine
months ended September 30, 2004, sales transactions resulted in $29,981 and
$17,059 of realized gains and realized losses, respectively. The Company uses
the FIFO method to determine the cost of funeral trust available-for-sale
securities sold during the period.
Deferred Preneed Funeral Revenues
At September 30, 2004,
Deferred preneed funeral revenues
, net of allowance for
cancellation, represent future funeral service revenues including distributed
trust investment earnings associated with unperformed trust funded preneed
funeral contracts that are not held in trust accounts. Future funeral service
revenues and net trust investment earnings that are held in trust accounts are
included in
Non-controlling interest in funeral and cemetery trusts
. At December 31, 2003 and
prior to the implementation of FIN 46R,
Deferred preneed funeral revenues
represent the original price of a trust funded preneed funeral contract plus
the net trust investment earnings.
An allowance for contract cancellation is provided based on historical
experience. However, the amount has decreased since the implementation of FIN
46R, as the Company no longer provides an allowance for the deferred preneed
funeral revenues now included in
Non-controlling interest in funeral and
cemetery trusts
.
Insurance Funded Preneed Funeral Contracts
Not included in the consolidated balance sheet are insurance funded preneed
funeral contracts that will be funded by life insurance or annuity contracts
issued by third party insurers. The net amount of these contracts that have
not been fulfilled at September 30, 2004 and December 31, 2003, including
increasing insurance benefits and reduced by an allowance for cancellation, was
approximately $2,204,237 and $3,505,094 (of which $1,515,984 related to the
Companys French operations at December 31, 2003), respectively, and were
previously included in
Preneed funeral receivables and trust investments
with a
corresponding liability in
Deferred preneed funeral revenues
. The proceeds of
the life insurance policies or annuity contracts will be reflected in funeral
revenues as these funerals are performed by the Company.
13
5. Preneed Cemetery Activities
The Company sells price-guaranteed preneed cemetery contracts providing for
future property interment rights, merchandise or services in advance of need at
prices prevailing when the agreements are signed. Some or all of the funds
received under these contracts for merchandise or services may be required to
be placed into trust accounts, or a surety bond may be posted in lieu of
trusting, pursuant to applicable law. Effective March 31, 2004, the Company
changed certain aspects of its accounting for preneed cemetery contracts upon
implementation of FIN 46R. For additional information, see note three to the
consolidated financial statements. When the Company receives payments from the
customer, the Company deposits the amount required by law into the trust and
reclasses the corresponding amount from
Deferred preneed cemetery revenues
into
Non-controlling interest in funeral and cemetery trusts
. The Company deposited
$42,997 and $75,835 into the trusts during the three and nine months ended
September 30, 2004, respectively and withdrew $24,257 and $57,581 from the
trusts during the three and nine months ended September 30, 2004, respectively.
Direct selling costs related to preneed cemetery contracts are deferred
and included in
Deferred charges and other assets
in the consolidated balance
sheet. The deferred selling costs are expensed in proportion to the
corresponding revenue when recognized. Deferred selling costs related to
preneed cemetery contracts were $205,504 and $205,123 as of September 30, 2004
and December 31, 2003, respectively.
Preneed Cemetery Receivables and Trust Investments
Preneed cemetery receivables and trust investments
, net of allowance for
cancellation, represent trust investments and customer receivables (net of
unearned finance charges) for contracts sold in advance of when the property
interment rights, merchandise or services are needed. The components of
Preneed cemetery receivables and trust investments
in the consolidated balance
sheet at September 30, 2004 and December 31, 2003 are as follows:
Interest rates on cemetery contracts ranged from 3.5% to 15.7% for both
periods presented. The average term of a financed preneed cemetery contract is
approximately 4.6 years.
An allowance for contract cancellation is provided based on historical
experience with a corresponding decrease in
Deferred preneed cemetery revenues
.
The amount of the allowance has decreased since the implementation of FIN 46R.
An allowance is no longer provided on the monies associated with the preneed
contract that are held in trust, currently recorded as trust investments, but
previously recorded as receivables due from trust investments.
The cost and market values associated with the cemetery merchandise and
service trust investments at September 30, 2004 are detailed below. The market
value of cemetery trust investments was based primarily on quoted market prices
at September 30, 2004. The Company periodically evaluates investments for
other-than-temporary impairment and as a result of the Companys most recent
review believes the unrealized losses of $24,891 related to trust investments
are temporary in nature. At September 30, 2004, the Companys unrealized
losses greater than one year in duration primarily related to private equity
and other investments.
14
Maturities of fixed income securities at September 30, 2004 are estimated
as follows:
During the three and nine months ended September 30, 2004, purchases of
available-for-sale securities included in trust investments were $142,468 and
$426,831, respectively and sales of available-for-sale securities included in
trust investments were $185,794 and $470,090, respectively. These sale
transactions resulted in $13,553 and $12,215 of realized gains and realized
losses, respectively for the three months ended September 30, 2004. For the
nine months ended September 30, 2004, sales transactions resulted in $30,279
and $20,755 of realized gains and realized losses, respectively. The Company
uses the FIFO method to determine the cost of cemetery trust available-for-sale
securities sold during the period.
Deferred Preneed Cemetery Revenues
At September 30, 2004,
Deferred preneed cemetery revenues
, net of allowance for
cancellation, represent future preneed cemetery revenues including distributed
trust investment earnings associated with unperformed trust funded preneed
cemetery contracts that are not held in trust accounts. Future contract
revenues and net trust investment earnings that are held in trust accounts are
included in
Non-controlling interest in funeral and cemetery trusts
. At
December 31, 2003 and prior to the implementation of FIN 46R,
Deferred preneed
cemetery revenues
represent the original price of a trust funded preneed
cemetery contract plus the net trust investment earnings.
An allowance for contract cancellation is provided based on historical
experience. However, the amount has decreased since the implementation of FIN
46R, as the Company no longer provides an allowance for the deferred preneed
cemetery revenues now included in
Non-controlling interest in funeral and
cemetery trusts
.
6. Cemetery Perpetual Care Trusts
The Company is required by state or provincial law to pay into perpetual care
trusts a portion of the proceeds from the sale of cemetery property interment
rights. As a result of the implementation of FIN 46R, the Company has
consolidated the perpetual care trust investments with a corresponding amount
recorded as
Non-controlling interest in perpetual care trusts
. The Company
deposited $5,877 and $12,091 into trusts during the three and nine months ended
September 30, 2004, respectively and withdrew $11,951 and $17,616 from trusts
during the three and nine months ended September 30, 2004, respectively.
15
The cost and market value associated with trust investments held in
perpetual care trusts at September 30, 2004 are detailed below. The market
value of perpetual care trusts was based primarily on quoted market prices at
September 30, 2004. The Company periodically evaluates investments for
other-than-temporary impairments and as a result of its most recent review
believes the unrealized losses of $4,802 related to trust assets are temporary
in nature. There were no significant investments with unrealized losses at
September 30, 2004 greater than one year in duration.
Maturities of fixed income securities at September 30, 2004 are estimated
as follows:
During the three and nine months ended September 30, 2004, purchases of
available-for-sale securities in the perpetual care trusts were $284,909 and
$571,078, respectively and sales of available-for-sale securities in the
perpetual care trusts were $283,402 and $559,921, respectively. These sale
transactions resulted in $4,638 and $1,871 of realized gains and realized
losses, respectively for the three months ended September 30, 2004. For the
nine months ended September 30, 2004, these sales transactions resulted in
$8,225 and $5,553 of realized gains and realized losses, respectively. The
Company uses the FIFO method to determine the cost of perpetual care
trusts
available-for-sale securities sold during the period.
Distributable earnings from these perpetual care trust investments are
recognized in current cemetery revenues to the extent of qualifying cemetery
maintenance costs. Recognized earnings related to these perpetual care trust
investments were $9,974 and $7,428 for the three months ended September 30,
2004 and 2003, and $22,778 and $20,675 for the nine months ended September 30,
2004 and 2003, respectively.
7. Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual
Care Trusts
Non-Controlling Interest in Funeral and Cemetery Trusts
16
Effective March 31, 2004, the Company consolidated the merchandise and service
trusts associated with its preneed funeral and cemetery activities as a result
of the implementation of FIN 46R. Although FIN 46R requires the consolidation
of the merchandise and service trusts, it does not change the legal
relationships among the trusts, the Company and its customers. The customers
are the legal beneficiaries of these merchandise and service trusts, and
therefore, their interests in these trusts represent a non-controlling interest
in subsidiaries. For additional information, see note three to the
consolidated financial statements.
Non-Controlling Interest in Perpetual Care Trusts
The
Non-controlling interest in perpetual care trusts
reflected in the
consolidated balance sheet represents the cemetery perpetual care trusts, net
of the accrued expenses and other long-term liabilities of the perpetual care
trusts. For additional information, see note three to the consolidated
financial statements.
The components of
Non-controlling interest in funeral and cemetery trusts
and
Non-controlling interest in perpetual care trusts
in the Companys
consolidated balance sheet at September 30, 2004 are detailed below.
Debt Associated with Certain Trusts Consolidated by the Company
Certain trusts, consolidated with the adoption of FIN 46R and recorded in
Preneed funeral receivables and trust investments, Preneed cemetery receivables
and trust investments
and
Cemetery perpetual care trust investments
, have
indirect interests in real estate partnerships. These partnerships have
incurred indebtedness of $77,898 that is included in
Other liabilities
in the
consolidated balance sheet at September 30, 2004. The trusts obligation on
this indebtedness is limited to their investment in the respective
partnerships. The debt has interest rates ranging from 5.0% to 8.5% and
maturities between 2011 and 2019.
Other income, net
The components of
Other income, net
in the Companys consolidated statement of
operations for the three months ended September 30, 2004 are detailed below.
See notes three through six to the consolidated financial statements for further discussion of the amounts related to
the funeral, cemetery and perpetual care trusts.
17
The components of
Other income, net
in the Companys consolidated statement of
operations for the nine months ended September 30, 2004 are detailed below.
Amounts included in Other income within
Other income, net
primarily relate
to foreign currency gains and losses, interest income on notes receivable and
general agency commissions from third party insurance companies.
8. Debt
Debt was as follows:
18
The Companys consolidated debt had a weighted average interest rate of
7.08% and 6.95% at September 30, 2004 and December 31, 2003,
respectively. Approximately 99% of the total debt had a fixed interest rate at
September 30, 2004 and December 31, 2003.
Bank Credit Agreements
The Companys bank credit agreement, which was executed on August 11, 2004,
provides a total lending commitment of $200,000, including a sublimit of
$175,000 for letters of credit. The agreement, which matures August 2007,
replaces a $185,000 facility that was set to expire in July 2005. Upon
closing, the Company transferred $72,456 in letters of credit, which were
originally issued under the previously existing bank credit agreement. The new
bank credit facility provides the Company with greater flexibility in terms of
acquisitions, dividends and share repurchases. It is secured by the stock of
the Companys domestic subsidiaries and these domestic subsidiaries have
guaranteed the Companys indebtedness associated with this facility. The
facility contains certain financial covenants, including a minimum interest
coverage ratio, a maximum leverage ratio, maximum capital expenditure
limitations, minimum net worth requirements and certain cash distribution
restrictions. Interest rates for the outstanding borrowings will be based on
various indices as determined by the Company. The Company also will pay a quarterly
fee on the unused commitment, which ranges from 0.25% to 0.50%.
Debt Issuances and Additions
In connection with $250,000 of senior unsecured 6.75% notes due April 1, 2016,
issued on April 14, 2004 in an unregistered offering, the Company filed a
registration statement on September 2, 2004 with the Securities and Exchange
Commission pursuant to a Registration Rights Agreement. In accordance with the
terms of the Registration Rights Agreement, the interest rate on the new notes
increased by 0.25% for the period that the Company failed to file the
registration statement. During the period of July 14, 2004 to September 1,
2004, the interest rate on the notes increased by 0.25% for an aggregate
incremental interest expense of $83. On September 2, 2004, the interest rate
reverted to the stated rate of 6.75%. The majority of the holders of the unregistered notes
have exchanged for registered notes.
The holders of $221,633 of the Companys 6.75% convertible subordinated
notes due 2008 converted their holdings to equity on June 22, 2004, pursuant to
the terms of the notes. The Company paid $7,480 in accrued interest to the
holders. Simultaneously, the Company exercised its option by redeeming the
remaining outstanding $91,061 of the notes. The Company paid a total of
$97,649, including interest and premium, to the holders of the redeemed notes
and recognized a $5,606 loss on the early extinguishment of debt, recorded in
(Loss) gain on early extinguishment of debt
, in the consolidated statement of
operations during the quarter ended June 30, 2004.
Debt Extinguishments and Reductions
In March 2004, in connection with the joint venture of the Companys operations
in France, mortgage notes and other debt was reduced by approximately $24,194
for capital lease obligations related to vehicles used in the French
operations.
19
In connection with the pending sale of the Companys Argentina operations,
approximately $9,174 at September 30, 2004 and $9,694 at December 31, 2003 were
reclassified from mortgage notes and other debt to
Liabilities of discontinued
operations
in the consolidated balance sheet. For additional information
regarding this matter, see note sixteen to the consolidated financial
statements.
On April 15, 2004, as required by the terms of the agreement, the Company
repaid the remaining $111,190 of the 7.375% notes due 2004.
On April 22, 2004, the Company extinguished $200,000 aggregate principal
amount of the 6.00% notes due 2005, pursuant to the Offer to Purchase, dated
March 24, 2004. The Company paid $214,233 to the tendering holders, including
a premium and accrued interest. As a result of the transaction, the Company
recognized a loss on the early extinguishment of debt of $10,831, recorded in
(Loss) gain on early extinguishment of debt
, in the consolidated statement of
operations. In early May 2004, the Company also purchased $8,650 aggregate
principal amount of the 6.00% notes due 2005 in the open market. As a result
of these transactions, the Company recognized a loss of $333, recorded in
(Loss) gain on early extinguishment of debt
, in the consolidated statement of
operations.
Additional Debt Disclosures
At September 30, 2004 and December 31, 2003, the Company had deposited $188,176
and $95,325, respectively, in restricted, interest-bearing accounts that were
pledged as collateral for various credit instruments and commercial
commitments, including $135,000 included in
Other current assets
on the
consolidated balance sheet which are held in escrow for settlement of certain
litigation. The remaining $53,176 is included in
Deferred charges and other
assets
in the consolidated balance sheet.
9. Derivatives
The Company occasionally participates in hedging activities using a variety of
derivative instruments, including interest rate swap
agreements, cross-currency swap agreements and forward exchange contracts.
These instruments are used to hedge exposure to risk in the interest rate and
foreign exchange rate markets. The Company has documented policies and
procedures to monitor and control the use of derivative transactions, which may
only be executed with a limited group of creditworthy financial institutions.
The Company generally does not engage in derivative instruments for speculative
or trading purposes, nor is it a party to leveraged derivatives.
During the first quarter of 2004, the Company executed certain forward
exchange contracts, having an aggregate notional value of EUR 240,000 and a
corresponding notional value of $300,011 to hedge its net foreign investment in
France. Upon receipt of the net proceeds from the joint venture transaction,
the Company settled these derivative instruments and recorded a gain of $8,919
in
Other comprehensive income (loss)
in the consolidated statement of
stockholders equity, which was then recognized pursuant to the
sale of the Companys operations in France
in
Gains and impairment (losses) on dispositions, net
in the consolidated
statement of operations.
The Company also executed certain forward exchange contracts during the
first half of 2004, having an aggregate notional value of GBP 22,436 and a
corresponding notional value of $41,334, relating to the ultimate sale of its
minority investment in and the repayment of its note receivable from a funeral
and cemetery company in the United Kingdom. On April 8, 2004, the Company
received the expected proceeds and settled these derivative instruments,
recognizing a gain of $198, which was recorded in
Other income, net
in the
consolidated statement of operations during the three months ended June 30,
2004.
The Company was not a party to any derivative instruments at September 30,
2004 or December 31, 2003.
10. Retirement Plans
The Company has a non-contributory, defined benefit pension plan covering
approximately 40% of its United States employees (US Pension Plan), a
supplemental retirement plan for certain current and former key employees
(SERP), a supplemental retirement plan for officers and certain key employees
(Senior SERP) and a retirement plan for certain non-employee directors
(Directors Plan). The Company also has a 401(k) employee savings plan.
Effective January 1, 2004, the Company changed the accounting for gains
and losses on its pension plan assets and obligations. The Company recognizes
such gains and losses in its consolidated statement of operations in the year
such gains and losses are incurred. Prior to January 1, 2004, the Company
amortized the difference between actual and expected investment returns and
actuarial gains and losses over seven years (except to the extent that
settlements with employees required earlier recognition). For additional
discussion of this accounting change, see note three to the consolidated
financial statements.
20
Effective January 1, 2001, the Company curtailed its US Pension Plan,
SERP, Senior SERP and Directors Plan. As these plans have been frozen, the
participants do not earn additional benefit from additional years of service
and the Company does not incur new service cost.
Retirement benefits for the US Pension Plan are generally based on years
of service and compensation. Required contributions are actuarially determined
amounts consistent with the funding requirements of the Employee Retirement
Income Security Act of 1974. Assets of the pension plan consist of
core diversified and market neutral hedge funds, fixed income investments and marketable equity
securities.
Retirement benefits under the SERP are based on years of service and
average monthly compensation, reduced by benefits under the US Pension Plan
and Social Security. The Senior SERP provides retirement benefits based on
years of service and position. The Directors Plan provides for an annual
benefit to directors following their retirement, based on a vesting schedule.
Most foreign employees are covered by their respective foreign government
mandated or defined contribution plans that are adequately funded and are not
considered significant to the financial condition or results of operations of
the Company. The plans liabilities and their related costs are computed in
accordance with the laws of the individual countries and appropriate actuarial
practices.
The components of net periodic pension plan benefit cost for the three and
nine months ended September 30 were as follows:
The Company recorded net pension income of $1,655 for the nine months
ended September 30, 2004 based on actuarial information obtained from the
Plans annual remeasurement as of September 30, 2004. Due to the write off of the
$54,873 unrecognized net loss associated with the change in accounting
principle on January 1, 2004, the Companys amortization of unrecognized net
loss is $0 for the three and nine months ended September 30, 2004 compared to
$1,897 and $5,690 for the same periods of 2003.
The plans weighted-average assumptions used to determine the net pension
expense for the three and nine months ended September 30, 2004 and
2003 are as follows. The three and nine month periods ending September 30,
2004 reflect an adjustment based on results from the annual remeasurement. Due
to the curtailment of the plans in 2001, the assumed rate of compensation
increase is $0.
SERP, Senior SERP and Directors Plan
The retirement benefits under the SERP, Senior SERP and Directors Plan are
unfunded obligations of the Company. As of December 31, 2003, the benefit
obligation of the SERP, Senior SERP and Directors Plan was $33,764; however,
the Company holds various life insurance policies with the intent to use the
proceeds or any cash value buildup from such policies to assist in meeting, at
least to the extent of such assets, the Senior SERPs funding requirements.
The face value of these insurance policies is approximately $51,082 while the
cash surrender value of these insurance policies is approximately $33,470 as of
September 30, 2004. In July 2004, the Company paid off an $11,383 loan and
$517 in interest associated with these policies.
21
US Pension Plan
In March 2004, the
Company voluntarily contributed $20,000 to the
frozen US Pension Plan. The fair value of the plan assets as of September
30, 2004 is $88,383, compared to a projected benefit obligation of $110,649 at
December 31, 2003. As a result of the previously mentioned accounting change,
the minimum pension liability adjustment included in
Accumulated other
comprehensive loss
was $0 as of September 30, 2004 compared to $33,599 at
December 31, 2003.
The plans weighted-average asset allocations by asset category are as
follows:
Equity securities included shares of Company common stock in the amounts
of $0 and $7,138 (nine percent of plan assets) at September 30, 2004 and
December 31, 2003, respectively. On March 31, 2004, the plan assets were
rebalanced to include investments in core diversified and market neutral hedge
funds.
The primary investment objective of the plan is to achieve a rate of
investment return over time that will allow the plan to achieve a fully funded
status, while maintaining prudent investment return volatility levels. In
2004, the investment strategy was revised to have a lower percentage invested in traditional equity securities and fixed
income securities and instead include investments in hedge funds allowing for
reduced volatility with limited reduction of returns. The Company has an asset
allocation strategy of 35% traditional equity, 15% fixed income and 50% hedge
funds. The investment strategy is managed within ranges that are centered at
specific allocation targets. The specific allocations within the strategy, as
well as individual asset class ranges are as follows:
11. Segment Reporting
The Companys operations are both product and geographically based, and the
reportable operating segments presented below include funeral and cemetery
operations. The Companys geographic areas include North America, Europe and
Other Foreign. Other Foreign consists of the Companys operations in Singapore
and South America. Europe includes operations in Germany and France. The
Company conducts both funeral and cemetery operations in the North America,
Europe and Other Foreign geographic areas.
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.
22
The Companys reportable segment information is as follows:
The following table reconciles gross profits from reportable segments to
the Companys consolidated income from continuing operations before income
taxes and cumulative effects of accounting changes:
23
The Companys geographic area information is as follows:
Included in the North America figures above are the following United
States amounts:
(a) Prior year amounts are as of December 31, 2003.
24
Included in the Europe figures above are the following France amounts:
(a) Prior year amounts are as of December 31, 2003.
The changes in the carrying amounts of goodwill for the Companys two
segments are as follows:
12. Commitments and Contingencies
Payment of Purchase Obligations
In connection with certain acquisitions made by the Companys South America
operations, the Company entered into contingent purchase obligations with
certain former owners of those businesses. At December 31, 2003, the estimated
$53,000 obligation was recorded in
Other liabilities
in the consolidated
balance sheet. In July 2004, the Company paid $51,749 to satisfy this
obligation.
Litigation
The Company is a party to various litigation matters, investigations and
proceedings. For each of its outstanding legal matters, the Company evaluates
the merits of the case, its exposure to the matter, possible legal or
settlement strategies and the likelihood of an unfavorable outcome. If the
Company determines that an unfavorable outcome is probable and can be
estimated, it establishes the necessary accruals. Certain insurance policies
held by the Company may reduce cash outflows with respect to an adverse outcome
of these litigation matters. The Company accrues such insurance recoveries
when they become probable of being paid and can be reasonably estimated. The
following discussion describes certain litigation and proceedings as of
November 5, 2004.
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 Companys 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.
25
The plaintiffs in the Consolidated Lawsuit alleged that defendants
violated federal securities laws by making materially false and misleading
statements and failing to disclose material information concerning the
Companys preneed funeral business and other financial matters, including in
connection with the ECI merger. The Consolidated Lawsuit sought recovery of an
unspecified amount of monetary damages. A Motion to Dismiss the Consolidated
Lawsuit filed by the Company and the Individual Defendants has been pending
before the Court.
On April 20, 2004, the Company announced that it had entered into a
memorandum of understanding to settle the Consolidated Lawsuit. The terms of
the proposed settlement call for the Company to cause to be created a
settlement fund in May 2004 totaling $65,000 in settlement of the claims. The
Company and its insurance carriers have also entered into an agreement
providing for the payment by the Companys insurance carriers of $30,000
towards this settlement, which resulted in direct payments made by the Company
of approximately $35,000.
As a result of this proposed settlement, the Company recognized litigation
related expenses in
General and administrative expenses
, net of amounts to be
funded into escrow by the insurance carriers, of approximately $35,000 on a
pretax basis in the first quarter of 2004. During the second quarter of 2004, the Company deposited
$35,000 into escrow for this proposed settlement. This amount is included in
Other current assets
with a corresponding liability in
Accrued liabilities
in
the consolidated balance sheet. At a hearing on November 4,
2004, the court entered an order approving the settlement. Subject to
appeal, all claims under the Consolidated Lawsuit have been
dismissed. The Company may also
have additional potential liability for those who have opted out of the
Consolidated Lawsuit. The most significant opt out claim is the subject of the
T. Rowe Price Lawsuit discussed below.
Several other related lawsuits have been filed against the Company and the
Individual Defendants in Texas state courts by former SCI and ECI shareholders.
These lawsuits include the following matters:
No. 31820-99-2;
Charles Fredrick v. Service Corp. International;
In the
District Court of Angelina County, Texas, filed February 16, 1999.
No. 2004-28511;
Thomas G. Conway, John T Conway and Trust U/W/O George
M. Conway, Jr. v. Service Corporation International;
In the 127th Judicial
District Court of Harris County, Texas, filed May 28, 2004 (the Conway
Lawsuit).
No. 2004-429637;
T. Rowe Price Balanced Fund, Inc., et al. v. Service
Corporation International,
et al; In the 270th Judicial District Court,
Harris County, Texas, filed June 7, 2004 (the T. Rowe Price Lawsuit).
These lawsuits allege, among other things, violations of Texas securities
law and statutory and common law fraud, and seek compensatory and exemplary
damages. The plaintiffs in the Conway Lawsuit have not opted out of the
Consolidated Lawsuit, and therefore they are precluded from prosecuting the
Conway Lawsuit. For that reason, the Company expects the Conway Lawsuit to be
dismissed in the near future. The plaintiffs in the other lawsuits have opted
out of the Consolidated Lawsuit. In the other lawsuits, no discovery has
occurred and the Company is unable to determine whether an adverse outcome is
probable. The Company intends to aggressively defend such lawsuits.
The plaintiffs in the T. Rowe Price Lawsuit consist of investment
companies and trust funds who were former ECI and SCI shareholders and who have
opted out of the proposed settlement of the Consolidated Lawsuit. They allege
that the Company and the Individual Defendants violated the Texas Securities
Act by making materially false and misleading statements and failing to
disclose material information concerning the Companys business and other
financial matters, including in connection with the ECI merger. The T. Rowe
Price Lawsuit seeks recovery of at least $32,000 in actual damages plus
unspecified exemplary damages.
The plaintiffs in the Conway Lawsuit also filed a separate arbitration
styled
Thomas G. Conway et al v. Service Corporation International, et al;
Cause No. 70 Y 168 00748 02 before the American Arbitration Association (AAA)
(Conway action). The Conway action raised claims distinct from those claims
alleged in the Conway Lawsuit. The Company has recently settled the Conway
action.
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 (Consumer Lawsuit). The Consumer Lawsuit was filed December 19, 2001
and named the Company, a subsidiary and other related entities as defendants.
On August 19, 2003, the Court certified a class
26
comprising all persons with
burial plots or family members buried at Menorah Gardens & Funeral Chapels in
Florida. Excluded from the class definition were persons whose claims had been
reduced to judgment or had been settled as of the date of class certification.
The defendants appealed the trial courts order regarding class certification.
The plaintiffs alleged that defendants had 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 alleged that the above conduct
constituted negligence, tortious interference with the handling of dead bodies,
infliction of emotional distress, and violation of industry specific state
statutes, as well as the states Deceptive and Unfair Trade Practices Act. The
plaintiffs sought an unspecified amount of compensatory and punitive damages.
The Court granted plaintiffs motion for leave to amend their complaint to
include punitive damages. Plaintiffs also sought 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.
Counsel for plaintiffs in the Consumer Lawsuit also represented
individuals who filed numerous separate lawsuits setting forth individual
claims similar to those in the Consumer Lawsuit. These lawsuits include
Sheldon Cohen, surviving son of Hymen Cohen, deceased v. SCI Funeral Services
of Florida, Inc., d/b/a Menorah Gardens & Funeral Chapels and Service
Corporation International;
Case No. 02014679; In the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida, and
Marian Novins,
surviving daughter of Harold Wells deceased v. SCI Funeral Services of Florida,
Inc. d/b/a Menorah Gardens & Funeral Chapels, and Service Corporation
International;
Case No. 0307886; In the Circuit Court of the 17th Judicial
Circuit, in and for Broward County, Florida, General Jurisdiction Division.
In December 2003, the Company entered into an agreement in principle to
settle the Consumer Lawsuit and the above individual related lawsuits. A
settlement agreement pertaining specifically to the Consumer Lawsuit was filed
with the court on March 2, 2004. On October 28, 2004, the Court entered an order approving the
settlement. Subject to appeal, all claims under the Consumer Lawsuit have been
dismissed. The terms of the proposed settlement call for the Company to make
payments totaling approximately $100,000 in settlement of these claims. As of
December 31, 2003, the Company had recorded reserves of $100,000 relating to
this matter. In the fourth quarter of 2003, the Company recognized a
receivable of $25,000 for expected recoveries under one primary layer of the
Companys insurance coverage related to the litigation. During the first
quarter of 2004, the Company deposited $100,000 into escrow for this proposed
settlement. This amount is included in
Other current assets
with a
corresponding liability in
Accrued liabilities
in the consolidated balance
sheet.
On April 21, 2002, additional plaintiffs filed a lawsuit styled
Sol
Guralnick, Linda Weinr, 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 (Guralnick Lawsuit), making essentially the same allegations as the
Consumer Lawsuit with the exception that it does not contain class allegations.
In addition to the Guralnick Lawsuit, counsel filed a lawsuit containing
cemetery mismanagement allegations styled
Diane Wolff, Arlene Benowitz, Michael
Wolff, Randee Wolff Blumstein, and Martha Freedberg v. SCI, Funeral Services of
Florida, Inc. a Florida corporation d/b/a Menorah Gardens & Funeral Chapels,
Service Corporation International, a Texas Corporation, Menorah Partnership, a
Florida General Partnership, and Sharon Gardens Limited Partnership, a Florida
Limited Partnership;
In the Circuit Court in the Fifteenth Judicial Circuit in
and for Palm Beach County, Florida, Case No. 2003CA013025 (Wolff Lawsuit).
In October 2004, the Company reached an agreement for settlement of the
Guralnick and Wolff Lawsuits.
Conley Investment Counsel v. Service Corporation International, et al;
Civil Action 04-MD-1609; In the United States District Court for the Southern
District of Texas, Houston Division (the 2003 Securities Lawsuit). The 2003
Securities Lawsuit resulted from the transfer and consolidation by the Judicial
Panel on Multidistrict Litigation of three lawsuits
Edgar Neufeld v. Service
Corporation International, et.al,;
Cause No. CV-S-03-1561-HDM-PAL; In the
United States District Court for the District of Nevada; and
Rujira Srisythemp
v. Service Corporation International, et. al
.; Cause No. CV-S-03-1392-LDG-LRL;
In the United States District for the District of Nevada; and
Joshua Ackerman
v. Service Corporation International, et. al.;
Cause No. 04-CV-20114; In the
United States District Court for the Southern District of Florida. The 2003
Securities Lawsuit names as defendants the Company and three of the
27
Companys
current and former executive officers or directors. The 2003 Securities
Lawsuit is a purported class action filed in connection with the circumstances
surrounding the Consumer Lawsuit. The plaintiffs allege that the Company
failed to disclose, or falsely stated, material information relating to the
circumstances surrounding the Consumer Lawsuit. Since the action is in its
preliminary stages, no discovery has occurred, and the Company cannot quantify
its ultimate liability, if any, for the payment of damages. The Company
intends to aggressively defend itself in the 2003 Securities Lawsuit.
David Hijar v. SCI Texas Funeral Services, Inc., SCI Funeral Services,
Inc., and Service Corporation International.
;
In the County Court of El Paso,
County, Texas, County Court at Law Number Three; Cause Number 2002-740 (Hijar
Lawsuit). The Hijar Lawsuit is a putative class action brought on behalf of
all persons, entities and organizations who purchased funeral services from the
Company or its subsidiaries at any time since March 18, 1998. Plaintiffs allege that
federal and Texas funeral related rules (Rules) required the Company to
disclose its markups on all items obtained from third parties in connection
with funeral service contracts and that the failure to make required
disclosures of markups resulted in fraud and other legal claims. The Company
believes that the plaintiffs interpretation of the Rules is incorrect. The
Hijar Lawsuit seeks to recover an unspecified amount of monetary damages. The
plaintiffs counsel has pursued two arbitration claims raising similar issues
in California. The Company has recently filed a complaint for declaratory
relief in Federal District Court for the Central District of California
relating to these arbitration claims.
Each side in the Hijar Lawsuit filed motions to summarily establish that
its interpretation of the Rules was correct, and the judge has ruled in favor
of the plaintiffs. This ruling allows the plaintiffs to proceed with the case.
No class has been certified.
The International Cemetery and Funeral Association, the Texas Funeral
Directors Association, the National Funeral Directors Association, the National
Funeral Directors and Morticians Association, Inc., the Texas Funeral Service
Commission, and three industry competitors filed Amicus Curiae briefs asserting
that their interpretation of the Rules was the same as the defendants.
Additionally, the Federal Trade Commission provided the Company with an
informal staff opinion supporting the defendants argument.
The ultimate outcome of the Hijar Lawsuit cannot be determined at this
time. However, the Company intends to aggressively defend this lawsuit.
During the quarter ended September 30, 2004, the Company accrued
approximately $9,000 for litigation related matters described in this note
twelve. The Company has substantial face amount of insurance coverage which it
believes is applicable to these litigation related matters. There are various
unresolved coverage issues relative to such insurance, and the Company is
currently involved in litigation with certain of its insurance carriers
regarding these matters. For that reason, the Company has not accrued an
estimated receivable for insurance recoveries other than the $25,000 receivable
recorded in the fourth quarter of 2003 as described above. Such receivables
are recorded when they are probable of being paid and can be reasonably
estimated.
No assurance can be given regarding the ultimate outcome of these
proceedings. Certain insurance policies held by the Company may reduce cash
outflows with respect to an adverse outcome of these litigation related
matters. If an adverse decision in these matters exceeds the insurance
coverage or if the insurance coverage is deemed not to apply to these matters
or if an insurance carrier is unable to pay, an adverse decision could have a
material adverse effect on the Company, its financial condition, results of
operations and cash flows.
13. Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other obligations to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in our earnings.
28
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is presented below:
The computation of diluted earnings per share excludes outstanding stock
options and convertible debt in certain periods in which the inclusion of such
items would be antidilutive in the periods presented. Total options and
convertible debt not currently included in the computation of dilutive earnings
per share are as follows:
14. 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.
29
If the Company had elected to recognize compensation expense for its
option plans based on the fair value method, net income and per share amounts
would have changed to the pro forma amounts indicated below.
The fair value of the Companys 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.
Accumulated Other Comprehensive Loss
The components of
Accumulated other comprehensive loss
are as follows:
30
The reclassification adjustment of $49,006 during the nine months ended
September 30, 2004 relates to the sale of 75% of the Companys interest in its
French operations. Included in the Foreign currency translation adjustment at
September 30, 2004 are net currency losses of $67,326 related to discontinued
operations of the Companys Argentina operations held for sale at September 30,
2004.
The components of Comprehensive income are as follows:
Share Repurchase Program
On August 16, 2004, the Company announced a share repurchase program
authorizing the investment of up to $100,000 to repurchase its common stock.
The Company, subject to market conditions and normal trading restrictions,
makes purchases in the open market or through privately negotiated
transactions. During the third quarter of 2004, the Company repurchased 5,612
shares of common stock at a cost of $34,812.
15. Gains and Impairment (Losses) on Dispositions and Other Operating
Expenses
Gains and Impairment (Losses) on Dispositions for the Three and Nine Months
Ended September 30, 2004 and 2003
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 Companys 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 and impairment (losses) on dispositions, net
consists of the
following:
Previous Years Charges
The Companys previous years charges (in 2002, 2001 and 1999) included
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,
market value adjustments for certain options associated with the Companys
senior notes and relieving certain individuals from their consulting and/or
covenant-not-to-compete contractual obligations.
The majority of the remaining balance at September 30, 2004 of these
original charge amounts relate to severance costs on completed actions and
terminated consulting and/or covenant-not-to-compete contractual obligations,
which will be paid by 2012. Of the $34,082 remaining liability at September
30, 2004, $10,564 is included in
Accounts payable and accrued liabilities
and
$23,518 is
31
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 previous years charges for the nine months
ended September 30, 2004 is detailed below. Any adjustments made during the
three and nine months ended September 30, 2004 and 2003 to the original
impairment charge amounts were recognized in the income statement line item
Gains and impairment (losses) on dispositions, net
, as described above.
Sale of French Operations
On March 11, 2004, the Company completed a joint venture transaction of its
funeral operations in France. In addition to maintaining a 25% share of the
total equity capital of the newly formed entity, the Company received net cash
proceeds of $287,886, net of transaction costs, and a note receivable in the
amount of EUR 10,000. The transaction resulted in a pretax gain of $12,639,
recorded in
Gains and impairment (losses) on dispositions, net
, in the
consolidated statement of operations, and a non-cash tax benefit of $24,929,
which were recognized in the quarter ended March 31, 2004. In July 2004, the
Company paid $6,318, pursuant to the joint venture agreement, as a purchase
price adjustment for the sale of its French operations, which reduced the pretax gain to
$6,420 and the after tax gain to $33,624. Included in the pretax gain, the
Company recognized $35,768 of contractual obligations related to representation
and warranties and other indemnifications resulting from the joint venture
contract. Goodwill in the amount of $23,467 was removed from the Companys
consolidated balance sheet as a result of this transaction. For further
information regarding the sale of its French operations, including pro forma financial
information, see the Companys Form 8-K filed on September 2, 2004.
Proceeds from Investment in United Kingdom Company
During the second quarter of 2004, the Company received proceeds of $53,839
from the sale of its minority interest equity investment in the United Kingdom
and the prepayment of its note receivable, with accrued interest, following a
successful public offering transaction of its United Kingdom company.
The Company recognized income of $27,179, recorded in
Gains and impairment
(losses) on dispositions, net
, in the consolidated statement of operations as
of March 31, 2004, to adjust the carrying amount of the receivable to its
realizable value. In addition, the Company recognized interest income on the
receivable, in the amount of $4,478 recorded in
Other income, net
in the
consolidated statement of operations as of March 31, 2004. In the second
quarter of 2004, the Company recorded a pretax gain of $13,984 in
Gains and
impairment (losses) on dispositions, net
in the consolidated statement of
operations, as a result of the sale and recognized a non-cash tax benefit of
$8,000.
16. Discontinued Operations
The Company committed to a plan during the second quarter of 2004 to divest its
existing funeral and cemetery operations in Argentina and Uruguay. The Company
is actively marketing these operations. The Company plans to have no
continuing interest in these operations subsequent to disposal of the Argentina
and Uruguay businesses. Therefore, these operations were classified as
discontinued operations during the second quarter of 2004.
Impairment of Argentina
During the second quarter of 2004, the Company recorded an impairment of its
funeral and cemetery operations in Argentina in the amount of $15,189 recorded
in
Loss from discontinued operations
in the consolidated statement of
operations. The new carrying
32
amount reflects the estimated fair value based on
current market conditions less costs to sell. Additionally, the Company
recognized a non-cash tax benefit of $49,236 in discontinued
operations during the
three months ended June 30, 2004. This tax benefit represents the reduction of
a previously recorded valuation allowance.
The results of the Companys discontinued operations for the three and
nine months ended September 30, 2004 and 2003 were as follows:
Net (liabilities) and assets of discontinued operations at September 30,
2004 and December 31, 2003 were as follows:
17. Restatement of Financial Statements
33
The Company restated its previously issued financial statements for the fiscal
years ended December 31, 2000, 2001 and 2002, the interim quarters of 2000,
2001 and 2002, and the first three quarters of 2003, related to adjustments to
Deferred preneed cemetery revenues
and changes in the methodology for
amortizing preneed funeral deferred selling costs. See the Companys current
report on Form 8-K filed September 2, 2004, which superseded the annual report
on Form 10-K filed with the U. S. Securities and Exchange Commission for the
year ended December 31, 2003 for complete disclosures relating to this
restatement of the Companys financial statements. All applicable amounts
relating to these restatements have been reflected in the consolidated
financial statements and notes to the consolidated financial statements.
The effect of the restatement on the Companys previously reported
consolidated statement of operations for the three and nine months ended
September 30, 2003 was as follows:
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Service Corporation International (SCI or the Company) is the worlds largest
provider of funeral and cemetery services. At September 30, 2004,
we operated 1,244 funeral service locations and 412 cemeteries. We also had a
minority interest equity investment in funeral operations in France.
In addition to our funeral and cemetery operations, we own Kenyon
International Emergency Services, a disaster response team that
engages in mass fatality and emergency response services.
Our funeral and cemetery operations are organized into a North America
division covering the United States and Canada, and a Foreign division
including operations in South America, Germany and Singapore. For the quarter
ended September 30, 2004, our North America operations represented
approximately 97% of our consolidated revenues and consolidated gross profits.
Our operations in the North America division are organized into 32 major
markets and 44 middle markets. Each market is led by a market director with
responsibility for funeral and cemetery operations and preneed sales. Within
each market, the funeral homes and cemeteries realize efficiencies by sharing
common resources such as personnel, preparation services and vehicles. There
are three market support centers in North America to assist market directors
with financial, administrative and human resource needs. These support centers
are located in Houston, New York and Los Angeles. The primary functions of the
market support centers are to help facilitate the execution of corporate
strategies, coordinate communications between the field and corporate offices
and serve as liaisons for implementation of policies and procedures.
Strengths and Challenges
SCI is the leading provider of funeral, cremation and cemetery services in
North America. While there are four other publicly-traded companies that
operate in our industry, we have more funeral homes and cemeteries and serve
more consumers than the rest of the public peer group combined. Despite some
consolidation, the industry remains fragmented. We estimate that the other
three public companies and SCI combined generate approximately 20% of total
industry revenue. The other 80% is generated by independent funeral and
cemetery operators.
34
In 2000, we launched the first national branding strategy in the funeral
service industry in North America under the name Dignity Memorial
®
. While this
branding process is intended to emphasize our seamless national network of
funeral service locations and cemeteries, the original names associated with
acquired locations generally remain the same. For example, Geo. H. Lewis &
Sons Funeral Directors is now Geo. H. Lewis & Sons Funeral Directors, a Dignity
Memorial
®
provider. We believe SCI is the only
company in our industry that
has successfully implemented a national brand. We believe that a national
brand gives us a competitive advantage. This is discussed further in our
strategies for growth described below.
Our core business can be described as stable. It has favorable
demographic characteristics due to the aging of America. It also has
relatively predictable revenue and cash flow streams. This stability is
enhanced by a large backlog of deferred revenues associated with North America
preneed funeral and cemetery sales. However, we and others in the industry
face certain challenges in growing revenues. The primary external factors
affecting revenue growth are a lack of near-term expansion 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 between 0.7% and
0.8% annually through 2010, modern advances in medicine and healthier
lifestyles could reduce the numbers of deaths during this time.
In North America, social trends, religious changes, environmental issues
and cultural preferences are driving an increasing preference for cremation.
SCI is the largest provider of cremation services in North America.
Approximately 40% of the total funeral services we perform are cremation
services as compared to the national average of approximately 30%. Our
cremation mix is greater due to the high concentration of properties we own
along the west coast of the United States, Florida, and Arizona where cremation
rates exceed 45%. The rate of cremation in North America has been increasing
approximately 100 to 150 basis points each year and we expect this trend to
continue in the near term. Cremation services historically have generated less
revenue and gross profit dollars than traditional funeral services.
Additionally, the cremation consumer may choose not to purchase cemetery
property or merchandise. We believe we are well positioned to respond to this
trend and have experienced initial success through the use of contemporary
marketing strategies and unique product and service offerings that specifically
appeal to cremation consumers. See the further discussion regarding
initiatives to address cremation as part of our overall revenue growth strategy
described below.
The Path to Growth
We have made substantial progress in reducing debt and improving cash flow
since 1999. Our current capital structure and liquidity afford us significant
financial flexibility. Our primary focus has now shifted to initiatives that
will grow revenues and earnings. In the near term, we believe that cost
reduction efforts will be the main means to improve earnings. We believe
strategies centered on our national brand, Dignity Memorial
®
, and other revenue
growth initiatives can provide the framework for sustainable growth over the
longer term.
Improving the Infrastructure
Historically we have had an infrastructure that did not allow us to realize
fully the inherent efficiencies of our business organization. As a result, we
were unable to enjoy all of the benefits of standardization, technology, and
process improvement. Recently we have been moving to capitalize more fully on
the inherent economies of scale of our business by reformulating our
infrastructure. This has been accomplished by redesigning our sales
organization, improving business and financial processes, outsourcing certain
of our accounting functions including accounts payable and payroll, and
expanding our existing trust administration and information technology
outsourcing programs. We also began to implement a new information system in
our field locations. This new system will replace three separate contract
entry systems and integrate these functions into one.
Having simplified our sales approach and redesigned our financial,
technical and administrative infrastructure, we were able to make significant
changes to the field management structure in late 2003. The former management
structure consisted of multiple layers and two organizations (sales and
operations). The new management structure is based on a major market and
middle market concept with the understanding that our markets and businesses
are not all the same and can benefit from different management approaches. We
eliminated the dual management organizational structure, and now have one
person responsible for each market who has the ability to lead in a
multi-segment environment. This individual is charged with the responsibility
of growing our business and maintaining a commitment to the Dignity Memorial
®
standards and brand.
35
Building the Brand
SCI implemented the first national brand in the funeral service industry. This
brand is called Dignity Memorial
®
. Internally, we are focused on ensuring that
we have consistency in service standards and processes across our network of
businesses. We want every customer interaction to be the standard Dignity
interaction, which is based upon values of integrity, respect, enduring
relationships and service excellence. Externally, we continue to enhance
signage and local advertising efforts using the Dignity
®
name and logo, and we
also sponsor several nationally recognized community programs. In 2003, we
initiated a national advertising and marketing program to build awareness of
our national brand name. Through broadcast and cable television, newspapers,
yellow pages and direct mail media, this program focuses on the distinct
benefits and values that set Dignity Memorial
®
apart from other providers.
Based on our market studies, we believe todays funeral consumers are less
interested in traditional funeral products and more interested in creating a
life celebration experience as well as receiving professional help to deal with
the administrative and legal challenges which occur when a loved one dies.
Through our Dignity
®
brand we are developing more contemporary and
comprehensive products and services that we believe will help the consumer
through the entire experience. Some of the exclusive items offered through
Dignity
®
providers include grief counseling services, legal services, internet
memorial archive capabilities, and the Aftercare
®
Planner a comprehensive
organizing system that helps families manage the many business details that
arise after a death occurs. Dignity
®
benefits also include the Bereavement
Travel Program, a unique feature that allows customers to obtain special rates
on airfare, car rentals and hotel accommodations for family and friends who
must travel from out of town to attend funeral, cremation or memorial services.
Importantly, these products and services appeal to both burial and cremation
consumers. We are also focusing on programs that offer consumers new ways to
personalize funeral services and create value in the experience.
Growing Our Revenues
As described earlier, we believe improvements in our cost structure will
increase earnings in the near term; however, we also realize that to achieve
sustainable long-term earnings growth, we must also increase our revenues. We
believe we can be successful in this regard by developing the Dignity
®
brand
and listening to our customers.
Enhancing Sales Opportunities
We believe we can grow core revenues by utilizing technology and
contemporary marketing techniques to enhance our sales opportunities and
strengthen the competitive advantage of our national brand name. In this
regard, particular focus is being placed on selling Dignity Memorial
®
packaged
funeral and cremation plans. We are also developing product differentiation
within our cemeteries and enhancing our cremation strategies.
Our national brand name also represents a unique set of packaged funeral
and cremation plans offered exclusively through our network on an atneed and
preneed basis. These packages are designed to simplify customer
decision-making and include the unique value-added products and services
described earlier which have traditionally been unavailable through funeral
service locations. Our customer satisfaction index, as measured by independent
surveys completed by consumers three weeks following a funeral, continues to
reach record levels, which we believe are largely attributable to the value and
savings consumers receive when they select a Dignity
®
package. We believe we can increase the selection rate of these packaged
plans through improved merchandising strategies that place less emphasis on
traditional funeral merchandise and more focus on the comprehensive product and
service offerings unique to Dignity Memorial
®
providers.
We are also beginning to use more contemporary marketing techniques within
our cemetery segment. Initiatives are underway to employ a tiered-product
model that emphasizes a wide range of product and service offerings. We are
particularly focusing on the development of high-end cemetery property projects
such as private family estates. We believe this initiative will be a key
driver of cemetery revenue growth in 2005.
To grow core revenues and profits, we believe we must capitalize on the
opportunities provided by the growing cremation trend. We believe a successful
cremation strategy is built on product differentiation, personalization and
simplicity. Along with the sale of
36
Dignity Memorial
®
cremation plans, we are
developing new displays to be used in the arrangement process that clearly
explain the products and services available to cremation consumers. Within the
cemetery segment, we are promoting cremation gardens, which are separate
sections located within certain of our cemeteries where cremated remains can be
permanently placed and that contain other unique memorialization products. We
continue to develop our national brand, National Cremation
®
, which targets the
direct cremation consumer. And finally, comprehensive training programs are
being developed to support these key initiatives, as well as to focus on
creating a personal and meaningful experience for the cremation consumer.
Increasing Market Share
We believe that SCI has opportunities to grow market share due to its size and
geographic diversity. We believe that a national brand name will provide us
access to new customers over the long term given the increasingly mobile nature
of North Americans. In addition, we will continue to capitalize on our
nationwide network of providers to develop affinity relationships with large
groups of individuals to whom we can market our products and services. Such
relationships include employers, social organizations and insurance companies.
Our most strategic affinity partnership today is with the Veterans of Foreign
Wars and Ladies Auxiliary whose membership exceeds two million. Over the
longer term, we believe such groups can be a key influence in the funeral home
selection process.
In late 2003, we eliminated the dual management structures of sales and
operations and replaced them with a single-line business management structure.
In addition to reducing costs, our new structure is intended to have our
strongest business managers focused on producing results in each of our
markets. Under the new structure, many of the administrative and financial
functions are now handled by support centers. The geographical scope of
responsibility of these managers has also been narrowed. We believe this new
structure allows for greater focus on developing people, growing market share
and improving profitability.
We are also targeting expansion through acquisition or construction in the
top 150 markets in North America where probable investment returns will exceed
our cost of capital. We will focus future growth capital deployment in the
major metropolitan markets where there is a large population base and where
multiple businesses are more conducive to clustering and contemporary marketing
strategies and where it is easier to attract quality management. Over the
longer term, the potential for a franchising opportunity exists for further
expansion in the smaller markets.
Critical Accounting Policies and Accounting Changes
Our consolidated financial statements are impacted by the accounting policies
used and the estimates and assumptions made by management during their
preparation. Estimates and assumptions affect the carrying values of assets
and liabilities and disclosures of contingent assets and liabilities at the
balance sheet date. Actual results could differ from such estimates due to
uncertainties associated with the methods and assumptions underlying our
critical accounting measurements. The following discussion of our critical
accounting policies and estimates should be read in conjunction with our
current report on Form 8-K filed September 2, 2004, which superseded our annual
report filed on Form 10-K for the year ended December 31, 2003.
In March 2004, the Financial Accounting Standards Board (FASB) reached
consensus on the guidance provided by Emerging Issues Task force Issue 03-1
(EITF 03-1),
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.
The guidance is applicable to debt and
equity securities that are within the scope of FASB Statement of Financial
Accounting Standard (SFAS) No. 115,
Accounting for Certain Investments in
Debt and Equity Securities: and Certain Other Investments.
EITF 03-1 specifies that an impairment would be considered
other-than-temporary unless (a) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for the recovery of
the fair value up to (or beyond) the cost of the investment and (b) evidence
indicating the cost of the investment is recoverable within a reasonable period
of time outweighs evidence to the contrary. EITF 03-1 was scheduled to be
effective for reporting periods ending after June 15, 2004. The measurement
and recognition provisions relating to debt and equity securities have been
delayed until the FASB issues additional guidance. We adopted the disclosure
provisions during the period ended June 30, 2004. The adoption of the
measurement and recognition provisions will not have a material impact on our
consolidated financial statements, result of operations or liquidity.
Variable Interest Entities
37
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) No. 51.
This interpretation 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. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN
46R).
Under the provisions of FIN 46R, we are required to consolidate certain
cemeteries and trusts. Merchandise and service trusts and cemetery perpetual
care trusts are variable interest entities because the trusts meet the
conditions of paragraphs 5(a) and 5(b)(1) of FIN 46R. That is, as a group, the
equity investors (if any) do not have sufficient equity at risk and do not have
the direct or indirect ability through voting or similar rights to make
decisions about the trusts activities that have a significant effect on the
success of the trusts. FIN 46R requires us to consolidate merchandise and
service trusts and cemetery perpetual care trusts for which we are the primary
beneficiary (i.e., those for which we absorb a majority of the trusts expected
losses). We are the primary beneficiary of a trust whenever a majority of the
assets of the trust are attributable to deposits of our customers.
Consolidation of Trusts:
We implemented FIN 46R as of March 31, 2004, which
resulted in the consolidation of our preneed funeral and cemetery merchandise
and service trusts and our cemetery perpetual care trusts. We did not
recognize a cumulative effect of an accounting change as a result of the
implementation of FIN 46R, as it relates to the consolidation of our trusts.
The implementation of FIN 46R affects certain line items on our consolidated
balance sheet and statement of operations as described below; however, there
will be no impact to net income in the statement of operations as a result of
the implementation. Additionally, the implementation of FIN 46R did not result
in any net changes to our consolidated statement of cash flows; however, it
does require certain financing and investing activities to be disclosed.
Although FIN 46R requires consolidation of most of the merchandise and
service and perpetual care trusts, it does not change the legal relationships
among the trusts, the Company and our customers. In the case of merchandise
and service trusts, the customers are the legal beneficiaries. In the case of
cemetery perpetual care trusts, we do not have a legal right to the perpetual
care trust assets. For these reasons, upon consolidation of the trusts, we
recognize non-controlling interests in its financial statements to reflect
third party interests in these trusts in accordance with FASB Statement No.
150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liability and Equity
(SFAS 150). We classify deposits to merchandise and
service trusts as non-controlling liability interests and classify deposits to
cemetery perpetual care trusts as non-controlling equity interests.
We
record cash received from customers that has not been deposited in
trusts as restricted cash in
Deferred charges and other assets
in our
consolidated balance sheet. At September 30, 2004, these pending deposits
totaled $10.8 million. We continue to account for amounts received from customers
prior to delivery of merchandise or services that are not required to be
deposited in merchandise and service trusts as deferred revenue.
Beginning March 31, 2004, we recognize net realized investment earnings of
the merchandise and service trusts and perpetual care trusts, as well as the
related trustee investment expenses and taxes, within
Other income, net
. We
then recognize a corresponding expense within
Other income, net
representing
the net realized earnings of those trusts that are attributable to the
non-controlling interest holders. The corresponding credit for this expense is
reflected in our consolidated balance sheet in
Non-controlling interest in
funeral and cemetery trusts
for merchandise and service trusts or
Non-controlling interest in perpetual care trusts
for cemetery perpetual care trusts. The sum of these expenses recorded in
Other
income, net
offset the net realized earnings of such trusts also recognized
within
Other income, net
. Accordingly, net income in the consolidated
statement of operations is not affected by consolidation of the trusts in
accordance with FIN 46R.
To the extent the earnings of the trusts are distributed prior to the
delivery of merchandise and/or services, a corresponding amount of
non-controlling interest is reclassified to deferred revenue, until the
corresponding revenues are recognized. In the case of merchandise and service
trusts, we recognize as revenues, amounts previously attributed to
non-controlling interests and deferred revenues upon the performance of
services and delivery of merchandise, including earnings accumulated in these
trusts. In the case of the cemetery perpetual care trusts, distributable
earnings are recognized in cemetery revenues to the extent of qualifying
cemetery maintenance costs.
Prior to the implementation of FIN 46R and the consolidation of the
trusts, monies received from customers and deposited into merchandise and
service trusts until maturity of the preneed contract were recorded as
receivables due from trust assets. Upon
38
implementation of FIN 46R, we replaced
receivables due from trust assets with the trust assets, at market, to the
extent we were required to consolidate the trusts.
An allowance for contract cancellation is provided based on historical
experience. An allowance is no longer provided on the monies associated with
the preneed contract that are held in trust, currently recorded as trust
assets, but previously recorded as receivables due from trust assets. As such,
the amount has decreased since the implementation of FIN 46R.
Both the merchandise and services trusts and the cemetery perpetual care
trusts hold investments in marketable securities that we classify as
available-for-sale under the requirements of SFAS 115. In accordance with SFAS
115, available-for-sale securities of the trusts are recorded at fair value,
with unrealized gains and losses excluded from earnings and initially recorded
as a component of
Accumulated other comprehensive loss
in our consolidated
balance sheet. Using the guidance in EITF Topic D-41,
Adjustments in Assets
and Liabilities for Holding Gains and Losses as Related to the Implementation
of FASB Statement No. 115
(Topic D-41), unrealized gains and losses on
available-for-sale securities of the trusts attributable to the non-controlling
interest holders are not recorded as
Accumulated other comprehensive income
(loss)
, but are recorded as an adjustment to either
Non-controlling interest in
funeral and cemetery trusts
or
Non-controlling interest in perpetual care
trusts
. Therefore, unrealized gains and losses attributable to the
non-controlling interest holders are reclassified from
Accumulated other
comprehensive income (loss)
to either
Non-controlling interest in funeral and
cemetery trusts
or
Non-controlling interest in perpetual care trusts
. The
gross effect from applying Topic D-41 on our
Accumulated other
comprehensive income (loss)
is disclosed in note fourteen in Item 1 of this
Form 10-Q. However, our
Accumulated other comprehensive income (loss)
on the
face of the balance sheet is ultimately not affected by consolidation of the
trusts.
For additional discussion of our accounting policies after the
implementation of FIN 46R, see notes four through seven to the consolidated
financial statements in Item 1 of this Form 10-Q.
Consolidation of Certain Cemeteries:
Additionally, effective as of March 31,
2004, we consolidated certain cemeteries that we manage in accordance with FIN
46R. We recognized an after tax charge of $14.5 million, representing the
cumulative effect of an accounting change, as a result of consolidating these
cemeteries. The results of operations and cash flows of these cemeteries are
included in our consolidated statements of operations and cash flows beginning
March 31, 2004. Excluding the cumulative effect of accounting change, the
effect of consolidating these entities did not have a significant effect on our
reported results of operations.
Insurance Funded Preneed Insurance Contracts
We changed our method of accounting for insurance funded preneed contracts as
we have concluded that our insurance funded preneed funeral contracts are not
assets and liabilities as defined by Statement of Financial Accounting Concepts
No. 6,
Elements in Financial Statements.
Therefore, we have removed from our
consolidated balance sheet amounts relating to insurance funded preneed funeral
contracts previously recorded in
Preneed funeral receivables and trust
investments
and
Deferred preneed funeral revenues
, which at September 30, 2004
and December 31, 2003, were $2.2 billion and $3.5 billion, respectively. The
removal of these amounts did not have an impact on our consolidated stockholders equity,
results of operations or cash flows. See note four to the consolidated
financial statements in Item 1 of this Form 10-Q and the preneed funeral and cemetery activities
in Item 2 of this Form 10-Q for additional information on insurance related
preneed funeral contracts.
Pension Plans
Effective January 1, 2004, we changed the accounting for gains and losses on
our pension plan assets and liabilities. In 2004, we began recognizing such
gains and losses in our consolidated statement of operations during the year in
which they occur. Prior to January 1, 2004, we amortized the difference
between actual and expected investment returns and actuarial gains and losses
over seven years (except to the extent that settlements with employees required
earlier recognition). We believe the change is preferable as the new method of
accounting better reflects the economic nature of our pension plan and
recognizes gains and losses on the pension plan assets and liabilities in the
year the gains and losses occur. As a result of this accounting method change,
we recorded a charge for the cumulative effect of the change in accounting
principle of $33.6 million (net of $21.3 million of deferred taxes) as of
January 1, 2004. This amount represents accumulated unrecognized net losses
related to the pension plan assets and liabilities.
39
Under our new accounting method, our pension expense in future periods may
be more volatile as this method accelerates recognition of actual experience.
In addition, for our interim financial statements, we record net pension
expense or income reflecting estimated returns on plan assets and obligations.
We recognize actual gains and losses on plan assets and obligations as
actuarial information becomes available upon review of the annual
remeasurement.
Our pension costs and liabilities are actuarially determined based on
certain assumptions, including expected long-term rates of return on plan
assets and the discount rate used to compute future benefit obligations. As
our pension plans have been frozen, participants do not earn additional
benefits from additional years of service and we do not incur new service costs
subsequent to 2000. The key drivers of pension cost are the discount rate used
to determine the projected benefit obligation, the related interest cost and
the rate of return on plan assets.
Discount Rate It is our policy to use a discount rate comparable to rates
of return on high-quality fixed income investments available and expected to
be available during the period to maturity of the Companys pension benefits.
The discount rate used to determine the present value of the obligation is
adjusted annually based on prevailing interest rates as of the measurement
date, which is September 30. In 2003, we lowered the discount rate used to
determine the pension obligation from 7.00% to 6.25% based on the lower
interest rate environment. For the 2004 interim periods prior to September
30, 2004, we used a discount rate of 6.25%. However, following the review of
the annual remeasurement, we lowered the discount rate used to determine the
pension obligation from 6.25% to 6.00%.
Return on Plan Assets In 2003, we used a 9.0% assumed rate of return on
plan assets as a result of a high allocation of equity securities within the
plan assets. At December 31, 2003, 74% of the plan assets were equity
securities with the remaining 26% of plan assets being represented by fixed
income securities. After the $20 million voluntary infusion of funds into
the plan in March 2004, we rebalanced the plan assets to have a lower
percentage invested in traditional equity securities and fixed income
securities and instead incorporate investments in market neutral hedge funds.
As of September 30, 2004, approximately 54% of plan assets were invested in
core diversified and market neutral hedge funds, 33% of the plan assets were
equity securities and the remaining 13% of plan assets were fixed income
securities. We believe that this reallocation will reduce the volatility
with limited reduction of returns.
Results of Operations Three Months Ended September 30, 2004 and 2003
In the following discussion of results of operations, certain prior year
amounts have been reclassified to conform to the current period financial
presentation with no effect on previously reported net income, financial
condition or cash flows.
Consolidated revenues in the third quarter of 2004 declined $163.1
million, primarily attributable to the disposition of our French funeral
operations, which were joint ventured on March 11, 2004. In the three months
ended September 30, 2003, revenues from funeral operations in France were $148.4 million. Consolidated gross profits
decreased only $0.7 million despite the loss of profit from France, which was
$16.1 million in 2003. Excluding our French operations, gross profit grew due
to increased profitability in North America operations.
Revenues from comparable North American businesses declined by $10.5
million or 2.6% due to declines in other funeral revenue and expected decreased
revenues from cemetery development projects. Gross profits from comparable
North America funeral and cemetery businesses rose 33.2% or $16.7 driven by
cost reductions as described below.
Net income was $12.6 million or $.04 per diluted share in the third
quarter of 2004 compared to a net loss of $4.7 million or $.02 per diluted
share in the third quarter of 2003. Earnings in 2003 benefited from $.03 per
diluted share, or $10.0 million, related to our funeral operations in France
which were subsequently divested in March 2004. Results in both periods also
included items such as litigation expenses, losses on dispositions, other
income and discontinued operations as follows:
Three Months Ended September 30, 2004 (all amounts are after tax):
40
Three Months Ended September 30, 2003 (all amounts are after tax):
North America Comparable Operating Results Three Months Ended September 30,
2004 and 2003
The following table summarizes the North America comparable operating results
for the three months ended September 30, 2004 and 2003. Comparable North
America operations represented approximately 97% of consolidated revenues and
approximately 98% of consolidated gross profits during the third quarter of
2004. Comparable financial information excludes operations that have been
divested, acquired or constructed during the period January 1, 2003 to
September 30, 2004, and are meant to be reflective of same store results of
operations.
In millions, except funeral services performed and average revenue per
funeral service
.
Funeral
Funeral revenues declined $3.2 million in the quarter predominantly due to a
decrease in other funeral service revenues. During the quarter, revenues from
Kenyon, our disaster assistance subsidiary, declined $1.8 million. We also
experienced a $1.2 million decline in general agency revenues associated with
insurance funded prearranged funeral sales due to a shift in the mix of
products sold.
Operating funeral revenues were flat as an increase in the average revenue
per funeral offset a decline in funeral volume. The number of funeral services
performed in the third quarter declined 2.7%. On a year-to-date basis, the
number of funeral services performed is down 0.7% compared to the first nine
months of 2003 and is consistent with managements guidance for the year.
During the quarter, the average revenue per funeral service grew 2.8%. We
continue to see a strong positive trend in the average revenue which is mainly
a result of the expanded product and service offerings included in our Dignity
Memorial
®
funeral and
41
cremation plans. The Dignity
®
plans are focused on
adding value for the consumer instead of relying on price increases. These
plans offer consumers unique products and services aimed at providing
assistance with administrative and legal issues, travel needs, emotional
support, and memorialization when a death occurs. Because of these
comprehensive value-added offerings, the packages generate significant
incremental revenue per funeral service compared to non-Dignity sales.
During the third quarter of 2004, 17.2% of the total funeral consumers
served selected a Dignity Memorial
®
plan compared to
16.9% in the third quarter
of 2003. We are continuing to utilize technology and contemporary marketing
techniques to enhance our sales opportunities and to strengthen the competitive
advantage of our national brand, Dignity Memorial
®
.
Funeral results in the quarter were impacted by an increase in the rate of
cremation. Of the total comparable funeral services performed in the third
quarter of 2004, 39.8% were cremation services versus 38.9% in the same period
of 2003. In spite of this increased mix of cremation services, we are pleased
with our continued ability to consistently deliver meaningful growth in the
overall average revenue per funeral service.
Funeral gross profits increased 14.8% or $5.7 million and the gross margin
percentage rose to 16.9% compared to 14.6%. This improvement is primarily a
result of reductions in overhead and pension costs which were partially offset
by declines in other revenue described above.
Cemetery
North America cemetery revenue decreased $7.3 million or 5.4% in the third
quarter of 2004. Consistent with guidance given for 2004, revenues associated
with cemetery development projects were down $7.3 million. Revenue related to
the preneed sale of unconstructed cemetery property is deferred until it is
constructed and a minimum of 10% of the sales price is collected from the
customer. In 2003, there were unusually high levels of revenues associated
with these property development projects as a result of completing projects
from a backlog created in 1999 and 2000 when our cash resources were limited.
In 2004, we are experiencing more normal levels of revenues related to these
completed construction projects.
Atneed revenues grew $4.5 million consisting of increases in the sale of
property and merchandise, partially offset by declines in revenues from
services performed. Recognized preneed revenues (excluding new development
projects) declined $9.2 million as increased revenues from property sales were
offset by declines in merchandise deliveries and services performed.
Other cemetery revenues improved by $4.8 million during the quarter led by
increases in interest income from installment contracts and increases in
cemetery perpetual care trust fund income.
Cemetery gross profits nearly doubled despite a 5.4% decline in revenues.
Cemetery gross profits grew $11.0 million and the gross margin percentage
climbed to 17.8% compared to 8.7% in the prior period. This significant
improvement is a result of reductions in all cemetery cost categories during
the quarter, partially offset by the decline in cemetery construction revenues.
Of particular note, overhead costs declined 29% due to changes in our
management structure and total selling costs were down 28% as a result of
changes to the compensation plans.
Overhead Expenses
In addition to corporate general and administrative expenses, there are two
other components of overhead costs that are allocated to funeral and cemetery
operations in North America: home office overhead and field overhead. These
two overhead categories totaled $27.1 million in the third quarter of 2004
compared to $37.8 million in the same period of 2003 representing a decrease of
$10.7 million or 28.3%. This decline in costs is a direct result of
initiatives undertaken in 2003 to improve the management structure and to
reduce our fixed costs.
General and Administrative Expenses
In the third quarter of 2004, general and administrative expenses declined
$27.5 million to $25.3 million, predominantly associated with a decrease in
litigation expenses and system amortization costs. In the third quarter of
2004, we recognized legal expenses (net of insurance recoveries) of $8.3
million compared to $32.0 million in the third quarter of 2003 related to
outstanding litigation matters. Additionally, included in the third quarter of
2003 was $4.6 million of accelerated amortization expense that is not included
in 2004. In 2002, we made the decision to implement new information systems
and, therefore, accelerated the amortization of the old systems. These
accelerated amortization costs ceased at the end of the third quarter of 2003
when amortization of the new systems commenced.
42
Excluding legal expenses and accelerated system amortization costs in both
periods, general and administrative expenses increased less than $1 million.
During the quarter we experienced increased professional fees of $1.8 million
associated with Sarbanes-Oxley compliance and $1.3 million of increased
non-cash long-term compensation expenses; however, these increased expenses
were offset primarily by reductions in information technology and other
expenses.
Other Income and Expenses
In the third quarter of 2004, we recognized a net pretax loss of $3.3 million
associated with dispositions compared to a net pretax loss of $1.5 million in
2003. These net losses are primarily associated with various dispositions in
North America. For further information regarding gains and impairment losses
on dispositions see footnote fifteen to the consolidated financial statements
in Item 1 of this Form 10-Q.
Interest expense was $6.9 million lower in the third quarter of 2004
compared to the third quarter of 2003 primarily due to the debt extinguishments
in early 2004, including the early retirement of 6% notes due 2005, the
repayment of 7.375% notes due 2004 and the conversion and redemption of 6.75%
convertible notes due 2008.
Other income declined $6.6 million in the third quarter of 2004 compared
to 2003. Contributing to this decline was a decrease of $2.8 million in
interest income and a decline of $1.1 million in net foreign currency and other
gains. Also, included in 2003 was a $2.6 million net gain from corporate
investments.
The effective tax rate in the quarter was 24.9% and was favorably impacted
by a $2.4 million benefit resulting from a change in estimated 2003 federal tax
liabilities. Due to this benefit and tax benefits realized from certain
international dispositions, we expect our effective tax rate for the year will
be 11% to 15%.
The diluted weighted average number of shares increased by approximately
40 million shares in the third quarter of 2004 compared to 2003 mainly due to
the conversion in June 2004 of our convertible senior notes which resulted in
the issuance of approximately 32 million shares. The remaining share increase
is related to dilutive outstanding stock options and the Companys contribution
of common stock to its 401(k) retirement plan, partially offset by share
repurchases.
Results of Operations Nine Months Ended September 30, 2004 and 2003
In the nine months ended September 30, 2004, total consolidated revenues
decreased $307.8 million primarily as a result of the joint venture of our
funeral operations in France completed on March 11, 2004. Revenues from our
businesses in France were $127.3 million during the nine months ended September
30, 2004 compared to $424.1 million in the same period of 2003, a decrease of
$296.8 million.
Consolidated gross profits declined $23.8 million mainly as a result of a
$39.0 million decrease in gross profits contributed from France. Gross profits
from our French operations were $11.6 million in the first nine months of 2004
versus $50.6 million in the same period of 2003. The loss of profits from
businesses in France was partially offset by increased profitability in our
North America funeral and cemetery businesses.
Revenues from comparable North America funeral and cemetery businesses
improved $3.3 million. Gross profits from comparable North America businesses
grew 7.1% or $15.9 million, led by cost reductions.
Net
income was $87.5 million or $.27 per diluted share in the first nine
months of 2004 compared to $54.7 million or $.18 per diluted share in the first
nine months of 2003. Net income in the first nine months of 2004 included $8.1
million or $.02 per diluted share, related to our French business compared to
$29.3 million or $.10 per diluted share in the first nine months of 2003.
Results in both periods included items such as accounting changes, gains on
dispositions, litigation expenses, gains and losses on the early extinguishment
of debt and other income and expenses as follows:
Nine Months Ended September 30, 2004 (all amounts are after tax):
43
Nine Months Ended September 30, 2003 (all amounts are after tax):
North America Comparable Operating Results Nine Months Ended September 30,
2004 and 2003
The following table summarizes the North America comparable operating results
for the first nine months of 2004 and 2003. Comparable North America
operations represented approximately 88% of consolidated revenues and
approximately 94% of consolidated gross profits during the first nine months of
2004. Comparable financial information excludes operations that have been
divested, acquired or constructed during the period January 1, 2003 to
September 30, 2004, and are meant to be reflective of same store results of
operations.
In millions, except funeral services performed and average revenue per
funeral service
44
Funeral
Comparable North America funeral revenues rose $6.7 million or 0.8% in the
first nine months of 2004 compared to 2003 primarily driven by growth in the
average revenue per funeral service. This increase was partially offset by
declines in funeral volume, lower levels of general agency revenues, and
decreased activity in Kenyon (our disaster assistance subsidiary).
In the first nine months of 2004, the average revenue per funeral service
increased by 2.3% compared to the same period in 2003. During the first nine
months of 2004, approximately 17.2% of the total funeral consumers served
selected a Dignity Memorial
®
plan compared to 16.6% in the first nine months of
2003. Dignity Memorial
®
funeral and cremation plans are designed to simplify
the customer decision-making process and provide savings and value to consumers
through unique products and services which have traditionally not been
available through funeral service locations. In addition to improving customer
satisfaction levels as measured by independent surveys, these packages also
generate significant incremental revenue per funeral service compared to
non-Dignity sales due to the comprehensive value-added offerings they provide.
The number of funerals performed decreased by 0.7% and within managements
guidance for the full year. Of the total comparable funeral services
performed, 40.0% were cremation services in the first nine months of 2004
compared to 39.1% in 2003.
Funeral gross profits grew $11.2 million or 7.0% during the first nine
months of 2004. The gross margin percentage improved to 20.4% versus 19.2% in
the prior year period. This improvement in gross profits is primarily due to
reduced overhead costs and increased revenues. Our targeted gross margin range
for the full year of 2004 is 20% to 24%.
Cemetery
North America cemetery revenue decreased $3.4 million or less than 1% in the
first nine months of 2004. As guided by management for the full year 2004, we
experienced lower levels of revenues associated with new cemetery development
projects. In the first nine months of 2004, recognition of revenues from
constructed cemetery property declined by $10.8 million. Revenue related to the
preneed sale of unconstructed cemetery property is deferred until it is
constructed and a minimum of 10% of the sales price is collected from the
customer. In 2003, there were unusually high levels of revenues associated
with these property development projects as a result of completing projects
from a backlog created in 1999 and 2000 when our cash resources were limited.
In 2004, we are experiencing more normal levels of revenues related to these
completed construction projects.
Atneed revenues grew $19.8 million due to increases in the sale of
property and merchandise. Recognized preneed revenues (excluding new
development projects) declined $12.7 million as increased revenues from
property sales were offset by declines in merchandise deliveries and services
performed.
Other cemetery revenues increased slightly during the first nine months of
2004. Declines in cemetery merchandise trust fund income were offset by
increases in endowment care trust fund income, management fee income and
interest income from installment contracts.
Cemetery gross profits improved $4.7 million or 7.5%. The gross margin
percentage grew to 16.2% compared to 14.9% in the prior period and is on the
high end of our guidance range for 2004 of 13% to 17%. This improvement in
gross profit is primarily a result of reductions in overhead costs, which were
partially offset by the decline in construction revenues.
Overhead Expenses
Home office overhead and field overhead, which are allocated to funeral and
cemetery operations in North America, totaled $87.3 million in the first nine
months of 2004 compared to $114.7 million in the same period of 2003
representing a decrease of $27.4 million or 23.9%. This decline in costs is
due to an improved management structure, and reduced expenses associated with
various outsourcing programs and new information systems.
General and Administrative Expenses
45
In the first nine months of 2004, general and administrative expenses declined
$10.1 million to $100.3 million, primarily due to a decrease in system
amortization costs. Included in the first nine months of 2003 was $13.8
million of accelerated amortization expense that is not included in 2004. In
2002, we made the decision to implement new information systems and, therefore,
accelerated the amortization of the old systems. These accelerated
amortization costs ceased at the end of the third quarter of 2003 when
amortization of the new systems commenced.
Litigation related costs are included in general and administrative
expenses in both periods. In the first nine months of 2004, we recognized
legal expenses of $48.3 million compared to $47.0 million in 2003. Legal
expenses in 2004 are primarily related to the $35 million proposed settlement
of outstanding securities litigation, net of $30 million funded directly into
escrow by our insurance carriers. Legal expenses in 2003 are primarily related
to a decision in an arbitration matter and litigation related matters in
Florida.
Excluding legal expenses and accelerated system amortization costs in both
periods, general and administrative expenses increased $2.4 million. During
the first nine months of 2004, we experienced $3.8 million of increased
non-cash long-term compensation expenses primarily related to the appreciation
of SCIs common stock in 2004 and increased costs of $2.1 million associated
with Sarbanes-Oxley compliance. These increased expenses were offset primarily
by reductions in information technology expenses and other professional fees.
Other Operating Income and Expenses
In 2003, we initiated projects to reconcile our consolidated trust assets and
corresponding preneed deferred revenues primarily due to the implementation of
the preneed component of our new information systems and the adoption of FIN
46R. As a result of these
reconciliation projects, we recognized other operating income of $6.9 million
in the first nine months of 2004, which represented an estimate of the total
impact of these reconciling activities. We expect to finalize the funeral
segment reconciliation project and make significant progress with the cemetery
reconciliation project by the time we file our 2004 Form 10-K. While the final
amount of any resulting adjustment will not be known until these projects are
complete, we do not expect any material adjustments to our results of
operations, financial condition or cash flows to result from the conclusion of
these projects.
Other Income and Expenses
In the first nine months of 2004, we recognized a net pretax gain of $33.0
million predominantly related to gains from the joint venture of our French
funeral operations and the sale of our minority interest in the United Kingdom
company. These gains were partially offset by net losses associated with the
dispositions of funeral and cemetery businesses and excess cemetery property in
North America.
Interest expense continued to decline during the period reflecting the
success we have had in reducing outstanding debt. Interest expense was $13.3
million lower in the first nine months of 2004 compared to the first nine
months of 2003 and will continue to decline due to the extinguishment of the
Companys 6.75% convertible subordinated notes due 2008 following the
conversion and redemption in June 2004.
Other income declined $3.8 million in the first nine months of 2004
compared to 2003. Included in 2004 was a $2.8 million foreign exchange
currency transaction loss related to a contingent payment from the acquisition
of our business in Chile. Also, included in 2003 was a $2.6 million net gain
from corporate investments. These net declines were offset by an increase of
$1.1 million of net foreign currency and other gains and a $0.4 million
increase in interest income.
The consolidated effective tax rate in the first nine months of 2004 was a
benefit of 4.7% which included non-cash tax benefits realized from the joint
venture of our business in France and the sale of our minority interest in the
United Kingdom, as well as a $2.4 million tax benefit resulting from a change
in estimated 2003 federal tax liabilities. This compares to an effective tax
rate of 36.2% in the first nine months of 2003.
Financial Condition, Liquidity and Capital Resources
Overview
46
Our primary financial objectives are to capitalize on our financial flexibility
and to continue generating strong operating cash flows. At the beginning of
2004, we had a goal of achieving a credit rating of BB with Standard and
Poors (S&P) and Ba2 with Moodys Investors Service (Moodys). In July 2004,
we achieved our targeted rating with S&P. In October 2004, Moodys upgraded
our rating to Ba3, one level below our target. In addition, Moodys upgraded
SCI to its highest Speculative Grade Liquidity rating of SGL-1. We believe
these current ratings provide us with adequate access to obtain funds at a
reasonable cost, if necessary.
Internally generated cash flows are a significant source of liquidity for
us. Based upon our year-to-date performance we believe we will be within our
guidance range for operating cash flows (excluding non-recurring items) for the
full year 2004 of $270 million to $310 million. As of September 30, 2004, our
cash balance exceeded $300 million. We also have a new $200 million credit
facility that was executed in August 2004. We have no cash borrowings under
this credit facility, but have used it to support $72.5 million of letters of
credit as of September 30, 2004. We believe these resources are adequate to
meet our near and intermediate term debt obligations, planned capital
expenditures and other cash requirements, as well as to have funds available
for future growth.
We expect to generate cash flows in the next several years above our
operating and financing needs. We currently have less than $140 million in
debt maturing during the remainder of 2004 and 2005. We believe that this
financial flexibility coupled with our liquidity allows us to consider
investments or capital structure related transactions that will enhance
shareholder value. We will continue to evaluate internal opportunities such as construction of new funeral homes
and development of high-end cemetery inventory. We expect to make
acquisitions, if such acquisitions are available at reasonable market prices. Finally, we could
consider a dividend or additional debt reductions depending on acceptable
market conditions.
On August 16, 2004, we announced a share repurchase program authorizing
the investment of up to $100 million to repurchase our common stock. As of
October 31, 2004, we had repurchased approximately 9.5 million shares at a
total cost of approximately $59.4 million. We plan to continue to make
purchases from time to time in the open market or through privately negotiated
transactions, subject to market conditions and normal trading restrictions.
During the third quarter of 2004, we made our first strategic acquisition
since 1999 for a total cash cost of $1.8 million. We will continue to look for
attractive acquisition opportunities to complement our internal growth
initiatives; however, we anticipate only modest activity due to elevated price
expectations of potential sellers.
We have other potential sources of cash that could be available to us in
the future. We are continuing our program to divest of our international
operations. In June 2004, management committed to a plan to divest of our
businesses in Argentina and Uruguay. We also own funeral businesses in Germany
and Singapore and a cemetery business in Chile that we will look to exit when
market values and economic conditions are conducive to a sale. In addition,
our improved financial condition and credit profile is allowing us to receive
cash collateral back related to various commercial commitments. During the
third quarter of 2004, we received $39.6 million of collateral back and expect
to receive additional amounts during the balance of the year. We expect our
cash interest payments to decline predominantly as a result of the conversion
and redemption of our convertible senior notes in June 2004, which will reduce
annual cash interest payments by approximately $21 million. Lastly, because of
our significant net operating loss carryforwards and future tax losses
anticipated from proposed international asset sales, we do not expect to be a
cash taxpayer until 2007.
Cash Flow
We believe our ability to generate strong operating cash flow is one of our
fundamental financial strengths and provides us with substantial flexibility in
meeting operating and investing needs. Highlights of cash flow for the first
nine months of 2004 compared to the same period of 2003 are as follows:
Operating Activities
Cash flows from operating activities declined by
$120.4 million. Included in 2004 was a $20.0 million voluntary cash
contribution to our pension plan, the payment of $11.4 million to retire life
insurance policy loans related to our SERP and Senior
47
SERP retirement program,
and a net receipt of $0.7 million related to the resolution of certain
litigation matters. Included in 2003 was a tax refund of $94.5 million and
disbursements of $25.1 million (net of insurance recoveries) related to the
resolution of certain litigation matters. Excluding these items in both
periods, cash flows from operating activities declined $20.3 million or 8.7%.
A portion of this decline is attributable to our French business which was
divested in March 2004. Cash flow from operating activities in France declined
$7.8 million from $26.1 million in the first nine months of 2003 to $18.3
million for the period January 1, 2004 through March 11, 2004.
The remaining decline of $12.5 million is primarily due to increased net
trust deposits in Florida. In February 2004, we began making net trust
deposits in Florida for our new preneed sales and discontinued the use of
surety bonding as our primary financial assurance mechanism. Net
trust deposits to preneed funeral and cemetery merchandise and
service trusts were $11.9 million for new sales in Florida in
2004. No trust deposits to preneed funeral and cemetery merchandise
and service trusts were made for new Florida sales in 2003, as we
used surety bonding for those sales.
Cash interest payments declined $10.0 million to $72.9 million in the
first nine months of 2004 compared to $82.9 million in the same period of 2003.
Cash tax payments declined $5.7 million in the first nine months of 2004 to
$5.9 million from $11.6 million in 2003. These improvements were offset by
working capital declines primarily associated with a decrease in accounts
receivable collections and cash outflows associated with Sarbanes-Oxley
compliance.
Investing Activities
Cash flows from investing activities improved by
$174.3 million primarily due to an increase in proceeds of $300.0 million from
sales of international businesses and equity investments and reduced capital
spending, partially offset by $135.0 million in restricted escrow deposits
related to certain litigation matters (described below) and $21.9 million in
reduced proceeds from our North America divestiture program.
In March 2004, we completed the joint venture of our funeral operations in
France. In addition to maintaining a 25% share of the total equity capital of
the newly formed entity, we received net cash proceeds of approximately $287.9
million. Following a successful public offering transaction of our former
United Kingdom affiliate during the second quarter of 2004, we liquidated our
debt and equity holding in our former United Kingdom affiliate and collected
$53.8 million in aggregate of which $49.2 million is reported as an investing
activity. During the second quarter of 2003, we sold our remaining equity
investment in our operations in Spain and received $26.0 million in proceeds.
In July 2004, we paid $51.8 million to satisfy a contingent purchase
obligation associated with the 1998 acquisition of our businesses in Chile.
Also in 2004, we paid $6.3 million as a purchase price adjustment related to
our March 2004 joint venture of French business, which brings our cash proceeds
from this joint venture to an approximate $281.6 million.
In March 2004, we deposited $100 million into a restricted escrow fund
related to certain litigation matters in Florida. In May 2004, we deposited
$35 million (net of $30 million provided by our insurance carriers) into a
restricted escrow fund related to the proposed settlement of our securities
class action lawsuit originally filed in 1999.
Restricted cash deposits in 2003 resulted from our decision to replace
certain letters of credit with cash collateral for various commercial
commitments. Our improved financial condition and credit profile is now
allowing us to receive some of this cash collateral back. During the third
quarter of 2004, we received $39.6 million of collateral back. During October
2004, we received an additional $15.6 million, reducing our deposits for cash
collateral for such commitments to $48.4 million. This compares to $95.3
million at December 31, 2003.
Capital expenditures declined $12.4 million primarily as a result of the
joint venture of our operations in France in March 2004. Capital expenditures
by our French operations were $2.8 million during 2004 compared to $23.8
million during the nine months ended September 30, 2003. Capital expenditures
in North America increased $8.8 million mainly due to planned additional
spending on growth-oriented projects.
Financing Activities
Cash used for financing activities improved $64.9
million primarily due to debt restructurings in 2004. In 2004, we have
executed a series of transactions to further strengthen our capital structure.
In April 2004, we successfully completed a private offering of $250 million
principal amount of 6.75% notes due 2016 and received net cash proceeds of
approximately $243 million. Including the premium, $219.0 million of the net
cash proceeds were applied to the early retirement of $208.7 million in
principal of our 6% notes due 2005. Also in April 2004, as required by the
terms of the agreement, we repaid the remaining $111.2 million of our 7.375%
notes due 2004. Immediately following the June 22, 2004 conversion into common
stock of approximately 71% of our outstanding 6.75% bonds due 2008, we
exercised our option to redeem the remaining outstanding $91.1 million of the
bonds for
48
$94.6 million in cash, including interest and a premium. With these
transactions in 2004, we have significantly extended our debt maturity
schedule.
On August 16, 2004, we announced a share repurchase program authorizing up
to $100 million to repurchase our common stock. From August 16, 2004 through
September 2004, we repurchased 5.6 million shares of common stock for $34.8
million. During October 2004, we repurchased an additional 3.9 million shares
for $24.6 million.
Debt
Our financial condition continues to improve as demonstrated by the following
trend in our cash and debt balances:
Total debt less cash and cash equivalents at September 30, 2004 was $976.7
million, representing the lowest levels in our company since 1992. Total debt
has been reduced by over $1.2 billion or 49% since December 31, 2001. This
reduction is a result of strong operating cash flows including the receipt of
tax refunds of approximately $152 million and a successful asset divestiture
and joint venture program that produced over $800 million of net cash proceeds.
In the first nine months of 2004, we continued to increase our cash
balance while simultaneously reducing our total debt. Our cash balance grew by
nearly $80 million while our total debt declined by over $400 million. Our
cash balance at September 30, 2004 does not reflect a $25 million receivable
from our insurance carriers related to the settlement of the litigation matters
in Florida (See note twelve to the consolidated financial statements in Item 1
of this Form 10-Q).
Along with our operating cash flows, we received $287.9 million in net
cash proceeds from our joint venture of our France operations in March 2004 and
collected $53.8 million during the second quarter from the liquidation of our
debt and equity holdings in our former United Kingdom affiliate. The
conversion into common stock of our convertible bonds in June 2004 reduced
total debt by $221.7 million in principal. Our debt also declined due to a $24
million reduction in capital lease obligations associated with our divested
French operations. Partially offsetting these items was $135 million in
payments into escrow for the proposed settlement of class action litigation
matters.
Preneed Funeral and Cemetery Activities
In addition to selling our products and services to client families at the time
of need, we believe an active funeral and cemetery preneed program, which
complements our framework for long-term growth, can increase future market
share in our service markets. Preneed arrangement is a means through which a
customer contractually agrees to the terms of a funeral service, cremation
service, and/or cemetery burial interment right, merchandise or cemetery
service to be performed or provided in the future (that is, in advance of when
needed or preneed).
Preneed Funeral Activities
Since preneed funeral services or merchandise will not be provided until some
time in the future, most states and provinces require that all or a portion of
the funds collected from customers on preneed funeral contracts be protected
for the benefit of the customer pursuant to applicable law. Some or all of the
funds may be required to be placed into trust accounts, or a surety bond may be
posted in lieu of trusting (collectively trust funded preneed funeral
contracts). Alternatively, where allowed, customers may choose to purchase a
life insurance or annuity policy from third party insurance companies to fund
their preneed funeral (insurance funded preneed funeral contract). Only
certain of these customer funding options may be applicable in any given market
we serve.
The contract amounts associated with unfulfilled insurance funded preneed
funeral contracts are not reflected on our consolidated balance sheet.
However, when customers enter into a trust funded preneed contract, we record
an asset,
Preneed funeral receivables and trust investments
and a corresponding
obligation,
Deferred preneed funeral revenues
in our consolidated balance sheet
for the contract price. The funeral revenues are deferred and will not be
recognized in the consolidated statement of operations until the
49
funeral
services are performed or the merchandise is delivered. When we
receive payments on a trust funded preneed funeral contract from the customer,
we deposit the amount required by law into the trust and reclass
the corresponding amount from
Deferred preneed funeral revenues
into
Non-controlling interest in funeral and cemetery trusts
. While some customers
may pay for their contract in a single payment, most preneed funerals are sold
on an installment basis over a period of one to seven years. On these
installment contracts, we receive, on average, a down payment at the time of
sale of approximately 11%. Historically, the majority of our preneed funeral
trust contracts have not included a finance charge.
Trust Funded Preneed Funeral Contracts:
Where the applicable law requires
that all or a portion of the funds collected from preneed funeral contracts be
placed in trust accounts, the funds deposited into trust are invested by the
independent trustees in accordance with the investment guidelines established by statute or, where the
prudent investor rule is applicable, the guidelines established by our
Investment Committee. The trustees utilize professional investment advisors to
select and monitor the money managers that make the individual investment
decisions in accordance with the guidelines. We retain any funds above the
amounts required to be deposited into trust accounts and use them for working
capital purposes, generally to offset the selling and administrative costs of
the preneed programs. Applicable law governs the timing of the required
deposits into the trust accounts, which generally ranges from five to 45 days
after receipt of the funds from the customer.
The trust investments are expected to generate earnings sufficient to
offset the inflationary costs of providing the preneed funeral services and
merchandise in the future for the prices that were guaranteed at the time of
sale. As a result of the adoption of FIN 46R, the preneed funeral trust assets
have been consolidated and are recorded in our consolidated balance sheet at
market value in accordance with SFAS 115. Investment earnings on trust assets
are generally accumulated in the trust and distributed as each preneed contract
is either utilized upon the death of, or cancelled by, the customer. However,
in certain states, the trusts are allowed to distribute a portion of the
investment earnings to us prior to that date. See the Critical Accounting
Policies and Accounting Changes of Item 2 of this Form 10-Q for additional
information regarding the implementation of FIN 46R.
Direct selling costs incurred pursuant to the sales of trust funded
preneed funeral contracts are deferred and included in
Deferred charges and
other assets
in the consolidated balance sheet. The deferred selling costs are
expensed in proportion to the corresponding trust funded preneed funeral
contract revenues when recognized. Other selling costs associated with the
sales and marketing of preneed funeral contracts (e.g., lead procurements
costs, brochures and marketing materials, advertising and administrative costs)
are expensed as incurred. An allowance for cancellation is recorded for trust
funded preneed funeral contract deferred selling costs based on historical
contract cancellation experience.
If a customer cancels the trust funded preneed funeral contract,
applicable law determines the amount of the refund owed to the customer,
including in certain situations the amount of the attributed investment
earnings. Upon cancellation, we receive the amount of principal deposited to
trust and previously undistributed net investment earnings and pay the customer
the required refund. We retain any excess funds and recognize the amounts as
funeral revenues in our consolidated statement of operations. In certain
jurisdictions, we may be obligated to fund any shortfall if the amounts
deposited by the customer exceed the funds in trust. As a result, when
realized or unrealized losses of a trust result in trust funded preneed funeral
contracts being under-funded, we will assess those contracts to determine
whether a loss provision should be recorded. We have not been required to
recognize any loss amounts at September 30, 2004 and December 31, 2003.
The cash flow activity over the life of a trust funded preneed funeral
contract from the date of sale to its death maturity or cancellation is
captured in the line item
Net effect of preneed funeral production and
maturities
in the consolidated statement of cash flows. While the contract is
outstanding, cash flow is provided by the amount retained from funds collected
from the customer and any distributed investment earnings. This is reduced by
the payment of trust funded preneed funeral deferred selling costs. The effect
of amortizing trust funded preneed funeral deferred selling costs is reflected
in
Depreciation and amortization
in the consolidated
50
statement of cash flows.
At the time of death maturity, we receive the principal and undistributed
investment earnings from the trust and any remaining receivable due from the
customer. This cash flow at the time of service is generally less than the
revenue recognized, thus creating a negative effect on working capital cash
flow from operating activities.
In certain situations pursuant to applicable laws, we can post a surety
bond as financial assurance for an amount that would otherwise be required to
be deposited in trust accounts for trust funded preneed funeral contracts. See
the
Financial Assurances
section within this Preneed
Funeral and Cemetery Activities section for further details on our practice of posting such
surety bonds. We believe the deferred revenues associated with preneed funeral
bonded contracts exceed the expected cost of meeting our obligations to provide
funeral services and merchandise for the outstanding preneed funeral bonded
contracts, and our future operating cash flows will be sufficient to fulfill
these contracts without use of the surety bonds.
If a customer cancels the trust funded preneed funeral contract that has
been bonded prior to death maturity, applicable law
determines the amount of the refund owed to the customer. Because the funds
have not been held in trust, there are no earnings to be refunded to the
customer or us. We pay the customer refund out of our operating funds, which
reduces working capital cash flow from operating activities.
The cash flow activity over the life of a preneed funeral contract that
has been bonded from the date of sale to its death maturity or cancellation is
captured in the line item
Net effect of preneed funeral production and
maturities
in the consolidated statement of cash flows. The payments received
from our customers for their trust funded preneed funeral contracts that have
been bonded are a source of working capital cash flow from operating activities
until the contracts mature. This is reduced by the payment of deferred selling
costs, the premiums to the surety companies for the bond coverage, and refunds
on customer cancellations of contracts. When a trust funded preneed funeral
contract that has been bonded matures upon the death of the beneficiary, there
is no additional cash flow to us unless the customer owed an outstanding
balance, thus creating a negative effect on the cash flow from operating
activities.
Insurance Funded Preneed Funeral Contracts:
Where permitted, customers
arrange their funeral contract by purchasing a life insurance or annuity policy
from third party insurance companies, for which we earn a commission for being
the general agent for the insurance company. The policy amount of the
insurance contract between the customer and the third party insurance company
generally equals the amount of the preneed funeral contract. However, we do
not reflect the unfulfilled insurance funded preneed funeral contract amounts
in our consolidated balance sheet.
The third party insurance company collects funds related to the insurance
contract directly from the customer. The life insurance contracts include
increasing death benefit provisions, which are expected to offset the
inflationary costs of providing the preneed funeral services and merchandise in
the future for the prices that were guaranteed at the time of the preneed sale.
The customer/policy holder assigns the policy benefits to our funeral home to
pay for the preneed funeral contract at the time of need. Approximately 67% of
our 2004 North America preneed funeral production is insurance funded preneed
funeral contracts.
The commission we earn for being the general agent on behalf of the third
party insurance companies is based on a percentage per contract sold. These
general agency (GA) revenues are recognized as funeral revenues when the
insurance purchase transaction between the customer and third party insurance
provider is completed. Direct selling costs incurred pursuant to the sale of
insurance funded preneed funeral contracts are expensed as incurred.
Additionally, we may receive cash overrides based on achieving certain
dollar volume targets of life insurance policies sold as a result of marketing
agreements entered into in connection with the sale of our insurance
subsidiaries in 2000. These overrides are recorded in
Other income, net
in the
consolidated statement of operations.
If a customer cancels the insurance funded preneed funeral contract prior
to death maturity, the insurance company pays the cash surrender value under
the insurance policy directly to the customer. If the contract was outstanding
for less than one year, the insurance company charges back the GA revenues and
overrides we received on the contract. An allowance for these chargebacks is
included in the consolidated balance sheet based on our historical chargeback
experience.
The cash flow activity over the life of an insurance funded preneed
funeral contract from the date of sale to its death maturity or cancellation is
captured in the consolidated statement of cash flows as cash flows from
operating activities within our funeral segment. While the unfulfilled
insurance funded preneed funeral contracts are not included in the consolidated
balance sheet, they are included
51
in funeral trade accounts receivable and
funeral revenues when the funeral service is performed. Proceeds from the life
insurance policies are used to satisfy the receivables due. The cash flow
activity associated with these contracts generally occurs at the time of sale,
where the GA revenues received net of the direct selling costs provide a net
source of cash flow, and at death maturity, where the insurance proceeds
(including increasing death benefit) less the funds used to provide the funeral
goods and services provide a net source of cash flow. If the cancellation
occurs within the one year following the date of sale, our cash flow is reduced
by the charge-back of GA revenues and overrides.
The table below details the North America results of trust and insurance
funded preneed funeral production for the nine months ended September 30, 2004
and 2003, the related deferred selling costs incurred to obtain the trust
funded preneed arrangements and the net selling activity associated with
insurance funded preneed arrangements included in our consolidated statement of
operations. The decline in GA revenue is a result of a shift in product mix
from whole life policies to flex insurance policies, for which we earn a lower
commission rate. The increase in direct expenses is the result of higher
fringe benefits expenses and shifts in the product mix by
counselor between trust and insurance. Additionally, the table reflects
revenues and previously deferred trust funded preneed funeral contract selling
costs recognized in the consolidated statement of operations associated with
death maturities of preneed funeral contracts for the nine months ended
September 30, 2004 and 2003.
(1) Amounts are not included in the consolidated balance sheet.
The following table reflects the North America backlog of trust funded
deferred preneed funeral contract revenues (including amounts related to
Non-controlling interest in funeral and cemetery trusts
) at September 30, 2004
and December 31, 2003. Additionally, we have reflected the North American
backlog of unfulfilled insurance funded contracts (not included in our
consolidated balance sheet) and total North American backlog of preneed funeral
contract revenues at September 30, 2004 and December 31, 2003. The backlog
amounts presented are reduced by an amount that we believe will cancel before
maturity. The preneed funeral deferred selling costs associated with trust
funded contracts (net of an estimated allowance for cancellation) are included
with preneed cemetery deferred selling costs as a component of
Deferred charges
and other assets
.
52
Preneed Cemetery Activities
When purchasing cemetery property interment rights, merchandise, and services
on a preneed basis, approximately 30% of our consumers choose to pay the entire
amount of the contract at the time of sale. The remaining customers choose to
pay for their contracts on an installment basis generally over a period of one
to seven years. On these installment contracts, we receive an average down
payment at the time of sale of approximately 14%. Historically, the
installment contracts have included a finance charge ranging from 3.5% to 15.7%
depending on the date sold, the payment period selected, state laws and the
payment method (i.e., monthly statement billing or automated bank draft).
Unlike trust funded preneed funeral contracts, where the entire purchase price
is deferred and the revenue is recognized as one event at the time of death
maturity, the revenues associated with a preneed cemetery contract can be
recognized as different contract events occur. Preneed sales of cemetery
interment rights (cemetery burial property) are recognized when a minimum of
10% of the sales price has been collected and the property has been constructed
or is available for interment. With the customers direction, which is
generally obtained at the time of sale, we can choose to order, store, and
transfer title to the customer of their personalized marker merchandise. Upon
the earlier of vendor storage of these items or delivery in our cemetery, we
recognize the associated revenues and record the cost of sale. For services,
personalized marker merchandise where the customer chooses not to elect vendor
storage or early delivery to our cemetery, and non-personalized merchandise
(such as vaults), we defer the revenues until the services are performed and
the merchandise is delivered.
Because the services or merchandise will not be provided until some time
in the future, all or a portion of the proceeds from the sale of preneed
cemetery merchandise and services may be required by law to be paid into
merchandise and services trusts until the merchandise is delivered or the
service is provided. As with trust funded preneed funeral contracts, the funds
deposited into trust are invested by the independent trustees in accordance
with the investment guidelines established by statute or, where the prudent
investor rule is applicable, the guidelines as established by our Investment
Committee. The trustees utilize professional investment advisors to select and
monitor the money managers that make the investment decisions in accordance
with the guidelines. We retain any funds above the amounts required to be
deposited into trust accounts and use them for working capital purposes,
generally to offset the
53
selling and administrative costs of the preneed
programs. Applicable law governs the timing of the required deposits into the
trust accounts, which generally ranges from five to 45 days after receipt of
the funds from the customer. In certain situations pursuant to applicable
laws, we post a surety bond as financial assurance for a certain amount of the
preneed cemetery contract in lieu of placing funds into trust accounts. See
the
Financial Assurances
section within this Preneed Funeral
and Cemetery Activities section for further details on our practice of posting such
surety bonds.
The trust investments are expected to generate earnings sufficient to
offset the inflationary costs of providing the preneed cemetery services and
merchandise in the future for the prices that were guaranteed at the time of
sale. As a result of the adoption of
FIN 46R, the preneed cemetery trust investments have been consolidated in our
balance sheet and are recorded at market value in accordance with SFAS 115.
Investment earnings on trust assets are generally accumulated in the trust and
distributed as each preneed contract item is delivered or cancelled. However,
in certain states, the trustees are allowed to distribute a portion of the
investment earnings to us before the preneed cemetery service or merchandise
item is delivered (distributable states). Until delivered or cancelled, any
investment earnings are attributed to the individual contract items.
Recognition of the net investment earnings is independent of the timing of the
receipt of the related cash flows, but generally will be the same in states
that are not distributable states.
Direct selling costs incurred pursuant to the sales of preneed cemetery
contracts are deferred and included in
Deferred charges and other assets
in the
consolidated balance sheet. The deferred selling costs are expensed in
proportion to the corresponding revenues when recognized. Other selling costs
associated with the sales and marketing of preneed cemetery contracts (e.g.,
lead procurements costs, brochures and marketing materials, advertising and
administrative costs) are expensed as incurred. An allowance for cancellation
is recorded for cemetery deferred selling costs based on historical contract
cancellation experience.
If a preneed cemetery contract is cancelled prior to delivery, applicable
law determines the amount of the refund owed to the customer, if any, including
the amount of the attributed investment earnings. Upon cancellation, we
receive the amount of principal deposited to trust and previously undistributed
investment earnings and, where required, issue a refund to the customer. We
retain any excess funds and recognize the attributed investment earnings (net
of any investment earnings payable to the customer) in our consolidated
statement of operations. Based on our historical experience, we have included
an allowance for cancellation for preneed cemetery contracts in
Preneed
cemetery receivables and trust investments
and
Deferred preneed cemetery
revenues
in our consolidated balance sheet.
As the preneed cemetery contract merchandise and service items for which
we were required to deposit funds to trust are delivered and recognized as
revenues, we receive the principal and previously undistributed investment
earnings from the trust. There is generally no remaining receivable due from
the customer, as our policy is to deliver preneed cemetery merchandise and
service items only upon payment of the contract balance in full. This cash
flow at delivery is generally less than the revenue recognized, thus creating a
negative effect on working capital cash flow from operating activities,
especially if we posted a surety bond in lieu of trusting for the preneed
cemetery contract merchandise and service items, as there are no funds in trust
available for withdrawal.
The cash flow activity from the date of sale of a preneed cemetery
contract (origination) to the date of the recognition of the deferred revenue
upon its delivery or cancellation (maturity) is reported in the
Net effect of
cemetery production and deliveries
line item in the consolidated statement of
cash flows. Net effect of preneed cemetery production and deliveries is
affected by cash flows provided by the amount retained from funds collected
from the customer and distributed trust earnings, reduced by the use of funds
for the payment of deferred selling costs when the preneed cemetery contracts
are originated. The amortization of the cemetery deferred selling costs is
included in
Depreciation and amortization
in the consolidated statement of cash
flows.
The table below details the North America results of total cemetery sales
production and the amounts that have been deferred for the nine months ended
September 30, 2004 and 2003 and the related deferred selling costs incurred to
obtain the contract items. Additionally, the table reflects previously
deferred revenues and previously deferred selling costs recognized in the
consolidated statements of operations associated with deliveries/services of
cemetery contract items for the nine months ended September 30, 2004 and 2003.
54
The following table reflects the total North America backlog of
Deferred
cemetery contract revenues
(including amounts related to
Non-controlling
interests in funeral and cemetery trusts
) and the related preneed cemetery
deferred selling costs included in our consolidated balance sheet at September
30, 2004 and December 31, 2003. The backlog amount presented is reduced by an
amount that we believe will cancel before maturity. The preneed cemetery
deferred selling costs (net of an estimated allowance for cancellation) are
included with preneed funeral deferred selling costs as a component of
Deferred
charges and other assets
.
Financial Assurances
55
In support of operations, we have entered into arrangements with certain surety
companies whereby such companies agree to issue surety bonds on our behalf 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 our
preneed funeral and cemetery sales activities. The underlying obligations
these surety bonds assure are recorded on the consolidated balance sheet as
Deferred preneed funeral revenues
and
Deferred preneed cemetery revenues
. The
breakdown of surety bonds between funeral and cemetery preneed arrangements, as
well as surety bonds for other activities are described below. The increase in
preneed funeral surety bonds is primarily a result of the annual review
performed in Florida during the first quarter of 2004. This review adjusted
the bonds to cover the liabilities associated with sales during 2003. We
expect this number to decline in subsequent years as merchandise and services
related to such bonded contracts are delivered or performed (see further
discussion related to Florida bonding below).
When selling preneed funeral and cemetery contracts, we intend to post
surety bonds where allowed by applicable law, except as noted below for
Florida. We post the surety bonds in lieu of trusting a certain amount of
funds received from the customer. The amount of the bond posted is generally
determined by the total amount of the preneed contract that would otherwise be
required to be trusted, in accordance with applicable state law. For the nine
months ended September 30, 2004 and 2003, we had $66.4 million and $70.2
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
until maturity of the underlying preneed contracts, unless we are given prior
notice of cancellation. 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 was to cancel the surety bond, we are required to obtain replacement
surety assurance from another surety company or fund a trust for an amount
generally less than the posted bond amount. Management does not expect it will
be required to fund material future amounts related to these surety bonds
because of lack of surety capacity.
The applicable Florida law that allows posting of surety bonds for preneed
contracts expires December 31, 2004; however, it allows for preneed contracts
entered into prior to December 31, 2004 to continue to be bonded for the
remaining life of those contracts. Of the total cash receipts
attributable to bonded sales
for the nine months ended September 30, 2004 and 2003, approximately $40.7
million and $52.8 million, respectively, were attributable to the state of
Florida. On February 1, 2004, we elected to begin trusting as a financial
assurance mechanism in Florida, rather than surety bonding, on new Florida
sales of preneed funeral and cemetery merchandise and services. Our net trust deposits attributable to these eight months of new
Florida sales were $11.9 million. No trust deposits were made
for new Florida sales in 2003, as we used surety bonding for those
sales.
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 we
believe are reasonable; however, many important factors could cause our actual
results in the future to differ materially from the forward-looking statements
made herein and in any other documents or oral presentations made
56
by us, or on
our behalf. Important factors, which could cause actual results to differ
materially from those in forward-looking statements include, among others, the following:
For further information on these and other risks and uncertainties, see our
Securities and Exchange Commission filings, including our current report on
Form 8-K filed September 2, 2004, which superseded our 2003 Annual Report on
Form 10-K. Copies of this document as well as other SEC filings can be
obtained from our website at www.sci-corp.com. We assume no obligation to
publicly update or revise any forward-looking statements made herein or any
other forward-looking statements made by us, whether as a result of new
information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For information regarding our exposure to certain market risks, see Item 7A.
Quantitative and Qualitative Disclosures about Market Risk in our current
report on Form 8-K filed September 2, 2004, which superseded our Form 10-K for
the year ended December 31, 2003. Approximately $315.9 million, or 21%, of our
net assets at December 31, 2003, were denominated in Euros related to our
French
operations. At September 30, 2004, less than 1% of our net assets related to
our equity investment in France after consummation of a joint venture
transaction. There have been no other material changes to the disclosure on
this matter made in such Form 8-K.
57
We occasionally use derivative instruments, primarily in the form of
forward exchange contracts, to hedge our net investment in foreign assets and
for other hedging activities. We generally do not participate in derivative
transactions that are leveraged or considered speculative in nature. During
the first quarter 2004, we executed certain forward exchange contracts as
hedges of our net foreign investment in our France operations and related to
our expected proceeds from the sale of a portion of our equity interest in and
the prepayment of a note receivable from a United Kingdom company.
As of September 30, 2004, the above derivative instruments had expired
with the sale of France and the receipt of the proceeds from the United
Kingdom. We were not a party to any derivative transactions at September 30,
2004.
Item 4. Controls and Procedures
In early 2003, we began our efforts to comply with Section 404 of
the Sarbanes-Oxley Act of 2002 (SOX 404), which requires
detailed review, documentation and testing of our internal controls over financial reporting. This detailed review, documentation and testing includes an
assessment of the risks that could adversely affect the timely and accurate
preparation of our financial statements and the identification of internal
controls that are currently in place to mitigate the risks of untimely or
inaccurate preparation of these financial statements. We will be required to
include a report on managements assessment of internal controls over financial
reporting in our annual report on Form 10-K for the fiscal year ended December
31, 2004, which must be attested to by our independent auditor. We have not completed our assessment at this time.
In 2004, we have dedicated to date a significant amount of internal resources and time
to our SOX 404 compliance efforts. In addition to our dedicated internal
resources, we engaged an accounting firm to assist us in the documentation and
testing procedures of the SOX 404 compliance project.
As required by SOX 404, we are evaluating the design and operating
effectiveness of our internal controls over financial reporting. Our
evaluation and documentation of the design effectiveness of our internal
controls over financial reporting is substantially complete. We have initiated
the required testing process to evaluate the operating effectiveness of our
internal controls over financial reporting. This testing process involves (1)
testing our controls for effectiveness and (2) reviewing the
documentary evidence that supports the effective operations of the internal
controls over financial reporting.
As a result of the testing, we have become aware of the deficiencies in
our internal controls over financial reporting that are described below. We
are actively attempting to remediate these identified deficiencies.
58
Primarily as a result of our decision to implement new point-of-sale
information systems in our funeral and cemetery locations, we have experienced
significant delays in completing our review, documentation and testing of our
internal controls related to our information technology systems and processes.
Active plans using significant internal and external resources are currently
underway to complete the required SOX 404 work on a timely basis. Despite this
delay, we continue to believe our decision to implement the new point-of-sale
information systems is ultimately in the best interest of our shareholders.
While we continue to attempt to remediate the deficiencies identified
above, as well as complete our SOX 404 compliance efforts related to our
information technology processes, it is possible that we will not complete our
testing and retesting efforts by December 31, 2004. It is also possible we
could experience further delays in our SOX 404 compliance efforts or identify
deficiencies in addition to those discussed above. If we are unable to
complete all of our SOX 404 compliance efforts on a timely basis, or if there
are deficiencies that have not been remediated, we may be required to conclude
in our annual report that our internal controls over financial reporting are
not effective as of December 31, 2004. Furthermore, we have not
completed our evaluation of the deficiencies identified above at this time; therefore, we have not
been able to determine whether the deficiencies described above constitute
significant deficiencies or material weaknesses in our internal controls over
financial reporting at this time. If left unremediated, it is possible that
the deficiencies described above, or other additional deficiencies identified,
could be determined to be significant deficiencies, material weaknesses or
aggregate to material weaknesses in our internal controls over financial
reporting.
If our independent auditor either disagrees with our assessment or
otherwise concludes that our internal controls are not effective, this will be
disclosed in the auditors report on internal controls in our annual report.
The chairman of our Audit Committee has received communications from our
independent auditor stating their concern about our ability to complete our
assessment of internal controls over financial reporting on a timely basis.
In addition to communicating to our independent auditors, we have
communicated to our Audit Committee the deficiencies in our internal controls
over financial reporting identified to date, as well as our current remediation
efforts. Our management, with the oversight of our Audit Committee, is
committed to effectively remediating known deficiencies as expeditiously as
possible and continuing our extensive efforts to comply with SOX 404 by
December 31, 2004.
In a separate evaluation performed under the supervision of our principal
executive officer and our principal financial officer, we have evaluated our
disclosure controls and procedures (as such term is defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of our third quarter of 2004 (the Evaluation Date).
We reviewed the status of our SOX 404 compliance evaluation and the
deficiencies in our internal controls over financial reporting described above.
Based on such evaluation, we have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective in alerting us on a timely
basis to material information relating to our Company (including our
consolidated subsidiaries) required to be included in our periodic filings
under the Exchange Act except for the deficiencies identified above.
59
Change in Internal Controls
Except as described in the above paragraphs, there were no other changes in our
internal controls over financial reporting during the quarter ended September
30, 2004, that have materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is set forth in note twelve to the
unaudited consolidated financial statements in Item 1 of Part I of this Form
10-Q, which information is hereby incorporated by reference herein.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
On August 16, 2004, the Company announced a share repurchase program
authorizing the investment of up to $100 million to repurchase its common
stock. Pursuant to the program, the Company has repurchased shares of its
common stock as set forth in the table below.
Item 5. Other Information
None.
Item 6. Exhibits
60
Undertaking
We hereby undertake, pursuant to Regulation S-K, Item 601(b),
paragraph (4) (iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the
rights of holders of our long-term debt not filed herewith for the
reason that the total amount of securities authorized under any of such
instruments does not exceed 10 percent of our total consolidated
assets.
61
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.
62
INDEX TO EXHIBITS
63
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three months ended
Nine months ended
September 30,
September 30,
2004
2003
2004
2003
(Restated)
(Restated)
note 17
note 17
$
403,352
$
566,461
$
1,421,526
$
1,729,337
335,083
497,515
1,166,776
1,450,801
68,269
68,946
254,750
278,536
(25,298
)
(52,775
)
(100,347
)
(110,454
)
(3,281
)
(1,452
)
33,018
5,413
6,932
(1,724
)
39,690
14,719
194,353
171,771
(27,888
)
(34,835
)
(94,668
)
(107,968
)
176
(16,770
)
2,079
4,569
11,218
12,758
16,590
(23,319
)
(23,441
)
(98,680
)
(89,299
)
16,371
(8,722
)
95,673
82,472
4,079
(3,331
)
(4,468
)
29,815
$
12,292
$
(5,391
)
$
100,141
$
52,657
284
659
35,375
2,005
(48,061
)
$
12,576
$
(4,732
)
$
87,455
$
54,662
$
.04
$
(.02
)
$
.32
$
.18
.11
(.15
)
$
.04
$
(.02
)
$
.28
$
.18
$
.04
$
(.02
)
$
.31
$
.18
.10
(.14
)
$
.04
$
(.02
)
$
.27
$
.18
336,590
300,507
315,656
299,221
340,215
300,507
348,894
299,842
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CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30,
December 31,
2004
2003
$
318,045
$
239,431
118,414
229,839
86,951
136,807
5,808
6,101
171,957
61,146
701,175
673,324
1,192,619
1,229,765
1,370,412
1,083,035
1,534,642
1,524,847
969,849
1,277,583
4,340
3,217
668,151
738,011
1,167,092
1,195,422
699,888
$
8,308,168
$
7,725,204
$
369,608
$
449,497
59,025
182,682
9,187
7,600
7,466
29,576
445,286
669,355
1,235,691
1,519,189
480,514
1,612,347
874,298
1,575,352
311,583
418,375
69,647
53,930
361,360
349,698
1,977,856
675,140
332,658
302,040
2,451,512
2,274,664
(2,264
)
(850,608
)
(938,063
)
(54,505
)
(111,683
)
1,876,793
1,526,958
$
8,308,168
$
7,725,204
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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine months ended
September 30,
2004
2003
(Restated)
note 17
$
87,455
$
54,662
(35,375
)
(2,005
)
16,770
(2,079
)
48,061
103,607
122,120
(6,507
)
7,635
(33,018
)
(5,413
)
(6,932
)
1,724
20,213
52,291
964
32,617
19,757
33,080
(30,461
)
1,289
(4,159
)
(1,876
)
348
10,468
180,723
304,513
2,503
(925
)
183,226
303,588
(67,495
)
(79,864
)
30,326
52,186
330,789
30,802
(1,818
)
(51,749
)
(119,085
)
(56,230
)
120,968
(53,106
)
(132
)
(373
)
120,836
(53,479
)
241,237
(124,752
)
(86,604
)
(313,778
)
(194,019
)
6,040
(34,812
)
(10,349
)
(226,065
)
(290,972
)
617
4,158
78,614
(36,705
)
239,431
200,625
$
318,045
$
163,920
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CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
Accumulated
Capital in
other
Common
excess of
Unearned
Accumulated
comprehensive
Stock
par value
Compensation
deficit
loss
Total
$
302,040
$
2,274,664
$
$
(938,063
)
$
(111,683
)
$
1,526,958
87,455
87,455
(25,427
)
(25,427
)
33,599
33,599
49,006
49,006
57,178
2,110
12,048
14,158
1,658
6,397
8,055
32,034
185,120
217,154
428
2,483
(2,911
)
647
647
(5,612
)
(29,200
)
(34,812
)
$
332,658
$
2,451,512
$
(2,264
)
$
(850,608
)
$
(54,505
)
$
1,876,793
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(Amounts in thousands, except per share amounts)
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Three months ended
Nine months ended
September 30, 2003
September 30, 2003
Historical
Pro forma
Historical
Pro forma
(Restated
(Restated
note 17)
note 17)
$
(5,391
)
$
(2,055
)
$
52,657
$
59,737
$
(4,732
)
$
(1,396
)
$
54,662
$
61,742
$
(.02
)
$
(.01
)
$
.18
$
.21
$
(.02
)
$
(.01
)
$
.18
$
.21
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September 30, 2004
December 31, 2003
$
$
1,201,059
1,039,118
168,580
190,332
1,207,698
1,391,391
(15,079
)
(161,626
)
$
1,192,619
$
1,229,765
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Market
$
73,642
151,149
70,754
185,180
$
480,725
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September 30, 2004
December 31, 2003
$
$
862,265
1,000,652
493,130
522,079
(69,899
)
(75,785
)
1,423,883
1,308,559
(53,471
)
(225,524
)
$
1,370,412
$
1,083,035
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Market
$
23,423
61,965
73,473
185,698
$
344,559
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Market
$
1,249
99,260
73,293
149,079
$
322,881
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September 30, 2004
December 31, 2003
$
$
111,190
50,797
50,797
63,801
272,451
150,000
150,000
143,475
143,475
195,000
195,000
312,694
358,266
358,266
Table of Contents
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September 30, 2004
September 30, 2003
6.00
%
6.25
%
8.00
%
9.00
%
Table of Contents
September 30, 2004
December 31, 2003
54
%
33
%
74
%
13
%
26
%
100
%
100
%
Ranges
10% - 25
%
5% - 10
%
5% - 10
%
0% - 25
%
15% - 35
%
15% - 35
%
0% - 1
%
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Reportable
Funeral
Cemetery
segments
2004
$
266,715
$
136,637
$
403,352
$
421,892
$
144,569
$
566,461
2004
$
982,148
$
439,378
$
1,421,526
$
1,287,266
$
442,071
$
1,729,337
2004
$
44,774
$
23,495
$
68,269
$
54,929
$
14,017
$
68,946
2004
$
183,045
$
71,705
$
254,750
$
212,379
$
66,157
$
278,536
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North
America
Europe
Other Foreign
Total
2004
$
392,053
$
1,648
$
9,651
$
403,352
$
408,385
$
149,950
$
8,126
$
566,461
2004
$
1,263,119
$
132,139
$
26,268
$
1,421,526
$
1,278,752
$
429,245
$
21,340
$
1,729,337
2004
$
(3,476
)
$
$
195
$
(3,281
)
$
(2,929
)
$
1,477
$
$
(1,452
)
2004
$
32,926
$
92
$
$
33,018
$
7,262
$
(899
)
$
(950
)
$
5,413
2004
$
$
$
$
$
$
$
$
2004
$
6,932
$
$
$
6,932
$
(1,724
)
$
$
$
(1,724
)
2004
$
36,846
$
(79
)
$
2,923
$
39,690
$
(5,592
)
$
17,829
$
2,482
$
14,719
2004
$
176,058
$
11,501
$
6,794
$
194,353
$
115,314
$
51,775
$
4,682
$
171,771
2004
$
32,063
$
$
344
$
32,407
$
42,279
$
$
227
$
42,506
2004
$
102,247
$
$
1,360
$
103,607
$
121,808
$
$
312
$
122,120
$
8,159,626
$
8,275
$
140,267
$
8,308,168
$
7,034,062
$
543,141
$
148,001
$
7,725,204
Three months ended
Nine months ended
September 30,
September 30,
2004
2003
2004
2003
(Restated
(Restated
note 17)
note 17)
$
371,045
$
387,965
$
1,191,538
$
1,220,145
$
$
$
8,030
$
(1,724
)
$
33,603
$
(7,722
)
$
160,513
$
103,309
$
30,543
$
41,656
$
96,642
$
117,679
$
7,779,049
$
6,801,492
$
7,779,049
$
6,801,492
Table of Contents
Three months ended
Nine months ended
September 30,
September 30,
2004
2003
2004
2003
$
$
148,412
$
127,282
$
424,060
$
$
17,578
$
11,664
$
51,081
$
$
535,222
$
$
535,222
Funeral
Cemetery
Total
$
1,193,138
$
2,284
$
1,195,422
1,912
1,912
(31,782
)
(20
)
(31,802
)
1,560
1,560
$
1,164,828
$
2,264
$
1,167,092
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Foreign
Minimum
Accumulated
currency
pension
Unrealized
other
translation
liability
gains
comprehensive
adjustment
adjustment
and losses
loss
$
(78,084
)
$
(33,599
)
$
$
(111,683
)
(25,427
)
33,599
8,172
(63,894
)
(63,894
)
63,894
63,894
49,006
49,006
$
(54,505
)
$
$
$
(54,505
)
$
(170,591
)
$
(36,555
)
$
$
(207,146
)
61,883
61,883
$
(108,708
)
$
(36,555
)
$
$
(145,263
)
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Three months ended
Nine months ended
September 30,
September 30,
As Reported
As Restated
As Reported
As Restated
2003
$
567,357
$
566,461
$
1,727,462
$
1,729,337
499,789
497,515
1,454,790
1,450,801
67,568
68,946
272,672
278,536
13,341
14,719
165,906
171,771
(10,100
)
(8,722
)
76,608
82,472
(3,865
)
(3,331
)
27,541
29,815
(5,576
)
(4,732
)
51,072
54,662
(.02
)
(.02
)
.17
.18
(.02
)
(.02
)
.17
.18
Table of Contents
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We recognized expenses of $5.2 million or $.02 per diluted share
associated with outstanding litigation matters.
We recognized a net loss on dispositions of $1.8 million or less
than $.01 per diluted share.
Discontinued operations contributed net earnings of $0.3 million or
less than $.01 per diluted share.
Table of Contents
We recognized expenses of $19.8 million or $.07 per diluted share
related to outstanding litigation matters.
We recognized a net gain on corporate investments in other income of
$2.6 million or $.01 per diluted share.
We recognized a net loss on dispositions of $0.9 million or less
than $.01 per diluted share.
Discontinued operations contributed net earnings of $0.7 million or less
than $.01 per diluted share.
Three Months Ended
September 30,
Increase
2004
2003
(Decrease)
Percentage
(Restated
note 17)
$
262.0
$
265.2
$
(3.2
)
(1.2
)%
$
44.3
$
38.6
$
5.7
14.8
%
16.9
%
14.6
%
59,292
60,966
(1,674
)
(2.7
)%
$
4,289
$
4,174
$
115
2.8
%
$
127.7
$
135.0
$
(7.3
)
(5.4
)%
$
22.7
$
11.7
$
11.0
94.0
%
17.8
%
8.7
%
Table of Contents
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We recorded a charge of $48.1 million (including an income tax
benefit of $21.3 million) or $.14 per diluted share for the cumulative
effect of accounting changes related to the implementation of FIN 46R
and changes in pension accounting. For additional information regarding
these accounting changes, see note three to the consolidated financial
statements in Item 1 of this Form 10-Q.
Table of Contents
We recognized a net gain on dispositions of $58.5 million
(including tax benefits realized from the dispositions of our French
operations and our minority interest in the United Kingdom) or $.18 per
diluted share. For further information, see note fifteen to the
consolidated financial statements in Item 1 of this Form 10-Q.
We recognized expenses of $30.6 million or $.09 per diluted share
associated with the proposed settlement of our securities class action
lawsuit and other outstanding litigation matters. See note twelve to
the consolidated financial statements in Item 1 of this Form 10-Q.
We recognized a loss on the early extinguishment of debt of $10.5
million or $.03 per diluted share primarily related to the successful
tender offer of our notes due 2005 and the redemption of our convertible
notes due 2008.
We recognized other operating income of $4.7 million or $.01 per
diluted share as a result of various reconciling activities regarding
our trust accounts and preneed backlogs.
We recognized a foreign currency transactional loss reported in
other expense of $2.3 million or $.01 per diluted share associated with
the payment of a contingent purchase obligation in Chile.
We recognized interest income reported in other income of $2.7
million or $.01 per diluted share related to interest income on a note
receivable from the United Kingdom company in which we owned a minority
interest.
Discontinued operations reported net income of $35.4 million or
$.10 per diluted share. This includes a non-cash benefit of $49.2
million which is expected to reduce cash taxes in future years.
We incurred expenses of $29.1 million or $.09 per diluted share
related to outstanding litigation matters.
We recognized a net gain associated with dispositions of $3.4
million or $.01 per diluted share.
We recognized a net gain on corporate investments of $2.6 million
or $.01 per diluted share.
We recognized a gain on the early extinguishment of debt of $1.2
million or less than $.01 per diluted share.
We recognized other operating expenses of $1.1 million or less than
$.01 per diluted share related to the termination of a lease contract.
Discontinued operations contributed $2.0 million or less than $.01 per
diluted share.
Nine months ended
September 30,
Increase
2004
2003
(Decrease)
Percentage
(Restated
note 17)
$
839.7
$
833.0
$
6.7
0.8
%
$
171.2
$
160.0
$
11.2
7.0
%
20.4
%
19.2
%
191,450
192,715
(1,265
)
(0.7
)%
$
4,248
$
4,154
$
94
2.3
%
$
413.5
$
416.9
$
(3.4
)
(0.8
)%
$
67.0
$
62.3
$
4.7
7.5
%
16.2
%
14.9
%
Table of Contents
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(In millions)
September 30,
December 31,
2004
2003
2002
2001
$
1,294.7
$
1,701.9
$
1,974.4
$
2,522.0
318.0
239.4
200.6
29.3
$
976.7
$
1,462.5
$
1,773.8
$
2,492.7
Table of Contents
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(1)
Includes amounts reflected as
Non-controlling interest in funeral and
cemetery trusts
in the consolidated
balance sheet, net of estimated cancellation reserve. Excludes unrealized
gains/losses.
(2)
Insurance funded preneed funeral contracts are not included in the
consolidated balance sheet.
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North America
Cemetery
(In millions)
2004
2003
$
1,648.6
$
1,574.2
$
216.0
$
204.9
(1)
Includes amounts reflected as
Non-controlling interest in
funeral and cemetery trusts
in the consolidated balance sheet, except
for unrealized gains or losses. Additionally, upon implementation of
FIN 46R as of March 31, 2004, we recorded an increase of
$43.5 million to
Deferred preneed cemetery revenues
in connection
with the consolidation of certain cemeteries managed but not owned by
us.
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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 us, particularly, but not
limited to, levels of trust fund income, interest expense, pension expense and negative currency translation effects.
The outcomes of pending lawsuits and proceedings against us involving alleged violations of securities laws and the
possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any
covered amounts to us.
Our ability to consummate the previously disclosed proposed settlement of our Consolidated Lawsuit (as defined within our
Form 10-Q) involving allegations of violations of federal securities laws.
Our ability to consummate the settlement of lawsuits in Florida as described in the agreement in principle with respect
thereto, and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is
unable to pay any covered amounts to us.
Amounts payable by us with respect to our outstanding legal matters exceeding our established reserves.
We maintain accruals for tax liabilities which relate to uncertain tax matters. If these tax matters are unfavorably
resolved, we will make any required payments to tax authorities. If these tax matters are favorably resolved, the accruals
maintained by us will no longer be required and these amounts will be reversed through the tax provision at the time of
resolution.
Our ability to successfully implement our strategic plan related to producing operating improvements, strong cash flows and
further deleveraging.
Our ability to successfully implement our plan to reduce costs and increase cash flows associated with significant changes
being made to our organization structure, process and quality of our sales efforts.
Changes to net income as a result of our ongoing reconciliation processes regarding our trust assets and preneed backlogs.
Changes in consumer demand and/or pricing for our products and services due to several factors, such as changes in numbers of
deaths, cremation rates, competitive pressures and local economic conditions.
Changes in domestic and international political and/or regulatory environments in which we operate, including potential
changes in tax, accounting and trusting policies.
Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace.
Our ability to successfully complete our ongoing process improvement and system implementation projects, including our
replacement of our North America point-of-sale information technology systems.
Our ability to successfully access surety and insurance markets at a reasonable cost.
Our ability to successfully exploit our substantial purchasing power with certain of our vendors.
The outcome of a pending Internal Revenue Service audit and future tax deductions resulting from potential asset sales.
The effectiveness of our internal controls over financial reporting, and our ability to certify the effectiveness of the
internal controls and to obtain a favorable attestation report of our auditors regarding our assessment of our internal
controls.
Table of Contents
We have identified deficiencies in our internal controls over
financial reporting related to revenue recognition transactions
specifically associated with the timely recording of the delivery and
performance of cemetery goods and services sold on a preneed basis. As previously reported, we
have improved our internal controls and procedures with respect to these
matters since the adoption of SAB 101, effective January 1, 2000, and
we have further strengthened these internal controls and procedures in 2004
through Company-wide remediation efforts. Furthermore, during the third
quarter of 2004, our new point-of-sale information system used by our
cemeteries became operational and contains further internal control and
procedure enhancements related to this area. We continue to
enhance the effectiveness of these internal controls and procedures.
We have identified deficiencies in our internal controls over
financial reporting related to our preneed funeral and cemetery
activities. The identification of these deficiencies resulted from
on-going projects to reconcile our preneed backlog detailed
records, consolidated trust fund assets and corresponding preneed
deferred revenues. These projects continue and could result in
changes to estimates or adjustments in the preneed items. We expect to finalize the funeral segment
reconciliation project and make significant progress with the cemetery
segment reconciliation project by the time we file our 2004 Form 10-K.
We have also implemented improvements to our internal controls with respect to our preneed funeral and cemetery activities,
and we continue to enhance such internal controls.
As noted above, we have implemented new point-of-sale information
systems that contain enhanced internal controls related to both preneed and atneed activities in our funeral and
cemetery locations.
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We have identified deficiencies in the operating effectiveness
of our internal controls at the funeral and cemetery field level. As a
result, we have initiated Company-wide efforts to formalize and improve
the operating effectiveness of our field-level internal controls and
remediate these deficiencies. We have implemented formal training to
educate our funeral and cemetery personnel on our responsibilities
mandated by SOX 404 and have implemented key control checklists covering
operational and financial controls that are now completed monthly by our
funeral and cemetery locations and reviewed by
market support centers. Our three market support centers help
facilitate the execution of this remediation effort, including the key
control checklists, and serve as liaisons between field and corporate
offices for reinforcement and implementation of policies and procedures.
We have identified deficiencies in the operating effectiveness of
our internal controls at the corporate home office level. These deficiencies relate primarily to controls surrounding reconciliations, approvals, proper authorizations and general computer controls. We have
initiated efforts to formalize and improve the operating effectiveness
of our internal controls at our corporate home office level and
remediate these deficiencies.
Table of Contents
Issuer purchases of equity securities
(a)
(b)
(c)
(d)
Total number
Maximum number (or
of shares
approximate dollar
Total
(or units)
value) of shares
number of
Average
purchased as part
(or units) that may
shares
price paid
of publicly
yet be purchased
(or units)
per share
announced plans or
under the plans or
Period
purchased
(or unit)
programs
programs
1,048,100
$
6.0060
1,048,100
$
93,705,116
4,563,400
$
6.2490
4,563,400
$
65,188,499
5,611,500
6.2036
5,611,500
65,188,499
Form of Indemnification Agreement for officers and directors.
First Amendment to the SCI 401(k) Retirement Savings Plan.
Ratio of earnings to fixed charges for the nine months ended September 30, 2004 and 2003.
Certification of Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302
of the Sarbanes-Oxley Act of 2002.
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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.
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.
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).
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).
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).
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).
Defendants Reply to Plaintiffs Opposition to
Defendants Motion to Dismiss the Consolidated Class Action
Complaint filed November 24, 1999 in Civil Action No. H-99-280,
In
re Service Corporation International
. (Incorporated by reference
to Exhibit 99.12 to Form 10-K for the fiscal year ended December
31, 1999).
Table of Contents
November 8, 2004
SERVICE CORPORATION INTERNATIONAL
By:
/s/ Jeffrey E. Curtiss
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Table of Contents
Exhibit
No.
Description
Form of Indemnification Agreement for officers and directors.
First Amendment to the SCI 401(k) Retirement Savings Plan.
Ratio of earnings to fixed charges for the nine months ended September 30, 2004 and 2003.
Certification of Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302
of the Sarbanes-Oxley Act of 2002.
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.
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.
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).
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).
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).
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).
Defendants Reply to Plaintiffs Opposition to
Defendants Motion to Dismiss the Consolidated Class Action
Complaint filed November 24, 1999 in Civil Action No. H-99-280,
In
re Service Corporation International
. (Incorporated by reference
to Exhibit 99.12 to Form 10-K for the fiscal year ended December
31, 1999).
Exhibit 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this Agreement) is made and entered into as of , 2004, by and between Service Corporation International, a Texas corporation (the Company), and (the Indemnitee).
BACKGROUND
The Indemnitee is an officer and/or director of the Company. It is essential to the Company that it retain and attract as officers and/or directors the most capable persons available. Both the Company and the Indemnitee recognize the increased risk of litigation and other claims being asserted against officers and/or directors of companies in todays environment.
The Texas Business Corporation Act, as amended (the Texas Statute), expressly recognizes that the indemnification provisions of the Texas Statute are not exclusive of any other rights to which a person seeking indemnification may be entitled under a resolution of the directors, an agreement or as permitted or required by common law. This Agreement is being entered into as permitted by the Texas Statute and as authorized by the board of directors of the Company (the Board of Directors).
In recognition of the Indemnitees need for substantial protection against personal liability, in order to enhance the Indemnitees continued service to the Company in an effective manner, and in part to provide the Indemnitee with specific contractual assurance that the protection of the Texas Statute, the Companys articles of incorporation and bylaws and this Agreement will be available to the Indemnitee (regardless of, among other things, any amendment to or revocation of such provisions or any change in the composition of the Board of Directors or any acquisition or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of, and the advancement of expenses to, the Indemnitee as set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Indemnification.
(a) In accordance with the provisions of Section 1(b), the Company shall hold harmless and indemnify the Indemnitee against any and all expenses, liabilities and losses (including, without limitation, investigation expenses and expert witnesses and attorneys fees and expenses, judgments, penalties, fines, excise taxes under the Employee Retirement Income Security Act of 1974, as amended, and amounts paid or to be paid in settlement) actually incurred by the Indemnitee (net of any related insurance proceeds or other amounts received by the Indemnitee or paid by or on behalf of the Company on the Indemnitees behalf), in connection with any action, suit, arbitration or proceeding (or any inquiry or investigation, whether brought by or in the right of the Company or otherwise, that the Indemnitee in good faith believes might lead to the institution of any such action, suit, arbitration or proceeding), whether civil, criminal, administrative or investigative, or any appeal therefrom, in which the
Indemnitee is a party, is threatened to be made a party, is a witness or is participating (each, a Proceeding) based upon, arising from, relating to or by reason of the fact that Indemnitee is, was, shall be or shall have been an officer and/or director of the Company or is or was serving, shall serve, or shall have served at the request of the Company as an officer and/or director (an Affiliate Indemnitee) of another foreign or domestic corporation or nonprofit corporation, cooperative, partnership, limited liability company, joint venture, trust or other incorporated or unincorporated enterprise.
(b) In providing the foregoing indemnification, the Company shall, with respect to a Proceeding, hold harmless and indemnify the Indemnitee to the fullest extent permitted by the Texas Statute or by any amendment thereof or other statutory provisions expressly permitting such indemnification which is adopted after the date hereof (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law required or permitted the Company to provide prior to such amendment).
(c) Without limiting the generality of the foregoing, the Indemnitee shall be entitled to the rights of indemnification provided in this Section 1 for any expenses actually incurred in any Proceeding initiated by or in the right of the Company, provided that in the event that the Indemnitee shall have been adjudged in a final, nonappealable judgment or other final adjudication to be liable to the Company or shall have been adjudged liable on the basis that personal benefit was improperly received by the Indemnitee, indemnification (i) shall be limited to reasonable expenses actually incurred by the Indemnitee in connection with the Proceeding, and (ii) shall not be made in respect of any Proceeding in which the Indemnitee shall have been found liable for willful or intentional misconduct in the performance of his duty to the Company.
(d) If the Indemnitee is entitled under this Agreement to indemnification by the Company for some or a portion of the Indemnified Amounts (as hereinafter defined) but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion thereof to which the Indemnitee is entitled.
(e) The Company will indemnify the Indemnitees spouse to whom the Indemnitee is legally married at any time the Indemnitee is covered under the indemnification provided in this Agreement (even if the Indemnitee did not remain married to him or her during the entire period of coverage) in any Proceeding, to the same extent and subject to the same standards, limitations, obligations and conditions under which the Indemnitee is provided indemnification herein, if the Indemnitees spouse (or former spouse) becomes involved in a Proceeding solely by reason of his or her status as the Indemnitees spouse, including, without limitation, any Proceeding that seeks damages recoverable from marital community property, jointly-owned property or property purported to have been transferred from the Indemnitee to his/her spouse (or former spouse). The Indemnitees spouse or former spouse also may be entitled to receive Advanced Amounts (as hereinafter defined) to the same extent that the Indemnitee is entitled to Advanced Amounts herein. The Company may maintain insurance to cover its obligation hereunder with respect to the Indemnitees spouse (or former spouse) or set aside assets in a trust or escrow funds for that purpose. Any spouse or former spouse of the
2
Indemnitee entitled to indemnification under this Section 1(e) is an intended third party beneficiary of this Agreement.
2. Other Indemnification Arrangements. The Texas Statute permits the Company to purchase and maintain insurance or furnish similar protection or make other arrangements, including, without limitation, securing indemnification obligations by granting a security interest or other lien on the assets of the Company and providing self insurance, a letter of credit, guaranty or surety bond (collectively, the Indemnity Arrangements) on behalf of the Indemnitee against any liability asserted against him or incurred by or on behalf of him in such capacity as an officer and/or director of the Company or as an Affiliate Indemnitee, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Agreement or under the Texas Statute, as it may then be in effect. The purchase, establishment and maintenance of any such Indemnity Arrangement shall not in any way limit or affect the rights and obligations of the Company or of the Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and the Indemnitee shall not in any way limit or affect the rights and obligations of the Company or the other party or parties thereto under any such Indemnity Arrangement. All amounts payable by the Company pursuant to this Section 2 and Section 1 hereof, including the Advanced Amounts (as defined below), are herein referred to as Indemnified Amounts.
3. Advance Payment of Indemnified Amounts.
(a) The Indemnitee hereby is granted the right to receive promptly in advance of a final, nonappealable judgment or other final adjudication of a Proceeding (a Final Determination) the amount of any and all expenses, including, without limitation, investigation expenses, expert witness and attorneys fees and other expenses expended or incurred by the Indemnitee in connection with any Proceeding or otherwise expended or incurred by the Indemnitee (such amounts so expended or incurred being referred to as Advanced Amounts).
(b) In making any written request for the Advanced Amounts, the Indemnitee shall submit to the Company a schedule setting forth in reasonable detail the dollar amount expended or incurred and expected to be expended. Each such listing shall be supported by the bill, agreement or other documentation relating thereto, each of which shall be appended to the schedule as an exhibit. In addition, before the Indemnitee may receive Advanced Amounts from the Company, the Indemnitee shall provide to the Company (i) a written affirmation of the Indemnitees good faith belief that the applicable standard of conduct required for indemnification by the Company has been satisfied by the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the Advanced Amounts if it shall ultimately be determined that the Indemnitee has not satisfied any applicable standard of conduct. The written undertaking required from the Indemnitee shall be an unlimited general obligation of the Indemnitee, but need not be secured. The Company shall pay to the Indemnitee all Advanced Amounts within ten business days after receipt by the Company of all information and documentation required to be provided by the Indemnitee pursuant to this Section 3(b).
3
4. Procedure for Payment of Indemnified Amounts.
(a) To obtain indemnification under this Agreement, the Indemnitee shall submit to the Company a written request for payment of the appropriate Indemnified Amounts, including with such request such documentation and information as are reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Reviewing Party (as defined in Section (4(f)) in writing that the Indemnitee has requested indemnification.
(b) The Company shall pay the Indemnitee the appropriate Indemnified Amounts, unless it is established by the Reviewing Party that the Indemnitee has not met any applicable standard of conduct of the Texas Statute. For purposes of determining whether the Indemnitee is entitled to Indemnified Amounts, Indemnitee shall be presumed to be entitled to indemnification under this Agreement, and in order to deny indemnification to the Indemnitee, the Company shall have the burden of proof in establishing that the Indemnitee did not meet the applicable standard of conduct. In this regard, a termination of any Proceeding by judgment, order, settlement, conviction, pleading of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, shall not create a presumption that the Indemnitee did not meet the requisite standard of conduct.
(c) Any determination that the Indemnitee has not met the applicable standard of conduct required to qualify for indemnification shall be made by the Reviewing Party.
(d) The Reviewing Party will use its best efforts to conclude as soon as practicable any required determination pursuant to Section 4(c) and will promptly advise the Indemnitee in writing with respect to any determination that the Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied. Payment of any applicable Indemnified Amounts will be made to the Indemnitee within ten business days after any determination of the Indemnitees entitlement to indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time after 60 days after a claim for Indemnified Amounts has been filed with the Company (or upon receipt of written notice that a claim for Indemnified Amounts has been rejected, if earlier) and prior to the expiration of three years after a claim for Indemnified Amounts has been filed, petition a court of competent jurisdiction and obtain formal adjudication of whether the Indemnitee is entitled to indemnification under the provisions of this Agreement, and such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such action without having made such determination. The court shall, as petitioned, make an independent determination of whether the Indemnitee is entitled to indemnification as provided under this Agreement, irrespective of any prior determination made by the Reviewing Party. If the court shall determine that the Indemnitee is entitled to indemnification as to any claim, issue or matter involved in the Proceeding with respect to which there has been no prior determination pursuant to this Agreement or with respect to which there has been a prior determination that the Indemnitee was not entitled to
4
indemnification hereunder, the Company shall pay all expenses (including reasonable attorneys fees) actually incurred by the Indemnitee in connection with such judicial determination.
(f) If there has not been a Change in Control (as defined in Section 4(g)), the Reviewing Party shall be selected by the Board of Directors in accordance with the Texas Statute and the Companys bylaws, and if there has been a Change in Control (other than a Change in Control which has been approved by a vote of at least two-thirds (2/3) of the Companys Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification under this Agreement or any other agreement or under the Companys Articles of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be independent legal counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the independent legal counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay expenses of more than one independent legal counsel in connection with all matters concerning a single Indemnitee, and such independent legal counsel shall be the independent legal counsel for any or all other Indemnitees unless (i) the employment of separate counsel by one or more Indemnitees has been previously authorized by the Company in writing, or (ii) an Indemnitee shall have provided to the Company a written statement that such Indemnitee has reasonably concluded that there may be a conflict of interest between such Indemnitee and the other Indemnitees with respect to the matters arising under this Agreement.
(g) Change in Control shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Companys then outstanding voting securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Companys shareholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by
5
the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Companys assets.
5. Agreement Not Exclusive; Subrogation Rights, etc.
(a) This Agreement shall not be deemed exclusive of and shall not diminish any other rights that the Indemnitee may have to be indemnified or insured or otherwise protected against any liability, loss or expense by the Company, any subsidiary of the Company or any other person or entity under any charter, bylaws, law, agreement, policy of insurance or similar protection, vote of shareholders or directors, disinterested or not, or otherwise, whether or not now in effect, both as to actions in the Indemnitees official capacity, and as to actions in another capacity while holding such office. The Companys obligations to make payments of Indemnified Amounts hereunder shall be satisfied to the extent that payments with respect to the same Proceeding (or part thereof) have been made to or for the benefit of the Indemnitee by reason of the indemnification of the Indemnitee pursuant to any other arrangement made by the Company for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any insurance carrier or from the plaintiff in any Proceeding against the Indemnitee in respect of Indemnified Amounts after payments on account of all or part of such Indemnified Amounts have been made by the Company pursuant hereto, the Indemnitee shall promptly reimburse to the Company the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Company or pursuant to arrangements made by the Company to the Indemnitee exceeds such Indemnified Amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy, such as deductible or coinsurance payments, shall not be deemed to be payments to the Indemnitee hereunder. In addition, upon payment of Indemnified Amounts hereunder, the Company shall be subrogated to the rights of the Indemnitee receiving such payments (to the extent thereof) against any insurance carrier (to the extent permitted under such insurance policies) or plaintiff in respect of such Indemnified Amounts, and the Indemnitee shall execute and deliver any and all instruments and documents and perform any and all other acts or deeds which the Company deems necessary or advisable to secure such rights. Such right of subrogation shall be terminated upon receipt by the Company of the amount to be reimbursed by the Indemnitee pursuant to the first sentence of this Section 5(b).
6. Continuation of Indemnity. All agreements and obligations of the Company contained herein shall continue during the period the Indemnitee is an officer and/or director of the Company (or is serving at the request of the Company as an Affiliate Indemnitee) and shall continue thereafter for a period of ten years from the date the Indemnitee ceases to serve as an officer and/or director of the Company or ceases to serve as an Affiliate Indemnitee (whichever is later).
7. Notice and Defense of Claim. The Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint,
6
indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of expenses covered hereunder. Notwithstanding any other provision of this Agreement, with respect to any such Proceeding or matter as to which the Indemnitee notifies the Company of the commencement thereof:
(a) The Company will be entitled to participate therein at its own expense.
(b) Except as otherwise provided in this Section 7(b), to the extent it desires, the Company, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of the Companys election to so assume the defense thereof, the Company shall not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Indemnitee shall have the right to employ his own counsel in such Proceeding or matter, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of such action, or (iii) the Company shall not in fact have employed counsel to assume the defense of such Proceeding or matter, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Proceeding or matter brought by or on behalf of the Company or as to which the Indemnitee shall have made the conclusion provided for in clause (ii) above.
(c) The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding or matter affected without its written consent. The Company shall not settle any Proceeding or matter in any manner that would impose any penalty or limitation on the Indemnitee without the Indemnitees written consent. Neither the Company nor the Indemnitee will unreasonably withhold its consent to any proposed settlement.
8. Defense Counsel. The Indemnitee hereby agrees that in any Proceeding in which the Indemnitee and other past or present directors or officers of the Company (or its successor) who are entitled to indemnification from the Company are named defendants or respondents, the Indemnitee and such other past or present directors or officers shall collectively select one firm of attorneys in any jurisdiction to defend all such defendants and respondents in such Proceeding unless counsel for the Indemnitee concludes in a reasoned opinion that there are issues which may raise conflicts of interest between the Indemnitee and such other persons.
9. Indemnification for Negligence. TO THE EXTENT PERMITTED BY THEN APPLICABLE LAW AND SUBJECT TO THE PROVISIONS OF THIS AGREEMENT, THE PARTIES HERETO RECOGNIZE AND ACKNOWLEDGE THAT THE INDEMNITEE MAY BE INDEMNIFIED IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT IN PROCEEDINGS INVOLVING THE NEGLIGENCE OF THE INDEMNITEE.
7
10. Successors; Binding Agreement. This Agreement shall be binding on and shall inure to the benefit of and be enforceable by the Companys successors and assigns and by the Indemnitees personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Company shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement in form and substance reasonably satisfactory to the Company and to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place.
11. Enforcement. The Company has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce the Indemnitee to act as an officer and/or director, as the case may be, of the Company, and acknowledges that the Indemnitee is relying upon this Agreement in continuing in such capacity. In the event the Indemnitee is required to bring any action to enforce rights or to collect monies due under this Agreement and is successful in such action, the Company shall reimburse the Indemnitee for all of the Indemnitees reasonable attorneys fees and expenses in bringing and pursuing such action. The Indemnitee shall be entitled by or to the advancement of Indemnified Amounts to the full extent contemplated by Section 3 hereof in connection with such proceeding. In the event that the Company shall breach any of its obligations to the Indemnitee hereunder, including the Companys obligations with respect to the Advanced Amounts under Section 3 of this Agreement, the parties hereto agree that the Indemnitees remedies available at law would not be adequate and that Indemnitee would be entitled to the remedies of specific performance and injunctive relief to enforce such obligations of the Company.
12. Severability. In the event that any provision of this Agreement is determined by a court to require the Company to do or to fail to do an act which is in violation of applicable law, such provision shall be limited or modified in its application to the minimum extent necessary to avoid a violation of law, and, as so limited or modified, such provision and the balance of this Agreement shall be enforceable in accordance with its terms.
13. Entire Agreement. This Agreement contains the entire understanding of the parties relating to the subject matter contained herein and supersedes all prior agreements and understandings, written or oral, relating to the subject matter hereof.
14. Amendment; Waiver. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by the Indemnitee and either the President of the Company or another officer of the Company specifically designated by the directors. No waiver by either party at any time of any breach by the other party of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a wavier of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent times.
15. Notices. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or three days after being deposited by United States certified mail, return receipt requested, postage prepaid, as follows:
8
If to the Company:
Service Corporation International
1929 Allen Parkway
Houston, Texas 77019
Attention: General Counsel
If to the Indemnitee:
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or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
17. Choice of Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas (without regards to principles of conflicts of laws).
18. Titles and Captions. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend, or describe the scope or intent of any provisions hereof.
[Signature page follows.]
9
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the day and year first above written.
COMPANY:
SERVICE CORPORATION INTERNATIONAL |
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By: | ||||
Name: | ||||
Title: | ||||
INDEMNITEE:
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By: | ||||
Name: | ||||
Title: | ||||
10
Exhibit 10.2
FIRST AMENDMENT TO THE
SCI 401(K) RETIREMENT SAVINGS PLAN
(AS AMENDED AND RESTATED JANUARY 14, 2004)
WHEREAS, Service Corporation International (the Company) previously adopted and maintains the SCI 401(k) Retirement Savings Plan, as amended and restated effective July 1, 2000 (the Plan); and
WHEREAS, the Company reserved the right to amend the Plan at any time; and
WHEREAS, the Plan, as amended and restated was amended by the First Amendment dated August 13, 2003 to change the name of the Plan Administrator;
WHEREAS , the Plan Administrator executed an amended and restated adoption agreement and basic plan document on January 14, 2004:
WHEREAS , Company now desires to further amend the Plan as set forth below;
NOW, THEREFORE, the Plan shall be and hereby is amended as follows:
1. | The date of the amendment and restatement of the Plan shall be changed to January 14, 2004 and the Plan name shall be changed accordingly; | |||
2. | Effective as of December 30, 2004, the Introduction to the Plan shall be amended in its entirety to read as set forth in Exhibit A attached hereto. | |||
3. | Effective as of July 1, 2000, Section E.4. of the Adoption Agreement shall be amended to provide that service prior to the time an Employee has attained age 18 shall be counted toward Vesting Service. | |||
4. | The Addendum A to the Plan, which pertains to participation in the Plan by employees of Marsellus Casket Company shall be deleted in its entirety, and the attached Addendum A shall be substituted therefore, effective as of the dates set forth therein; | |||
5. | Effective as of January 1, 2004, Section 1.0(k) of Addendum B to the Plan shall be deleted. | |||
6. | Effective as of January 1, 2004, Addendum D of the Plan shall be amended to read as follows: |
The classification of Employees eligible to participate in the Plan shall include all Employees of CemCare, Inc. (CemCare) other than Employees covered by a collective bargaining agreement if such agreement does not
specifically provide for participation in the Plan. Employees of CemCare shall participate in the Plan on the same basis as other eligible Participants.
7. | Effective as of December 30, 2004, item B.3. of the Plans Adoption Agreement shall be amended to read as follows: | |||
PLAN YEAR means the 12 consecutive month period beginning on January 1 and ending on December 31, except that there will be a short Plan Year beginning on December 31, 2004 and ending on December 31, 2004. | ||||
8. | Whereas it was not the Companys intention to change the vesting computation period with the adoption of the GUST Amended MassMutual prototype document as the basic plan document (the Adoption Agreement for which was executed January 14, 2004), effective as to the date of such adoption, the first sentence of the fourth paragraph of Section 1.91 of the basic plan document shall be amended to read as follows: | |||
For vesting purposes, and all other purposes not specifically addressed in this Section, the computation period shall be the calendar year. | ||||
It is the Companys intention hereby, not to change the vesting computation period, which, pursuant to the prior adoption agreement, was the calendar year. | ||||
9. | Effective for claims or requests for review of an adverse benefit determination filed on or after January 1, 2003, Sections 2.10 and 2.11 shall be deleted and the following shall be inserted in lieu thereof: | |||
2.10 CLAIMS AND REVIEW PROCEDURES |
Claims for benefits under the Plan may be filed in writing with the Administrator. The Administrator will maintain a separate written document explaining the Plans claims procedure. This Section 2.10 specifically incorporates the written claims procedure as from time to time published by the Administrator as part of the Plan. Such procedures shall provide for a review of a denied claim in accordance with the requirements of ERISA. If the Administrator makes a final written determination denying a Participants or Beneficiarys benefit claim, the Participant or Beneficiary to preserve the claim must file an action in federal court with respect to the denied claim not later than 180 days following the date of the Plan Administrators final determination.
10. | Effective as of January 1, 2004, Section 6.2 of the Plan shall be amended by adding the following subsection (i): |
(i) Upon the death of a Participant, any Beneficiary may renounce his or her interest in the Participants death benefit. Any such renunciation shall be by written instrument in a form satisfactory to the Administrator and shall be
received by the Administrator on or before the earlier of (i) the date of any distribution of the Participants benefit to such Beneficiary or (ii) five years from the date of the Participants death. Upon determination by the Administrator that a Beneficiary has validly renounced his or her interest in the Participants benefit, the Participants benefit shall be distributed as though such Beneficiary had predeceased the Participant.
Except as modified herein, the Plan is in all other respects, specifically ratified and affirmed. |
IN WITNESS WHEREOF, the Company has executed this First Amendment this day of Oct. 22, 2004.
SERVICE CORPORATION INTERNATIONAL
By: | Helen Dugand | |||
Helen Dugand, | ||||
Vice-President of SCI Funeral & Cemetery Purchasing & Cooperative Inc. | ||||
ADDENDUM A
REV. PROC. 2002-29 MODEL AMENDMENT
MINIMUM DISTRIBUTION REQUIREMENTS
Section 1. General Rules
1.1. Effective Date. Unless an earlier effective date is specified in the Adoption Agreement, the provisions of this addendum will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.
1.2. Coordination with Minimum Distribution Requirements Previously in Effect. If the Adoption Agreement specifies an effective date of this addendum that is earlier than calendar years beginning with the 2003 calendar year, required minimum distributions for 2002 under this addendum will be determined as follows. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the effective date of this addendum equals or exceeds the required minimum distributions determined under this addendum, then no additional distributions will be required to be made for 2002 on or after such date to the distributee. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the effective date of this addendum is less than the amount determined under this addendum, then required minimum distributions for 2002 on and after such date will be determined so that the total amount of required minimum distributions for 2002 made to the distributee will be the amount determined under this addendum.
1.3. Precedence. The requirements of this addendum will take precedence over any inconsistent provisions of the Plan.
1.4. Requirements of Treasury Regulations Incorporated. All distributions required under this addendum will be determined and made in accordance with the Treasury regulations under section 401(a)(9) of the Internal Revenue Code.
1.5. TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this addendum, distributions may be made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to section 242(b)(2) of TEFRA.
Section 2. Time and Manner of Distribution.
2.1. Required Beginning Date. The Participants entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participants Required Beginning Date.
2.2. Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participants entire interest will be distributed, or begin to be distributed, no later than as follows:
1
(a) If the Participants Surviving Spouse is the Participants sole Designated Beneficiary, then, except as provided in the adoption agreement, distributions to the Surviving Spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 1/2, if later.
(b) If the Participants Surviving Spouse is not the Participants sole Designated Beneficiary, then, except as provided in the adoption agreement, distributions to the Designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.
(c) If there is no Designated Beneficiary as of September 30 of the year following the year of the Participants death, the Participants entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participants death.
(d) If the Participants Surviving Spouse is the Participants sole Designated Beneficiary and the Surviving Spouse dies after the Participant but before distributions to the Surviving Spouse begin, this section 2.2, other than section 2.2(a), will apply as if the Surviving Spouse were the Participant.
For purposes of this section 2.2 and section 4, unless section 2.2(d) applies, distributions are considered to begin on the Participants Required Beginning Date. If section 2.2(d) applies, distributions are considered to begin on the date distributions are required to begin to the Surviving Spouse under section 2.2(a). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participants Required Beginning Date (or to the Participants Surviving Spouse before the date distributions are required to begin to the Surviving Spouse under section 2.2(a)), the date distributions are considered to begin is the date distributions actually commence.
2.3. Forms of Distribution. Unless the Participants interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, as of the first distribution calendar year distributions will be made in accordance with sections 3 and 4 of this addendum. If the Participants interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of section 401(a)(9) of the Code and the Treasury regulations.
Section 3. Required Minimum Distributions During Participants Lifetime.
3.1. Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Participants lifetime, the minimum amount that will be distributed for each Distribution Calendar Year is the lesser of:
(a) the quotient obtained by dividing the Participants Account Balance by the distribution period in the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the
2
Treasury regulations, using the Participants age as of the Participants birthday in the distribution calendar year; or
(b) if the Participants sole Designated Beneficiary for the Distribution Calendar Year is the Participants Spouse, the quotient obtained by dividing the Participants Account Balance by the number in the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury regulations, using the Participants and Spouses attained ages as of the Participants and Spouses birthdays in the Distribution Calendar Year.
3.2. Lifetime Required Minimum Distributions Continue Through Year of Participants Death. Required minimum distributions will be determined under this section 3 beginning with the first Distribution Calendar Year and up to and including the Distribution Calendar Year that includes the Participants date of death.
Section 4. Required Minimum Distributions After Participants Death.
4.1. Death On or After Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participants death is the quotient obtained by dividing the Participants Account Balance by the longer of the remaining Life Expectancy of the Participant or the remaining Life Expectancy of the Participants Designated Beneficiary, determined as follows:
(1) The Participants remaining Life Expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
(2) If the Participants Surviving Spouse is the Participants sole Designated Beneficiary, the remaining Life Expectancy of the Surviving Spouse is calculated for each Distribution Calendar Year after the year of the Participants death using the Surviving Spouses age as of the Spouses birthday in that year. For Distribution Calendar Years after the year of the Surviving Spouses death, the remaining Life Expectancy of the Surviving Spouse is calculated using the age of the Surviving Spouse as of the Spouses birthday in the calendar year of the Spouses death, reduced by one for each subsequent calendar year.
(3) If the Participants Surviving Spouse is not the Participants sole Designated Beneficiary, the Designated Beneficiarys remaining Life Expectancy is calculated using the age of the Beneficiary in the year following the year of the Participants death, reduced by one for each subsequent year.
(b) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no Designated Beneficiary as of September 30 of the year
3
after the year of the Participants death, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participants death is the quotient obtained by dividing the Participants Account Balance by the Participants remaining Life Expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
4.2. Death Before Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. Except as provided in the adoption agreement, if the Participant dies before the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participants death is the quotient obtained by dividing the Participants Account Balance by the remaining Life Expectancy of the Participants Designated Beneficiary, determined as provided in section 4.1.
(b) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no Designated Beneficiary as of September 30 of the year following the year of the Participants death, distribution of the Participants entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participants death.
(c) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participants Surviving Spouse is the Participants sole Designated Beneficiary, and the Surviving Spouse dies before distributions are required to begin to the Surviving Spouse under section 2.2(a), this section 4.2 will apply as if the Surviving Spouse were the Participant.
Section 5. Definitions.
5.1. Designated Beneficiary. The individual who is designated as the Beneficiary under section 6.2 of the Plan and is the Designated Beneficiary under section 401(a)(9) of the Internal Revenue Code and section 1.401(a)(9)-1, Q&A-4, of the Treasury regulations.
5.2. Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participants death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participants required beginning date. For distributions beginning after the Participants death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin under section 2.2. The required minimum distribution for the Participants first Distribution Calendar Year will be made on or before the Participants Required Beginning Date. The required minimum distribution for other Distribution Calendar Years, including the required minimum distribution for the Distribution Calendar Year in which the Participants Required Beginning Date occurs, will be made on or before December 31 of that distribution calendar year.
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5.3. Life Expectancy. Life Expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury regulations.
5.4. Participants Account Balance. The account balance as of the last valuation date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the Distribution Calendar Year if distributed or transferred in the valuation calendar year.
5.5 Required Beginning Date. The date specified in section 6.5 of the Plan.
1. Adoption Agreement
(Check and complete section 1 below if any required minimum distributions for the 2002 Distribution Calendar Year were made in accordance with the § 401(a)(9) Final and Temporary Regulations.)
Section 1. Effective Date of Plan Amendment for Section 401(a)(9) Final and Temporary Treasury Regulations.
o Minimum Distribution Requirements, applies for purposes of determining required minimum distributions for distribution calendar years beginning with the 2003 calendar year, as well as required minimum distributions for the 2002 distribution calendar year that are made on or after .
(Check and complete any of the remaining sections if you wish to modify the rules in sections 2.2 and 4.2 of this Addendum.)
Section 2. Election to Apply 5-Year Rule to Distributions to Designated Beneficiaries.
x If the Participant dies before distributions begin and there is a Designated Beneficiary, distribution to the Designated Beneficiary is not required to begin by the date specified in section 2.2 of this Addendum, but the Participants entire interest will be distributed to the Designated Beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participants death. If the Participants Surviving Spouse is the Participants sole Designated Beneficiary and the Surviving Spouse dies after the Participant but before distributions to either
5
the Participant or the Surviving Spouse begin, this election will apply as if the Surviving Spouse were the Participant.
This election will apply to:
x All distributions.
o The following distributions: .
Section 3. Election to Allow Participants or Beneficiaries to Elect 5-Year Rule.
x Participants or Beneficiaries may elect on an individual basis whether the 5-year rule or the Life Expectancy rule in sections 2.2 and 4.2 of this Addendum applies to distributions after the death of a Participant who has a Designated Beneficiary. The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under section 2.2 of this Addendum, or by September 30 of the calendar year which contains the fifth anniversary of the Participants (or, if applicable, Surviving Spouses) death. If neither the Participant nor Beneficiary makes an election under this paragraph, distributions will be made in accordance with sections 2.2 and 4.2 of this Addendum and, if applicable, the elections in section 2 above.
Section 4. Election to Allow Designated Beneficiary Receiving Distributions Under 5-Year Rule to Elect Life Expectancy Distributions.
x A Designated Beneficiary who is receiving payments under the 5-year rule may make a new election to receive payments under the Life Expectancy rule until December 31, 2003, provided that all amounts that would have been required to be distributed under the Life Expectancy rule for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003 or the end of the 5-year period.
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EXHIBIT A
SCI 401(K) RETIREMENT SAVINGS PLAN
AS AMENDED AND RESTATED (JANUARY 14, 2004)
INTRODUCTION
Service Corporation International has previously adopted the SCI 401(k) Retirement Savings Plan (the Plan) effective as of July 1, 2000. The Plan is an individually designed single employer plan, but has been amended and restated to conform to the GUST amended version of the MassMutual Retirement Services FlexInvest Defined Contribution Prototype Plan and Non-Standardized 401(k) Profit Sharing Adoption Agreement which is attached hereto and incorporated herein for all purposes, with the modifications set forth below and any and all other modifications as may be separately set forth in Addenda or Amendments to the Plan. This Introduction is amended as set forth below effective as of December 30, 2004, except where a different effective date is noted. The provisions of this Introduction and any addenda to the Plan supersede and control with respect to any contrary provisions of the Plan set forth in the adoption agreement or basic plan document.
1. | Effective as of July 1, 2000, notwithstanding anything in the Plan to the contrary, all Years of Service with the Company prior to a Break in Service shall be included for purposes of determining the Participants vested interest under Section 6.4 of the Plan if such Participant had a nonforfeitable accrued benefit in the SCI Cash Balance Plan or the SCI Pension Plan at the time such Participant first incurred a One-Year Break in Service. | |||
2. | Effective as of January 1, 2001, the Percentage Match for each Participant shall be determined based on the Participants Years of Vesting Service as of the end of each Plan Year and shall apply for the entire next Plan Year notwithstanding the fact that the Participant may be credited with an additional Year of Service during such next Plan Year. | |||
3. | Addenda A through E as amended by the First Amendment and as may be amended from time to time shall be incorporated into the Plan for all purposes. |
IN WITNESS WHEREOF , the Plans amended and restated adoption agreement was executed on the 14th day of January 2004 and this Introduction (as amended by the First Amendment) is hereby executed on this 22 day of October, 2004 by a duly authorized officer of the Plan Administrator by authority granted by the Plan sponsor.
SERVICE CORPORATION INTERNATIONAL
By: | Helen Dugand | |||
Helen Dugand | ||||
Vice-President of SCI Funeral & Cemetery Purchasing & Cooperative, Inc. | ||||
7
Exhibit 12.1
SERVICE CORPORATION INTERNATIONAL
RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio amounts)
Nine Months Ended September 30,
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2004
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2003
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(Restated) | ||||||||
Earnings:
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Income from continuing operations before income taxes and cumulative effects of
accounting changes
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$ | 95,673 | $ | 82,472 | ||||
Minority interest in income of majority owned subsidiaries that have not
incurred fixed charges
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338 | 432 | ||||||
Add fixed charges as adjusted (from below)
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109,058 | 122,813 | ||||||
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$ | 205,069 | $ | 205,717 | ||||
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Fixed charges:
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Interest expense:
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Corporate
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$ | 87,563 | $ | 100,703 | ||||
Amortization of debt costs
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7,105 | 7,265 | ||||||
1/3 of rental expense
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14,390 | 14,845 | ||||||
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Fixed charges
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109,058 | 122,813 | ||||||
Less: Capitalized interest
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Fixed charges as adjusted
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$ | 109,058 | $ | 122,813 | ||||
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Ratio (earnings divided by fixed charges)
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1.88 | 1.68 | ||||||
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Exhibit 31.1
CERTIFICATION
I, Robert L. Waltrip, certify that:
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 registrants 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 registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting; and
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 registrants 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 registrants internal control
over financial reporting.
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 registrants 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:
5.
The registrants other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions):
Date: November 8, 2004
/s/ Robert L. Waltrip
Robert L. Waltrip
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Jeffrey E. Curtiss, certify that:
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 registrants 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 registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting; and
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 registrants 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 registrants internal control
over financial reporting.
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 registrants 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:
5.
The registrants other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions):
Date: November 8, 2004
/s/ Jeffrey E. Curtiss
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer and
Treasurer
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:
Dated: November 8, 2004
(1)
the Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2004 (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.
/s/ Robert L. Waltrip
Robert L. Waltrip
Chairman of the Board and
Chief Executive Officer
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:
Dated: November 8, 2004
(1)
the Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2004 (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.
/s/ Jeffrey E. Curtiss
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer and
Treasurer
(Principal Financial Officer)